ITEM 1. BUSINESS
GENERAL
The Company is a fully-integrated real estate investment trust ("REIT") which owns, leases, develops, redevelops and manages retail and industrial properties primarily located in the Midatlantic and Northeast regions of the United States.
The Company's primary focus is on shopping centers. The Company's shopping centers are generally located on major regional highways in mature densely populated areas. The Company believes its shopping centers attract consumers from a regional, rather than a neighborhood, marketplace because of their location on regional highways and the high percentage of square feet dedicated to large stores. As of December 31, 1995, the Company owned 56 shopping centers in seven states containing 9.9 million square feet, including 1.2 million square feet built by tenants on land leased from the Company. The Company's shopping centers accounted for 92% and 91%, respectively, of the Company's rental revenue for the years ended December 31, 1995 and 1994. The occupancy rate of the Company's shopping center properties was 91% and 94% as of March 1, 1996 and 1995, respectively and has been over 90% in each of the past five years.
Further, the Company owns eight warehouse/industrial properties in New Jersey containing 2.0 million square feet and one office building in New Jersey containing 100,000 square feet. In addition, the Company owns 29.3% of the common stock of Alexander's, Inc. ("Alexander's") which has nine properties in the greater New York metropolitan area.
As of December 31, 1995, approximately 80% of the square footage of the Company's shopping centers was leased to large stores (over 20,000 square feet) and over 93% was leased to tenants whose businesses are national or regional in scope. The Company's large tenants include destination retailers such as discount department stores, supermarkets, home improvements stores, discount apparel stores, membership warehouse clubs and "category killers." Category killers are large stores which offer a complete selection of a category of items (e.g., toys, office supplies, etc.) at low prices, often in a warehouse format. The Company's large store tenants typically offer basic consumer necessities such as food, health and beauty aids, moderately priced clothing, building materials and home improvement supplies, and compete primarily on the basis of price. The Company believes that this tenant mix mitigates the effects on its properties of adverse changes in general economic conditions. Substantially all of the Company's large store leases are long-term with fixed base rents and provide for step-ups in rent typically occurring every five years.
In addition, the Company's leases generally provide for additional rents based on a percentage of tenants' sales. Of the Company's $80,429,000 of rental revenue in 1995, base rents accounted for approximately 98.8% and percentage rents accounted for approximately 1.2%. The Company's leases generally pass through to tenants the tenant's share of all common area charges (including roof and structure, unless it is the tenant's direct responsibility), real estate taxes and insurance costs and certain capital expenditures. As of December 31, 1995, the average annual base rent per square foot for the Company's shopping centers was $8.68.
From 1991 through 1995, the Company's property rentals from shopping centers (including the effects of straight-lining of rents) was $54,700,000, $56,900,000, $61,900,000, $64,700,000 and $74,300,000 respectively. Straight-lining of rents averages the rent increases provided for in leases such that property rentals for financial statement purposes is constant throughout the term of the lease. This convention applies to leases entered into after November 14, 1985.
ITEM 1. BUSINESS - continued
As of December 31, 1995, no single shopping center property accounted for more than 6.3% of the Company's total leasable area for its shopping center properties or more than 5.2% of property rentals for its shopping center properties. Bradlees, Inc. ("Bradlees") accounted for 21%, 19% and 18% of total property rentals for each of the three years ended December 31, 1995, respectively. In June 1995, Bradlees filed for protection under Chapter 11 of the U.S. Bankruptcy Code ("Chapter 11"). The Company leases 21 locations to Bradlees of which 19 are fully guaranteed by Stop & Shop Companies, Inc. Further, Montgomery Ward & Co., Inc. remains liable on eight of such leases including the rent it was obligated to pay - approximately 70% of current rent. Home Depot represented 5% and Sam's Wholesale/Wal*Mart, Shop Rite, Pathmark, T.J. Maxx/Marshalls and Staples each accounted for approximately 3% of the total property rentals for the year ended December 31, 1995. Several of the Company's other tenants, whose rents aggregated less than 5% of the Company's total property rentals for the year ended December 31, 1995, have also filed for protection under Chapter 11.
Vornado, Inc., the immediate predecessor to the Company, was merged with the Company on May 6, 1993 in connection with the Company's conversion to a REIT.
The Company administers all operating functions, including leasing, management, construction, finance, legal, accounting and data processing, from its executive offices (other than the leasing of the Company's three Texas properties, which is done by an employee locally).
The Company's principal executive offices are located at Park 80 West, Plaza II, Saddle Brook, New Jersey 07663; telephone (201) 587-1000.
RELATIONSHIP WITH ALEXANDER'S
In March 1995, the Company purchased all of the 1,353,468 shares of common stock of Alexander's then owned by Citibank, N.A. ("Citibank") representing 27.1% of the outstanding shares of common stock of Alexander's, for $40.50 per share in cash. As a result of the acquisition, the Company owns 29.3% of the common stock of Alexander's. In addition, the Company lent Alexander's $45,000,000 (see "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" at page 18).
Alexander's has disclosed in its annual report on Form 10-K for the year ended December 31, 1995, that it has nine properties (where its department stores were formerly located) consisting of:
Operating properties:
(i) a recently redeveloped 359,000 square foot building, two-thirds of which is leased to Sears and Marshalls, on Queens Boulevard and 63rd Road in Rego Park, Queens, New York ("Rego Park I"), (ii) a 50% interest in the 427,000 square feet of mall stores at the Kings Plaza regional shopping center on Flatbush Avenue in Brooklyn, New York, (iii) a 303,000 square foot building leased to Caldor on Fordham Road in the Bronx, New York, (iv) a 177,000 square foot building subleased to Caldor at Roosevelt Avenue and Main Street in Flushing, New York and (v) a 173,000 square foot building leased to an affiliate of Conway located at Third Avenue and 152nd Street in the Bronx, New York, and
Non-operating properties to be redeveloped:
(i) the square block, including a 418,000 square foot building, bounded by Lexington Avenue and Third Avenue and 58th and 59th Streets in Manhattan, New York, in which Alexander's has the general partnership interest and a 92% limited partnership interest, (ii) 39.3 acres at the intersection of Routes 4 and 17 in Paramus, New Jersey, (iii) a 320,000 square foot anchor store which is one of the two anchor stores at the Kings Plaza regional shopping center and (iv) one and one-half blocks of vacant land adjacent to the Rego Park I location ("Rego Park II").
ITEM 1. BUSINESS - continued
In September 1995, Caldor filed for protection under Chapter 11. Caldor accounted for approximately 56% and 64% of Alexander's consolidated revenues for the years ended December 31, 1995 and 1994, respectively.
The Company manages, develops and leases the Alexander's properties under a management and development agreement (the "Management Agreement") and a leasing agreement (the "Leasing Agreement") pursuant to which the Company receives annual fees from Alexander's.
As of December 31, 1995, Interstate Properties owned 27.7% of the common shares of beneficial interest of the Company and 27.1% of Alexander's common stock. Interstate Properties is a general partnership in which Steven Roth, David Mandelbaum and Russell B. Wight, Jr. are partners. Mr. Roth is the Chairman of the Board and Chief Executive Officer of the Company, the Managing General Partner of Interstate Properties, and the Chief Executive Officer and a director of Alexander's. Messrs. Mandelbaum and Wight are trustees of the Company and are also directors of Alexander's. Effective March 2, 1995, for a three year period, the Company and Interstate Properties are restricted from owning in excess of two-thirds of Alexander's common stock or entering into certain other transactions with Alexander's, without the consent of the independent directors of Alexander's. Alexander's common stock is listed on the New York Stock Exchange under the symbol "ALX".
COMPETITION
The leasing of real estate is highly competitive. Demand for retail space has been impacted by the recent bankruptcy of a number of retail companies and a general trend toward consolidation in the retail industry which could adversely affect the ability of the Company to attract or retain tenants. The principal means of competition are price, location and the nature and condition of the facility to be leased. The Company directly competes with all lessors and developers of similar space in the areas in which its properties are located.
ENVIRONMENTAL REGULATIONS
See "Note 10 - Contingencies" to the Consolidated Financial Statements at page 37.
EMPLOYEES
The Company employs 68 people.
SEGMENT DATA
The company operates in one business segment - real estate. See "Note 9 - Leases" to the Consolidated Financial Statements at page 36 for information on significant tenants. Vornado engages in no foreign operations.
ITEM 2.

ITEM 2. PROPERTIES
The Company leases 27,000 square feet in Saddle Brook, New Jersey for use as its executive offices.
The following table sets forth certain information as of December 31, 1995 relating to the properties owned by the Company.
(1) Average annualized base rent per square foot does not include ground leases (which leases are included in percent leased) or rent for leases which had not commenced as of December 31, 1995.
(2) The tenant at these locations has subleased or been assigned its space from Montgomery Ward & Co., Inc. which remains liable on such lease including the rent it was obligated to pay - approximately 70%.
(3) These leases are guaranteed by the Stop & Shop Companies, Inc.
(4) Ground and/or building leasehold interest
(5) The tenant has ceased operations at these locations but continues to pay rent.
(6) Square footage excludes Albertson's which owns its land and building.
INSURANCE
The Company carries comprehensive liability, fire, flood, extended coverage and rental loss insurance with respect to its properties with policy specifications and insured limits customarily carried for similar properties. Management of the Company believes that the Company's insurance coverage conforms to industry norms.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
The Company is from time to time involved in legal actions arising in the ordinary course of its business. In the opinion of management, after consultation with legal counsel, the outcome of such matters will not have a material effect on the Company's financial condition or results of operations.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of the year ended December 31, 1995.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the names, ages, principal occupations and positions with Vornado of the executive officers of Vornado and the positions held by such officers during the past five years. All executive officers of Vornado have terms of office which run until the next succeeding meeting of the Board of Trustees of Vornado following the Annual Meeting of Shareholders unless they are removed sooner by the Board.
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
- -------------------------------------------------------------------------------
Vornado's common shares are traded on the New York Stock Exchange.
Quarterly price ranges of the common shares and dividends per share paid for the years ended December 31, 1995 and 1994 were as follows:
The approximate number of record holders of common shares of Vornado at December 31, 1995, was 2,000.
PART II
ITEM 6.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA - (continued)
(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.
(2) Effective January 1, 1995, the Company changed its definition of funds from operations to exclude amortization of debt issuance costs and depreciation of personal property. Prior period amounts have been restated to conform to the current year's presentation. The Company's definition of funds from operations does not conform to the NAREIT definition because the Company deducts the effect of straight-lining of property rentals.
Amounts included in revenues and expenses have been reclassified to conform with the current year's presentation.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
The Company's revenues, which consist of property rentals, tenant expense reimbursements and other income were $108,718,000 in 1995, compared to $93,998,000 in 1994, an increase of $14,720,000 or 15.7%.
Property rentals from shopping centers were $73,296,000 in 1995, compared to $63,778,000 in 1994, an increase of $9,518,000 or 14.9%. Of this increase, (i) $6,067,000 resulted from expansions of shopping centers and acquisitions of retail properties, (ii) $2,823,000 resulted from rental step-ups in existing tenant leases which are not subject to the straight-line method of revenue recognition and (iii) $628,000 resulted from property rentals received from new tenants exceeding property rentals lost from vacating tenants.
Property rentals from the remainder of the portfolio were $6,174,000 in 1995, compared to $6,090,000 in 1994, an increase of $84,000 or 1.4%. Percentage rent was $959,000 in 1995, compared to $887,000 in 1994.
Tenant expense reimbursements were $24,091,000 in 1995, compared to $21,784,000 in 1994, an increase of $2,307,000. This increase reflects a corresponding increase in operating expenses passed through to tenants.
Other income was $4,198,000 in 1995, compared to $1,459,000 in 1994, an increase of $2,739,000. This increase resulted primarily from the fee income recognized in connection with the Management Agreement and Leasing Agreement with Alexander's (including $915,000 applicable to 1993 and 1994 recognized in the first quarter of 1995). No leasing fee income was recognized prior to 1995 because Alexander's had not repaid certain creditors, which was a condition precedent to the commencement of the payment of leasing fees owed by Alexander's to the Company. In addition to the Management Agreement fee income included in other income in 1995, $2,250,000 of such fees was earned in 1995 by Vornado Management Corp. ("VMC") and is included in the caption "Income from investment in and advances to Vornado Management Corp." in the Consolidated Statements of Income.
Operating expenses were $32,282,000 in 1995 as compared to $30,223,000 in 1994, an increase of $2,059,000. Of this increase (i) $1,484,000 resulted from real estate taxes from expansions and acquisitions, which were passed through to tenants, and (ii) $258,000 resulted from bad debt expenses primarily due to tenant bankruptcies.
Depreciation and amortization expense increased in 1995, compared to 1994, primarily as a result of property expansions.
General and administrative expenses were $6,687,000 in 1995 as compared to $6,495,000 in 1994, an increase of $192,000. This increase is the net of increases from (i) payroll expenses of $1,017,000, (due to additions to staff and bonuses), and (ii) professional fees and other corporate office expenses of $305,000, offset by (iii) the reduction in expenses of $1,130,000 resulting from the assignment of the Company's Management Agreement with Alexander's to VMC in the third quarter of this year.
In March 1995, the Company purchased all of the 1,353,468 shares of common stock of Alexander's then owned by Citibank, representing 27.1% of the outstanding shares. As a result of the acquisition, the Company owns 29.3% of the common stock of Alexander's and has changed its accounting for its investment in Alexander's to the equity method. For the period from March 2, 1995 through December 31, 1995, Vornado's equity in Alexander's losses amounted to $1,972,000. In addition, during the same period the Company recognized interest income on its loan to Alexander's of $6,343,000 and fee income from its Management Agreement and Leasing Agreement with Alexander's of $2,973,000 (excluding $2,250,000 earned by VMC - see paragraph below). The Company believes that its share of Alexander's losses (which are non-cash) combined with its fee income and interest income will not have a negative effect on its results of operations, liquidity and financial condition.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
- -------------------------------------------------------------------------------
On July 6, 1995 the Company assigned its Management Agreement with Alexander's to VMC, a newly formed New Jersey corporation. In exchange, the Company received 100% of the non-voting preferred stock of VMC which entitles it to 95% of the distributions by VMC to its shareholders. In addition, the Company lent $5,000,000 to VMC for working capital purposes under a three year term loan bearing interest at the prime rate plus 2%. VMC is responsible for its pro-rata share of compensation (including bonuses) and fringe benefits of common employees and 30% of other common expenses. Income from investment in and advances to VMC consists of dividend income of $565,000 and interest income of $223,000.
Investment income (interest and dividend income and net gains/(losses) on marketable securities) was $5,733,000 for 1995, compared to $8,132,000 in 1994, a decrease of $2,399,000 or 29.5%. This decrease was caused by (i) lower interest income resulting from the use of cash for the Alexander's investment and (ii) net gains on marketable securities being $349,000 less than in the prior year.
Interest and debt expense was $16,426,000 in 1995 as compared to $14,209,000 in 1994, an increase of $2,217,000 or 15.6%. Of this increase, $1,046,000 resulted from borrowings under the revolving credit facility to temporarily fund the investment in Alexander's and $1,134,000 resulted from a decrease in interest capitalized during construction.
The Company operates in a manner intended to enable it to continue to qualify as a REIT under Sections 856-860 of the Internal Revenue Code of 1986 as amended (the "Code"). Under those sections, a REIT which distributes at least 95% of its REIT taxable income as a dividend to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. The Company has distributed to its shareholders an amount greater than its taxable income. Therefore, no provision for Federal income taxes is required. In 1993, as a result of the Company's conversion to a REIT, the deferred tax balance of $6,369,000 at December 31, 1992 was reversed.
RESULTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1993
The Company's revenues, which consist of property rentals, tenant expense reimbursements and other income were $93,998,000 in 1994, compared to $88,790,000 in 1993, an increase of $5,208,000 or 5.9%.
Property rentals from shopping centers were $63,778,000 in 1994, compared to $60,919,000 in 1993, an increase of $2,859,000 or 4.7%. This increase resulted from rental step-ups in leases which are not subject to the straight-line method of revenue recognition of $1,700,000 and $1,300,000 of rents from tenants at expansions of shopping centers. Property rentals from new tenants were approximately the same as property rentals lost from vacating tenants. Property rentals from the remainder of the portfolio were $6,090,000 in 1994 as compared to $5,340,000 in 1993, an increase of $750,000 or 14.0%. This increase resulted primarily from property rentals received from new tenants exceeding property rentals lost from vacating tenants. Percentage rent was $887,000 in 1994 as compared to $954,000 in 1993.
Tenant expense reimbursements were $21,784,000 in 1994, compared to $19,839,000 in 1993, an increase of $1,945,000. This increase reflects a corresponding increase in operating expenses passed through to tenants.
Other income was greater in 1993 than in 1994 primarily as a result of reimbursements recognized under the Company's leasing agreement with Alexander's in 1993.
Operating expenses were $30,223,000 in 1994 as compared to $27,994,000 in 1993, an increase of $2,229,000. This increase resulted primarily from an increase in real estate taxes, snow removal costs and other common area maintenance charges.
Depreciation and amortization expense increased in 1994 primarily as a result of the completion of property expansions.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- -------------------------------------------------------------------------------
General and administrative expenses were $6,495,000 in 1994 as compared to $5,890,000 in 1993, an increase of $605,000. This increase resulted from higher professional fees and payroll.
Investment income was $8,132,000 in 1994 compared to $11,883,000 in 1993, a decrease of $3,751,000 or 31.6%. The change in investment income resulted primarily from a decrease in interest and dividend income of $4,131,000 as a result of lower average investments due to the use of approximately $100,000,000 to reduce debt in November 1993, partially offset by an increase in net gains on marketable securities.
Interest and debt expense was $14,209,000 in 1994 as compared to $31,155,000 in 1993, a decrease of $16,946,000 or 54.3%. Of this decrease, (i) $14,586,000 resulted from the refinancing of a blanket mortgage loan (see Note 6), and (ii) $1,300,000 resulted from an increase in capitalized interest during construction.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Year Ended December 31, 1995 Cash flows provided by operating activities of $62,882,000 was comprised of: (i) net income of $53,008,000 and (ii) adjustments for non-cash items of $11,305,000 less (iii) the net change in operating assets and liabilities of $1,431,000. The adjustments for non-cash items are primarily comprised of depreciation and amortization of $11,779,000, plus equity in loss of Alexander's of $2,389,000, offset by the effect of straight-lining of rental income of $2,569,000. Further, during this period in connection with the Alexander's transaction, "Leasing fees and other receivables" increased by $7,656,000 and "Deferred leasing fee income" correspondingly increased by $8,888,000. These amounts have been included in "Changes in assets and liabilities: other" in the Consolidated Statements of Cash Flows and are part of the net change in operating assets and liabilities shown in item (iii) above.
Net cash used in investing activities of $103,891,000 was comprised of (i) the Company's investment in and advances to Alexander's of $100,482,000, (ii) capital expenditures of $16,644,000, (iii) a loan to VMC of $5,074,000 and (iv) purchases of securities available for sale of $4,027,000, offset by (v) the net proceeds from the sale of securities available for sale of $22,336,000.
Net cash provided by financing activities of $36,577,000 was primarily comprised of (i) net proceeds from issuance of common shares of $79,831,000, and (ii) borrowings on U.S. Treasury obligations of $9,600,000, offset by (iii) dividends paid of $52,875,000.
Year Ended December 31, 1994 Cash flows provided by operating activities of $46,948,000 was comprised of: (i) net income of $41,240,000, and (ii) adjustments for non-cash items of $8,015,000, less (iii) the net change in operating assets and liabilities of $2,307,000. The adjustments for non-cash items are primarily comprised of depreciation and amortization of $10,839,000, offset by the effect of straight-lining of rental income of $2,181,000.
Net cash used in investing activities of $15,434,000 was comprised of capital expenditures of $25,417,000, offset by proceeds from the sale of securities available for sale of $9,983,000.
Net cash used in financing activities of $32,074,000 was primarily comprised of dividends paid of $43,236,000, offset by borrowings on U.S. Treasury obligations of $11,428,000.
Year Ended December 31, 1993 Cash flows provided by operating activities of $27,725,000 was primarily comprised of: (i) net income of $31,755,000, less (ii) adjustments for non-cash items of $599,000 and the net change in operating assets and liabilities of $2,831,000. The adjustments for non-cash items are primarily comprised of depreciation and amortization of $11,435,000, offset by (i) the effect of straight- lining of rental income of $2,200,000, (ii) the reversal of deferred income taxes of $6,369,000, and (iii) the loss on the early extinguishment of debt of $3,202,000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
- -------------------------------------------------------------------------------
Net cash provided by investing activities of $1,350,000 was comprised of net proceeds from the sale of securities available for sale of $28,336,000, offset by capital expenditures of $26,986,000.
Net cash used in financing activities of $56,433,000 was primarily comprised of (i) debt repayments of $333,664,000, net of proceeds from borrowings of $227,000,000, less $5,247,000 of deferred debt expenses incurred therewith, (ii) dividends paid to shareholders of $84,482,000 (including a special dividend of $54,022,000 of accumulated earnings and profits, as determined for federal income tax purposes), and (iii) repayment of borrowings on U.S. Treasury obligations of $30,048,000, offset by (iv) net proceeds from issuance of common shares of $172,051,000.
FUNDS FROM OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Management considers funds from operations an appropriate supplemental measure of the Company's operating performance. Funds from operations were $62,409,000 in 1995, compared to $48,200,000 in 1994, an increase of $14,209,000 or 29.5%. The following table reconciles funds from operations and net income:
* Effective January 1, 1995, the Company changed its definition of funds from operations to exclude amortization of debt issuance costs and depreciation of personal property. Prior period amounts have been restated to conform to the current year's presentation. 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.
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. Below are the cash flows provided by (used in) operating, investing and financing activities:
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
- -------------------------------------------------------------------------------
On June 23, 1995, Bradlees, which accounted for 21% of property rentals for the year ended December 31, 1995, filed for protection under Chapter 11. The Company leases 21 locations to Bradlees of which 19 are fully guaranteed by Stop & Shop Companies, Inc. Furthermore, Montgomery Ward & Co., Inc., remains liable on eight of such leases including the rent it was obligated to pay approximately 70% of current rent. Bradlees has not affirmed any of these leases.
The major items of capital expenditures for 1995 were $8,200,000 for expansions of four shopping centers and $4,600,000 for improvements at five shopping centers. The Company has budgeted approximately $3,000,000 for investment over the next year. In addition, the Company will continue its program of upgrading its shopping centers by refurbishing its parking lots (including resurfacing, new lighting, updated landscaping, islands and curbing) and re-roofing of buildings, the cost of which will be substantially reimbursed by tenants in accordance with existing lease terms.
In March 1995, the Company purchased all of the 1,353,468 shares of common stock of Alexander's then owned by Citibank, representing 27.1% of the outstanding shares of common stock of Alexander's, for $40.50 per share in cash or $56,615,000 (including $1,800,000 of costs incurred in the purchase). As a result of the acquisition, the Company owns 29.3% of the common stock of Alexander's.
On March 15, 1995, the Company lent Alexander's $45 million, the subordinated tranche of a $75 million secured financing, the balance of which was funded by a bank. The Company's loan has a three-year term and bears interest at 16.43% per annum for the first two years and at a fixed rate for the third year of 992 basis points over the one-year Treasury bill rate. In addition, the Company received a loan origination fee of $1,500,000 from Alexander's.
Alexander's has disclosed in its annual report on Form 10-K for the year ended December 31, 1995, that its current operating properties (five of its nine properties) do not generate sufficient cash flow to pay all of its expenses, and that its four non-operating properties (Lexington Avenue, Paramus, the Kings Plaza Store and Rego Park II) are in various stages of redevelopment, and as rents commence from a portion of the redevelopment properties, it expects that cash flow will become positive.
In addition to the disclosures above, Alexander's estimates that the fair market values of its assets are substantially in excess of their historical cost and that there is additional borrowing capacity. Alexander's continues to evaluate its needs for capital, which may be raised through (a) property specific or corporate borrowing, (b) the sale of securities and (c) asset sales. Further, Alexander's may receive the proceeds from tax certiorari and/or condemnation proceedings. Although there can be no assurance, Alexander's believes that these cash sources will be adequate to fund cash requirements until its operations generate adequate cash flow.
On February 27, 1995, the Company entered into a three-year unsecured revolving credit facility with a bank providing for borrowings of up to $75,000,000. Borrowings bear annual interest, at the Company's election, at LIBOR plus 1.50% or the higher of the federal funds rate plus 1% or prime rate plus .50%. At December 31, 1995 the Company had no borrowings outstanding under the facility.
On May 3, 1995, the Company completed the sale of 2,500,000 common shares in a public offering at $34.00 per share, which net of expenses yielded approximately $80,000,000 of which $60,000,000, was used to repay indebtedness incurred under a revolving credit facility in connection with the Alexander's investment. On December 26, 1995, a shelf registration statement relating to $500,000,000 of securities became effective.
The Company anticipates that cash from continuing operations, net liquid assets, borrowings under its revolving credit facility and/or proceeds from the issuance of securities under the Company's shelf registration statement will be adequate to fund its business operations, capital expenditures, continuing debt obligations and the payment of dividends.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - (continued)
- -------------------------------------------------------------------------------
ECONOMIC CONDITIONS
At December 31, 1995, approximately 80% of the square footage of the Company's shopping centers was leased to large stores (over 20,000 square feet). The Company's large store tenants typically offer basic consumer necessities such as food, health and beauty aids, moderately priced clothing, building materials and home improvement supplies, and compete primarily on the basis of price. The Company believes that this tenant mix mitigates the effects on its properties of adverse changes in general economic conditions. However, demand for retail space has been impacted by the recent bankruptcy of a number of retail companies (see page 18) and a general trend toward consolidation in the retail industry which could adversely affect the ability of the Company to attract or retain tenants.
Substantially all of the Company's leases contain step-ups in rent. Such rental increases are not designed to, and in many instances do not, approximate the cost of inflation, but do have the effect of mitigating the adverse impact of inflation. In addition, substantially all of the Company's leases contain provisions that require the tenant to reimburse the Company for the tenant's share of common area charges (including roof and structure, unless it is the tenant's direct responsibility) and real estate taxes thus passing through to the tenants the effects of inflation on such expenses.
Inflation did not have a material effect on the Company's results for the periods presented.
RECENTLY ISSUED ACCOUNTING STANDARDS
In October 1995, the Financial Accounting Standards Board adopted Statement No. 123, "Accounting for Stock-Based Compensation". The statement is effective for fiscal years beginning after December 15, 1995. Pursuant to the new standard, companies are required to adopt the fair value method of accounting for employee stock-based transactions. The new standard requires expanded disclosures of stock-based compensation arrangements with employees and encourages, but does not require, application of the "fair value" recognition provisions in the new statement. Beginning with the first quarter of 1996, the Company will disclose in a note to the financial statements pro forma net income and earnings per share based on the new method of accounting.
ITEM 8.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH INDEPENDENT AUDITORS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
INDEPENDENT AUDITORS' REPORT
Shareholders and Board of Trustees Vornado Realty Trust Saddle Brook, New Jersey
We have audited the accompanying consolidated balance sheets of Vornado Realty Trust and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity (deficit) and cash flows for each of the three years in the period ended December 31, 1995. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Vornado Realty Trust and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP Parsippany, New Jersey March 7, 1996
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS (CONTINUED)
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
* Includes $3,435 in unrealized gains attributable to the Company's investment in the common stock of Alexander's, Inc. (see Note 3).
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
NON-CASH TRANSACTIONS:
During the year ended December 31, 1995, the unrealized gain on securities available for sale included in shareholders' equity was adjusted to reflect (i) a reduction of $3,435 to the Company's investment in Alexander's as a result of the change from fair value to the equity method of accounting and (ii) a net decrease of $263 in the market value of other securities available to sale.
During 1994, a credit to shareholders' equity of $2,336 was recorded to reflect an unrealized gain on securities available for sale.
In May 1993, 5,007,024 shares of common stock held in treasury were retired. The retirement of the shares was recorded by reducing the common stock account ($200), additional capital ($53,917) and retained earnings ($128,933).
- ------------------------------------------------------------------------------- See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------
1. ORGANIZATION AND BUSINESS
On May 6, 1993, Vornado, Inc. merged into Vornado Realty Trust, a Maryland real estate investment trust ("REIT"). Vornado Realty Trust was formed on March 29, 1993, as a wholly-owned subsidiary of Vornado, Inc., specifically for the purpose of the merger.
The Company is a fully-integrated REIT which owns, leases, develops, redevelops and manages retail and industrial properties primarily located in the Midatlantic and Northeast regions of the United States. In addition, the Company owns 29.3% of the common stock of Alexander's, Inc. which has nine properties in the greater New York metropolitan area.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying consolidated financial statements include the accounts of Vornado Realty Trust and its subsidiaries, all of which are wholly-owned. All significant intercompany balances and transactions have been eliminated.
The consolidated financial statements are prepared in conformity with generally accepted accounting principles. Management has made estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
The financial statements for the applicable periods present the fleece apparel wholesaling business as a discontinued operation.
REAL ESTATE: Real estate is carried at cost, net of accumulated depreciation and amortization. Betterments, major renewals and certain costs directly related to the acquisition, improvement and leasing of real estate are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation is provided on a straight-line basis over the assets estimated useful lives. Additions to real estate include interest expense capitalized during construction of $442,000 and $1,582,000 for the years ended December 31, 1995 and 1994.
The Company's policy is to assess any impairment in value by making a comparison of the current and projected operating cash flows of each of its properties into the foreseeable future on an undiscounted basis, to the carrying amount of such property. Such carrying amount would be adjusted, if necessary, to reflect an impairment in the value of the asset. This is in accordance with Financial Accounting Standards Board Statement No. 121 -
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of (SFAS No. 121).
CASH AND CASH EQUIVALENTS: Cash and cash equivalents consist of highly liquid investments purchased with original maturities of three months or less.
MARKETABLE SECURITIES: Marketable securities are carried at fair market value. The Company has classified debt and equity securities which it intends to hold for an indefinite period of time as securities available for sale and equity securities it intends to buy and sell on a short term basis as trading securities. Unrealized gains and losses are included in earnings for trading securities and as a component of shareholder's equity for securities available for sale. Realized gains or losses on the sale of securities are recorded based on average cost.
REVENUE RECOGNITION: Base rents, additional rents based on tenants' sales volume and reimbursement of the tenants' share of certain operating expenses are generally recognized when due from tenants. The straight-line basis is used to recognize base rents under leases entered into after November 14, 1985 which provide for varying rents over the lease terms.
INCOME TAXES: The Company operates in a manner intended to enable it to continue to qualify as a REIT under Sections 856-860 of the Internal Revenue Code of 1986 as amended. Under those sections, a REIT which distributes at least 95% of its REIT taxable income as a dividend to its shareholders each year and which meets certain other conditions will not be taxed on that portion of its taxable income which is distributed to its shareholders. The Company has distributed to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
shareholders an amount greater than its taxable income. Therefore, no provision for Federal income taxes is required. As a result of the Company's conversion to a REIT in 1993, the deferred tax balance at December 31, 1992 was reversed in 1993. The basis in the Company's assets and liabilities for both financial reporting purposes and tax purposes is approximately the same.
AMOUNTS PER SHARE: Amounts per share are computed based upon the weighted average number of shares outstanding during the year and the dilutive effect of stock options.
3. INVESTMENT IN AND ADVANCES TO ALEXANDER'S
In March 1995, the Company purchased all of the 1,353,468 shares of common stock of Alexander's then owned by Citibank, N.A. ("Citibank") representing 27.1% of the outstanding shares of common stock of Alexander's for $40.50 per share in cash or $56,615,000 (including $1,800,000 of costs incurred in the purchase). At December 31, 1994, the Company owned 113,100 shares of Alexander's common stock. The investment was carried at market value of $5,980,000 at December 31, 1994 (cost was $2,545,000). As a result of the acquisition, the Company owns 29.3% of the common stock of Alexander's and has changed its accounting for its investment in Alexander's to the equity method. This required a reduction of its investment by the unrealized gain recorded in shareholders' equity at December 31, 1994, of $3,435,000. Prior years' financial statements were not restated as a result of the change in accounting for the Company's investment in Alexander's due to it not being material. In accordance with purchase accounting, Vornado's investment in Alexander's in excess of carrying amounts has been allocated two-thirds to land and one-third to building. The building allocation in excess of Alexander's carrying amount is being depreciated over a 35 year period.
Also, in March 1995, the Company lent Alexander's $45 million, the subordinated tranche of a $75 million secured financing, the balance of which was funded by a bank. The Company's loan has a three-year term and bears interest at 16.43% per annum for the first two years and at a fixed rate for the third year of 992 basis points over the one-year Treasury bill rate. In addition, the Company received a loan origination fee of $1,500,000 from Alexander's to be amortized over the term of the loan.
Investment in and advances to Alexander's consists of:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - -------------------------------------------------------------------------------- 3. INVESTMENT IN AND ADVANCES TO ALEXANDER'S - CONTINUED Below is a summarized Balance Sheet as at December 31, 1995 and Statement of Operations of Alexander's for the period from March 2, 1995 to December 31, 1995:
The unaudited proforma information set forth below presents the condensed statement of income for Vornado for the years ended December 31, 1995 and 1994, as if on January 1, 1994, the investment in Alexander's and related agreements were consummated and 1,880,000 common shares of beneficial interest of Vornado were issued to partially fund the investment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - --------------------------------------------------------------------------------
3. INVESTMENT IN AND ADVANCES TO ALEXANDER'S - CONTINUED
In March 1995, the Company and Alexander's entered into a three-year management and development agreement (the "Management Agreement"). The annual management fee payable to the Company by Alexander's is $3,000,000, plus 6% of development costs with a minimum guaranteed fee for the development portion of $1,650,000 in the first year and $750,000 in each of the second and third years. On July 6, 1995, the Company assigned this Management Agreement to Vornado Management Corp. Management fees subsequent to July 6, 1995 of $2,250,000 were received by Vornado Management Corp. (see Note 12).
The fee pursuant to the Management Agreement is in addition to the leasing fee the Company receives from Alexander's under the leasing agreement (the "Leasing Agreement") which has been in effect since 1992 and has been extended to be coterminous with the term of the Management Agreement. The Company recognized $1,448,000 of leasing fee income in 1995. The Leasing Agreement provides for the Company to generally receive a fee of (i) 3% of sales proceeds and (ii) 3% of lease rent for the first ten years of a lease term, 2% of lease rent for the eleventh through the twentieth years of a lease term and 1% of lease rent for the twenty-first through thirtieth year of a lease term. Subject to the payment of rents by Alexander's tenants, the Company is due $7,868,000 at December 31, 1995. Such amount is receivable annually in an amount not to exceed $2,500,000 until the present value of such installments (calculated at a discount rate of 9% per annum) equals the amount that would have been paid had it been paid on September 21, 1993, or at the time the transactions which gave rise to the commissions occurred, if later. Two leases which the Company had previously negotiated on behalf of Alexander's for its Paramus property terminated in the second quarter of 1995 because governmental approvals to begin construction on a timely basis could not be obtained as a result of a pending condemnation, resulting in $2,424,000 of previously recorded leasing fees receivable and a corresponding credit (deferred leasing fee income) being reversed.
As of December 31, 1995, Interstate Properties owned 27.7% of the common shares of the Company and 27.1% of Alexander's common stock. Steven Roth is the Chairman of the Board and Chief Executive Officer of the Company, the managing general partner of Interstate Properties and the Chief Executive Officer, and a director of Alexander's. Effective March 2, 1995, for a three-year period, the Company and Interstate agreed not to own in excess of two-thirds of Alexander's common stock or to enter into certain other transactions with Alexander's, other than the transactions described above, without the consent of Alexander's independent directors.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - --------------------------------------------------------------------------------
4. MARKETABLE SECURITIES
The aggregate cost and market value of securities held at December 31, 1995 and 1994 were as follows:
Gross unrealized gains and losses at December 31, 1995 and 1994 were as follows:
Of the U.S. treasury obligations at December 31, 1995, $40,604,000 (market value $40,781,000) matured in the first quarter of 1996, $4,993,000 (market value $5,064,000) matures in the fourth quarter of 1996 and $10,468,000 (market value $10,776,000) matures in the fourth quarter of 1997.
U.S. treasury obligations with a fair market value of $56,621,000 and $35,205,000 were held as collateral for amounts due for U.S. treasury obligations at December 31, 1995 and 1994. Amounts due for U.S. treasury obligations bear variable interest rates which averaged 6.08% and 4.36% for the years ended December 31, 1995 and 1994.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - --------------------------------------------------------------------------------
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value of cash and cash equivalents, due from officer, accounts receivable, amounts due for U.S. Treasury obligations, accounts payable, and accrued expenses are reflected in the balance sheet. The fair value of marketable securities is based on quoted market prices. At December 31, 1995 and 1994, the fair value of marketable securities was $70,997,000 and $87,206,000 compared to carrying value of $72,251,000 and $88,297,000 at their respective dates. The fair value of the loan receivable from Alexander's and the notes and mortgages payable have been estimated by discounting cash flows at the current rate at which similar loans would be made to borrowers with similar credit ratings for the remaining term. At December 31, 1995, the fair value of the loan receivable was estimated at $46,100,000 compared to a carrying value of $45,000,000. At December 31, 1995 and 1994, the fair value of notes and mortgages payable was estimated to be $233,900,000 and $205,496,000, compared to carrying value of $233,353,000 and $234,160,000 at their respective dates. The fair value estimates presented herein are based on pertinent information available to management as of December 31, 1995 and 1994.
6. NOTES AND MORTGAGES PAYABLE
In November 1993, a private placement of $227,000,000 aggregate principal amount of secured notes due December 1, 2000 was completed by Vornado Finance Corp., a wholly-owned, special-purpose subsidiary of the Company. The 7-year notes bear a fixed rate of interest of 6.36% per annum. The net proceeds from the offering, together with working capital of Vornado Realty Trust, were used to prepay $327,132,000 of debt, including $313,539,000 under a blanket mortgage loan which bore interest at a rate of 9.36% per annum and was scheduled to mature in January 1994. As a result of the early extinguishment of debt, a fourth quarter extraordinary charge of $3,202,000, which primarily represented prepayment penalties, was recorded in 1993.
Notes and mortgages are summarized by range of interest rates as follows:
The net carrying value of property securing the notes and mortgages amounted to $172,306,000 at December 31, 1995. As at December 31, 1995, the maturities for the next five years are as follows:
On February 27, 1995, the Company entered into a three-year unsecured revolving credit facility with a bank providing for borrowings of up to $75,000,000. Borrowings bear annual interest, at the Company's election, at LIBOR plus 1.50% or the higher of the federal funds rate plus 1% or prime rate plus .50%. At December 31, 1995 the Company had no borrowings outstanding under the facility.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - --------------------------------------------------------------------------------
7. EMPLOYEES' SHARE OPTION PLAN
Various officers and key employees have been granted incentive share options and/or nonqualified options to purchase common shares. Options granted are at prices equal to 100% of the market price of the Company's shares at date of grant, become exercisable up to 27 months after grant, and expire ten years after the date of grant.
The changes in number of shares under option for the three years ended December 31, 1995 were as follows:
* Option prices and number of shares have been adjusted, as applicable, to reflect the impact of a $3.36 special dividend paid in June 1993, in accordance with the terms of the Plan.
- -------------------------------------------------------------------------------- Shares available for future grant at December 31, 1995 were 1,252,816. - --------------------------------------------------------------------------------
In October 1995, the Financial Accounting Standards Board adopted Statement No. 123, "Accounting for Stock-Based Compensation". The statement is effective for fiscal years beginning after December 15, 1995. Pursuant to the new standard, companies are required to adopt the fair value method of accounting for employee stock-based transactions. The new standard requires expanded disclosures of stock-based compensation arrangements with employees and encourages, but does not require, application of the "fair value" recognition provisions in the new statement. Beginning with the first quarter of 1996, the Company will disclose in a note to the financial statements pro forma net income and earnings per share based on the new method of accounting.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - --------------------------------------------------------------------------------
8. RETIREMENT PLAN
The Company's qualified retirement plan covers all full-time employees. The Plan provides annual pension benefits that are equal to 1% of the employee's annual compensation for each year of participation.
The funding policy is in accordance with the minimum funding requirements of ERISA.
Pension expense includes the following components:
The following table sets forth the Plan's funded status and the amount recognized in the Company's balance sheet:
Plan assets are invested in U.S. government obligations and securities backed by U.S. government guaranteed mortgages.
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - --------------------------------------------------------------------------------
9. LEASES
As lessor:
The Company leases properties to tenants. The lease terms range from less than five years for smaller tenant spaces to as much as thirty years for major tenants. Most of the leases provide for the payment of fixed base rentals payable monthly in advance, and for the payment by the lessee of additional rents based on a percentage of the tenants' sales as well as reimbursements of real estate taxes, insurance and maintenance. As of December 31, 1995, future base rental revenue under noncancellable operating leases, excluding rents for leases with an original term of less than one year and rents resulting from the exercise of renewal options, is as follows:
These amounts do not include rentals based on tenants' sales. These percentage rents approximated $959,000, $887,000 and $954,000 for the years ended December 31, 1995, 1994 and 1993. Bradlees, Inc. accounted for 21%, 19% and 18% of total property rentals for each of the three years ended December 31, 1995, respectively. In June 1995, Bradlees filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The Company leases 21 locations to Bradlees of which 19 are fully guaranteed by Stop & Shop Companies, Inc. Further, Montgomery Ward & Co., Inc. remains liable on eight of such leases including the rent it was obligated to pay - approximately 70% of current rent. Bradlees has not affirmed any of these leases.
As lessee:
The Company is a tenant under leases for certain properties. These leases will expire principally during the next twenty years. Future minimum lease payments under operating leases at December 31, 1995, are as follows:
Rent expense was $1,395,000, $1,313,000, and $1,366,000 for the years ended December 31, 1995, 1994 and 1993.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - --------------------------------------------------------------------------------
10. CONTINGENCIES
In order to comply with environmental laws and with relevant health-based standards, the Company has an active monitoring and maintenance program for asbestos-containing materials ("ACMs") on its properties. The Company's program to remove friable ACMs has been completed, except for one location. Pursuant to the lease for this location, it is the tenant's responsibility to remove such ACMs. The Company has received an estimate of $500,000 to remove such ACMs; if the Company has to make such expenditure, it will not have a material adverse effect on the Company's financial condition or results of operations.
The Company also has certain other existing and potential environmental liabilities with respect to compliance costs relating to underground storage tanks and cleanup costs relating to tanks at three Company sites at which preexisting contamination was found.
The Company believes that known and potential environmental liabilities will not have a material adverse effect on the Company's business, assets or results of operation. However, there can be no assurance that the identification of new areas of contamination, change in the extent or known scope of contamination, the discovery of additional sites, or changes in cleanup requirements would not result in significant costs to the Company.
At December 31, 1995, the Company had outstanding $900,000 of real estate related standby letters of credit which were drawn under a $5,000,000 unsecured line of credit with a bank bearing interest at prime.
From time-to-time, the Company has disposed of substantial amounts of real estate to third parties for which, as to certain properties, it remains contingently liable for rent payments or mortgage indebtedness.
There are various legal actions against the Company in the ordinary course of business. In the opinion of management, after consultation with legal counsel, the outcome of such matters will not have a material effect on the Company's financial condition or results of operations.
11. REPURCHASE AGREEMENTS
The Company enters into agreements for the purchase and resale of U.S. government obligations for periods of up to one week. The obligations purchased under these agreements are held in safekeeping in the name of the Company by various money center banks. The Company has the right to demand additional collateral or return of these invested funds at any time the collateral value is less than 102% of the invested funds plus any accrued earnings thereon.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - --------------------------------------------------------------------------------
12. VORNADO MANAGEMENT CORP.
On July 6, 1995, the Company assigned its Management Agreement with Alexander's (see Note 3) to Vornado Management Corp. ("VMC"), a newly formed New Jersey corporation. In exchange, the Company received 100% of the non-voting preferred stock of VMC which entitles it to 95% of the distributions by VMC to its shareholders. Steven Roth and Richard West, Trustees of the Company, own the common stock of VMC. In addition, the Company lent $5,000,000 to VMC for working capital purposes under a three year term loan bearing interest at the prime rate plus 2%. VMC is responsible for its pro-rata share of compensation and fringe benefits of common employees and 30% of other common expenses. This entity is not consolidated and the Company accounts for its investment in VMC on the equity method. Below is a summarized Statement of Operations of VMC for the period from July 6, 1995 to December 31, 1995:
13. OTHER RELATED PARTY TRANSACTIONS
At December 31, 1995, the loans due from Mr. Roth ($13,122,500) Mr. Rowan ($253,000) and Mr. Macnow ($227,000) in connection with their stock option exercises aggregated $13,602,500 ($5,185,000 of which is shown as a reduction in shareholders' equity). The loans bear interest at a rate equal to the broker call rate (7.50% at December 31, 1995) but not less than the minimum applicable federal rate provided under the Internal Revenue Code. Interest on the loan to Mr. Roth is payable quarterly. Mr. Roth's loan is due on December 29, 1997. The loans to Messrs. Rowan and Macnow are due March 31, 1996.
The Company currently manages and leases the six shopping centers of Interstate Properties pursuant to a Management Agreement for which the Company receives a quarterly fee equal to 4% of base rent and percentage rent and certain other commissions. The Management Agreement has a term of one year and is automatically renewable unless terminated by either of the parties on sixty days' notice at the end of the term. Although the Management Agreement was not negotiated at arms length, the Company believes based upon comparable fees charged by other real estate companies, that its terms are fair to the Company. For the years ended December 31, 1995, 1994 and 1993, $1,150,000, $894,000 and $913,000 of management fees were earned by the Company pursuant to the Management Agreement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) - --------------------------------------------------------------------------------
14. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The following summary represents the results of operations for each quarter in 1995 and 1994:
* The total for the year ended December 31, 1994 differs from the sum of the quarters as a result of the weighting of the average number of shares outstanding and the dilutive effect of stock options.
15. DIVIDEND DISTRIBUTIONS
Dividends are characterized for Federal income tax purposes as follows:
* For shareholders who received all dividends distributed during 1993.
16. SUBSEQUENT EVENT
On January 11, 1996, the Company provided $17 million of debtor-in-possession financing to Rickel Home Centers, Inc. ("Rickel"), which is operating under Chapter 11 of the Bankruptcy Code. The loan is secured by 29 of Rickel's leasehold properties and has a term of one year plus two annual extensions, but is due not later than the date on which Rickel's plan of reorganization is confirmed. The loan earns interest at 13% per annum for the first year and at a fixed rate of LIBOR plus 7.50% for the extension periods. In addition, the Company received a loan origination fee of 2% or $340,000 and will receive an additional fee of 2% of the outstanding principal amount on each extension.
PART III
ITEM 10.

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to trustees of the Registrant will be contained in a definitive Proxy Statement involving the election of trustees which the Registrant will file with the Securities and Exchange Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than 120 days after December 31, 1995, and such information is incorporated herein by reference. Information relating to Executive Officers of the Registrant appears at page 10 of this Annual Report on Form 10-K.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation will be contained in the Proxy Statement referred to above in Item 10, "Directors and Executive Officers of the Registrant", and such information is incorporated herein by reference.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information relating to security ownership of certain beneficial owners and management will be contained in the Proxy Statement referred to in Item 10, "Directors and Executive Officers of the Registrant", and such information is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information relating to certain relationships and related transactions will be contained in the Proxy Statement referred to in Item 10, "Directors and Executive Officers of the Registrant", and such information is incorporated herein by reference.
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. The consolidated financial statements are set forth in Item 8 of this Annual Report on Form 10-K.
2. Financial Statement Schedules.
The following financial statement schedules should be read in conjunction with the financial statements included in Item 8 of this Annual Report on Form 10-K.
Schedules other than those listed above are omitted because they are not applicable or the information required is included in the consolidated financial statements or the notes thereto.
The consolidated financial statements of Alexander's, Inc. for the year ended December 31, 1995 are hereby incorporated by reference to Item 14(a)1 of the Annual Report on Form 10-K of Alexander's, Inc.
3. Exhibits. See the Exhibit Index at page 48 of this Annual Report on Form 10-K. The following exhibits listed on the Exhibit Index are filed with this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
VORNADO REALTY TRUST
By: s/JOSEPH MACNOW ------------------------------ Joseph Macnow, Vice President, Chief Financial Officer
Date: March 25, 1996 ----------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
VORNADO REALTY TRUST
AND SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
VORNADO REALTY TRUST AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1995 (amounts in thousands)
----- CONTINUED -----
VORNADO REALTY TRUST AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1995 (amounts in thousands)
--- CONTINUED ---
VORNADO REALTY TRUST AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1995 (amounts in thousands)
* These encumbrances are cross collateralized under a blanket mortgage in the amount of $227,000,000 at December 31, 1995.
Notes:
1) Initial cost is cost as of January 30, 1982 (the date on which Vornado commenced real estate operations) unless acquired subsequent to that date - see Column H.
2) Aggregate cost is approximately the same for federal income tax purposes.
3) Date of original construction - many properties have had substantial renovation or additional construction - see Column D.
4) Buildings on these properties were demolished in 1993. As a result, the cost of the buildings and improvements, net of accumulated depreciation, were transferred to land. In addition, the cost of the land in Kearny is net of a $1,615,000 insurance recovery.
VORNADO REALTY TRUST AND SUBSIDIARIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION (amounts in thousands)
The following is a reconciliation of real estate assets and accumulated depreciation:
EXHIBIT INDEX
- -------------------- * Incorporated by reference ** Management contract or compensatory plan
- -------------------- * Incorporated by reference ** Management contract or compensatory plan
- -------------------- * Incorporated by reference