VORNADO REALTY TRUST 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS These costs will be recorded as a reduction to earnings in arriving at net income applicable to common shares, in accordance with the July 2003 EITF clarification of Topic D-42. Holders of Series C Preferred Shares of beneficial interest ar e entitled to receive dividends at an annual rate of 8.5% of the liquidation preference, or $2.125 per Series C Preferred Share per annum. These dividends are cumulative and payable quarterly in arrears. The Series C Preferred Shares ar not convertible into or exchangeable for any other property or any other securities of the Company at the election of the holders. However, subject to certain limitations relating to the source of funds used in connection with any such redemption, on or after May 17, 2004 (or sooner under limited circumstances), the Company, at its option, may redeem Series C Preferred Shares at a r edemption price of $25.00 per share, plus any accrued and unpaid  dividends through the date of redemption. The Series C Pr eferred Shares have no maturity date and will remain outstanding indefinitely unless redeemed by the Company. Holders of Series D-10 Preferred Shares of beneficial inter est are entitled to receive dividends at an annual rate of 7.0% of  the liquidation preference, or $1.75 per Series D-10 Preferr ed Share per annum. These dividends are cumulative and payable quarterly in arrears. The Series D-10 Preferred Shares ar e not convertible into or exchangeable for any other property or  any other securities of the Company at the election of the holders. On or after November 17, 2008 (or sooner under limited  circumstances), the Company, at its option, may redeem Series D-10 Preferred Shares at a redemption price of $25.00  per share, plus any accrued and unpaid dividends through the date of redemption. The Series D-10 Preferred Shares have  no maturity date and will remain outstanding indefinitely unless redeemed by the Company. The Company’s Share Option Plan (the “Plan”) provides for grants of incentive and non-qualified stock options, restricted stock, stock appreciation rights and performance shares to certain employees and officers of the Company. Restricted stock awards ar granted at the market price on the date of grant and vest over a 3 to 5 year period. The Company recognizes the value of restricted stock as compensation expense based on the Company’s closing stock price on the NYSE on the date of grant on a straight-line basis over the vesting period. As of December 31, 2003, there are 246,030 restricted shares outstanding, excluding 626,566 shares issued to the Company’s President in connection with his employment agreement. The Company recognized $2,599,000 and $1,868,000 of compensation expense in 2003 and 2002 for the portion of these shares that vested during each year Dividends paid on both vested and unvested shares are charged directly to retained  earnings and amounted to $777,700 and $210,100 for 2003 and 2002, respectively. Dividends on shares that are cancelled  or terminated prior to vesting are charged to compensation expense in the period of the cancellation or termination.  Stock options are granted at an exercise price equal to 100% of the market price of the Company’s stock on the date of grant, vest pro-rata over three years and expire 10 years from the date of grant. As of December 31, 2003 there are 14,153,587 options outstanding, of which 125,000 wer granted during 2003. On January 1, 2003, the Company elected to adopted SFAS 123—Accounting for Stock Based Compensation, on a pr ospective basis covering all grants subsequent to 2002. Under  SFAS 123, the Company recognizes compensation expense for the fair value of options granted on a straight-line basis over the vesting period. For the year ended December 31, 2003, the Company recognized $77,200 of compensation expense  related to the options granted during 2003. Grants prior to 2003 are accounted for under the intrinsic value method under which compensation expense is measured as the excess, if any , of the quoted market price of the Company’s stock at the date  of grant over the exercise price of the option granted. As the Company’s policy is to grant options with an exercise price equal to 100% of the quoted market price on the grant date, no compensation expense has been recognized for options granted prior to 2003. If compensation cost for grants prior to 2003 were recognized as compensation expense based on the fair value at the grant dates, net income and income per shar would have been reduced to the pro-forma amounts below: 9.  Stock-based Compensation SERIES D-10 PREFERRED SHARES OF BENEFICIAL INTEREST SERIES C PREFERRED SHARES OF BENEFICIAL INTEREST