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EXHIBIT 99.1
TABLE OF CONTENTS
Item Page
---- ----
Item 6. Selected Financial Data 2
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 3
Item 8. Financial Statements and Supplementary Data 12
Schedule III - Real Estate and Accumulated Depreciation 32
1
Item 6. Selected Financial Data
Summary of Selected Financial Data
(Amounts in thousands, except per share data)
Year Ended December 31,
---------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ --------- ------------- -------------
Operating data:
Total revenues $ 76,800 $ 67,792 $ 62,696 $ 63,133 $ 50,468(4)
========= ========= ========= ========== =========
Income (loss) from continuing
operations (7) $ 12,400 $ 26,440 $ 4,425 $ 4,743 $ (6,786)
Income from discontinued
operations 11,184 946 772 781 731
--------- --------- --------- ---------- ---------
Net income (loss) $ 23,584(1) $ 27,386(2) $ 5,197 $ 5,524(3) $ (6,055)(5)
========= ========= ========= ========== =========
Income (loss) per share (basic and
diluted):
Continuing operations $ 2.48 $ 5.29 $ .89 $ .95 $ (1.36)
Discontinued operations 2.24 .19 .15 .15 .15
--------- --------- --------- ---------- ---------
Net income (loss) (6) $ 4.72 $ 5.48 $ 1.04 $ 1.10 $ (1.21)
========= ========= ========= ========== =========
Balance sheet data:
Total assets $ 664,912 $ 583,339 $ 403,305 $ 366,496 $ 317,043
Real estate, net 542,975 377,961 343,612 269,324 236,631
Debt 543,807 515,831 367,788 329,161 277,113
Stockholders' equity 68,665 45,081 17,695 12,498 6,974
- ------------------
Notes:
(1) Net income includes income from discontinued operations comprised of a gain
on the sale of the Third Avenue property of $10,366.
(2) Net income includes the following, (i) a gain on sale of the Fordham Road
Property of $19,026, (ii) a gain from early extinguishment of debt of
$3,534, offset by (iii) $3,058 resulting from the write-off of
architectural and engineering costs associated with development plans at
Paramus prior to IKEA, and (iv) $2,030 from the write-off of professional
fees resulting from the termination of the spin-off of Alexander's Tower
LLC.
(3) Net of $4,877 resulting from the write-off of the asset arising from the
straight-lining of rents primarily due to Caldor's rejection of its
Flushing lease in 1999.
(4) In June 1998, the Company increased its interest in the Kings Plaza Mall to
100% by acquiring Federated's 50% interest.
(5) Net loss includes the write-off of $15,096 resulting from the razing of the
building formerly located at the Company's Lexington Avenue site.
(6) Income (loss) per share is the same for all years presented with and
without dilution. For further discussion of income (loss) per share see
notes to the consolidated financial statements.
(7) Includes (loss) income from the Company's Flushing property of
$(916), $(866), $(960), $357, and $2,482, respectively.
2
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
The Company had net income of $23,584,000 for the year ended December
31, 2002, compared to net income of $27,386,000 in the prior year. Net income
for 2002 includes income from discontinued operations comprised of a gain on the
sale of the Third Avenue property of $10,366,000. Net income for 2001 includes
(i) a gain on the sale of the Fordham Road property of $19,026,000, (ii) a gain
from the early extinguishment of debt of $3,534,000, partially offset by (iii) a
charge of $3,058,000 resulting from the write-off of architectural and
engineering costs associated with the development plans prior to the IKEA
Property Inc. (IKEA) ground lease at Paramus, and (iv) a charge of $2,030,000
resulting from the write-off of professional fees resulting from the termination
of the proposed spin-off of Alexander's Tower LLC discussed below. Excluding
these items, net income for the year ended December 31, 2002, would have been
higher than net income in the corresponding year by $3,304,000.
Effective January 1, 2002, the Company changed its method of accounting
for long-lived assets held for sale, in accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment and Disposal of
Long-Lived Assets. This Statement requires that the results of operations, gains
and losses, and cash flows attributed to properties held for sale or sold during
2002 and thereafter, such as Third Avenue, be classified as discontinued
operations for all periods presented, and that any assets and liabilities of
properties held for sale be presented separately in the consolidated balance
sheet. Properties held for sale or sold as a result of sales activities that
were initiated prior to 2002, such as Fordham Road, continue to be accounted for
under the applicable prior accounting guidance.
CRITICAL ACCOUNTING POLICIES
In preparing the consolidated financial statements 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. Set forth below is a summary of the accounting policies
that management believes are critical to the preparation of the consolidated
financial statements. The summary should be read in conjunction with the more
complete discussion of the Company's accounting policies included in Note 2 to
the consolidated financial statements in this Annual Report on Form 10-K.
Real Estate
Real estate is carried at cost, net of accumulated depreciation and
amortization. Maintenance and repairs are charged to operations as incurred.
Depreciation requires an estimate by management of the useful life of each
property as well as an allocation of the costs associated with a property to its
various components. If the Company does not allocate these costs appropriately
or incorrectly estimates the useful lives of its real estate, depreciation
expense may be misstated. When real estate and other property is undergoing
development activities, all property operating expenses, including interest
expense, are capitalized to the cost of the real property to the extent that
management believes such costs are recoverable through the value of the
property. The Company's properties are reviewed for impairment if events or
circumstances indicate that the carrying amount of the asset may not be
recoverable. In such event, a comparison is made of the current and projected
operating cash flows of each property on an undiscounted basis, to the carrying
amount of such property. If the Company incorrectly estimates the value of the
asset or the undiscounted cash flows, the impairment charges may be different.
Revenue Recognition
The Company has the following revenue sources and revenue recognition
policies:
- Base Rents -- income arising from tenant leases. These rents
are recognized over the non-cancellable term of the related
leases on a straight-line basis which includes the rent steps
and free rent abatements under the leases.
3
- Percentage Rents -- income arising from retail tenant leases
which are contingent upon the sales of the tenant exceeding a
defined threshold. These rents are recognized in accordance
with SAB 101, which states that this income is to be
recognized only after the contingency has been removed (i.e.,
sales thresholds have been achieved).
- Expense Reimbursement Income -- income arising from tenant
leases which provide for the recovery of all or a portion of
the operating expenses and real estate taxes of the respective
property. This income is accrued in the same periods as the
expenses are incurred.
Before the Company can recognize revenue, it is required to assess,
among other things, its collectibility. If the Company incorrectly determines
the collectibility of its revenue, its net income and assets could be
overstated.
Income Taxes
The Company operates in a manner intended to enable it to continue to
qualify as a REIT under sections 856 through 860 of the Internal Revenue Code of
1986, as amended (the "Code"). Under those sections, a REIT which distributes at
least 90% of its REIT taxable income as a dividend to its stockholders each year
and which meets certain other conditions will not be taxed on that portion of
its taxable income. The Company's net operating loss ("NOL") carryovers
generally would be available to offset the amount of the Company's REIT taxable
income.
RESULTS OF OPERATIONS
Years Ended December 31, 2002 and December 31, 2001
The Company's revenues were $76,800,000 in 2002, compared to
$67,792,000 in 2001, an increase of $9,008,000.
Property rentals were $50,630,000 in 2002, compared to $44,560,000 in
2001, an increase of $6,070,000. This increase results primarily from (i)
commencement, on October 5, 2001, of the ground lease with IKEA at the Paramus
property, and (ii) an increase in occupancy at the Kings Plaza Regional Shopping
Center.
Tenant expense reimbursements were $26,170,000 in 2002, compared to
$23,232,000 in 2001, an increase of $2,938,000. This increase resulted primarily
from higher reimbursements for real estate taxes, insurance and repairs and
maintenance.
Operating expenses were $33,042,000 in 2002, compared to $29,265,000 in
2001, an increase of $3,777,000. This resulted primarily from an increase in
real estate taxes, insurance and repairs and maintenance.
Depreciation and amortization expense was $6,668,000 in 2002, compared
to $6,442,000 in 2001, an increase of $226,000.
Interest and debt expense was $22,888,000 in 2002, compared to
$22,469,000 in 2001, an increase of $419,000. This increase resulted from (i)
interest of $8,272,000 due to higher average debt in 2002, offset by (ii) a
$4,116,000 reduction in interest due to a decrease in average interest rates
from 9.20% to 8.23% and (iii) $4,529,000 of additional capitalized interest
relating to the Company's development property (interest expense of $23,788,000
was capitalized in 2002, as compared to $19,259,000 in 2001).
Interest and other income was $2,178,000 in 2002, compared to
$3,237,000 in 2001. This decrease of $1,059,000 resulted primarily from lower
average cash invested due to the funding of the Company's development project
and lower yields on investments, offset by a gain of $169,000 resulting from the
sale of air rights (see "Liquidity and Capital Resources -- Development Plans"
below for further details).
4
Discontinued operations include the Company's Third Avenue property as
shown below:
Year Ended December 31,
-------------------------------
2002 2001
-------------- --------------
Total revenues $ 1,198,000 $ 1,551,000
Total expenses 380,000 605,000
-------------- --------------
Operating income 818,000 946,000
Gain on sale of Third Avenue 10,366,000 --
-------------- --------------
Income from discontinued operations $ 11,184,000 $ 946,000
============== ==============
Years Ended December 31, 2001 and December 31, 2000
The Company had net income of $27,386,000 for the year ended December
31, 2001, compared to net income of $5,197,000 in the prior year. Net income for
2001 includes (i) a gain on the sale of the Fordham Road property of
$19,026,000, (ii) a gain from the early extinguishment of debt of $3,534,000,
partially offset by (iii) a charge of $3,058,000 resulting from the write-off of
architectural and engineering costs associated with the development plans prior
to the IKEA Property Inc. (IKEA) ground lease at Paramus, and (iv) a charge of
$2,030,000 resulting from the write-off of professional fees resulting from the
termination of the proposed spin-off of Alexander's Tower LLC.
Details of the additional changes in the components of net income for
the year ended December 31, 2001 as compared to 2000 are discussed below.
The Company's revenues were $67,792,000 in 2001, compared to
$62,696,000 in 2000, an increase of $5,096,000.
Property rentals were $44,560,000 in 2001, compared to $42,308,000 in
2000, an increase of $2,252,000. This increase results primarily from (i)
commencement, on October 5, 2001, of the ground lease with IKEA at the Paramus
property, and (ii) an increase in occupancy at the Kings Plaza Regional Shopping
Center.
Tenant expense reimbursements were $23,232,000 in 2001, compared to
$20,388,000 in 2000, an increase of $2,844,000. This increase resulted primarily
from (i) higher reimbursements for real estate taxes and repairs and
maintenance, and (ii) a $531,000 adjustment, made in the first quarter of 2000,
in the method of allocating an anchor tenant's share of parking lot expenses at
the Rego Park I property (which covered a number of years).
Operating expenses were $29,265,000 in 2001, compared to $28,615,000 in
2000, an increase of $650,000. This resulted primarily from an increase in real
estate taxes and repairs and maintenance of $1,405,000, partially offset by the
following relating to the Kings Plaza Regional Shopping Center, decreases in (i)
operating expenses of $866,000 primarily from fuel costs at the utility plant
and (ii) marketing expenses of $492,000, partially offset by an accrual of
$675,000 for environmental remediation.
Depreciation and amortization expense was $6,442,000 in 2001, compared
to $5,481,000 in 2000. This increase of $961,000 is a result of the interior
refurbishment of the Company's Kings Plaza Regional Shopping Center completed in
the beginning of 2001.
Interest and debt expense was $22,469,000 in 2001, compared to
$21,424,000 in 2000, an increase of $1,045,000. This increase resulted from (i)
interest of $7,404,000 due to higher average debt in 2001, offset by (ii) a
$3,032,000 reduction in interest due to a decrease in average interest rates
from 10.07% to 9.20% and (iii) $2,528,000 of additional capitalized interest
relating to the Company's development property (interest expense of $19,259,000
was capitalized in 2001, as compared to $16,731,000 in 2000).
Interest and other income was $3,237,000 in 2001, compared to
$1,124,000 in 2000. This increase of $2,113,000 results primarily from increased
invested cash balances attributable to additional borrowings on the Company's
Kings Plaza Regional Shopping Center on June 1, 2001, and Paramus property on
October 5, 2001.
5
Minority interest of $49,000 in 2001 relates to $1,200,000 of
non-convertible preferred stock that was sold to Vornado Realty Trust by 59th
Street Corporation (a wholly-owned subsidiary of the Company) on August 1, 2001.
This issue was redeemed by 59th Street Corporation, and a $49,000 dividend was
paid, on December 28, 2001.
Discontinued operations include the Company's Third Avenue property as
shown below:
Year Ended December 31,
-------------------------------
2001 2000
-------------- --------------
Total revenues $ 1,551,000 $ 1,269,000
Total expenses 605,000 497,000
-------------- --------------
Income from discontinued operations $ 946,000 $ 772,000
============== ==============
LIQUIDITY AND CAPITAL RESOURCES
Alexander's operating properties do not generate sufficient cash flow
to pay all of its expenses. After the completion of the Lexington Avenue
property, which is not expected until 2005, the Company expects that cash flow
will become positive.
Development Plans
The development plans at Lexington Avenue consist of an approximately
1.3 million square foot multi-use building. The building will contain
approximately 154,000 net rentable square feet of retail (45,000 square feet of
which has been leased to Hennes & Mauritz), approximately 878,000 net rentable
square feet of office (695,000 square feet of which has been leased to Bloomberg
L.P.) and approximately 248,000 net saleable square feet of residential
consisting of condominium units (through a taxable REIT subsidiary).
Construction is expected to be completed in 2005. On July 3, 2002 the Company
finalized a $490,000,000 loan with HVB Real Estate Capital (Hypo Vereinsbank) to
finance the construction of the Lexington Avenue property (the "Construction
Loan"). The estimated construction costs in excess of the construction loan of
approximately $140,000,000 will be provided by the Company of which $107,000,000
has been expended through December 31, 2002. The Construction Loan has an
interest rate of LIBOR plus 2.5% (currently 3.94%) and a term of forty-two
months subject to two one-year extensions. The Company received an initial
funding of $55,500,000 under the Construction Loan, of which $25,000,000 was
used to repay the Company's term loan to a bank in the amount of $10,000,000 and
a secured note in the amount of $15,000,000. Of the total construction budget of
$630,000,000, $162,000,000 has been expended through December 31, 2002 and an
additional $184,000,000 has been committed to.
The Company's lease with Bloomberg L.P. has an initial term of 25
years, with a ten-year renewal option. Base annual net rent is $34,529,000 in
each of the first four years and $38,533,000 in the fifth year with a similar
percentage increase each four years thereafter.
For the development of the residential portion of the Lexington Avenue
project, the Company will utilize 241,125 square feet of air rights, of which
72,525 square feet were generated "as of right" in accordance with the zoning
code and 196,711 square feet were acquired in a number of separate transactions
for an aggregate cost of $20,708,000 (including 56,932 square feet which were
acquired from Vornado at a cost of $6,517,000). Of the acquired air rights,
28,111 square feet were sold to a third party for $3,339,000 resulting in a gain
of $169,000 which is reflected as part of interest and other income in the
Company's statement of income.
There can be no assurance that the Lexington Avenue project ultimately
will be completed, completed on time or completed for the budgeted amount.
Further, the Company may need additional financing for the project, which may
involve equity, debt, joint ventures and asset sales, and which may involve
arrangements with Vornado Realty Trust. If the project is not completed on a
timely basis, the Bloomberg L.P. lease may be cancelled and significant
penalties may apply. See Vornado "Completion Guarantee" described below.
In conjunction with the closing of the Lexington Avenue construction
loan on July 3, 2002, the Company's management and development agreements with
Vornado were amended to provide for a term lasting until substantial completion
of the property, with automatic renewals, and for the payment of the estimated
development fee of $26,300,000 upon the earlier of January 3, 2006 or the
payment in full of the construction loan encumbering
6
the property. Vornado has also agreed to guarantee among other things, the lien
free, timely completion of the construction of the project, and funding of
project costs in excess of a stated loan budget, if not funded by the Company
(the "Completion Guarantee"). The $6,300,000 estimated fee payable by the
Company to Vornado is 1% of construction costs (as defined) and is due at the
same time that the development fee is due. In addition, if Vornado should
advance any funds under the Completion Guarantee in excess of the $26,000,000
currently available under the secured line of credit, interest on those advances
would be at 15% per annum.
Insurance
The Company's debt instruments, consisting of mortgage loans secured by
its properties (which are generally non-recourse to the Company), contain
customary covenants requiring the Company to maintain insurance. There can be no
assurance that the lenders under these instruments will not take the position
that an exclusion from all risk insurance coverage for losses due to terrorist
acts is a breach of these debt instruments that allows the lenders to declare an
event of default and accelerate repayment of debt. In addition, if lenders
insist on coverage for these risks, it could adversely affect the Company's
ability to finance and/or refinance its properties, including the construction
of its Lexington Avenue development property.
On November 26, 2002, the Terrorism Risk Insurance Act of 2002 was
signed into law. Under this new legislation, through 2004 (with a possible
extension through 2005), regulated insurers must offer coverage in their
commercial property and casualty policies (including existing policies) for
losses resulting from defined "acts of terrorism." The Company's current
property insurance carrier has advised us that there will be no additional
premium for this coverage through the end of the policy term, June 30, 2003. The
carrier has further advised us that the situation may change at renewal.
Disposition of Properties
On August 30, 2002, the Company closed on the sale of its Third Avenue
property, located in the Bronx, New York. The 173,000 square feet property was
sold for $15,000,000, resulting in a gain of $10,366,000. Included in the
expenses relating to the sale, the Company paid a commission of $600,000, of
which $350,000 was paid to Vornado pursuant to the 1992 Leasing Agreement
between the companies.
On May 30, 2002, the Company entered into an agreement to sell its
subsidiary, which owns the building and has the ground lease for its property in
Flushing, New York for $18,800,000. The Company has received a non-refundable
deposit of $1,875,000 from the purchaser. By Notice of Default dated August 16,
2002, the landlord of the premises notified the Company of certain alleged
defaults under the lease including, but not limited to, the fact that the
purchaser performed unauthorized construction at the premises. The Company
commenced an action for injunctive relief and a declaration of the rights and
obligations of the parties under the lease. The Company has obtained an
injunction, which temporarily restrains the landlord from terminating the lease.
On September 6, 2002, the scheduled closing date, the Company notified the
purchaser that the purchaser failed to close and is in default of its
obligations under the purchase contract. While negotiations are in process with
the parties to attempt to settle the disputes, there can be no assurance that
the sale will be consummated, that the dispute with the landlord will be
resolved favorably, or that the deposit will not be required to be returned.
Because these matters continue to be unresolved, the Company reclassified the
property from "held for sale" to "held and used" during the three months ended
September 30, 2003. Accordingly, the results of operations of the property
previously reported as discontinued operations have been reclassified and
included in continuing operations. The reclassification has no effect on the
Company's previously reported net income or net income per share. Since the
Company continues to attempt to close this transaction, it has not recognized
the $1,875,000 non-refundable deposit from the purchaser as income. The Company
continues to explore all of its options, including subleasing the property.
7
Debt
Below is a summary of the Company's properties and their encumbrances
at December 31, 2002:
Debt
Outstanding Interest Maturity
Property (in 000's) Rate Dates
-------- -------------- -------- --------
Kings Plaza Shopping Center $ 219,307,000 7.46% 6/10/11
Rego Park 82,000,000 7.25% 6/10/09
Paramus 68,000,000 5.92% 10/5/11
Lexington Avenue* 55,500,000 3.94% 1/3/06
Rego Park II (raw land) -- -- --
Flushing (lease interest) -- -- --
Vornado loan 119,000,000 12.48% 1/3/06
--------------
Total $ 543,807,000
==============
*Represents initial funding on a $490 million construction loan.
At December 31, 2002, the principal repayments for the next five years
and thereafter are as follows:
Year Ending December 31,
- ------------------------
2003 $ 2,721,000
2004 3,226,000
2005 3,895,000
2006 178,699,000
2007 4,526,000
Thereafter 350,740,000
At December 31, 2002, the Company was indebted to Vornado in the amount
of $119,000,000 comprised of (i) $95,000,000 financing, and (ii) $24,000,000
under a $50,000,000 line of credit (which carries a 1% unused commitment fee).
The interest rate on the loan and the line of credit which is currently 12.48%,
will reset quarterly using a Treasury index (with a 3% floor) plus the same
spread to treasuries as previously existed.
The Company has additional borrowing capacity of $26,000,000 under its
line of credit with Vornado. The Company can also raise additional capital
through mezzanine level borrowing (deeply subordinated debt which is not secured
by a senior interest in assets) and through the sale of securities and assets
(the Company estimates that the fair market value of its assets are
substantially in excess of their historical cost). The Company continues to
evaluate its financing alternatives. Based on discussions with third party
lenders, the Company believes it could borrow an additional $60 to $70 million
through the refinancing of its Kings Plaza and Rego Park I properties at the
mezzanine level and repay a portion of the Vornado loan; however the interest
rate on this incremental debt would be substantially in excess of the interest
rate under the Vornado line of credit which is 12.48% at December 31, 2002,
therefore the Company does not intend to pursue such refinancings at this time.
Although there can be no assurance, the Company believes that its cash
sources as outlined above will be adequate to fund its cash requirements until
its operations generate adequate cash flow.
CASH FLOWS
Year Ended December 31, 2002
Net cash provided by operating activities of $7,643,000 was comprised
of (i) net income of $23,584,000 and (ii) non-cash items of $5,935,000 offset by
(iii) the net change in operating assets and liabilities of $11,341,000, (iv)
gain on sale of Third Avenue property of $10,366,000 and (v) gain on sale of air
rights of $169,000. The adjustments for non-cash items are primarily comprised
of (i) depreciation and amortization of $9,034,000, offset by (ii) the effect of
straight-lining of rental income of $3,099,000.
8
Net cash used in investing activities of $114,028,000 (includes cash
provided by discontinued operations of $13,176,000) was comprised of capital
expenditures of $133,250,000 partially offset by proceeds from the sale of the
Third Avenue property of $13,176,000. The capital expenditures were primarily
related to the Lexington Avenue development.
Net cash provided by financing activities of $16,366,000 resulted
primarily from an increase in debt of $55,500,000 partially offset by debt
repayments of $27,524,000 and debt issuance costs of $11,110,000.
Year Ended December 31, 2001
Net cash provided by operating activities of $9,839,000 was comprised
of (i) net income of $27,386,000, (ii) non-cash items of $4,824,000, (iii)
write-off of architectural and engineering costs of $3,058,000 associated with
the development plans prior to the IKEA Property, Inc. ground lease, (iv)
write-off of professional fees of $2,030,000 resulting from the termination of
the spin-off of Alexander's Tower LLC, offset by (v) gain on sale of Fordham
Road property of $19,026,000, (vi) a gain from early extinguishment of debt of
$3,534,000, and (vii) the net change in operating assets and liabilities of
$4,899,000. The adjustments for non-cash items are primarily comprised of (i)
depreciation and amortization of $7,973,000, offset by (ii) the effect of
straight-lining of rental income of $3,149,000.
Net cash used in investing activities of $22,995,000 was comprised of
(i) proceeds from the sale of Fordham Road property of $23,701,000 and (ii) the
release of restricted cash of $21,670,000 offset by (iii) capital expenditures
of $48,490,000 and (iv) an increase in restricted cash of $19,876,000. The
capital expenditures were primarily comprised of (i) capitalized interest and
other carrying costs of $21,378,000, (ii) renovations to the Kings Plaza
Regional Shopping Center of $3,651,000 and (iii) excavation, foundation and
predevelopment costs at Lexington Avenue of $21,599,000.
Net cash provided by financing activities of $146,142,000 was comprised
of (i) proceeds from the issuance of debt of $300,685,000 offset by (ii)
repayment of debt of $149,337,000 and (iii) debt issuance costs of $5,206,000.
Year Ended December 31, 2000
Cash provided by operating activities of $10,741,000 was comprised of
net income of $5,197,000, non-cash items of $4,540,000 and the net change in
operating assets and liabilities of $1,004,000. The adjustments for non-cash
items are comprised of depreciation and amortization of $8,049,000 and the
effect of straight-lining of rental income of $3,509,000.
Net cash used in investing activities of $65,636,000 was comprised of
capital expenditures of $77,931,000 offset by the release of restricted cash of
$12,295,000. The capital expenditures were primarily comprised of: (i)
excavation, foundation and predevelopment costs at Lexington Avenue of
$35,300,000, (ii) renovations to the Kings Plaza Regional Shopping Center of
$22,700,000, and (iii) capitalized interest and other carrying costs of
$18,800,000.
Net cash provided by financing activities of $31,114,000 was comprised
of (i) proceeds from the issuance of debt of $38,849,000 offset by (ii) payment
of acquisition obligation of $6,936,000, (iii) repayments of debt of $222,000
and (iv) debt issuance costs of $577,000.
9
Funds from Operations for the Years Ended December 31, 2002 and 2001
Funds from operations ("FFO") were $19,921,000 in the year ended
December 31, 2002, an increase of $8,587,000 from the prior year. The following
table reconciles FFO and net income:
Year ended December 31,
-------------------------------
2002 2001
-------------- --------------
Net income $ 23,584,000 $ 27,386,000
Depreciation and amortization of
real property 6,703,000 6,508,000
Gain on sale of Third Avenue property (10,366,000) --
Gain on sale of Fordham Road property -- (19,026,000)
Gain on early extinguishment of debt -- (3,534,000)
-------------- --------------
$ 19,921,000 $ 11,334,000
============== ==============
Effective with the Company's filing of its 2003 first quarter Form
10-Q, the Company revised its definition of FFO to include the effect of
straight-lining of rents and exclude the effect of leasing fees paid directly to
Vornado in excess of the expense recognized. This change was made in order to
comply with the Securities and Exchange Commission's Regulation G concerning
non-GAAP financial measures, to adhere to the National Association of Real
Estate Investment Trust's ("NAREIT") definition of FFO and to disclose FFO on a
comparable basis with the vast majority of other companies in the industry. FFO
for the years ended December 31, 2002 and 2001 are presented here in accordance
with the revised definition of FFO and thus, has been restated from the amounts
presented in the Company's Annual Report on Form 10-K for the year ended
December 31, 2002 and 2001. Straight-lining of rents amounted to $3,099,000 and
$3,149,000 for the years ended December 31, 2002 and 2001, respectively. Leasing
fees paid in excess of the expense recognized amounted to $2,189,000 and
$2,400,000 for the years ended December 31, 2002 and 2001, respectively.
FFO does not represent cash generated from operating activities in
accordance with accounting principles generally accepted in the United States of
America 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 FFO. FFO 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 FFO a relevant
supplemental measure of operating performance because it provides a basis for
comparison among real estate investment trusts ("REITs"). FFO is computed in
accordance with NAREIT's standards, which may not be comparable to FFO reported
by other REITs that do not define the term in accordance with NAREIT's
definition or that interpret NAREIT's definition differently.
RECENTLY ISSUED ACCOUNTING STANDARDS
SFAS No. 142 - Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other
Intangible Assets (effective January 1, 2002). The adoption of SFAS No. 142 did
not have a material effect on the Company's financial statements.
10
SFAS No. 143 - Accounting for Asset Retirement Obligations and SFAS No.
144 - Accounting for the Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations (effective January 1, 2003) and SFAS No. 144, Accounting
for the Impairment of Disposal of Long-Lived Assets (effective January 1, 2002).
SFAS No. 143 requires the recording of the fair value of a liability for an
asset retirement obligation in the period which it is incurred. SFAS No. 144
supersedes current accounting literature and now provides for a single
accounting model for long-lived assets to be disposed of by sale and requires
discontinued operations presentations for disposals of a "component" of an
entity. The adoption of these statements did not have a material effect on the
Company's financial statements; however under SFAS No. 144, the Company has
reclassified its statement of operations to reflect income and expenses for the
properties which are held for sale or sold during 2002 as discontinued
operations (see "-- Disposition of Properties" above regarding the Company's
Flushing property).
SFAS No. 145 - Rescission of No. 4, 44 and 64, Amendment of SFAS No.
13, and Technical Corrections
In April 2002, FASB issued SFAS No. 145, Rescission of FASB Statement
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 requires, among other things, (i) that the
modification of a lease that results in a change of the classification of the
lease from capital to operating under the provisions of SFAS No. 13 be accounted
for as a sale-leaseback transaction and (ii) the reporting of gains or losses
from the early extinguishment of debt as extraordinary items only if they met
the criteria of Accounting Principles Board Opinion No. 30, Reporting the
Results of Operations. The Company reclassified the $3,534,000 gain from
extraordinary items to a gain from early extinguishment of debt in 2001. As
permitted by this statement, the Company elected to apply the provision applying
to early extinguishment of debt for the Company's 2002 and all prior financial
statements accordingly.
SFAS No. 146 - Accounting for Costs Associated with Exit or Disposal
Activities
In July 2002, FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (effective January 1, 2003). SFAS No. 146
replaces current accounting literature and requires the recognition of costs
associated with exit or disposal activities when they are incurred rather than
at the date of a commitment to an exit or disposal plan. The Company does not
believe the adoption of SFAS No. 146 will have a material effect on the
Company's financial statements.
SFAS No. 148 - Accounting For Stock-Based Compensation - Transition and
Disclosure - An Amendment of FASB Statement No. 123
On August 7, 2002, the FASB issued Statement No. 148 - Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
Statement No. 123, to amend the transition and disclosure provisions of SFAS No.
123. Specifically, SFAS No. 123, as amended, would permit two additional
transition methods for entities that adopt the fair value method of accounting
for stock based employee compensation. The Company does not believe the adoption
of SFAS No. 148 will have a material effect on the Company's financial
statements.
11
Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Page
Number
------
Independent Auditors' Report 13
Consolidated Balance Sheets at December 31, 2002 and 2001 14
Consolidated Statements of Income for the
Years Ended December 31, 2002, 2001 and 2000 16
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 2002, 2001 and 2000 17
Consolidated Statements of Cash Flows for the
Years Ended December 31, 2002, 2001 and 2000 18
Notes to Consolidated Financial Statements 19
12
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
of Alexander's, Inc.
New York, New York
We have audited the accompanying consolidated balance sheets of Alexander's,
Inc. and Subsidiaries (the "Company") as of December 31, 2002 and 2001 and the
related consolidated statements of income, stockholders' equity and cash flows
for each of the three years in the period ended December 31, 2002. Our audits
also included the financial statement schedules listed in the index at Item
15(a)(2). These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 the Company as of December 31,
2002, and 2001, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of America. 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.
As discussed in Note 12 to the consolidated financial statements, the Company
has changed its presentation of the consolidated financial statements to conform
to Statement of Financial Accounting Standards No. 144.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 5, 2003
(November 20, 2003 as to the effect of the Flushing property reclassification
described in Note 12)
13
ALEXANDER'S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands except share amounts)
December 31,
-----------------------
2002 2001
---------- ----------
ASSETS:
Real estate, at cost:
Land $ 90,768 $ 90,768
Buildings, leaseholds and leasehold improvements 176,581 171,601
Construction in progress (including Vornado fees of $13,325 and $3,367) 315,781 154,545
Air rights acquired for Lexington Avenue development 17,531 14,191
---------- ----------
Total 600,661 431,105
Less accumulated depreciation and amortization (57,686) (53,144)
---------- ----------
Real estate, net 542,975 377,961
Asset held for sale -- 2,398
Cash and cash equivalents 45,239 135,258
Restricted cash 2,425 6,596
Accounts receivable, net of allowance for doubtful accounts
of $96 and $929 in 2002 and 2001 2,508 1,534
Receivable arising from the straight-lining of rents, net 20,670 18,233
Deferred lease and other property costs
(including unamortized Vornado leasing fees of $14,837 and $15,154) 27,765 29,371
Deferred debt expense, net 14,619 5,840
Other assets 8,711 6,148
---------- ----------
TOTAL ASSETS $ 664,912 $ 583,339
========== ==========
See notes to consolidated financial statements.
14
ALEXANDER'S, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(amounts in thousands except share amounts)
December 31,
--------------------------
2002 2001
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY:
Debt (including $119,000 due to
Vornado in 2002 and 2001) $ 543,807 $ 515,831
Amounts due to Vornado 11,294 4,822
Accounts payable and accrued expenses 36,895 13,940
Other liabilities 4,251 3,665
----------- -----------
TOTAL LIABILITIES 596,247 538,258
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock: no par value; authorized, 3,000,000 shares;
issued, none
Common stock: $1.00 par value per share; authorized, 10,000,000 shares;
issued, 5,173,450 shares 5,174 5,174
Additional capital 24,843 24,843
Retained earnings 39,608 16,024
----------- -----------
69,625 46,041
Less treasury shares, 172,600 shares at cost (960) (960)
----------- -----------
Total stockholders' equity 68,665 45,081
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 664,912 $ 583,339
=========== ===========
See notes to consolidated financial statements.
15
ALEXANDER'S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands except share amounts)
Year Ended December 31,
---------------------------------------
2002 2001 2000
---- ---- ----
REVENUES:
Property rentals $ 50,630 $ 44,560 $ 42,308
Expense reimbursements 26,170 23,232 20,388
-------- -------- --------
Total revenues 76,800 67,792 62,696
-------- -------- --------
EXPENSES:
Operating (including management fees of $1,442, $1,362 and $1,337
to Vornado) 33,042 29,265 28,615
Write-off of architectural and engineering costs associated with
development plans of Paramus prior to IKEA -- 3,058 --
General and administrative (including management
fees of $2,160 to Vornado in each year) 3,980 3,836 3,875
Depreciation and amortization 6,668 6,442 5,481
-------- -------- --------
Total expenses 43,690 42,601 37,971
-------- -------- --------
OPERATING INCOME 33,110 25,191 24,725
Interest and debt expense
(including interest on loans from Vornado) (22,888) (22,469) (21,424)
Interest and other income, net 2,178 3,237 1,124
Gain on sale of Fordham Road property -- 19,026 --
Gain on early extinguishment of debt -- 3,534 --
Write-off of professional fees resulting from the termination of the spin-off of
Alexander's Tower LLC -- (2,030) --
Minority interest -- (49) --
-------- -------- --------
Income from continuing operations 12,400 26,440 4,425
Income from discontinued operations 11,184 946 772
-------- -------- --------
NET INCOME $ 23,584 $ 27,386 $ 5,197
======== ======== ========
Income per share(basic and diluted):
Continuing operations $ 2.48 $ 5.29 $ .89
Discontinued operations 2.24 .19 .15
-------- -------- --------
Net income $ 4.72 $ 5.48 $ 1.04
======== ======== ========
See notes to consolidated financial statements.
16
ALEXANDER'S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(amounts in thousands)
Retained
Common Additional Earnings/ Treasury Stockholders'
Stock Capital (Deficit) Stock Equity
----- ------- --------- ----- ------
Balance, January 1, 2000 $ 5,174 $ 24,843 $ (16,559) $ (960) $ 12,498
Net income -- -- 5,197 -- 5,197
-------- -------- ---------- -------- ---------
Balance, December 31, 2000 5,174 24,843 (11,362) (960) 17,695
Net income -- -- 27,386 -- 27,386
-------- -------- ---------- -------- ---------
Balance, December 31, 2001 5,174 24,843 16,024 (960) 45,081
Net income -- -- 23,584 -- 23,584
-------- -------- ---------- -------- ---------
Balance, December 31, 2002 $ 5,174 $ 24,843 $ 39,608 $ (960) $ 68,665
======== ======== ========== ======== =========
See notes to consolidated financial statements.
17
ALEXANDER'S, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
Year Ended December 31,
------------------------------------
2002 2001 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income from continuing operations $ 12,400 $ 26,440 $ 4,425
Adjustments to reconcile income from continuing operations to
net cash provided by continuing operating activities:
Depreciation and amortization (including debt issuance costs) 8,999 7,907 7,987
Straight-lining of rental income, net (3,099) (3,149) (3,509)
Gain on sale of air rights (169) -- --
Gain on sale of Fordham Road property -- (19,026) --
Gain from early extinguishment of debt -- (3,534) --
Write-off of architectural and engineering costs associated with
development plans prior to the IKEA Property Inc. ground lease -- 3,058 --
Write-off of professional fees resulting from the termination of the
spin-off of Alexander's Tower LLC -- 2,030 --
Change in assets and liabilities:
Accounts receivable (974) 189 1,630
Amounts due to Vornado and its affiliate (3,115) 3,555 (2,554)
Accounts payable and accrued expenses (2,845) 348 3,017
Other liabilities (789) 932 (546)
Other (3,618) (9,923) (543)
---------- ---------- ----------
Net cash provided by operating activities of continuing operations 6,790 8,827 9,907
---------- ---------- ----------
Income from discontinued operations 11,184 946 772
Depreciation and amortization 35 66 62
Gain on sale of Third Avenue property (10,366) -- --
---------- ---------- ----------
Net cash provided by discontinued operations 853 1,012 834
---------- ---------- ----------
Net cash provided by operating activities 7,643 9,839 10,741
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash flow from continuing operations:
Additions to real estate (133,250) (48,490) (77,931)
Cash made available for construction financing -- 8,388 12,202
Cash made available for operating liabilities 13,574 13,282 93
Cash restricted for operating liability (9,403) (19,876) --
Deposit on sale of Flushing 1,875 -- --
Proceeds from sale of Fordham Road property -- 23,701 --
---------- ---------- ----------
Net cash used in continuing operations (127,204) (22,995) (65,636)
---------- ---------- ----------
Cash flows from discontinued operations:
Proceeds from sale of Third Avenue property 13,176 -- --
---------- ---------- ----------
Net cash provided by discontinued operations 13,176 -- --
---------- ---------- ----------
Net cash used in investing activities (114,028) (22,995) (65,636)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of debt 55,500 300,685 38,849
Debt repayments (27,524) (149,337) (222)
Deferred debt expense (11,110) (5,206) (577)
Payment of acquisition obligation (500) -- (6,936)
---------- ---------- ----------
Net cash provided by financing activities 16,366 146,142 31,114
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents (90,019) 132,986 (23,781)
Cash and cash equivalents at the beginning of the year 135,258 2,272 26,053
---------- ---------- ----------
Cash and cash equivalents at the end of the year $ 45,239 $ 135,258 $ 2,272
========== ========== ==========
SUPPLEMENTAL INFORMATION:
Cash payments for interest (of which $23,788, $19,259 and $16,731
have been capitalized) $ 45,818 $ 38,793 $ 33,979
========== ========== ==========
See notes to consolidated financial statements.
18
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND BUSINESS
Alexander's, Inc. (the "Company") is a real estate investment trust
("REIT") engaged in leasing, managing, developing and redeveloping properties.
Alexander's activities are conducted through its manager, Vornado Realty Trust
("Vornado").
Alexander's operating properties do not generate sufficient cash flow
to pay all of its expenses. After the completion of the Lexington Avenue
property, which is not expected until 2005, the Company expects that cash flow
will become positive.
The Company has additional borrowing capacity of $26,000,000 under its
line of credit with Vornado. The Company can also raise additional capital
through mezzanine level borrowing (deeply subordinated debt which is not secured
by a senior interest in assets) and through the sale of securities and assets
(the Company estimates that the fair market value of its assets are
substantially in excess of their historical cost). Although there can be no
assurance, the Company believes that these cash sources will be adequate to fund
cash requirements until its operations generate adequate cash flow.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation - The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries. All intercompany
accounts and transactions have been eliminated. Certain reclassifications to
prior year amounts have been made to conform with the current year's
presentation. The Company currently operates in one business segment.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates.
Cash and Cash Equivalents - The Company includes in cash and cash
equivalents both cash and short-term highly liquid investments purchased with
original maturities of three months or less. Cash and cash equivalents does not
include cash restricted for construction financing and operating liabilities
which is disclosed separately.
Fair Value of Financial Instruments - All financial instruments of the
Company are reflected in the accompanying consolidated balance sheets at
historical cost which, in management's estimation, based upon an interpretation
of available market information and valuation methodologies (including
discounted cash flow analyses with regard to fixed rate debt), reasonably
approximates their fair values. Such fair value estimates are not necessarily
indicative of the amounts that would be realized upon disposition of the
Company's financial instruments.
Real Estate and Other Property - Real estate and other property is
carried at cost, net of accumulated depreciation. Depreciation is provided on
buildings and improvements on a straight-line basis over their estimated useful
lives ranging from four years to forty years. When real estate and other
property is undergoing development activities, all property operating expenses,
including interest expense, are capitalized to the cost of the real property to
the extent that management believes such costs are recoverable through the value
of the property.
The Company's properties are reviewed for impairment if events or
changes in circumstances indicate that the carrying amount of the property may
not be recoverable. In such an event, a comparison is made of the current and
projected operating cash flows of each such property into the foreseeable future
on an undiscounted basis, to the carrying amount of such property. Such carrying
amount would be adjusted, if necessary, to reflect an impairment in the value of
the asset.
19
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred Charges - Direct financing costs are deferred and amortized
over the terms of the related agreements as a component of interest expense.
Direct costs related to leasing activities are capitalized and amortized on a
straight-line basis over the lives of the related leases. All other deferred
charges are amortized on a straight-line basis, which approximates the effective
interest rate method, in accordance with the terms of the agreements to which
they relate.
Revenue Recognition - The Company has the following revenue sources and
revenue recognition policies:
Base rent - income arising from tenant leases. These rents are
recognized over the non-cancellable term of the related leases on a
straight-line basis which included the rent steps and free rent abatements under
the leases.
Percentage Rents - income arising from retail tenant leases which are
contingent upon the sales of the tenant exceeding a defined threshold. These
rents are recognized in accordance with SAB 101, which states that this income
is to be recognized only after the contingency has been removed (i.e., sales
thresholds have been achieved).
Expenses Reimbursement Income - income arising from tenant leases which
provide for the recovery of all or a portion of the operating expenses and real
estate taxes of the respective property. This income is accrued in the same
periods as the expenses are incurred.
Income Taxes - The Company operates in a manner intended to enable it
to continue to qualify as a REIT under sections 856 through 860 of the Internal
Revenue Code of 1986, as amended (the "Code"). Under the Code, the Company's net
operating loss carryovers ("NOL") generally would be available to offset the
amount of the Company's REIT taxable income that otherwise would be required to
be distributed as a dividend to its stockholders.
The Company has reported NOLs for federal tax purposes of approximately
$94,000,000 at December 31, 2002, expiring from 2007 to 2015. The Company also
has investment tax and targeted jobs tax credits of approximately $2,800,000
expiring in 2008 through 2014.
The following table reconciles net income to taxable income for the
year ended December 31, 2002, 2001 and 2000.
Year Ended December 31,
---------------------------------------------------------
2002 2001 2000
---- ---- ----
Net income $ 23,584,000 $ 27,386,000 $ 5,197,000
Straight-line rent adjustments (2,953,000) (3,002,000) (3,632,000)
Depreciation and amortization timing differences 2,985,000 2,625,000 2,903,000
Book/tax difference on gain of sale of assets 1,345,000 16,026,000 --
Interest expense (2,972,000) (6,515,000) (6,132,000)
Other 988,000 (1,181,000) 277,000
------------- -------------- --------------
Taxable income (loss) 22,977,000 35,339,000 (1,387,000)
NOL carryforward opening balance (117,041,000) (152,380,000) (150,993,000)
------------- -------------- --------------
NOL available ending balance $ (94,064,000) $ (117,041,000) $ (152,380,000)
============= ============== ==============
The net basis in the Company's assets and liabilities for tax purposes
is approximately $42,000,000 lower than the amount reported for financial
statement purposes.
Amounts Per Share - Basic income per share excludes any dilutive
effects of stock options. Stock options outstanding were not dilutive in any
period.
20
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options - The Company accounts for stock-based compensation using
the intrinsic value method. Under the intrinsic value method, compensation cost
is measured as the excess, if any, of the quoted market price of the Company's
stock at the date of grant over the exercise price of the option granted.
Compensation cost for stock options, if any, is recognized ratably over the
vesting period. The Company's policy is to grant options with an exercise price
equal to the quoted market price of the Company's stock on the grant date.
Accordingly, no compensation cost has been recognized for the Company's stock
option plans.
Stock Appreciation Rights - Stock Appreciation Rights (SARs) are
granted at 100% of the market price of the Common Stock on the date of grant.
SARs vest ratably, becoming fully vested 36 months after grant. Expense is
recognized ratably in the statement of income if the stock price exceeds the
exercise price at the balance sheet date. On subsequent balance sheet dates, if
the stock price falls, the previously recognized expense is reversed, but not
below zero.
Recently Issued Accounting Standards
SFAS No. 142 - Goodwill and Other Intangible Assets
In June 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill and Other Intangible Assets (effective January 1, 2002). The adoption
of SFAS No. 142 did not have a material effect on the Company's financial
statements.
SFAS No. 143 - Accounting for Asset Retirement Obligations and
SFAS No. 144 - Accounting for the Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 143, Accounting for
Asset Retirement Obligations (effective January 1, 2003) and SFAS No. 144,
Accounting for the Impairment of Disposal of Long-Lived Assets (effective
January 1, 2002). SFAS No. 143 requires the recording of the fair value of a
liability for an asset retirement obligation in the period which it is incurred.
SFAS No. 144 supersedes current accounting literature and now provides for a
single accounting model for long-lived assets to be disposed of by sale and
requires discontinued operations presentations for disposals of a "component" of
an entity. The adoption of these statements did not have a material effect on
the Company's financial statements; however under SFAS No. 144 the Company has
reclassified its statement of operations to reflect income and expenses for the
properties which are held for sale or sold during 2002 as discontinued
operations (see Note 12 regarding the Company's Flushing property).
SFAS No. 145 - Rescission of No. 4, 44 and 64, Amendment of
SFAS No. 13, and Technical Corrections
In April 2002, FASB issued SFAS No. 145, Rescission of FASB
Statement No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS No. 145 requires, among other things, (i) that the
modification of a lease that results in a change of the classification of the
lease from capital to operating under the provisions of SFAS No. 13 be accounted
for as a sale-leaseback transaction and (ii) the reporting of gains or losses
from the early extinguishment of debt as extraordinary items only if they met
the criteria of Accounting Principles Board Opinion No. 30, Reporting the
Results of Operations. The Company reclassified the $3,534,000 gain from
extraordinary items to a gain from early extinguishment of debt in 2001. As
permitted by this statement, the Company elected to apply the provision applying
to early extinguishment of debt for the Company's 2002 and all prior financial
statements accordingly.
SFAS No. 146 - Accounting for Costs Associated with Exit or
Disposal Activities
In July 2002, FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities (effective January 1, 2003). SFAS
No. 146 replaces current accounting literature and requires the recognition of
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. The Company does
not believe the adoption of SFAS No. 146 will have a material effect on the
Company's financial statements.
21
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No. 148 - Accounting For Stock-Based Compensation -
Transition and Disclosure - An Amendment of FASB Statement No. 123
On August 7, 2002, the FASB issued Statement No. 148 -
Accounting for Stock-Based Compensation - Transition and Disclosure - An
Amendment of FASB Statement No. 123, to amend the transition and disclosure
provisions of SFAS No. 123, Specifically, SFAS No. 123, as amended, would permit
two additional transition methods for entities that adopt the fair value method
of accounting for stock based employee compensation. The Company does not
believe the adoption of SFAS No. 148 will have a material effect on the
Company's financial statements.
3. DEBT
Below is a summary of the Company's outstanding debt.
Interest Rate
as of Balance as of December 31,
December --------------------------------
Maturity 31, 2002 2002 2001
-------- -------- ---- ----
January
Term loan to Vornado (1) 2006 12.48% $ 119,000,000 $ 119,000,000
First mortgage loan, secured by
the Company's Kings Plaza June
Regional Shopping Center (2) 2011 7.46% 219,307,000 221,831,000
First mortgage loan, secured by the May
Company's Rego Park I Shopping Center (3) 2009 7.25% 82,000,000 82,000,000
First mortgage loan secured by the October
Company's Paramus Property (4) 2011 5.92% 68,000,000 68,000,000
Construction loan, secured by the
Company's Lexington Avenue Property January
(see Note 5) 2006 3.94% 55,500,000 --
Secured note (5) -- 15,000,000
Term loan to bank (6) -- 10,000,000
-------------- --------------
$ 543,807,000 $ 515,831,000
============== ==============
(1) At December 31, 2002, the Company was indebted to Vornado in the amount
of $119,000,000 comprised of (i) $95,000,000 financing and (ii)
$24,000,000 under a $50,000,000 line of credit (which carries a 1%
unused commitment fee). The interest rate on the loan and line of
credit is 12.48% and the maturity has been extended to the earlier of
January 3, 2006 or the date the Lexington Avenue construction loan is
repaid in full. The interest rate on the loan and line of credit will
reset quarterly, using the same spread to treasuries as presently
exists and a 3.00% floor for treasuries.
22
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's subsidiary, 59th Street Corporation is the borrower with
respect to $40 million of the Vornado loans, which is guaranteed by the
Company and the Company is the borrower for the remaining $79 million.
The existing collateral for each of the Vornado loans is as follows:
(i) back-up guaranties given by Alexander's of Rego Park II, Inc.
("Rego II"), Alexander's Rego Park III, Inc. ("Rego III") and
Alexander's of Flushing, Inc. ("Flushing"), (ii) a pledge given by the
Company of its interest in the entities holding the commercial and
residential parcels comprising the Lexington Avenue property, Flushing,
Rego II and Rego III and (iii) a lockbox agreement between the Company
and Vornado, giving Vornado a security interest and springing control
of the Company's corporate bank account into which, among other things,
any distributions to the Company from its subsidiaries owning the Kings
Plaza shopping center, the Rego Park shopping center, and the Paramus
property are deposited and (iv) unrecorded mortgages on the Rego II and
Rego III properties given by such entities to secure their guaranties.
(2) On June 1, 2001, the Company, through a newly formed subsidiary,
completed a $223,000,000 refinancing of its subsidiary's Kings Plaza
Regional Shopping Center property and repaid the then existing balance
of $115,210,000 of debt collateralized by the property from the
proceeds of the new loan. The mortgage matures in June 2011 and bears
interest at a fixed rate of 7.46%. Monthly payments include principal
based on a 27-year amortization schedule.
(3) The mortgage loan, which is an obligation of a wholly-owned subsidiary,
matures in May 2009 and is secured by a mortgage on the Rego Park I
property and guaranteed by the Company. The loan bears interest at a
fixed rate of 7.25%. Amortization of principal begins in July 2004 on a
30-year schedule.
(4) The $68,000,000 interest only, non-recourse mortgage loan on the
Paramus property is from a third party lender. The fixed interest rate
on the debt is 5.92% with interest payable monthly until maturity in
October 2011.
(5) The note was secured by a third mortgage on the Lexington Avenue
property. This note has been satisfied in connection with the closing
of the construction loan for Lexington Avenue development.
(6) The loan has been satisfied in connection with the closing of the
construction loan for Lexington Avenue development.
At December 31, 2002, the principal repayments for the next five years and
thereafter are as follows:
Year Ending December 31,
- ------------------------
2003 $ 2,721,000
2004 3,226,000
2005 3,895,000
2006 178,699,000
2007 4,526,000
Thereafter 350,740,000
All of the Company's debt is secured by mortgages and/or pledges of the
stock of subsidiaries holding the properties. The net carrying value of real
estate collateralizing the debt amounted to $542,848,000 at December 31, 2002.
The Company's debt instruments, consisting of mortgage loans secured by
its properties (which are generally non-recourse to the Company), contain
customary covenants requiring the Company to maintain insurance. There can be no
assurance that the lenders under these instruments will not take the position
that an exclusion from all risk insurance coverage for losses due to terrorist
acts is a breach of these debt instruments that allows the lenders to declare an
event of default and accelerate repayment of debt. In addition, if lenders
insist on coverage for these risks, it could adversely affect the Company's
ability to finance and/or refinance its properties, including the construction
of its Lexington Avenue development property.
23
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 26, 2002, the Terrorism Risk Insurance Act of 2002 was signed
into law. Under this new legislation, through 2004 (with a possible extension
through 2005), regulated insurers must offer coverage in their commercial
property and casualty policies (including existing policies) for losses
resulting from defined "acts of terrorism." The Company's current property
insurance carrier has advised us that there will be no additional premium for
this coverage through the end of the policy term, June 30, 2003. The carrier has
further advised us that the situation may change at renewal.
4. LEASES
As Lessor
The Company leases properties to tenants. The rental terms for the
properties leased range from five years to approximately 40 years. The leases
provide for the payment of fixed base rentals payable monthly in advance and for
the payment by the lessees of additional rents based on a percentage of the
tenants' sales as well as reimbursements of real estate taxes, insurance and
maintenance.
Future base rental revenue under these noncancellable operating leases
(other than leases which have not commenced, including Bloomberg) is as follows:
Year Ending Total
December 31, Amounts
- ------------ -------------
2003 $ 39,175,000
2004 39,101,000
2005 38,981,000
2006 37,260,000
2007 34,201,000
Thereafter 445,734,000
Sears accounted for 19%, 21% and 21% of the Company's consolidated revenues
for the years ended December 31, 2002, 2001, and 2000, respectively. No other
tenant accounted for more than 10% of revenues.
As Lessee
The Company is a tenant under long-term leases. Future minimum lease
payments under the operating leases are as follows:
Year Ending Total
December 31, Amounts
- ------------ -------------
2003 $ 416,000
2004 416,000
2005 416,000
2006 416,000
2007 315,000
Thereafter 4,532,000
Rent expense was $416,000 for each of the years ended December 31, 2002,
2001 and 2000.
24
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LEXINGTON AVENUE
On May 1, 2001, the Company entered into a lease agreement with Bloomberg
L.P. to lease approximately 690,000 square feet. The initial term of the lease
is for 25 years, with a ten-year renewal option. Base annual net rent is
$34,529,000 in each of the first four years and $38,533,000 in the fifth year
with a similar percentage increase each four years thereafter. There can be no
assurance that the project ultimately will be completed, completed on time or
completed for the budgeted amount. If the project is not completed on a timely
basis, the lease may be cancelled and significant penalties may apply.
The development plans at Lexington Avenue consist of an approximately 1.3
million square foot multi-use building. The building will contain approximately
154,000 net rentable square feet of retail (45,000 square feet of which has been
leased to Hennes & Mauritz), approximately 878,000 net rentable square feet of
office (695,000 square feet of which has been leased to Bloomberg L.P.) and
approximately 248,000 net saleable square feet of residential consisting of
condominium units (through a taxable REIT subsidiary). Construction is expected
to be completed in 2005. On July 3, 2002 the Company finalized a $490,000,000
loan with HVB Real Estate Capital (Hypo Vereinsbank) to finance the construction
of the Lexington Avenue property (the "Construction Loan"). The estimated
construction costs in excess of the construction loan of approximately
$140,000,000 will be provided by the Company of which $107,000,000 has been
expended through December 31, 2002. The Construction Loan has an interest rate
of LIBOR plus 2.5% (currently 3.94%) and a term of forty-two months subject to
two one-year extensions. The Company received an initial funding of $55,500,000
under the Construction Loan of which $25,000,000 was used to repay the Company's
term loan to a bank in the amount of $10,000,000 and a secured note in the
amount of $15,000,000. Of the total construction budget of $630,000,000,
$162,000,000 has been expended through December 31, 2002, and an additional
$184,000,000 has been committed to. Pursuant to this Construction Loan, Vornado
has agreed to guarantee, among other things, the lien free, timely completion
of the construction of the project and funding of project costs in excess of a
stated loan budget, if not funded by the Company (the "Completion Guarantee").
The $6,300,000 estimated fee payable by the Company to Vornado for the
Completion Guarantee is 1% of construction costs (as defined). In addition, if
Vornado should advance any funds under the Completion Guarantee in excess of the
$26,000,000 currently available under the secured line of credit, interest on
those advances is at 15% per annum.
There can be no assurance that the Lexington Avenue project ultimately
will be completed, completed on time or completed for the budgeted amount.
Further, the Company may need additional financing for the project, which may
involve equity, debt, joint ventures and asset sales, and which may involve
arrangements with Vornado Realty Trust. If the project is not completed on a
timely basis, the Bloomberg L.P. lease may be cancelled and significant
penalties may apply.
6. PARAMUS PROPERTY
On October 5, 2001, the Company entered into a ground lease for its Paramus,
N.J. property with IKEA Property, Inc. The lease has a 40-year term with an
option to purchase at the end of the 20th year for $75,000,000. Further, the
Company has obtained a $68,000,000 interest only, non-recourse mortgage loan on
the property from a third party lender. The fixed interest rate on the debt is
5.92% with interest payable monthly until maturity in October 2011. The triple
net rent each year is the sum of $700,000 plus the amount of debt service on the
mortgage loan. If the purchase option is not exercised at the end of the 20th
year, the triple net rent for the last 20 years must include debt service
sufficient to fully amortize the $68,000,000 over the remaining 20-year lease
period.
7. SALE OF THIRD AVENUE PROPERTY
On August 30, 2002, the Company closed on the sale of its Third Avenue
property, located in the Bronx, New York. The 173,000 square feet property was
sold for $15,000,000, resulting in a gain of $10,366,000. Included in the
expenses relating to the sale, the Company paid a commission of $600,000, of
which $350,000 was paid to Vornado pursuant to the 1992 Leasing Agreement
between the companies.
25
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. RELATED PARTY TRANSACTIONS
Vornado owns 33.1% of the Company's common stock as of December 31, 2002.
Steven Roth is Chief Executive Officer and a director of the Company, the
Managing General Partner of Interstate Properties ("Interstate") and Chairman of
the Board and Chief Executive Officer of Vornado. At December 31, 2002, Mr.
Roth, Interstate and the other two general partners of Interstate, David
Mandelbaum and Russell B. Wight, Jr. (who are also directors of the Company and
trustees of Vornado) own, in the aggregate, 27.5% of the outstanding common
stock of the Company, and 12.9% of the outstanding common shares of beneficial
interest of Vornado.
The Company is managed by and its properties are leased by Vornado pursuant
to management, leasing and development agreements with one-year terms expiring
in March of each year which are automatically renewable. In conjunction with the
closing of the Lexington Avenue construction loan on July 3, 2002 (Note 5),
these agreements were bifurcated to cover the Company's Lexington Avenue
property separately. Further, the management and development agreements with
Vornado were amended to provide for a term lasting until substantial completion
of the property, with automatic renewals, and for the payment of the development
fee upon the earlier of January 3, 2006 or the payment in full of the
construction loan encumbering the property.
Pursuant to this construction loan, Vornado has agreed to guarantee among
other things, the lien free, timely completion of the construction of the
project and funding of project costs in excess of a stated loan budget, if not
funded by the Company (the "Completion Guarantee"). The $6,300,000 estimated fee
payable by the Company to Vornado for the Completion Guarantee is 1% of
construction costs (as defined) and is due at the same time that the development
fee is due. In addition, if Vornado should advance any funds under the
Completion Guarantee in excess of the $26,000,000 currently available under the
secured line of credit, discussed below, interest on those advances would be at
15% per annum.
Pursuant to both the pre and post July 3, 2002 management, leasing and
development agreements, Vornado is entitled to a development fee based on 6% of
construction costs as defined. The development fee for the Lexington Avenue
project is estimated to be approximately $26,300,000. At December 31, 2002, the
Company owes Vornado $7,721,000 under the development agreement.
The annual management fee payable by the Company to Vornado is equal to the
sum of (i) $3,000,000, (ii) 3% of the gross income from the Mall, (iii) 6% of
development costs with minimum guaranteed fees of $750,000 per annum, plus (iv)
1% of construction costs for the Completion Guarantee. The leasing agreement
provides for the Company to pay a fee to Vornado equal to (i) 3% of the gross
proceeds, as defined, from the sale of an asset and (ii) in the event of a lease
or sublease of an asset, 3% of lease rent for the first ten years of a lease
term, 2% of lease rent for the eleventh through the twentieth years of a lease
term and 1% of lease rent for the twenty-first through thirtieth year of a lease
term, subject to the payment of rents by tenants. Such amount is payable
annually in an amount not to exceed $2,500,000, until the present value of such
installments (calculated at a discount rate of 9% per annum) equals the amount
that would have been paid had it been paid at the time the transactions which
gave rise to the commissions occurred. Pursuant to the leasing agreement, in the
event third party real estate brokers are used, the fees to Vornado increase by
1% and Vornado is responsible for the fees to the third party real estate
brokers. At December 31, 2002, the Company owes Vornado $410,000 for leasing
fees. The following table shows the amounts incurred under these agreements:
Year Ended December 31,
-------------------------------------------
2002 2001 2000
------------ ------------ ------------
Management fee $ 3,602,000 $ 3,522,000 $ 3,497,000
Development fee, guarantee fee and rent for development
office 10,769,000 1,855,000 750,000
Leasing and other fees 3,056,000 3,984,000 2,474,000
------------ ------------ ------------
$ 17,427,000 $ 9,361,000 $ 6,721,000
============ ============ ============
26
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has $119,000,000 of outstanding loans with Vornado. The Company
incurred interest (includes 1% unused commitment fee) on these loans of
$15,547,000, $17,455,000 and $15,934,000 for the years ended December 31, 2002,
2001 and 2000.
In July 2002, Alexander's Tower LLC, a wholly-owned subsidiary of the
Company purchased 28,821 square feet of air rights from the Lexington Avenue and
30th Street Venture owned by Vornado and an unrelated third party ("the 30th
Street Venture") for a purchase price of $3,458,520 ($120 per square foot) which
is included on the Company's balance sheet in "Air rights acquired for Lexington
Avenue development." The Company purchased these air rights in order to increase
the amount of square feet that it could develop for the residential portion of
its 59th Street Project to the maximum amount of air rights permitted for
residential use by the New York City Zoning Code. The 30th Street Venture also
identified third party buyers for 28,111 square feet of air rights which it
owned. These third party buyers desired to use the air rights for the
development of two projects located in upper Manhattan in the general area of
86th Street. However, the air rights held by the 30th Street Venture could not
be transferred to the applicable sites because the sites were not within the
required geographical limited radius nor were they in the same Community Board
District as the 30th Street Venture. The 30th Street Venture asked the Company
to sell 28,111 square feet of the Company's already owned air rights to these
third party buyers (which could use them) and the 30th Street Venture would
replace them with 28,111 square feet of the 30th Street Venture's air rights. In
October 2002, the Company purchased these air rights from the 30th Street
Venture in two transactions for an aggregate purchase price of $3,058,020 (an
average of $109 per square foot). The Company then sold an equal amount of air
rights it already owned at the 59th Street Project to the third party buyers
for an aggregate sales price of $3,339,000 resulting in a gain of $169,000 which
is included as part of interest and other income in the Company's statement of
income.
In connection with tax planning for the development of the Company's
Lexington Avenue property, 100 shares of $.01 par value preferred stock was sold
by 59th Street Corporation (a wholly-owned subsidiary of the Company) to Vornado
on August 1, 2001 for $1,200,000. The non-convertible preferred stock entitles
the holder to cumulative 10% dividends payable semi-annually and is redeemable
at any time at the option of 59th Street Corporation. On December 28, 2001, 59th
Street Corporation redeemed this issue and paid a $49,000 dividend.
As of December 31, 2002, Winston & Strawn, a law firm in which Neil
Underberg, a director of the Company, is a partner, performed legal services for
the Company for which it was paid $480,000, $648,000 and $396,000 for the years
ended December 31, 2002, 2001 and 2000.
9. COMMITMENTS AND CONTINGENCIES
The Company carries comprehensive liability and all risk property insurance
(fire, flood, extended coverage and rental loss insurance) with respect to its
assets. The Company's all risk insurance policies in effect before September 11,
2001 included coverage for terrorist acts, except for acts of war. Since
September 11, 2001, insurance companies have for the most part excluded
terrorists acts from coverage in all risk policies. The Company has obtained
$200 million of separate aggregate coverage for terrorists acts. In addition,
the Company's builder's risk policy for the Lexington Avenue Development, which
expires on December 1, 2003, includes coverage for terrorist acts up to $428
million. Therefore, the risk of financial loss in excess of these limits in the
case of terrorist acts (as defined) is the Company's, which loss could be
material.
The Company's debt instruments, consisting of mortgage loans secured by its
properties (which are generally non-recourse to the Company), contain customary
covenants requiring the Company to maintain insurance. There can be no assurance
that the lenders under these instruments will not take the position that an
exclusion from all risk insurance coverage for losses due to terrorist acts is a
breach of these debt instruments that allows the lenders to declare an event of
default and accelerate repayment of debt. In addition, if lenders insist on
coverage for these risks, it could adversely affect the Company's ability to
finance and/or refinance its properties, including the construction of its
Lexington Avenue development property.
27
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On November 26, 2002, the Terrorism Risk Insurance Act of 2002 was signed
into law. Under this new legislation, through 2004 (with a possible extension
through 2005), regulated insurers must offer coverage in their commercial
property and casualty policies (including existing policies) for losses
resulting from defined "acts of terrorism." The Company's current property
insurance carrier has advised us that there will be no additional premium for
this coverage through the end of the policy term, June 30, 2003. The carrier has
further advised us that the situation may change at renewal.
In June 1997, the Kings Plaza Regional Shopping Center (the "Center"),
commissioned an Environmental Study and Contamination Assessment Site
Investigation (the Phase II "Study") to evaluate and delineate environmental
conditions disclosed in a Phase I study. The results of the Study indicate the
presence of petroleum and bis (2-ethylhexyl) phthalate contamination in the soil
and groundwater. The Company has delineated the contamination and has developed
a remediation approach, which is ongoing. The New York State Department of
Environmental Conservation ("NYDEC") has approved a portion of the remediation
approach. The Company accrued $2,675,000 in previous years ($2,087,000 has been
paid as of December 31, 2002) for its estimated obligation with respect to the
clean up of the site, which includes costs of (i) remedial investigation, (ii)
feasibility study, (iii) remedial design, (iv) remedial action and (v)
professional fees. If the NYDEC insists on a more extensive remediation
approach, the Company could incur additional obligations.
The Company believes the majority of the contamination may have resulted
from activities of third parties; however, the sources of the contamination have
not been fully identified. Although the Company is pursuing claims against
potentially responsible third parties, there can be no assurance that such
parties will be identified, or if identified, whether these third parties will
be solvent. In addition, the costs associated with pursuing responsible parties
may be cost prohibitive. The Company has not recorded an asset as of December
31, 2002 for possible recoveries of environmental remediation costs from
potentially responsible third parties.
Neither the Company nor any of its subsidiaries is a party to, nor is their
property the subject of, any material pending legal proceeding other than
routine litigation incidental to their businesses. The Company believes that
these legal actions will not be material to the Company's financial condition or
results of operations.
Letters of Credit
Approximately $8,100,000 in standby letters of credit were issued at
December 31, 2002.
10. STOCK OPTION PLAN
Under the Omnibus Stock Plan (the "Plan"), approved by the Company's
stockholders on May 22, 1996, directors, officers, key employees, employees of
Vornado Realty Trust and any other person or entity as designated by the Omnibus
Stock Plan Committee are eligible to be granted incentive share options and
non-qualified options to purchase common shares. Options granted are at prices
equal to 100% of the market price of the Company's shares at the date of grant,
vest on a graduated basis, becoming fully vested 36 months after grant and
expire ten years after grant. The Plan also provides for the award of Stock
Appreciation Rights, Performance Shares and Restricted Stock, as defined.
28
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
If compensation cost for Plan awards had been determined based on fair value
at the grant dates, net income and income per share would have been reduced to
the pro forma amounts below, for the years ended December 31, 2002, 2001 and
2000:
Year Ended December 31,
------------------------------------------------
2002 2001 2000
------------- ------------- -------------
Net income:
As reported $ 23,584,000 $ 27,386,000 $ 5,197,000
Pro forma $ 23,200,000 $ 25,851,000 $ 3,662,000
Net income per share applicable
to common shareholders:
As reported $ 4.72 $ 5.48 $ 1.04
Pro forma $ 4.64 $ 5.17 $ .73
A summary of the Plan's status, and changes during the years ended December
31, 2002, 2001 and 2000 are presented below:
December 31, 2002 December 31, 2001 December 31, 2000
-------------------- ------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
Exercise Average Average
Shares Price Shares Exercise Price Shares Exercise Price
------- --------- ------- -------------- ------- --------------
Outstanding at January 1 105,000 $ 70.38 105,000 $ 70.38 955,000 $ 71.66
Converted to Stock
Appreciation Rights -- -- -- -- (850,000) 71.82
------- ------- -------
Outstanding at December 31 105,000 $ 70.38 105,000 $ 70.38 105,000 $ 70.38
======= ======= =======
The following table summarizes information about options outstanding under
the Plan at December 31, 2002:
Options outstanding:
Number outstanding at December 31, 2002 105,000
Weighted-average remaining contractual life 6.2 years
Weighted-average exercise price $ 70.375
Options exercisable:
Number exercisable at December 31, 2002 105,000
Weighted-average exercise price $ 70.375
Shares available for future grant at December 31, 2002 were 1,745,000.
On June 5, 2000, the Board of Directors approved the conversion of 850,000
stock options of two officers/directors into equivalent stock appreciation
rights (SARs). The SARs have the same vesting terms and strike prices as the
options. Since the stock price at December 31, 2002 is less than the strike
price of $71.82, no expense is included in the statement of income for the year
ended December 31, 2002. Similarly, there was no SARs expense in the statement
of income for the year ended December 31, 2001 and 2000. SARs, unlike options,
are not aggregated under the REIT rules.
29
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. INCOME PER SHARE
The following table sets forth the computation of basic and diluted income
per share:
Year Ended December 31,
--------------------------------------------------
2002 2001 2000
------------ ------------ -----------
Numerator:
Income from continuing operations.................. $ 12,400,000 $ 26,440,000 $ 4,425,000
Income from discontinued operations................ 11,184,000 946,000 772,000
------------ ------------ -----------
Net income......................................... $ 23,584,000 $ 27,386,000 $ 5,197,000
============ ============ ===========
Denominator
Denominator for basic income per share-
weighted average shares......................... 5,000,850 5,000,850 5,000,850
Effect of dilutive securities:
Employee stock options.......................... -- -- 4,927
------------ ------------ -----------
Denominator for diluted income per share-
adjusted weighted average shares and
assumed conversions............................. 5,000,850 5,000,850 5,005,777
============ ============ ===========
INCOME PER COMMON SHARE-
BASIC AND DILUTED:
Income from continuing operations.................. $ 2.48 $ 5.29 $ .89
Income from discontinued operations................ 2.24 .19 .15
------------ ------------ -----------
Net income per common share........................ $ 4.72 $ 5.48 $ 1.04
============ ============ ===========
12. DISCONTINUED OPERATIONS
Effective January 1, 2002, the Company changed its method of accounting for
long-lived assets held for sale, in accordance with Statement of Financial
Accounting Standards No. 144, Accounting for the Impairment and Disposal of
Long-Lived Assets. This Statement requires that the results of operations, gains
and losses, and cash flows attributed to properties held for sale or sold during
2002 and thereafter, such as Third Avenue, be classified as discontinued
operations for all periods presented, and that any assets and liabilities of
properties held for sale be presented separately in the consolidated balance
sheet. Properties held for sale or sold as a result of sales activities that
were initiated prior to 2002, such as Fordham Road, continue to be accounted for
under the applicable prior accounting guidance.
Discontinued operations include the Company's Third Avenue property:
Year Ended December 31,
--------------------------------------------------
2002 2001 2000
------------ ------------ -----------
Total revenues.......................................... $ 1,198,000 $ 1,551,000 $ 1,269,000
Total expenses.......................................... 380,000 605,000 497,000
------------ ------------ -----------
Net income.............................................. 818,000 946,000 772,000
Gain on sale of Third Avenue property................... 10,366,000 -- --
------------ ------------ -----------
Income from discontinued operations..................... $ 11,184,000 $ 946,000 $ 772,000
============ ============ ===========
30
ALEXANDER'S, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 30, 2002, the Company entered into an agreement to sell its
subsidiary, which owns the building and has the ground lease for its property in
Flushing, New York for $18,800,000. The Company has received a non-refundable
deposit of $1,875,000 from the purchaser. By Notice of Default dated August 16,
2002, the landlord of the premises notified the Company of certain alleged
defaults under the lease including, but not limited to, the fact that the
purchaser performed unauthorized construction at the premises. The Company
commenced an action for injunctive relief and a declaration of the rights and
obligations of the parties under the lease. The Company has obtained an
injunction, which temporarily restrains the landlord from terminating the lease.
On September 6, 2002, the scheduled closing date, the Company notified the
purchaser that the purchaser failed to close and is in default of its
obligations under the purchase contract. While negotiations are in process with
the parties to attempt to settle the disputes, there can be no assurance that
the sale will be consummated, that the dispute with the landlord will be
resolved favorably, or that the deposit will not be required to be returned.
Because these matters continue to be unresolved, the Company reclassified the
property from "held for sale" to "held and used" during the three months ended
September 30, 2003. Accordingly, the results of operations of the property
previously reported as discontinued operations have been reclassified and
included in continuing operations. The reclassification has no effect on the
Company's previously reported net income or net income per share. Since the
Company continues to attempt to close this transaction, it has not recognized
the $1,875,000 non-refundable deposit from the purchaser as income. The Company
continues to explore all of its options, including subleasing the property.
13. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
(amounts in thousands except per share amounts)
Net Income (Loss) Per Common Share(1)
Net Income (Loss) Basic and Diluted
------------------------------------------- -------------------------------------
Continuing Discontinued Continuing Discontinued
Revenue Operations Operations Total Operations Operations Total
--------- ---------- ------------ ----------- ---------- ------------ ---------
2002
March 31......... $ 18,871 $ 3,235 $ 296 $ 3,531 $ .65 $ .06 $ .71
June 30.......... 18,762 (1,428) 295 (1,133)(2) (.29) .06 (.23)
September 30..... 19,397 6,787 10,593 17,380(2) 1.36 2.12 3.48
December 31...... 19,770 3,806 -- 3,806 .76 -- .76
2001
March 31......... $ 16,576 $ 25,417(5) $ 190 $ 25,607(3) $ 5.08 $ .04 $ 5.12
June 30.......... 16,687 1,914 156 2,070 .38 .03 .41
September 30..... 15,997 1,947 295 2,242 .39 .06 .45
December 31...... 18,532 (2,838) 305 (2,533)(4) (.57) .06 (.51)
- -----------------
(1) The total for the year may differ from the sum of the quarters as a result
of weighting.
(2) Net of Stock Appreciation Rights (SARs) expense of $4,236 in the second
quarter of 2002. The third quarter of 2002 includes $4,236 representing the
reversal of the SARs expense previously recognized during 2002 and a gain on
the sale of the Third Avenue property of $10,366.
(3) Includes a gain on the sale of the Fordham Road property of $19,026 and a
gain from the early extinguishment of debt of $3,534.
(4) Includes of a charge of (i) $3,058 resulting from the write-off of
architectural and engineering costs associated with the development plans at
Paramus prior to the IKEA ground lease, and (ii) a charge of $2,030 from the
write-off of professional fees resulting from the termination of the spin-
off of Alexander's Tower LLC.
(5) Adjusted to present the gain on sale of Fordham Road property and gain on
early extinguishment of debt.
31
ALEXANDER'S, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 2002
(amounts in thousands)
Column A Column B Column C Column D Column E
- ------------------------------------------------------------------------------------------------------------------------------------
Initial Cost to Company (2) Gross Amount at which Carried at Close of Period
--------------------------- -------------------------------------------------
Building, Cost Buildings,
Leaseholds Capitalized Leasehold
and Leasehold Subsequent to and Leaseholds Construction
Description Encumbrances Land Improvements Acquisition(3) Land Improvements In Progress Total(3)
- ------------------- ------------ -------- ------------- ------------- -------- -------------- ------------ ---------
Commercial Property:
New York City,
New York:
Rego Park I $ 82,000 $ 1,647 $ 8,953 $ 57,641 $ 1,647 $ 66,594 $ -- $ 68,241
Rego Park II -- 3,906 1,467 657 3,906 1,565 559 6,030
Flushing -- -- 1,660 1,553 -- 3,213 -- 3,213
Lexington Ave. 55,500 14,432 12,355 354,154 48,380 -- 332,561 380,941
Kings Plaza
Regional Shopping
Center 219,307 497 9,542 118,040 24,482 103,405 192 128,079
--------- -------- --------- --------- -------- --------- --------- ---------
Total New York 356,807 20,482 33,977 532,045 78,415 174,777 333,312 586,504
New Jersey - Paramus 68,000 1,441 -- 10,313 11,754 -- -- 11,754
Other Properties -- 599 1,804 -- 599 1,804 -- 2,403
-------- --------- --------- -------- --------- --------- ---------
Other debt (1) 119,000
---------
TOTAL $ 543,807 $ 22,522 $ 35,781 $ 542,358 $ 90,768 $ 176,581 $ 333,312 $ 600,661
========= ======== ========= ========= ======== ========= ========= =========
Column A Column F Column G Column H Column I
- --------------------------------------------------------------------------------
Life on Which
Accumulated Depreciation in
Depreciation Date Latest Income
and Date of Acquired Statement is
Description Amortization Construction (2) Computed
- ------------------- ------------ ------------ -------- ---------------
Commercial Property:
New York City,
New York:
Rego Park I $ 19,203 1959 1992 15-39 years
Rego Park II 1,474 1965 1992 38-39 years
Flushing 1,711 1975(4) 1992 26 years
Lexington Ave. -- -- 1992 --
Kings Plaza
Regional Shopping
Center 33,492 1970 1992 7-50 years
--------
Total New York 55,880
New Jersey - Paramus -- -- 1992 --
Other Properties 1,806 Various 1992 7-25 years
--------
Other debt (1)
TOTAL $ 57,686
========
(1) Vornado loan (see Note 3).
(2) Initial cost is as of May 15, 1992 (the date on which the Company commenced
real estate operations) unless acquired subsequent to that date. See Column
H.
(3) The net basis in the Company's assets and liabilities for tax purposes is
approximately $42,000 lower than the amount reported for financial statement
purposes.
(4) Date represents lease acquisition date.
32
ALEXANDER'S, INC. AND SUBSIDIARIES
SCHEDULE III - REAL ESTATE AND ACCUMULATED DEPRECIATION
(amounts in thousands)
December 31,
---------------------------------------------
2002 2001 2000
---------- ---------- ----------
REAL ESTATE:
Balance at beginning of period $ 431,105 $ 404,935 $ 327,004
Additions during the period:
Buildings, leaseholds and
leasehold improvements 4,608 3,118 1,541
Construction in progress 164,948 45,372 76,390
---------- ---------- ----------
600,661 453,425 404,935
Less: asset sold and written-off -- (22,320) --
---------- ---------- ----------
Balance at end of period $ 600,661 $ 431,105 $ 404,935
========== ========== ==========
ACCUMULATED DEPRECIATION:
Balance at beginning of period $ 53,144 $ 58,884 $ 55,199
Additions charged to operating
expenses 4,563 4,535 3,685
---------- ---------- ----------
57,707 63,419 58,884
Less: asset sold (21) (10,275) --
---------- ---------- ----------
Balance at end of period $ 57,686 $ 53,144 $ 58,884
========== ========== ==========
33