1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------------ FORM 10-K/A AMENDMENT NO. 2 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER: 1-11954 VORNADO REALTY TRUST (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 22-1657560 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) PARK 80 WEST, PLAZA II, SADDLE BROOK, NEW JERSEY 07663 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER INCLUDING AREA CODE: (201) 587-1000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ---------------- ---------------------------------------- COMMON SHARES OF BENEFICIAL NEW YORK STOCK EXCHANGE INTEREST, $.04 PAR VALUE PER SHARE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting shares held by non-affiliates of the registrant, i.e. by persons other than officers and trustees of Vornado Realty Trust as reflected in the table in Item 12 of this Annual Report, at March 7, 1997 was $1,085,100,000. As of March 8, 1997, there were 26,547,680 shares of the registrant's shares of beneficial interest outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part III: Proxy Statement for Annual Meeting of Shareholders held on May 28, 1997. ================================================================================
2 THIS FORM 10-K/A AMENDS THE COMPANY'S ANNUAL REPORT ON FORM 10-K PREVIOUSLY FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 13, 1997 AND AMENDED ON JULY 18, 1997. TABLE OF CONTENTS ITEM PAGE ---- ---- PART I. 1. Business............................................................... 2 2. Properties............................................................. 6 3. Legal Proceedings...................................................... 11 4. Submission of Matters to a Vote of Security Holders.................... 11 Executive Officers of the Registrant................................... 11 PART II. 5. Market for the Registrant's Common Equity and Related Stockholder Matters................................................................ 11 6. Selected Consolidated Financial Data................................... 12 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................... 14 8. Financial Statements and Supplementary Data............................ 20 9. Changes in and Disagreements with Independent Auditors' on Accounting and Financial Disclosure............................................... 20 PART III. 10. Directors and Executive Officers of the Registrant..................... 38(1) 11. Executive Compensation................................................. 38(1) 12. Security Ownership of Certain Beneficial Owners and Management......... 38(1) 13. Certain Relationships and Related Transactions......................... 38(1) PART IV. 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....... 38 SIGNATURES............................................................................... 40 - --------------- (1) These items are omitted because the Registrant filed 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, 1996, which is incorporated by reference herein. Information relating to Executive Officers of the Registrant appears on page 11 of this Annual Report on Form 10-K. 1
3 PART I ITEM 1. BUSINESS GENERAL The Company is a fully-integrated real estate investment trust ("REIT") which owns, leases, develops, redevelops and manages retail and industrial properties primarily located in the Midatlantic and Northeast regions of the United States. On December 2, 1996, Michael D. Fascitelli became the President of the Company and was elected to the Company's Board. Mr. Fascitelli was formerly the Partner at Goldman, Sachs & Co. in charge of its real estate practice. Mr. Fascitelli also has been elected a director of Alexander's, Inc. To date, the Company's primary focus has been on shopping centers. The Company may expand its focus by utilizing its senior management's skills and its access to capital to take advantage of strategic opportunities to acquire additional real estate assets or interests therein, mortgage loans secured by underlying real estate and companies that own real estate. Acquisitions may include, among others, assets or interests in the retail, office building, hotel and residential sectors in the geographic areas where it presently operates or in other comparable markets. Investments are not necessarily required to be based on specific allocation by type of property. To the extent to which the Company would use that financing varies with the type of investment and the economic conditions. The Company may offer its shares in exchange for property and repurchase or otherwise reacquire its shares or any other securities and may engage in such activities in the future. On March 12, 1997, the Company entered into a definitive agreement (the "Agreement") to acquire interests in all or a portion of seven Manhattan office buildings and a management company held by the Mendik Company and certain of its affiliates. In conjunction with this transaction, the Company will convert to an Umbrella Partnership REIT (UPREIT). The estimated consideration for the transaction is approximately $654,000,000, including $269,000,000 in cash, $168,000,000 in UPREIT limited partnership units and $217,000,000 in indebtedness. The Agreement is subject to the consent of third parties and other customary conditions. It is currently expected that the proposed transaction would be consummated in the second quarter, but there can be no assurance that the proposed transaction will be completed. The Company's shopping centers are generally located on major regional highways in mature densely populated areas. The Company believes its shopping centers attract consumers from a regional, rather than a neighborhood, marketplace because of their location on regional highways and the high percentage of square feet dedicated to large stores. As of December 31, 1996, the Company owned 57 shopping centers in seven states containing 10.0 million square feet, including 1.2 million square feet built by tenants on land leased from the Company. The Company's shopping centers accounted for 92% of the Company's rental revenue for the years ended December 31, 1996 and 1995. The occupancy rate of the Company's shopping center properties was 90% and 91% as of February 1, 1997 and 1996, respectively, and has been over 90% in each of the past five years. Further, the Company owns eight warehouse/industrial properties in New Jersey containing 2.0 million square feet and two office buildings containing 250,000 square feet. In addition, the Company owns 29.3% of the common stock of Alexander's, Inc. ("Alexander's") which has nine properties in the New York City region. See "Relationship with Alexander's" for a discussion of Alexander's properties. As of December 31, 1996, approximately 80% of the square footage of the Company's shopping centers was leased to large stores (over 20,000 square feet) and over 93% was leased to tenants whose businesses are national or regional in scope. The Company's large tenants include destination retailers such as discount department stores, supermarkets, home improvements stores, discount apparel stores, membership warehouse clubs and "category killers." Category killers are large stores which offer a complete selection of a category of items (e.g., toys, office supplies, etc.) at low prices, often in a warehouse format. The Company's large store tenants typically offer basic consumer necessities such as food, health and beauty aids, moderately priced clothing, building materials and home improvement supplies, and compete primarily on the basis of price. The 2
4 Company believes that this tenant mix mitigates the effects on its properties of adverse changes in general economic conditions. Substantially all of the Company's large store leases are long-term with fixed base rents and provide for step-ups in rent typically occurring every five years. In addition, the Company's leases generally provide for additional rents based on a percentage of tenants' sales. Of the Company's $87,424,000 of rental revenue in 1996, base rents accounted for approximately 99% and percentage rents accounted for approximately 1%. The Company's leases generally pass through to tenants the tenant's share of all common area charges (including roof and structure, unless it is the tenant's direct responsibility), real estate taxes and insurance costs and certain capital expenditures. As of December 31, 1996, the average annual base rent per square foot for the Company's shopping centers was $9.09. From 1992 through 1996, the Company's property rentals from shopping centers (including the effects of straight-lining of rents) were $56,900,000, $61,900,000, $64,700,000, $74,300,000 and $80,000,000, respectively. Straight-lining of rents averages the rent increases provided for in leases such that property rentals for financial statement purposes is constant throughout the term of the lease. This convention applies to leases entered into after November 14, 1985. As of December 31, 1996, no single shopping center property accounted for more than 6.2% of the Company's total leasable area for its shopping center properties or more than 5.8% of property rentals for its shopping center properties. Bradlees, Inc. ("Bradlees") accounted for 22%, 21% and 19% of total property rentals for the years ended December 31, 1996, 1995 and 1994, respectively. Home Depot represented 5.5% and Sam's Wholesale/Wal*Mart, Shop Rite, Pathmark, T.J. Maxx/Marshalls and Staples each accounted for approximately 3.0% of the total property rentals for the year ended December 31, 1996. In June 1995, Bradlees filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The Company currently leases 17 locations to Bradlees. Of these locations, 14 are fully guaranteed by Stop & Shop Companies, Inc. ("Stop & Shop"), a wholly-owned subsidiary of Royal Ahold NV, a leading international food retailer, and one is guaranteed as to 70% of the rent. Several of the Company's other tenants, whose rents aggregated less than 3.0% of the Company's total property rentals for the year ended December 31, 1996, have also filed for protection under Chapter 11. Vornado, Inc., the immediate predecessor to the Company, was merged with the Company on May 6, 1993 in connection with the Company's conversion to a REIT. The Company administers all operating functions, including leasing, management, construction, finance, legal, accounting and data processing, from its executive offices (other than the leasing of the Company's three Texas properties, which is done by an employee locally). The Company's principal executive offices are located at Park 80 West, Plaza II, Saddle Brook, New Jersey 07663; telephone (201) 587-1000. RELATIONSHIP WITH ALEXANDER'S In March 1995, the Company purchased all of the 1,353,468 shares of common stock of Alexander's then owned by Citibank, N.A. ("Citibank"), representing 27.1% of the outstanding shares of common stock of Alexander's, for $40.50 per share in cash. As a result of the acquisition, the Company owns 29.3% of the common stock of Alexander's. (See "Interstate Properties" for a description of its ownership of the Company and Alexander's.) Alexander's has nine properties (where its department stores were formerly located) consisting of: Operating properties: (i) the Rego Park I property located in Queens, New York; (ii) a 50% interest in the 427,000 square feet of mall stores at the Kings Plaza Shopping Center (the "Kings Plaza Mall") in Brooklyn, New York; (iii) the Fordham Road property located in the Bronx, New York; 3
5 (iv) the Flushing property located in Flushing, New York; and (v) the Third Avenue property in the Bronx, New York. The occupancy rate of Alexander's operating properties was 95% and 69% as of December 31, 1996 and 1995, respectively. Non-operating properties to be redeveloped: (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. This Property is owned by a limited partnership in which Alexander's is the general partner and owns approximately 92% of the limited partnership interests. Alexander's redevelopment plans include razing the existing building and developing a large, multi-use building, requiring capital expenditures in excess of $300 million. No development decisions have been finalized; (vii) the Paramus property which consists of 39.3 acres of land, including its former store building, located at the intersection of Routes 4 and 17 in Paramus, New Jersey. Approximately 9 acres located on the property's periphery are subject to condemnation by the State of New Jersey. Alexander's and the New Jersey Department of Transportation (the "DOT") are negotiating an agreement, pursuant to which the DOT will pay approximately $14.7 million for the acreage subject to condemnation and grant Alexander's the right to develop up to 550,000 square feet on the remaining acreage. The agreement with the DOT is subject to negotiation of final documentation and to certain municipal approvals. Alexander's is considering razing the existing building and developing a two or three level shopping center on the site. The estimated total cost of such redevelopment is between $60 million and $70 million. No development decisions have been finalized; (viii) the Kings Plaza Store, a 339,000 square foot anchor store, which is one of the two anchor stores at the Kings Plaza Mall Shopping Center. In January 1997, Sears leased 289,000 square feet at this location for use as a full-line department store expected to open in the last quarter of 1997, and (ix) Rego Park II, comprising one and one-half blocks of vacant land adjacent to the Rego Park I location. Vornado expects to provide a portion of the financing required for Alexander's redevelopment projects. None of the redevelopment plans for the non-operating properties above have been finalized. See Item 2. "Properties -- Alexander's". In March 1995, the Company lent Alexander's $45 million to repay its creditors and provide working capital. The loan matures in March 1998, and bears interest at 15.60%. Management believes there are no indications of impairment in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan". In September 1995, Caldor, which leases the Fordham Road and Flushing properties from Alexander's, filed for protection under Chapter 11. Caldor accounted for approximately 36% and 56% of Alexander's consolidated revenues for the years ended December 31, 1996 and 1995, respectively. On February 11, 1997, Caldor announced that, subject to Bankruptcy Court approval, it expects to close its Fordham Road store in May 1997. The Company manages, develops and leases the Alexander's properties under a management and development agreement (the "Management Agreement") and a leasing agreement (the "Leasing Agreement") pursuant to which the Company receives annual fees from Alexander's. Alexander's common stock is listed on the New York Stock Exchange under the symbol "ALX". Interstate Properties As of December 31, 1996, Interstate Properties owned 24.4% of the common shares of beneficial interest of the Company and 27.1% of Alexander's common stock. Interstate Properties is a general partnership in 4
6 which Steven Roth, David Mandelbaum and Russell B. Wight, Jr. are partners. Mr. Roth is the Chairman of the Board and Chief Executive Officer of the Company, the Managing General Partner of Interstate Properties, and the Chief Executive Officer and a director of Alexander's. Messrs. Mandelbaum and Wight are trustees of the Company and are also directors of Alexander's. Effective March 2, 1995, for a three-year period, the Company and Interstate Properties agreed not to own in excess of two-thirds of Alexander's common stock or enter into certain other transactions with Alexander's, without the consent of the independent directors of Alexander's. COMPETITION The leasing of real estate is highly competitive. Demand for retail space has been impacted by the recent bankruptcy of a number of retail companies and a general trend toward consolidation in the retail industry which could adversely affect the ability of the Company to attract or retain tenants. The principal means of competition are price, location and the nature and condition of the facility to be leased. The Company directly competes with all lessors and developers of similar space in the areas in which its properties are located. ENVIRONMENTAL REGULATIONS See "Note 11 -- Contingencies" to the Consolidated Financial Statements at page 40. EMPLOYEES The Company employs 72 people. SEGMENT DATA The company operates in one business segment -- real estate. See "Note 9 -- Leases" to the Consolidated Financial Statements at page 39 for information on significant tenants. Vornado engages in no foreign operations. 5
7 ITEM 2. PROPERTIES The Company leases 27,000 square feet in Saddle Brook, New Jersey for use as it's executive offices The following table sets forth certain information as of December 31, 1996 relating to the properties owned by the Company The Principal Tenants as described below, which are primarily tenants which occupy 30,000 square feet or more, accounted for approximately 70% of total square footage. LEASABLE BUILDING SQUARE FOOTAGE ------------------------- YEAR OWNED BY NUMBER AVERAGE ORIGINALLY LAND OWNED/ TENANT ON OF ANNUALIZED DEVELOPED AREA LEASED BY LAND LEASED TENANTS BASE RENT LOCATION OR ACQUIRED (ACRES) COMPANY FROM COMPANY 12/31/96 PER SQ. FT.(1) - --------------------------------------------------- ----------- ------- ---------- ------------ -------- -------------- SHOPPING CENTERS NEW JERSEY Atlantic City.................................. 1965 17.7 135,774 -- -- -- Bordentown..................................... 1958 31.2 178,678 -- 4 $ 6.54 Bricktown...................................... 1968 23.9 259,888 2,764 19 10.22 Cherry Hill.................................... 1964 37.6 231,142 63,511 13 8.38 Delran......................................... 1972 17.5 167,340 1,200 5 5.32 Dover.......................................... 1964 19.6 172,673 -- 12 5.87 East Brunswick................................. 1957 19.2 219,056 10,400 7 11.45 East Hanover................................... 1962 24.6 271,066 -- 16 10.21 Hackensack..................................... 1963 21.3 207,548 59,249 19 14.75 Jersey City.................................... 1965 16.7 222,478 3,222 10 11.99 Kearny......................................... 1959 35.3 41,518 62,471 4 6.47 Lawnside....................................... 1969 16.4 145,282 -- 3 9.07 Lodi........................................... 1975 8.7 130,000 -- 1 8.50 Manalapan...................................... 1971 26.3 194,265 2,000 7 8.84 Marlton........................................ 1973 27.8 173,238 6,836 10 8.29 Middletown..................................... 1963 22.7 179,584 52,000 21 12.25 Morris Plains.................................. 1985 27.0 171,493 1,000 18 11.04 North Bergen................................... 1959 4.6 6,515 55,597 3 25.78 North Plainfield(4)............................ 1989 28.7 217,360 -- 16 8.71 LEASE EXPIRATION/ PERCENT OPTION LOCATION LEASED PRINCIPAL TENANTS EXPIRATION - --------------------------------------------------- ------- ------------------------ ----------- SHOPPING CENTERS NEW JERSEY Atlantic City.................................. -- -- Bordentown..................................... 100% Bradlees(2)(3) 2001/2021 Shop-Rite 2011/2016 Bricktown...................................... 99% Caldor 2008/2028 Shop-Rite 2002/2017 Cherry Hill.................................... 94% Bradlees(2)(3) 2006/2026 Drug Emporium 2002 Shop & Bag 2007/2017 Toys "R" Us 2012/2042 Delran......................................... 95% Sam's Wholesale 2011/2021 Dover.......................................... 97% Ames 2017/2037 Shop-Rite 2012/2022 East Brunswick................................. 100% Bradlees(3) 2003/2023 Shoppers World 2007/2012 T.J. Maxx 1999 East Hanover................................... 97% Home Depot 2009/2019 Marshalls 2004/2009 Pathmark 2001/2024 Todays Man 2009/2014 Hackensack..................................... 96% Bradkees(3) 2012/2017 Pathmark 2014/2024 Rickel Home Center 2003/2013 Jersey City.................................... 92% Bradlees(3) 2002/2022 Shop-Rite 2008/2028 Kearny......................................... 89% Pathmark 2013/2033 Rickel Home Center 2008 Lawnside....................................... 100% Home Deposit 2012/2027 Drug Emporium 2007 Lodi........................................... 100% National Wholesale Liquidators 2013/2023 Manalapan...................................... 100% Bradlees(3) 2002/2022 Grand Union 2012/2022 Marlton........................................ 100% Kohl's(2)(3) 2011/2031 Shop-Rite 1999/2009 Middletown..................................... 96% Bradlees(3) 2002/2022 Grand Union 2009/2029 Morris Plains.................................. 97% Caldor 2002/2023 Shop-Rite 2002 North Bergen................................... 100% A&P 2012/2032 North Plainfield(4)............................ 96% KMart 2006/2016 Pathmark 2001/2011 6
8 LEASABLE BUILDING SQUARE FOOTAGE ------------------------- YEAR OWNED BY NUMBER AVERAGE ORIGINALLY LAND OWNED/ TENANT ON OF ANNUALIZED DEVELOPED AREA LEASED BY LAND LEASED TENANTS BASE RENT LOCATION OR ACQUIRED (ACRES) COMPANY FROM COMPANY 12/31/96 PER SQ. FT.(1) - --------------------------------------------------- ----------- ------- ---------- ------------ -------- -------------- Totowa......................................... 1957 40.5 201,471 93,613 8 15.96 Turnersville................................... 1974 23.3 89,453 6,513 3 5.98 Union.......................................... 1962 24.1 257,045 -- 12 17.48 Vineland....................................... 1966 28.0 143,257 -- 4 6.95 Watchung....................................... 1959 53.8 49,979 115,660 6 17.80 Woodbridge..................................... 1959 19.7 232,755 3,614 10 13.00 NEW YORK 14th Street and Union Square, Manhattan........ 1993 0.8 231,770 -- 1 9.92 Albany (Menands)............................... 1965 18.6 140,529 -- 2 6.35 Buffalo (Amherst)(4)........................... 1968 22.7 184,832 111,717 10 6.71 Coram(4)....................................... 1976 2.4 103,000 -- 1 2.22 Freeport....................................... 1981 12.5 166,587 -- 3 11.50 New Hyde Park(4)............................... 1976 12.5 101,454 -- 1 13.55 North Syracuse(4).............................. 1976 29.4 98,434 -- 1 2.74 Rochester (Henrietta)(4)....................... 1971 15.0 147,812 -- 1 5.86 Rochester...................................... 1966 18.4 176,261 -- 1 6.05 PENNSYLVANIA Allentown...................................... 1957 86.8 262,607 356,938 19 9.63 LEASE EXPIRATION/ PERCENT OPTION LOCATION LEASED PRINCIPAL TENANTS EXPIRATION - --------------------------------------------------- ------- ------------------------ ----------- Totowa......................................... 97% Bradlees(3) 2013/2028 Home Depot 2015/2025 Marshall's 2007/2012 Turnersville................................... 100% Bradlees(2)(3) 2011/2031 Union.......................................... 100% Bradlees(3) 2002/2022 Toys "R" Us 2015 Cost Cutter Drug 2000 Vineland....................................... 51% Rickel Home Center 2005/2010 Watchung....................................... 96% BJ Wholesale 2024 Woodbridge..................................... 96% Bradlees(3) 2002/2022 Foodtown 2007/2014 Syms 2000 NEW YORK 14th Street and Union Square, Manhattan........ 100% Bradlees 2019/2029 Albany (Menands)............................... 100% Fleet Bank 2004/2014 Albany Public Mkts.(5) 2000 Buffalo (Amherst)(4)........................... 96% Circuit City 2017 Media Play 2002/2017 MJ Design 2006/2017 Toys "R" Us 2013 TJ Maxx 1999 Coram(4)....................................... 100% May Department 2011 Stores(5) Freeport....................................... 100% Home Depot 2011/2021 Cablevision 2004 New Hyde Park(4)............................... 100% Bradlees(6) 2019/2029 North Syracuse(4).............................. 100% Reisman Properties 2014 Rochester (Henrietta)(4)....................... 47% Hechinger(5) 2005/2025 Rochester...................................... 41% Hechinger(5) 2005/2025 PENNSYLVANIA Allentown...................................... 98% Hechinger 2011/2031 Shop-Rite 2011/2021 Burlington Coat Factory 2017 Wal-Mart 2024/2094 Sam's Wholesale 2024/2094 TJ Maxx 1998/2008 7
9 LEASABLE BUILDING SQUARE FOOTAGE ------------------------- YEAR OWNED BY NUMBER AVERAGE ORIGINALLY LAND OWNED/ TENANT ON OF ANNUALIZED DEVELOPED AREA LEASED BY LAND LEASED TENANTS BASE RENT LOCATION OR ACQUIRED (ACRES) COMPANY FROM COMPANY 12/31/96 PER SQ. FT.(1) - --------------------------------------------------- ----------- ------- ---------- ------------ -------- -------------- Bensalem....................................... 1972 23.2 208,174 6,714 13 7.49 Bethlehem...................................... 1966 23.0 157,212 2,654 12 4.76 Broomall....................................... 1966 21.0 145,776 22,355 5 8.31 Glenolden...................................... 1975 10.0 101,235 -- 3 14.75 Lancaster...................................... 1966 28.0 179,982 -- 7 4.28 Levittown...................................... 1964 12.8 104,448 -- 1 5.98 10th and Market Streets, Philadelphia.......... 1994 1.8 271,300 -- 2 7.94 Upper Moreland................................. 1974 18.6 122,432 -- 1 7.50 York........................................... 1970 12.0 113,294 -- 3 4.64 MARYLAND Baltimore (Belair Rd).......................... 1962 16.0 205,723 -- 3 4.83 Baltimore (Towson)............................. 1968 14.6 146,393 6,800 7 9.62 Baltimore (Dundalk)............................ 1966 16.1 183,361 -- 17 6.48 Glen Burnie.................................... 1958 21.2 117,369 3,100 4 5.90 Hagerstown..................................... 1966 13.9 133,343 14,965 6 3.01 CONNECTICUT Newington...................................... 1965 19.2 134,229 45,000 4 6.24 Waterbury...................................... 1969 19.2 139,717 2,645 10 7.64 MASSACHUSETTS Chicopee....................................... 1969 15.4 112,062 2,851 3 4.85 Milford(4)..................................... 1976 14.7 83,000 -- 1 5.26 Springfield.................................... 1966 17.4 8,016 117,044 2 11.25 LEASE EXPIRATION/ PERCENT OPTION LOCATION LEASED PRINCIPAL TENANTS EXPIRATION - --------------------------------------------------- ------- ------------------------ ----------- Bensalem....................................... 89% (2)(3) 2011/2031 Shop-Rite 2011/2031 Bethlehem...................................... 78% Pathmark 2000/2023 Super Petz 2005/2015 Broomall....................................... 100% Bradlees(2)(3) 2006/2026 Glenolden...................................... 100% Bradlees(2)(3) 2012/2022 Lancaster...................................... 50% Weis Markets 1998/2018 Levittown...................................... 100% (2)(3) 2006/2026 10th and Market Streets, Philadelphia.......... 62% Kimco Realty Corporation 2010/2035 Upper Moreland................................. 100% Sam's Wholesale(2) 2010/2015 York........................................... 100% Builders Square 2009/2018 MARYLAND Baltimore (Belair Rd).......................... 100% Bib B Food 1999/2004 Warehouse Y? Innovatyve 2002/2007 Baltimore (Towson)............................. 100% Staples 2004 Cost Saver Supermarket 2000/2020 Drug Emporium 1999/2004 Baltimore (Dundalk)............................ 97% A&P 1997/2007 Ollie's 1998/2008 Manor Shops 1998 Glen Burnie.................................... 78% Pathmark Stores, Inc(5) 2005 Hagerstown..................................... 100% Big Lots 2002/2012 Pharmhouse 2008/2012 Weis Markets 1999/2009 CONNECTICUT Newington...................................... 100% (3) 2002/2022 The Wiz 2007/2027 Waterbury...................................... 100% Toys "R" Us 2010 Shaws Supermarkets 2003/2018 MASSACHUSETTS Chicopee....................................... 93% Bradlees(3) 2002/2022 Milford(4)..................................... 100% Bradlees(3) 2004/2009 Springfield.................................... 100% Wal-Mart 2018/2092 8
10 LEASABLE BUILDING SQUARE FOOTAGE ------------------------- YEAR OWNED BY NUMBER AVERAGE ORIGINALLY LAND OWNED/ TENANT ON OF ANNUALIZED DEVELOPED AREA LEASED BY LAND LEASED TENANTS BASE RENT LOCATION OR ACQUIRED (ACRES) COMPANY FROM COMPANY 12/31/96 PER SQ. FT.(1) - --------------------------------------------------- ----------- ------- ---------- ------------ -------- -------------- TEXAS Lewisville..................................... 1990 13.3 34,893 1,204 14 13.60 Mesquite....................................... 1990 5.5 71,246 -- 14 13.90 Dallas......................................... 1990 9.9 99,733 -- 8 9.25 ------- ---------- ------------ --- ------ Total Shopping Centers..................... 1,182.1 8,785,082 1,233,637 411 9.09 ------- ---------- ------------ --- ------ WAREHOUSE/INDUSTRIAL E. Brunswick..................................... 1972 16.1 325,800 -- 2 2.17 E. Hanover....................................... 1963-1967 45.5 941,429 -- 12 3.64 Edison........................................... 1982 18.7 272,071 -- 1 2.75 Garfield......................................... 1959 31.6 486,620 -- 3 3.46 ------- ---------- ------------ --- ------ Total Warehouse/Industrial................. 111.9 2,025,920 -- 18 3.19 ------- ---------- ------------ --- ------ OTHER PROPERTIES Paramus(4)....................................... 1987 3.4 118,225 -- 25 17.29 Montclair........................................ 1972 1.6 16,928 -- 1 17.00 Rahway(4)........................................ 1972 -- 32,000 -- 1 4.88 Manhattan, NY(8)................................. 1966 0.5 149,000 -- 1 7.65 ------- ---------- ------------ --- ------ Total Other Properties..................... 5.5 316,153 -- 28 10.61 ------- ---------- ------------ --- ------ Grand Total................................ 1,299.5 11,127,155 1,233,637 457 $ 8.13 ======= ========= ============= ======== ============= LEASE EXPIRATION/ PERCENT OPTION LOCATION LEASED PRINCIPAL TENANTS EXPIRATION - --------------------------------------------------- ------- ------------------------ ----------- TEXAS Lewisville..................................... 88% Albertson's(7) 2055 Mesquite....................................... 95% Dallas......................................... 80% Albertson's(7) 2055 ------- Total Shopping Centers..................... 90% ------- WAREHOUSE/INDUSTRIAL E. Brunswick..................................... 97% Popsicle Playwear 2000/2005 IFB Apparel 2001/2006 E. Hanover....................................... 94% Various Tenants Edison........................................... 100% White Cons. Ind. 1998/2001 Garfield......................................... 38% Popular Services of Various Tenants 2007 ------- Total Warehouse/Industrial................. 81% ------- OTHER PROPERTIES Paramus(4)....................................... 65% Montclair........................................ 100% Rahway(4)........................................ 100% Manhattan, NY(8)................................. 100% American Broadcasting Companies 1999 ------- Total Other Properties..................... 87% ------- Grand Total................................ 89% ======= ------------------ (1) Average annualized base rent per square foot does not include ground leases (which leases are included in percent leased) or rent for leases which had not commenced as of December 31, 1996. (2) Montgomery Ward & Co., Inc. (a previous lessor) remains liable on such lease including the rent it was obligated to pay -- approximately 70%. (3) These leases are either fully guaranteed by Stop & Shop, a wholly-owned subsidiary of Royal Ahold NV, or in the case of Totowa, guaranteed as to 70% of rent . (4) Ground and/or building leasehold interest. (5) The tenant has ceased operations at these locations but continues to pay rent. (6) Bradlees received Bankruptcy Court approval in January 1997 to close this store. (7) Square footage excludes Albertson's which owns its land and building. (8) The Company owns a 50% interest in this property. 9
11 ITEM 2. ALEXANDER'S PROPERTIES The following table shows the location, approximate size and leasing status as of December 31, 1996 of each of Alexander's properties. APPROXIMATE APPROXIMATE LAND SQUARE BUILDING SQUARE AVERAGE LEASE FOOTAGE FOOTAGE/ ANNUALIZED EXPIRATION/ ("SF") NUMBER BASE RENT PERCENT OPTION LOCATION OWNERSHIP OR ACREAGE OF FLOORS PER SQ. FOOT(1) LEASED TENANTS EXPIRATION - ---------------- --------- ------------- --------------- --------------- ------- ---------------- ---------- OPERATING PROPERTIES NEW YORK: Rego Park -- Queens... Owned 4.8 acres 351,000/3(2) $ 27.79 96% Bed Bath & (3) Beyond Circuit City (3) Marshalls 2008/2021 Sears 2021 Kings Plaza Shopping Center & Marina (Kings Plaza Mall) Brooklyn..... 50% 24.3 acres 427,000/2(2)(4) 31.19 84% 120 Tenants Various Owned Fordham Road -- Bronx... Owned 92,211 SF 303,000/5 11.54 100% Caldor(5) 2013/2028 Flushing -- Queens... Leased 44,975 SF 177,000/4(2) 16.35 100% Caldor 2027 Third Avenue -- Bronx... Owned 60,451 SF 173,000/4 4.33 100% An affiliate of 2023 1,431,000 Conway REDEVELOPMENT PROPERTIES Lexington Avenue -- Manhattan... 92% 84,420 SF 591,000/6(6) Owned Kings Plaza Store -- Brooklyn... Owned Included in 339,000/4 Sears (3) Shopping Center above Rego Park II -- Queens... Owned 6.6 acres -- NEW JERSEY: Paramus, New Jersey....... Owned 39.3 acres(7) 340,000/3(6) - --------------- (1) Average annualized base rent per square foot does not include rent for leases which had not commenced as of December 31, 1996. (2) Excludes parking garages operated for the benefit of Alexander's. (3) The Circuit City and Bed Bath & Beyond leases are expected to commence in the first half of 1997. The Sears lease is expected to commence in the last quarter of 1997. (4) Excludes approximately 150,000 square feet of enclosed, common area space. (5) On February 11, 1997, Caldor announced that, subject to Bankruptcy Court approval, it expects to close this store in May 1997. (6) Alexander's is evaluating redevelopment plans for these sites which may involve razing the existing buildings. (7) Approximately 9 acres are subject to condemnation. 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. INDEBTEDNESS The Company has historically maintained a relatively low level of debt to market capitalization. At December 31, 1996, the ratio of debt to market capitalization was 17% based on debt of $232,287,000 and market equity of $1,394,000,000. In the future, in connection with its strategy for growth, this percentage may increase. This policy may be reviewed and modified from time to time by the Company without the vote of shareholders. 10
12 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 effect on the Company's financial condition or results of operations. 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, 1996. EXECUTIVE OFFICERS OF THE REGISTRANT The following is a list of the names, ages, principal occupations and positions with Vornado of the executive officers of Vornado and the positions held by such officers during the past five years. All executive officers of Vornado have terms of office which run until the next succeeding meeting of the Board of Trustees of Vornado following the Annual Meeting of Shareholders unless they are removed sooner by the Board. PRINCIPAL OCCUPATION, POSITION AND OFFICE (CURRENT AND NAME AGE DURING PAST FIVE YEARS WITH VORNADO UNLESS OTHERWISE STATED) - ----------------------- --- -------------------------------------------------------------- Steven Roth............ 55 Chairman of the Board, Chief Executive Officer and Chairman of the Executive Committee of the Board; the Managing General Partner of Interstate Properties, a developer and operator of shopping centers and an investor in securities and partnerships; Chief Executive Officer of Alexander's, Inc. since March 2, 1995 and a Director since 1989; Director of Insituform Technologies, Inc. Michael D. 40 President and a Trustee since December 2, 1996; Director of Fascitelli........... Alexander's, Inc. since December 2, 1996; Partner at Goldman, Sachs & Co. in charge of its real estate practice from December 1992 to December 1996; and Vice President at Goldman, Sachs & Co., prior to December 1992. Richard T. Rowan....... 50 Vice President -- Real Estate Joseph Macnow.......... 51 Vice President -- Chief Financial Officer; Vice President -- Chief Financial Officer of Alexander's, Inc. since August 1995 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Vornado's common shares are traded on the New York Stock Exchange. Quarterly price ranges of the common shares and dividends per share paid for the years ended December 31, 1996 and 1995 were as follows: YEAR ENDED YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 --------------------------- --------------------------- QUARTER HIGH LOW DIVIDENDS HIGH LOW DIVIDENDS ------------------------------ ------ ------ --------- ------ ------ --------- 1st........................... $38.38 $35.63 $ .61 $36.25 $33.88 $ .56 2nd........................... 41.50 37.13 .61 36.00 32.63 .56 3rd........................... 42.13 40.50 .61 39.00 34.75 .56 4th........................... 52.88 40.50 .61 37.88 34.38 .56 The approximate number of record holders of common shares of Vornado at December 31, 1996, was 2,000. 11
13 ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) OPERATING DATA Revenues: Property rentals................... $ 87,424 $ 80,429 $ 70,755 $ 67,213 $ 63,186 Expense reimbursements............. 26,644 24,091 21,784 19,839 17,898 Other income....................... 2,819 4,198 1,459 1,738 913 ----------- ----------- ----------- ----------- ----------- Total Revenues........................ 116,887 108,718 93,998 88,790 81,997 ----------- ----------- ----------- ----------- ----------- Expenses: Operating.......................... 36,412 32,282 30,223 27,994 27,587 Depreciation and amortization...... 11,589 10,790 9,963 9,392 9,309 General and administrative......... 5,167 6,687 6,495 5,890 4,612 Amortization of officer's deferred compensation expense............. 2,083 -- -- -- -- Costs incurred in connection with the merger Vornado, Inc. into Vornado Realty Trust............. -- -- -- 856 -- Cost incurred upon exercise of a stock option by an officer and subsequent repurchase of a portion of the shares............ -- -- -- -- 15,650 ----------- ----------- ----------- ----------- ----------- Total Expenses........................ 55,251 49,759 46,681 44,132 57,158 ----------- ----------- ----------- ----------- ----------- Operating income...................... 61,636 58,959 47,317 44,658 24,839 Income (loss) applicable to Alexander's: Equity in income (loss)............ 1,679 (1,972) -- -- -- Depreciation....................... (571) (417) -- -- -- Interest income on loan............ 6,848 6,343 -- -- -- Income from investment in and advances to Vornado Management Corp......... 1,855 788 -- -- -- Interest income on mortgage note receivable......................... 2,579 -- -- -- -- Interest and dividend income.......... 3,151 5,439 7,489 11,620 8,555 Interest and debt expense............. (16,726) (16,426) (14,209) (31,155) (33,910) Net gain on marketable securities..... 913 294 643 263 2,779 ----------- ----------- ----------- ----------- ----------- Income from continuing operations before income taxes................ 61,364 53,008 41,240 25,386 2,263 Provision (benefit) for income taxes.............................. -- -- -- (6,369) 1,080 ----------- ----------- ----------- ----------- ----------- Income from continuing operations..... $ 61,364 $ 53,008 $ 41,240 $ 31,755 $ 1,183 =========== =========== =========== =========== =========== Weighted average number of shares outstanding........................ 24,603,442 23,579,669 21,853,720 19,790,448 16,559,330 Income per share from continuing operations....................... $ 2.49 $ 2.25 $ 1.89 $ 1.60 $ .07 Cash dividends declared............ 2.44 2.24 2.00 1.50* 1.15 - --------------- * Does not include special dividend of $3.36 per share of accumulated earnings and profits paid in June 1993. 12
14 YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1996 1995 1994 1993 1992 -------- --------- -------- -------- -------- (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS) BALANCE SHEET DATA As at: Total assets................................ $565,204 $ 491,496 $393,538 $385,830 $420,616 Real estate, at cost........................ 397,298 382,476 365,832 340,415 314,651 Accumulated depreciation.................... 151,049 139,495 128,705 118,742 111,142 Debt........................................ 232,387 233,353 234,160 235,037 341,701 Shareholders' equity (deficit).............. 276,257 194,274 116,688 115,737 (3,242) OTHER DATA Funds from operations(1): Income from continuing operations before income taxes............................. $ 61,364 $ 53,008 $ 41,240 $ 25,386 $ 2,263 Depreciation and amortization of real property............................... 10,583 10,019 9,192 8,842 8,778 Straight-lining of rental income......... (2,676) (2,569) (2,181) (2,200) (2,200) Leasing fees received in excess of income recognized............................. 1,805 1,052 -- -- -- Losses/(gains) on sale of securities available for sale..................... -- 360 (51) (263) (846) Proportionate share of adjustments to Alexander's income (loss) to arrive at Alexander's funds from operations...... (1,760) 539 -- -- -- Costs incurred in connection with the merger/upon exercise of a stock option................................. -- -- -- 856 15,650 -------- --------- -------- -------- -------- Funds from operations....................... $ 69,316 $ 62,409 $ 48,200 $ 32,621 $ 23,645 ======== ========= ======== ======== ======== Cash flow provided by (used in): Operating activities..................... $ 70,703 $ 62,882 $ 46,948 $ 27,725 $ 17,607 Investing activities..................... $ 14,912 $(103,891) $(15,434) $ 1,350 $ 14,800 Financing activities..................... $(15,046) $ 36,577 $(32,074) $(56,433) $ 4,384 - --------------- (1) 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 applicable to common shares 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 income. 13
15 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements made in this report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following general economic and business conditions, which will, among other things, affect demand for retail space or retail goods, availability and creditworthiness of prospective tenants, lease rents and the terms and availability of financing; adverse changes in the real estate markets including, among other things, competition with other companies and technology; risks of real estate development and acquisition; governmental actions and initiatives; and environmental/safety requirements. RESULTS OF OPERATIONS Years Ended December 31, 1996 and December 31, 1995 The Company's revenues, which consist of property rentals, tenant expense reimbursements and other income, were $116,887,000 in 1996, compared to $108,718,000 in 1995, an increase of $8,169,000 or 7.5%. Property rentals from shopping centers were $80,001,000 in 1996, compared to $74,255,000 in 1995, an increase of $5,746,000 or 7.7%. Of this increase, (i) $3,800,000 resulted from rental step-ups in existing tenant leases which are not subject to the straight-line method of revenue recognition and (ii) $2,000,000 resulted from expansions and an acquisition. Property rentals received from new tenants were approximately the same as property rentals lost from vacating tenants. Percentage rent included in property rentals was $936,000 in 1996, compared to $959,000 in 1995. Property rentals from the remainder of the portfolio were $7,423,000 in 1996, compared to $6,174,000 in 1995, an increase of $1,249,000 or 20.2%. Of this increase, $650,000 resulted from the purchase of an office building in June 1996. Tenant expense reimbursements, which consist of the tenants' pro-rata share of common area maintenance expenses (such as snow removal costs, landscaping and parking lot repairs), real estate taxes and insurance, were $26,644,000 in 1996, compared to $24,091,000 in 1995, an increase of $2,553,000. This increase reflects a corresponding increase in operating expenses passed through to tenants. Other income was $2,819,000 in 1996, compared to $4,198,000 in 1995, a decrease of $1,379,000. This decrease resulted primarily from (i) including management and development fee income from Alexander's in "Income from investment in and advances to Vornado Management Corp." ("VMC") rather than in "Other income" for a full year in 1996, compared to six months in 1995 and (ii) the recognition of leasing fee income in the first quarter of 1995 from Alexander's of $915,000 applicable to 1993 and 1994 (no leasing fee income was recognized prior to 1995 because required conditions had not been met), partially offset by (iii) the increase in management, development and leasing fees from Interstate Properties. Operating expenses were $36,412,000 in 1996, compared to $32,282,000 in 1995, an increase of $4,130,000. Of this increase, (i) $3,100,000 were passed through to tenants and consisted of higher snow removal costs of $1,500,000, increased real estate taxes of $1,000,000 and other common area maintenance expense increases of $600,000 and (ii) $500,000 resulted from increases in rent expense and other property expenses. In addition, in 1995 operating expenses were partially offset by real estate tax refunds and other miscellaneous income of approximately $500,000. Depreciation and amortization expense increased by $799,000 in 1996, compared to 1995, as a result of expansions and an acquisition. General and administrative expenses were $5,167,000 in 1996, compared to $6,687,000 in 1995, a decrease of $1,520,000. This decrease resulted primarily from a reduction in corporate office expenses caused by the third quarter 1995 assignment of the Company's Management and Development Agreement with Alexander's to VMC. 14
16 In December 1996, the Company recognized an expense of $2,083,000, representing one month's amortization of the $25,000,000 deferred payment due to the Company's President. The balance of the deferred payment will be amortized in 1997. Income applicable to Alexander's (loan interest income, equity in income (loss) and depreciation) was $7,956,000 for the year ended December 31, 1996, compared to $3,954,000 in the prior year, an increase of $4,002,000. This increase resulted from (i) lower operating losses at Alexander's caused by the commencement of rent at the Rego Park I property in March 1996, (ii) the recognition of $2,053,000 of non-recurring income as a result of the reversal of a liability which is no longer required and (iii) interest income on the loan to Alexander's for a full year in 1996, compared to a ten month period in 1995. The Company believes that its share of Alexander's losses (which are non-cash), combined with its fee income and interest income, will not have a negative effect on its results of operations, liquidity and financial condition. In July 1995, the Company assigned its Management Agreement with Alexander's to VMC. In exchange, the Company received 100% of the non-voting preferred stock of VMC which entitles it to 95% of the economic benefits of VMC through distributions. In addition, the Company lent $5,000,000 to VMC for working capital purposes under a three-year term loan bearing interest at the prime rate plus 2%. VMC is responsible for its pro-rata share of compensation and fringe benefits of employees and 30% of other expenses which are common to both Vornado and VMC. Income from investment in and advances to VMC was $1,855,000 for the year ended December 31, 1996, compared to $788,000 for the period from July 6th to December 31, in 1995. Income from investment in and advances to VMC for the year ended December 31, 1996 reflects additional fee income earned by VMC in the first quarter of 1996 relating to the substantial completion of the redevelopment of Alexander's Rego Park I property. Investment income (interest income on mortgage note receivable, interest and dividend income and net gains/(losses) on marketable securities) was $6,643,000 for 1996, compared to $5,733,000 in 1995, an increase of $910,000 or 15.9%. This increase resulted from higher net gains on marketable securities and the yield earned on the mortgage note receivable exceeding the yield earned on the investment of such funds in 1995. The Company operates in a manner intended to enable it to continue to qualify as a REIT under Sections 856-860 of the Internal Revenue Code of 1986 as amended. Under those sections, a REIT which distributes at least 95% of its REIT taxable income as a dividend to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. The Company has distributed to its shareholders an amount greater than its taxable income. Therefore, no provision for Federal income taxes is required. RESULTS OF OPERATIONS Years Ended December 31, 1995 and December 31, 1994 The Company's revenues, which consist of property rentals, tenant expense reimbursements and other income were $108,718,000 in 1995, compared to $93,998,000 in 1994, an increase of $14,720,000 or 15.7%. Property rentals from shopping centers were $74,255,000 in 1995, compared to $64,665,000 in 1994, an increase of $9,590,000 or 14.8%. Of this increase, (i) $6,067,000 resulted from expansions of shopping centers and acquisitions of retail properties, (ii) $2,823,000 resulted from rental step-ups in existing tenant leases which are not subject to the straight-line method of revenue recognition and (iii) $628,000 resulted from property rentals received from new tenants exceeding property rentals lost from vacating tenants. Percentage rent included in property rentals was $959,000 in 1995, compared to $887,000 in 1994. Property rentals from the remainder of the portfolio were $6,174,000 in 1995, compared to $6,090,000 in 1994, an increase of $84,000 or 1.4%. Tenant expense reimbursements were $24,091,000 in 1995, compared to $21,784,000 in 1994, an increase of $2,307,000. This increase reflects a corresponding increase in operating expenses passed through to tenants. 15
17 Other income was $4,198,000 in 1995, compared to $1,459,000 in 1994, an increase of $2,739,000. This increase resulted primarily from the fee income recognized in connection with the Management Agreement and Leasing Agreement with Alexander's including $915,000 applicable to 1993 and 1994 recognized in the first quarter of 1995 (no leasing fee income was recognized prior to 1995 because required conditions had not been met). In addition to the Management Agreement fee income included in other income in 1995, $2,250,000 of such fees was earned in 1995 by VMC and is included in the caption "Income from investment in and advances to Vornado Management Corp." in the Consolidated Statements of Income. Operating expenses were $32,282,000 in 1995, compared to $30,223,000 in 1994, an increase of $2,059,000. Of this increase (i) $1,484,000 resulted from real estate taxes from expansions and acquisitions, which were passed through to tenants, and (ii) $258,000 resulted from bad debt expenses primarily due to tenant bankruptcies. Depreciation and amortization expense increased by $827,000 in 1995, compared to 1994, primarily as a result of property expansions. General and administrative expenses were $6,687,000 in 1995, compared to $6,495,000 in 1994, an increase of $192,000. This increase is the net of increases from (i) payroll expenses of $1,017,000, (due to additions to staff and bonuses), and (ii) professional fees and other corporate office expenses of $305,000, offset by (iii) the reduction in expense of $1,130,000 resulting from the assignment of the Company's Management Agreement with Alexander's to VMC in the third quarter of 1995. For the period from March 2, 1995 through December 31, 1995, Vornado's equity in Alexander's losses amounted to $1,972,000. In addition, during the same period the Company recognized interest income on its loan to Alexander's of $6,343,000 and fee income from its Management Agreement and Leasing Agreement with Alexander's of $2,973,000 (excluding $2,250,000 earned by VMC). Income from investment in and advances to VMC consists of dividend income of $565,000 and interest income of $223,000. Investment income was $5,733,000 for 1995, compared to $8,132,000 in 1994, a decrease of $2,399,000 or 29.5%. This decrease was caused by (i) lower interest income resulting from the use of cash for the Alexander's investment and (ii) net gains on marketable securities being $349,000 less than in the prior year. Interest and debt expense was $16,426,000 in 1995, compared to $14,209,000 in 1994, an increase of $2,217,000 or 15.6%. Of this increase, $1,046,000 resulted from borrowings under the revolving credit facility to temporarily fund the investment in Alexander's and $1,134,000 resulted from a decrease in interest capitalized during construction. LIQUIDITY AND CAPITAL RESOURCES Cash Flows for the Years Ended December 31, 1996, 1995 and 1994 Year Ended December 31, 1996 Cash flows provided by operating activities of $70,703,000 was comprised of (i) net income of $61,364,000 and (ii) adjustments for non-cash items of $9,972,000, less (iii) the net change in operating assets and liabilities of $633,000. The adjustments for non-cash items are primarily comprised of depreciation and amortization of $12,586,000 and amortization of deferred officers compensation expense of $2,083,000, partially offset by the effect of straight-lining of rental income of $2,676,000 and equity in income from Alexander's of $1,108,000. The net change in "Leasing fees receivable" and "Deferred leasing fee income" included in item (iii) above reflects a decrease of $1,717,000 resulting from the rejection of a lease by an Alexander's tenant in March 1996 and an increase of $1,738,000 resulting from the releasing of a portion of this space. "Leasing fees receivable" of $2,500,000 were collected during this period. Net cash provided by investing activities of $14,912,000 was comprised of (i) proceeds from sale or maturity of securities available for sale of $46,734,000, partially offset by (ii) the Company's investment in a mortgage note receivable of $17,000,000 and (iii) capital expenditures of $14,822,000 (including $8,923,000 for the purchase of an office building). 16
18 Net cash used in financing activities of $15,046,000 was primarily comprised of (i) dividends paid of $59,558,000, (ii) the net repayment of borrowings on U.S. Treasury obligations of $34,239,000, (iii) the net repayment on mortgages of $966,000, partially offset by (iv) net proceeds from the issuance of common shares of $73,060,000 and (v) the proceeds from the exercise of stock options of $6,657,000. Cash increased during the period from December 31, 1995 to December 31, 1996 from $19,127,000 to $89,696,000 primarily as the result of the issuance of common shares in the fourth quarter of 1996 as noted above. Year Ended December 31, 1995 Cash flows provided by operating activities of $62,882,000 was comprised of: (i) net income of $53,008,000 and (ii) adjustments for non-cash items of $11,305,000 less (iii) the net change in operating assets and liabilities of $1,431,000. The adjustments for non-cash items are primarily comprised of depreciation and amortization of $11,779,000, plus equity in loss of Alexander's of $2,389,000, partially offset by the effect of straight-lining of rental income of $2,569,000. Further, during this period in connection with the Alexander's transaction, "Leasing fees and other receivables" increased by $7,656,000 and "Deferred leasing fee income" correspondingly increased by $8,888,000. These amounts have been included in "Changes in assets and liabilities: other" in the Consolidated Statements of Cash Flows and are part of the net change in operating assets and liabilities shown in item (iii) above. Net cash used in investing activities of $103,891,000 was comprised of (i) the Company's investment in and advances to Alexander's of $100,482,000, (ii) capital expenditures of $16,644,000, (iii) a loan to VMC of $5,074,000 and (iv) purchases of securities available for sale of $4,027,000, partially offset by (v) the net proceeds from the sale of securities available for sale of $22,336,000. Net cash provided by financing activities of $36,577,000 was primarily comprised of (i) net proceeds from issuance of common shares of $79,831,000, and (ii) net borrowings on U.S. Treasury obligations of $9,600,000, partially offset by (iii) dividends paid of $52,875,000. Year Ended December 31, 1994 Cash flows provided by operating activities of $46,948,000 was comprised of: (i) net income of $41,240,000, and (ii) adjustments for non-cash items of $8,015,000, less (iii) the net change in operating assets and liabilities of $2,307,000. The adjustments for non-cash items are primarily comprised of depreciation and amortization of $10,839,000, partially offset by the effect of straight-lining of rental income of $2,181,000. Net cash used in investing activities of $15,434,000 was comprised of capital expenditures of $25,417,000, partially offset by proceeds from the sale of securities available for sale of $9,983,000. Net cash used in financing activities of $32,074,000 was primarily comprised of dividends paid of $43,236,000, partially offset by borrowings on U.S. Treasury obligations of $11,428,000. 17
19 Funds from Operations for the Years Ended December 31, 1996 and 1995 Management considers funds from operations an appropriate supplemental measure of the Company's operating performance. Funds from operations were $69,316,000 in 1996, compared to $62,409,000 in 1995, an increase of $6,907,000 or 11.1%. The following table reconciles funds from operations and net income: YEAR ENDED DECEMBER 31, --------------------------- 1996 1995 ----------- ----------- Net income................................................ $61,364,000 $53,008,000 Depreciation and amortization of real property............ 10,583,000 10,019,000 Straight-lining of property rentals....................... (2,676,000) (2,569,000) Leasing fees received in excess of income recognized...... 1,805,000 1,052,000 Loss on sale of securities available for sale............. -- 360,000 Proportionate share of adjustments to Alexander's income (loss) to arrive at Alexander's funds from operations......................................... (1,760,000) 539,000 ----------- ----------- Funds from operations..................................... $69,316,000 $62,409,000 =========== =========== 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 applicable to common shares 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 income. Below are the cash flows provided by (used in) operating, investing and financing activities: YEAR ENDED DECEMBER 31, ------------------------------ 1996 1995 ------------ ------------- Operating activities........................... $ 70,703,000 $ 62,882,000 ============ ============= Investing activities........................... $ 14,912,000 $(103,891,000) ============ ============= Financing activities........................... $(15,046,000) $ 36,577,000 ============ ============= Bradlees accounted for 22% of property rentals for the year ended December 31, 1996. In June 1995, Bradlees filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The Company currently leases 17 locations to Bradlees. Of these locations, 14 are fully guaranteed by Stop & Shop Companies, Inc. ("Stop & Shop"), a wholly-owned subsidiary of Royal Ahold NV, a leading international food retailer, and one is guaranteed as to 70% of the rent. During 1996, Bradlees rejected three leases and assigned one lease to Kohl's Department Stores, Inc. These four leases are fully guaranteed by Stop & Shop. In January 1997, Bradlees received Bankruptcy Court approval to close one of the two stores whose leases are not guaranteed by Stop & Shop. Montgomery Ward & Co., Inc. remains liable with respect to the rent it was obligated to pay as a previous lessor on eight of the leases guaranteed by Stop & Shop -- approximately 70% of current rent. In January 1996, the Company provided $17 million of debtor-in-possession financing to Rickel which is operating under Chapter 11 of the Bankruptcy Code. The loan is secured by 27 of Rickel's leasehold properties and has a remaining term through January 1998, plus a one year extension, but is due not later than the date on which Rickel's plan of reorganization is confirmed. The loan bears interest at 13% per annum and at a fixed 18
20 rate of LIBOR plus 7.50% for the extension period. In addition, the Company receives a loan origination fee of 2% for each year the loan is outstanding. In June 1996, the Company entered into a joint venture (50% interest) to purchase the 149,000 square foot office portion of a multi-use building in midtown Manhattan, New York City. The space is 100% leased to a single tenant whose lease expires in 1999. The Company advanced the $8,923,000 purchase price and is entitled to an annual preferred return on its funds invested and the return of its funds invested prior to the other joint venture partner receiving any distributions. Vornado's consolidated financial statements include the accounts of the joint venture since Vornado currently exercises control over its operating and financial affairs. Alexander's has disclosed in its annual report on Form 10-K for the year ended December 31, 1996, that its current operating properties (five of its nine properties) do not generate sufficient cash flow to pay all of its expenses, and that its four non-operating properties (Lexington Avenue, Paramus, the Kings Plaza Store and Rego Park II) are in various stages of redevelopment. As rents commence from a portion of the redevelopment properties, Alexander's expects that cash flow will become positive. Alexander's estimates that the fair market values of its assets are substantially in excess of their historical cost and that there is 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. Further, Alexander's may receive proceeds from condemnation proceedings of a portion of its Paramus property. Although there can be no assurance, Alexander's believes that these cash sources will be adequate to fund cash requirements until its operations generate adequate cash flow. Alexander's borrowing capacity is demonstrated by the additional $16,700,000 it borrowed in March 1997 under its Rego Park construction loan. Although Vornado may provide a portion of the financing required for Alexander's redevelopment projects, no specific financing requirements have been determined or committed. None of the redevelopment plans for the non-operating properties have been finalized. At December 31, 1996, the Company had no borrowings outstanding under its unsecured revolving credit facility which provides for borrowings of up to $75,000,000. Average borrowings were $8,740,000 during 1996 and $12,500,000 during 1995. Borrowings bear annual interest, at the Company's election, at LIBOR plus 1.35% or the higher of the federal funds rate plus .50% or the prime rate. On December 2, 1996, Michael D. Fascitelli became the President of the Company and was elected to the Company's Board. Mr. Fascitelli signed a five year employment contract under which, in addition to his annual salary, he received a deferred payment consisting of $5,000,000 in cash and a $20,000,000 convertible obligation payable at the Company's option in 459,770 of its Common Shares or the cash equivalent of their appreciated value. Accordingly, cash of $5,000,000 and 459,770 Common Shares are being held in an irrevocable trust. The deferred payment obligation to Mr. Fascitelli vests as of December 2, 1997. Further, Mr. Fascitelli was granted options for 1,750,000 Common Shares of the Company. On December 23, 1996, the Company completed the sale of 1,500,000 common shares in a public offering, which net of expenses generated approximately $73,100,000. $10,000,000 of the proceeds was used to repay debt under the Company's revolving credit facility. The remaining proceeds will be used for general corporate purposes. The Company anticipates that cash from continuing operations will be adequate to fund business operations and the payment of dividends on an ongoing basis for more than the next twelve months; however, capital outlays for significant acquisitions may require funding from borrowings or equity offerings. ECONOMIC CONDITIONS At December 31, 1996, approximately 80% of the square footage of the Company's shopping centers was leased to large stores (over 20,000 square feet). The Company's large store tenants typically offer basic consumer necessities such as food, health and beauty aids, moderately priced clothing, building materials and home improvement supplies, and compete primarily on the basis of price. The Company believes that because the stores operated by its tenants offer such basic consumer necessities, demand typically continues even during economic declines, which therefore may mitigate the effects on its properties of adverse changes in 19
21 general economic conditions. However, demand for retail space continues to be impacted by the bankruptcy of a number of retail companies and a general trend toward consolidation in the retail industry which could adversely affect the ability of the Company to attract or retain tenants. Substantially all of the Company's leases contain step-ups in rent. Such rental increases are not designed to, and in many instances do not, approximate the cost of inflation, but do have the effect of mitigating the adverse impact of inflation. In addition, substantially all of the Company's leases contain provisions that require the tenant to reimburse the Company for the tenant's share of common area charges (including roof and structure, unless it is the tenant's direct responsibility) and real estate taxes thus passing through to the tenants the effects of inflation on such expenses. Inflation did not have a material effect on the Company's results for the periods presented. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA INDEX TO FINANCIAL STATEMENTS PAGE ------- Independent Auditors' Report.......................................................... 21 Consolidated Balance Sheets as at December 31, 1996 and 1995.......................... 22 Consolidated Statements of Income for the years ended December 31, 1996, 1995 and 1994................................................................................ 23 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and 1994....................................................................... 24 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994................................................................................ 25 Notes to Consolidated Financial Statements............................................ 26 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not applicable. 20
22 INDEPENDENT AUDITORS' REPORT Shareholders and Board of Trustees Vornado Realty Trust Saddle Brook, New Jersey We have audited the accompanying consolidated balance sheets of Vornado Realty Trust and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the 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 consolidated financial statements present fairly, in all material respects, the financial position of Vornado Realty Trust and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 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 12, 1997 21
23 VORNADO REALTY TRUST CONSOLIDATED BALANCE SHEETS DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ (AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS) ASSETS Real estate, at cost: Land............................................................. $ 61,278 $ 61,278 Buildings and improvements....................................... 327,485 314,265 Leasehold improvements and equipment............................. 8,535 6,933 -------- -------- Total.................................................... 397,298 382,476 -------- -------- Less accumulated depreciation and amortization................... 151,049 139,495 -------- -------- Real estate, net......................................... 246,249 242,981 -------- -------- Cash and cash equivalents, including U.S. government obligations under repurchase agreements of $17,036 and $12,575............... 89,696 19,127 Marketable securities.............................................. 27,549 70,997 Investment in and advances to Alexander's, Inc..................... 107,628 109,686 Investment in and advances to Vornado Management Corp.............. 5,193 5,074 Due from officer................................................... 8,418 8,418 Accounts receivable, net of allowance for doubtful accounts of $575 and $578................................................. 9,786 7,086 Officer's deferred compensation expense............................ 22,917 -- Mortgage note receivable........................................... 17,000 -- Receivable arising from the straight-lining of rents............... 17,052 14,376 Other assets....................................................... 13,716 13,751 -------- -------- $565,204 $491,496 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Notes and mortgages payable........................................ $232,387 $233,353 Due for U.S. Treasury Obligations.................................. 9,636 43,875 Accounts payable and accrued expenses.............................. 9,905 6,545 Deferred leasing fee income........................................ 8,373 8,888 Officer's deferred compensation payable............................ 25,000 -- Other liabilities.................................................. 3,646 4,561 -------- -------- Total liabilities........................................ 288,947 297,222 -------- -------- Commitments and contingencies Shareholders' equity: Preferred shares of beneficial interest: no par value per share; authorized, 1,000,000 shares; issued, none Common shares of beneficial interest: $.04 par value per share; authorized, 50,000,000 shares; issued, 26,547,680 and 24,246,913 shares............................................. 1,044 970 Additional capital............................................... 358,874 279,231 Deficit.......................................................... (77,574) (79,380) -------- -------- 282,344 200,821 Unrealized (loss) on securities available for sale............... (998) (1,362) Due from officers for purchase of common shares of beneficial interest...................................................... (5,089) (5,185) -------- -------- Total shareholders' equity............................... 276,257 194,274 -------- -------- $565,204 $491,496 ======== ======== See notes to consolidated financial statements. 22
24 VORNADO REALTY TRUST CONSOLIDATED STATEMENTS OF INCOME YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ (AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS) Revenues: Property rentals.................................... $ 87,424 $ 80,429 $ 70,755 Expense reimbursements.............................. 26,644 24,091 21,784 Other income (including fee income from related parties of $2,569, $4,123 and $1,144)............ 2,819 4,198 1,459 --------- --------- -------- Total revenues........................................ 116,887 108,718 93,998 --------- --------- -------- Expenses: Operating........................................... 36,412 32,282 30,223 Depreciation and amortization....................... 11,589 10,790 9,963 General and administrative.......................... 5,167 6,687 6,495 Amortization of officer's deferred compensation expense.......................................... 2,083 -- -- --------- --------- -------- Total expenses........................................ 55,251 49,759 46,681 --------- --------- -------- Operating income...................................... 61,636 58,959 47,317 --------- --------- -------- Income/(loss) applicable to Alexander's: Equity in income (loss)............................. 1,679 (1,972) -- Depreciation........................................ (571) (417) -- Interest income on loan............................. 6,848 6,343 -- Income from investment in and advances to Vornado Management Corp..................................... 1,855 788 -- Interest income on mortgage note receivable........... 2,579 -- -- Interest and dividend income.......................... 3,151 5,439 7,489 Interest and debt expense............................. (16,726) (16,426) (14,209) Net gain on marketable securities..................... 913 294 643 --------- --------- -------- NET INCOME.......................................... $ 61,364 $ 53,008 $ 41,240 --------- --------- -------- NET INCOME PER SHARE based on 24,603,442, 23,579,669, and 21,853,720 shares outstanding................... $ 2.49 $ 2.25 $ 1.89 ========= ========= ======== See notes to consolidated financial statements. 23
25 VORNADO REALTY TRUST CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY UNREALIZED GAIN(LOSS) ON SECURITIES DUE TOTAL COMMON ADDITIONAL AVAILABLE FROM SHAREHOLDERS' SHARES CAPITAL DEFICIT FOR SALE OFFICERS EQUITY ------ ---------- -------- ------------- -------- ------------- (AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS) BALANCE, DECEMBER 31, 1993........ $ 864 $ 197,575 $(77,517) $ -- $ (5,185) $ 115,737 Unrealized gains on securities available for sale at January 1, 1994............................ -- -- -- 8,565 -- 8,565 Net income........................ -- -- 41,240 -- -- 41,240 Dividends paid ($2.00 per share).......................... -- -- (43,236) -- -- (43,236) Common shares issued under employees' share plans.......... 2 609 -- -- -- 611 Change in unrealized gains (losses) on securities available for sale........................ -- -- -- (6,229) -- (6,229) ------ -------- -------- ------- ------- ------- BALANCE, DECEMBER 31, 1994........ 866 198,184 (79,513) 2,336 (5,185) 116,688 Net income........................ -- -- 53,008 -- -- 53,008 Net proceeds from issuance of common shares................... 100 79,731 -- -- -- 79,831 Dividends paid ($2.24 per share).......................... -- -- (52,875) -- -- (52,875) Common shares issued under employees' share plans.......... 4 1,316 -- -- -- 1,320 Change in unrealized gains (losses) on securities available for sale........................ -- -- -- (3,698)* -- (3,698) ------ -------- -------- ------- ------- ------- BALANCE, DECEMBER 31, 1995........ 970 279,231 (79,380) (1,362) (5,185) 194,274 Net income........................ -- -- 61,364 -- -- 61,364 Net proceeds from issuance of common shares................... 60 73,000 -- -- -- 73,060 Dividends paid ($2.44 per share).......................... -- -- (59,558) -- -- (59,558) Common shares issued under employee's share plans.......... 14 6,643 -- -- -- 6,657 Change in unrealized gains (losses) on securities available for sale........................ -- -- -- 364 -- 364 Forgiveness of amount due from officers........................ -- -- -- -- 96 96 ------ -------- -------- ------- ------- ------- BALANCE, DECEMBER 31, 1996........ $1,044 $ 358,874 $(77,574) $ (998) $ (5,089) $ 276,257 ====== ======== ======== ======= ======= ======= - --------------- * Includes $3,435 in unrealized gains attributable to the Company's investment in the common stock of Alexander's, Inc. (see Note 3). See notes to consolidated financial statements. 24
26 VORNADO REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ (AMOUNTS IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net income.......................................... $ 61,364 $ 53,008 $ 41,240 Adjustments to reconcile income to net cash provided by continuing operations: Depreciation and amortization (including debt issuance costs)................................ 12,586 11,779 10,839 Amortization of officer's deferred compensation expense........................................ 2,083 -- -- Straight-lining of rental income................. (2,676) (2,569) (2,181) Equity in (income) loss of Alexander's including depreciation of $571 and $417.................. (1,108) 2,389 -- Net gain on marketable securities................ (913) (294) (643) Changes in assets and liabilities: Trading securities............................... (2,009) (2,069) 1,485 Accounts receivable.............................. (2,700) (2,188) (699) Accounts payable and accrued expenses............ 3,360 2,270 (3,920) Other............................................ 716 556 827 -------- --------- -------- Net cash provided by operating activities............. 70,703 62,882 46,948 -------- --------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Investment in mortgage note receivable.............. (17,000) -- -- Additions to real estate............................ (14,822) (16,644) (25,417) Investment in and advances to Alexander's........... -- (100,482) -- Investment in and advances to Vornado Management Corp............................................. -- (5,074) -- Purchases of securities available for sale.......... -- (4,027) -- Proceeds from sale or maturity of securities available for sale............................... 46,734 22,336 9,983 -------- --------- -------- Net cash provided by (used by) investing activities... 14,912 (103,891) (15,434) -------- --------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net proceeds from issuance of common shares......... 73,060 79,831 -- Proceeds from borrowings on U.S. Treasury obligations...................................... 10,000 40,000 11,428 Repayment of borrowings on U.S. Treasury obligations...................................... (44,239) (30,400) -- Proceeds from borrowings on revolving credit facility......................................... 10,000 60,000 -- Repayments on mortgages and revolving credit facility......................................... (10,966) (60,807) (877) Costs of refinancing debt........................... -- (492) -- Dividends paid...................................... (59,558) (52,875) (43,236) Exercise of share options........................... 6,657 1,320 611 -------- --------- -------- Net cash (used in) provided by financing activities... (15,046) 36,577 (32,074) -------- --------- -------- Net increase (decrease) in cash and cash equivalents......................................... 70,569 (4,432) (560) Cash and cash equivalents at beginning of year........ 19,127 23,559 24,119 -------- --------- -------- Cash and cash equivalents at end of year.............. $ 89,696 $ 19,127 $ 23,559 -------- --------- -------- Supplemental Disclosure of Cash Flow Information: Cash payments for interest.......................... $ 15,695 $ 15,881 $ 14,915 -------- --------- -------- NON-CASH TRANSACTIONS: Deferred officer's compensation expense and related liability........................................ $ 25,000 -- -- Unrealized (loss)gain on securities available for sale............................................. $ 364 $ (3,698)* $ 2,336 ======== ========= ======== - --------------- * Reflects a reduction of $3,435 to the Company's investment in Alexander's as a result of the change from fair value to the equity method of accounting. See notes to consolidated financial statements. 25
27 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND BUSINESS On May 6, 1993, Vornado, Inc. merged into Vornado Realty Trust, a Maryland real estate investment trust ("REIT"). Vornado Realty Trust was formed on March 29, 1993, as a wholly-owned subsidiary of Vornado, Inc., specifically for the purpose of the merger. The Company is a fully-integrated REIT which owns, leases, develops, redevelops and manages retail and industrial properties primarily located in the Midatlantic and Northeast regions of the United States. In addition, the Company owns 29.3% of the common stock of Alexander's, Inc. which has nine properties in the New York City region. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The accompanying consolidated financial statements include the accounts of Vornado Realty Trust and its subsidiaries, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated. 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 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. REAL ESTATE: Real estate is carried at cost, net of accumulated depreciation and amortization. Betterments, major renewals and certain costs directly related to the acquisition, improvement and leasing of real estate are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation is provided on a straight-line basis over the assets, estimated useful lives. Additions to real estate include interest expense capitalized during construction of $442,000 and $1,582,000 for the years ended December 31, 1995 and 1994. The Company's policy is to assess any impairment in value by making a comparison of the current and projected operating cash flows of each of its properties 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. CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of highly liquid investments purchased with original maturities of three months or less. MARKETABLE SECURITIES: Marketable securities are carried at fair market value. The Company has classified debt and equity securities which it intends to hold for an indefinite period of time as securities available for sale and equity securities it intends to buy and sell on a short term basis as trading securities. Unrealized gains and losses are included in earnings for trading securities and as a component of shareholder's equity for securities available for sale. Realized gains or losses on the sale of securities are recorded based on average cost. REVENUE RECOGNITION: Base rents, additional rents based on tenants' sales volume and reimbursement of the tenants' share of certain operating expenses are generally recognized when due from tenants. The straight-line basis is used to recognize base rents under leases entered into after November 14, 1985 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 REIT under Sections 856-860 of the Internal Revenue Code of 1986 as amended. Under those sections, a REIT which distributes at least 95% of its REIT taxable income as a dividend to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. The Company has distributed to shareholders an amount greater than its taxable income. Therefore, no provision for Federal income taxes is required. 26
28 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The net basis of the Company's assets and liabilities for both financial reporting purposes and tax purposes is approximately the same. AMOUNTS PER SHARE: Amounts per share are computed based upon the weighted average number of shares outstanding during the year and the dilutive effect of stock options. 3. INVESTMENT IN AND ADVANCES TO ALEXANDER'S In March 1995, the Company purchased all of the 1,353,468 shares of common stock of Alexander's then owned by Citibank, N.A. ("Citibank"), representing 27.1% of the outstanding shares of common stock of Alexander's for $40.50 per share in cash or $56,615,000 (including $1,800,000 of costs incurred in the purchase). As a result of the acquisition, the Company owns 29.3% of the common stock of Alexander's and has changed its accounting for its investment in Alexander's to the equity method. This required a reduction of its investment by the unrealized gain recorded in shareholders' equity at December 31, 1994, of $3,435,000. Prior years' financial statements were not restated as a result of the change in accounting for the Company's investment in Alexander's due to it not being material. In accordance with purchase accounting, Vornado's investment in Alexander's in excess of carrying amounts has been allocated two-thirds to land and one-third to building. The building allocation in excess of Alexander's carrying amount is being depreciated over a 35 year period. Also, in March 1995, the Company lent Alexander's $45 million, the subordinated tranche of a $75 million secured financing, the balance of which was funded by a bank. The Company's loan has a three-year term and bears interest at 16.43% per annum for the first two years and at a fixed rate for the third year of 992 basis points over the one-year Treasury bill rate. In addition, the Company received a loan origination fee of $1,500,000 from Alexander's to be amortized over the term of the loan. Investment in and advances to Alexander's consists of: DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ Common stock, net of $989,000 and $417,000 of accumulated depreciation of buildings (at fair value)............. $ 56,952,000 $ 58,693,000 Loan receivable......................................... 45,000,000 45,000,000 Deferred loan origination income........................ (583,000) (1,083,000) Leasing fees and other receivables...................... 5,901,000 8,182,000 Equity in loss since March 2, 1995...................... (293,000) (1,972,000) Deferred expenses....................................... 651,000 866,000 ------------ ------------ $107,628,000 $109,686,000 ============ ============ 27
29 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Below are summarized Balance Sheets and Statements of Operations of Alexander's: DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ Balance Sheets: Assets: Real estate, net........................................... $181,005,000 $150,435,000 Cash....................................................... 5,480,000 8,471,000 Other assets............................................... 25,100,000 39,635,000 ------------ ------------ $211,585,000 $198,541,000 ============ ============ Liabilities and Stockholders' Equity: Debt....................................................... $192,347,000 $182,883,000 Other liabilities.......................................... 13,674,000 34,794,000 Stockholders' equity....................................... 5,564,000 (19,136,000) ------------ ------------ $211,585,000 $198,541,000 ============ ============ YEAR ENDED PERIOD FROM DECEMBER MARCH 2, 1995 TO 31, 1996 DECEMBER 31, 1995 ----------- ----------------- Statements of Operations: Revenues..................................................... $21,833,000 $11,734,000 Expenses..................................................... 12,092,000 9,255,000 ----------- ----------- Operating income............................................. 9,741,000 2,479,000 Interest and debt expense.................................... (13,934,000) (11,330,000) Interest and other income.................................... 2,918,000 1,651,000 Gain on reversal of liability for post-retirement healthcare benefits.................................................. 14,372,000 -- ----------- ----------- Income (loss) from continuing operations before income tax benefit................................................... 13,097,000 (7,200,000) Reversal of deferred taxes................................... -- 469,000 ----------- ----------- Income (loss) from continuing operations..................... $13,097,000 $(6,731,000) =========== =========== Vornado's 29.3% equity in income (loss) before adjustment.... $ 3,837,000 $(1,972,000) Adjustment for the portion of the reversal of a liability previously considered in its purchase price allocation.... (2,158,000) -- ----------- ----------- Vornado's 29.3% equity in income (loss)...................... $ 1,679,000 $(1,972,000) =========== =========== In March 1995, the Company and Alexander's entered into a three-year management and development agreement (the "Management Agreement"). The annual management fee payable to the Company by Alexander's is $3,000,000, plus 6% of development costs with a minimum guaranteed fee for the development portion of $1,650,000 in the first year and $750,000 in each of the second and third years. On July 6, 1995, the Company assigned this Management Agreement to Vornado Management Corp. The fee pursuant to the Management Agreement is in addition to the leasing fee the Company receives from Alexander's under the leasing agreement (the "Leasing Agreement") which has been in effect since 1992 and was extended to be coterminous with the term of the Management Agreement. The Company recognized leasing fee income of $695,000 and $1,448,000 in 1996 and 1995. The Leasing Agreement provides for the Company to generally receive a fee of (i) 3% of sales proceeds and (ii) 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 28
30 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Alexander's tenants, the Company is due $5,565,000 at December 31, 1996. Such amount is receivable 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. During 1996, leasing fees receivable and deferred leasing fee income were adjusted to reflect (i) a decrease of $1,717,000 resulting from the rejection of a lease by an Alexander's tenant in March 1996 and (ii) an increase of $1,738,000 resulting from the releasing of a portion of this space. As of December 31, 1996, Interstate Properties owned 24.4% of the common shares of the Company and 27.1% of Alexander's common stock. Steven Roth is the Chairman of the Board and Chief Executive Officer of the Company, the Managing General Partner of Interstate Properties and the Chief Executive Officer and a director of Alexander's. Effective March 2, 1995, for a three-year period, the Company and Interstate agreed not to own in excess of two-thirds of Alexander's common stock or to enter into certain other transactions with Alexander's, other than the transactions described above, without the consent of Alexander's independent directors. 4. MARKETABLE SECURITIES The aggregate cost and market value of securities held at December 31, 1996 and 1995 were as follows: DECEMBER 31, 1996 DECEMBER 31, 1995 ---------------------------- ---------------------------- COST MARKET COST MARKET ------------ ------------ ------------ ------------ Securities available for sale: U.S. treasury obligations........... $ 10,228,000 $ 10,247,000 $ 56,065,000 $ 56,621,000 Other equity and debt securities.... 10,811,000 9,794,000 10,802,000 8,884,000 ----------- ----------- ----------- ----------- 21,039,000 20,041,000 66,867,000 65,505,000 Trading securities -- equity.......... 7,260,000 7,508,000 5,384,000 5,492,000 ----------- ----------- ----------- ----------- Total................................. $ 28,299,000 $ 27,549,000 $ 72,251,000 $ 70,997,000 =========== =========== =========== =========== Gross unrealized gains and losses at December 31, 1996 and 1995 were as follows: DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------------ ------------------------ GAINS (LOSSES) GAINS (LOSSES) -------- ----------- -------- ----------- Securities available for sale: U.S. treasury obligations.............. $ 19,000 -- $556,000 -- Other equity and debt securities....... 339,000 $(1,356,000) 90,000 $(2,008,000) -------- ----------- -------- ----------- 358,000 (1,356,000) 646,000 (2,008,000) Trading securities -- equity............. 248,000 -- 108,000 -- -------- ----------- -------- ----------- Total.................................... $606,000 $(1,356,000) $754,000 $(2,008,000) ======== =========== ======== =========== The U.S. treasury obligations at December 31, 1996, $10,228,000 (market value $10,247,000) mature in the fourth quarter of 1997. U.S. treasury obligations with a fair market value of $10,247,000 and $56,621,000 were held as collateral for amounts due for U.S. treasury obligations at December 31, 1996 and 1995. Amounts due for U.S. treasury obligations bear variable interest rates which averaged 5.79% and 6.08% for the years ended December 31, 1996 and 1995. 29
31 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 5. MORTGAGE NOTE RECEIVABLE In January 1996, the Company provided $17 million of debtor-in-possession financing to Rickel Home Centers, Inc. ("Rickel"), which is operating under Chapter 11 of the Bankruptcy Code. The loan is secured by 27 of Rickel's leasehold properties and has a remaining term through January 1998, plus a one year extension, but is due not later than the date on which Rickel's plan of reorganization is confirmed. The loan bears interest at 13.2% per annum and at a fixed rate of LIBOR plus 7.50% for the extension period. In addition, the Company receives a loan origination fee of 2% for each year the loan is outstanding. 6. FAIR VALUE OF FINANCIAL INSTRUMENTS The Company estimated the fair value of its financial instruments using the following methods and assumptions: (1) quoted market prices are used to estimate the fair value of marketable securities; (2) discounted cash flows at the current rate at which similar loans would be made to borrowers with similar credit ratings for the remaining term are used to estimate the fair value of the loans receivable from Alexander's, the mortgage note receivable and mortgages payable and (3) carrying amounts in the balance sheet approximate fair value for cash and cash equivalents, marketable securities, due from officer and amounts due for U.S. Treasury obligations. DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------------------ ------------------------------ CARRYING FAIR CARRYING FAIR VALUE VALUE VALUE VALUE ------------- ------------- ------------- ------------- Loan receivable from Alexander's..................... $ 45,000,000 $ 45,100,000 $ 45,000,000 $ 46,100,000 Mortgage note receivable.......... 17,000,000 17,000,000 -- -- Notes and mortgages payable....... 232,387,000 227,100,000 233,353,000 233,900,000 7. NOTES AND MORTGAGES PAYABLE Notes and mortgages payable at December 31, 1996 are comprised of $227,000,000 of secured notes due December 1, 2000, with interest at a fixed rate of 6.36% per annum and three other mortgages aggregating $5,387,000. Notes and mortgages by range of interest rates are as follows: INTEREST RATE PRINCIPAL AMOUNT ---------------------------------------------- ---------------- 5.25%......................................... $ 3,635,000 6.36%......................................... 227,000,000 8.00%......................................... 826,000 8.25%......................................... 926,000 The net carrying value of properties securing the notes and mortgages amounted to $166,833,000 at December 31, 1996. As at December 31, 1996, the maturities for the next five years are as follows: YEAR ENDING DECEMBER 31: AMOUNT ----------------------------------------------- ------------ 1997........................................... $ 1,046,000 1998........................................... 870,000 1999........................................... 535,000 2000........................................... 227,295,000 2001........................................... 310,000 On February 27, 1995, the Company entered into a three-year unsecured revolving credit facility with a bank providing for borrowings of up to $75,000,000. Borrowings bear annual interest, at the Company's 30
32 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) election, at LIBOR plus 1.35% or the higher of the federal funds rate plus .50% or the prime rate. At December 31, 1996 the Company had no borrowings outstanding under the facility. 8. EMPLOYEES' SHARE OPTION PLAN Under the Omnibus Share Plan (the "Plan"), various officers and key employees have been 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 27 months after grant (with the exception of 1,750,000 shares granted in connection with Mr. Fascitelli's employment agreement which becomes fully vested after 60 months), 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, 1996. In October 1995, the Financial Accounting Standards Board issued Statement No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 requires expanded disclosures of stock-based compensation arrangements with employees, and encourages, but does not require compensation cost to be measured based on the fair value of the equity instrument awarded. Companies are permitted, however, to continue to apply Accounting Principles Board Opinion No. 25 ("APB 25"), which recognizes compensation cost based on the intrinsic value of the equity instrument awarded. The Company will continue to apply APB 25 to its stock-based compensation awards to employees. 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, 1996 and 1995: DECEMBER DECEMBER 31, 31, 1996 1995 ----------- ----------- Net income: As reported............................................. $61,364,000 $53,008,000 Pro-forma............................................... 60,613,000 52,875,000 Net income per share: As reported............................................. $ 2.49 $ 2.25 Pro-forma............................................... 2.46 2.24 The pro-forma effect of applying SFAS 123 is not necessarily indicative of the effect on reported net income for future years. 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 in the periods ending December 31, 1996 and 1995. DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ Expected volatility........................................ 26% 26% Expected life.............................................. 5 years 5 years Risk-free interest rate.................................... 5.6% 7.1% Expected dividend yield.................................... 5.1% 6.0% 31
33 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) A summary of the Plan's status, and changes during the years then ended, is presented below: DECEMBER 31, 1996 DECEMBER 31, 1995 ------------------------------- ----------------------------- WEIGHTED-AVERAGE WEIGHTED-AVERAGE SHARES EXERCISE PRICE SHARES EXERCISE PRICE ---------- ---------------- -------- ---------------- Outstanding at January 1.............. 539,940 $24.53 557,568 $21.35 Granted............................... 1,870,750 46.27 75,000 35.50 Exercised............................. (340,997) 19.51 (92,628) 14.30 --------- ------ -------- ------ Outstanding at December 31............ 2,069,693 $45.01 539,940 $24.53 ========= ====== ======== ====== Options exercisable at December 31.... 210,385 442,506 ========= ======== Weighted-average fair value of options granted during the year ended December 31 (per option)............ $9.50 $7.24 The following table summarizes information about options outstanding under the Plan at December 31, 1996: OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------------- -------------------------------------- NUMBER WEIGHTED-AVERAGE NUMBER RANGE OF OUTSTANDING AT REMAINING WEIGHTED-AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE EXERCISE PRICES DECEMBER 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE DECEMBER 31, 1996 EXERCISE PRICE - --------------- ----------------- ---------------- ---------------- ----------------- ---------------- $ 12 to $23 26,434 6.0 Years $ 22 26,434 $ 22 34 to 38 293,259 8.1 Years 36 183,951 35 47 1,750,000 10.0 Years 47 -- -- ---------- ----------- ---- ------ ------- ---- --- $ 12 to $47 2,069,693 8.0 Years $ 45 210,385 $ 34 ========== =========== ========== ======= ======= Shares available for future grant at December 31, 1996 were 882,066. 9. RETIREMENT PLAN The Company's qualified retirement plan covers all full-time employees. The Plan provides annual pension benefits that are equal to 1% of the employee's annual compensation for each year of participation. The funding policy is in accordance with the minimum funding requirements of ERISA. Pension expense includes the following components: YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, 1996 1995 1994 ------------ ------------ ------------ Service cost -- benefits earned during the $ 108,000 $ 70,000 $ 81,000 period...................................... Interest cost on projected benefit 544,000 573,000 558,000 obligation.................................. Actual return on assets....................... (179,000) (307,000) 130,000 Net amortization and deferral................. (59,000) 66,000 (359,000) --------- --------- --------- Net pension expense...................... $ 414,000 $ 402,000 $ 410,000 --------- --------- --------- Assumptions used in determining the net pension expense were: Discount rate................................. 7 1/2% 7 1/4% 8 1/2% Rate of increase in compensation levels....... 5 1/2% 6 1/2% 6 1/2% Expected rate of return on assets............. 8% 8% 8% 32
34 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The following table sets forth the Plan's funded status and the amount recognized in the Company's balance sheet: DECEMBER 31, DECEMBER 31, 1996 1995 ------------ ------------ Actuarial present value of benefit obligations: Vested benefit obligation............................. $ 7,590,000 $ 7,652,000 ---------- ---------- Accumulated benefit obligation........................ $ 7,657,000 $ 7,717,000 ---------- ---------- Projected benefit obligation.......................... $ 8,028,000 $ 8,066,000 Plan assets at fair value............................. 3,915,000 3,494,000 ---------- ---------- Projected benefit obligation in excess of plan assets... 4,113,000 4,572,000 Unrecognized net obligations............................ (2,135,000) (2,122,000) Adjustment required to recognize minimum liability...... 1,764,000 1,773,000 ---------- ---------- Accrued pension costs................................... $ 3,742,000 $ 4,223,000 ========== ========== Plan assets are invested in U.S. government obligations and securities backed by U.S. government guaranteed mortgages. 10. LEASES As lessor: The Company leases properties to tenants. The lease terms range from less than five years for smaller tenant spaces to as much as thirty years for major tenants. Most of the leases provide for the payment of fixed base rentals payable monthly in advance, and for the payment by the lessee of additional rents based on a percentage of the tenants' sales as well as reimbursements of real estate taxes, insurance and maintenance. As of December 31, 1996, future base rental revenue under noncancellable operating leases, excluding rents for leases with an original term of less than one year and rents resulting from the exercise of renewal options, is as follows: YEAR ENDING DECEMBER 31: AMOUNT ----------------------------------------------- ------------ 1997........................................... $ 85,477,000 1998........................................... 84,678,000 1999........................................... 80,532,000 2000........................................... 75,029,000 2001........................................... 70,697,000 Thereafter..................................... 522,152,000 These amounts do not include rentals based on tenants' sales. These percentage rents approximated $936,000, $959,000 and $887,000 for the years ended December 31, 1996, 1995 and 1994. Bradlees accounted for 22% of property rentals for the year ended December 31, 1996. In June 1995, Bradlees filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The Company currently leases 17 locations to Bradlees. Of these locations, 14 are fully guaranteed by Stop & Shop Companies, Inc. ("Stop & Shop"), a wholly-owned subsidiary of Royal Ahold NV, a leading international food retailer, and one is guaranteed as to 70% of the rent. During 1996, Bradlees rejected three leases and assigned one lease to Kohl's Department Stores, Inc. These four leases are fully guaranteed by Stop & Shop. In January 1997, Bradlees received Bankruptcy Court approval to close one of the two stores whose leases are not guaranteed by Stop & Shop. Montgomery Ward & Co., Inc. remains liable with respect to the rent it was obligated to pay as a previous lessor on eight of the leases guaranteed by Stop & Shop -- approximately 70% of current rent. 33
35 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) As lessee: The Company is a tenant under leases for certain properties. These leases will expire principally during the next twenty years. Future minimum lease payments under operating leases at December 31, 1996, are as follows: YEAR ENDING DECEMBER 31: AMOUNT ------------------------------------------------ ----------- 1997............................................ $ 1,808,000 1998............................................ 1,819,000 1999............................................ 1,743,000 2000............................................ 1,578,000 2001............................................ 1,567,000 Thereafter...................................... 28,261,000 Rent expense was $1,465,000, $1,395,000 and $1,313,000 for the years ended December 31, 1996, 1995 and 1994. 11. CONTINGENCIES In order to comply with environmental laws and with relevant health-based standards, the Company has an active monitoring and maintenance program for asbestos-containing materials ("ACMs") on its properties. The Company's program to remove friable ACMs has been completed, except for one location. Pursuant to the lease for this location, it is the tenant's responsibility to remove such ACMs. The Company has received an estimate of $500,000 to remove such ACMs; if the Company has to make such expenditure, it will not have a material adverse effect on the Company's financial condition or results of operations. The Company also has certain other existing and potential environmental liabilities with respect to compliance costs relating to underground storage tanks and cleanup costs relating to tanks at three Company sites at which preexisting contamination was found. The Company believes that known and potential environmental liabilities will not have a material adverse effect on the Company's business, assets or results of operation. However, there can be no assurance that the identification of new areas of contamination, change in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs to the Company. At December 31, 1996, the Company had outstanding $600,000 of real estate related standby letters of credit which were drawn under a $5,000,000 unsecured line of credit with a bank bearing interest at prime. From time-to-time, the Company has disposed of substantial amounts of real estate to third parties for which, as to certain properties, it remains contingently liable for rent payments or mortgage indebtedness. There are various legal actions against the Company in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the outcome of such matters will not have a material effect on the Company's financial condition or results of operations. 12. REPURCHASE AGREEMENTS The Company enters into agreements for the purchase and resale of U.S. government obligations for periods of up to one week. The obligations purchased under these agreements are held in safekeeping in the name of the Company by various money center banks. The Company has the right to demand additional collateral or return of these invested funds at any time the collateral value is less than 102% of the invested funds plus any accrued earnings thereon. 34
36 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 13. VORNADO MANAGEMENT CORP. In July 1995, the Company assigned its Management Agreement with Alexander's (see Note 3) to Vornado Management Corp. ("VMC"). In exchange, the Company received 100% of the non-voting preferred stock of VMC which entitles it to 95% of the distributions by VMC to its shareholders. Steven Roth and Richard West, Trustees of the Company, own the common stock of VMC. In addition, the Company lent $5,000,000 to VMC for working capital purposes under a three-year term loan bearing interest at the prime rate plus 2%. VMC is responsible for its pro-rata share of compensation and fringe benefits of employees and 30% of other expenses which are common to both Vornado and VMC. This entity is not consolidated and accordingly, the Company accounts for its investment in VMC on the equity method. Below is a summarized Statement of Operations of VMC: PERIOD FROM YEAR ENDED JULY 6, 1995 TO DECEMBER 31, 1996 DECEMBER 31, 1995 ----------------- ----------------- Revenues: Management fees from Alexander's................... $ 5,343,000 $ 2,250,000 Expenses: General and administrative......................... (2,691,000) (1,130,000) Interest, net...................................... (282,000) (115,000) ----------- ----------- Income before income taxes........................... 2,370,000 1,005,000 Income taxes......................................... (968,000) (411,000) ----------- ----------- Net income......................................... 1,402,000 594,000 Preferred dividends.................................. (1,332,000) (565,000) ----------- ----------- Net income available to common shareholders.......... $ 70,000 $ 29,000 =========== =========== Vornado's 95% equity in income....................... $ 1,332,000 $ 565,000 =========== =========== 14. RELATED PARTY TRANSACTIONS On December 2, 1996, Michael D. Fascitelli became the President of the Company and was elected to the Company's Board. Mr. Fascitelli signed a five-year employment contract under which, in addition to his annual salary, he received a deferred payment consisting of $5,000,000 in cash and a $20,000,000 convertible obligation payable at the Company's option in 459,770 of its Common Shares or the cash equivalent of their appreciated value. Accordingly, cash of $5,000,000 and 459,770 Common Shares (which are not considered outstanding for accounting purposes) are being held in an irrevocable trust. The deferred payment obligation to Mr. Fascitelli vests as of December 2, 1997. Further, Mr. Fascitelli was granted options for 1,750,000 Common Shares of the Company. At December 31, 1996, the loans due from Mr. Roth ($13,122,500), Mr. Rowan ($299,000) and Mr. Macnow ($268,000) in connection with their stock option exercises aggregated $13,599,000 ($5,089,000 of which is shown as a reduction in shareholders' equity). The loans bear interest at a rate equal to the broker call rate (7.0% at December 31, 1996) but not less than the minimum applicable federal rate provided under the Internal Revenue Code. Interest on the loan to Mr. Roth is payable quarterly. Mr. Roth's loan is due on December 29, 1997. The Company has agreed that on each January 1st (commencing January 1, 1997) to forgive one-fifth of the amounts due from Mr. Rowan and Mr. Macnow, provided that they remain employees of the Company. The Company currently manages and leases the real estate assets of Interstate Properties pursuant to a Management Agreement for which the Company receives a quarterly fee equal to 4% of base rent and percentage rent and certain other commissions. The Management Agreement has a term of one year and is 35
37 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) automatically renewable unless terminated by either of the parties on sixty days' notice at the end of the term. Although the Management Agreement was not negotiated at arms length, the Company believes based upon comparable fees charged by other real estate companies, that its terms are fair to the Company. For the years ended December 31, 1996, 1995 and 1994, $2,074,000, $1,150,000 and $894,000 of management fees were earned by the Company pursuant to the Management Agreement. See Notes 3 and 13 for details on the Company's investment in and advances to Alexander's and VMC. 15. SUMMARY OF QUARTERLY RESULTS (UNAUDITED) The following summary represents the results of operations for each quarter in 1996 and 1995: NET NET INCOME REVENUE INCOME PER SHARE ----------- ----------- --------- 1996* March 31..................................... $28,610,000 $15,922,000 $ .65 June 30...................................... 29,245,000 15,120,000 .62 September 30................................. 29,063,000 14,939,000 .61 December 31.................................. 29,969,000 15,383,000** .62** 1995 March 31..................................... $26,216,000 $11,837,000 $ .54 June 30...................................... 27,056,000 13,185,000 .56 September 30................................. 26,630,000 13,567,000 .56 December 31.................................. 28,816,000 14,419,000 .59 - --------------- * The total for the year differs from the sum of the quarters as a result of weighting. ** In December 1996, the Company recognized an expense of $2,083,000, representing one month's amortization of the $25,000,000 deferred payment due to the Company's President. Also, the Company recognized $2,053,000 of non-recurring income as a result of the reversal of a liability which is no longer required by Alexander's (which Vornado accounts for on the equity method). 16. DIVIDEND DISTRIBUTIONS Dividends are characterized for Federal income tax purposes as follows: 1996 1995 1994 ----- ----- ----- Ordinary income............................................. 100.0% 100.0% 96.0% Return of capital (generally non-taxable)................... -- -- 4.0 ----- ----- ----- Total....................................................... 100.0% 100.0% 100.0% ===== ===== ===== 17. SUBSEQUENT EVENT On March 12, 1997, the Company entered into a definitive agreement (the "Agreement") to acquire interests in all or a portion of seven Manhattan office buildings and certain management and leasing assets held by the Mendik Company and certain of its affiliates. In conjunction with this transaction, the Company will convert to an Umbrella Partnership REIT (UPREIT). The estimated consideration for the transaction is approximately $654,000,000, including $269,000,000 in cash, $168,000,000 in UPREIT limited partnership units and $217,000,000 in indebtedness. Pro forma 36
38 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) revenue of the Mendik Company and affiliates' interests being acquired was approximately $109,000,000 for the year ended December 31, 1996. The Agreement is subject to the consent of third parties and other customary conditions. It is currently expected that the proposed transaction would be consummated in the second quarter, but there can be no assurance that the proposed transaction will be completed. 37
39 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information relating to trustees of the Registrant are contained in a definitive Proxy Statement involving the election of trustees which the Registrant filed 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, 1996, and such information is incorporated herein by reference. Information relating to Executive Officers of the Registrant appears at page 11 of this Annual Report on Form 10-K/A. 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 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. 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/A. 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/A. PAGES IN THIS ANNUAL REPORT ON FORM 10-K/A --------------- Independent Auditors' Report II -- Valuation and Qualifying Accounts -- years ended December 31, 1996, 1995 and 1994.......................................... 41 III -- Real Estate and Accumulated Depreciation as of December 31, 1996......................................................... 42 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. The consolidated financial statements of Alexander's, Inc. for the year ended December 31, 1996 are hereby incorporated by reference to Item 14(a)1 of the Annual Report on Form 10-K of Alexander's, Inc. 3. The following exhibits listed on the Exhibit Index are filed with this Annual Report on Form 10-K/A. 38
40 EXHIBIT NO. - ----------- 11 Statement Re Computation of Per Share Earnings. 12 Consolidated Ratios of Earnings to Fixed Charges and Combined Fixed Charges and Preferred Share Dividend Requirements 21 Subsidiaries of the Registrant. 23 Consent of Independent Auditors to Incorporation by Reference. 27 Financial Data Schedule. (b) Reports on Form 8-K During the last quarter of the period covered by this Annual Report on Form 10-K/A described below. PERIOD COVERED: (DATE OF EARLIEST EVENT) REPORT ITEMS REPORTED DATE OF REPORT ----------------------------------- ----------------------------- ------------------ December 2, 1996................... Other events -- December 10, 1996 re: new President of Company December 18, 1996.................. Other events -- December 18, 1996 re: sale of Common Shares 39
41 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 REALTY TRUST By: /s/ JOSEPH MACNOW ------------------------------------ Joseph Macnow, Vice President, Chief Financial Officer Date: August 8, 1997 -------------------------------------- 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 August 8, 1997 --------------------------------------------- Trustees (Principal (Steven Roth) Executive Officer) By: /s/ MICHAEL D. FASCITELLI President and Trustee August 8, 1997 --------------------------------------------- (Michael D. Fascitelli) By: /s/ JOSEPH MACNOW Vice President -- Chief August 8, 1997 --------------------------------------------- Financial Officer and (Joseph Macnow) Controller (Principal Financial and Accounting Officer) By: /s/ DAVID MANDELBAUM Trustee August 8, 1997 --------------------------------------------- (David Mandelbaum) By: /s/ STANLEY SIMON Trustee August 8, 1997 --------------------------------------------- (Stanley Simon) By: /s/ RONALD G. TARGAN Trustee August 8, 1997 --------------------------------------------- (Ronald G. Targan) By: /s/ RUSSELL B. WIGHT, JR. Trustee August 8, 1997 --------------------------------------------- (Russell B. Wight, Jr.) By: /s/ RICHARD R. WEST Trustee August 8, 1997 --------------------------------------------- (Richard R. West) 40
42 VORNADO REALTY TRUST AND SUBSIDIARIES SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS COLUMN B COLUMN D ------------ COLUMN C ------------------------------ COLUMN E --------------- -------- COLUMN A BALANCE ADDITIONS DEDUCTIONS BALANCE - ---------------------------------- AT BEGINNING CHARGED AGAINST ------------------------------ AT END DESCRIPTION OF YEAR OPERATIONS DESCRIPTION AMOUNT OF YEAR - ---------------------------------- ------------ --------------- ---------------------- ------ -------- (AMOUNTS IN THOUSANDS) YEAR ENDED DECEMBER 31, 1996: Deducted from accounts receivable allowance for Uncollectible accounts doubtful accounts............ $578 $ 211 written-off $214 $575 ==== ==== ==== ==== YEAR ENDED DECEMBER 31, 1995: Deducted from accounts receivable, allowance for Uncollectible accounts doubtful accounts............ $457 $ 613 written-off $492 $578 ==== ==== ==== ==== YEAR ENDED DECEMBER 31, 1994: Deducted from accounts receivable, allowance for Uncollectible accounts doubtful accounts............ $402 $ 385 written-off $330 $457 ==== ==== ==== ==== 41
43 VORNADO REALTY TRUST AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS) COLUMN C COLUMN E ----------------------- ---------------------------------- COLUMN D INITIAL COST TO -------------- GROSS AMOUNT AT WHICH COMPANY(1) COSTS CARRIED AT CLOSE OF PERIOD COLUMN A COLUMN B ----------------------- CAPITALIZED ---------------------------------- - ---------------------------------- ------------ BUILDINGS AND SUBSEQUENT BUILDINGS AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS TOTAL(2) - ---------------------------------- ------------ ------- ------------- -------------- ------- ------------- -------- SHOPPING CENTERS NEW JERSEY Atlantic City................. $ 2,135* $ 358 $ 2,143 $ 594 $ 358 $ 2,737 $ 3,095 Bordentown.................... 3,276* 498 3,176 1,134 713 4,095 4,808 Bricktown..................... 9,919* 929 2,175 9,179 929 11,354 12,283 Cherry Hill................... 9,706* 915 3,926 3,322 915 7,248 8,163 Delran........................ 2,848* 756 3,184 2,037 756 5,221 5,977 Dover......................... 3,635* 224 2,330 2,354 205 4,703 4,908 East Brunswick................ 8,205* 319 3,236 3,746 319 6,982 7,301 East Hanover.................. 11,066* 376 3,063 3,439 477 6,401 6,878 Hackensack.................... -- 536 3,293 7,177 536 10,470 11,006 Jersey City................... 10,381* 652 2,962 1,798 652 4,760 5,412 Kearny(4)..................... -- 279 4,429 (1,295) 290 3,123 3,413 Lawnside...................... 5,708* 851 2,222 1,313 851 3,535 4,386 Lodi.......................... 2,420* 245 2,315 957 245 3,272 3,517 Manalapan..................... 6,397* 725 2,447 4,959 725 7,406 8,131 Marlton....................... 5,398* 1,514 4,671 694 1,611 5,268 6,879 Middletown.................... 7,761* 283 1,508 3,950 283 5,458 5,741 Morris Plains................. 6,600* 1,254 3,140 3,277 1,104 6,567 7,671 North Bergen(4)............... -- 510 3,390 (955) 2,309 636 2,945 North Plainfield.............. 3,879 500 13,340 329 500 13,669 14,169 Totowa........................ 15,646* 1,097 5,359 11,796 1,097 17,155 18,252 Turnersville.................. 2,116* 900 2,132 75 900 2,207 3,107 Union......................... 15,975* 1,014 4,527 1,888 1,014 6,415 7,429 Vineland...................... 2,358* 290 1,594 1,253 290 2,847 3,137 Watchung(4)................... -- 451 2,347 6,733 4,200 5,331 9,531 Woodbridge.................... 8,792* 190 3,047 709 220 3,726 3,946 -------- ------- ------- ------- ------- -------- -------- Total New Jersey.......... 144,221 15,666 85,956 70,463 21,499 150,586 172,085 -------- ------- ------- ------- ------- -------- -------- NEW YORK 14th Street and Union Square, Manhattan..................... -- 12,566 4,044 3,457 12,581 7,486 20,067 Albany (Menands).............. -- 460 1,677 2,908 460 4,585 5,045 Buffalo (Amherst)............. 4,863* 402 2,019 2,185 636 3,970 4,606 Freeport...................... 8,021* 1,231 3,273 2,852 1,231 6,125 7,356 New Hyde Park................. 2,043* -- -- 122 -- 122 122 North Syracuse................ -- -- -- 23 -- 23 23 Rochester (Henrietta)......... 2,203* -- 2,124 1,173 -- 3,297 3,297 Rochester..................... 2,832* 443 2,870 635 443 3,505 3,948 -------- ------- ------- ------- ------- -------- -------- Total New York............ 19,962 15,102 16,007 13,355 15,351 29,113 44,464 -------- ------- ------- ------- ------- -------- -------- COLUMN I COLUMN F ---------------------- ---------------- COLUMN G COLUMN H LIFE ON WHICH COLUMN A ACCUMULATED --------------- -------- DEPRECIATION IN LATEST - ---------------------------------- DEPRECIATION AND DATE OF DATE INCOME STATEMENT DESCRIPTION AMORTIZATION CONSTRUCTION(3) ACQUIRED IS COMPUTED - ---------------------------------- ---------------- --------------- -------- ---------------------- SHOPPING CENTERS NEW JERSEY Atlantic City................. $ 1,820 1965 1965 14-40 Years Bordentown.................... 3,511 1958 1958 10-40 Years Bricktown..................... 3,946 1968 1968 27-40 Years Cherry Hill................... 4,549 1964 1964 15-40 Years Delran........................ 2,575 1972 1972 20-40 Years Dover......................... 2,537 1964 1964 16-40 Years East Brunswick................ 4,592 1957 1957 13-33 Years East Hanover.................. 3,873 1962 1962 16-40 Years Hackensack.................... 3,828 1963 1963 17-40 Years Jersey City................... 3,283 1965 1965 19-40 Years Kearny(4)..................... 909 1938 1959 28-40 Years Lawnside...................... 1,892 1969 1969 19-40 Years Lodi.......................... 2,156 1935 1955 11-27 Years Manalapan..................... 3,185 1971 1971 18-40 Years Marlton....................... 3,534 1973 1973 21-40 Years Middletown.................... 2,376 1963 1963 27-40 Years Morris Plains................. 3,738 1961 1985 14-19 Years North Bergen(4)............... 58 1993 1959 30 Years North Plainfield.............. 3,464 1955 1989 26-30 Years Totowa........................ 5,068 1957 1957 22-40 Years Turnersville.................. 1,599 1974 1974 23-40 Years Union......................... 4,571 1962 1962 10-40 Years Vineland...................... 1,603 1966 1966 22-40 Years Watchung(4)................... 377 1994 1959 30 Years Woodbridge.................... 2,689 1959 1959 11-40 Years ------- Total New Jersey.......... 71,733 ------- NEW YORK 14th Street and Union Square, Manhattan..................... 413 1965 1993 40 Years Albany (Menands).............. 1,739 1965 1965 27-40 Years Buffalo (Amherst)............. 2,268 1968 1968 14-40 Years Freeport...................... 2,412 1981 1981 19-40 Years New Hyde Park................. 122 1970 1976 6-7 Years North Syracuse................ 23 1967 1976 11-12 Years Rochester (Henrietta)......... 1,890 1971 1971 22-40 Years Rochester..................... 2,236 1966 1966 15-40 Years ------- Total New York............ 11,103 ------- (Continued) 42
44 VORNADO REALTY TRUST AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS) COLUMN C COLUMN E ----------------------- ---------------------------------- COLUMN D INITIAL COST TO -------------- GROSS AMOUNT AT WHICH COMPANY(1) COSTS CARRIED AT CLOSE OF PERIOD COLUMN A COLUMN B ----------------------- CAPITALIZED ---------------------------------- - ---------------------------------- ------------ BUILDINGS AND SUBSEQUENT BUILDINGS AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS TOTAL(2) - ---------------------------------- ------------ ------- ------------- -------------- ------- ------------- -------- PENNSYLVANIA Allentown..................... 7,696* 70 3,446 9,555 334 12,737 13,071 Bensalem...................... 3,967* 1,198 3,717 1,582 1,198 5,299 6,497 Bethlehem..................... -- 278 1,806 3,634 278 5,440 5,718 Broomall...................... 3,260* 734 1,675 1,606 850 3,165 4,015 Glenolden..................... 4,245* 850 1,295 695 850 1,990 2,840 Lancaster..................... 2,312* 606 2,312 2,475 606 4,787 5,393 Levittown..................... 2,283* 193 1,231 105 193 1,336 1,529 10th and Market Streets, Philadelphia................ -- 933 3,230 4,148 933 7,378 8,311 Upper Moreland................ 3,517* 683 2,497 112 683 2,609 3,292 York.......................... 1,463* 421 1,700 1,233 421 2,933 3,354 -------- ------- -------- -------- -------- -------- -------- Total Pennsylvania........ 28,743 5,966 22,909 25,145 6,346 47,674 54,020 -------- ------- -------- -------- -------- -------- -------- MARYLAND Baltimore (Belait Rd)......... -- 785 1,333 2,978 785 4,311 5,096 Baltimore (Towson)............ 5,779* 581 2,756 484 581 3,240 3,821 Baltimore (Dundalk)........... 4,084* 667 1,710 2,952 667 4,662 5,329 Glen Burnie................... 2,299* 462 1,741 522 462 2,263 2,725 Hagerstown.................... -- 168 1,453 894 168 2,347 2,515 -------- ------- -------- -------- -------- -------- -------- Total Maryland............ 12,162 2,663 8,993 7,830 2,663 16,823 19,486 -------- ------- -------- -------- -------- -------- -------- CONNECTICUT Newington..................... 3,042* 502 1,581 525 502 2,106 2,608 Waterbury..................... 3,889* -- 2,103 1,341 667 2,777 3,444 -------- ------- -------- -------- -------- -------- -------- Total Connecticut......... 6,931 502 3,684 1,866 1,169 4,883 6,052 -------- ------- -------- -------- -------- -------- -------- MASSACHUSETTS Chicopee...................... 1,999* 510 2,031 358 510 2,389 2,899 Springfield(4)................ -- 505 1,657 857 2,586 433 3,019 -------- ------- -------- -------- -------- -------- -------- Total Massachusetts....... 1,999 1,015 3,688 1,215 3,096 2,822 5,918 -------- ------- -------- -------- -------- -------- -------- TEXAS Dallas Lewisville............. 764* 2,433 2,271 676 2,469 2,911 5,380 Mesquite...................... 3,445* 3,414 4,704 1,134 3,414 5,838 9,252 Skillman...................... 1,987* 3,714 6,891 1,030 3,714 7,921 11,635 -------- ------- -------- -------- -------- -------- -------- Total Texas............... 6,196 9,561 13,866 2,840 9,597 16,670 26,267 -------- ------- -------- -------- -------- -------- -------- TOTAL SHOPPING CENTERS............ 220,214 50,475 155,103 122,714 59,721 268,571 328,292 -------- ------- -------- -------- -------- -------- -------- COLUMN I COLUMN F ---------------------- ---------------- COLUMN G COLUMN H LIFE ON WHICH COLUMN A ACCUMULATED --------------- -------- DEPRECIATION IN LATEST - ---------------------------------- DEPRECIATION AND DATE OF DATE INCOME STATEMENT DESCRIPTION AMORTIZATION CONSTRUCTION(3) ACQUIRED IS COMPUTED - ---------------------------------- ---------------- --------------- -------- ---------------------- PENNSYLVANIA Allentown..................... 4,059 1957 1957 24-42 Years Bensalem...................... 3,260 1972 1972 20-40 Years Bethlehem..................... 2,717 1966 1966 13-40 Years Broomall...................... 1,792 1966 1966 13-40 Years Glenolden..................... 946 1975 1975 23-40 Years Lancaster..................... 2,632 1966 1966 14-40 Years Levittown..................... 1,059 1964 1964 14-40 Years 10th and Market Streets, Philadelphia................ 296 1977 1994 Upper Moreland................ 1,833 1974 1974 22-40 Years York.......................... 1,555 1970 1970 19-40 Years -------- Total Pennsylvania........ 20,149 -------- MARYLAND Baltimore (Belait Rd)......... 2,743 1962 1962 26-33 Years Baltimore (Towson)............ 1,931 1968 1968 19-40 Years Baltimore (Dundalk)........... 2,301 1966 1966 16-40 Years Glen Burnie................... 1,717 1958 1958 22-33 Years Hagerstown.................... 1,239 1966 1966 13-40 Years -------- Total Maryland............ 9,931 -------- CONNECTICUT Newington..................... 1,427 1965 1965 15-40 Years Waterbury..................... 1,669 1969 1969 23-40 Years -------- Total Connecticut......... 3,096 -------- MASSACHUSETTS Chicopee...................... 1,694 1969 1969 20-40 Years Springfield(4)................ 48 1993 1966 30 Years -------- Total Massachusetts....... 1,742 -------- TEXAS Dallas Lewisville............. 624 1989 1990 28-30 Years Mesquite...................... 1,249 1988 1990 28-30 Years Skillman...................... 1,633 1988 1990 27-30 Years -------- Total Texas............... 3,506 -------- TOTAL SHOPPING CENTERS............ 121,260 -------- (Continued) 43
45 VORNADO REALTY TRUST AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1996 (AMOUNTS IN THOUSANDS) COLUMN C COLUMN E ----------------------- ---------------------------------- COLUMN D INITIAL COST TO -------------- GROSS AMOUNT AT WHICH COMPANY(1) COSTS CARRIED AT CLOSE OF PERIOD COLUMN A COLUMN B ----------------------- CAPITALIZED ---------------------------------- - ---------------------------------- ------------ BUILDINGS AND SUBSEQUENT BUILDINGS AND DESCRIPTION ENCUMBRANCES LAND IMPROVEMENTS TO ACQUISITION LAND IMPROVEMENTS TOTAL(2) - ---------------------------------- ------------ ------- ------------- -------------- ------- ------------- -------- WAREHOUSE/INDUSTRIAL NEW JERSEY East Brunswick................ -- -- 4,772 2,844 7,616 7,616 East Hanover.................. 8,210* 576 7,752 6,904 691 14,541 15,232 Edison........................ 2,455* 705 2,839 1,235 704 4,075 4,779 Garfield...................... 1,249 96 8,068 3,808 96 11,876 11,972 -------- ------- -------- -------- -------- -------- -------- Total Warehouse/ Industrial.............. 11,914 1,377 23,431 14,791 1,491 38,108 39,599 -------- ------- -------- -------- -------- -------- -------- OTHER PROPERTIES NEW JERSEY Paramus....................... 1,225 -- 8,345 2,201 -- 10,546 10,546 Montclair..................... -- 66 470 329 66 799 865 Rahway........................ -- -- -- 25 -- 25 25 NEW YORK 825 7th Ave. Manhattan........ -- -- 8,870 -- -- 8,870 8,870 -------- ------- -------- -------- -------- -------- -------- Total Other Properties.... 1,225 66 17,685 2,555 66 20,240 20,306 -------- ------- -------- -------- -------- -------- -------- LEASEHOLD IMPROVEMENTS AND EQUIPMENT 9,101 9,101 -------- -------- TOTAL -- DECEMBER 31, 1996............... $233,353 $51,918 $ 196,219 $140,060 $61,278 $ 336,020 $397,298 ======== ======= ======== ======== ======== ======== ======== COLUMN I COLUMN F ---------------------- ---------------- COLUMN G COLUMN H LIFE ON WHICH COLUMN A ACCUMULATED --------------- -------- DEPRECIATION IN LATEST - ---------------------------------- DEPRECIATION AND DATE OF DATE INCOME STATEMENT DESCRIPTION AMORTIZATION CONSTRUCTION(3) ACQUIRED IS COMPUTED - ---------------------------------- ---------------- --------------- -------- ---------------------- WAREHOUSE/INDUSTRIAL NEW JERSEY East Brunswick................ 3,645 1972 1972 19-40 Years East Hanover.................. 8,159 1963-1967 1963 5-40 Years Edison........................ 1,821 1954 1982 17-25 Years Garfield...................... 8,088 1942 1959 17-33 Years -------- Total Warehouse/ Industrial.............. 21,713 -------- OTHER PROPERTIES NEW JERSEY Paramus....................... 2,361 1967 1987 33-40 Years Montclair..................... 488 1972 1972 15 Years Rahway........................ 23 1972 1972 14 Years NEW YORK 825 7th Ave. Manhattan........ 129 1963 1996 39 Years -------- Total Other Properties.... 3,001 -------- LEASEHOLD IMPROVEMENTS AND EQUIPMENT 5,075 3-20 Years -------- TOTAL -- DECEMBER 31, 1996............... $151,049 ======== - --------------- * These encumbrances are cross collateralized under a blanket mortgage in the amount of $227,000,000 at December 31, 1996. Notes (1) Initial cost is cost as of January 30, 1982 (the date on which Vornado commenced real estate operations) unless acquired subsequent to the date -- See Column H. (2) Aggregate cost is approximately the same for Federal income tax purposes. (3) Date of original construction -- many properties have had substantial renovation or additional construction -- see Column D. (4) Building on these properties were demolished in 1993. As a result, the cost of the buildings and improvements, net of accumulated depreciation, were transferred to land. In addition, the cost of the land in Kearny is net of a $1,615,000 insurance recovery. 44
46 VORNADO REALTY TRUST AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (AMOUNTS IN THOUSANDS) The following is a reconciliation of real estate assets and accumulated depreciation: YEAR ENDED YEAR ENDED YEAR ENDED DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994 ----------------- ----------------- ----------------- REAL ESTATE Balance at beginning of period........................ $ 382,476 $ 365,832 $ 340,415 Additions during the period: Land............................................... -- 161 989 Buildings & improvements........................... 14,822 16,635 24,428 -------- -------- -------- 397,298 382,628 365,832 Less: Cost of assets written-off...................... -- 152 -- -------- -------- -------- Balance at end of period.............................. $ 397,298 $ 382,476 $ 365,832 ======== ======== ======== ACCUMULATED DEPRECIATION Balance at beginning of period........................ $ 139,495 $ 128,705 $ 118,742 Additions charged to operating expenses............... 11,589 10,790 9,963 -------- -------- -------- 151,084 139,495 128,705 Less: Accumulated depreciation on assets written-off........................................ 35 -- -- -------- -------- -------- Balance at end of period.............................. $ 151,049 $ 139,495 $ 128,705 ======== ======== ======== 45