ALEXANDERS INC — Interim / Quarterly Report 1999

Nov 12, 1999

1 EXHIBIT INDEX ON PAGE 17 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: SEPTEMBER 30, 1999 ------------------------------------------------ or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to --------------------- --------------------- Commission File Number: 1-6064 ------------------------------------------------------- ALEXANDER'S, INC. - ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter)

(201) 587-8541 - ------------------------------------------------------------------------------- (Registrant's telephone number, including area code) N/A - ------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. [ ] Yes [ ] No As of October 25, 1999 there were 5,000,850 common shares outstanding. Page 1 2 INDEX

Page 2 3 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ALEXANDER'S, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (amounts in thousands except share amounts)

See notes to consolidated financial statements. Page 3 4 ALEXANDER'S, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (amounts in thousands except per share amounts)

See notes to consolidated financial statements. Page 4 5 ALEXANDER'S, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands)

See notes to consolidated financial statements. Page 5 6 ALEXANDER'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. CONSOLIDATED FINANCIAL STATEMENTS The Consolidated Balance Sheet as of September 30, 1999, the Consolidated Statements of Operations for the three and nine months ended September 30, 1999 and 1998, and the Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 are unaudited. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and changes in cash flows have been made. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's 1998 Annual Report to Shareholders. The results of operations for the nine months ended September 30, 1999 are not necessarily indicative of the operating results for the full year. 2. ACQUISITION OF KINGS PLAZA MALL On June 18, 1998, the Company increased its interest in the Kings Plaza Mall (the "Mall") to 100% by acquiring Federated Department Store's ("Federated") 50% interest. The purchase price was approximately $28,000,000, which was paid in cash, plus the Company has agreed to pay Federated $15,000,000 to renovate its Macy's store in the Mall of which $4,649,000 has been paid and Federated agreed to certain modifications to the Kings Plaza Operating Agreement. Set forth below is the unaudited pro forma condensed consolidated operating data for the Company for the nine months ended September 30, 1998 as if the acquisition of the Kings Plaza Mall and the related financing transactions had occurred on January 1, 1998.

The pro forma results include the write-off of $15,096,000 resulting from the razing of the building formerly located at the Company's Lexington Avenue site. 3. RELATIONSHIP WITH VORNADO REALTY TRUST ("VORNADO") Vornado owned 29.3% of the Company's Common Stock at September 30, 1999. The Company is managed by and its properties are redeveloped and leased by Vornado, pursuant to agreements with a one-year term expiring in March of each year which are automatically renewable. Under these agreements, the Company incurred fees of $1,677,000 and $1,563,000 in each of the three month periods ended September 30, 1999 and 1998 and $5,057,000 and $4,688,000 in each of the nine month periods ended September 30, 1999 and 1998. In addition, Vornado is due $2,333,000 at September 30, 1999 under the leasing agreement, subject to the payment of rents by tenants. Page 6 7 ALEXANDER'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) At September 30, 1999, the Company was indebted to Vornado in the amount of $45,000,000, the subordinated tranche of a $65,000,000 secured financing. The Company incurred interest on its loan from Vornado of $1,631,000 and $1,595,000 in the three months ended September 30, 1999 and 1998, of which $1,198,000 and $976,000 were capitalized. Interest on the loan was $4,806,000 and $4,891,000 in the nine months ended September 30, 1999 and 1998, of which $3,415,000 and $2,785,000 were capitalized. On October 20, 1999, the Company borrowed an additional $50,000,000 from Vornado and on October 21, 1999, Vornado increased its ownership percentage in the Company - see "Subsequent Events". 4. LEASES In the first quarter of 1999, Caldor closed all of its stores. Caldor previously sub-leased its Flushing store from the Company. Caldor rejected the Flushing lease effective March 29, 1999. In connection therewith the Company wrote-off the $3,000,000 asset arising from the straight lining of Caldor's rent. 5. COMMITMENTS AND CONTINGENCIES In June 1997, the Kings Plaza Regional Shopping Center (the "Center"), commissioned an Environmental Study and Contamination Assessment Site Investigation (the Phase II "Study") to evaluate and delineate environmental conditions disclosed in a Phase I study. The results of the Study indicate the presence of petroleum and other hydrocarbons in the soil and groundwater. The Study recommends a remedial approach, but agreement has not yet been reached with the New York State Department of Environmental Conservation ("NYDEC") on the finalization of the approach. In 1997, the Center accrued $1,500,000 for its estimated obligation with respect to the clean up of the site, which includes costs of (i) remedial investigation, (ii) feasibility study, (iii) remedial design, (iv) remedial action and (v) professional fees. Based upon revised estimates, the Company accrued an additional $500,000 in the second quarter of 1999. If the NYDEC insists on a more extensive remediation approach, the Center could incur additional obligations. Such contamination may have resulted from activities of third parties; however, the sources of the contamination have not been fully identified. Although the Company intends to pursue all available remedies against any potentially responsible third parties, there can be no assurance that such parties will be identified, or if identified, whether these potentially responsible third parties will be solvent. In addition, the costs associated with pursuing any potentially responsible parties may be cost prohibitive. The Company has not recorded an asset as of September 30, 1999 for potential recoveries of environmental remediation costs from other parties. The Company let a contract for $20,000,000 to excavate and build a foundation at the Lexington Avenue site which is expected to be completed next year. Page 7 8 ALEXANDER'S, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share:

1. SUBSEQUENT EVENTS On October 20, 1999, the Company borrowed an additional $50,000,000 from Vornado under the same terms and conditions as its existing $45,000,000 loan from Vornado, including the interest rate of 14.18% and the maturity date of March 15, 2000. The Company plans to use the proceeds to fund a portion of the real estate development costs at its Lexington Avenue property and a portion of the costs to refurbish its Kings Plaza Regional Shopping Center. In connection therewith, the Company paid to Vornado $11,200,000 (Vornado's cost plus $200,000 in interest and closing costs) for 112,000 square feet of air rights which Vornado had recently contracted to purchase. Vornado paid for the air rights at the time it entered into the contracts with closings to take place when the developments which give rise to the air rights are completed in 2000. On October 21, 1999, Vornado aquired 135,600 additional shares of the Company's stock increasing its ownership from 29.3% to 32.0%. Page 8 9 ALEXANDER'S, INC. AND SUBSIDIARIES ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Certain factors could cause actual results to differ materially from those in the forward-looking statements. Factors that might cause such a material difference include, but are not limited to, (a) 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 expense, (f) the timing of and costs associated with property improvements, (g) changes in taxation or zoning laws, (h) government regulations, (i) failure of Alexander's to continue to qualify as a REIT, (j) availability of financing on acceptable terms, (k) potential liability under environmental or other laws or regulations, (l) general competitive factors, (m) dependence upon Vornado Realty Trust, (n) possible conflicts of interest with Vornado Realty Trust and (o) failure by Alexander's, or by other companies with which it does business, to remediate possible Year 2000 problems in computer software or embedded technology. RESULTS OF OPERATIONS The Company had net income of $1,635,000 in the quarter ended September 30, 1999, compared to a net loss of $11,942,000 in the quarter ended September 30, 1998, an increase of $13,577,000 and net income of $5,446,000 for the nine months ended September 30, 1999, compared to a net loss of $9,904,000 for the nine months ended September 30, 1998, an increase of $15,350,000. The net loss for the quarter and the nine months ended September 30, 1998, includes the write-off of $15,096,000 resulting from the razing of the building formerly located at the Company's Lexington Avenue site. Operating income before depreciation and amortization and the effect of the straight-lining of property rentals for rent escalations, was $6,329,000 in the quarter ended September 30, 1999, compared to $7,216,000 in the quarter ended September 30, 1998, a decrease of $887,000 and $21,314,000 for the nine months ended September 30, 1999, compared to $15,665,000 for the nine months ended September 30, 1998, an increase of $5,649,000. Property rentals were $10,724,000 in the quarter ended September 30, 1999, compared to $11,100,000 in the quarter ended September 30, 1998, a decrease of $376,000. Property rentals were $32,870,000 for the nine months ended September 30, 1999, compared to $23,451,000 for the nine months ended September 30, 1998, an increase of $9,419,000. These changes resulted from:

Tenant expense reimbursements were $5,223,000 in the quarter ended September 30, 1999, compared to $5,101,000 in the prior year's quarter, an increase of $122,000. Tenant expense reimbursements were $15,737,000 for the nine months ended September 30, 1999, compared to $7,711,000 for the prior year's nine months, an increase of $8,026,000. The increase for the nine months ended September 30, 1999, resulted primarily from the acquisition of the remaining 50% interest in the Kings Plaza Mall (the Mall) and the resulting consolidation of the Mall's operations after June 18, 1998. The decrease in equity in income of unconsolidated joint venture resulted from the consolidation of the Mall's operations as noted above. Operating expenses were $7,768,000 in the quarter ended September 30, 1999, compared to $6,951,000 in the prior year's quarter, an increase of $817,000. This increase resulted primarily from higher real estate taxes and bad debt expenses. Operating expenses were $24,568,000 for the nine months ended September 30, 1999, compared to $11,964,000 in the prior year's nine months, an increase of $12,604,000. This increase resulted primarily from the Page 9 10 ALEXANDER'S, INC. AND SUBSIDIARIES acquisition of the remaining 50% interest in the Kings Plaza Mall and the resulting consolidation of the Mall's operations after June 18, 1998. In addition, operating expenses for the nine months ended September 30, 1999, includes $3,000,000 resulting from the write-off of the asset arising from the straight-lining of rents due to Caldors rejection of its Flushing lease in the first quarter of 1999. General and administrative expenses were $872,000 in the quarter ended September 30, 1999, compared to $869,000 in the prior year's quarter, an increase of $3,000. General and administrative expenses were $2,793,000 for the nine months ended September 30, 1999, compared to $3,106,000 in the prior year's nine months, a decrease of $313,000. This decrease resulted primarily from lower professional fees. Depreciation and amortization expense increased for the three and nine months ended September 30, 1999, as compared to last year primarily as a result of the acquisition of the remaining 50% interest in the Kings Plaza Mall and the resulting consolidation of the Mall's operations after June 18, 1998. Interest and debt expense was $4,223,000 in the quarter ended September 30, 1999, compared to $4,336,000 in the prior year's quarter, a decrease of $113,000. Interest and debt expense was $12,323,000 for the nine months ended September 30, 1999, compared to $11,261,000 in the prior year's nine months, an increase of $1,062,000. This increase resulted primarily from higher average debt, offset by an increase in capitalized interest relating to the Company's non-operating properties. Other income (expense) was an expense of $5,000 in the quarter ended September 30, 1999, compared to income of $328,000 in the prior year's quarter, a decrease of $333,000. This decrease resulted from the write-off of certain deferred costs and a decrease in interest income which resulted from lower average invested balances. Other income (expense) was $597,000 for the nine months ended September 30, 1999, compared to $752,000 in the prior year's nine months, a decrease of $155,000. This decrease resulted from the write-off of certain deferred costs, partially offset by an increase in interest income which resulted from higher average invested balances. LIQUIDITY AND CAPITAL RESOURCES In the aggregate, Alexander's current operating properties (five of the eight properties) do not generate sufficient cash flow to pay all of its expenses. The Company's three non-operating properties (Lexington Avenue, Paramus, and Rego Park II) are in various stages of redevelopment. As rents commence from a portion of the redevelopment properties, the Company expects that cash flow will become positive. In connection with the acquisition of the remaining 50% interest in the Kings Plaza Mall in June 1998, the Company obtained a $90,000,000 three-year mortgage loan with Union Bank of Switzerland. On August 9, 1999 the Company increased the availability under this mortgage loan by $30,000,000, of which $15,000,000 will be used to partially fund a renovation of the Mall (estimated to cost $33,000,000) and $15,000,000 will be used to pay its liability to Federated ($4,649,000 has been paid as of September 30, 1999). The Company estimates that capital expenditure requirements for the redevelopment of its Paramus property, will approximate $100,000,000. The Company is evaluating development plans for the Lexington Avenue site, which may include a large multi-use building requiring capital in excess of $300,000,000 to be expended; of such amount, the Company let a contract for $20,000,000 to excavate and build a foundation which is expected to be completed next year. On October 20, 1999, the Company borrowed an additional $50,000,000 from Vornado under the same terms and conditions as its existing $45,000,000 loan from Vornado, including the interest rate of 14.18% and the maturity date of March 15, 2000. The Company plans to use the proceeds to fund a portion of the real estate development costs at its Lexington Avenue property and a portion of the costs to refurbish its Kings Plaza Regional Shopping Page 10 11 ALEXANDER'S, INC. AND SUBSIDIARIES Center. In connection therewith, the Company paid to Vornado $11,200,000 (Vornado's cost plus $200,000 in interest and closing costs) for 112,000 square feet of air rights which Vornado had recently contracted to purchase. Vornado paid for the air rights at the time it entered into the contracts with closings to take place when the developments which give rise to the air rights are completed in 2000. While the Company anticipates that additional financing will be available after tenants have been obtained for these redevelopment projects, there can be no assurance that such additional financing will be obtained or if obtained, that such financings will be on terms that are acceptable to the Company. It is uncertain as to when these projects will commence. In the first quarter of 1999, Caldor closed all of its stores. Caldor previously sub-leased its Flushing Store from the Company. Caldor rejected the Flushing lease effective March 29, 1999. The annual base rental under the lease was $2,963,000. On May 12, 1999, the Company, through a newly formed subsidiary, completed an $82,000,000 refinancing of its subsidiary's Rego Park I property and repaid the then existing $75,000,000 debt on the property from the proceeds of the new loan. The new 10-year debt, which is an obligation of the subsidiary, matures in May 2009 and bears interest at 7.25%. The Company estimates that the fair market values of its assets are substantially in excess of their historical cost and that it has additional borrowing capacity. Alexander's continues to evaluate its needs for capital which may be raised through (a) property specific or corporate borrowing, (b) the sale of securities and (c) asset sales. Although there can be no assurance, the Company believes that these cash sources will be adequate to fund cash requirements until its operations generate adequate cash flow. CASH FLOWS Nine Months Ended September 30, 1999 Cash provided by operating activities of $7,258,000 was comprised of (i) net income of $5,446,000, (ii) non-cash items of $5,154,000, off-set by (iii) the net change in operating assets and liabilities of $3,342,000. The adjustments for non-cash items are comprised of (i) the write-off of the asset arising from the straight-lining of rents of $3,000,000 and (ii) depreciation and amortization of $4,860,000, offset by (iii) the effect of straight-lining of rental income of $2,706,000. Net cash used in investing activities of $10,457,000 was primarily comprised of capital expenditures. Net cash used in financing activities of $6,941,000 resulted primarily from proceeds of $82,000,000 from the refinancing of its subsidiary's Rego Park I property offset by (i) the repayment of the then existing $75,000,000 debt on the property, (ii) repayment of the $10,000,000 debt on the Paramus property and, (iii) an increase in debt issuance costs of $3,476,000. Nine Months Ended September 30, 1998 Cash used in operating activities of $2,904,000 was comprised of (i) a net loss of $9,904,000 and (ii) the net change in operating assets and liabilities of $7,957,000, offset by (iii) non-cash items of $14,957,000. The adjustments for non-cash items are comprised of (i) the write-off of the carrying value of the Lexington Avenue building and related predevelopment costs of $15,096,000 and (ii) depreciation and amortization of $3,937,000, offset by (iii) the effect of straight-lining of rental income of $4,076,000. Page 11 12 ALEXANDER'S, INC. AND SUBSIDIARIES Net cash used in investing activities of $33,259,000 was primarily comprised of (i) $28,000,000 for the acquisition of the remaining 50% interest in the Kings Plaza Mall, (ii) the escrowing of cash from the condemnation of a portion of the Paramus property ($4,172,000) and cash from the proceeds from the Kings Plaza Shopping Center loan ($5,131,000) which is restricted as to its use and (iii) capital expenditures of $10,656,000, partially offset by (iv) proceeds from the condemnation of a portion of the Paramus property of $14,700,000. Net cash provided by financing activities of $47,938,000 was comprised of (i) proceeds from the issuance of debt on the Kings Plaza Center of $90,000,000, offset by (ii) repayments of debt of $38,720,000 and (iii) debt issuance costs of $3,342,000. Funds from Operations for the Three and Nine Months Ended September 30, 1999 and 1998 Funds from operations were $1,406,000 in the quarter ended September 30, 1999, compared to $2,707,000 in the prior year's quarter, a decrease of $1,301,000. Funds from operations were $8,231,000 in the nine months ended September 30, 1999, compared to $4,108,000 in the prior year's nine months, an increase of $4,123,000. The following table reconciles funds from operations and net income (loss):

Page 12 13 ALEXANDER'S, INC. AND SUBSIDIARIES The number of shares that should be used for determining funds from operations per share is the number used for basic and diluted earnings per share. (See Note 6 of Notes to Consolidated Financial Statements.) Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of funds from operations. Funds from operations should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Management considers funds from operations a relevant supplemental measure of operating performance because it provides a basis for comparison among REITs; however, funds from operations may not be comparable to similarly titled measures reported by other REITs since the Company's method of calculating funds from operations is different from that used by NAREIT. Funds from operations, as defined by NAREIT, represents net income before depreciation and amortization, extraordinary items and gains or losses on sales of real estate. Funds from operations as disclosed above has been modified to adjust for the effect of straight-lining of property rentals for rent escalations and leasing fee expenses. Below are the cash flows provided by (used in) operating, investing and financing activities:

Year 2000 Issues The Company is managed by Vornado Realty Trust. Vornado has advised the Company that Vornado initiated its Year 2000 compliance programs and information systems modifications in early 1998 to ensure that its systems and key processes will remain functional. Vornado has determined that all mission critical systems are Year 2000 compliant. Vornado believes that any issues encountered with informational or operational systems have been remediated. Vornado completed its testing of all mission critical systems during the quarter ended September 30, 1999. In certain cases, Vornado will be relying on statements from outside vendors as to the Year 2000 readiness of its systems. The Company is not aware of any operational systems within its control that are not Year 2000 compliant. In the event that a third-party service is interrupted due to a Year 2000 issue, the Company will seek to obtain such service from another third-party provider. Failure of third parties with which the Company conducts business to successfully respond to their Year 2000 issues may have an adverse effect on the Company. Recently Issued Accounting Standards In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities". This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It is effective for all fiscal quarters of fiscal years beginning after June 15, 2000. Because the Company does not currently utilize derivatives or engage in hedging activities, management does not anticipate that implementation of this statement will have a material effect on the Company's financial statements. Page 13 14 ALEXANDER'S, INC. AND SUBSIDIARIES ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At September 30, 1999, the Company had $126,648,000 of variable rate debt at a weighted average interest rate of 7.45% and $147,000,000 of fixed rate debt bearing interest at a weighted average interest rate of 9.35%. A one percent increase in the base used to determine the interest rate of the variable rate debt would result in a $1,266,000 decrease in the Company's annual net income ($.25 per basic and diluted share). Page 14 15 ALEXANDER'S, INC. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is from time to time involved in legal actions arising in the ordinary course of its business. In the opinion of management, after consultation with legal counsel, the outcome of such matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-K are filed herewith and are listed in the attached Exhibit Index. (b) Reports on Form 8-K: None Page 15 16 ALEXANDER'S, INC. 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 thereunto duly authorized. ALEXANDER'S, INC. ------------------------------ (Registrant) Date: November 4, 1999 /s/ Joseph Macnow. ------------------------------ Joseph Macnow, Vice President, Chief Financial Officer Page 16 17 ALEXANDER'S, INC. EXHIBIT INDEX The following is a list of all exhibits filed as part of this Report:

• Incorporated by reference Page 17 18

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• Incorporated by reference Page 19