Item 1. Business
GENERAL
Alexander's, Inc. (the "Company") is a real estate investment trust ("REIT") engaged in leasing, managing, developing and redeveloping properties. Alexander's activities are conducted through its manager, Vornado Realty Trust ("Vornado").
Alexander's has eight properties consisting of:
Operating properties:
(i) the Rego Park I property located on Queens Boulevard and 63rd Road in Rego Park, Queens, New York, which contains a recently redeveloped 351,000 square foot building, which is 100% leased to Sears, Circuit City, Bed Bath & Beyond, Marshalls and Old Navy;
(ii) the Kings Plaza Regional Shopping Center on Flatbush Avenue in Brooklyn, New York, which contains 1,100,000 square feet is comprised of a two-level mall containing 477,000 square feet, a 289,000 square foot department store leased to Sears and another anchor department store owned and operated as a Macy's by Federated Department Stores, Inc. ("Federated");
(iii) the Fordham Road property located at Fordham Road and the Grand Concourse in the Bronx, New York, which contains a 303,000 square foot building currently unoccupied;
(iv) the Flushing property located at Roosevelt Avenue and Main Street in Flushing, New York, which contains a 177,000 square foot building currently unoccupied; and
(v) the Third Avenue property located at Third Avenue and 152nd Street in the Bronx, New York, which contains a 173,000 square foot building leased to an affiliate of Conway.
Non-operating properties to be developed:
(vi) the Lexington Avenue property which comprises the entire square block bounded by Lexington Avenue, East 59th Street, Third Avenue and East 58th Street in Manhattan, New York;
(vii) the Paramus property which consists of 30.3 acres of land located at the intersection of Routes 4 and 17 in Paramus, New Jersey; and
(viii) the Rego Park II property, which comprises one and one-half square blocks of vacant land adjacent to the Rego Park I property.
The Company is currently undertaking the excavation and laying the foundation for its Lexington Avenue property as part of the proposed development of a large multi-use building. The proposed building is expected to be comprised of a commercial portion, which may include a combination of retail stores, offices, hotel space, extended stay residences, residential rentals and parking; and a residential portion, consisting of condominium units to be sold to the public. In connection therewith, the Company paid $14,500,000 for 140,000 square feet of air rights of which $12,200,000 was paid to Vornado (Vornado's cost plus $243,000 in interest and closing costs). The air rights were contracted for and paid for in 1999, with closings to take place when the developments which give rise to the air rights are completed in 2000. The capital required for the proposed building will be in excess of $400,000,000.
Because a REIT is not permitted to sell condominiums, the air rights representing the residential portion of the property are being transferred to a preferred stock affiliate, a corporation in which the Company owns all of the preferred equity and none of the common equity. The transfer value will be adjusted once the final size of the residential portion is determined.
Sears accounted for 22%, 28% and 31% of the Company's consolidated revenues for the years ended December 31, 1999, 1998 and 1997, respectively. Caldor, a former tenant, accounted for 22% of the Company's consolidated revenues in 1997. No other tenant accounted for more than 10% of revenues.
In June 1998, the Company increased its interest in the Kings Plaza Mall (the "Mall") to 100% by acquiring Federated's 50% interest. The purchase price was approximately $28,000,000, which was paid in cash, plus the Company agreed to pay Federated $15,000,000 to renovate its Macy's store in the Mall ($12,103,000 has been paid as of January 31, 2000) and Federated agreed to certain modifications to the Kings Plaza Operating Agreement. In connection with the acquisition, the Company completed a $90,000,000 three-year mortgage loan. The loan is collateralized by the Company's interest in the Kings Plaza Regional Shopping Center and bears interest at LIBOR plus 1.25% (7.75% at December 31, 1999). In addition to funding the acquisition, the proceeds from the borrowing were also used to repay $34,900,000 of debt. Further, on August 9, 1999 the Company increased the availability under this mortgage loan by $30,000,000 ($9,935,000 is outstanding as of January 31, 2000) of which $15,000,000 will be used to partially fund a renovation of the Mall estimated to cost $33,000,000 ($9,045,000 has been paid as of January 31, 2000) and $15,000,000 will be used to pay the liability to Federated noted above. The renovations are expected to be completed in 2000.
In the aggregate, Alexander's operating properties do not generate sufficient cash flow to pay all of its expenses. The Company's three non-operating properties (Lexington Avenue, Paramus, and Rego Park II) are in various stages of development. As rents commence from portions of the development properties and from the vacant property(s), the Company expects that cash flow will become positive.
The Company estimates that the fair market values of its assets are substantially in excess of their historical cost and that it has additional borrowing capacity. Alexander's continues to evaluate its needs for capital, which may be raised through (a) property specific or corporate borrowing, (b) the sale of securities and (c) asset sales. Although there can be no assurance, the Company believes that these cash sources will be adequate to fund cash requirements until its operations generate adequate cash flow.
The Company is a Delaware corporation with its principal executive office located at Park 80 West, Plaza II, Saddle Brook, New Jersey 07663, telephone (201) 587-8541.
Relationship with Vornado Realty Trust ("Vornado")
Vornado owns 32% of the Company's Common Stock. The Company is managed by, and its properties are redeveloped and leased by Vornado, pursuant to agreements with a one-year term expiring in March of each year which are automatically renewable.
The annual management fee payable by the Company to Vornado is equal to the sum of (i) $3,000,000, (ii) 3% of the gross income from the Mall, plus (iii) 6% of development costs with minimum guaranteed fees of $750,000 per annum. The leasing agreement provides for the Company to pay a fee to Vornado equal to (i) 3% of the gross proceeds, as defined, from the sale of an asset and (ii) in the event of a lease or sublease of an asset, 3% of lease rent for the first ten years of a lease term, 2% of lease rent for the eleventh through the twentieth years of a lease term and 1% of lease rent for the twenty-first through thirtieth year of a lease term. Subject to the payment of rents by tenants, the Company owes Vornado $1,756,000 at December 31, 1999. Such amount is payable annually in an amount not to exceed $2,500,000, until the present value of such installments (calculated at a discount rate of 9% per annum) equals the amount that would have been paid had it been paid on September 21, 1993, or at the time the transactions which gave rise to the Commissions occurred, if later.
As of December 31, 1999, the Company has a loan payable to Vornado aggregating $95,000,000, including $50,000,000 it borrowed from Vornado on October 20, 1999. The Company used the proceeds from the additional $50,000,000 loan to fund a portion of the development costs at its Lexington Avenue property and a portion of the costs to refurbish its Kings Plaza Regional Shopping Center. The loan, which was scheduled to mature on March 15, 2000, has been extended to March 15, 2001 and the interest rate has been reset from 14.18% per annum to 15.72% per annum reflecting an increase in the underlying treasury rate. The loan is secured by liens on all of the Company's assets and/or pledges of the stock of subsidiaries owning the assets and/or guarantees of such subsidiaries and the parent. The liens do not cover the Kings Plaza Regional Shopping Center and Rego Park I and are subordinate to first mortgages and a $20,000,000 bank term loan.
Vornado is a fully integrated REIT with significant experience in the ownership, development, leasing, operation and management of retail and office properties.
Steven Roth is Chief Executive Officer and a director of the Company, the Managing General Partner of Interstate Properties ("Interstate") and Chairman of the Board and Chief Executive Officer of Vornado. At December 31, 1999, Interstate and its Partners own 27.3% of the outstanding common stock of the Company and owns 15.0% of the outstanding common shares of beneficial interest of Vornado. In addition, Mr. Roth owns 1.8% of the outstanding common shares of beneficial interest of Vornado. Mr. Roth, Interstate and the other two general partners of Interstate, David Mandelbaum and Russell B. Wight, Jr. (who are also directors of the Company and trustees of Vornado) own, in the aggregate, 17.8% of the outstanding common shares of beneficial interest of Vornado.
ENVIRONMENTAL MATTERS
In June 1997, the Kings Plaza Regional Shopping Center (the "Center"), commissioned an Environmental Study and Contamination Assessment Site Investigation (the Phase II "Study") to evaluate and delineate environmental conditions disclosed in a Phase I study. The results of the Study indicate the presence of petroleum and bis (2-ethylhexyl) phthalate contamination in the soil and groundwater. The Company has delineated the contamination and has developed a remediation approach. The New York State Department of Environmental Conservation ("NYDEC") has not yet approved the remediation approach. In 1997, the Center accrued $1,500,000 for its estimated obligation with respect to the clean up of the site, which includes costs of (i) remedial investigation, (ii) feasibility study, (iii) remedial design, (iv) remedial action and (v) professional fees. Based upon revised estimates the Company accrued an additional $500,000 in the second quarter of 1999 ($727,000 has been paid as of January 31, 2000). If the NYDEC insists on a more extensive remediation approach, the Company could incur additional obligations.
The majority of the contamination may have resulted from activities of third parties; however, the sources of the contamination have not been fully identified. Although the Company intends to pursue all available remedies against any potentially responsible third parties, there can be no assurance that such parties will be identified, or if identified, whether these potentially responsible third parties will be solvent. In addition, the costs associated with pursuing any potentially responsible parties may be cost prohibitive. The Company has not recorded an asset as of December 31, 1999 for potential recoveries of environmental remediation costs from other parties.
Compliance with applicable provisions of federal, state and local laws regulating the discharge of materials into the environment or otherwise relating to the protection of the environment have not had, and, although there can be no assurance, are not expected to have, a material effect on the Company's financial position, results of operations and cash flows.
COMPETITION
The Company conducts its real estate operations in the New York metropolitan area, a highly competitive market. The Company's success depends upon, among other factors, the trends of the national and local economies, the financial condition and operating results of current and prospective tenants, the availability and cost of capital, interest rates, construction and renovation costs, income tax laws, governmental regulations and legislation, population trends, the market for real estate properties in the New York metropolitan area, zoning laws and the ability of the Company to lease, sublease or sell its properties at profitable levels. The Company competes with a large number of real estate property owners. In addition, although the Company believes that it will realize significant value from its properties over time, the Company anticipates that it may take a number of years before all of its properties generate cash flow at or near anticipated levels. The Company's success is also subject to its ability to finance its development and to refinance its debts as they come due.
EMPLOYEES
The Company currently has one corporate employee and 70 property level employees.
Item 2.
Item 2. Properties
The following table shows the location, approximate size and leasing status as of December 31, 1999 of each of the Company's properties.
(1) Excludes parking garages operated for the benefit of the Company.
(2) Excludes the 339,000 square foot Macy's store, owned and operated by Federated.
(3) Leased to the Company through January 2027. The Company is obligated to pay rent to the landlord as follows: $331,000 per year from February 1997 through January 2007, $220,000 per year from February 2007 through January 2017, and $147,000 per year from February 2017 through January 2027.
(4) The Company razed the existing buildings and is currently undertaking the excavation and laying the foundation of the site. It is evaluating development plans for this site which may include a large multi-use building.
(5) Governmental approvals have been obtained to develop a shopping center at this site containing approximately 550,000 square feet (see Item 2 "Paramus Property").
Operating Properties:
Rego Park I
The Rego Park I property encompasses the entire block fronting on Queens Boulevard and bounded by 63rd Road, 62nd Drive, 97th Street and Junction Boulevard.
The existing 351,000 square foot building was redeveloped in 1996 and is fully leased to Sears, Circuit City, Bed Bath & Beyond, Marshalls and Old Navy. In addition, in conjunction with the redevelopment, a multi-level parking structure was constructed which provides paid parking spaces for approximately 1,200 vehicles.
Kings Plaza Regional Shopping Center
The Kings Plaza Regional Shopping Center (the "Center") contains approximately 1.1 million square feet and is comprised of a two-level mall (the "Mall") containing 477,000 square feet and two four-level anchor stores. One of the anchor stores is owned by the Company and leased to Sears, while the other anchor store is owned and operated as a Macy's store by Federated. In June 1998, the Company increased its interest in the Mall to 100% by acquiring Federated's 50% interest. The purchase price was approximately $28,000,000, which was paid in cash, plus the Company agreed to pay Federated $15,000,000 to renovate its Macy's store in the Mall and Federated agreed to certain modifications to the Kings Plaza Operating Agreement. The Center occupies a 24.3-acre site at the intersection of Flatbush Avenue and Avenue U located in Brooklyn, New York. Among the Center's features are a marina, a five-level parking structure and an energy plant that generates all of the Center's electrical power. The Company is currently renovating the Mall in connection with the overall renovation of the Center at an estimated cost of $33,000,000 of which $9,045,000 has been expended as of January 31, 2000. The renovation is expected to be completed in 2000.
The following table shows lease expirations for the Mall tenants in the Center for the next ten years, assuming none of the tenants exercise renewal options:
The following table shows the occupancy rate and the average annual rent per square foot for the Mall stores as of:
Fordham Road
The Company owns the Fordham Road property, which is located at the intersection of Fordham Road and the Grand Concourse in the Bronx, New York. The property includes a five-floor building containing approximately 303,000 square feet located in the center of a shopping complex in one of the busiest shopping areas in the Bronx. This property, which is currently unoccupied, was previously leased to Caldor. The Company is currently in discussions with several tenants to re-lease all or portions of this space.
Flushing
The Flushing property is located on Roosevelt Avenue and Main Street in the downtown, commercial section of Flushing, Queens. Roosevelt Avenue and Main Street are active shopping districts with many national retailers located in the area. A subway entrance is located directly in front of the property with bus service across the street. It comprises a four-floor building containing 177,000 square feet and a parking garage.
This property, which is currently unoccupied, was previously sub-leased to Caldor (other than the portion currently being used as a parking garage). In January 1999, Caldor announced that it is closing all of its stores. Caldor rejected the lease effective March 29, 1999. The Company is currently in discussions with several tenants to re-lease all or portions of this space.
Third Avenue
The Company owns the Third Avenue property, a four-floor building and a small surface parking lot located at the intersection of Third Avenue and 152nd Street in the Bronx, New York. The store is located in a densely populated neighborhood. This property is leased to an affiliate of Conway, a New York area discount retailer.
Development Properties:
Lexington Avenue
The Company owns the Lexington Avenue property which comprises the entire square block bounded by Lexington Avenue, East 59th Street, Third Avenue and East 58th Street and is situated in the heart of one of Manhattan's busiest business and shopping districts with convenient access to several subway and bus lines. The property is located directly across the street from Bloomingdale's flagship store and only a few blocks away from both Fifth Avenue and 57th Street.
The Company is currently undertaking the excavation and laying the foundation for its Lexington Avenue property as part of the proposed development of a large multi-use building. The proposed building is expected to be comprised of a commercial portion, which may include a combination of retail stores, offices, hotel space, extended stay residences, residential rentals and parking; and a residential portion, consisting of condominium units to be sold to the public. In connection therewith, the Company paid $14,500,000 for 140,000 square feet of air rights of which $12,200,000 was paid to Vornado (Vornado's cost plus $243,000 in interest and closing costs). The air rights were contracted for and paid for in 1999, with closings to take place when the developments which give rise to the air rights are completed in 2000. The capital required for the proposed building will be in excess of $400,000,000.
Because a REIT is not permitted to sell condominiums, the air rights representing the residential portion of the property are being transferred to a preferred stock affiliate, a corporation in which the Company owns all of the preferred equity and none of the common equity. The transfer value will be adjusted once the final size of the residential portion is determined.
Paramus
The Company owns 30.3 acres of land located at the intersection of Routes 4 and 17 in Paramus, New Jersey. The Company's property is located directly across from the Garden State Plaza regional shopping mall, within two miles of three other regional shopping malls and within 10 miles of New York City.
The Company intends to develop a shopping center of approximately 550,000 square feet on this site. The estimated cost of such development is approximately $100,000,000. The Company has received municipal approvals on tentative plans to redevelop the site. No development plans have been finalized.
Rego Park II
The Company owns two land parcels adjacent to the Rego Park I property. They are the entire square block bounded by the Long Island Expressway, 97th Street, 62nd Drive and Junction Boulevard and a smaller parcel of approximately one-half square block at the intersection of 97th Street and the Long Island Expressway. Both parcels are currently zoned for residential use. Both parcels are being used for public paid parking. The Company intends to continue to use these properties for paid parking while it evaluates development options.
Insurance
The Company carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to its properties with policy specifications and insured limits customarily carried for similar properties. Management of the Company believes that the Company's insurance coverage conforms to industry norms.
Item 3.
Item 3. Legal Proceedings
Neither the Company nor any of its subsidiaries is a party to, nor is their property the subject of, any material pending legal proceeding other than routine litigation incidental to their businesses. The Company believes that these legal actions will not be material to the Company's financial condition or results of operations.
Item 4.
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 Company
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 positions held by such officers during the past five years.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Equity and Related Stockholder Matters
The common stock, par value $1.00 per share, of the Company is traded on the New York Stock Exchange under the symbol "ALX". Set forth below are the high and low sales prices for the Company's common stock for each full quarterly period within the two most recent years:
As of December 31, 1999, there were approximately 1,800 holders of record of the Company's common stock. The Company pays dividends only if, as and when declared by its Board of Directors. No dividends were paid in 1999 and 1998. In order to qualify as a REIT, the Company generally is required to distribute as a dividend 95% of its taxable income. At December 31, 1999, the Company had net operating loss carryovers ("NOL's") of approximately $158,000,000. Under the Internal Revenue Code of 1986, as amended, the Company's NOL's generally would be available to offset the amount of the Company's REIT taxable income that otherwise would be required to be distributed as a dividend to stockholders.
Item 6.
Item 6. Selected Financial Data
Summary of Selected Financial Data (Amounts in thousands, except per share data)
1. Net of $4,877,000 resulting from the write-off of the asset arising from the straight-lining of rents primarily due to Caldor's rejection of its Flushing lease in 1999.
2. Includes the write-off of $15,096,000 resulting from the razing of the building formerly located at the Company's Lexington Avenue site.
3. Includes a gain of $8,914,000 from the condemnation of a portion of the Paramus property net of the write-off of the carrying value of the building of $5,786,000.
4. Includes income from the gain on reversal of the Company's postretirement healthcare liability of $14,372,000.
5. Income (loss) per share is the same for all years' presented with and without dilution. For further discussion of income (loss) per share see notes to the consolidated financial statements.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
OVERVIEW
The Company had net income of $5,524,000 for the year ended December 31, 1999 as compared to net loss of $6,055,000 in the prior year. Net income for 1999 is net of $4,877,000 resulting from the write-off of the asset arising from the straight-lining of rents primarily due to Caldor's rejection of its Flushing lease in 1999. The net loss for 1998 includes the write-off of $15,096,000 resulting from the razing of the building formerly located at the Company's Lexington Avenue site.
Details of the changes in the components of net income are discussed in the comparison of the years ended December 31, 1999 and December 31, 1998 below.
RESULTS OF OPERATIONS
Years Ended December 31, 1999 and December 31, 1998
The Company's revenues, which consist of property rentals, tenant expense reimbursements and equity in income of unconsolidated joint venture (prior to 1999) were $64,390,000 in 1999, compared to $51,663,000 in 1998, an increase of $12,727,000.
Property rentals were $44,232,000 in 1999, compared to $35,151,000 in 1998, an increase of $9,081,000. This increase resulted from:
Tenant expense reimbursements were $20,158,000 in 1999, compared to $13,993,000 in 1998, an increase of $6,165,000. This increase resulted primarily from the acquisition of the remaining 50% interest in the Kings Plaza Mall and the resulting consolidation of its operations after June 18, 1998.
The decrease in equity in income of unconsolidated joint venture resulted from the consolidation of the Mall's operations in 1998 as noted above.
Operating expenses were $33,081,000 in 1999, compared to $20,132,000 in 1998, an increase of $12,949,000. Of this increase (i) $9,254,000 primarily resulted from the acquisition of the remaining 50% interest in the Kings Plaza Mall and the resulting consolidation of the Mall's operations after June 18, 1998 and (ii) $4,877,000 resulted from the write-off of the asset arising from the straight-lining of rents primarily due to Caldor's rejection of its Flushing lease in 1999, partially offset by a decrease in real estate tax, repairs and maintenance and parking garage expenses.
General and administrative expenses were $3,692,000 in 1999, compared to $4,079,000 in 1998, a decrease of $387,000 primarily as a result of lower professional fees.
Depreciation and amortization expense was $5,441,000 in 1999 compared to $4,289,000 in 1998, an increase of $1,152,000 primarily as a result of the acquisition of the remaining 50% interest in the Kings Plaza Mall and the resulting consolidation of its operations after June 18, 1998.
In September 1998, the Company wrote-off $15,096,000 resulting from the razing of the building formerly located at the Lexington Avenue site.
Interest and debt expense was $17,647,000 in 1999, compared to $15,115,000 in 1998, an increase of $2,532,000. This increase resulted primarily from (i) higher average debt, partially offset by (ii) a decrease in the average interest rate and (iii) an increase in capitalized interest relating to the Company's development properties.
Years Ended December 31, 1998 and December 31, 1997
The Company's revenues, which consist of property rentals, tenant expense reimbursements and equity in income of unconsolidated joint venture were $51,663,000 in 1998, compared to $25,369,000 in 1997, an increase of $26,294,000.
Property rentals were $35,151,000 in 1998, compared to $18,455,000 in 1997, an increase of $16,696,000. This increase resulted from:
Tenant expense reimbursements were $13,993,000 in 1998, compared to $2,668,000 in 1997, an increase of $11,325,000. This increase reflects (i) corresponding increases in operating expenses passed through to tenants as a result of leases commencing subsequent to March 31, 1997 at the Rego Park I property, (ii) the commencement of operations of the Sears department store at the Kings Plaza Regional Shopping Center and (iii) the acquisition of the remaining 50% interest in the Mall and the resulting consolidation of its operations after June 18, 1998.
The decreases in equity in income of unconsolidated joint venture resulted from the consolidation of the Mall's operations as noted above.
Operating expenses were $20,132,000 in 1998, compared to $7,459,000 in 1997, an increase of $12,673,000. This increase resulted primarily from (i) real estate taxes which previously had been capitalized, being charged to income due to the commencement of operations of the Sears department store at the Kings Plaza Regional Shopping Center and (ii) the acquisition of the remaining 50% interest in the Mall and the resulting consolidation of the Mall's operations after June 18, 1998, partially offset by (iii) a $667,000 charge to bad debt expense in the prior year in connection with Caldor's rejection of its Fordham Road lease.
General and administrative expenses were $4,079,000 in 1998, compared to $3,933,000 in 1997, an increase of $146,000.
Depreciation and amortization expense increased in 1998, compared to 1997 as a result of the Kings Plaza Mall acquisition in June 1998 and the commencement of operations at the Kings Plaza Regional Shopping Center in October 1997.
In September 1998, the Company wrote-off $15,096,000 resulting from the razing of the building formerly located at its Lexington Avenue site.
Interest and debt expense was $15,115,000 in 1998, compared to $13,430,000 in 1997, an increase of $1,685,000. Of this increase $1,215,000 resulted from less interest capitalized in 1998 and $470,000 resulted from higher average borrowings.
Interest and other income was $993,000 in 1998, compared to $719,000 in 1997, an increase of $274,000. This increase resulted primarily from an increase in interest income this year due to higher average investments.
In October 1997, Alexander's entered into an agreement, in lieu of condemnation, with the New Jersey Department of Transportation ("DOT") pursuant to which the DOT agreed to buy approximately 9 acres from the Company located on the periphery of its Paramus property for $14,700,000. In connection with this agreement, the Company recorded a gain of $8,914,000 in the fourth quarter of 1997 which reflects the proceeds net of the write-off of the book value of the building.
LIQUIDITY AND CAPITAL RESOURCES
In the aggregate, Alexander's operating properties do not generate sufficient cash flow to pay all of its expenses. The Company's three non-operating properties (Lexington Avenue, Paramus, and Rego Park II) are in various stages of development. As rents commence from portions of the development property(s) and from the vacant property(s), the Company expects that cash flow will become positive.
In June, 1998, the Company increased its interest in the Kings Plaza Mall (the "Mall") to 100% by acquiring Federated's 50% interest. The purchase price was approximately $28,000,000, which was paid in cash, plus the Company agreed to pay Federated $15,000,000 to renovate its Macy's store in the Mall ($12,103,000 has been paid as of January 31, 2000) and Federated agreed to certain modifications to the Kings Plaza Operating Agreement. In connection with the acquisition, the Company completed a $90,000,000 three-year mortgage loan. The loan is collateralized by the Company's interest in the Kings Plaza Regional Shopping Center and bears interest at LIBOR plus 1.25% (7.75% at December 31, 1999). In addition to funding the acquisition, the proceeds from the borrowing were also used to repay $34,900,000 of debt. Further, on August 9, 1999 the Company increased the availability under this mortgage loan by $30,000,000 ($9,935,000 is outstanding as of January 31, 2000) of which $15,000,000 will be used to partially fund a renovation of the Mall estimated to cost $33,000,000 ($9,045,000 has been paid as of January 31, 2000) and $15,000,000 will be used to pay the liability to Federated noted above. The renovations are expected to be completed in 2000.
The Company estimates that capital expenditure requirements for the development of its Paramus property will approximate $100,000,000.
The Company is currently undertaking the excavation and laying the foundation for its Lexington Avenue property as part of the proposed development of a large multi-use building. The proposed building is expected to be comprised of a commercial portion, which may include a combination of retail stores, offices, hotel space, extended stay residences, residential rentals and parking; and a residential portion, consisting of condominium units to be sold to the public. In connection therewith, the Company paid $14,500,000 for 140,000 square feet of air rights of which $12,200,000 was paid to Vornado (Vornado's cost plus $243,000 in interest and closing costs). The air rights were contracted for and paid for in 1999, with closings to take place when the developments which give rise to the air rights are completed in 2000. The capital required for the proposed building will be in excess of $400,000,000.
Because a REIT is not permitted to sell condominiums, the air rights representing the residential portion of the property are being transferred to a preferred stock affiliate, a corporation in which the Company owns all of the preferred equity and none of the common equity. The transfer value will be adjusted once the final size of the residential portion is determined.
In the first quarter of 1999, Caldor closed all of its stores. Caldor previously sub-leased its Flushing store from the Company. Caldor rejected the Flushing lease effective March 29, 1999. The annual base rent under the lease was $2,963,000.
On May 12, 1999, the Company, through a newly formed wholly-owned subsidiary, completed an $82,000,000 refinancing of its subsidiary's Rego Park I property and repaid the then existing $75,000,000 debt on the property from the proceeds of the new loan. The new 10-year debt, which is an obligation of the subsidiary, matures in May 2009 and bears interest at 7.25%.
The Company's $21,485,000 loan collateralized by a mortgage on its Fordham Road property, which was scheduled to mature on February 24, 2000, has been extended 60 days in connection with negotiations to extend the loan for an additional three-years. The existing loan bears interest at LIBOR plus 4.25% (10.73% at December 31, 1999). Beginning in 1998, all cash flow of the property after debt service further amortizes the loan. There has been no further amortization through December 31, 1999. Under the terms of the proposed extension, interest accrues at LIBOR plus 1.50% in the first two years and LIBOR plus 1.75% in year three. Interest will be payable at LIBOR for the entire term. Interest accrued but not paid will be added to the outstanding principal balance. The net carrying value of the Fordham Road property is $4,602,000 at December 31, 1999.
As of December 31, 1999, the Company has a loan payable to Vornado aggregating $95,000,000, including $50,000,000 it borrowed from Vornado on October 20, 1999. The Company used the proceeds from the additional $50,000,000 loan to fund a portion of the development costs at its Lexington Avenue property and a portion of the costs to refurbish its Kings Plaza Regional Shopping Center. The loan, which was scheduled to mature on March 15, 2000, has been extended to March 15, 2001 and the interest rate has been reset from 14.18% per annum to 15.72% per annum reflecting an increase in the underlying treasury rate. The loan is secured by liens on all of the Company's assets and/or pledges of the stock of subsidiaries owning the assets and/or guarantees of such subsidiaries and the parent. The liens do not cover the Kings Plaza Regional Shopping Center and Rego Park I and are subordinate to first mortgages and a $20,000,000 bank term loan.
A summary of maturities of debt at December 31, 1999 is as follows:
The Company estimates that the fair market values of its assets are substantially in excess of their historical cost and that it has additional borrowing capacity. Alexander's continues to evaluate its needs for capital which may be raised through (a) property specific or corporate borrowing, (b) the sale of securities and (c) asset sales. Although there can be no assurance, the Company believes that these cash sources will be adequate to fund cash requirements until its operations generate adequate cash flow.
CASH FLOWS
Year Ended December 31, 1999
Cash provided by operating activities of $9,765,000 was comprised of income after adjustments for non-cash items of $8,921,000, net of the change in operating assets and liabilities of $4,680,000. The adjustments for non-cash items are comprised of depreciation and amortization of $7,460,000 and the effect of straight-lining of rental income of $1,461,000.
Net cash used in investing activities of $47,601,000 was primarily comprised of (i) the escrowing of cash from the proceeds from the Kings Plaza Regional Shopping Center which is restricted as to its use ($13,601,000), net of the release of cash from escrow for the condemnation of a portion of the Paramus property ($2,318,000) and (ii) capital expenditures of $36,318,000.
Net cash provided by financing activities of $48,526,000 was comprised of (i) proceeds from the issuance of debt of $137,676,000, offset by (ii) repayments of debt of $85,628,000 and (iii) debt issuance costs of $3,522,000.
Year Ended December 31, 1998
Cash provided by operating activities of $5,461,000 was comprised of income after adjustments for non-cash items of $10,327,000, net of the change in operating assets and liabilities of $4,866,000. The adjustments for non-cash items are comprised of (i) the write-off of the carrying value of the Lexington Avenue building and related development costs of $15,096,000 and (ii) depreciation and amortization of $5,715,000, offset by (iii) the effect of straight-lining of rental income of $4,429,000.
Net cash used in investing activities of $40,217,000 was primarily comprised of (i) $28,000,000 for the
acquisition of the remaining 50% interest in the Kings Plaza Mall, (ii) the escrowing of cash from the condemnation of a portion of the Paramus property ($2,318,000) and cash from the proceeds from the Kings Plaza Regional Shopping Center loan ($5,212,000) which is restricted as to its use and (iii) capital expenditures of $19,387,000, partially offset by (iv) proceeds from the condemnation of a portion of the Paramus property of $14,700,000.
Net cash provided by financing activities of $47,428,000 was comprised of (i) proceeds from the issuance of debt on the Kings Plaza Regional Center of $90,000,000, offset by (ii) repayments of debt of $39,236,000 and (iii) debt issuance costs of $3,336,000.
Year Ended December 31, 1997
Cash used in operating activities of $1,454,000 was comprised of: (i) a net loss from operations of $1,448,000 (net income of $7,466,000 less the net gain from the Paramus condemnation of $8,914,000), (ii) a net change in operating assets and liabilities of $2,353,000 and (iii) the payment of liabilities of discontinued operations of $326,000, partially offset by (iv) adjustments for non-cash items of $2,673,000. The adjustments for non-cash items are comprised of depreciation and amortization of $4,494,000, partially offset by the effect of straight-lining of rental income of $1,821,000.
Net cash used in investing activities of $16,877,000 was comprised of additions to real estate of $20,625,000, offset by the use of restricted cash of $3,748,000.
Net cash provided by financing activities of $15,542,000 was comprised of proceeds from the issuance of debt (net of deferred debt expense) of $16,468,000, offset by $926,000 of debt repayments.
Funds from Operations for the Years Ended December 31, 1999 and 1998
Funds from operations were $9,896,000 in the year ended December 31, 1999, an increase of $2,222,000 over the prior year. The following table reconciles funds from operations and net (loss) income:
Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of funds from operations. Funds from operations should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Management considers funds from operations a relevant supplemental measure of operating performance because it provides a basis for comparison among REITs; however, funds from operations may not be comparable to similarly titled measures reported by other REITs since the Company's method of calculating funds from operations is different from that used by NAREIT. Funds from operations, as defined by NAREIT, represents net income before depreciation and amortization, extraordinary items and gains or losses on sales of real estate. Funds from operations as disclosed above has been modified to adjust for the effect of straight-lining of property rentals for rent escalations and leasing fee expenses. Below are the cash flows provided by (used in) operating, investing and financing activities:
Year 2000 Issues
The Company is managed by Vornado. 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 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 Companies financial statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
At December 31, 1999, the Company had $132,161,000 of variable rate debt at a weighted average interest rate of 8.43% and $197,000,000 of fixed rate debt bearing interest at a weighted average interest rate of 10.58%. A one percent increase in the base used to determine the interest rate of the variable rate debt would result in a $1,322,000 decrease in the Company's annual net income ($.26 per basic and diluted share).
Item 8.
Item 8. Financial Statements and Supplementary Data
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders of Alexander's, Inc. Saddle Brook, New Jersey
We have audited the accompanying consolidated balance sheets of Alexander's, Inc. and Subsidiaries (the "Company") as of December 31, 1999 and 1998 and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedules listed in the index at Item 14(a)(2). These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules 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 financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 1999, and 1998, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey March 8, 2000 (March 23, 2000 as to note 4)
ALEXANDER'S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (amounts in thousands except share amounts)
See notes to consolidated financial statements
ALEXANDER'S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued) (amounts in thousands except share amounts)
See notes to consolidated financial statements
ALEXANDER'S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands except per share amounts)
See notes to consolidated financial statements.
ALEXANDER'S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (amounts in thousands)
- --------------------------------------------------------------------------------
See notes to consolidated financial statements.
ALEXANDER'S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands)
- --------------------------------------------------------------------------------
1998 amounts exclude an increase in real estate of $14,400 and debt of $15,000 and a reduction in minority interest of $600 as a result of the Company acquiring a partnership interest.
See notes to consolidated financial statements.
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. ORGANIZATION AND BUSINESS
Alexander's Inc. (the "Company") is a real estate investment trust ("REIT") engaged in leasing, managing, developing and redeveloping properties. Alexander's activities are conducted through its manager, Vornado Realty Trust ("Vornado").
In the aggregate, Alexander's operating properties do not generate sufficient cash flow to pay all of its expenses. The Company's three non-operating properties (Lexington Avenue, Paramus, and Rego Park II) are in various stages of development. As rents commence from portions of the development properties and from the vacant property(s), the Company expects that cash flow will become positive.
The Company estimates that the fair market values of its assets are substantially in excess of their historical cost, and that it has additional borrowing capacity. Alexander's continues to evaluate its needs for capital, which may be raised through (a) property specific or corporate borrowing, (b) the sale of securities and (c) asset sales. Although there can be no assurance, the Company believes that these cash sources will be adequate to fund cash requirements until its operations generate adequate cash flow.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation -- The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been eliminated. Certain reclassifications to prior year amounts have been made to conform with the current year's presentation. The Company currently operates in one business segment.
The consolidated financial statements are prepared in conformity with generally accepted accounting principles. 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 periods. Actual results could differ from those estimates.
Cash and Cash Equivalents -- The Company includes in cash and cash equivalents both cash and short-term highly liquid investments purchased with original maturities of three months or less. Cash and cash equivalents does not include cash restricted for construction financing and operating liabilities which is disclosed separately.
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 (including discounted cash flow analyses with regard to fixed rate debt) 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.
Real Estate and Other Property - Real estate and other property is carried at cost, net of accumulated depreciation. Depreciation is provided on buildings and improvements on a straight-line basis over their estimated useful lives ranging from four years to forty years. When real estate and other property is undergoing development activities, all property operating expenses, including interest expense, are capitalized to the cost of the real property to the extent that management believes such costs are recoverable through the value of the property.
The Company's 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 reflect an impairment in the value of the asset.
Deferred Lease Expense - The Company capitalizes the costs incurred in connection with obtaining long-term leases. Deferred lease expense is amortized on the straight-line method over the initial terms of the leases.
Deferred Finance and Debt Expense - The Company capitalizes the costs incurred in connection with obtaining short-term or long-term debt or refinancing existing debt. These costs are amortized on the straight-line method over the initial terms of the debt, which approximates the interest method.
Leases - All leases are operating leases whereby rents and reimbursements of operating expenses are recorded as real estate operating revenue. The straight-line basis is used to recognize rents under leases entered into which provide for varying rents over the lease terms.
Income Taxes - The Company operates in a manner intended to enable it to continue to qualify as a real estate investment trust ("REIT") under sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"). Under the Code, the Company's net operating loss ("NOL") carryovers generally would be available to offset the amount of the Company's REIT taxable income that otherwise would be required to be distributed as a dividend to its stockholders.
The Company has reported NOL carryovers for federal tax purposes of approximately $158,000,000 at December 31, 1999, expiring from 2005 to 2012. The Company also has investment tax and targeted jobs tax credits of approximately $3,000,000 expiring in 2002 through 2005.
The net basis in the Company's assets and liabilities for tax purposes is approximately $80,000,000 lower than the amount reported for financial statement purposes.
Amounts Per Share - Basic income (loss) per share excludes any dilutive effects of options, warrants and convertible securities. Options outstanding were not dilutive in any period.
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
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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.
3. ACQUISITION OF KINGS PLAZA MALL AND RELATED FINANCING TRANSACTIONS
In June 1998, the Company increased its interest in the Kings Plaza Mall (the "Mall") to 100% by acquiring Federated Department Store's ("Federated") 50% interest. The purchase price was approximately $28,000,000, which was paid in cash, plus the Company agreed to pay Federated $15,000,000 to renovate its Macy's store in the Mall ($12,103,000 has been paid as of January 31, 2000) and Federated agreed to certain modifications to the Kings Plaza Operating Agreement. Prior to June 18, 1998, the Company owned a 50% interest in the Mall and had accounted for this investment under the equity method. The acquisition was recorded under the purchase method of accounting. The purchase cost was allocated to the acquired assets and assumed liabilities based on the fair value as of the closing date.
In connection with the acquisition, the Company completed a $90,000,000 three-year mortgage loan. The loan is collateralized by the Company's interest in the Kings Plaza Regional Shopping Center and bears interest at LIBOR plus 1.25% (7.75% at December 31, 1999). In addition to funding the acquisition, the proceeds from the borrowing were also used to repay $34,900,000 of debt. Further, on August 9, 1999 the Company increased the availability under this mortgage by $30,000,000 ($9,935,000 is outstanding as of January 31, 2000) of which $15,000,000 will be used to partially fund a renovation of the Mall estimated to cost $33,000,000 ($9,045,000 has been paid as of January 31, 2000) and $15,000,000 will be used to pay the liability to Federated noted above. The renovations are expected to be completed in 2000.
Set forth below is the unaudited pro forma condensed consolidated operating data for the Company for the years ended December 31, 1998 and 1997 as if the acquisition of the Kings Plaza Mall and the related financing transactions had occurred on January 1, 1997.
(Amounts in thousands, except per share amounts)
Summary financial information for the Kings Plaza Mall prior to the acquisition is as follows:
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
4. DEBT
Debt comprises:
(1) On October 20, 1999, the Company increased its loan from Vornado by $50,000,000. The Company used the proceeds from the additional loan to fund a portion of the development costs at its Lexington Avenue property and a portion of the costs to refurbish its Kings Plaza Regional Shopping Center. The term loans which were scheduled to mature on March 15, 2000, have been extended to March 15, 2001. The interest rate on the Vornado loan has been reset from 14.18% to 15.72% reflecting an increase in the underlying treasury rate. The interest rate on the bank loan was reset from a fixed rate of 7.10% to a floating rate of LIBOR plus 1.85% (7.67% at December 31, 1999). The loans are secured by liens on all of the Company's assets and/or pledges of the stock of subsidiaries owning the assets and/or guarantees of such subsidiaries and the parent. The liens do not cover the Kings Plaza Regional Shopping Center and Rego Park I and are subordinate to first mortgages. The Vornado lien is subordinate to the bank's. The Vornado loan is prepayable quarterly without penalty. Under the terms of the loans, no dividends can be paid unless required to maintain Real Estate Investment Trust ("REIT") status.
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- (2) The Company's mortgage loan, which is an obligation of a wholly-owned subsidiary, matures on June 1, 2001 and is secured by a mortgage on the Kings Plaza Regional Shopping Center and guaranteed by the Company. The loan bears interests at LIBOR plus 1.25% (7.75% at December 31, 1999).
(3) The Company's $75,000,000 loan, collateralized by a mortgage on its Rego Park I property, was paid off on May 12, 1999, when the Company, through a newly formed wholly-owned subsidiary, completed an $82,000,000 refinancing of its subsidiary's Rego Park I property. The new 10-year debt, which is an obligation of the subsidiary, matures in May 2009 and bears interest at 7.25%. Amortization of principal begins in July 2004 on a 30-year schedule.
(4) The Company's $21,485,000 loan collateralized by a mortgage on its Fordham Road property, which was scheduled to mature on February 24, 2000, has been extended 60 days in connection with negotiations to extend the loan for an additional three-years. The existing loan bears interest at LIBOR plus 4.25% (10.73% at December 31, 1999). Beginning in 1998, all cash flow of the property after debt service further amortizes the loan. There has been no further amortization through December 31, 1999. Under the terms of the proposed extension, interest accrues at LIBOR plus 1.50% in the first two years and LIBOR plus 1.75% in year three. Interest will be payable at LIBOR for the entire term. Interest accrued but not paid will be added to the outstanding principal balance. The net carrying value of the Fordham Road property is $4,602,000 at December 31, 1999.
(5) The note is secured by a third mortgage on the Lexington Avenue property. The note bears annual interest at Prime plus 1% (9.50% at December 31, 1999) and is prepayable without penalty.
A summary of maturities of debt at December 31, 1999, is as follows:
All of the Company's debt is secured by mortgages and/or pledges of the stock of subsidiaries holding the properties. The net carrying value of real estate collateralizing the debt amounted to $271,805,000 at December 31, 1999.
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
5. LEASES
As Lessor
The Company leases properties to tenants. The rental terms for the properties leased range from 10 years to approximately 34 years. The leases provide for the payment of fixed base rentals payable monthly in advance and for the payment by the lessees of additional rents based on a percentage of the tenants' sales as well as reimbursements of real estate taxes, insurance and maintenance.
Future base rental revenue under these noncancellable operating leases is as follows:
Included in operating expenses for the year ended December 31, 1999 is $4,877,000 resulting from the write-off of the asset arising from the straight-lining of rents primarily as a result of Caldor's rejection of its Flushing lease in 1999.
Sears accounted for 22%, 28% and 31% of the Company's consolidated revenues for the years ended December 31, 1999, 1998, and 1997, respectively. Caldor, a former tenant, accounted for 22% of the Company's consolidated revenues in 1997. No other tenant accounted for more than 10% of revenues
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
As Lessee
The Company is a tenant under a long-term leases. Future minimum lease payments under the operating leases are as follows:
Rent expense was $416,000, $376,000 and $331,000 for the years ended December 31, 1999, 1998 and 1997, respectively.
6. RELATED PARTY TRANSACTIONS
Steven Roth is Chief Executive Officer and a Director of the Company, the Managing General Partner of Interstate Properties ("Interstate") and Chairman of the Board and Chief Executive Officer of Vornado. At December 31, 1999, Interstate and its Partners own 27.3% of the outstanding common stock of the Company and owns 15.0% of the outstanding common shares of beneficial interest of Vornado. In addition, Mr. Roth owns 1.8% of the outstanding common shares of beneficial interest of Vornado. Mr. Roth, Interstate and the other two general partners of Interstate, David Mandelbaum and Russell B. Wight, Jr. (who are also directors of the Company and trustees of Vornado) own, in the aggregate, 17.8% of the outstanding common shares of beneficial interest of Vornado. Vornado owns 32% of the outstanding common stock of the Company.
The Company is managed by and its properties are redeveloped and leased by Vornado, pursuant to agreements with a one-year term expiring in March of each year which are automatically renewable.
The annual management fee payable by the Company to Vornado is equal to the sum of (i) $3,000,000, (ii) 3% of the gross income from the Kings Plaza Mall, plus (iii) 6% of development costs with minimum guaranteed fees of $750,000 per annum. The leasing agreement provides for the Company to pay a fee to Vornado equal to (i) 3% of the gross proceeds, as defined, from the sale of an asset, and (ii) in the event of a lease or sublease of an asset, 3% of lease rent for the first ten years of a lease term, 2% of lease rent for the eleventh through the twentieth years of a lease term and 1% of lease rent for the twenty-first through thirtieth year of a lease term. Subject to the payment of rents by tenants, the Company owes Vornado $1,756,000 at December 31, 1999. Such amount is payable annually in an amount not to exceed $2,500,000, until the present value of such installments (calculated at a discount rate of 9% per annum) equals the amount that would have been paid had it been paid on September 21, 1993, or at the time the transactions which gave rise to the Commissions occurred, if later.
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------- The Company owes Vornado $95,000,000, the subordinated tranche of a $115,000,000 secured financing. The Company incurred interest on the loan of $7,857,000, $6,486,000 and $7,214,000 for the years ended December 31, 1999, 1998 and 1997, of which $5,171,000, $4,008,000 and $4,851,000 was capitalized.
7. COMMITMENTS AND CONTINGENCIES
The Company let a contract for $20,000,000 to undertake the excavation, clearing and preparation of the Lexington Avenue property for the development of a large multi-use building. As of January 31, 2000, $5,700,000 has been paid.
In June 1997, the Kings Plaza Regional Shopping Center (the "Center"), commissioned an Environmental Study and Contamination Assessment Site Investigation (the Phase II "Study") to evaluate and delineate environmental conditions disclosed in a Phase I study. The results of the Study indicate the presence of petroleum and bis (2-ethylhexyl) phthalate contamination in the soil and groundwater. The Company has delineated the contamination and has developed a remediation approach. The New York State Department of Environmental Conservation ("NYDEC") has not yet approved the finalization of the approach. In 1997, the Center accrued $1,500,000 for its estimated obligation with respect to the clean up of the site, which includes costs of (i) remedial investigation, (ii) feasibility study, (iii) remedial design, (iv) remedial action and (v) professional fees. Based upon revised estimates the Company accrued an additional $500,000 in the second quarter of 1999 ($727,000 has been paid as of January 31, 2000). If the NYDEC insists on a more extensive remediation approach, the Company could incur additional obligations.
The majority of the contamination may have resulted from activities of third parties; however, the sources of the contamination have not been fully identified. Although the Company intends to pursue all available remedies against any potentially responsible third parties, there can be no assurance that such parties will be identified, or if identified, whether these potentially responsible third parties will be solvent. In addition, the costs associated with pursuing any potentially responsible parties may be cost prohibitive. The Company has not recorded an asset as of December 31, 1999 for potential recoveries of environmental remediation costs from other parties.
Letters of Credit
Approximately $900,000 in standby letters of credit were issued at December 31, 1999.
8. STOCK OPTION PLAN
Under the Omnibus Stock Plan (the "Plan"), approved by the Company's stockholders on May 22, 1996, directors, officers, key employees, employees of Vornado Realty Trust and any other person or entity as designated by the Omnibus Stock Plan Committee are eligible to be granted incentive share options and non-qualified options to purchase common shares. Options granted are at prices equal to 100% of the market price of the Company's shares at the date of grant, vest on a graduated basis, becoming fully vested 60 months after grant and expire ten years after grant. The Plan also provides for the award of Stock Appreciation Rights, Performance Shares and Restricted Stock, as defined, none of which have been awarded as of December 31, 1999.
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 years ended December 31, 1999, 1998 and 1997:
The fair value of each option grant is estimated on the date of grant using an option-pricing model with the following weighted-average assumptions used for grants in the period ended December 31, 1999 (no options were granted in the years ended December 31, 1998 and 1997):
A summary of the Plan's status, and changes during the years ended December 31, 1999 and 1998, are presented below:
The following table summarizes information about options outstanding under the Plan at December 31, 1999:
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
9. INCOME (LOSS) PER SHARE
The following table sets forth the computation of basic and diluted income (loss) per share:
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------
10. SUMMARY OF QUARTERLY RESULTS (UNAUDITED) (amounts in thousands except per share amounts)
(1) The total for the year may differ from the sum of the quarters as a result of weighting.
(2) In September 1998, the Company wrote-off $15,096,000 resulting from the razing of the building formerly located at the Lexington Avenue site.
(3) Net of $4,877,000 resulting from the write-off of the asset arising from the straight-lining of rents, primarily due to Caldor's rejection of its Flushing lease in 1999, of which $1,877,000 was recognized in the fourth quarter of 1999.
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------------------------------------------ 11. SUBSEQUENT EVENT
The Company is currently undertaking the excavation and laying the foundation for its Lexington Avenue property as part of the proposed development of a large multi-use building. The proposed building is expected to be comprised of a commercial portion, which may include a combination of retail stores, offices, hotel space, extended stay residences, residential rentals and parking; and a residential portion, consisting of condominium units to be sold to the public. In connection therewith, the Company paid $14,500,000 for 140,000 square feet of air rights of which $12,200,000 was paid to Vornado (Vornado's cost plus $243,000 in interest and closing costs). The air rights were contracted for and paid for in 1999, with closings to take place when the developments which give rise to the air rights are completed in 2000. The capital required for the proposed building will be in excess of $400,000,000.
Because a REIT is not permitted to sell condominiums, the air rights representing the residential portion of the property are being transferred to a preferred stock affiliate, a corporation in which the Company owns all of the preferred equity and none of the common equity. The transfer value will be adjusted once the final size of the residential portion is determined.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
Information relating to directors and executive officers 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, as amended, not later than 120 days after December 31, 1999, and such information is incorporated herein by reference. Information relating to Executive Officers of the Registrant appears on page 10 of this Annual Report on Form 10-K.
Item 11.
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.
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.
Item 13. Certain Relationships and Related Transactions
Information relating to 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.
PART IV
ITEM 14.
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Documents 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.
All other consolidated financial schedules are omitted because they are inapplicable, not required, or the information is included elsewhere in the consolidated financial statements or the notes thereto.
3. Exhibits
See Exhibit Index on page 43
(b) Reports on Form 8-K
During the last quarter of the period covered by this Annual Report on Form 10-K, no reports on Form 8-K were filed.
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.
ALEXANDER'S, INC.
By: /s/ Joseph Macnow ---------------------------------- Joseph Macnow, Vice President, Chief Financial Officer
Date: March 7, 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.
ALEXANDER'S, INC. AND SUBSIDIARIES SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1999 (amounts in thousands)
(1) The loans, which were scheduled to mature in March 2000, have been extended to March 2001. The loans are secured by liens on all of the Company's assets and/or pledges of the stock of subsidiaries owning the assets and/or guarantees of such subsidiaries and the parent, except for the Kings Plaza Regional Shopping Center and Rego Park I. These liens are subordinate to first mortgages.
(2) Initial cost is as of May 15, 1992 (the date on which the Company commenced real estate operations) unless acquired subsequent to that date. See Column J.
(3) The net basis in the Company's assets and liabilities for tax purposes is approximately $80,000,000 lower than the amount reported for financial statement purposes.
(4) Date represents lease acquisition date.
ALEXANDER'S, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION (amounts in thousands)
Index to Exhibits
The following is a list of all exhibits filed as part of this Report:
- ----------------------------------- * Incorporated by reference
- ----------------------------------- * Incorporated by reference
EXHIBIT NO. DOCUMENT - ------------ ------------------------------- 13 Not applicable.
16 Not applicable.
18 Not applicable.
19 Not applicable.
21 Subsidiaries of Registrant.
22 Not applicable.
23 Consent by Deloitte & Touche LLP.
25 Not applicable.
27 Financial Data Schedule.
29 Not applicable.