1 EXHIBIT INDEX ON PAGE 24 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: JUNE 30, 1998 or / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number: 1-11954 VORNADO REALTY TRUST (Exact name of registrant as specified in its charter) MARYLAND 22-1657560 (State or other jurisdiction of incorporation (I.R.S. Employer or organization) Identification Number) PARK 80 WEST, PLAZA II, SADDLE BROOK, NEW JERSEY 07663 (Address of principal executive offices) (Zip Code) (201)587-1000 (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 As of July 24, 1998 there were 83,327,904 common shares outstanding. Page 1
2 VORNADO REALTY TRUST INDEX Page Number PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997............................................3 Consolidated Statements of Income for the Three and Six Months Ended June 30, 1998 and June 30, 1997.................4 Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 1998 and June 30, 1997.................5 Notes to Consolidated Financial Statements...................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................14 PART II. OTHER INFORMATION: Item 1. Legal Proceedings...........................................21 Item 4. Submission of Matters to a Vote of Security Holders.........22 Item 6. Exhibits and Reports on Form 8-K............................22 Signatures ...................................................................23 Exhibit Index ................................................................24 Page 2
3 PART I. FINANCIAL INFORMATION VORNADO REALTY TRUST CONSOLIDATED BALANCE SHEETS (AMOUNTS IN THOUSANDS EXCEPT SHARE AMOUNTS) <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1998 1997 ----------- ----------- <S> <C> <C> ASSETS: Real estate, at cost: Land $ 612,909 $ 436,274 Buildings and improvements 2,173,752 1,118,334 Leasehold improvements and equipment 10,067 9,485 ----------- ----------- Total 2,796,728 1,564,093 Less accumulated depreciation and amortization (195,557) (173,434) ----------- ----------- Real estate, net 2,601,171 1,390,659 Cash and cash equivalents, including U.S. government obligations under repurchase agreements of $161,100 and $8,775 257,584 355,954 Restricted cash 26,489 27,079 Marketable securities 46,737 34,469 Investment in and advances to partially-owned entities, including investments in and advance to Alexander's of $107,789 and $108,752 690,216 482,787 Due from officers 15,070 8,625 Accounts receivable, net of allowance for doubtful accounts of $1,690 and $658 23,918 16,663 Mortgage loans receivable 33,875 88,663 Deposits in connection with real estate acquisitions 181,072 47,275 Receivable arising from the straight- lining of rents 34,072 24,127 Other assets 73,332 47,788 ----------- ----------- TOTAL ASSETS $ 3,983,536 $ 2,524,089 =========== =========== </TABLE> <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1998 1997 ----------- ----------- <S> <C> <C> LIABILITIES AND SHAREHOLDERS' EQUITY: Notes and mortgages payable $ 1,156,862 $ 586,654 Revolving credit facility 652,250 370,000 Accounts payable and accrued expenses 76,702 36,538 Officer's deferred compensation payable 20,000 25,000 Deferred leasing fee income 9,906 9,927 Other liabilities 3,319 3,641 ----------- ----------- 1,919,039 1,031,760 ----------- ----------- Minority interest of unitholders in the Operating Partnership 305,153 178,567 ----------- ----------- Commitments and contingencies Shareholders' equity: Preferred shares of beneficial interest: no par value per share; authorized, 20,000,000 shares; liquidation preference $50.00 per share; issued, 5,789,315 shares 281,320 279,884 Common shares of beneficial interest: $.04 par value per share; authorized, 100,000,000 shares; issued 83,327,904 and 72,164,654 shares in each period 3,333 2,887 Additional capital 1,591,221 1,146,385 Accumulated deficit (114,070) (109,561) ----------- ----------- 1,761,804 1,319,595 Unrealized gain (loss) on securities available for sale 2,464 (840) Due from officers for purchase of common shares of beneficial interest (4,924) (4,993) ----------- ----------- Total shareholders' equity 1,759,344 1,313,762 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 3,983,536 $ 2,524,089 =========== =========== </TABLE> See notes to consolidated financial statements.
4 VORNADO REALTY TRUST CONSOLIDATED STATEMENTS OF INCOME (amounts in thousands except per share amounts) <TABLE> <CAPTION> FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED -------------------------- ------------------------ JUNE 30, JUNE 30, JUNE 30, JUNE 30, 1998 1997 1998 1997 --------- --------- --------- --------- <S> <C> <C> <C> <C> Revenues: Property rentals $ 109,362 $ 41,004 $ 181,727 $ 63,471 Expense reimbursements 17,094 8,951 32,790 15,161 Other income (including fee income from related parties of $777 and $329 and $1,185 and $643) 2,067 707 4,217 1,327 --------- --------- --------- --------- Total revenues 128,523 50,662 218,734 79,959 --------- --------- --------- --------- Expenses: Operating 51,454 18,151 85,607 26,658 Depreciation and amortization 15,029 5,462 25,395 8,429 General and administrative 7,070 2,903 12,017 4,748 Amortization of officer's deferred compensation expense -- 6,249 -- 12,498 --------- --------- --------- --------- Total expenses 73,553 32,765 123,019 52,333 --------- --------- --------- --------- Operating income 54,970 17,897 95,715 27,626 Income applicable to Alexander's 1,490 1,437 3,146 2,842 Income from partially owned entities 5,756 585 9,676 802 Interest and other investment income 5,271 9,241 12,837 11,658 Interest and debt expense (26,679) (13,272) (46,502) (17,350) Minority interest of unitholders in the Operating Partnership (4,492) (2,100) (7,069) (2,100) --------- --------- --------- --------- Net Income 36,316 13,788 67,803 23,478 Preferred stock dividends (including accretion of issuance expenses of $719 and $479 and $1,438 and $479 ) (5,422) (4,855) (10,845) (4,855) --------- --------- --------- --------- Net Income applicable to common shares $ 30,894 $ 8,933 $ 56,958 $ 18,623 ========= ========= ========= ========= Net Income per common share - basic $ .38 $ .17 $ .74 $ .36 ========= ========= ========= ========= Net income per common share - diluted $ .37 $ .17 $ .72 $ .35 ========= ========= ========= ========= Dividends per common share $ .40 $ .32 $ .80 $ .64 ========= ========= ========= ========= </TABLE> See notes to consolidated financial statements. Page 4
5 VORNADO REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) <TABLE> <CAPTION> FOR THE SIX MONTHS ENDED JUNE 30, JUNE 30, 1998 1997 ----------- ----------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 67,803 $ 23,478 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization (including debt issuance costs) 26,834 8,977 Amortization of officer's deferred compensation expense -- 12,498 Straight-lining of rental income (6,414) (1,487) Minority interest of unitholders in the Operating Partnership 7,069 2,100 Equity in (income) loss of Alexander's, including depreciation of $300 in each period (297) 307 Equity in net income of partially-owned entities (9,676) (282) Gain on marketable securities (1,447) (579) Changes in operating assets and liabilities (1,661) 5,977 ----------- ----------- Net cash provided by operating activities 82,211 50,989 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Acquisitions of real estate and other (681,387) (263,790) Investments in partially-owned entities (165,633) -- Investment in mortgage loans receivable (2,875) (226,000) Repayment of mortgage loans receivable 57,663 -- Cash restricted for tenant improvements 590 (29,434) Additions to real estate (47,450) (107,153) Purchases of securities available for sale (22,420) (3,436) Proceeds from sale or maturity of securities available for sale 14,903 -- Real estate deposits and other (133,072) -- ----------- ----------- Net cash used in investing activities (979,681) (629,813) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 1,295,855 463,000 Repayments on borrowings (863,258) (504) Debt issuance costs (6,533) (1,857) Proceeds from issuance of common shares 445,282 -- Proceeds from issuance of preferred stock -- 276,000 Repayment of borrowings on U.S. Treasury obligations -- (9,636) Dividends paid on common shares (61,470) (33,387) Dividends paid on preferred shares (10,845) (4,855) Exercise of stock options 69 193 ----------- ----------- Net cash provided by financing activities 799,100 688,954 ----------- ----------- Net (decrease) increase in cash and cash equivalents (98,370) 110,130 Cash and cash equivalents at beginning of period 355,954 89,696 ----------- ----------- Cash and cash equivalents at end of period $ 257,584 $ 199,826 =========== =========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash payments for interest $ 43,370 $ 14,001 =========== =========== NON-CASH TRANSACTIONS: Financing assumed in acquisitions $ 420,000 $ 215,000 Minority interest in connection with acquisitions 116,000 177,000 Unrealized gain on securities available for sale 3,304 996 </TABLE> See notes to consolidated financial statements. Page 5
6 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Vornado Realty Trust ("Vornado") is a fully-integrated real estate investment trust ("REIT"). In April 1997, Vornado transferred substantially all of its assets to Vornado Realty L.P., a Delaware limited partnership (the "Operating Partnership"). As a result, Vornado now conducts its business through, and substantially of its interests in properties are held by, the Operating Partnership. Vornado is the sole general partner of the Operating Partnership and owns a 92% limited partnership interest at June 30, 1998. All references to "Vornado" in these financial statements refer to Vornado Realty Trust; all references to the "Operating Partnership" refer to Vornado Realty L.P. and all references to the "Company" refer to Vornado and its consolidated subsidiaries, including the Operating Partnership. 2. BASIS OF PRESENTATION The consolidated balance sheet as of June 30, 1998, the consolidated statements of income for the three and six months ended June 30, 1998 and June 30, 1997 and the consolidated statements of changes in cash flows for the six months ended June 30, 1998 and June 30, 1997 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 footnote 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 Vornado's 1997 Annual Report to Shareholders. The results of operations for the period ended June 30, 1998 are not necessarily indicative of the operating results for the full year. The accompanying unaudited consolidated condensed financial statements include the accounts of Vornado Realty Trust and its majority-owned subsidiary, Vornado Realty L.P. All significant intercompany amounts have been eliminated. Equity interests in partially-owned entities include partnerships, joint ventures and preferred stock affiliates (corporations in which the Company owns all of the preferred stock and none of the common equity) and are accounted for under the equity method of accounting as the Company exercises significant influence. These investments are recorded initially at cost and subsequently adjusted for equity in net income (loss) and cash contributions and distributions. Ownership of the preferred stock entitles the Company to substantially all of the economic benefits in the preferred stock affiliates. The common stock of the preferred stock affiliates is owned by Officers and Trustees of Vornado. Certain prior period amounts have been reclassified to conform to the June 30, 1998 financial statement presentation. 3. ACQUISITIONS AND FINANCINGS: ACQUISITIONS: Westport On January 29, 1998, the Company acquired the Westport Corporate Office Park from a limited partnership that included members of the Mendik Group, a related party. The purchase price was approximately $14 million consisting of $6 million of cash and an $8 million mortgage loan. One Penn Plaza On February 9, 1998, the Company acquired a long-term leasehold interest in One Penn Plaza, a Manhattan office building from Mid-City Associates. The purchase price was approximately $410 million consisting of $317 million of cash and a $93 million bridge mortgage loan. Page 6
7 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 150 East 58th Street On March 9, 1998, the Company acquired 150 East 58th Street (the "Architects and Design Center"), a Manhattan office building, for a cash purchase price of approximately $118 million, from a limited partnership. The Merchandise Mart Properties On April 1, 1998, the Company acquired a real estate portfolio from the Kennedy Family for approximately $630 million, consisting of $187 million in cash, $116 million in Operating Partnership Units, $77 million in existing debt and $250 million of newly issued debt. The components of the $630 million reflect a July 1998 repayment of a $26 million mortgage. The acquired real estate assets consist of a portfolio of properties used for office, retail and trade showroom space which aggregate approximately 5.4 million square feet and include the Merchandise Mart in Chicago. The transaction also includes the acquisition of Merchandise Mart Properties, Inc. which manages the properties and trade shows. Following is a summary of the notes and mortgages payable, collateralized by the Merchandise Mart Properties (amounts in thousands): <TABLE> <S> <C> Merchandise Mart mortgage payable, due in 1999, non-amortizing with interest at LIBOR plus 1.35% (7.09% at June 30, 1998) (prepayable without penalty) $250,000 Washington Office Center mortgage payable, due in 2004, amortization based on a 25 year term, with interest at 6.80% (prepayable with yield maintenance) 51,537 Washington Design Center mortgage payable, due in 2000, amortization based on a 25 year term, with interest at LIBOR plus 3.00% (8.77% at June 30, 1998) (prepayable without penalty) 24,335 -------- $325,872 ======== </TABLE> 888 Seventh Avenue and 40 Fulton Street On June 2, 1998, the Company entered into an agreement to acquire the leasehold interest in 888 Seventh Avenue, a 46 story office building containing approximately 847,000 square feet located in midtown Manhattan, and simultaneously acquired 40 Fulton Street, a 29 story office building containing approximately 234,000 square feet located in downtown Manhattan. The aggregate consideration for both buildings is approximately $154.5 million. The acquisition of 888 Seventh Avenue is expected to be completed not later than the third quarter of 1999 in conjunction with other unrelated transactions to be effected by the seller, and is subject to customary closing conditions. Page 7
8 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OTHER FINANCINGS: Sale of Common Shares On April 15, 1998, the Company completed the sale of 10,000,000 common shares pursuant to an effective registration statement with net proceeds to the Company of approximately $401,000,000. On April 29, 1998, the Company sold 1,132,420 common shares to a unit investment trust, which were valued for the purpose of the trust at $41.06 per share, resulting in net proceeds of approximately $44,000,000. One Penn Plaza On June 15, 1998, the Company completed a $275,000,000 refinancing of its One Penn Plaza office building and borrowed $170,000,000 pursuant thereto. In the third quarter, the Company borrowed the remaining $105,000,000. The debt matures in June 2002, is prepayable at anytime, and bears interest at LIBOR + 1.25% (currently 6.95%). This debt replaced the $93,000,000 bridge-mortgage loan financing put in place when the property was acquired. See "Investments in and Advances to Partially Owned Entities" for other acquisitions and financing activities of partially owned entities. PRO FORMA INFORMATION The unaudited pro forma condensed consolidated information set forth below presents (i) the condensed consolidated statements of income for Vornado for the six months ended June 30, 1998 and 1997 as if the acquisitions described above and those included in Investments in and Advances to Partially Owned entities and the financings attributable thereto had occurred on January 1, 1997 and (ii) the condensed consolidated pro forma balance sheet of Vornado as of June 30, 1998, as if such acquisitions and financings had occurred on that date. Condensed Consolidated Pro Forma Income Statements <TABLE> <CAPTION> Pro Forma Six Months Ended June 30, 1998 June 30, 1997 ------------- ------------- (amounts in thousands, except per share amounts) <S> <C> <C> Revenues $ 281,391 $ 269,513 ========= ========= Net income $ 68,072 $ 60,733 Preferred stock dividends (10,845) (9,992) --------- --------- Net income applicable to common shares $ 57,227 $ 50,741 ========= ========= Net income per common share - basic $ .69 $ .61 ========= ========= Net income per common share - diluted $ .67 $ .59 ========= ========= </TABLE> Page 8
9 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Condensed Consolidated Pro Forma Balance Sheet at June 30, 1998 (amounts in thousands) <TABLE> <S> <C> Total assets $4,282,536 ========== Total liabilities $2,218,039 Minority interest 305,153 Total shareholders' equity 1,759,344 ---------- Total liabilities and shareholders' equity $4,282,536 ========== </TABLE> 4. INVESTMENTS IN AND ADVANCES TO PARTIALLY-OWNED ENTITIES: The Company's investments in and advances to partially-owned entities and income recognized from such investments is as follows: INVESTMENTS AND ADVANCES: <TABLE> <CAPTION> June 30, 1998 December 31, 1997 ------------- ----------------- (amounts in thousands) <S> <C> <C> Cold Storage Companies $351,970 $243,846 Alexander's 107,789 108,752 Charles E. Smith Commercial Realty L.P. 61,375 60,437 Hotel Pennsylvania 45,159 20,152 Mendik Partially-Owned Office Buildings 80,302 37,209 Vornado Management Corp., Mendik Management Company, Merchandise Mart Properties, Inc. and other 43,621 12,391 -------- -------- $690,216 $482,787 ======== ======== </TABLE> INCOME: <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------ ---------------- June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997 ------------- ------------- ------------- ------------- (amounts in thousands) <S> <C> <C> <C> <C> Income Applicable to Alexander's $1,490 $1,437 $3,146 $2,842 ====== ====== ====== ====== Other Partially-Owned Entities: Cold Storage Companies $1,450 $ -- $3,164 $ -- Hotel Pennsylvania 1,445 -- 1,389 -- Charles E. Smith Commercial Realty L.P. 1,352 -- 2,351 -- Mendik Partially-Owned Office Buildings 409 282 1,322 282 Vornado Management Corp., Mendik Management Company, Merchandise Mart Properties Inc. and other 1,100 303 1,450 520 ------ ------ ------ ------ $5,756 $ 585 $9,676 $ 802 ====== ====== ====== ====== </TABLE> Alexander's Alexander's is managed by and its properties are leased by the Company pursuant to agreements with a one-year term which are automatically renewable. Subject to the payments of rents by Alexander's tenants, the Company is due $3,689,000 under its leasing agreement with Alexander's which amount is included in Investments in and Advances to Alexander's. Included in Income from Vornado Management Corp. is management fee income from Alexander's of $938,000 and $1,876,000 in each of the three and six months ended June 30, 1998 and 1997, respectively. Page 9
10 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On June 18, 1998, Alexander's increased its interest in the Kings Plaza 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. In addition, Alexander's has agreed to pay Federated $15,000,000 to renovate its Macy's store in the mall in exchange for certain modifications to the Kings Plaza Operating Agreement. In connection with the acquisition, Alexander's has completed a $90 million three-year mortgage loan with Union Bank of Switzerland. Cold Storage Companies On April 23, 1998, the Cold Storage Companies completed a $550,000,000 non-recourse ten-year loan secured by 58 of its warehouses. The loan bears interest at 6.89%. The net proceeds from the loan together with working capital were used to repay $607,000,000 of bridge financing, which replaced high yield debt assumed at the date of acquisition. On June 15, 1998, a partnership in which Vornado owns a 60% interest through a preferred stock affiliate acquired the assets of Freezer Services, Inc., consisting of nine cold storage warehouses in the central United States for approximately $133 million, including $107 million in cash and $26 million in indebtedness. On July 1, 1998, the Carmar Group cold storage warehouse business was similarly acquired for approximately $158 million including $144 million in cash and $14 million indebtedness. Carmar owns and operates five cold storage distribution warehouses in the midwest and southeast United States. Hotel Pennsylvania On May 1, 1998, the Company acquired an additional 40% interest in the Hotel Pennsylvania increasing its ownership to 80%. The Company purchased the additional 40% interest from Hotel Properties Limited (one of its joint venture partners) for approximately $70 million, including $48 million of existing debt. Mendik Partially-Owned Office Buildings On April 20, 1998, the Company increased its interest from 5.6% to approximately 50% in 570 Lexington Avenue, a 49 story office building located in midtown Manhattan containing approximately 435,000 square feet. The Company purchased the additional interest for approximately $37.2 million, including $4.9 million of existing debt. 5. OTHER RELATED PARTY TRANSACTIONS The Company lent Mr. Fascitelli, the President of the Company, $3,500,000 on March 2, 1998 and $2,600,000 on April 30, 1998, in accordance with the terms of his employment agreement. The loans have a five-year term and bear interest, payable quarterly, at a rate of 5.47% and 5.58%, respectively (based on the mid-term applicable federal rate provided under the Internal Revenue Code). The Company currently manages and leases the real estate assets of Interstate Properties pursuant to a management agreement. Management fees earned by the Company pursuant to the management agreement were $574,000 and $184,000 for the three months ended June 30, 1998 and 1997 and $772,000 and $377,000 for the six months ended June 30, 1998 and 1997. Page 10
11 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Mendik Group owns an entity which provides cleaning and related services and security services to office properties including the Company's Manhattan office properties acquired subsequent to June 30, 1997. The Company was charged fees for these services of $5,957,000 and $11,224,000 for the three and six months ended June 30, 1998 and $2,585,000 for the period from April 15, 1997 to June 30, 1997. A portion of these fees is expected to be reimbursed to the Company by its tenants. 6. COMMITMENTS AND CONTINGENCIES At June 30, 1998, in addition to the $652,250,000 balance outstanding under the Company's revolving credit facility, the Company has utilized approximately $77,000,000 of availability under the facility for letters of credit and guarantees primarily related to pending acquisitions. In January 1997, two individual investors in Mendik Real Estate Limited Partnership ("RELP"), the publicly held limited partnership that indirectly owns a 60% interest in the Two Park Avenue Property, filed a purported class action against NY Real Estate Services 1, Inc. ("NY Real Estate"), Mendik RELP Corp., B&B Park Avenue, L.P. (an indirect subsidiary of the Company which acquired the remaining 40% interest in Two Park Avenue) and Bernard H. 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, that the then proposed transfer of the 40% interest in Two Park Avenue would result in a burden on the operation and management of Two Park Avenue and 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. Both complaints seek unspecified damages, an accounting and a judgment requiring either the liquidation of RELP and the appointment of a receiver or an auction of Two Park Avenue. In August 1997, a fourth limited partner, represented by separate counsel, commenced another purported class action in the same court by serving a complaint essentially identical to the complaints in the two previously commenced actions. These lawsuits have since been consolidated. On June 2, 1998, the parties entered into a Stipulation and Agreement of Compromise, Settlement and Release (the "Settlement"). The Settlement provides, among other things: (i) for Vornado to purchase the Partnership's interest in Two Park Avenue for approximately $34.6 million, which will be paid in cash, or at Vornado's election, in any combination of cash or shares of Vornado stock, plus the assumption of $39 million in existing debt; and (ii) for Vornado to purchase the Partnership's interest in 550-600 Mamaroneck Avenue, Harrison, New York and 330 West 34th Street, New York, NY for an aggregate price of $30 million in cash. The Settlement is subject to, among other things, the final approval of the Court and the execution of definitive documentation. The Court has scheduled a Settlement Fairness Hearing for September 23, 1998 to, among other things, determine whether the Settlement is fair, reasonable and adequate and to determine whether an Order and Final Judgment should be entered dismissing the actions with prejudice. In April 1997, the Company's Lodi shopping center was destroyed by a fire. The Company intends to rebuild the shopping center commencing in 1998, which rebuilding is subject to the approval of local authorities. The Company carries replacement value insurance. To date, the insurance carrier has paid the Company $5,500,000 as a deposit for the above mentioned rebuilding. In the event the Company cannot rebuild the shopping center, a large portion of the deposit would be returned to the carrier. If the shopping center is rebuilt, the Company will recognize a gain measured by the total proceeds from the insurance carrier, which could amount to approximately $10,000,000, net of the book value of the property of $1,564,000. Page 11
12 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings per share: <TABLE> <CAPTION> Three Months Ended Six Months Ended ------------------ ---------------- June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997 ------------- ------------- ------------- ------------- (amounts in thousands except per share amounts) <S> <C> <C> <C> <C> Numerator: Net income $ 36,316 $ 13,788 $ 67,803 $ 23,478 Preferred stock dividends (5,422) (4,855) (10,845) (4,855) -------- -------- -------- -------- Numerator for basic and diluted earnings per share - income applicable to common shares $ 30,894 $ 8,933 $ 56,958 $ 18,623 ======== ======== ======== ======== Denominator: Denominator for basic earnings per share --weighted average shares 82,159 52,184 77,197 52,180 Effect of dilutive securities: Employee stock options 2,085 1,594 2,286 1,399 -------- -------- -------- -------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 84,244 53,778 79,483 53,579 ======== ======== ======== ======== Net income per common share - basic $ .38 $ .17 $ .74 $ .36 ======== ======== ======== ======== Net income per common share - diluted $ .37 $ .17 $ .72 $ .35 ======== ======== ======== ======== </TABLE> 8. COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement No. 130, "Reporting Comprehensive Income" (SFAS 130). SFAS 130 establishes standards for reporting and display of comprehensive income and its components. The statement, which requires disclosure of net income including unrealized gains and losses recognized in the equity section of the balance sheet, was adopted by the Company in the first quarter of 1998. The Company's comprehensive income was $32,647,000 and $9,954,000 for the three months ended June 30, 1998 and 1997 and $60,262,000 and $19,619,000 for the six months ended June 30, 1998 and 1997. Page 12
13 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. SUBSEQUENT EVENTS Investment in Limited Partnership On July 8, 1998, the Company invested $47 million for a 30% share in a joint venture with Apollo Real Estate Investment Fund III, L.P. which owns Newkirk Holdings. Newkirk Holdings owns various equity and debt interests relating to 120 limited partnerships which own credit net leased real estate. 770 Broadway On July 24, 1998, the Company acquired 770 Broadway, a 1,000,000 square foot Manhattan office building, for approximately $149 million, including $18 million of Vornado Operating Partnership Units (on June 26, 1998, $167,600,000 had been escrowed for this transaction). Capital Trust On July 29, 1998, the Company purchased $50 million of Capital Trust's 8.25% Step Up Convertible Trust Securities. The preferred shares are convertible at any time by the holder into common shares at a price of $11.70, reflecting a 30% conversion premium over Capital Trust's common stock price at the close of business on Friday, July 24, 1998. The preferred shares have a 20-year maturity and are non-callable for five years. Capital Trust is a fully integrated, self-managed specialty finance company focused on the commercial real estate industry. Steven Roth, Chairman and Chief Executive Officer of Vornado will join Capital Trust's Board of Trustees. 20 Broad Street On August 4, 1998, the Company sold a 40% interest in a $27,000,000 mortgage on 20 Broad Street to one of the owners of the property for $10,800,000. On August 5, 1998, as part of a related transaction, the Company acquired the Mendik Group's 60% interest in the property for approximately $600,000 of Vornado Operating Partnership Units. Page 13
14 VORNADO REALTY TRUST 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 and Section 21E of the Securities Exchange Act of 1934. 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 Vornado to continue to qualify as a REIT, (j) availability of financing on acceptable terms, (k) potential liability under environmental or other laws or regulations and (l) general competitive factors. RESULTS OF OPERATIONS The Company's revenues, which consist of property rentals, tenant expense reimbursements and other income were $128,523,000 in the quarter ended June 30, 1998, compared to $50,662,000 in the prior year's quarter, an increase of $77,861,000. Revenues were $218,734,000 for the six months ended June 30, 1998, compared to $79,959,000 in the prior year's six months, an increase of $138,775,000. These increases included $74,498,000 and $134,247,000 of revenues from properties acquired which are not reflected in operations for all or a portion of the prior year's periods presented. Property rentals were $109,362,000 in the quarter ended June 30, 1998, compared to $41,004,000 in the prior year's quarter, an increase of $68,358,000. Property rentals were $181,727,000 for the six months ended June 30, 1998, compared to $63,471,000 in the prior year's six months, an increase of $118,256,000. These increases resulted from: <TABLE> <CAPTION> Three Months Six Months Date of Ended Ended Acquisitions: Acquisition June 30, 1998 June 30, 1998 <S> <C> <C> <C> 40 Fulton Street June 1998 $ 489,000 $ 489,000 Merchandise Mart Properties April 1998 26,887,000 26,887,000 150 E.58th Street March 1998 4,018,000 5,150,000 One Penn Plaza February 1998 14,437,000 22,609,000 Westport January 1998 661,000 1,117,000 Green Acres Mall December 1997 5,506,000 10,963,000 640 Fifth Avenue December 1997 1,272,000 2,611,000 Riese June 1997 1,208,000 2,486,000 90 Park Avenue May 1997 6,957,000 13,889,000 Mendik April 1997 3,583,000 24,949,000 Montehiedra Shopping Center April 1997 367,000 2,203,000 ------------- ------------- 65,385,000 113,353,000 Leasing Activity and Step-Ups in Leases: Shopping centers 1,513,000 3,080,000 Office buildings 1,460,000 1,823,000 ------------- ------------- $ 68,358,000 $ 118,256,000 ============= ============= </TABLE> Page 14
15 VORNADO REALTY TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Tenant expense reimbursements were $17,094,000 in the quarter ended June 30, 1998, compared to $8,951,000 in the prior year's quarter, an increase of $8,143,000. Tenant expense reimbursements were $32,790,000 for the six months ended June 30, 1998, compared to $15,161,000 in the prior year's six months, an increase of $17,629,000. These increases included $8,477,000 and $18,174,000 from tenants at properties acquired which are not reflected in operations for all or a portion of the prior year's periods presented. Operating expenses were $51,454,000 in the quarter ended June 30, 1998, as compared to $18,151,000 in the prior year's quarter, an increase of $33,303,000. Operating expenses were $85,607,000 for the six months ended June 30, 1998, compared to $26,658,000 in the prior year's six months, an increase of $58,949,000. These increases included $31,848,000 and $57,230,000 from properties acquired which are not reflected in operations for all or a portion of the prior year's periods presented. Depreciation and amortization was $15,092,000 in the quarter ended June 30, 1998, as compared to $5,462,000 in the prior year's quarter, an increase of $9,567,000. Depreciation and amortization was $25,395,000 for the six months ended June 30, 1998, compared to $8,429,000 in the prior year's six months, an increase of $16,966,000. These increases were primarily a result of acquisitions. General and administrative expenses were $7,070,000 in the quarter ended June 30, 1998 compared to $2,903,000 in the prior year's quarter, an increase of $4,167,000. General and administrative expenses were $12,017,000 for the six months ended June 30, 1998, compared to $4,748,000 in the prior year's six months, an increase of $7,269,000. Of these increases: (i) $1,162,000 and $2,721,000 is attributable to acquisitions, (ii) $1,585,000 and $2,551,000 resulted from payroll and corporate office expenses and (iii) $1,420,000 and $1,997,000 resulted from professional fees. The Company recognized an expense of $6,249,000 and $12,498,000 in the prior year's quarter and six months representing the amortization of the deferred payment due to the Company's President, which was fully amortized at December 31, 1997. Income applicable to Alexander's (loan interest income, equity in income and depreciation) was $1,490,000 in the quarter ended June 30, 1998, compared to $1,437,000 in the prior year's quarter, an increase of $53,000. Income applicable to Alexander's was $3,146,000 for the six months ended June 30, 1998, compared to $2,842,000 in the prior at year's six months, an increase of $304,000. These increases resulted primarily from the commencement of leases at Alexander's Rego Park and Kings Plaza store properties, partially offset by lower interest income on the Company's loan to Alexander's commencing in the second quarter of 1998. Income from partially-owned entities was $5,756,000 in quarter ended June 30, 1998, compared to $585,000 in the prior year's quarter, an increase of $5,171,000. Income from partially-owned entities was $9,676,000 for the six months ended June 30, 1998, compared to $802,000 in the prior year's six months, an increase of $8,874,000. These increases resulted from: <TABLE> <CAPTION> Three Months Six Months Date of Ended Ended Investments Acquisition June 30, 1998 June 30, 1998 <S> <C> <C> <C> Cold Storage Companies October 1997 $ 1,450,000 $ 3,164,000 Charles E. Smith Commercial Realty L.P. October 1997 1,352,000 2,351,000 Hotel Pennsylvania September 1997 1,445,000 1,389,000 Mendik Partially-owned office buildings April 1997 127,000 1,040,000 Management Companies Various 797,000 930,000 -------------- -------------- $ 5,171,000 $ 8,874,000 ============== ============== </TABLE> Page 15
16 VORNADO REALTY TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Interest and other investment income (interest income on mortgage loans receivable, other interest income, dividend income and net gains on marketable securities) was $5,271,000 for the quarter ended June 30, 1998, compared to $9,241,000 in the prior year's quarter, a decrease of $3,970,000. This decrease resulted primarily from higher average investments in the second quarter of the prior year. Interest and other investment income was $12,837,000 for the six months ended June 30, 1998, compared to $11,658,000 in the prior year's six months, an increase of $1,179,000. This increase resulted primarily from gains on the sale of marketable securities. Interest and debt expense was $26,679,000 for the quarter ended June 30, 1998, compared to $13,272,000 in the prior year's quarter, an increase of $13,407,000. Interest and debt expense was $46,502,000 for the six months ended June 30, 1998, compared to $17,350,000 in the prior year's six months, an increase of $29,152,000. These increases resulted primarily from debt in connection with acquisitions. The minority interest unit holders in the Operating Partnership are entitled to preferential distributions which aggregated $4,492,000 and $7,069,000 for the three and six months ended June 30, 1998 and $2,100,000 for the period from April 15, 1997 to June 30, 1997. Distributions for the three and six months ended June 30, 1998 include approximately $1,915,000 applicable to Operating Partnership units issued in connection with the acquisition of the Merchandise Mart properties in April 1998. The preferred stock dividends of $5,422,000 and $10,845,000 for the three and six months ended June 30, 1998 and $4,855,000 for the period from April 15, 1997 to June 30, 1997 in the prior year apply to the 6.5% preferred shares issued in April and December 1997 and include accretion of expenses of issuing them. Page 16
17 VORNADO REALTY TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES Six Months Ended June 30, 1998 Cash flows provided by operating activities of $82,211,000 was primarily comprised of (i) net income of $67,803,000 and (ii) adjustments for non-cash items of $16,069,000, offset by (iii) the net change in operating assets and liabilities of $1,661,000. The adjustments for non-cash items are primarily comprised of (i) depreciation and amortization of $26,834,000 and (ii) minority interest of $7,069,000, partially offset by (iii) the effect of straight-lining of rental income of $6,414,000 and (iv) equity in net income of partially-owned entities of $9,676,000. Net cash used in investing activities of $979,681,000 was primarily comprised of (i) acquisitions of real estate of $681,387,000 (see detail below), (ii) investments in partially-owned entities of $165,633,000 (see detail below), (iii) deposits in connection with real estate acquisitions of $133,797,000 and (iv) capital expenditures of $47,450,000, partially offset by (v) proceeds from the repayment of mortgage loans receivable of $57,663,000 (Rickel and Riese mortgage loans). Acquisitions of real estate and investments in partially-owned entities comprised of (amounts in thousands): <TABLE> <CAPTION> Debt Value of Total Cash Assumed Units Issued Consideration <S> <C> <C> <C> <C> Real Estate: Merchandise Mart Properties $ 187,000* $ 327,000* $ 116,000 $ 630,000 One Penn Plaza Office Building 317,000 93,000 -- 410,000 150 East 58th Street Office Building 118,000 -- -- 118,000 40 Fulton Street Office Building 54,000 -- -- 54,000 Other 5,387 -- -- 5,387 ---------- ---------- ---------- ---------- $ 681,387 $ 420,000 $ 116,000 $1,217,387 ========== ========== ========== ========== Investments in Partially Owned Entities: Hotel Pennsylvania (acquisition of additional 40% interest increasing ownership to 80%) $ 22,000 $ 48,000 $ -- $ 70,000 570 Lexington Avenue Office Building (increased interest from 5.6% to approximately 50%) 32,300 4,900 -- 37,200 Acquisition of Freezer Services, Inc. (60% interest) 58,000 16,000 6,000 80,000 Reduction in Cold Storage Companies debt (60% interest) 44,000 -- -- 44,000 Other 9,333 -- -- 9,333 ---------- ---------- ---------- ---------- $ 165,633 $ 68,900 $ 6,000 $ 240,533 ========== ========== ========== ========== </TABLE> * Reflects July 1998 repayment of $26 million of debt. Net cash provided by financing activities of $799,100,000 was primarily comprised of (i) proceeds from borrowings of $1,295,855,000, and (ii) proceeds from the issuance of common shares of $445,282,000 partially offset by (iii) repayment of borrowings of $863,258,000, (iv) dividends paid on common shares of $61,470,000 and (v) dividend paid on preferred shares of $10,845,000 (includes accretion of expenses of issuing the preferred shares of $1,438,000). Page 17
18 VORNADO REALTY TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Six Months Ended June 30, 1997 Cash flows provided by operating activities of $50,989,000 was comprised of (i) net income of $23,478,000, (ii) adjustments for non-cash items of $21,534,000 and (iii) the net change in operating assets and liabilities of $5,977,000. The adjustments for non-cash items are primarily comprised of (i) amortization of deferred officer's compensation expense of $12,498,000, (ii) depreciation and amortization of $8,977,000, (iii) equity in loss of Alexander's of $307,000, and (iv) minority interest of $2,100,000, partially offset by (v) the effect of straight-lining of rental income of $1,487,000 and (vi) equity in net income of investees of $282,000. Net cash used in investing activities of $629,813,000 was primarily comprised of (i) expenditures of $263,790,000 in connection with the Mendik Transaction, (ii) investments in mortgage loans receivable of $226,000,000, (iii) capital expenditures of $107,153,000 (including the acquisition of a shopping center for $75,587,000 in April 1997 (Puerto Rico Transaction) and the acquisition of four other properties in June 1997 for $26,000,000 (Riese Transaction)) and (iv) restricted cash for tenant improvements of $29,434,000. Net cash provided by financing activities of $688,954,000 was primarily comprised of proceeds from (i) borrowings of $463,000,000, and (ii) issuance of preferred shares of $276,000,000, partially offset by (iii) dividends paid of $38,242,000 and (iv) the repayment of borrowings on U.S. Treasury obligations of $9,636,000. Funds from Operations for the Three and Six Months Ended June 30, 1998 and 1997 Funds from operations were $59,901,000 in the quarter ended June 30, 1998, compared to $14,950,000 in the prior year's quarter, an increase of $44,951,000. Funds from operations were $107,759,000 in the six months ended June 30, 1998, compared to $27,183,000 in the year's six months, an increase of $80,576,000. Funds from operations for the prior year's quarter and six months reflect amortization of the deferred payment due to the Company's President of $6,249,000 and $12,498,000. The following table reconciles funds from operations and net income: <TABLE> <CAPTION> For The Three Months Ended For the Six Months Ended June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997 ------------- ------------- ------------- ------------- <S> <C> <C> <C> <C> Net income applicable to common shares $ 30,894,000 $ 8,933,000 $ 56,958,000 $ 18,623,000 Depreciation and amortization of real property 14,839,000 5,173,000 25,033,000 7,857,000 Straight-lining of property rentals for rent escalations (4,122,000) (818,000) (6,414,000) (1,487,000) Leasing fees received in excess of income recognized 369,000 849,000 737,000 1,303,000 Proportionate share of adjustments to equity in net income of partially owned entities to arrive at funds from operations 13,429,000 813,000 24,376,000 887,000 Minority interest in excess of preferential distributions (657,000) -- (1,509,000) -- ------------ ------------ ------------ ------------ $ 54,752,000 $ 14,950,000 $ 99,181,000 * $ 27,183,000 ============ ============ ============ ============ </TABLE> * Restated to conform to second quarter 1998 presentation - no effect on a per share basis. The number of shares that should be used for determining funds from operations per share is the number used for earnings per share.- Page 18
19 VORNADO REALTY TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Funds from operations does not represent cash generated from operating activities in accordance with generally accepted accounting principles and is not necessarily indicative of cash available to fund cash needs, which is disclosed in the Consolidated Statements of Cash Flows for the applicable periods. There are no material legal or functional restrictions on the use of funds from operations. Funds from operations should not be considered as an alternative to net income as an indicator of the Company's operating performance or as an alternative to cash flows as a measure of liquidity. Management considers funds from operations a relevant supplemental measure of operating performance because it provides a basis for comparison among REITs; however, funds from operations may not be comparable to similarly titled measures reported by other REITs since the Company's method of calculating funds from operations is different from that used by NAREIT. Funds from operations, as defined by NAREIT, represents net income applicable to common shares before depreciation and amortization, extraordinary items and gains or losses on sales of real estate. Funds from operations as disclosed above has been modified to adjust for the effect of straight-lining of property rentals for rent escalations and leasing fee income. Below are the cash flows provided by (used in) operating, investing and financing activities: <TABLE> <CAPTION> For The Three Months Ended For the Six Months Ended June 30, 1998 June 30, 1997 June 30, 1998 June 30, 1997 <S> <C> <C> <C> <C> Operating activities $ 48,638,000 $ 31,236,000 $ 82,211,000 $ 50,989,000 ============= ============= ============= ============= Investing activities $(435,816,000) $(629,530,000) $(979,681,000) $(629,813,000) ============= ============= ============= ============= Financing activities $ 408,105,000 $ 705,693,000 $ 799,100,000 $ 688,954,000 ============= ============= ============= ============= </TABLE> Certain Cash Requirements Effecting the Company's Liquidity at June 30, 1998: Acquisitions and investments completed subsequent to June 30, 1998: Investment in Limited Partnership On July 8, 1998, the Company invested $47 million for a 30% share in a joint venture with Apollo Real Estate Investment Fund III, L.P. which owns Newkirk Holdings. Newkirk Holdings owns various equity and debt interests relating to 120 limited partnerships which own credit net leased real estate. 770 Broadway On July 24, 1998, the Company acquired 770 Broadway, a 1,000,000 square foot Manhattan office building for approximately $149 million, including $18 million of Vornado Operating Partnership Units (on June 26, 1998, $167,600,000 had been escrowed for this transaction). Capital Trust On July 29, 1998, the Company purchased $50 million of Capital Trust's 8.25% Step Up Convertible Trust Securities. The preferred shares are convertible at any time by the holder into common shares at a price of $11.70, reflecting a 30% conversion premium over Capital Trust's common stock price at the close of business on Friday, July 24, 1998. The preferred shares have a 20-year maturity and are non-callable for five years. 20 Broad Street On August 4, 1998, the Company sold a 40% interest in a $27,000,000 mortgage on 20 Broad Street to one of the owners of the property, for $10,800,000. On August 5, 1998, as part of a related transaction, the Company acquired the Mendik Group's 60% interest in the property for approximately $600,000 of Vornado Operating Partnership Units. Page 19
20 VORNADO REALTY TRUST MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Pending Acquisitions: On June 2, 1998, the Company entered into an agreement to acquire the leasehold interest in 888 Seventh Avenue a 46 story office building containing approximately 847,000 square feet located in midtown Manhattan for approximately $100 million. The acquisition of 888 Seventh Avenue is expected to be completed not later than the third quarter of 1999 in conjunction with other unrelated transactions to be effected by the seller, and is subject to customary closing conditions. On June 2, 1998, the Company entered into an agreement to settle existing litigation - see Legal Proceedings. The Settlement provides, among other things: (i) for Vornado to purchase the remaining 60% interest in Two Park Avenue for approximately $34.6 million, which will be paid in cash, or at the Company's election, in any combination of cash or shares of Vornado stock, plus the assumption of $39 million in existing debt; and (ii) for Vornado to purchase the Partnership's interest in 550-600 Mamaroneck Avenue, Harrison, New York and 330 West 34th Street, New York, New York for an aggregate price of $30 million in cash. The Settlement is subject to, among other things, the final approval of the Court. Financings: On April 15, 1998, the Company completed the sale of 10,000,000 common shares pursuant to an effective registration statement with net proceeds to the Company of approximately $401,000,000. On April 29, 1998, the Company sold 1,132,420 common shares to a unit investment trust, which were valued for purposes of the trust at $41.06 per share, resulting in net proceeds of approximately $44,000,000. On June 30, 1998, the Company had $652,250,000 outstanding under its $1,000,000,000 revolving credit facility at a blended interest rate of 7.12%. Also, in February 1998, the Company completed a $160,000,000 refinancing of the Green Acres Mall and prepaid the then existing $118,000,000 debt on the property. The new 10-year debt matures in March 2008 and bears interest at 6.75%. On April 23, 1998, the Cold Storage Companies completed a $550,000,000 non-recourse ten-year loan secured by 58 of its warehouses. The loan bears interest at 6.89%. The net proceeds from the loan together with working capital were used to repay $607,000,000 of bridge financing, which replaced high yield debt assumed at the date of acquisition. On June 15, 1998, the Company completed a $275,000,000 refinancing of its One Penn Plaza office building and borrowed $170,000,000 pursuant thereto. In the third quarter, the Company borrowed the remaining $105,000,000. The debt matures in June 2002, is prepayable at anytime, and bears interest at LIBOR + 1.25%; (currently 6.95%). This debt replaced the $93,000,000 bridge-mortgage loan financing put in place when the property was acquired. The Company anticipates that cash from continuing operations will be adequate to fund business operations and the payment of dividends and distributions on an ongoing basis for more than the next twelve months; however, capital outlays for significant acquisitions may require funding from borrowings or equity offerings. Year 2000 Issues The Company is continuing to address the Year 2000 issues. Review of the systems effecting the Company is progressing. During the six months ended June 30, 1998, the Company has not incurred substantial costs related to its Year 2000 efforts. The Company does not expect that the cost of modifications to it systems, if any, will have a material effect on its financial position, results of operations or liquidity. Page 20
21 VORNADO REALTY TRUST PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In January 1997, two individual investors in Mendik Real Estate Limited Partnership ("RELP"), the publicly held limited partnership that indirectly owns a 60% interest in the Two Park Avenue Property, filed a purported class action against NY Real Estate Services 1, Inc. ("NY Real Estate"), Mendik RELP Corp., B&B Park Avenue, L.P. (an indirect subsidiary of the Company which acquired the remaining 40% interest in Two Park Avenue) and Bernard H. 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, that the then proposed transfer of the 40% interest in Two Park Avenue would result in a burden on the operation and management of Two Park Avenue and 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. Both complaints seek unspecified damages, an accounting and a judgment requiring either the liquidation of RELP and the appointment of a receiver or an auction of Two Park Avenue. In August 1997, a fourth limited partner, represented by separate counsel, commenced another purported class action in the same court by serving a complaint essentially identical to the complaints in the two previously commenced actions. These lawsuits have since been consolidated. On June 2, 1998, the parties entered into a Stipulation and Agreement of Compromise, Settlement and Release (the "Settlement"). By Order dated July 9, 1998, the Court granted preliminary approval of the Settlement and certified a class pursuant to CPLR 902, for settlement purposes. The Settlement provides, among other things: (i) for Vornado to purchase the Partnership's interest in Two Park Avenue for approximately $34.6 million, which will be paid in cash, or at Vornado's election, in any combination of cash or shares of Vornado stock (which will be freely tradable pursuant to a Section 3(a)(10) exemption under the Securities Act of 1933), plus the assumption of $39 million in existing debt; and (ii) for Vornado Realty to purchase the Partnership's interest in 550-600 Mamaroneck Avenue, Harrison, New York and 330 West 34th Street, New York, NY for an aggregate price of $30 million in cash. Under the terms of the settlement, B&B Park Avenue, L.P. will not incur any liability to Plaintiffs. The Settlement is subject to, among other things, the final approval of the Court and the execution of definitive documentation. The Court has scheduled a Settlement Fairness Hearing for September 23, 1998 to, among other things, determine whether the Settlement is fair, reasonable and adequate and to determine whether an Order and Final Judgment should be entered dismissing the actions with prejudice. Page 21
22 VORNADO REALTY TRUST ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 25, 1998, Vornado held its annual meeting of shareholders. The shareholders voted, in person or by proxy for the election of two nominees to serve on the Board of Trustees for a term of three years or until their respective successors are duly elected and qualify. The two nominees were elected. The results of the voting are shown below: Votes Cast Against or Trustee Votes Cast For Withheld ---------------- --------------- -------------- David Mandelbaum 62,765,131 64,360 Richard West 62,765,131 64,360 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: The following exhibits are filed with this Quarterly Report on Form 10-Q. 10 Credit Agreement dated as of June 22, 1998 among One Penn Plaza, LLC, as Borrower, The Lenders Party Hereto, The Chase Manhattan Bank, as Administrative Agent 27 Financial Data Schedule. (b) Reports on Form 8-K During the quarter ended June 30, 1998, Vornado Realty Trust filed the reports on Form 8-K described below: <TABLE> <CAPTION> Date of Report (Date of Earliest Event Reported) Item Reported Date Filed - --------------- ------------- ---------- <S> <C> <C> April 1, 1998 Completion of Merchandise Mart April 8, 1998 properties acquisition and financial statements and pro forma in connection therewith April 1, 1998 Amendment to Merchandise Mart April 9, 1998 properties Form 8-K April 9, 1998 Issuance and sale of 10,000,000 April 16, 1998 common shares April 22, 1998 Increase in authorized shares and April 28, 1998 underwriting agreement for sale of 1,132,420 common shares June 2, 1998 Agreement to acquire 888 Seventh June 11, 1998 Avenue and 40 Fulton Street </TABLE> Page 22
23 VORNADO REALTY TRUST 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. VORNADO REALTY TRUST ------------------------------------ (Registrant) Date: August 6, 1998 /s/ Irwin Goldberg ------------------------------------ IRWIN GOLDBERG Vice President - Chief Financial Officer and Chief Accounting Officer Page 23
24 VORNADO REALTY TRUST EXHIBIT INDEX EXHIBIT NO. 10 Credit Agreement dated as of June 22, 1998 among One Penn Plaza, LLC, as Borrower, The Lenders Party Hereto, The Chase Manhattan Bank, as Administrative Agent 27 Financial Data Schedule. Page 24