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As filed with the Securities and Exchange Commission on March 26, 1997
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) March 12, 1997
VORNADO REALTY TRUST
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(Exact Name of Registrant as Specified in Its Charter)
Maryland
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(State or Other Jurisdiction of Incorporation)
1-11954 22-1657560
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(Commission File Number) (IRS Employer Identification No.)
Park 80 West, Plaza II, Saddle Brook, New Jersey 07663
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(Address of Principal Executive Offices) (Zip Code)
(201) 587-1000
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(Registrant's Telephone Number, Including Area Code)
N/A
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(Former Name or Former Address, if Changed Since Last Report)
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Items 1-4. Not Applicable.
Item 5. Other Events.
The summary of the transaction contained herein (the "Mendik
Transaction") does not purport to be complete and is subject to, and qualified
in its entirety by reference to, the terms and provisions of the various
agreements filed as exhibits hereto and incorporated by reference herein. There
can be no assurance that the Mendik Transaction will be completed.
On March 12, 1997, Vornado Realty Trust (the "Company"), a real estate
investment trust ("REIT") organized under the laws of the state of Maryland,
entered into a definitive agreement (the "Consolidation Agreement", a copy of
which is attached as an exhibit hereto and is incorporated herein by reference)
to acquire, through an operating partnership, interests in all or a portion of
seven Manhattan office buildings (the "Mendik Properties") and certain
management and leasing assets held by the Mendik Group (the "Mendik Group",
which means as used herein, individually or collectively as the context may
require, Bernard H. Mendik, David R. Greenbaum and the entities controlled by
them, including Mendik Realty Company, Inc. and the subsidiaries and affiliates
of such entities that own interests in certain partnerships (the "Mendik
Property Partnerships") owning interests in certain of the Mendik Properties and
certain of its affiliates (the "Partners" and, together with the Mendik Group,
the "Mendik Partners"). Simultaneously with the closing of the Mendik
Transaction (as defined below), and in connection therewith, the Company will
convert to an Umbrella Partnership REIT ("UPREIT") by transferring (by
contribution, merger or otherwise) all or substantially all of the interests in
its properties and other assets to an operating partnership, currently named The
Mendik Company, L.P., which will be renamed Vornado Realty L.P. following
closing of the Mendik Transaction (the "Operating Partnership"), of which the
Company will be the sole general partner. Following the consummation of the
Mendik Transaction, the Company's activities as an UPREIT will be conducted
through the Operating Partnership.
A copy of the Company's press release (the "Press Release") announcing
the Mendik Transaction is attached as an exhibit hereto and is incorporated
herein by reference. The Press Release and this Current Report on Form 8-K
contain statements that constitute forward-looking statements as such term is
defined in Section 27A of the Securities Act of 1933, as amended (the
"Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Certain factors, as discussed herein, could cause
actual results to differ materially from those in the forward- looking
statements. Factors that might cause such a material difference include, but are
not limited to (a) changes in the general economic climate, (b) local conditions
such as an oversupply of space or a reduction in demand for real estate in the
area, (c) conditions of tenants, (d) competition from other available space, (e)
increased operating costs and interest expenses, (f) changes in taxation or
zoning laws, (g) government regulations, (h) failure of the Company to continue
to qualify as a REIT, (h) availability of financing on acceptable terms and (i)
potential liability under environmental or other laws or regulations.
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GENERAL
The current estimated consideration for the Mendik Transaction is
approximately $654 million, including $269 million in cash, $168 million in the
limited partnership units of the Operating Partnership and $217 million in
indebtedness. When the Company and the Mendik Group reached an initial
understanding regarding the basic terms with respect to the Mendik Transaction,
the market price of the Company's Common Shares was $52 per share. This cash
portion could increase by as much as $68 million with a corresponding decrease
in the Operating Partnership Units being issued resulting from elections
available to certain of the Mendik Partners.
The Company presently intends to finance most of the cash portion of
the Mendik Transaction through a registered public offering and sale (the
"Offering") of Series A Convertible Preferred Shares of Beneficial Interest,
liquidation preference $25.00 per share (the "Series A Preferred Shares")
expected to occur early in the second quarter of 1997. The Company intends to
contribute the net proceeds of the Offering, to the Operating Partnership
concurrently with the closing of the Mendik Transaction in exchange for a number
of preferred limited partnership units in the Operating Partnership (the
"Preferred Units") equal to the number of Series A Preferred Shares sold. The
Preferred Units will have a distribution preference equal to the distribution
preference on the Series A Preferred Shares, will rank, as to distributions and
upon liquidation, senior to the Class A, C, D and E units of the Operating
Partnership and will automatically convert into Class A units of the Operating
Partnership upon the conversion of the Series A Preferred Shares into Common
Shares.
In addition, the Company has signed a commitment letter (the
"Commitment Letter") with Union Bank of Switzerland ("UBS") pursuant to which
UBS has agreed, upon consummation of the Mendik Transaction to provide the
Operating Partnership a one-year bridge loan of $400 million in connection with
the Mendik Transaction. A copy of the Commitment Letter is attached as an
exhibit hereto and is incorporated herein by reference.
The Consolidation Agreement is subject to the consent of third parties,
including the consent of the Mendik Partners, and other customary conditions. It
is currently expected that the Mendik Transaction will be consummated in the
second quarter of 1997, but there can be no assurance that the proposed
transaction will be completed. The proposed offering of the Series A Preferred
Shares is not conditioned on the consummation of the Mendik Transaction, nor is
the Mendik Transaction conditioned on the sale of the Series A Preferred Shares.
In the event the Mendik Transaction is not consummated, the net proceeds from
the Offering will be used for general corporate purposes.
Bernard Mendik, the Chairman of the Board of Directors of Mendik
Realty, will become Co-Chairman of the Board of Trustees and Chief Executive
Officer of the Mendik Division of the Company. David Greenbaum will become
President of the Mendik Division of the Company. Steven Roth continues as the
Company's Chairman and Chief Executive Officer. Upon consummation of the Mendik
Transaction, Mr. Roth, together with
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Michael Fascitelli, the President of the Company, and Interstate Properties, a
significant shareholder of the Company, will enter into a voting agreement (the
"Voting Agreement", a copy of the form of which is attached as an exhibit hereto
and is incorporated herein by reference) pursuant to which Messrs. Roth and
Fascitelli and Interstate Properties will agree to vote any Common Shares of the
Company they beneficially own in favor of the election of Mr. Mendik to the
Board of Trustees of the Company at every meeting of the shareholders of the
Company at which such matter is considered over the next six years.
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OPERATING PARTNERSHIP
Upon the consummation of the Mendik Transaction, the Company
will convert to an Umbrella Partnership REIT. As such, the Company generally
will not own properties or conduct operations directly; instead, the Company's
principal assets will consist of its interests in the Operating Partnership. The
Company's properties and other assets will be owned, and its operations will be
conducted, by the Operating Partnership and affiliates of the Operating
Partnership. The Company will be the sole general partner of the Operating
Partnership and initially will own approximately 90% of the limited partnership
interests in the Operating Partnership (assuming that (i) the Mendik Partners
elect to receive Units as opposed to cash, (ii) the payment of certain
additional working capital to the Mendik Partners in connection with the closing
is made in Units and (iii) no additional securities of the Company, including
the Series A Preferred Shares, are issued between the date hereof and the
closing of the Mendik Transaction) through the ownership of Class A Units, the
terms of which substantially mirror the economic terms of the Company's
outstanding Common Shares.
The Mendik Partners (other than the Mendik Group) who elect to
receive Units instead of cash will receive a class of Units ("Class D Units" or
"Class E Units") in the Operating Partnership which will entitle the holders
thereof to a preferential annual distribution rate of $4.03 (7.75% of $52, the
market price of the Common Shares at the time the Company and the Mendik Group
reached an initial understanding regarding the basic business terms of the
Mendik Transaction). The Mendik Group will receive a class of Units ("Class C
Units") in the Operating Partnership which will entitle the holders thereof to a
preferential annual distribution rate of $3.38 (6.5% of $52). Class C Units will
automatically convert to Class A Units when the distributions paid to holders of
Class A Units equals $.8450 per quarter ($3.38 annually) for four consecutive
quarters following the consummation of the Mendik Transaction. Class D and Class
E Units will automatically convert to Class A Units when the distributions paid
to holders of Class A Units equals $1.0075 per quarter ($4.03 annually) for four
consecutive quarters following the consummation of the Mendik Transaction.
At any time after a holding period of one year (or two years
in the case of the majority of the Class C Unit holders) following the
consummation of the Mendik Transaction, Class D and Class E Unit holders will
have the right to have their Units redeemed in whole or in part by the Operating
Partnership for cash equal to the fair market value, at the time of redemption,
of one Common Share of the Company for each Unit redeemed or, at the option of
the Company, one Common Share of the Company
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for each Unit tendered, subject to customary anti-dilution provisions (the "Unit
Redemption Right"). In addition to the foregoing, during the period from the
91st day after the Mendik Transaction until the first anniversary of the Mendik
Transaction, holders of Class E Units will have the right to have redeemed their
Class E Units for cash at a 6% discount from the fair market value at the time
of the redemption of one Common Share of the Company for each Unit redeemed.
Beginning one year following the consummation of the Mendik Transaction, holders
of Units may be able to sell Common Shares received upon the exercise of their
Unit Redemption Right in the public market pursuant to registration rights
granted to such holders or available exemptions from registration. No prediction
can be made about the effect that future sales of such Common Shares will have
on the market price for Common Shares.
THE MENDIK PROPERTIES
Upon consummation of the Mendik Transaction, the Operating
Partnership will succeed to ownership interests in seven midtown Manhattan
office properties currently managed by the Mendik Group. The following table
sets forth certain information with respect to the Mendik Properties as of
December 31, 1996, except as to Two Penn Plaza for which the information is as
of March 15, 1997:
OPERATING ANNUAL
PARTNERSHIP'S TOTAL RENT PER
EXPECTED RENTABLE LEASED
OWNERSHIP SQUARE PERCENT SQUARE SIGNIFICANT
PROPERTY INTEREST FEET(1) LEASED FOOT(2) TENANTS(3)
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Two Penn Plaza 100.0% 1,474,526 84.2%(4) $27.99 Digital Equipment (12%)
Information
Builders, Inc. (12%)
Eleven Penn Plaza 100.0 956,280 95.5 27.64 Times Mirror (24%)
General Mills (16%)
1740 Broadway 100.0 551,301 100.0 32.85 Mutual of New York (48%)
(The MONY Building) William Douglas
McAdams (11%)
866 United Nations Plaza 100.0 384,815 97.3 31.29 Bear Stearns (17%)
Two Park Avenue (5) 40.0 946,697 97.8 23.59 Times Mirror (30%)
Smith Barney (11%)
330 Madison Avenue (5) 24.8 770,828 96.5 34.77 BDO Seidman (15%)
570 Lexington Avenue 5.6 433,342 33.5 (6) 29.38 (6) (6)
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(1) Includes 158,123 square feet of retail space, 151,839 square feet of
basement space and, at the 866 United Nations Plaza Property, 42,674
square feet of underground parking garage space.
(2) Represents annualized monthly base rent including tenant pass-throughs
of operating expenses (exclusive of tenant electricity costs) and
excludes rent for any tenant whose lease has not commenced.
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(3) The percentage shown represents the tenant's percentage of square
footage leased at the corresponding Mendik Property.
(4) The percent leased was 69.0% as of December 31, 1996, primarily as a
result of the expiration on October 31, 1996 of a lease with respect to
approximately 430,000 square feet. Since December 31, 1996, the Two
Penn Property Partnership has entered into leases with respect to
approximately 269,000 square feet of this space, although certain
contingencies exist with respect to one lease for approximately 180,000
square feet of this space.
(5) Messrs. Mendik and Greenbaum and entities that they control will retain
certain immaterial ownership interests with respect to these Mendik
Properties.
(6) 570 Lexington Avenue was acquired in 1994 with substantially all of the
building unoccupied. The building has been substantially redeveloped
and currently is being leased.
THE MANAGEMENT ENTITIES
In addition to interests in the Mendik Properties, the
Operating Partnership will acquire all of the interest in the office management
and leasing business currently conducted by the Mendik Group for the four
wholly-owned Mendik Properties and substantially all of the economic interest
and none of the voting interest in the office management and leasing business
for (i) the other three Mendik Properties which are partially owned; and (ii)
the other properties currently serviced by the Mendik Group's management and
leasing business. All of the voting interest and the balance of the economic
interest not acquired by the operating partnership will be owned by Messrs.
Mendik, Greenbaum and Fascitelli.
CONDITIONS TO THE CLOSING OF THE MENDIK TRANSACTION
Certain conditions must be satisfied or waived in order for
the closing of the Mendik Transaction (the "Closing") to be consummated,
including the following: (i) all of the Mendik Property Partnerships must
participate in the Mendik Transaction; (ii) with respect to any particular
Mendik Property Partnership, the Mendik Transaction must be approved by the
Mendik Partners (including the Mendik Group) holding the requisite percentage of
the outstanding partnership interests in such Mendik Property Partnership (which
requisite percentage is not identical for all Mendik Property Partnerships);
(iii) the Mendik Transaction will not be completed unless the closings of the
certain other transactions with certain limited partners and certain other
parties set forth in the Consolidation Agreement have occurred or will occur
concurrently with the Closing; (iv) the Financing Transactions (as defined
below) must be consummated; (v) all required consents of third parties must be
obtained or waived; and (vi) the Mendik Transaction must be consummated on or
before June 30, 1997.
In addition to the closing conditions set forth above,
consummation of the Mendik Transaction is subject to other customary closing
conditions such as the accuracy of certain representations and warranties
contained in the Consolidation Agreement, the delivery of certain opinions and
the absence of any restraining orders or injunctions prohibiting the Closing.
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THE FINANCING TRANSACTIONS
Simultaneously with the consummation of the Mendik
Transaction, the Operating Partnership (or the relevant Mendik Property-owning
entity, as applicable) intends to consummate the following financing
transactions: (i) the partial repayment of approximately $110 million of
existing indebtedness secured by the Two Penn Plaza, Eleven Penn Plaza and 866
United Nations Plaza Properties; (ii) the refinancing of approximately $80
million of existing indebtedness secured by the Two Penn Plaza Property; (iii)
the refinancing of approximately $55 million of existing indebtedness secured by
the Eleven Penn Plaza Property; (iv) the refinancing of approximately $33
million of existing indebtedness secured by the 866 United Nations Plaza
Property; and (v) the refinancing of approximately $65 million of existing
indebtedness secured by the Two Park Avenue Property (collectively, the
"Financing Transactions"). If the Mendik Transaction is consummated, all future
issuances of debt will be at the Operating Partnership level.
OPERATING PARTNERSHIP UNITS
The Units constitute equity interests entitling each limited
partner in the Operating Partnership to his or her pro rata share of cash
distributions in accordance with the class preferences provided for in the
Operating Partnership's partnership agreement (the "Partnership Agreement", a
copy of the form of which is attached as an exhibit hereto and is incorporated
herein by reference). Holders of Units will have the rights to which limited
partners are entitled under the Partnership Agreement and the Delaware Revised
Uniform Limited Partnership Act (the "Delaware Partnership Act"). The Company
does not intend to register the Units to be issued in the Mendik Transaction
pursuant to any Federal or state securities laws, nor to list such Units on any
exchange or national market system. The Partnership Agreement imposes certain
restrictions on the transfer of Units.
DISTRIBUTIONS; ALLOCATIONS OF INCOME AND LOSS
The Partnership Agreement provides for distributions, as
determined in the manner provided in the Partnership Agreement, to the Company
and the limited partners in proportion to their percentage interest in the
Operating Partnership, subject to the Initial Distribution Preferences. The
Company, as general partner of the Operating Partnership, will have the
exclusive right to declare and cause the Operating Partnership to make
distributions as and when the Company deems appropriate or desirable in its sole
discretion. For so long as the Company elects to qualify as a REIT, the Company
will make reasonable efforts (as determined by it in its sole discretion) to
make distributions to partners in amounts such that the Company will be able to
pay shareholder dividends that will satisfy the requirements for qualification
as a REIT and avoid any federal income or excise tax liability to the Company.
The Partnership Agreement provides for the allocation to the general partner and
the limited partners of items of Operating Partnership income and loss.
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The value of each Unit issued in the Mendik Transaction
regardless of its class will equate to one Common Share of the Company; however,
Class C, Class D and Class E Units will have special priorities in the
distributions paid by the Operating Partnership. The Partnership Agreement
provides that the Operating Partnership (when declared by the Company) will make
distributions in the order of preference provided for in the Partnership
Agreement. The order of preference in the Partnership Agreement provides that
distributions will be paid first to the Company as necessary to enable the
Company to pay REIT Expenses (as defined below). Thereafter, distributions will
be paid first to holders of limited partnership interests of any class ranking
senior (as to distributions or redemption or voting rights) to Class C Units,
Class D Units and Class E Units, if any are then outstanding. Distributions will
be paid second to holders of Class D Units and Class E Units (pro rata based on
the ratio of the total number of Class D Units or Class E Units, as applicable,
to the aggregate number of Class D Units and Class E Units taken together on the
relevant partnership record date) for any unpaid past cumulated distributions
and then to holders of Class D and Class E Units a quarterly amount equal to
$1.0075 per unit (an annual return of 7.75% of $52, the market price of the
Common Shares at the time the Company and the Mendik Group reached an initial
understanding regarding the basic business terms of the Mendik Transaction).
Distributions are paid third to Class C Unit holders for any unpaid past
cumulated distributions and then a quarterly amount equal to $.8450 per Unit (an
annual return of 6.5% of $52). Class C Unit holders will also share in any
distribution to Class A Unit holders above $.8450 per Unit, and Class D and
Class E Unit holders will share in any distribution above $1.0075 per Unit.
Class C Units will automatically convert to Class A Units when
the distributions paid to holders of Class A Units equals the per quarter
distribution specified above for Class C Unit holders for four consecutive
quarters following the Mendik Transaction. Class D and Class E Units will
automatically convert to Class A Units when the distributions paid to holders of
Class A Units equals the per quarter distribution specified above for Class D
and Class E Unit holders for four consecutive quarters following the Mendik
Transaction. Until such time as all Class C, Class D and Class E Units have been
converted into Class A Units, the Partnership Agreement will prohibit the
Operating Partnership from issuing any class of limited partnership interests
ranking senior (as to distributions or redemption or voting rights) to Class C
Units or Class D Units or Class E Units, unless either (1) such limited
partnership interests are substantially similar to the terms of securities
issued by the Company and the proceeds of the issuance of such securities have
been contributed to the Operating Partnership or (2) the issuance of such
limited partnership interests has been approved by the holders of a majority of
the Class C, Class D and Class E Units issued in the Mendik Transaction and then
outstanding (taken together as a group).
The Partnership Agreement defines "REIT Expenses" to mean (i)
costs and expenses relating to the continuity of existence of the Company and
any person in which the Company owns an equity interest, (ii) costs and expenses
relating to any offer or registration of securities by the Company, (iii) costs
and expenses associated with preparing and filing periodic reports of the
Company under federal, state and local laws (including Securities and Exchange
Commission filings), (iv) costs and expenses
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associated with the Company's compliance with laws, rules and regulations
applicable to it, and (v) all other operating or administrative expenses
incurred by the Company in the ordinary course of its business.
If the Mendik Transaction and the Offering are consummated,
the Series A Preferred Units of the Operating Partnership acquired by the
Company (which represent the Series A Preferred Shares sold hereunder) will rank
senior to the Class A, C, D and E Units issued in connection with the Mendik
Transaction with respect to payment of dividends and amounts upon liquidation,
dissolution or winding up of the Operating Partnership.
REDEMPTION OF UNITS
Subject to certain limitations, holders of Class C, D and E
Units may exercise their Unit Redemption Right by providing notice to the
Operating Partnership at any time beginning one year in the case of Class D and
E Unit holders and two years in the case of the majority of the Class C Unit
holders following consummation of the Mendik Transaction. Unless the Company
elects to assume and perform the Operating Partnership's obligation with respect
to the Unit Redemption Right, as described below, a redeeming limited partner
will receive cash from the Operating Partnership in an amount equal to the
market value of the Units to be redeemed. The market value of a Unit for this
purpose will be equal to the average of the closing trading price of a Common
Share on the NYSE for the ten trading days before the day on which the
redemption notice was given. In lieu of the Operating Partnership's acquiring
the Units for cash, the Company will have the right (except as described below,
if the Common Shares are not publicly traded) to elect to acquire the Units
directly from a limited partner exercising the Unit Redemption Right, in
exchange for either cash or Common Shares, and, upon such acquisition, the
Company will become the owner of such Units. Upon exercise of the Unit
Redemption Right, the limited partner's right to receive distributions for the
Units so redeemed or exchanged will cease. No redemption or exchange for Common
Shares will occur if delivery of Common Shares would be prohibited either under
the provisions of the Company's Declaration of Trust designed primarily to
protect the Company's qualification as a REIT or under applicable Federal or
state securities laws as long as the Common Shares are publicly traded.
In addition to the foregoing, during the period from the 91st
day after the Mendik Transaction until the first anniversary of the Mendik
Transaction holders of Class E Units will have the right to have redeemed their
Class E Units for cash at a 6% discount from the fair market value at the time
of redemption of one Common Share of the Company for each Unit redeemed.
CONFLICTS OF INTEREST
Messrs. Mendik and Greenbaum will continue to own direct and
indirect managing general partner interests in two of the Mendik Properties (Two
Park Avenue and 330 Madison Avenue), direct and indirect interests in numerous
additional office properties and other real estate assets, and interests in
certain property services
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businesses, including in businesses which provide cleaning and related services,
security services and facilities management services. These interests may give
rise to certain conflicts of interest concerning the fulfillment of Mr. Mendik's
responsibility as an officer and trustee of the Company and Mr. Greenbaum's
responsibility as an officer of the Company. The Company will have an option to
purchase at specified prices the Mendik Group's interests in certain other
Manhattan office properties.
After the consummation of the Mendik Transaction, the Mendik
Group will own an entity which will provide cleaning and related services and
security services to the Mendik Properties acquired in the Mendik Transaction.
Upon the consummation of the Mendik Transaction, the Company will enter into
five-year, non-cancelable contracts with the Mendik Group to provide such
services to the Mendik Properties in which the Operating Partnership will own a
100% interest. Although the Company believes that the terms and conditions of
the contracts pursuant to which these services will be provided, taken as a
whole, will not be less favorable to the Company than those which could have
been obtained from a third party providing comparable services, there can be no
assurance to this effect.
In addition, as described above, the Management Corporation
(which will be controlled by Messrs. Mendik and Greenbaum and not by the
Company) will provide management and leasing services to properties in which the
Operating Partnership has less than a 100% interest as well as to other office
properties (including several properties in which the Mendik Group has an
interest but are not being included in the Mendik Transaction). Certain
conflicts of interest may result from the Management Corporation providing
leasing services both to properties in which the Operating Partnership has an
interest and other properties in which the Mendik Group has an interest.
LEGAL PROCEEDINGS
On January 14, 1997, two individual investors in Mendik Real
Estate Limited Partnership ("RELP"), the publicly held limited partnership that
indirectly owns an effective 60% interest in the Two Park Avenue Property ("Two
Park"), filed a purported class action suit against NY Real Estate Services I,
Inc. ("NY Real Estate"), Mendik RELP Corp., B&B Park Avenue, L.P. (the entity
that owns a 40% interest in Two Park and in which the Operating Partnership
proposes to acquire all of the interests in the Mendik Transaction) and Mr.
Mendik in the Supreme Court of the State of New York, County of New York, on
behalf of all persons holding limited partnership interests in RELP. The
complaint alleges that for reasons which include purported conflicts of
interest, the defendants breached their fiduciary duty to the limited partners
and that NY Real Estate and Mendik RELP Corp. also breached their contractual
duty to the limited partners. The plaintiffs further allege that such a proposed
transfer of the 40% interest in Two Park will result in a burden on the
operation and management of Two Park since the purchaser of the 40% interest
will have no fiduciary duty to RELP, yet all decisions regarding any proposed
sale or refinancing of the property will require its consent, with the result
that, among other things, the transfer will prevent RELP from negotiating for
the sale of Two Park at better terms than a sale of only RELP's 60% interest.
The complaint also alleges,
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among other things, that the transfer of the 40% interest violates RELP's right
of first refusal to purchase the interest being transferred and fails to provide
limited partners in RELP with a comparable transfer opportunity.
Shortly after the filing of the complaint, another limited
partner represented by the same attorneys filed an essentially identical
complaint in the same court. Among other things, both complaints claim that the
purported class has and will continue to suffer unspecified damages, and seek a
declaration that the suits are properly class actions, an accounting and certain
injunctive relief, including an injunction enjoining the transfer of the 40%
interest and a judgment requiring either the liquidation of the partnership and
the appointment of a receiver or an auction of Two Park. The time for defendants
to respond to the complaints and to certain discovery requests has not yet
expired. In the interim, plaintiff's counsel have requested an agreement to
consolidate the two actions and have stated that they may seek to amend the
complaints in unspecified ways, as well as to file a motion seeking a
preliminary injunction.
The Mendik Group intends to vigorously defend against such
actions.
DISSOLUTION, WINDING UP AND TERMINATION
The Operating Partnership will continue until December 31,
2095 (as such date may be extended by the Company in its discretion), unless
sooner dissolved and terminated.
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Item 6. Not Applicable.
Item 7. Financial Statements, Pro Forma Financial Information and
Exhibits.
(a) Financial Statements of businesses acquired. Financial statements
for the following entities are attached as Annexes A through F:
Annex Financial Statements
A Financial statements for the years ended December 31, 1996,
1995 and 1994 for Two Penn Plaza Associates L.P. (a Limited
Partnership) (including independent auditors' report)
B Combined financial statements for the years ended December 31,
1996, 1995 and 1994 for M Eleven Associates, M 393 Associates
and Eleven Penn Plaza Company (General Partnerships)
(including independent auditors' report)
C Financial statements for the years ended December 31, 1996,
1995 and 1994 for 1740 Broadway Associates, L.P. (a Limited
Partnership) (including independent auditors' report)
D Financial statements for the years ended December 31, 1996,
1995 and 1994 for 866 U.N. Plaza Associates LLC (a Limited
Liability Company) (including independent auditors' report)
E Financial statements for the years ended December 31, 1996,
1995 and 1994 for Two Park Company (a New York general
partnership) (including independent auditors' report)
F Financial statements for the years ended December 31, 1996,
1995 and 1994 for B&B Park Avenue L.P. (a Limited Partnership)
(including independent auditors' report)
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(b) Pro Forma Financial Information. The following pro forma financial
statements of the Company reflecting the Mendik Transaction are attached as
Annex G:
Annex Financial Statements
G Condensed consolidated pro forma financial statements for the
Company for the year ended December 31, 1996
(c) Exhibits Required by Item 601 of Regulation S-K.
Exhibit No. Exhibit
2.1 Master Consolidation Agreement ("Master Consolidation
Agreement"), dated March 12, 1997, among Vornado Realty Trust,
Vornado/Saddle Brook L.L.C., The Mendik Company, L.P., and
various parties defined therein (collectively as the Mendik
Group). A list of omitted schedules, exhibits and annexes is
attached as the last page to this exhibit. The Registrant
agrees to furnish supplementallya copy of any omitted exhibit,
schedule or annex to the Securities and Exchange Commission
upon request.
2.1(a) Mendik Structure Memorandum, included as Appendix A to the
Master Consolidation Agreement
2.1(b) Vornado Structure Memorandum, included as Appendix B to the
Master Consolidation Agreement
2.1(c) Form of Amended and Restated Agreement of Limited Partnership
of Vornado Realty L.P., included as Exhibit G to the Master
Consolidation Agreement
2.1(d) Form of Voting Agreement between Steven Roth, Michael
Fascitelli and Interstate Properties and Bernard Mendik,
included as Exhibit J to the Master Consolidation Agreement
10.1 Commitment Letter, dated March 7, 1997, between Vornado Realty
Trust and Union Bank of Switzerland (New York Branch) re:
$400,000,000 one-year bridge loan
Page 14
15
23.1 Consent, dated March 26, 1997, of Friedman, Alpren & Green,
LLP, independent accountants for Two Penn Plaza Associates,
L.P.
23.2 Consent, dated March 26, 1997, of Friedman, Alpren & Green,
LLP, independent accountants for B&B Park Avenue L.P.
23.3 Consent, dated March 26, 1997, of Friedman, Alpren & Green,
LLP, independent accountants for M Eleven Associates, M 393
Associates and Eleven Penn Plaza Company
23.4 Consent, dated March 26, 1997, of Friedman, Alpren & Green,
LLP, independent accountants for 1740 Broadway Associates,
L.P.
23.5 Consent, dated March 26, 1997, of Friedman, Alpren & Green,
LLP, independent accountants for 866 U.N. Plaza Associates LLC
23.6 Consent, dated March 26, 1997, of KPMG Peat Marwick LLP,
independent accountants for Two Park Company
99.1 Press Release, dated March 12, 1997, of Vornado Realty Trust,
announcing its entry into a Master Consolidation Agreement
with Vornado/Saddle Brook L.L.C., The Mendik Company, L.P.,
and various parties defined therein collectively as the Mendik
Group
Item 8. Not Applicable.
Page 15
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned hereunto duly authorized.
VORNADO REALTY TRUST
Dated: March 26, 1997 By: /s/ Joseph Macnow
-------------------
Joseph Macnow
Vice President --
Chief Financial Officer
Page 16
17
INDEX TO ANNEXES
Annex Financial Statements Page
- ----- -------------------- ----
A Financial statements for the years ended December 31, 1996,
1995 and 1994 for Two Penn Plaza Associates L.P. (a Limited
Partnership) (including independent auditors' report)
B Combined financial statements for the years ended December 31,
1996, 1995 and 1994 for M Eleven Associates, M 393 Associates
and Eleven Penn Plaza Company (General Partnerships)
(including independent auditors' report)
C Financial statements for the years ended December 31, 1996,
1995 and 1994 for 1740 Broadway Associates, L.P. (a Limited
Partnership) (including independent auditors' report)
D Financial statements for the years ended December 31, 1996,
1995 and 1994 for 866 U.N. Plaza Associates LLC (a Limited
Liability Company) (including independent auditors' report)
E Financial statements for the years ended December 31, 1996,
1995 and 1994 for Two Park Company (a New York general
partnership) (including independent auditors' report)
F Financial statements for the years ended December 31, 1996,
1995 and 1994 for B&B Park Avenue L.P. (a Limited Partnership)
(including independent auditors' report)
G Condensed consolidated pro forma financial statements for the
Company for the year ended December 31, 1996
Page 17
18
ANNEX A
TWO PENN PLAZA ASSOCIATES L.P.
(A LIMITED PARTNERSHIP)
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND
INDEPENDENT AUDITORS' REPORT
19
TWO PENN PLAZA ASSOCIATES L.P.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
TABLE OF CONTENTS
Independent Auditors' Report 1
Financial Statements
Balance Sheet 2
Statement of Income 3
Statement of Cash Flows 4
Statement of Changes in Partners' Capital Deficiency 5
Notes to Financial Statements 6-14
20
FRIEDMAN 1700 BROADWAY
ALPREN & NEW YORK, NY 10019
GREEN LLP 212-582-1600
CERTIFIED PUBLIC ACCOUNTANTS FAX 212-265-4761
INDEPENDENT AUDITORS' REPORT
TO THE PARTNERS OF TWO PENN PLAZA ASSOCIATES L.P.
We have audited the accompanying balance sheet of TWO PENN PLAZA ASSOCIATES
L.P. (a limited partnership) as of December 31, 1996 and 1995, and the related
statements of income, cash flows and changes in partners' capital deficiency for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the managing general partner. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
managing general partner, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of TWO PENN PLAZA ASSOCIATES
L.P. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 4(a) to the financial statements, the financial
statements as of December 31, 1995 and for the years ended December 31, 1995 and
1994 have been restated to reflect adjustments to water and sewer expense
previously recorded entirely in 1995.
/s/ FRIEDMAN ALPREN & GREEN LLP
January 15, 1997, except for
Note 2, as to which the date
is March 12, 1997
-1-
21
TWO PENN PLAZA ASSOCIATES L.P.
BALANCE SHEET
DECEMBER 31, 1996 AND 1995
1996 1995
------------- -------------
ASSETS
Property and improvements - at cost, less accumulated
depreciation and amortization of $ $84,044,177 and
$80,050,988 - Note 5 $ 40,249,466 $ 40,362,894
Cash and short-term investments 7,822,176 5,435,297
Investment in U.S. Treasury obligations - Note 4(e) 8,118,765 5,628,317
Receivables - Note 6 14,954,965 16,610,622
Prepaid leasing costs 3,089,007 3,047,294
Other prepayments 58,131 55,879
Mortgage costs 3,061,956 3,892,110
Tenants' security deposits (cash in bank and
U.S. Treasury Bills) 773,859 807,929
------------- -------------
$ 78,128,325 $ 75,840,342
============= =============
LIABILITIES AND PARTNERS' CAPITAL DEFICIENCY
Liabilities
Mortgages payable - Note 7 $ 159,100,000 $ 159,100,000
Accrued interest payable 839,805 2,503,874
Accounts payable and accrued expenses 1,418,962 915,259
Improvements payable 181,542 121,008
Deferred income 179,885 150,190
Tenants' security deposits payable 866,659 900,729
------------- -------------
162,586,853 163,691,060
Commitments - Notes 7 and 10 -- --
Partners' capital deficiency (84,458,528) (87,850,718)
------------- -------------
$ 78,128,325 $ 75,840,342
============= =============
The accompanying notes are an integral part of these financial statements.
-2-
22
TWO PENN PLAZA ASSOCIATES L.P.
STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
Revenues
Rental income $41,885,873 $43,350,856 $43,067,969
Interest 560,595 438,668 334,670
----------- ----------- -----------
42,446,468 43,789,524 43,402,639
----------- ----------- -----------
Expenses
Renting 79,104 123,260 174,830
Administrative 951,479 1,283,034 1,159,659
Operating 12,347,504 12,815,854 12,651,141
Real estate taxes 8,081,435 8,612,906 8,463,386
----------- ----------- -----------
21,459,522 22,835,054 22,449,016
----------- ----------- -----------
Income before interest expense and
depreciation and amortization 20,986,946 20,954,470 20,953,623
Interest expense 11,932,302 11,982,814 11,840,999
----------- ----------- -----------
Income before depreciation and
amortization 9,054,644 8,971,656 9,112,624
Depreciation and amortization 5,642,317 5,505,290 5,089,126
----------- ----------- -----------
Net income $ 3,412,327 $ 3,466,366 $ 4,023,498
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-3-
23
TWO PENN PLAZA ASSOCIATES L.P.
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities
Net income $ 3,412,327 $ 3,466,366 $ 4,023,498
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation and amortization of fixed assets 3,993,189 4,043,699 4,051,144
Amortization of leasing and mortgage costs 1,649,128 1,461,591 1,037,982
(Gain) loss on sale of marketable securities 29,155 ( 13,936) --
Changes in assets and liabilities
Interest receivable ( 19,869) ( 42,896) 21,389
Receivables 1,655,657 1,050,799 88,712
Prepaid leasing costs ( 780,677) ( 433,087) ( 466,182)
Other prepayments ( 2,252) 92,881 93,009
Accrued interest payable ( 1,664,069) 35,175 ( 7,927)
Accounts payable and accrued expenses 503,702 ( 25,106) 222,079
Leasing costs payable -- -- ( 76,136)
Deferred income 29,695 ( 485) ( 79,876)
Tenants' security deposits 34,070 ( 79,001) ( 303,956)
Tenants' security deposits payable ( 34,070) 79,001 303,956
------------ ------------ ------------
Net cash provided by operating activities 8,805,986 9,635,001 8,907,692
------------ ------------ ------------
Cash flows from investing activities
Acquisition of improvements and equipment ( 3,819,227) ( 5,887,833) ( 5,104,459)
Acquisition of U.S. Treasury obligations (11,370,611) (10,699,760) ( 7,619,101)
Redemption of U.S. Treasury obligations 8,850,741 7,345,019 9,084,207
Due from partner -- ( 69,371) ( 127,788)
------------ ------------ ------------
Net cash used in investing activities ( 6,339,097) ( 9,311,945) ( 3,767,141)
------------ ------------ ------------
Cash flows from financing activities
Mortgage costs ( 80,010) ( 3,941,591) ( 22,372)
Escrow for mortgage costs -- 3,600,000 ( 3,600,000)
Distributions to partners -- -- ( 2,324,062)
------------ ------------ ------------
Net cash used in financing activities ( 80,010) ( 341,591) ( 5,946,434)
------------ ------------ ------------
Net increase (decrease) in cash and short-term
investments 2,386,879 ( 18,535) ( 805,883)
Cash and short-term investments, beginning of year 5,435,297 5,453,832 6,259,715
------------ ------------ ------------
Cash and short-term investments, end of year $ 7,822,176 $ 5,435,297 $ 5,453,832
============ ============ ============
Supplemental cash flow disclosures
Interest paid $ 13,596,371 $ 11,947,639 $ 11,848,926
============ ============ ============
The accompanying notes are an integral part of these financial statements.
-4-
24
TWO PENN PLAZA ASSOCIATES L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL DEFICIENCY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
General Partners Limited Partners
-------------------------------------------- ----------------------------
Union Bank
of Switzerland,
New York Branch,
Mendik as Successor
Realty Trustee for
Bernard H. Company, Nancy Account No. Carborundum
Total Mendik Inc. Creek, Inc. P-34742 Joint Venture
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1993 $(93,037,094) $(16,003,268) $ (161,648) $ (225,822) $(41,494,642) $(22,359,053)
Net income 4,023,498 951,622 9,612 8,997 1,652,346 890,545
Distributions ( 2,324,062) ( 626,485) ( 6,328) ( 4,968) ( 912,569) ( 491,837)
Unrealized loss on U.S.
Treasury obligations ( 21,199) ( 4,481) ( 45) ( 49) ( 8,997) ( 4,849)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1994 (91,358,857) (15,682,612) (158,409) (221,842) (40,763,862) (21,965,194)
Transfers of interest
January 1, 1995 -- -- -- -- 24,170,114 --
Net income 3,466,366 968,387 9,782 7,309 542,166 723,598
Reversal of prior year unrealized
loss on U.S. Treasury obligations 21,199 4,481 45 49 8,997 4,849
Unrealized gain on U.S. Treasury
obligations 20,574 5,748 58 43 3,218 4,294
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 (87,850,718) (14,703,996) (148,524) (214,441) (16,039,367) (21,232,453)
Transfers of interest
January 2, 1996 -- -- -- -- 16,039,367 --
Transfers of interest
December 13, 1996 -- -- -- 207,584 -- --
Transfers of interest
December 17, 1996 -- -- -- -- -- --
Net income 3,412,327 925,310 9,349 6,899 -- 720,537
Reversal of prior year
unrealized gain on U.S.
Treasury obligations ( 20,574) ( 5,748) ( 58) ( 43) -- ( 4,294)
Unrealized gain on U.S.
Treasury obligations 437 120 1 1 -- 92
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 $(84,458,528) $(13,784,314) $ (139,232) $ -0- $ -0- $(20,516,118)
============ ============ ============ ============ ============ ============
Limited Partners
--------------------------------------------------------------------------------------------
Portfolio U
Penby Knatten Bernard H. Holdings UBSCO Nancy
Associates Inc. Mendik Corporation Corporation Creek, Inc.
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1993 $ (6,396,328) $ (5,117,056) $ (1,279,277) $ -- $ -- $ --
Net income 255,190 204,148 51,038 -- -- --
Distributions ( 140,937) ( 112,750) ( 28,188) -- -- --
Unrealized loss on U.S.
Treasury obligations ( 1,389) ( 1,111) ( 278) -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1994 (6,283,464) (5,026,769) (1,256,705) -- --
Transfers of interest
January 1, 1995 -- -- -- (24,170,114) -- --
Net income 207,351 165,882 41,469 800,422 -- --
Reversal of prior year unrealized
loss on U.S. Treasury obligations 1,389 1,111 278 -- -- --
Unrealized gain on U.S. Treasury
obligations 1,231 985 246 4,751 -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 (6,073,493) (4,858,791) (1,214,712) (23,364,941) -- --
Transfers of interest
January 2, 1996 -- -- -- (16,039,367) -- --
Transfers of interest
December 13, 1996 -- -- -- -- -- (207,584)
Transfers of interest
December 17, 1996 -- -- -- 38,130,147 (38,130,147) --
Net income 206,473 165,180 41,293 1,281,966 54,941 379
Reversal of prior year
unrealized gain on U.S.
Treasury obligations ( 1,231) ( 985) ( 246) ( 7,969) -- --
Unrealized gain on U.S.
Treasury obligations 26 21 5 164 7 --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 $ (5,868,225) $ (4,694,575) $ (1,173,660) $ -0- $(38,075,199) $ (207,205)
============ ============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
-5-
25
TWO PENN PLAZA ASSOCIATES L.P.
NOTES TO FINANCIAL STATEMENTS
1 - ORGANIZATION AND GENERAL
The Partnership, originally named Two Penn Plaza Associates, was
organized in December 1978 to acquire, maintain and operate the property
located at Two Penn Plaza, New York, New York. On December 21, 1993, the
name of the Partnership was changed to Two Penn Plaza Associates L.P.
2 - TRANSFER OF OWNERSHIP
Pursuant to a solicitation contained in a private placement memorandum
dated November 11, 1996, the Partnership obtained the consent of its
partners to participate in an offering of shares of common stock in
accordance with a preliminary registration statement filed with the
Securities and Exchange Commission on December 18, 1996. On March 12, 1997,
the managing general partner entered into an agreement with Vornado Realty
Trust, a publicly traded real estate investment trust ("REIT"). The
partners will be resolicited to obtain their consents to participate in
this transaction, under terms and conditions similar to those stated in the
private placement memorandum dated November 11, 1996. The REIT is a fully
integrated, self-administered and self-managed real estate company which
has qualified as a real estate investment trust for Federal income tax
purposes. Upon completion of the transaction, it is anticipated that the
Partnership will be owned by a company controlled by the REIT.
3 - THE PARTNERSHIP AGREEMENT
(a) Allocation of Distributions and Net Income and Loss
As defined in the agreement, distributions are generally as
follows: first, $210,000 to Bernard H. Mendik and Mendik Realty
Company, Inc. (the "Mendik Group") and then, 20% to the Mendik Group
and 80% to the other partners in proportion to their respective
partnership interests.
Net income and net loss are generally allocated as follows:
first, gross income is allocated in the same ratio as an equal amount
of cash would have been distributed and then, deductions are allocated
in the same ratio as the gross income.
As described in the agreement, certain adjustments in the
distributions and income and loss allocations are made among the
partners for financing costs incurred to return the partners' original
capital contributions.
(Continued)
-6-
26
TWO PENN PLAZA ASSOCIATES L.P.
NOTES TO FINANCIAL STATEMENTS
3 - THE PARTNERSHIP AGREEMENT (Continued)
(b) Transfers of Interests
On January 1, 1995, Union Bank of Switzerland, New York Branch,
as Successor Trustee for Account P-34742, assigned 25.735% of its
partnership interest to Portfolio U Holdings Corporation. On January
2, 1996, the balance of its interest (17.432%) was assigned to
Portfolio U Holdings Corporation.
On December 17, 1996, Portfolio U Holdings Corporation assigned
its partnership interest to UBSCO Corporation, a Delaware corporation.
Effective December 13, 1996, Nancy Creek, Inc. withdrew as a
general partner and its general partnership interest was transferred
to that of a limited partner.
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Restatement of Financial Statements
The accompanying financial statements as of December 31, 1995 and
for the years ended December 31, 1995 and 1994 have been restated to
reflect adjustments to prior years' water and sewer expense for
amounts previously recorded entirely in 1995. Restated amounts reflect
an increase in partners' capital deficiency of $321,709 at December
31, 1994. In addition, expenses for the years ended December 31, 1995
and 1994 have been increased (decreased) by $(321,709) and $78,940,
respectively.
(b) Use of Estimates
The managing general partner uses estimates and assumptions in
preparing financial statements. Those estimates and assumptions affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported revenues and
expenses.
(c) Rental Income
Leases are classified as operating leases in accordance with the
provisions of Financial Accounting Standards Board (FASB) Statement
No. 13. One of these provisions requires the recognition of scheduled
rent increases and rent concessions on a straight-line basis over the
lease term. Included in rental income for the years ended December 31,
1996, 1995 and 1994 is $(562,614), $(925,432) and $(87,863),
respectively, representing reductions in rental income required under
this provision.
(Continued)
-7-
27
TWO PENN PLAZA ASSOCIATES L.P.
NOTES TO FINANCIAL STATEMENTS
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d) Depreciation and Amortization
Property and improvements are stated at cost. Depreciation and
amortization charges are computed over the following estimated useful
asset lives or periods, primarily on the straight-line basis:
Asset Asset Lives
----------------------- ------------------------------
Building Lives of the existing building
components, ranging from
15 to 30 years
Building improvements 10 to 39 years
Furniture and equipment 5 to 7 years
Tenant improvements Term of related lease
Leasing costs Term of related lease
Mortgage costs Term of mortgage
(e) Investment in U.S. Treasury Obligations
The Partnership has adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". U.S. Treasury obligations
are classified as available-for-sale in accordance with the provisions
of SFAS No. 115, and carried at fair value. Net unrealized gains
(losses) at December 31, 1996, 1995 and 1994 (presented as a component
of partners' capital deficiency) are $437, $20,574 and $(21,199),
respectively.
Contractual maturities (including accrued interest) of the
securities at December 31, 1996 are as follows:
Within 1 year $2,133,690
1-2 years 5,985,075
----------
$8,118,765
==========
Included in the investment in U.S. Treasury obligations is
accrued interest of $94,581 and $74,712 at December 31, 1996 and 1995,
respectively.
(Continued)
-8-
28
TWO PENN PLAZA ASSOCIATES L.P.
NOTES TO FINANCIAL STATEMENTS
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) Fair Value of Financial Instruments
Effective for years ended after December 15, 1995, Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value
of Financial Instruments", as amended, requires certain entities to
disclose the fair value of specified financial instruments for which
it is practicable to estimate that value. The fair value of the
investment in U.S. Treasury obligations is presented in Note 4(e). It
was not practicable to estimate the fair value of the mortgages
payable and interest rate exchange agreements because quoted market
prices do not exist and estimates could not be made through other
means without incurring excessive costs.
(g) Income Taxes
The Partnership is not a taxpaying entity for income tax purposes
and, accordingly, no provision has been made for income taxes. The
partners' allocable shares of the Partnership's taxable income or loss
are reportable on their income tax returns.
(h) Cash and Short-Term Investments
The Partnership considers all highly liquid investments with a
maturity of three months or less when purchased to be short-term
investments.
Cash balances and certificates of deposit of approximately
$6,194,000 and $4,706,000 at December 31, 1996 and 1995, respectively,
are maintained in two banks and are insured by the Federal Deposit
Insurance Corporation up to a maximum of $100,000 for each bank.
(Continued)
-9-
29
TWO PENN PLAZA ASSOCIATES L.P.
NOTES TO FINANCIAL STATEMENTS
5 - PROPERTY AND IMPROVEMENTS
1996 1995
------------ ------------
Land $ 6,014,574 $ 6,014,574
Building 53,707,119 53,707,119
Building improvements 21,800,688 17,287,884
Tenant improvements 41,206,093 38,839,925
Furniture and equipment 1,268,843 1,240,753
Improvements in progress 296,326 3,323,627
------------ ------------
124,293,643 120,413,882
Less - Accumulated depreciation
and amortization 84,044,177 80,050,988
------------ ------------
$ 40,249,466 $ 40,362,894
============ ============
6 - RECEIVABLES
1996 1995
------------ ------------
Receivable from tenants
Billed and not collected $ 447,346 $ 1,598,274
Escalation accruals 80,208 168,376
Accrual required by FASB
Statement No. 13 - Note 4(c) 14,017,851 14,580,465
------------ ------------
14,545,405 16,347,115
Due from maintenance services
company - Note 8(b) 185,000 25,407
Due from partner 197,159 197,159
Other 27,401 40,941
------------ ------------
$ 14,954,965 $ 16,610,622
============ ============
(Continued)
-10-
30
TWO PENN PLAZA ASSOCIATES L.P.
NOTES TO FINANCIAL STATEMENTS
7 - MORTGAGES PAYABLE
On May 11, 1988, the Partnership entered into a loan agreement
pursuant to which National Bank of Kuwait S.A.K., Grand Cayman Island
branch ("NBK") agreed to lend the Partnership up to $225,000,000 to be used
for, but not limited to, the partial or full payment of prior mortgages,
distributions to partners, payment of loan costs, and establishing
revolving credit and working capital facilities. At this time, it is
believed that because of a decline in the property's market value,
additional borrowings may not be available.
The loans mature on May 10, 2000 and require payment of interest at a
floating rate, as defined in the agreement. In addition, the Partnership
has entered into interest rate exchange agreements as follows:
On November 8, 1989, the Partnership entered into interest rate
exchange agreements with various commercial banks (the "Banks") and
NBK, as agent for the Banks, for an aggregate principal amount of
$40,000,000, to expire on November 8, 1999.
On October 6, 1992, the Partnership entered into an interest rate
exchange agreement for $115,000,000 until October 6, 1999.
The fixed interest was paid semiannually at the rate of 9.3625% on the
$40,000,000 mortgage and 6.7475% on the $115,000,000 mortgage.
Beginning November 8, 1996 and October 6, 1996, respectively, the
interest is paid monthly at the rate of 9.2525% on the $40,000,000
mortgage and 6.6725% on the $115,000,000 mortgage.
Interest rates vary on the remaining $4,100,000 of the mortgages
payable balance. The effective rates were approximately 6.2%, 6.75% and
6.5% for the years ended December 31, 1996, 1995 and 1994, respectively.
The overall effective interest rate paid by the Partnership was
approximately 7.5% for each of the years ended December 31, 1996 and 1995
and 7.4% for the year ended December 31, 1994.
(Continued)
-11-
31
TWO PENN PLAZA ASSOCIATES L.P.
NOTES TO FINANCIAL STATEMENTS
7 - MORTGAGES PAYABLE (Continued)
The partners and NBK had agreed that NBK would not record the new
mortgages arising as borrowings were made, but that NBK would have the
option to do so upon giving notice to the Partnership, with the Partnership
being responsible for payment of the mortgage recording tax. If for any
reason NBK could not record the mortgage notes, then certain partners
agreed to guarantee the debt. The partners also could voluntarily record
the mortgage. In 1994, at the voluntary request of the Partnership, the
Partnership paid $3,600,000 into a mortgage escrow deposit account. In
1995, NBK recorded mortgages of $131,000,000, requiring a total payment of
$3,941,591 for mortgage recording taxes, title insurance, and other costs.
The Partnership paid the additional amount due in excess of the balance in
the escrow account. Total costs were charged to mortgage costs and are
being amortized over the remaining term of the loans.
8 - RELATED PARTY TRANSACTIONS
(a) Management Services
Management services are provided to the Partnership by Mendik
Realty Company, Inc., a general partner of the Partnership. The annual
management fee is 1-1/2% of rental receipts, as defined. Management
fees for the years ended December 31, 1996, 1995 and 1994 were
$645,539, $667,048 and $651,203, respectively.
(b) Maintenance Services
Maintenance services for the property are provided at cost plus
an allocable share of overhead expenses by a company that is
controlled by a general partner of the Partnership. Services of the
building engineers are provided at cost. Profits earned from direct
tenant services are shared with the Partnership.
For the years ended December 31, 1996, 1995 and 1994, cleaning
and related expenses were $4,209,139, $4,167,915 and $4,009,013,
engineering and preventive maintenance was $780,007, $902,157 and
$747,694, and the Partnership's share of profits from tenant services
was $326,549, $359,293 and $417,077, respectively. Amounts receivable
from the maintenance services company were $185,000 and $25,407 at
December 31, 1996 and 1995, respectively.
(Continued)
-12-
32
TWO PENN PLAZA ASSOCIATES L.P.
NOTES TO FINANCIAL STATEMENTS
8 - RELATED PARTY TRANSACTIONS (Continued)
(b) Maintenance Services (Continued)
The maintenance services company occupied space in the building
under leases which were terminated on February 1, 1995. The leases,
for approximately 9,000 square feet, required base rent (including
electric) of $191,819 and provided for additional rent based on
increases in real estate taxes and operating expenses. Rental income
from the company for the years ended December 31, 1995 and 1994 was
$18,659 and $206,153, respectively.
(c) Security Services
Security services for the property are provided at cost plus an
allocable share of overhead expenses by a company whose controlling
stockholder is a general partner of the Partnership. Profits earned
from direct tenant services are shared equally with the Partnership.
The cost of security services provided by this company for the years
ended December 31, 1996, 1995 and 1994 was $621,709, $708,366 and
$637,048, respectively.
(d) Construction Services
Ambassador Construction Co., Inc., a partner of a partner in the
Partnership, provides construction and related services for the
property. Costs for the years ended December 31, 1996, 1995 and 1994
were $110,399, $1,433,418 and $645,341, respectively.
9 - LEASE ARRANGEMENTS
Space in the building is rented to a large number of tenants under
various lease agreements. These leases, which are classified as operating
leases, include renewal options and provisions for additional rent based on
increases in property taxes, operating expenses or porter wage rates, and
utilities over base period amounts.
(Continued)
-13-
33
TWO PENN PLAZA ASSOCIATES L.P.
NOTES TO FINANCIAL STATEMENTS
9 - LEASE ARRANGEMENTS (Continued)
Approximate minimum future rentals required under operating leases,
excluding rentals that are cancelable at the tenant's option, are as
follows:
Year Ending
December 31,
------------
1997 $ 26,667,000
1998 19,979,000
1999 19,616,000
2000 16,574,000
2001 13,959,000
Thereafter 65,691,000
------------
$162,486,000
============
Escalations (contingent rentals) included in rental income were
$2,752,775, $3,696,514 and $3,881,091 for the years ended December 31,
1996, 1995 and 1994, respectively.
Approximately 43% of total rental income was derived from two tenants
whose leases expire between October 31, 1996 and January 31, 1998. The
lease which expired October 31, 1996 represented approximately 30% of total
rental income and approximately $9,920,000 of annual base rents. The other
lease represented approximately $4,672,000 of annual base rents.
10 - COMMITMENTS
Pursuant to the terms of leases with various tenants, the Partnership
is obligated to pay approximately $2,050,000 of the cost of initial
alterations to be made to the leased premises. As of December 31, 1996,
approximately $121,000 of these costs have been incurred.
-14-
34
ANNEX B
M ELEVEN ASSOCIATES,
M 393 ASSOCIATES AND
ELEVEN PENN PLAZA COMPANY
(GENERAL PARTNERSHIPS)
COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND
INDEPENDENT AUDITORS' REPORT
35
M ELEVEN ASSOCIATES,
M 393 ASSOCIATES AND
ELEVEN PENN PLAZA COMPANY
COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
TABLE OF CONTENTS
Independent Auditors' Report 1
Combined Financial Statements
Balance Sheet at December 31, 1996 and 1995 2
Statement of Income 3
Statement of Cash Flows 4
Statement of Changes in Partners' Capital Deficiency 5
Notes to Combined Financial Statements 6-15
36
FRIEDMAN 1700 BROADWAY
ALPREN & NEW YORK, NY 10019
GREEN LLP 212-582-1600
CERTIFIED PUBLIC ACCOUNTANTS FAX 212-265-4761
INDEPENDENT AUDITORS' REPORT
TO THE PARTNERS OF M ELEVEN ASSOCIATES, M 393 ASSOCIATES
AND ELEVEN PENN PLAZA COMPANY
We have audited the accompanying combined balance sheet of M ELEVEN
ASSOCIATES, M 393 ASSOCIATES AND ELEVEN PENN PLAZA COMPANY (general
partnerships) as of December 31, 1996 and 1995, and the related combined
statements of income, cash flows and changes in partners' capital deficiency for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Partnerships' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of M ELEVEN
ASSOCIATES, M 393 ASSOCIATES AND ELEVEN PENN PLAZA COMPANY as of December 31,
1996 and 1995, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles.
/s/ FRIEDMAN ALPREN & GREEN LLP
-------------------------------
January 14, 1997, except for
Note 2, as to which the date
is March 12, 1997
37
M ELEVEN ASSOCIATES,
M 393 ASSOCIATES AND
ELEVEN PENN PLAZA COMPANY
COMBINED BALANCE SHEET
DECEMBER 31, 1996 AND 1995
1996 1995
-------------- --------------
ASSETS
Property and improvements - at cost, less accumulated
depreciation and amortization of $46,520,422 and
$43,201,381 - Note 4 $ 36,266,165 $ 34,271,529
Cash 716,244 952,032
Restricted cash - Note 7 1,062,888 3,556,630
Receivables - Note 5 21,810,111 21,857,329
Escrow deposits, real estate taxes - Note 7 374,822 330,821
Escrow deposits, tenant costs - Note 6 147,341 140,119
Prepaid real estate taxes 2,037,886 1,984,926
Prepaid leasing costs 3,758,264 3,629,698
Other prepayments 86,491 87,201
Unamortized mortgage costs 293,594 31,844
Tenants' security deposits - Note 10 679,995 666,797
-------------- --------------
$ 67,233,801 $ 67,508,926
============== ==============
LIABILITIES AND PARTNERS' CAPITAL DEFICIENCY
Liabilities
Mortgages payable - Note 7 $ 74,968,471 $ 76,963,344
Accrued interest payable 199,778 193,468
Accounts payable and accrued expenses 407,327 417,942
Improvements payable 112,262 25,989
Leasing costs payable 604,163 -
Deferred income 86,389 176,882
Tenants' security deposits payable 663,764 651,074
-------------- --------------
77,042,154 78,428,699
Commitment - Note 11 -- --
Partners' capital deficiency (9,808,353) (10,919,773)
-------------- --------------
$ 67,233,801 $ 67,508,926
============== ==============
The accompanying notes are an integral part of these combined financial
statements.
-2-
38
M ELEVEN ASSOCIATES,
M 393 ASSOCIATES AND
ELEVEN PENN PLAZA COMPANY
COMBINED STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
---------------- ---------------- ----------------
Revenues
Rental income $ 24,374,745 $ 24,270,234 $ 24,478,684
Lease cancellation income -- 7,479,701 --
Interest 574,153 201,451 73,147
---------------- ---------------- ----------------
24,948,898 31,951,386 24,551,831
---------------- ---------------- ----------------
Expenses
Renting 28,782 29,778 41,930
Administrative 840,638 991,813 865,893
Operating 7,644,611 7,397,211 6,755,338
Real estate taxes 4,071,360 4,156,110 4,623,700
---------------- ---------------- ----------------
12,585,391 12,574,912 12,286,861
---------------- ---------------- ----------------
Income before interest expense and
depreciation and amortization 12,363,507 19,376,474 12,264,970
Interest expense 7,099,948 7,222,720 7,003,505
---------------- ---------------- ----------------
Income before depreciation and
amortization 5,263,559 12,153,754 5,261,465
Depreciation and amortization 4,152,139 4,654,746 3,737,260
---------------- ---------------- ----------------
Net income $ 1,111,420 $ 7,499,008 $ 1,524,205
================ ================ ================
The accompanying notes are an integral part of these combined financial
statements.
-3-
39
M ELEVEN ASSOCIATES,
M 393 ASSOCIATES AND
ELEVEN PENN PLAZA COMPANY
COMBINED STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
Cash flows from operating activities
Net income $ 1,111,420 $ 7,499,008 $ 1,524,205
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization of fixed assets 3,319,040 3,558,110 2,721,099
Amortization of leasing and mortgage costs 833,099 1,096,636 1,016,161
Changes in assets and liabilities
Restricted cash 2,493,742 ( 3,004,182) ( 552,448)
Receivables 522,218 ( 5,435,467) ( 1,479,172)
Escrow deposits, real estate taxes ( 44,001) ( 330,821) --
Prepaid real estate taxes ( 52,960) 215,022 ( 2,199,948)
Prepaid leasing costs ( 800,639) ( 396,916) ( 381,705)
Other prepayments 710 483 330,359
Other assets -- -- 16,000
Accrued interest payable 6,310 ( 444,521) 29,185
Accounts payable and accrued expenses (10,615) 73,576 ( 63,874)
Leasing costs payable 604,163 ( 106,546) ( 354,901)
Lease cancellation obligation -- ( 13,523) ( 54,866)
Deferred income ( 90,493) 176,882 --
Tenants' security deposits ( 13,198) ( 89,980) 23,045
Tenants' security deposits payable 12,690 74,257 ( 23,045)
----------- ----------- -----------
Net cash provided by operating activities 7,891,486 2,872,018 550,095
----------- ----------- -----------
Cash flows from investing activities
Acquisition of improvements ( 5,227,403) ( 708,698) ( 2,389,987)
Con Edison rebate receivable ( 475,000) -- --
Escrow deposits, tenant costs ( 7,222) ( 7,666) 842,287
Due from partners -- -- 111,000
----------- ----------- -----------
Net cash used in investing activities ( 5,709,625) ( 716,364) ( 1,436,700)
----------- ----------- -----------
Cash flows from financing activities
Principal payments on mortgage ( 1,994,873) (2,199,041) ( 984,017)
Mortgage costs ( 422,776) (16,628) ( 659,994)
----------- ----------- -----------
Net cash used in financing activities ( 2,417,649) (2,215,669) ( 1,644,011)
----------- ----------- -----------
Net decrease in cash ( 235,788) ( 60,015) ( 2,530,616)
Cash, beginning of year 952,032 1,012,047 3,542,663
----------- ----------- -----------
Cash, end of year $ 716,244 $ 952,032 $ 1,012,047
=========== =========== ===========
Supplemental cash flow disclosures
Interest paid $ 7,093,638 $ 7,667,241 $ 6,969,600
=========== =========== ===========
The accompanying notes are an integral part of these combined financial
statements.
-4-
40
M ELEVEN ASSOCIATES,
M 393 ASSOCIATES AND
ELEVEN PENN PLAZA COMPANY
COMBINED STATEMENT OF CHANGES IN PARTNERS' CAPITAL DEFICIENCY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Balance, January 1, 1994 $ (19,942,986)
Net income 1,524,205
-------------
Balance, December 31, 1994 (18,418,781)
Net income 7,499,008
-------------
Balance, December 31, 1995 (10,919,773)
Net income 1,111,420
-------------
Balance, December 31, 1996 $ ( 9,808,353)
=============
The accompanying notes are an integral part of these combined financial
statements.
-5-
41
M ELEVEN ASSOCIATES,
M 393 ASSOCIATES AND
ELEVEN PENN PLAZA COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
1 - ORGANIZATION
Eleven Penn Plaza Company (the "Partnership") was organized in 1980
and acquired the property located at Eleven Penn Plaza (formerly 393
Seventh Avenue), New York, New York on July 1, 1980. M Eleven Associates
and M 393 Associates each own a 50% interest in Eleven Penn Plaza Company.
All three entities (the "Partnerships") are general partnerships.
2 - TRANSFER OF OWNERSHIP
Pursuant to a solicitation contained in a private placement memorandum
dated November 11, 1996, the Partnerships obtained the consent of their
partners to participate in an offering of shares of common stock in
accordance with a preliminary registration statement filed with the
Securities and Exchange Commission on December 18, 1996. On March 12, 1997,
the Partnerships entered into an agreement with Vornado Realty Trust, a
publicly traded real estate investment trust ("REIT"). The partners will be
resolicited to obtain their consents to participate in this transaction,
under terms and conditions similar to those stated in the private placement
memorandum dated November 11, 1996. The REIT is a fully integrated,
self-administered and self-managed real estate company which has qualified
as a real estate investment trust for Federal income tax purposes. Upon
completion of the transaction, it is anticipated that the Partnerships will
be owned by a company controlled by the REIT.
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Combination
The accompanying combined financial statements include the
accounts of the Partnerships. All material intercompany transactions
have been eliminated.
(b) Use of Estimates
Management uses estimates and assumptions in preparing financial
statements. Those estimates and assumptions affect the reported
amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported revenues and expenses.
(Continued)
-6-
42
M ELEVEN ASSOCIATES,
M 393 ASSOCIATES AND
ELEVEN PENN PLAZA COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(c) Rental Income
Leases are classified as operating leases in accordance with the
provisions of Financial Accounting Standards Board (FASB) Statement
No. 13. One of these provisions requires the recognition of scheduled
rent increases and deferred rent concessions on a straight-line basis
over the lease term. Included in rental income for the years ended
December 31, 1996, 1995 and 1994 is $648,901, $399,100 and $1,366,630,
respectively, representing the amounts required to be accrued under
this provision.
(d) Depreciation and Amortization
Property and improvements are stated at cost. Depreciation and
amortization is computed over estimated useful asset lives or periods,
primarily on the straight-line basis.
Details are as follows:
Asset Asset Lives or Periods
----------------------- --------------------------------
Building Lives of the building's components,
ranging from 8-1/2 to 23-1/2 years
Building improvements 15 to 39 years
Furniture and equipment 4 to 7 years
Tenant improvements Term of related lease
Leasing costs Term of related lease
Mortgage costs Term of mortgage
(Continued)
-7-
43
M ELEVEN ASSOCIATES,
M 393 ASSOCIATES AND
ELEVEN PENN PLAZA COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(e) Fair Value of Financial Instruments
Effective for years ended after December 15, 1995, Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value
of Financial Instruments", as amended, requires certain entities to
disclose the fair value of specified financial instruments for which
it is practicable to estimate that value. It was not practicable to
estimate the fair value of the mortgages payable at December 31, 1996
because quoted market prices do not exist and an estimate could not be
made through other means without incurring excessive costs.
(f) Income Taxes
The Partnerships are not taxpaying entities for income tax
purposes and, accordingly, no provision has been made for income
taxes. The partners' allocable shares of the Partnerships' taxable
income or loss are reportable on their income tax returns.
(g) Concentrations of Credit Risk for Cash
At December 31, 1996 and 1995, cash balances, maintained in two
banks by the Partnership and one bank by each of the other entities,
are insured by the Federal Deposit Insurance Corporation up to a
maximum of $100,000 in each bank for each entity.
(Continued)
-8-
44
M ELEVEN ASSOCIATES,
M 393 ASSOCIATES AND
ELEVEN PENN PLAZA COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
4 - PROPERTY AND IMPROVEMENTS
1996 1995
---------------- ----------------
Land $ 6,213,802 $ 6,213,802
Building 32,123,817 32,123,817
Building improvements 17,047,344 16,555,076
Tenant improvements 24,611,011 21,113,133
Furniture and equipment 800,756 758,888
Building improvements in progress 1,786,072 446,250
Tenant improvements in progress 203,785 261,944
---------------- ----------------
82,786,587 77,472,910
Less - Accumulated depreciation
and amortization 46,520,422 43,201,381
---------------- ----------------
$ 36,266,165 $ 34,271,529
================ ================
5 - RECEIVABLES
1996 1995
---------------- ----------------
Receivable from tenants
Billed and not collected $ 347,511 $ 75,783
Accruals 271,101 577,981
Lease cancellation (a) 5,259,514 6,315,744
Accruals required by FASB
Statement No. 13 - Note 3(c) 15,368,413 14,719,512
Con Edison rebate - chiller replacement 475,000 -
Due from maintenance services
and security services companies,
net - Notes 8(b) and 8(c) 23,547 163,673
Insurance claims 64,114 4,092
Other 911 544
---------------- ----------------
$ 21,810,111 $ 21,857,329
================ ================
(Continued)
-9-
45
M ELEVEN ASSOCIATES,
M 393 ASSOCIATES AND
ELEVEN PENN PLAZA COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
5 - RECEIVABLES (Continued)
(a) In 1995, the Partnership entered into an agreement with a tenant to
terminate, effective October 1, 1995, the tenant's obligations under a
lease covering certain space in the property. The present value of
total principal payments to be received, allocable to this
transaction, was $6,528,000. Interest has been imputed at 8%. Monthly
payments will range from approximately $9,000 to $138,000 from October
1, 1995 through June 1, 2001. Additionally, payments of approximately
$253,000 and $1,188,000 were received in October 1995 and January
1996, respectively. Income recognized in 1995, net of an adjustment of
approximately $1,409,000 for rent income previously recognized on the
straight-line basis (see Note 3(c)), was approximately $5,119,000. In
addition, related prepaid leasing costs and unamortized tenant
improvements of approximately $181,000 and $669,000, respectively,
were written off at October 1, 1995.
An agreement with the same tenant provides for the surrender of
additional space in 1997. The present value of principal payments to
be received, allocable to this transaction, total $17,938,000, and
monthly payments will be required through June 1, 2001. Interest will
also be imputed at 8%. Income to be recognized in 1997, net of an
adjustment of approximately $3,691,000 for rent income previously
recognized on the straight-line basis (see Note 3(c)), will be
approximately $14,247,000. In addition, related prepaid leasing costs
and unamortized tenant improvements of approximately $578,000 and
$2,100,000, respectively, will be written off in 1997.
6 - ESCROW DEPOSITS, TENANT COSTS
Payments required to be made by the Partnership for tenant improvement
and leasing costs for a tenant are held in escrow. The funds are released
as invoices are approved.
(Continued)
-10-
46
M ELEVEN ASSOCIATES,
M 393 ASSOCIATES AND
ELEVEN PENN PLAZA COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
7 - MORTGAGES PAYABLE
1996 1995
---------------- ----------------
The Equitable Life Assurance
Society of the United States (a) $ 53,835,471 $ 55,830,344
Citicorp Real Estate, Inc. (b) 21,133,000 21,133,000
---------------- ----------------
$ 74,968,471 $ 76,963,344
================ ================
(a) The Partnership borrowed $60,000,000 from The Equitable Life Assurance
Society of the United States, secured by a first mortgage on the
property. The mortgage agreement required monthly payments of $540,956
from January 2, 1994 through January 1, 1995 and $614,723 through
January 1, 1996, including interest at 9.25% a year. Effective January
30, 1996, monthly payments of $604,829 including interest at 9.25% a
year are required through January 31, 1999, the extended maturity
date, at which time the principal balance of approximately $48,850,000
will be payable. The Partnership can prepay the principal balance, in
full, but not in part, without penalty at any time during the last
three months prior to maturity, with 30 days' written notice. At any
other time, prepayment of principal can be made, in full, but not in
part, by giving 30 days' written notice and paying a 2% prepayment
penalty.
Annual maturities of principal at December 31, 1996 are approximately
as follows:
Year Ending
December 31,
------------
1997 $ 2,200,000
1998 2,500,000
1999 49,100,000
-------------
$ 53,800,000
=============
The Partnership is also required to make monthly payments into a real
estate tax escrow account.
(Continued)
-11-
47
M ELEVEN ASSOCIATES,
M 393 ASSOCIATES AND
ELEVEN PENN PLAZA COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
7 - MORTGAGES PAYABLE (Continued)
(b) A second mortgage loan with Citicorp Real Estate, Inc. matured on
March 30, 1994 and was extended to February 1, 1996. Interest only was
paid at a variable base rate, as defined. The effective rates for the
period January 1, 1996 through January 29, 1996 and for the years
ended December 31, 1995 and 1994 were 8.75%, 9.20% and 7.50%,
respectively. Effective January 30, 1996, the maturity date was
extended to January 31, 1999, and payments of interest only at 9.25% a
year are required. The mortgage principal balance can be prepaid, in
full or in part, at any time without penalty.
(c) An agreement for the collection of rents was entered into during 1994
between the mortgagees and the Partnership, pursuant to which all
rents are deposited into an account directly controlled by the
mortgagees. Any cash required by the Partnership to fund operations
must be requisitioned from the mortgagees.
8 - RELATED PARTY TRANSACTIONS
(a) Management Services
Management services are provided by Mendik Realty Company, Inc.,
a corporation which is a general partner of a partner in the
Partnership. The annual management fee is 2% of gross rental income.
Total management fees for the years ended December 31, 1996, 1995 and
1994 were $503,935, $533,029 and $462,395, respectively. The amounts
payable at December 31, 1996 and 1995 were $11,015 and $23,174,
respectively.
(b) Maintenance Services
Maintenance services for the property are provided at cost plus
an allocable share of overhead expenses by a company controlled by the
managing partner of the Partnership. Services of building engineers
are provided at cost. Profits earned from direct tenant services are
shared with the Partnership.
(Continued)
-12-
48
M ELEVEN ASSOCIATES,
M 393 ASSOCIATES AND
ELEVEN PENN PLAZA COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
8 - RELATED PARTY TRANSACTIONS (Continued)
(b) Maintenance Services (Continued)
Cleaning and related expenses for the years ended December 31,
1996, 1995 and 1994 were $2,685,969, $2,476,880 and $2,238,451,
respectively, engineering and preventive maintenance services were
$668,513, $764,855 and $675,818, respectively, and the Partnership's
share of the profits from tenant services was $178,788, $153,797 and
$171,871, respectively. The net amounts receivable from the
maintenance services company at December 31, 1996 and 1995 were
$36,009 and $162,697, respectively.
(c) Security Services
Security services for the property are provided at cost plus an
allocable share of overhead expenses by a company whose stockholder is
the managing partner of the Partnership. Profits earned from direct
tenant services are shared with the Partnership. Security services
provided by this company for the years ended December 31, 1996, 1995
and 1994 were $374,641, $343,271 and $358,783, respectively. The net
amount payable at December 31, 1996 was $12,462, and the amount
receivable at December 31, 1995 was $976.
9 - LEASE ARRANGEMENTS
Space in the building is rented by the Partnership to a large number
of tenants under various lease agreements. These leases, which are
classified as operating leases, include renewal options and provisions for
additional rent based on increases in real estate taxes, operating expenses
or porter wage rates, and utilities over base period amounts.
(Continued)
-13-
49
M ELEVEN ASSOCIATES,
M 393 ASSOCIATES AND
ELEVEN PENN PLAZA COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
9 - LEASE ARRANGEMENTS (Continued)
Approximate minimum future rentals required under operating leases at
December 31, 1996, excluding rentals that are cancelable at the tenant's
option, are as follows:
Year Ending
December 31,
------------
1997 $ 15,382,000
1998 16,379,000
1999 15,581,000
2000 14,446,000
2001 14,928,000
Thereafter 54,998,000
-------------
$ 131,714,000
==============
Escalations (contingent rentals) included in rental income were
$2,414,610, $2,468,169 and $2,461,280 for the years ended December 31,
1996, 1995 and 1994, respectively.
At December 31, 1996, a tenant with an annual base rent of
approximately $4,147,000 under a lease expiring December 31, 2002 provided
22% of base rental income. Another tenant, who is surrendering its lease as
of January 1, 1997, provided approximately $4,387,000, or 23%, of annual
base rental income. The surrender agreement is described in Note 5(a).
The maintenance services company occupies space in the building under
a 10-year lease which began on February 1, 1995. The lease, for
approximately 12,300 square feet, requires annual base rent (including
electric) of $98,400 and provides for additional rent based on increases in
real estate taxes. The lease provided for a 16-month rent abatement until
August 1996. Included in the amount required to be accrued by FASB
Statement No. 13 at December 31, 1996 is $131,097 for this lease.
(Continued)
-14-
50
M ELEVEN ASSOCIATES,
M 393 ASSOCIATES AND
ELEVEN PENN PLAZA COMPANY
NOTES TO COMBINED FINANCIAL STATEMENTS
10 - TENANTS' SECURITY DEPOSITS
In addition to cash deposits, the Partnership is holding letters of
credit of $102,795 at December 31, 1996 and 1995 as tenants' security
deposits pursuant to lease agreements.
11 - COMMITMENT
The Partnership has entered into a contract for a chiller replacement
project. The total cost of the project will be approximately $2,500,000, of
which approximately $475,000 will be funded by a Con Edison rebate program.
At December 31, 1996, approximately $2,256,000 of these costs have been
incurred, of which approximately $2,247,000 has been paid. The rebate
receivable from Con Edison of $475,000 has been recorded at December 31,
1996.
-15-
51
ANNEX C
1740 BROADWAY ASSOCIATES, L.P.
(A LIMITED PARTNERSHIP)
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND
INDEPENDENT AUDITORS' REPORT
52
1740 BROADWAY ASSOCIATES, L.P.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
TABLE OF CONTENTS
Independent Auditors' Report 1
Financial Statements
Balance Sheet at December 31, 1996 and 1995 2
Statement of Income 3
Statement of Cash Flows 4
Statement of Changes in Partners' Capital 5
Notes to Financial Statements 6-13
53
FRIEDMAN 1700 BROADWAY
ALPREN & NEW YORK, NY 10019
GREEN LLP 212-582-1600
CERTIFIED PUBLIC ACCOUNTANTS FAX 212-265-4761
INDEPENDENT AUDITORS' REPORT
TO THE PARTNERS OF 1740 BROADWAY ASSOCIATES, L.P.
We have audited the accompanying balance sheet of 1740 BROADWAY ASSOCIATES,
L.P. (a limited partnership) as of December 31, 1996 and 1995, and the related
statements of income, cash flows and changes in partners' capital for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the managing general partner. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
managing general partner, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 1740 BROADWAY ASSOCIATES,
L.P. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/S/ FRIEDMAN ALPREN & GREEN LLP
January 16, 1997, except for
Note 2, as to which the date
is March 12, 1997
-1-
54
1740 BROADWAY ASSOCIATES, L.P.
BALANCE SHEET
DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
ASSETS
Property and improvements - at cost, less
accumulated depreciation and amortization of
$18,085,937 and $14,957,089 - Note 5 $ 96,741,899 $ 99,017,284
Cash and short-term investments 4,557,595 2,320,557
Investment in U.S. Treasury obligations - Note 4(d) 2,119,196 4,890,481
Receivables - Note 6 12,110,468 9,680,435
Prepaid leasing costs, less accumulated amortization
of $623,857 and $478,844 5,128,964 1,668,658
Tenant acquisition costs, less accumulated amortization
of $2,547,797 and $2,062,988 6,907,943 7,669,918
Other prepayments 19,145 19,456
Tenants' security deposits - Note 10 525,158 527,123
------------ ------------
$128,110,368 $125,793,912
============ ============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Tenant acquisition costs payable - Note 7 $ 4,524,761 $ 6,290,088
Accounts payable and accrued expenses 267,325 224,930
Leasing costs payable 1,301,115 --
Improvements payable 130,279 --
Deferred income -- 28,118
Tenants' security deposits payable 525,158 527,123
------------ ------------
6,748,638 7,070,259
Commitments - Note 11 -- --
Partners' capital 121,361,730 118,723,653
------------ ------------
$128,110,368 $125,793,912
============ ============
The accompanying notes are an integral part of these financial statements.
-2-
55
1740 BROADWAY ASSOCIATES, L.P.
STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
Revenues
Rental income $20,035,207 $20,477,492 $20,894,991
Lease cancellation income 2,150,943 -- --
Interest 520,228 936,262 498,069
----------- ----------- -----------
22,706,378 21,413,754 21,393,060
----------- ----------- -----------
Expenses
Renting 23,483 20,847 25,145
Administrative 502,324 567,837 325,085
Operating 4,665,046 4,529,149 4,266,154
Real estate taxes 3,866,918 3,771,745 3,753,418
----------- ----------- -----------
9,057,771 8,889,578 8,369,802
----------- ----------- -----------
Income before depreciation and
amortization 13,648,607 12,524,176 13,023,258
Depreciation and amortization 3,758,670 3,979,628 3,947,037
----------- ----------- -----------
Net income $ 9,889,937 $ 8,544,548 $ 9,076,221
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-3-
56
1740 BROADWAY ASSOCIATES, L.P.
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
Cash flows from operating activities
Net income $ 9,889,937 $ 8,544,548 $ 9,076,221
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization of fixed assets 3,128,848 3,114,097 3,084,137
Amortization of leasing, tenant acquisition and
organization costs 629,822 865,531 862,900
Changes in assets and liabilities
Accrued interest, U.S. Treasury obligations 33,851 46,696 ( 83,772)
Receivables ( 2,574,236) ( 388,441) ( 3,037,072)
Prepaid leasing costs ( 3,605,319) ( 7,473) ( 295,099)
Tenant acquisition costs 277,166 -- ( 1,707,906)
Other prepayments 311 ( 8,952) ( 10,504)
Tenant acquisition costs payable ( 1,765,327) ( 994,229) 485,545
Accounts payable and accrued expenses 42,395 58,463 ( 49,411)
Leasing costs payable 1,301,115 -- --
Deferred income ( 28,118) ( 53,498) 62,539
Tenants' security deposits 1,965 1,934 ( 7,848)
Tenants' security deposits payable ( 1,965) ( 1,934) 7,848
------------ ------------ ------------
Net cash provided by operating activities 7,330,445 11,176,742 8,387,578
------------ ------------ ------------
Cash flows from investing activities
Acquisition of property and improvements ( 723,184) ( 870,626) ( 807,256)
Acquisition of U.S. Treasury obligations ( 7,968,520) (18,564,266) (11,108,954)
Redemption of U.S. Treasury obligations 10,688,130 21,622,418 4,501,224
Loan receivable 144,203 119,985 91,253
------------ ------------ ------------
Net cash provided by (used in)
investing activities 2,140,629 2,307,511 ( 7,323,733)
------------ ------------ ------------
Cash flows from financing activities
Distributions to partners ( 7,234,036) (15,263,195) ( 5,817,593)
------------ ------------ ------------
Net increase (decrease) in cash and
short-term investments 2,237,038 ( 1,778,942) ( 4,753,748)
Cash and short-term investments, beginning of year 2,320,557 4,099,499 8,853,247
------------ ------------ ------------
Cash and short-term investments, end of year $ 4,557,595 $ 2,320,557 $ 4,099,499
============ ============ ============
The accompanying notes are an integral part of these financial statements.
-4-
57
1740 BROADWAY ASSOCIATES, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
General Partners Limited Partners
----------------------------------- ----------------
Union Bank
of Switzerland,
New York Branch,
as Successor
Mendik Nancy Trustee for
Total 1740 Corp. Creek, Inc. Account P-34742
------------- ------------- ------------- ----------------
Balance, January 1, 1994 $ 122,168,116 $ 41,375 $ 590,929 $ 59,661,550
Net income 9,076,221 3,077 43,900 4,432,311
Distributions ( 5,817,593) ( 1,972) ( 28,139) ( 2,840,981)
Unrealized loss on U.S. Treasury
obligations ( 114,233) ( 39) ( 553) ( 55,784)
------------- ------------- ------------- -------------
Balance, December 31, 1994 125,312,511 42,441 606,137 61,197,096
Transfers of interest January 1, 1995 -- -- -- (61,197,096)
Net income 8,544,548 2,897 41,328 --
Distributions ( 15,263,195) ( 5,174) ( 73,827) --
Reversal of prior year unrealized loss
on U.S. Treasury obligations 114,233 39 553 --
Unrealized gain on U.S. Treasury
obligations 15,556 5 75 --
------------- ------------- ------------- -------------
Balance, December 31, 1995 118,723,653 40,208 574,266 --
Transfers of interest December 17, 1996 -- -- -- --
Net income 9,889,937 3,352 47,837 --
Distributions ( 7,234,036) ( 2,452) ( 34,990) --
Reversal of prior year unrealized gain
on U.S. Treasury obligations ( 15,556) ( 5) ( 75) --
Unrealized loss on U.S. Treasury
obligations ( 2,268) ( 1) ( 11) --
------------- ------------- ------------- -------------
Balance, December 31, 1996 $ 121,361,730 $ 41,102 $ 587,027 $ -0-
============= ============= ============= =============
Limited Partners
-------------------------------------------------------------------------------
Carborundum 1740 Broadway Portfolio U
Center Investment Holdings UBSCO
Joint Venture Company Corporation Corporation
------------- ------------- ------------- -------------
Balance, January 1, 1994 $ 58,502,226 $ 3,372,036 $ -- $ --
Net income 4,346,183 250,750 -- --
Distributions ( 2,785,777) ( 160,724) -- --
Unrealized loss on U.S. Treasury
obligations ( 54,701) ( 3,156) -- --
------------- ------------- ------------- -------------
Balance, December 31, 1994 60,007,931 3,458,906 -- --
Transfers of interest January 1, 1995 -- -- 61,197,096 --
Net income 4,091,589 236,062 4,172,672 --
Distributions ( 7,308,840) ( 421,678) ( 7,453,676) --
Reversal of prior year unrealized loss
on U.S. Treasury obligations 54,701 3,156 55,784 --
Unrealized gain on U.S. Treasury
obligations 7,449 430 7,597 --
------------- ------------- ------------- -------------
Balance, December 31, 1995 56,852,830 3,276,876 57,979,473 --
Transfers of interest December 17, 1996 -- -- ( 59,069,325) 59,069,325
Net income 4,735,835 273,230 4,631,203 198,480
Distributions ( 3,464,046) ( 199,856) ( 3,532,692) --
Reversal of prior year unrealized gain
on U.S. Treasury obligations ( 7,449) ( 430) ( 7,597) --
Unrealized loss on U.S. Treasury
obligations ( 1,086) ( 63) ( 1,062) ( 45)
------------- ------------- ------------- -------------
Balance, December 31, 1996 $ 58,116,084 $ 3,349,757 $ -0- $ 59,267,760
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
-5-
58
1740 BROADWAY ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
1 - ORGANIZATION
1740 Broadway Associates, L.P. was organized on December 11, 1990 to
acquire, maintain and operate the property located at 1740 Broadway, New
York, New York. The property was acquired December 17, 1990.
2 - TRANSFER OF OWNERSHIP
Pursuant to a solicitation contained in a private placement memorandum
dated November 11, 1996, the Partnership obtained the consent of its
partners to participate in an offering of shares of common stock in
accordance with a preliminary registration statement filed with the
Securities and Exchange Commission on December 18, 1996. On March 12, 1997,
the managing general partner entered into an agreement with Vornado Realty
Trust, a publicly traded real estate investment trust ("REIT"). The
partners will be resolicited to obtain their consents to participate in
this transaction, under terms and conditions similar to those stated in the
private placement memorandum dated November 11, 1996. The REIT is a fully
integrated, self-administered and self-managed real estate company which
has qualified as a real estate investment trust for Federal income tax
purposes. Upon completion of the transaction, it is anticipated that the
Partnership will be owned by a company controlled by the REIT.
3 - THE PARTNERSHIP AGREEMENT
(a) Capital Contributions
In addition to partners' initial capital contributions of
$60,000,000 and investment capital contributions of $50,000,000, each
partner has agreed to contribute additional capital aggregating
$8,000,000 to fund the Partnership's additional capital needs, as
defined. As of December 31, 1996 and 1995, the partners have
contributed $6,351,878 in additional capital.
(b) Allocation of Net Income, Net Loss and Distributions
As defined in the agreement, allocations to the partners are in
accordance with their respective partnership interests.
(c) Transfers of Interests
On January 1, 1995, Union Bank of Switzerland, New York Branch,
as Successor Trustee for Account P-34742, assigned its partnership
interest to Portfolio U Holdings Corporation, a Delaware corporation.
(Continued)
-6-
59
1740 BROADWAY ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
3 - THE PARTNERSHIP AGREEMENT (Continued)
(c) Transfers of Interests (Continued)
On December 17, 1996, Portfolio U Holdings Corporation assigned
its partnership interest to UBSCO Corporation, a Delaware corporation.
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
The managing general partner uses estimates and assumptions in
preparing financial statements. Those estimates and assumptions affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities, and the reported revenues and
expenses.
(b) Rental Income
Leases are classified as operating leases in accordance with the
provisions of Financial Accounting Standards Board (FASB) Statement
No. 13. One of these provisions requires the recognition of scheduled
rent increases and deferred rent concessions on a straight-line basis
over the lease term. Rental income includes $2,040,294, $599,138 and
$1,161,628 for the years ended December 31, 1996, 1995 and 1994,
respectively, representing the amounts required to be accrued under
this provision (see Note 6).
(c) Depreciation and Amortization
Property and improvements are stated at cost. Depreciation and
amortization is computed using the straight-line method over the
following estimated useful asset lives:
Asset Useful Asset Lives
------------------------ ----------------------
Building 31-1/2 years
Building improvements 31-1/2 and 39 years
Tenant improvements Term of related lease
Equipment 5 and 7 years
Leasing costs Term of related lease
Tenant acquisition costs Term of related lease
Organization costs 5 years
Organization costs have been fully amortized.
(Continued)
-7-
60
1740 BROADWAY ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d) Investment in U.S. Treasury Obligations
The Partnership has adopted the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". U.S. Treasury obligations
are classified as available-for-sale and carried at fair value. The
net unrealized gain (loss) at December 31, 1996 and 1995 (presented as
components of partners' capital) was $(2,268) and $15,556,
respectively. Contractual maturities (including accrued interest) of
the securities at December 31, 1996 and 1995 are as follows:
1996 1995
---------- ----------
Within 1 year $ 621,148 $1,489,068
1 to 2 years 1,498,048 3,401,413
---------- ----------
$2,119,196 $4,890,481
========== ==========
Accrued interest included in the investment in U.S. Treasury
obligations totals $29,731 and $63,582 at December 31, 1996 and 1995,
respectively.
(e) Fair Value of Financial Instruments
Effective for years ended after December 15, 1995, Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value
of Financial Instruments", as amended, requires certain entities to
disclose the fair value of specified financial instruments for which
it is practicable to estimate that value. The fair value of the
investment in U.S. Treasury obligations is presented in Note 4(d). It
was not practicable to estimate the fair value of notes and loans
receivable because quoted market prices do not exist and estimates
could not be made through other means without incurring excessive
costs.
(Continued)
-8-
61
1740 BROADWAY ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) Income Taxes
The Partnership is not a taxpaying entity for income tax purposes
and, accordingly, no provision has been made for income taxes. The
partners' allocable shares of the Partnership's taxable income or loss
are reportable on their income tax returns.
(g) Cash and Short-Term Investments
The Partnership considers all highly liquid investments with a
maturity of three months or less when purchased to be short-term
investments.
Cash balances of approximately $4,180,000 and $1,956,000 at
December 31, 1996 and 1995, respectively, are maintained in one bank,
generally in interest-bearing accounts, and are insured by the Federal
Deposit Insurance Corporation up to a maximum of $100,000.
5 - PROPERTY AND IMPROVEMENTS
1996 1995
------------ ------------
Land $ 20,520,077 $ 20,520,077
Building 86,722,856 86,722,856
Building improvements 3,009,502 1,435,392
Tenant improvements 4,384,732 4,384,732
Furniture and equipment 40,692 40,692
Improvements in progress 149,977 870,624
------------ ------------
114,827,836 113,974,373
Less - Accumulated depreciation
and amortization 18,085,937 14,957,089
------------ ------------
$ 96,741,899 $ 99,017,284
============ ============
(Continued)
-9-
62
1740 BROADWAY ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
6 - RECEIVABLES
1996 1995
----------- -----------
Receivable from tenants - billed
and not collected $ 112,097 $ 53,176
Lease cancellation (a) 677,797 --
Escalation accruals 175,571 286,821
Accrual required by FASB
Statement No. 13 - Note 4(b) 9,504,880 7,464,586
Note receivable - tenant
improvements (b) 167,323 182,524
Loan receivable (c) 1,444,799 1,589,002
Due from maintenance services
company - Note 8(b) 19,032 96,091
Other 8,969 8,235
----------- -----------
$12,110,468 $ 9,680,435
=========== ===========
(a) A lease cancellation agreement with a tenant, effective August 1,
1996, provides for payments by the tenant of $1,200,000 plus 17
monthly payments of $58,961. The total of the monthly payments,
$1,002,328, was recorded at its present value at August 1, 1996,
assuming an 8% interest rate.
(b) Matures on September 1, 2003 and requires monthly payments of $3,024
including interest at 12% a year.
(c) The loan, which is receivable from the subtenant described in Note 7,
matures on February 1, 2001 and requires monthly payments of $23,790
including interest at 10% a year. The balance due at maturity will be
approximately $737,000.
7 - TENANT ACQUISITION COSTS
Under the provisions of a leasing arrangement which commenced in
November 1992, the Partnership has assumed the tenant's obligation under a
pre-existing lease expiring in November 2000. The space was subleased as of
April 28, 1993 for the full lease term. The Partnership's total estimated
cost, net of sublease income, is $9,456,000, which is being amortized on a
straight-line basis over the term of the tenant's lease with the
Partnership, expiring December 2007.
(Continued)
-10-
63
1740 BROADWAY ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
8 - RELATED PARTY TRANSACTIONS
(a) Management and Leasing Services
Management and leasing services are provided to the Partnership
by Mendik Realty Company, Inc. (MRC), whose controlling stockholder is
also the controlling stockholder of Mendik 1740 Corp., a general
partner of the Partnership. The annual management fee is 1% of rental
receipts, as defined, increasing to 1-1/2% when payments of interest
on the investment loans and distributions of net cash flow to the
partners equal or exceed 9% of the outstanding investment loans and
capital contributed, as defined. Leasing commissions are calculated in
accordance with the management agreement and are generally consistent
with industry guidelines.
Compensation for these services for the years ended December 31,
1996, 1995 and 1994 was as follows:
1996 1995 1994
-------- -------- --------
Management fees $293,539 $298,509 $198,759
Leasing costs 300,597 285 55,712
-------- -------- --------
$594,136 $298,794 $254,471
======== ======== ========
The amount payable to MRC for leasing costs at December 31, 1996
was $30,506.
(b) Maintenance Services
Maintenance services for the property are provided at cost plus
an allocable share of overhead expenses by a company that is
controlled by the controlling stockholder of Mendik 1740 Corp.
Services of the building engineers are provided at cost. Profits
earned from direct tenant services are shared equally with the
Partnership.
For the years ended December 31, 1996, 1995 and 1994, cleaning
and related expenses were $1,712,745, $1,554,121 and $1,396,463,
engineering and preventive maintenance was $505,151, $526,814 and
$441,505, and the Partnership's share of the profits from tenant
services was $82,848, $95,874 and $93,719, respectively. Amounts
receivable from the maintenance services company were $19,032 and
$96,091 at December 31, 1996 and 1995, respectively.
(Continued)
-11-
64
1740 BROADWAY ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
8 - RELATED PARTY TRANSACTIONS (Continued)
(c) Security Services
Security services for the property are provided at cost plus an
allocable share of overhead expenses by a company whose stockholder is
the controlling stockholder of Mendik 1740 Corp. Profits earned from
direct tenant services are shared equally with the Partnership.
Security services provided by this company for the years ended
December 31, 1996, 1995 and 1994 were $345,432, $409,988 and $343,986,
respectively.
9 - LEASE ARRANGEMENTS
Space in the building is rented to a large number of tenants under
various lease agreements. These leases, which are classified as operating
leases, include renewal options and provisions for additional rent based on
increases in property taxes, operating expenses and utilities over base
period amounts.
Approximate minimum future rentals required under operating leases at
December 31, 1996, excluding rentals that are cancelable at the tenant's
option, are summarized as follows:
Year Ending
December 31,
------------
1997 $ 19,273,000
1998 14,592,000
1999 15,684,000
2000 14,926,000
2001 14,471,000
Thereafter 150,909,000
------------
$229,855,000
Escalations (contingent rentals) included in rental income were
$1,321,308, $1,551,127 and $1,431,149 for the years ended December 31,
1996, 1995 and 1994, respectively.
(Continued)
-12-
65
1740 BROADWAY ASSOCIATES, L.P.
NOTES TO FINANCIAL STATEMENTS
9 - LEASE ARRANGEMENTS (Continued)
Approximately 41% of base rental income for the year ended December
31, 1995 was derived from an insurance company under several leases
expiring between February 28, 1998 and December 31, 2002. Another tenant's
annual base rent, under a lease expiring December 31, 1997, was
approximately 12% of base rental income for 1995. A third tenant's annual
base rent, under a lease expiring December 14, 2007, represented
approximately 11% of base rental income.
Approximately 39% of base rental income for the year ended December
31, 1996 was derived from the insurance company under several leases
expiring between February 28, 1998 and May 31, 2016. The second tenant
mentioned above terminated its lease effective August 1, 1996, as described
in Note 6(a). The third tenant accounted for approximately 13% of base
rental income for 1996. All of these leases provide for additional rents
based on increases in certain expenses over base period amounts.
10 - TENANTS' SECURITY DEPOSITS
In addition to cash deposits, the Partnership is holding letters of
credit of $705,494 at December 31, 1996 and 1995 as tenants' security
deposits pursuant to lease agreements.
11 - COMMITMENTS
The Partnership has agreed to reimburse a tenant up to a maximum of
approximately $2,900,000 for Initial Tenant Changes, as defined. At
December 31, 1996 and 1995, the Partnership has paid approximately
$1,650,000 for such changes.
The Partnership has agreed to reimburse a second tenant approximately
$5,050,000 for alterations on various areas. At December 31, 1996, only
nominal costs have been incurred.
-13-
66
ANNEX D
866 U.N. PLAZA ASSOCIATES LLC
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND
INDEPENDENT AUDITORS' REPORT
67
866 U.N. PLAZA ASSOCIATES LLC
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
TABLE OF CONTENTS
Independent Auditors' Report 1
Financial Statements
Balance Sheet at December 31, 1996 and 1995 2
Statement of Income 3
Statement of Cash Flows 4
Statement of Changes in Members' Equity Deficiency 5
Notes to Financial Statements 6-14
68
[LETTERHEAD] 1700 BROADWAY
FRIEDMAN NEW YORK, NY 10019
ALPREN & 212-582-1600
GREEN LLP FAX 212-265-4761
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
TO THE MEMBERS OF 866 U.N. PLAZA ASSOCIATES LLC
We have audited the accompanying balance sheet of 866 U.N. PLAZA
ASSOCIATES LLC (a limited liability company) as of December 31, 1996 and 1995,
and the related statements of income, cash flows and changes in members' equity
deficiency for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 866 U.N. PLAZA ASSOCIATES
LLC as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/S/ Friedman Alpren & Green LLP
January 15, 1997, except for
Note 2, as to which the date
is March 12,1997
-1-
69
866 U.N. PLAZA ASSOCIATES LLC
BALANCE SHEET
DECEMBER 31, 1996 AND 1995
1996 1995
------------ ------------
ASSETS
- ------
Property and improvements - at cost, less accumulated
depreciation and amortization - 1996 - $16,028,152;
1995 - $14,958,830 - Note 4 $ 13,420,975 $ 13,893,568
Cash and short-term investments 4,132,259 3,164,525
Investment in U.S. Treasury obligations and marketable
security - Note 3 9,675,238 8,327,190
Receivables - Note 5 3,761,165 5,087,724
Prepaid leasing costs 1,606,397 1,851,500
Other prepayments 69,492 63,890
Unamortized mortgage costs 221,309 264,757
Tenants' security deposits - Note 9 444,401 343,124
------------ ------------
$ 33,331,236 $ 32,996,278
============ ============
LIABILITIES AND MEMBERS' EQUITY DEFICIENCY
Liabilities
Mortgages payable - Note 6 $ 49,779,004 $ 49,729,004
Accrued mortgage interest payable 178,709 240,736
Accounts payable and accrued expenses 269,263 306,810
Improvements payable 52,887 36,083
Tenants' security deposits payable 444,401 343,124
------------ ------------
50,724,264 50,655,757
Commitment - Note 10 -- --
Members' equity deficiency (17,393,028) (17,659,479)
------------ ------------
$ 33,331,236 $ 32,996,278
============ ============
The accompanying notes are an integral part of these financial statements.
-2-
70
866 U.N. PLAZA ASSOCIATES LLC
STATEMENT OF INCOME
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
------------ ------------ ------------
Revenues
Rental income $ 12,257,747 $ 12,234,046 $ 12,371,657
Lease cancellation income 13,915 138,230 19,878
Interest and dividends 607,161 645,681 545,947
Loss on sale of marketable securities, net -- -- (49,700)
------------ ------------ ------------
12,878,823 13,017,957 12,887,782
------------ ------------ ------------
Expenses
Renting 21,463 23,660 17,442
Administrative 473,974 506,360 496,608
Operating 3,458,780 3,292,711 3,281,969
Real estate taxes 2,710,171 2,896,483 3,059,875
------------ ------------ ------------
6,664,388 6,719,214 6,855,894
------------ ------------ ------------
Income before interest expense and
depreciation and amortization 6,214,435 6,298,743 6,031,888
Interest expense 3,782,762 4,264,946 4,280,929
------------ ------------ ------------
Income before depreciation and
amortization 2,431,673 2,033,797 1,750,959
Depreciation and amortization 1,593,933 1,620,500 1,580,989
------------ ------------ ------------
Net income $ 837,740 $ 413,297 $ 169,970
============ ============ ============
The accompanying notes are an integral part of these financial statements.
-3-
71
866 U.N. PLAZA ASSOCIATES LLC
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
----------- ----------- -----------
Cash flows from operating activities
Net income $ 837,740 $ 413,297 $ 169,970
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization of fixed assets 1,069,322 1,083,537 1,079,105
Amortization of leasing and mortgage costs 524,613 536,963 501,884
Loss on sale of marketable securities -- -- 49,700
Changes in assets and liabilities
Accrued interest receivable ( 14,896) 9,807 ( 71,984)
Receivables 416,059 328,460 ( 439,653)
Prepaid leasing costs ( 155,290) ( 250,145) ( 107,116)
Other prepayments ( 18,092) ( 29,856) ( 12,084)
Accrued mortgage interest payable ( 62,027) 81,341 ( 91,385)
Accounts payable and accrued expenses ( 37,547) 77,451 ( 11,605)
Leasing costs payable -- ( 11,504) ( 156,288)
Tenants' security deposits ( 101,277) ( 12,551) ( 7,213)
Tenants' security deposits payable 101,277 12,551 7,213
----------- ----------- -----------
Net cash provided by operating activities 2,559,882 2,239,351 910,544
----------- ----------- -----------
Cash flows from investing activities
Acquisition of property and improvements ( 763,396) (1,135,328) (1,350,403)
Con Edison rebate - improvements 166,667 -- --
Receivable from cooperative apartment
corporations - improvements 910,500 ( 910,500) --
Escrow deposits - tenant improvements 16,804 368,154 818,240
Purchase of U.S. Treasury obligations (8,008,823) (6,734,506) (9,159,490)
Sale and redemption of U.S. Treasury obligations 6,576,416 7,248,382 6,764,960
Purchase of marketable debt security ( 32,032) ( 317,017) --
Sale of marketable securities -- -- 2,586,618
----------- ----------- -----------
Net cash used in investing activities (1,133,864) (1,480,815) ( 340,075)
----------- ----------- -----------
Cash flows from financing activities
Mortgage principal payments - Equitable -- ( 62,305) ( 65,926)
Mortgage payable - Sumitomo 50,000 -- --
Mortgage costs ( 68,282) -- (3,964)
Distributions to members ( 440,002) ( 440,002) ( 330,000)
----------- ----------- -----------
Net cash used in financing activities (458,284) ( 502,307) ( 399,890)
----------- ----------- -----------
Net increase in cash and short-term investments 967,734 256,229 170,579
Cash and short-term investments, beginning of year 3,164,525 2,908,296 2,737,717
----------- ----------- -----------
Cash and short-term investments, end of year $ 4,132,259 $ 3,164,525 $ 2,908,296
=========== =========== ===========
Supplemental cash flow disclosures
Interest paid $ 3,844,789 $ 4,183,605 $ 4,372,314
=========== =========== ===========
The accompanying notes are an integral part of these financial statements.
-4-
72
866 U.N. PLAZA ASSOCIATES LLC
STATEMENT OF CHANGES IN MEMBERS' EQUITY DEFICIENCY
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
The Mendik Ambassador
Company, Lawrence E. Menby Construction Madlyn
Total L.P. Goldschmidt Associates Co., Inc. Braverman
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1993 $(17,658,190) $( 6,586,773) $( 1,162,382) $( 7,206,844) $( 540,026) $( 486,542)
Net income 169,970 72,237 12,748 61,810 4,632 4,173
Distributions ( 330,000) ( 140,250) ( 24,750) ( 120,003) ( 8,993) ( 8,102)
Unrealized loss on U.S. Treasury
obligations ( 275,318) ( 117,010) ( 20,649) ( 100,120) ( 7,503) ( 6,759)
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1994 (18,093,538) ( 6,771,796) ( 1,195,033) ( 7,365,157) ( 551,890) ( 497,230)
Net income 413,297 175,650 30,998 150,297 11,264 10,147
Distributions ( 440,002) ( 187,001) ( 33,000) ( 160,006) ( 11,990) ( 10,802)
Reversal of prior year unrealized
loss on U.S. Treasury obligations 275,318 117,010 20,649 100,120 7,503 6,759
Unrealized gain on U.S. Treasury
obligations 185,446 78,814 13,909 67,438 5,054 4,553
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 (17,659,479) ( 6,587,323) ( 1,162,477) ( 7,207,308) ( 540,059) ( 486,573)
Net income 837,740 356,040 62,831 304,602 22,870 20,525
Distributions ( 440,002) ( 187,001) ( 33,000) ( 160,006) ( 11,990) (10,802)
Reversal of prior year unrealized
gain on U.S. Treasury obligations ( 185,446) ( 78,814) ( 13,909) ( 67,438) ( 5,054) ( 4,553)
Unrealized gain on U.S. Treasury
obligations 54,159 23,017 4,062 19,693 1,478 1,327
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 $(17,393,028) $( 6,474,081) $( 1,142,493) $( 7,110,457) $( 532,755) $( 480,076)
============ ============ ============ ============ ============ ============
Leonard A. Ronald S. Jesse Bernard H. Vicki A.
Lauder Lauder Fierstein Mendik Albert
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1993 $( 180,360) $( 180,360) $( 486,542) $( 774,878) $( 53,483)
Net income 1,546 1,546 4,173 6,646 459
Distributions ( 3,003) ( 3,003) ( 8,102) ( 12,903) ( 891)
Unrealized loss on U.S. Treasury
obligations ( 2,505) ( 2,505) ( 6,759) ( 10,765) ( 743)
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1994 ( 184,322) ( 184,322) ( 497,230) ( 791,900) ( 54,658)
Net income 3,760 3,760 10,147 16,160 1,114
Distributions ( 4,004) ( 4,004) ( 10,802) ( 17,205) ( 1,188)
Reversal of prior year unrealized
loss on U.S. Treasury obligations 2,505 2,505 6,759 10,765 743
Unrealized gain on U.S. Treasury
obligations 1,687 1,687 4,553 7,251 500
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 ( 180,374) ( 180,374) ( 486,573) ( 774,929) ( 53,489)
Net income 7,623 7,623 20,608 32,756 2,262
Distributions ( 4,004) ( 4,004) ( 10,802) ( 17,205) ( 1,188)
Reversal of prior year unrealized
gain on U.S. Treasury obligations ( 1,687) ( 1,687) ( 4,553) ( 7,251) ( 500)
Unrealized gain on U.S. Treasury
obligations 493 493 1,332 2,118 146
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 $( 177,949) $( 177,949) $( 479,988) $( 764,511) $( 52,769)
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
-5-
73
866 U.N. PLAZA ASSOCIATES LLC
NOTES TO FINANCIAL STATEMENTS
1 - ORGANIZATION
In 1978, 866 U.N. Plaza Associates (a general partnership) was
organized and acquired the commercial property located at 866 United
Nations Plaza, New York, New York. Most of the space in the building is
generally leased to missions to the United Nations.
Effective September 8, 1995, the Partnership converted to a limited
liability company. Ownership percentages were unchanged by the conversion,
and the Partnership's income tax basis for assets and liabilities carried
over to the limited liability company. Amounts previously designated as
partners' capital deficiency have been reclassified to members' equity
deficiency for comparative purposes.
2 - TRANSFER OF OWNERSHIP
Pursuant to a solicitation contained in a private placement memorandum
dated November 11, 1996, the Company obtained the consent of its members to
participate in an offering of shares of common stock in accordance with a
preliminary registration statement filed with the Securities and Exchange
Commission on December 18, 1996. On March 12, 1997, the Company entered
into an agreement with Vornado Realty Trust, a publicly traded real estate
investment trust ("REIT"). The members will be resolicited to obtain their
consents to participate in this transaction, under terms and conditions
similar to those stated in the private placement memorandum dated November
11, 1996. The REIT is a fully integrated, self-administered and
self-managed real estate company which has qualified as a real estate
investment trust for Federal income tax purposes. Upon completion of the
transaction, it is anticipated that the Company will be owned by a company
controlled by the REIT.
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Use of Estimates
Management uses estimates and assumptions in preparing financial
statements. Those estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities, and the reported revenues and expenses.
(Continued)
-6-
74
866 U.N. PLAZA ASSOCIATES LLC
NOTES TO FINANCIAL STATEMENTS
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(b) Rental Income
Leases are classified as operating leases in accordance with the
provisions of Financial Accounting Standards Board (FASB) Statement No. 13.
One of these provisions requires the recognition of scheduled rent
increases and deferred rent concessions on a straight-line basis over the
lease term. Included in rental income for the years ended December 31,
1996, 1995 and 1994 is $(343,598), $47,159 and $292,589, respectively,
representing the accrual (reduction) required by this provision (see Note
5).
(c) Depreciation and Amortization
Property and improvements are stated at cost. Depreciation and
amortization is computed over estimated useful asset lives or periods,
primarily on the straight-line basis.
Details are as follows:
Asset Asset Lives or Periods
----------------------- ----------------------
Building Lives of the building's components, ranging
from 3 to 30 years
Building improvements 15 to 39 years
Furniture and equipment 5 to 7 years
Tenant improvements Term of related lease
Leasing costs Term of related lease
Mortgage costs Term of mortgage
(Continued)
-7-
75
866 U.N. PLAZA ASSOCIATES LLC
NOTES TO FINANCIAL STATEMENTS
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(d) Investment in U.S. Treasury Obligations and Marketable Security
U.S. Treasury obligations and the marketable security are classified
as available-for-sale in accordance with the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities", and are carried at fair value. The net
unrealized gain (loss) at December 31, 1996, 1995 and 1994 (presented as a
component of members' equity deficiency) was $54,159, $185,446 and
$(275,318), respectively. Contractual maturities (including accrued
interest) of the U.S. Treasury obligations at December 31, 1996 and 1995
are as follows:
1996 1995
---------- ----------
Within 1 year $1,822,539 $1,233,539
1 to 4 years 7,491,226 6,776,634
---------- ----------
$9,313,765 $8,010,173
========== ==========
Accrued interest included in the investment in U.S. Treasury
obligations is $125,512 and $106,407 at December 31, 1996 and 1995,
respectively.
The fair value of the marketable security, an investment in a mutual
fund, was $361,473 and $317,017 at December 31, 1996 and 1995,
respectively.
(e) Fair Value of Financial Instruments
Effective for years ended after December 15, 1995, Statement of
Financial Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments", as amended, requires certain entities to disclose
the fair value of specified financial instruments for which it is
practicable to estimate that value. The fair value of the U.S. Treasury
Bill and U.S. government discount notes included in short-term investments
approximates carrying value. The fair values of the investment in U.S.
Treasury obligations and the investment in the marketable security are
presented in Note 3(d). It was not practicable to estimate the fair value
of the mortgages payable at December 31, 1996 and 1995 because quoted
market prices do not exist and estimates could not be made through other
means without incurring excessive costs.
(Continued)
-8-
76
866 U.N. PLAZA ASSOCIATES LLC
NOTES TO FINANCIAL STATEMENTS
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
(f) Income Taxes
The Company is not a taxpaying entity for income tax purposes and,
accordingly, no provision has been made for income taxes. The members'
allocable shares of the Company 's taxable income or loss are reportable on
their income tax returns.
(g) Cash and Short-Term Investments
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be short-term investments.
Cash balances of approximately $3,827,000 and $1,958,000 at December
31, 1996 and 1995, respectively, are maintained in one bank and are insured
by the Federal Deposit Insurance Corporation up to a maximum of $100,000.
Short-term investments at December 31, 1995 include a U.S. Treasury Bill
with a cost of approximately $1,035,000.
4 - PROPERTY AND IMPROVEMENTS
1996 1995
----------- -----------
Land $ 4,279,686 $ 4,279,686
Building 12,210,181 12,210,181
Building improvements 3,120,210 3,105,450
Tenant improvements 8,530,973 7,968,075
Furniture and equipment 443,832 443,832
Improvements in progress 864,245 845,174
----------- -----------
29,449,127 28,852,398
Less - Accumulated depreciation
and amortization 16,028,152 14,958,830
----------- -----------
$13,420,975 $13,893,568
=========== ===========
(Continued)
-9-
77
866 U.N. PLAZA ASSOCIATES LLC
NOTES TO FINANCIAL STATEMENTS
5 - RECEIVABLES
1996 1995
---------- ----------
Receivable from tenants
Billed and not collected $ 88,399 $ 155,615
Escalation accruals 82,368 10,627
Accruals required by FASB
Statement No. 13 - Note 3(b) 3,459,423 3,803,021
Cooperative apartment corporations
860 West Tower, Inc. 80,768 512,609
870 East Tower, Inc. 50,207 480,084
Due from maintenance services
company - Note 7(b) -- 125,768
---------- ----------
$3,761,165 $5,087,724
========== ==========
6 - MORTGAGES PAYABLE
1996 1995
----------- -----------
Sumitomo Trust and Banking Co., Ltd. (a) $49,779,004 $40,000,000
The Equitable Life Assurance
Society of the United States (b) -- 9,729,004
----------- -----------
$49,779,004 $49,729,004
=========== ===========
(a) A credit facility of up to $50,000,000 exists with Sumitomo. The
facility is to be used as follows: (i) for working capital, tenant
improvements, leasing commissions and other purposes as determined by
the Company, (ii) to pay mortgage recording fees and taxes on
additional mortgages under this facility.
The mortgage constitutes a first mortgage lien on the land and a
second mortgage lien on the building and improvements and matures on
December 14, 1998, unless extended by the borrower to December 14,
2000. On January 2, 1996, in conjunction with the final advance under
the credit facility to purchase the Equitable mortgage, the existing
mortgages were consolidated to form a single first mortgage on the
property.
(Continued)
-10-
78
866 U.N. PLAZA ASSOCIATES LLC
NOTES TO FINANCIAL STATEMENTS
6 - MORTGAGES PAYABLE (Continued)
Interest is payable monthly at either the LIBOR rate or a fixed rate
option. The fixed rate option has been chosen as indicated until December
14, 1998: $15,000,000 at 6.72%, $15,000,000 at 9.45%, $2,000,000 at 9.87%,
$1,000,000 at 9.25%, $7,000,000 at 6.75% and $9,779,004 at 6.10%.
(b) The first mortgage lien on the building and improvements, dated December
19, 1985, matured on January 1, 1996 and required monthly payments of
$96,180, including interest at 11-1/8%. On January 2, 1996, the mortgage
was purchased by Sumitomo Trust and Banking Co., Ltd.
7 - RELATED PARTY TRANSACTIONS
(a) Management and Leasing Services
Management and leasing services are provided to the Company by Mendik
Realty Company, Inc., which is a general partner of The Mendik Company,
L.P., a member of the Company. The annual management fee is 2-1/2% of gross
collections. Leasing commissions are calculated according to industry
guidelines.
A summary of the compensation for these services for the years ended
December 31, 1996, 1995 and 1994 is as follows:
1996 1995 1994
-------- -------- --------
Management fees $329,099 $278,520 $334,073
Leasing costs 102,285 134,490 73,732
-------- -------- --------
$431,384 $413,010 $407,805
======== ======== ========
(b) Maintenance Services
Maintenance services for the property are provided at cost plus an
allocable share of overhead expenses by a company controlled by a general
partner of The Mendik Company, L.P. Services of building engineers are
provided at cost. Profits earned from direct tenant services are shared
with the Company.
(Continued)
-11-
79
866 U.N. PLAZA ASSOCIATES LLC
NOTES TO FINANCIAL STATEMENTS
7 - RELATED PARTY TRANSACTIONS (Continued)
(b) Maintenance Services (Continued)
For the years ended December 31, 1996, 1995 and 1994, cleaning and
related services were $1,242,097, $1,104,670 and $1,115,881, engineering
and preventive maintenance services were $963,120, $1,029,500 and $889,136,
and the Company's share of profits from tenant services was $26,801,
$29,629 and $44,174, respectively. The amount payable to the maintenance
services company at December 31, 1996 was $5,467. The amount receivable
from the maintenance services company at December 31, 1995 was $125,768.
(c) Security Services
Security services for the property are provided at cost plus an
allocable share of overhead expenses by a company whose stockholder is a
general partner of The Mendik Company, L.P. Profits earned from direct
tenant services are shared with the Company. Security services for the
years ended December 31, 1996, 1995 and 1994 were $339,494, $332,503 and
$323,776, respectively.
(d) Construction Services
Ambassador Construction Co., Inc., a member of the Company, provides
construction and related services for the property. Costs for the years
ended December 31, 1996, 1995 and 1994 were $162,748, $385,242 and
$1,033,380, respectively.
8 - LEASE ARRANGEMENTS
Space in the building is rented to a large number of tenants under various
lease agreements. These leases, which are classified as operating leases,
include renewal options and provisions for additional rent based on increases in
real estate taxes, operating expenses or porter wage rates, utilities and the
Consumer Price Index over base period amounts.
(Continued)
-12-
80
866 U.N. PLAZA ASSOCIATES LLC
NOTES TO FINANCIAL STATEMENTS
8 - LEASE ARRANGEMENTS (Continued)
Approximate minimum future rentals required under operating leases at
December 31, 1996, excluding rentals that are cancelable at the tenant's
option, are summarized as follows:
Year Ending
December 31,
------------
1997 $ 9,849,000
1998 7,430,000
1999 6,601,000
2000 5,765,000
2001 5,275,000
Thereafter 17,061,000
----------
$51,981,000
===========
Escalations (contingent rentals) included in rental income were $773,995,
$808,437 and $1,030,647 for the years ended December 31, 1996, 1995 and 1994,
respectively.
Approximately 21% of base rental income is derived from a tenant whose
lease expires October 30, 1997 and whose base rent is approximately $2,200,000.
Another tenant's lease, which provides for an annual base rent of approximately
$1,092,000 (approximately 10% of base rental income), expires March 31, 2006.
9 - TENANTS' SECURITY DEPOSITS
In addition to cash deposits, the Company is holding letters of credit of
$109,840 at December 31, 1996 and 1995, pursuant to lease agreements.
(Continued)
-13-
81
866 U.N. PLAZA ASSOCIATES LLC
NOTES TO FINANCIAL STATEMENTS
10 - COMMITMENT
The Company is in the process of installing new state-of-the-art air
conditioning equipment in the property. The total cost of the project will
be approximately $3,600,000, of which approximately $500,000 will be funded
by a Con Edison rebate program. In addition, the cooperative apartment
corporations will fund approximately $2,070,000, representing two-thirds of
the balance. The net cost of the project to the Company will be
approximately $1,030,000.
At December 31, 1996, approximately $3,073,000 of the total cost of
the project has been incurred, of which $1,725,000 has been billed to the
cooperative apartment corporations. At December 31, 1995, approximately
$1,400,000 had been incurred, of which $910,000 had been billed to the
cooperative apartment corporations.
-14-
82
Annex E
Two Park Company
(A New York General Partnership)
Financial Statements
December 31, 1996 and 1995
83
[KPMG PEAT MARWICK LLP LETTERHEAD]
Independent Auditors' Report
The Partners
Two Park Company:
We have audited the accompanying balance sheets of Two Park Company (a New
York general partnership) as of December 31, 1996 and 1995, and the related
statements of operations, changes in partners' capital and cash flows for each
of the years in the three-year period ended December 31, 1996. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Two Park Company as of
December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996,
in conformity with generally accepted accounting principles.
/s/ KPMG Pear Marwick LLP
March 14, 1997
84
TWO PARK COMPANY
================================================================================================
BALANCE SHEETS AT DECEMBER 31, AT DECEMBER 31,
1996 1995
- ------------------------------------------------------------------------------------------------
ASSETS
Property and improvements (Note 4) $ 99,905,783 $153,245,733
Cash and cash equivalents 3,685,644 2,993,717
Restricted cash 450,398 594,200
U.S. Treasuries and Agencies, net of unamortized premium
of $1,604 in 1996 and $20,373 in 1995 2,121,910 2,458,794
Rent and other receivables
net of allowance for doubtful accounts of
$118,611 in 1996 and $65,009 in 1995 411,588 505,539
Deferred rent receivable 9,907,586 7,831,616
Leasing costs, less accumulated amortization of
$4,521,623 in 1996 and $3,662,905 in 1995 6,701,968 7,561,649
Mortgage costs, less accumulated amortization of
$1,563,160 in 1996 and $1,587,661 in 1995 325,509 576,103
Other assets 285,128 307,444
- ------------------------------------------------------------------------------------------------
TOTAL ASSETS $123,795,514 $176,074,795
================================================================================================
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Mortgages payable (Note 6) $ 65,000,000 $ 65,000,000
Accrued interest payable 553,263 553,263
Accounts payable and accrued expenses 358,088 398,477
Due to affiliates (Note 7) 706,714 847,058
Security deposits payable 450,398 594,200
Improvements payable 31,007 227,289
Deferred rental income 6,515,337 7,355,711
-------------------------------
Total Liabilities 73,614,807 74,975,998
Partners' Capital 50,180,707 101,098,797
- ------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND PARTNERS' CAPITAL $123,795,514 $176,074,795
================================================================================================
===========================================================================================
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
M/H
TWO PARK B & B PARK
TOTAL ASSOCIATES AVENUE LP
- -------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1993 $ 107,149,063 $ 64,285,838 $ 42,863,225
Net loss (3,344,017) (2,006,410) (1,337,607)
- -------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1994 $ 103,805,046 $ 62,279,428 $ 41,525,618
Net loss (2,706,249) (1,623,749) (1,082,500)
- -------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1995 $ 101,098,797 $ 60,655,679 $ 40,443,118
Net loss (50,918,090) (30,550,854) (20,367,236)
- -------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 $ 50,180,707 $ 30,104,825 $ 20,075,882
===========================================================================================
See accompanying notes to the financial statements.
Page 2
85
TWO PARK COMPANY
===================================================================================================================
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------
INCOME
Rental $ 23,143,570 $ 21,387,332 $ 19,813,810
Tenant expense reimbursements 2,106,736 2,369,564 2,857,458
Interest 207,478 138,906 219,612
------------------------------------------------------
Total income 25,457,784 23,895,802 22,890,880
- -------------------------------------------------------------------------------------------------------------------
EXPENSES
Operating 6,736,363 6,879,327 6,629,875
Depreciation and amortization 8,194,646 7,548,566 7,026,980
Real estate taxes 3,949,017 3,905,082 4,161,549
Interest expense 6,532,083 7,533,674 7,619,110
Administrative 779,205 703,006 772,086
Renting 36,004 32,396 25,297
Provision for write-down of property and improvements 50,148,556 -- --
------------------------------------------------------
Total expenses 76,375,874 26,602,051 26,234,897
- -------------------------------------------------------------------------------------------------------------------
NET LOSS $(50,918,090) $ (2,706,249) $ (3,344,017)
===================================================================================================================
See accompanying notes to the financial statements.
Page 3
86
TWO PARK COMPANY
==========================================================================================================================
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $(50,918,090) $ (2,706,249) $(3,344,017)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Provision for write-down of property and improvements 50,148,556 -- --
Depreciation and amortization 8,194,646 7,548,565 7,026,980
Net premium (discount) amortization - U.S. Treasuries
and agencies (25,350) 50,092 (32,175)
Provision for losses on rents and receivables -- -- 384,916
Increase (decrease) in cash arising from changes
in operating assets and liabilities:
Restricted cash 143,802 (19,910) (31,857)
Rent and other receivables 93,951 13,885 (388,444)
Deferred rent receivable (2,075,970) 5,113,158 (234,949)
Leasing costs (112,770) (2,663,345) (1,123,135)
Other assets 22,316 (233,431) 170,569
Accrued interest payable -- (91,494) 27,617
Accounts payable and accrued expenses (40,389) (174,707) 203,374
Due to affiliates (140,344) 411,377 345,526
Security deposits payable (143,802) 19,910 31,857
Deferred income (840,374) 7,281,441 (158,457)
-----------------------------------------------------
Net cash provided by operating activities 4,306,182 14,549,292 2,877,805
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to property and improvements (3,976,489) (5,651,860) (4,147,411)
Acquisition of U.S. Treasuries and Agencies (3,021,038) (3,574,183) (4,659,415)
Redemption of U.S. Treasuries and Agencies 3,383,272 4,074,449 4,565,357
-----------------------------------------------------
Net cash used for investing activities (3,614,255) (5,151,594) (4,241,469)
- --------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on mortgages payable -- (10,000,000) --
-----------------------------------------------------
Net cash used for financing activities -- (10,000,000) --
- --------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 691,927 (602,302) (1,363,664)
Cash and cash equivalents, beginning of period 2,993,717 3,596,019 4,959,683
-----------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 3,685,644 $ 2,993,717 $ 3,596,019
==========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for interest $ 6,532,083 $ 7,625,168 $ 7,591,493
- --------------------------------------------------------------------------------------------------------------------------
See accompanying notes to the financial statements.
Page 4
87
TWO PARK COMPANY
NOTES TO THE FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
1. ORGANIZATION
Two Park Company, a New York general partnership (the "Partnership"), was
organized on December 18, 1986 for the purpose of acquiring, maintaining and
operating the property located at Two Park Avenue, New York, New York (the
"Property"). The Property is a 28-story office building that contains
approximately 948,000 net rentable square feet. The building includes two lower
levels consisting of a subway concourse, a small tenant garage containing
approximately 43 spaces, rentable storage areas and mechanical facilities. The
Property was acquired on December 22, 1986.
2. THE PARTNERSHIP AGREEMENT
CAPITAL CONTRIBUTIONS Capital contributions have been funded 60% by M/H Two Park
Associates and 40% by B&B Park Avenue L.P. Additional capital contributions as
required will be funded in the same ratio.
DISTRIBUTIONS Cash flow, as defined in the Partnership Agreement, is to be
distributed within 10 days after each fiscal quarter in the same ratio as the
capital contributions.
ALLOCATION OF NET INCOME AND NET LOSS Net income and net loss are to be
allocated in accordance with the "Distribution Percentages" as long as capital
account balances are positive. Otherwise net loss is allocated as follows;
first, to the extent of positive capital account balances in accordance with the
distribution percentages, then to the partner, if any, whose account balance is
positive until such capital account is reduced to zero and then in accordance
with the distribution percentages.
ALLOCATION OF GAINS AND LOSSES FROM CAPITAL TRANSACTIONS These items are to be
allocated first to increase or decrease the capital accounts to zero and then in
accordance with the distribution percentages.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
RENTAL INCOME AND DEFERRED RENT The Partnership rents its property to tenants
under operating leases with various terms. Deferred rent receivable and deferred
rental income consist of rental income which is recognized on the straight-line
basis over the lease terms in accordance with the provisions of Statement of
Financial Accounting Standards No. 13 "Accounting for Leases".
REAL ESTATE Property and improvements are stated at cost less accumulated
depreciation and amortization and less any write-down for impairment in carrying
value. Depreciation and amortization charges are computed using the
straight-line method over the following estimated useful asset lives:
Asset Useful Asset Life
----- -----------------
Building 35 years
Building improvements 31-1/2 years
Tenant improvements Term of related lease
Furniture, fixtures and equipment 5-7 years
ACCOUNTING FOR IMPAIRMENT In March 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of" ("FAS 121"), which requires impairment losses to be recorded on long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amounts. FAS 121 also addresses the accounting for long
lived assets that are expected to be disposed of. The Partnership adopted FAS
121 in the fourth quarter of 1995.
Page 5
88
TWO PARK COMPANY
FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards
No. 107, "Disclosures about Fair Value of Financial Instruments" ("FAS 107"),
requires the Partnership disclose the estimated fair values of its financial
instruments. Fair values generally represent estimates of amounts at which a
financial instrument could be exchanged between willing parties in a current
transaction other than in a forced liquidation.
Fair value estimates are subjective and are dependent on a number of significant
assumptions based on management's judgement regarding future expected loss
experience, current economic conditions, risk characteristics of various
financial instruments and other factors. In addition, FAS 107 allows a wide
range of valuation techniques, therefore, comparisons between entities, however
similar, may be difficult.
LEASING COSTS Leasing costs are capitalized and amortized over the terms of the
respective leases.
MORTGAGE COSTS Mortgage costs are capitalized and amortized over the terms of
the mortgages payable.
INCOME TAXES The Partnership allocates all profits, losses and other taxable
items to the partners. No provision for income taxes is made in the financial
statements as the liabilities for such taxes are those of the partners rather
than the Partnership.
RESTRICTED CASH Restricted cash consists of tenant security deposits.
CASH EQUIVALENTS Cash equivalents consist of short-term, highly liquid
investments which have maturities of three months or less from the date of
issuance. The carrying value approximates the fair value of these assets because
of the short maturity of these instruments.
MARKETABLE SECURITIES Marketable securities, which consist of United States
Treasury securities and Agencies, are carried at amortized cost, which
approximates market.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles 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 period. Management's review of recoverability of the carrying amount
of the Property and related accounts is one such estimate. Actual results could
differ from those estimates.
4. PROPERTY AND IMPROVEMENTS
A summary of property and improvements follows:
1996 1995
-----------------------------------
Land $ 17,389,411 $ 26,118,173
Building and improvements 69,188,976 142,995,340
Tenant improvements 13,244,146 30,436,260
Furniture, fixtures & equipment 83,250 1,478,302
-----------------------------------
99,905,783 201,028,075
Less - Accumulated depreciation
and amortization -- (47,782,342)
-----------------------------------
Property and improvements $ 99,905,783 $ 153,245,733
Leasing costs 6,701,968 7,561,649
Deferred rent receivable 9,907,586 7,831,616
Deferred rental income (6,515,337) (7,355,711)
-----------------------------------
$ 110,000,000 $ 161,283,287
-----------------------------------
Page 6
89
TWO PARK COMPANY
At December 31, 1996 and 1995, the Partnership completed reviews of
recoverability of the carrying amount of the Property and related accounts based
upon estimated undiscounted cash flows expected to result from the Property's
use and eventual disposition. As of December 31, 1995, it was management's
intention to hold the Property for long-term investment and, therefore
management concluded that the sum of the undiscounted future cash flows
estimated to be generated by the Property over the investment's estimated
holding period was greater than its carrying value.
Based upon continued improvements in the Midtown Manhattan commercial real
estate market in 1996, management reassessed their investment strategy.
Currently, management anticipates positioning the Property for sale over the
next 12 to 24 months and, as a result, the sum of the undiscounted future cash
flow estimated to be generated by the Property over this shorter holding period
is less than its carrying value. Based on the guidance of FAS 121, the
Partnership recorded a provision of $50,148,556 to reduce the Property's
carrying value to its estimated fair value of $110,000,000 at December 31, 1996.
The fair value was obtained from an appraisal report prepared by an independent
appraiser.
5. TENANTS' SECURITY
Additional security pledged in the form of letters of credit and U.S. Treasury
Notes of approximately $1,605,980 have been established by various tenants as
security for payments due under their leases.
6. MORTGAGES PAYABLE
A summary of mortgages payable to a lender follows:
1996 1995
----------------------------------
9.75% mortgage note $60,000,000 $60,000,000
11.50% mortgage note 5,000,000 5,000,000
----------------------------------
$65,000,000 $65,000,000
----------------------------------
The $60,000,000 first mortgage is for a term of twelve years and accrues
interest at the rate of 9.75% per annum. Interest only is payable in monthly
installments until the maturity date (December 19, 1998) at which time the full
amount of principal and any accrued interest shall be due and payable. On June
15, 1989, the Partnership placed a second mortgage on the Property in the amount
of $10,000,000. Interest only was payable in monthly installments at a rate of
10.791% through June 15, 1992 and thereafter at the rate of 10.625% through
December 19, 1998 at which time the full amount of principal and any accrued
interest would have been due and payable. In November 1995, the Partnership
prepaid, without penalty, the $10,000,000 second mortgage from proceeds received
from a tenant under a lease extension agreement. On December 26, 1990, the
Partnership placed a third mortgage on the Property in the amount of $5,000,000.
Interest only is payable in monthly installments at a rate of 11.5% through its
maturity date (December 19, 1998) at which time the full amount of principal and
any accrued interest shall be due and payable.
The lender has the right to accelerate the maturity date of the mortgages to a
date not earlier than December 31, 1996, upon at least 180 days prior notice
(June 19, 1996). Effective January 1, 1995, the loans are payable to Portfolio U
Holdings Corporation, a sole stockholder of a general partner and a limited
partner in B & B Park Avenue L.P.
Based on the maturity date and call feature of the mortgage notes, the fair
value of the mortgages payable approximates their carrying value.
7. RELATED PARTY TRANSACTIONS
MANAGEMENT SERVICES Management services are provided by Mendik Realty Company,
Inc. ("MRC"), an affiliate of a general partner of each of the partners in the
Partnership. The annual management fee is 2% of gross operating revenues, as
defined. Management fees for the years ended December 31, 1996, 1995 and 1994
were $494,916, $444,572 and $448,433, respectively.
Page 7
90
TWO PARK COMPANY
LEASING SERVICES Leasing services are provided to the Partnership by MRC and
other unaffiliated brokers. Leasing commissions are calculated in accordance
with the management agreement and are generally consistent with industry
guidelines; however, a 25% override is payable to MRC when an unaffiliated
broker is used. If the cost of all leasing services exceeds 3% of gross
operating revenue, as defined, the fees otherwise payable to MRC will be
deferred and payable only if such 3% limit is not exceeded in any subsequent
year. No leasing commissions were paid during the years ended December 31, 1996,
1995 and 1994. The deferred liabilities to MRC as of December 31, 1996 and 1995
were approximately $706,714 and $610,877, respectively.
MAINTENANCE SERVICES Building Maintenance Service LLC, ("BMS"), an affiliate of
a general partner of each of the partners of the Partnership, provides cleaning
and related services and metal and marble cleaning services to the Partnership.
These services, provided by BMS at its cost (plus an allocable share of overhead
expenses), totalled $2,477,553, $2,620,086 and $2,304,719 for the years ended
December 31, 1996, 1995 and 1994, respectively. In addition, BMS provides
engineering services to the Partnership. The salaries and benefits of the
Property's engineering staff totalled $451,654, $494,647 and $464,818 for the
years ended December 31, 1996, 1995 and 1994, respectively.
SECURITY SERVICES Guard Management Service Corporation, an affiliate of a
general partner of each of the partners of the Partnership, provides security
services to the Partnership at its cost (plus an allocable share of overhead
expenses), totalling $300,951, $274,372 and $286,297 for the years ended
December 31, 1996, 1995 and 1994, respectively.
8. RENTAL INCOME UNDER OPERATING LEASES
Space in the building is rented to tenants under various lease agreements. These
leases, which are classified as operating leases, include renewal options and
provisions for additional rent based on increases in real estate taxes,
operating expenses and utilities over predetermined amounts. Future annual
minimum rental payments to be received from operating leases (which are not
cancellable by their terms) are summarized as follows:
Year Ending
December 31, Amount
------------ ------
1997 $ 20,552,245
1998 18,472,801
1999 16,143,353
2000 15,014,726
2001 15,902,106
Thereafter 112,024,128
------------
$198,109,359
------------
The Property was 98%, 97% and 92% leased at December 31, 1996, 1995 and 1994,
respectively. As of December 31, 1996, significant tenants of the office
building are Times Mirror Company Inc. and Smith Barney. Times Mirror
Company Inc. leases approximately 287,000 square feet under various leases
scheduled to expire in 2010. Smith Barney leases approximately 100,000
square feet under a lease scheduled to expire in May 1998. The Times Mirror
Company Inc. and Smith Barney leases generated 25% and 12%, respectively, of
the Property's 1996 rental income.
9. COMMITMENTS
Pursuant to the terms of leases with various tenants, the Partnership is
obligated to pay approximately $1.8 million of the cost of alterations to be
made to the leased premises. As of December 31, 1996, approximately $1.4 million
of these costs have been incurred.
Page 8
91
Annex F
B&B PARK AVENUE L.P.
(A LIMITED PARTNERSHIP)
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND
INDEPENDENT AUDITORS' REPORT
92
B&B PARK AVENUE L.P.
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
TABLE OF CONTENTS
Independent Auditors' Report 1
Financial Statements
Balance Sheet at December 31, 1996 and 1995 2
Statement of Operations 3
Statement of Cash Flows 4
Statement of Changes in Partners' Capital 5
Notes to Financial Statements 6-9
93
FRIEDMAN 1700 BROADWAY
ALPREN & NEW YORK, NY 10019
GREEN LLP 212-582-1600
CERTIFIED PUBLIC ACCOUNTANTS FAX 212-265-4761
INDEPENDENT AUDITORS' REPORT
TO THE PARTNERS OF B&B PARK AVENUE L.P.
We have audited the accompanying balance sheet of B&B PARK AVENUE L.P. (a
limited partnership) as of December 31, 1996 and 1995, and the related
statements of operations, cash flows and changes in partners' capital for each
of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the managing general partner. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the financial statements of Two Park Company, a
general partnership, the investment in which, as discussed in Note 4 to the
financial statements, is accounted for by the equity method of accounting. The
investment in Two Park Company was $17,935,304 and $17,543,118 as of December
31, 1996 and 1995, respectively, and the distributive share of its net income
(loss) was $392,186, $(382,500) and $(637,607) for the years ended December 31,
1996, 1995 and 1994, respectively. The financial statements of Two Park Company
were audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for Two Park Company, is
based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
managing general partner, as well as evaluating the overall financial statement
presentation. We believe that our audits and the reports of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the financial position of B&B PARK AVENUE L.P. as of December 31, 1996 and 1995,
and the results of its operations and its cash flows for each of the three years
in the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ FRIEDMAN ALPREN & GREEN LLP
-------------------------------
January 15, 1997, except for
Note 2, as to which the date
is March 12, 1997
-1-
94
B&B PARK AVENUE L.P.
BALANCE SHEET
DECEMBER 31, 1996 AND 1995
1996 1995
------------ -----------
ASSETS
Investment in Two Park Company - Notes 4 and 5 $17,935,304 $17,543,118
Cash 371 145,691
Due from maintenance services company - Note 6 712 78,064
----------- -----------
$17,936,387 $17,766,873
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
Liabilities
Accrued expenses $ 9,200 $ 9,700
Partners' capital 17,927,187 17,757,173
----------- -----------
$17,936,387 $17,766,873
=========== ===========
The accompanying notes are an integral part of these financial statements.
-2-
95
B&B PARK AVENUE L.P.
STATEMENT OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
--------- ---------- ---------
Revenues
Distributive share of net income (loss) from
Two Park Company $ 392,186 $(382,500) $(637,607)
Rebate, maintenance services company -
Note 6 49,712 82,377 79,795
Interest income 3,612 1,044 --
--------- --------- ---------
445,510 (299,079) (557,812)
Expenses
Professional fees 60,496 82,610 45,608
--------- --------- ---------
Net income (loss) $ 385,014 $(381,689) $(603,420)
========= ========= =========
The accompanying notes are an integral part of these financial statements.
-3-
96
B&B PARK AVENUE L.P.
STATEMENT OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
--------- --------- ---------
Cash flows from operating activities
Net income (loss) $ 385,014 $(381,689) $(603,420)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities
Distributive share of net (income) loss from
Two Park Company (392,186) 382,500 637,607
Changes in assets and liabilities
Due from maintenance services company 77,352 ( 2,727) ( 29)
Accrued expenses ( 500) ( 10,700) 15,400
--------- --------- ---------
Net cash provided by (used in)
operating activities 69,680 ( 12,616) 49,558
Cash flows from financing activities
Distributions to partners (215,000) -- --
--------- --------- ---------
Net decrease in cash (145,320) ( 12,616) 49,558
Cash, beginning of year 145,691 158,307 108,749
--------- --------- ---------
Cash, end of year $ 371 $ 145,691 $ 158,307
========= ========= =========
The accompanying notes are an integral part of these financial statements.
-4-
97
B&B PARK AVENUE L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
Limited Partners
---------------------------
General Partners
------------------------------- Carborundum
Nancy Mendik Center Bernard H.
Total Creek, Inc. Corporation Joint Venture Mendik
------------ ------------ ------------- --------------- -----------
Balance, December 31, 1993 $ 18,742,282 $ 58,492 $ (160,423) $ 18,844,213 $ --
Net loss (603,420) (6,004) ( 3,017) (594,399) --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1994 18,138,862 52,488 (163,440) 18,249,814 --
Net loss (381,689) (3,798) ( 1,908) (375,983) --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 17,757,173 48,690 (165,348) 17,873,831 --
Net income 385,014 3,830 1,926 379,258 --
Distributions (215,000) (2,150) -- (212,850) --
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 $ 17,927,187 $ 50,370 $ (163,422) $ 18,040,239 $ -0-
============ ============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
-5-
98
B&B PARK AVENUE L.P.
NOTES TO FINANCIAL STATEMENTS
1 - ORGANIZATION
B&B Park Avenue L.P., a Delaware limited partnership, was organized on
December 15, 1986 to acquire a 40% general partnership interest in Two Park
Company. The property located at Two Park Avenue, New York, New York was
acquired by Two Park Company on December 22, 1986.
2 - TRANSFER OF OWNERSHIP
Pursuant to a solicitation contained in a private placement memorandum
dated November 11, 1996, the Partnership obtained the consent of its
partners to participate in an offering of shares of common stock in
accordance with a preliminary registration statement filed with the
Securities and Exchange Commission on December 18, 1996. On March 12, 1997,
the managing general partner entered into an agreement with Vornado Realty
Trust, a publicly traded real estate investment trust ("REIT"). The
partners will be resolicited to obtain their consents to participate in
this transaction, under terms and conditions similar to those stated in the
private placement memorandum dated November 11, 1996. The REIT is a fully
integrated, self-administered and self-managed real estate company which
has qualified as a real estate investment trust for Federal income tax
purposes. Upon completion of the transaction, it is anticipated that the
Partnership will be owned by a company controlled by the REIT.
3 - THE PARTNERSHIP AGREEMENT
Capital Contributions
Of the total initial capital, $37,425,103 was contributed by Delaware
Acres, Inc. (CLP) and $378,031 by New York Acres, Inc. (CGP). On September
30, 1992, the partnership interests of CLP and CGP were transferred to
Carborundum Center Joint Venture (MGP) and Nancy Creek, Inc. (Nancy Creek),
respectively. Additional capital contributions required for improvements
and leasing costs of the property are to be contributed by MGP. Mendik
Corporation (Mendco) and Bernard H. Mendik (Mendik) are not required to
make cash contributions.
Distributions
Net cash from operations is to be distributed as follows: After
repaying loans as required, 99% to MGP, until an amount equal to an 8%
annual preferred return (as defined) has been received, and 1% to the
general partners (as defined); then 99% to Mendik and 1% to Mendco until
Mendik has received his special preferred return (as defined); then 85% to
MGP, 14% to Mendik and 1% to the general partners until all distributions
to Nancy Creek aggregate $200,000; all remaining cash: 85% to MGP, 14% to
Mendik and 1% to Mendco.
(Continued)
-6-
99
B&B PARK AVENUE L.P.
NOTES TO FINANCIAL STATEMENTS
3 - THE PARTNERSHIP AGREEMENT (Continued)
Distributions (Continued)
Net proceeds from sales and refinancing will be distributed as
follows: first, 99% to MGP and 1% to Nancy Creek until each has received an
8% cumulative return (as defined); then to MGP and Nancy Creek until each
has received its adjusted total capital (as defined); then 99% to Mendik
and 1% to Mendco until Mendik has received the unpaid special cumulative
return (as defined); then 50% to Mendco and 50% to MGP until each has
received its unpaid deferred incentive share (as defined); finally, the
remainder, 79.17% to MGP, 20.33% to Mendik and .5% to Mendco.
Allocation of Loss or Income
Net losses will be allocated first to the extent that capital accounts
exceed certain amounts, as defined. However, as this criterion does not
presently exist, net losses are allocated .995% to Nancy Creek, 98.505% to
MGP and .5% to Mendco.
Net income will generally be allocated in the same manner as cash is
distributed.
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The managing general partner uses estimates and assumptions in
preparing financial statements. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent
assets and liabilities, and the reported revenues and expenses.
Investment in Two Park Company
The investment in Two Park Company is recorded on the equity method,
reflecting cost adjusted for the Partnership's interest in the net income
or losses of, and distributions from, that partnership.
As of December 31, 1996, the managing general partner of Two Park
Company concluded that the total estimated undiscounted future cash flow to
be generated by its property, from operations and its eventual disposition,
over an estimated holding period is less than its carrying value. As a
result, Two Park Company recorded a write-down of $50,148,556 at December
31, 1996 to reduce the property's carrying value to its estimated fair
value. The Partnership had previously determined that, prior to 1993, its
investment in Two Park Company had declined in value and that such decline
was deemed to be other than temporary. Accordingly, the investment was
written down by $25,000,000 prior to 1993, and the Partnership's 1996
financial statements do not reflect its distributive share of the 1996
write-down by Two Park Company. The difference between the carrying amount
(Continued)
-7-
100
B&B PARK AVENUE L.P.
NOTES TO FINANCIAL STATEMENTS
4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investment in Two Park Company (Continued)
of the investment and the underlying equity in the investee is being
amortized over the life of the property, with amortization being reflected
as reductions in the distributive share of net losses from Two Park
Company.
Income Taxes
The Partnership is not a taxpaying entity for income tax purposes and,
accordingly, no provision has been made for income taxes. The partners'
allocable shares of the Partnership's taxable income or loss are reportable
on their income tax returns.
Concentration of Credit Risk for Cash
Cash at December 31, 1995 included approximately $18,000 in excess of
amounts insured by the Federal Deposit Insurance Corporation.
5 - INVESTMENT IN TWO PARK COMPANY
Summarized financial information of Two Park Company is as follows:
1996 1995
----------------- -----------------
Balance Sheet
Assets
Property and improvements $ 99,905,783 $ 153,245,733
Cash and short-term investments 6,257,952 6,046,711
Receivables 10,604,302 8,644,599
Prepaid expenses 6,701,968 7,561,649
Unamortized costs 325,509 576,103
----------------- -----------------
$ 123,795,514 $ 176,074,795
================= =================
Liabilities and Partners' Capital
Mortgage payable $ 65,000,000 $ 65,000,000
Accrued interest payable 553,263 553,263
Accounts payable and accrued expenses 1,064,802 1,245,535
Security deposits payable 450,398 594,200
Deferred income 6,515,337 7,355,711
Improvements payable 31,007 227,289
Partners' capital 50,180,707 101,098,797
----------------- -----------------
$ 123,795,514 $ 176,074,795
================= =================
(Continued)
-8-
101
B&B PARK AVENUE L.P.
NOTES TO FINANCIAL STATEMENTS
5 - INVESTMENT IN TWO PARK COMPANY (Continued)
1996 1995 1994
------------ ------------ ------------
Statement of Operations
Revenues $ 25,457,784 $ 23,895,802 $ 22,890,880
Expenses 11,500,589 11,519,811 11,588,807
------------ ------------ ------------
Income before interest expense,
depreciation and amortization
and write-down of property and
improvements 13,957,195 12,375,991 11,302,073
------------ ------------ ------------
Interest expense 6,532,083 7,533,674 7,619,110
Depreciation and amortization 8,194,646 7,548,566 7,026,980
Loss on write-down of property and
improvements 50,148,556 -- --
------------ ------------ ------------
64,875,285 15,082,240 14,646,090
------------ ------------ ------------
Net loss $(50,918,090) $ (2,706,249) $ (3,344,017)
============ ============ ============
6 - RELATED PARTY TRANSACTION
Maintenance services for the Two Park Avenue property are provided by
a company that is controlled by a stockholder of a general partner of the
Partnership (Mendik). As defined in the maintenance contract, the
Partnership is entitled to receive a 20% share of the profits realized by
the maintenance services company from the performance of tenant services.
The Partnership's share of profits realized from tenant services for the
years ended December 31, 1996, 1995 and 1994 was $49,712, $82,377 and
$79,795, respectively.
-9-
102
CONDENSED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
The unaudited condensed consoliated pro forma financial information set
forth below presents (i) the condensed consolidated pro forma statement of
income for Vornado Realty Trust (the "Company") for the year ended December 31,
1996 as if the Mendik Transaction and certain related transactions were
consummated and the Offering and the use of proceeds therefrom had occurred on
January 1, 1996 and (ii) the condensed consolidated pro forma balance sheet of
the Company as of December 31, 1996 as if the Mendik Transaction and certain
related transactions were consummated and the Offering and the use of proceeds
therefrom had occurred on December 31, 1996.
Historical Mendik financial information consists of (a) combined
financial statements of entities owning the following properties: 11 Penn Plaza,
2 Penn Plaza, 866 U.N. Plaza and 1740 Broadway, (b) equity interests in entities
owning 2 Park Avenue (40%), 570 Lexington Avenue (5.7%) and 330 Madison Avenue
(24.75%) and (c) the Mendik Group.
The unaudited condensed consolidated pro forma financial information
is not necessarily indicative of what the Company's actual results of operations
or financial position would have been had the Mendik Transaction and related
transactions been consummated and had the Offering and the use of proceeds
therefrom occurred on the dates indicated, nor does it purport to represent the
Company's results of operations or financial position for any future period.
The unaudited condensed consolidated pro forma financial information should
be read in conjunction with the Consolidated Financial Statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 and the financial statements of the entities involved in the
Mendik Transaction, incorporated herein by reference. In management's opinion,
all adjustments necessary to reflect the Mendik Transaction and the related
transactions and the Offering and the use of proceeds therefrom have been made.
103
CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
DECEMBER 31, 1996
(Amounts in thousands)
HISTORICAL HISTORICAL PRO FORMA COMPANY
VORNADO MENDIK ADJUSTMENTS PRO FORMA
------- ------ ----------- ---------
ASSETS:
Real estate, net ......................................... $246,249 $187,433 $389,000 (A) $822,682
Cash and cash equivalents ................................ 117,245 50,654 (268,992) (A) 63,499
(50,908) (A)
215,500 (B)
Investment in and advances to
Alexander's, Inc. ....................................... 107,628 107,628
Investment in partnerships ............................... 19,863 19,863
Investment in Management Company ......................... 7,425 (A) 7,425
Officer's deferred compensation
expense .................................................. 22,917 22,917
Mortgage note receivable ................................. 17,000 17,000
Receivable arising from
straight-lining of rents ................................. 17,052 42,219 (42,219) (A) 17,052
Other assets ............................................. 37,113 42,855 (6,908) (A) 52,673
(17,718) (A)
(2,669) (C)
-------- -------- -------- ----------
$565,204 $343,024 $222,511 $1,130,739
======== ======== ======== ==========
LIABILITIES:
Notes and mortgages payable .............................. $232,387 $283,847 $ (5,000) (A) $ 400,768
(110,466) (A)
Due for US Treasury Obligations .......................... 9,636 9,636
Deferred leasing fee income .............................. 8,373 8,373
Officer's deferred compensation payable................... 25,000 25,000
Negative investment in partnership ....................... 5,399 (5,399) (A) --
Other liabilities ........................................ 13,551 13,806 (314) (C) 27,043
Minority interest ........................................ 168,162 (A) 168,162
-------- -------- -------- ----------
288,947 303,052 46,983 638,982
-------- -------- -------- ----------
PREFERRED EQUITY ............................................ 215,500 (B) 215,500
COMMON EQUITY ............................................... 276,257 39,972 (39,972) (A) 276,257
-------- -------- -------- ----------
276,257 39,972 175,528 491,757
-------- -------- -------- ----------
$565,204 $343,024 $222,511 $1,130,739
======== ======== ======== ==========
2
104
CONDENSED CONSOLIDATED PRO FORMA INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
(Amounts in thousands, except per share amounts)
HISTORICAL HISTORICAL PRO FORMA COMPANY
VORNADO MENDIK ADJUSTMENTS PRO FORMA
------- ------ ----------- ---------
REVENUES:
Property rentals ........................................ $ 87,424 $ 87,261 $ 7,071 (F) $ 181,712
(44) (G)
Expense reimbursements .................................. 26,644 13,551 40,195
Other income ............................................ 2,819 5,378 (5,378) (G) 2,819
--------- --------- --------- ---------
116,887 106,190 (1,649) 224,726
--------- --------- --------- ---------
EXPENSES:
Operating ............................................... 36,412 46,691 (39) (G) 83,180
116 (J)
Depreciation and amortization ........................... 11,589 14,133 (144) (G) 35,559
9,981 (H)
General and administrative .............................. 5,167 6,783 (3,788) (G) 8,162
Amortization of officer's deferred
compensation expense ................................ 2,083 2,083
--------- --------- --------- ---------
55,251 67,607 6,126 128,984
--------- --------- --------- ---------
Operating income ............................................ 61,636 38,583 (4,477) 95,742
Income applicable to Alexander's ........................ 7,956 7,956
Equity in net income of Management Companies ............ 1,855 1,471 (G) 3,326
Equity in net income of investees ....................... 1,663 1,755 (K) 3,418
Interest income on mortgage note receivable ............. 2,579 2,579
Interest and dividend income ............................ 3,151 2,536 (20) (G) 2,858
(2,809) (D)
Interest and debt expense ............................... (16,726) (23,998) 9,016 (E) (31,708)
Net gain on marketable securities ....................... 913 913
Minority interest ....................................... (6,673) (L) (6,673)
--------- --------- --------- ---------
Net income .................................................. 61,364 18,784 (1,737) 78,411
Preferred stock dividends ................................... -- -- (15,575) (I) (15,575)
--------- --------- --------- ---------
Net income applicable to common shareholders ................ $ 61,364 $ 18,784 $ (17,312) $ 62,836
========= ========= ========= =========
Net income per share, based on 24,603,442 shares ............ $ 2.49 $ 2.55
========= =========
OTHER DATA:
Funds from Operations (1):
Net income applicable to common shareholders ............ $ 61,364 $ 18,784 $ (17,312) $ 62,836
Depreciation and amortization of real property .......... 10,583 14,133 9,837 34,553
Straight-lining of property rent escalations ............ (2,676) (1,783) (7,071) (11,530)
Leasing fees received in excess of
income recognized ................................... 1,805 1,805
Proportionate share of adjustments to income
from equity investments to arrive at FFO ............ (1,760) 2,747 (970) 17
--------- --------- --------- ---------
$ 69,316 $ 33,881 $ (15,516) $ 87,681
========= ========= ========= =========
Cash flow provided by (used) in:
Operating activities .................................... $ 70,703 $ 29,267 13,669 113,639
Investing activities .................................... $ 14,912 $ (8,262) (326,688) (320,038)
Financing activities .................................... $ (15,046) $ (11,706) $ 206,713 179,961
(1) Funds from operations does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and
is not necessarily indicative of cash available to fund cash needs. Funds
from operations should not be considered as an alternative to net income
as an indicator of the Company's operating performance or as an
alternative to cash flows as a measure of liquidity. The Company's
definition of funds from operations does not conform to the NAREIT
definition because the Company deducts the effect of the straight-lining
of property rentals.
3
105
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(A) The Acquisitions will be accounted for as purchases applying the provisions
of Accounting Principles Board Opinion No. 16. The respective purchase
costs will be allocated to acquired assets and assumed liabilities using
their relative fair values as of the closing dates, based on valuations and
other studies which are not yet complete. Accordingly, the excess of the
purchase cost over the net assets acquired has not yet been allocated to
individual assets and liabilities. However, the Company believes that the
excess purchase price will be allocated principally to real estate.
The purchase costs and preliminary allocation of the excess of cost over
net assets acquired is as follows: (in thousands)
Issuance of units of operating partnership......................... $ 168,162
Cash paid directly associated with the acquisition:
Acquisition of partnership interest............................. 114,660
Cash used to reduce existing debt............................... 110,466
Acquisition of Management Company............................... 7,425
Fees and expenses............................................... 28,192
Other........................................................... 8,249 268,992
---------- ----------
Purchase Price..................................................... 437,154
----------
Pro forma net book value of assets acquired:
Net book value of assets acquired per historical
financial statements............................................ $ 39,972
Write-off of deferred assets:
Receivable arising from the straight-lining of rents............ (42,219)
Tenant acquisition costs........................................ (6,908)
Deferred lease fees and loan costs.............................. (17,718)
Cash not acquired.................................................. (50,908)
Cash used to reduce existing debt.................................. 110,466
Debt forgiven...................................................... 5,000
Negative investment in partnerships................................ 5,399
-----------
Pro forma net book value of assets acquired........................ 43,084
-----------
Pro forma excess of liabilities over assets acquired............... $ 394,070
===========
Preliminary allocation of excess:
Allocated to real estate........................................ $ 5,070
389,000
-----------
$ 394,070
===========
The total purchase price of $437,154 above excludes the following:
Indebtedness -- wholly owned properties.......................... $ 168,000
-- partially owned properties....................... 49,279 $ 217,279
----------
Purchase price, as above........................................... 437,154
-----------
Total purchase price, including debt............................... $ 654,433
===========
(B) Reflects proceeds from Offering of $225,000, net of offering costs of
$9,500.
(C) To reflect adjustments required to record the Company's investment in the
Management Company from consolidation to the equity method of accounting.
(D) Reflects a reduction in interest income associated with the use of
approximately $53,500 of cash and cash equivalents.
(E) Reflects decrease in interest expense and loan cost amortization resulting
from the reduction and refinancing of debt.
(F) To adjust rentals arising for the straight-lining of rent.
(G) To reflect adjustments required to record the Company's investment in the
Management Company under the equity method accounting.
(H) Increase in depreciation due to preliminary allocation of purchase price.
(I) To reflect the dividends on the Series A Preferred Shares at 6.5%, plus
amortization on $9,500 offering cost.
(J) Increase in operating expenses due to contract changes.
(K) Increase in Equity - investees, due to net decrease in interest expense
on refinanced debt.
(L) To reflect minority interest of 9.6% in operating partnership.
4
106
Annex G
CONDENSED CONSOLIDATED PRO FORMA FINANCIAL INFORMATION
The unaudited condensed consolidated pro forma financial information set
forth below presents (i) the condensed consolidated pro forma statement of
income for the Company for the year ended December 31, 1996 as if the Mendik
Transaction and certain related transactions were consummated and the Offering
and the use of proceeds therefrom had occurred on January 1, 1996 and (ii) the
condensed consolidated pro forma balance sheet of the Company as of December 31,
1996 as if the Mendik Transaction and certain related transactions were
consummated and the Offering and the use of proceeds therefrom had occurred on
December 31, 1996.
Historical Mendik financial information consists of (a) combined financial
statements of entities owning the following properties: Eleven Penn Plaza, Two
Penn Plaza, 866 U.N. Plaza and 1740 Broadway, (b) equity interests in entities
owning Two Park Avenue (40%), 570 Lexington Avenue (5.7%) and 330 Madison Avenue
(24.75%) (collectively, the "investees") and (c) the Mendik management
operations.
The unaudited condensed consolidated pro forma financial information is not
necessarily indicative of what the Company's actual results of operations or
financial position would have been had the Mendik Transaction and related
transactions been consummated and had the Offering and the use of proceeds
therefrom occurred on the dates indicated, nor does it purport to represent the
Company's results of operations or financial position for any future period.
The unaudited condensed consolidated pro forma financial information should
be read in conjunction with the Consolidated Financial Statements and notes
thereto included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1996 10-K and the financial statements of the significant entities
involved in the Mendik Transaction included in this Current Report on Form 8-K
filed with the Commission on March 26, 1997, incorporated herein by reference.
In management's opinion, all adjustments necessary to reflect the Mendik
Transaction and the related transactions and the Offering and the use of
proceeds therefrom have been made.
107
CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS)
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
VORNADO MENDIK ADJUSTMENTS COMPANY
----------- ----------- ------------ -----------
ASSETS:
Real estate, net................. $ 246,249 $ 187,433 $ 389,000 (A) $ 822,682
Cash and cash equivalents........ 117,245 50,654 (268,992) (A) 63,499
(50,908) (A)
215,500 (B)
Investment in and advances to
Alexander's, Inc.............. 107,628 107,628
Investment in partnerships....... 19,863 19,863
Investment in Management
Company....................... 7,425 (A) 7,425
Officer's deferred compensation
expense....................... 22,917 22,917
Mortgage note receivable......... 17,000 17,000
Receivable arising from straight-
lining of rents............... 17,052 42,219 (42,219) (A) 17,052
Other assets..................... 37,113 42,855 (6,908) (A) 52,673
(17,718) (A)
(2,669) (C)
--------- -------- -------- ----------
$ 565,204 $ 343,024 $ 222,511 $1,130,739
========= ======== ======== ==========
LIABILITIES:
Notes and mortgages payable...... $ 232,387 $ 283,847 $ (5,000) (A) $ 400,768
(110,466) (A)
Due for U.S. Treasury
Obligations................... 9,636 9,636
Deferred leasing fee income...... 8,373 8,373
Officer's deferred compensation
payable ...................... 25,000 25,000
Negative investment in
partnership................... 5,399 (5,399) (A) --
Other liabilities................ 13,551 13,806 (314) (C) 27,043
--------- -------- -------- ----------
288,947 303,052 (121,179) 470,820
--------- -------- -------- ----------
Minority interests................. -- -- 168,162 (A) 168,162
--------- -------- -------- ----------
PREFERRED SHAREHOLDERS' EQUITY..... 215,500 (B) 215,500
COMMON SHAREHOLDERS' EQUITY........ 276,257 39,972 (39,972) (A) 276,257
--------- -------- -------- ----------
276,257 39,972 175,528 491,757
--------- -------- -------- ----------
$ 565,204 $ 343,024 $ 222,511 $1,130,739
========= ======== ======== ==========
2
108
CONDENSED CONSOLIDATED PRO FORMA INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
HISTORICAL HISTORICAL PRO FORMA COMPANY
VORNADO MENDIK ADJUSTMENTS PRO FORMA
----------- ----------- ------------ ------------
REVENUES:
Property rentals................................ $ 87,424 $ 87,261 $ 7,071(F) $ 181,712
(44)(C)
Expense reimbursements.......................... 26,644 13,551 40,195
Other income.................................... 2,819 5,378 (5,378)(C) 2,819
-------- -------- --------- ---------
116,887 106,190 1,649 224,726
-------- -------- --------- ---------
EXPENSES:
Operating....................................... 36,412 46,691 (39)(C) 83,180
116(I)
Depreciation and amortization................... 11,589 14,133 (144)(C) 35,559
9,981(G)
General and administrative...................... 5,167 6,783 (3,788)(C) 8,162
Amortization of officer's deferred compensation
expense....................................... 2,083 2,083
-------- -------- --------- ---------
55,251 67,607 6,126 128,984
-------- -------- --------- ---------
Operating income.................................... 61,636 38,583 (4,477) 95,742
Income applicable to Alexander's................ 7,956 7,956
Equity in net income of management companies.... 1,855 1,471(C) 3,326
Equity in net income of investees............... 1,663 1,755(J) 3,418
Interest income on mortgage note receivable..... 2,579 2,579
Interest and dividend income.................... 3,151 2,536 (20)(C) 2,858
(2,809)(D)
Interest and debt expense....................... (16,726) (23,998) 9,016(E) (31,708)
Net gain on marketable securities............... 913 913
Minority interest............................... (10,075)(K) (10,075)
-------- -------- --------- ---------
Net income.......................................... 61,364 18,784 (5,139) 75,009
Preferred stock dividends........................... -- -- (15,575)(H) (15,575)
-------- -------- --------- ---------
Net income applicable to common shareholders........ $ 61,364 $ 18,784 $ (20,714) $ 59,434
======== ======== ========= =========
Net income per share, based on 24,603,442 shares.... $ 2.49 $ 2.42
OTHER DATA:
Funds from operations (1):
Net income applicable to common shareholders.... $ 61,364 $ 18,784 $ (20,714) $ 59,434
Depreciation and amortization of real
property...................................... 10,583 14,133 9,837 34,553
Straight-lining of property rent escalations........ (2,676) (1,783) (7,071) (11,530)
Leasing fees received in excess of income
recognized.................................... 1,805 1,805
Proportionate share of adjustments to income
from equity investments to arrive at FFO...... (1,760) 2,747 (970) 17
-------- -------- --------- ---------
$ 69,316 $ 33,881 $ (18,918) $ 84,279
======== ======== ========= =========
CASH FLOW PROVIDED BY (USED) IN:
Operating activities............................ $ 70,703 $ 29,267 $ 13,669 $ 113,639
Investing activities............................ $ 14,912 $ (8,262) $ (326,688) $ (320,038)
Financing activities............................ $ (15,046) $ (11,706) $ 206,713 $ 179,961
- ---------------
(1) Funds from operations does not represent cash generated from operating
activities in accordance with generally accepted accounting principles and
is not necessarily indicative of cash available to fund cash needs. Funds
from operations should not be considered as an alternative to net income as
an indicator of the Company's operating performance or as an alternative to
cash flows as a measure of liquidity. The Company's definition of funds from
operations does not conform to the NAREIT definition because the Company
deducts the effect of the straight-lining of property rentals for rent
escalations.
3
109
NOTES TO CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(A) The Mendik acquisition will be accounted for as purchases applying the
provisions of Accounting Principles Board Opinion No. 16. The respective
purchase costs will be allocated to acquired assets and assumed liabilities
using their relative fair values as of the closing dates, based on
valuations and other studies which are not yet complete. Accordingly, the
excess of the purchase cost over the net assets acquired has not yet been
allocated to individual assets and liabilities. However, the Company
believes that the excess purchase price will be allocated principally to
real estate.
The purchase costs and preliminary allocation of the excess of cost over
net assets acquired is as follows: (in thousands)
Issuance of units of operating partnership.................. $ 168,162
Cash paid directly associated with the Mendik acquisition:
Acquisition of partnership interest..................... 114,660
Cash used to reduce existing debt....................... 110,466
Acquisition of Mendik management operations............. 7,425
Fees and expenses....................................... 28,192
Other................................................... 8,249 268,992
-------- --------
Purchase Price.............................................. 437,154
---------
Pro forma net book value of assets acquired:
Net book value of assets acquired per historical financial
statements................................................ $ 39,972
Write-off of deferred assets:
Receivable arising from the straight-lining of rents.... (42,219)
Tenant acquisition costs................................ (6,908)
Deferred lease fees and loan costs...................... (17,718)
Cash not acquired........................................... (50,908)
Cash used to reduce existing debt........................... 110,466
Debt forgiven............................................... 5,000
Negative investment in partnerships......................... 5,399
---------
Pro forma net book value of assets acquired................. 43,084
---------
Pro forma excess of liabilities over assets acquired........ $ 394,070
=========
Preliminary allocation of excess:
Allocated to Mendik management operations............... $ 5,070
Allocated to real estate
389,000
---------
$ 394,070
=========
The total purchase price of $437,154 above excludes the
following:
Debt -- wholly owned properties.................... $ 168,000
-- partially owned properties................. 49,279 $ 217,279
---------
Purchase price, as above.................................... 437,154
---------
Total purchase price, including debt........................ $ 654,433
=========
(B) Reflects proceeds from this Offering of $225,000, net of offering costs.
(C) To reflect adjustments required to record the Company's investment in the
Mendik management operations under the equity method of accounting.
(D) Reflects a reduction in interest income associated with the use of
approximately $53,500 of cash and cash equivalents.
(E) Reflects decrease in interest expense and loan cost amortization resulting
from the reduction and refinancing of debt.
(F) To adjust rentals arising from the straight-lining of property rentals for
rent escalations.
(G) Increase in depreciation due to preliminary allocation of purchase price.
(H) To reflect the assumed dividends on the Series A Preferred Shares at 6.0%,
plus amortization of offering costs.
(I) Increase in operating expenses due to contract changes.
(J) Increase in Equity -- investees, due to net decrease in interest expense on
refinanced debt.
(K) To reflect minority interest of 9.6% in the Operating Partnership.
3
110
INDEX TO EXHIBITS
Exhibit No. Exhibit Page
- ----------- ------- ----
2.1 Master Consolidation Agreement (the "Master Consolidation
Agreement"), dated March 12, 1997, among Vornado Realty Trust,
Vornado/Saddle Brook L.L.C., The Mendik Company, L.P., and
various parties defined therein (collectively as the Mendik
Group). A list of omitted schedules, exhibits and annexes is
attached as the last page to this exhibit. The Registrant
agrees to furnish supplementally a copy of any omitted
exhibit, schedule or annex to the Securities and Exchange
Commission upon request.
2.1(a) Mendik Structure Memorandum, included as Appendix A to the
Master Consolidation Agreement
2.1(b) Vornado Structure Memorandum, included as Appendix B to the
Master Consolidation Agreement
2.1(c) Form of Amended and Restated Agreement of Limited Partnership
of Vornado Realty L.P., included as Exhibit G to the Master
Consolidation Agreement
2.1(d) Form of Voting Agreement between Steven Roth, Michael
Fascitelli and Interstate Properties and Bernard Mendik,
included as Exhibit J to the Master Consolidation Agreement
10.1 Commitment Letter, dated March 7, 1997, between Vornado Realty
Trust and Union Bank of Switzerland (New York Branch) re:
$400,000,000 one-year bridge loan
23.1 Consent, dated March 26, 1997, of Friedman, Alpren & Green,
LLP, independent accountants for Two Penn Plaza Associates,
L.P.
111
Exhibit No. Exhibit Page
- ----------- ------- ----
23.2 Consent, dated March 26, 1997, of Friedman, Alpren & Green,
LLP, independent accountants for B&B Park Avenue L.P.
23.3 Consent, dated March 26, 1997, of Friedman, Alpren & Green,
LLP, independent accountants for M Eleven Associates, M 393
Associates and Eleven Penn Plaza Company
23.4 Consent, dated March 26, 1997, of Friedman, Alpren & Green,
LLP, independent accountants for 1740 Broadway Associates,
L.P.
23.5 Consent, dated March 26, 1997, of Friedman, Alpren & Green,
LLP, independent accountants for 866 U.N. Plaza Associates LLC
23.6 Consent, dated March 26, 1997, of KPMG Peat Marwick LLP,
independent accountants for Two Park Company
99.1 Press Release, dated March 12, 1997, of Vornado Realty Trust,
announcing its entry into a Master Consolidation Agreement
with Vornado/Saddle Brook L.L.C., The Mendik Company, L.P.,
and various parties defined therein collectively as the Mendik
Group