SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended: MARCH 31, 2002 ------------------------------------------------ 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: 001-11954 -------------------------------------------------------- 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) 888 SEVENTH AVENUE, NEW YORK, NEW YORK 10019 - --------------------------------------------- --------------------------------- (Address of principal executive offices) (Zip Code) (212) 894-7000 - -------------------------------------------------------------------------------- (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 April 29, 2002, 106,513,918 of the registrant's common shares of beneficial interest are outstanding. Page 1 INDEX PART I. FINANCIAL INFORMATION: Item 1. Financial Statements: Page Number ----------- Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001............. 3 Consolidated Statements of Income for the Three Months Ended March 31, 2002 and March 31, 2001................................... 4 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2002 and March 31, 2001................................... 5 Notes to Consolidated Financial Statements....... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 19 Item 3. Quantitative and Qualitative Disclosures About Market Risks............................... 32 PART II. OTHER INFORMATION: Item 1. Legal Proceedings................................ 32 Item 6. Exhibits and Reports on Form 8-K................. 32 Signatures ................................................. 33 Exhibit Index ................................................. 34 Page 2 PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VORNADO REALTY TRUST CONSOLIDATED BALANCE SHEETS See notes to consolidated financial statements. Page 3
(amounts in thousands, except share and per share amounts) MARCH 31, DECEMBER 31, ----------- ------------ ASSETS 2002 2001 ----------- ------------ Real estate, at cost: Land................................................................................. $ 1,500,874 $ 895,831 Buildings and improvements........................................................... 5,184,332 3,480,249 Development costs and construction in progress....................................... 303,164 258,357 Leasehold improvements and equipment................................................. 250,252 55,774 ----------- ------------ Total........................................................................... 7,238,622 4,690,211 Less accumulated depreciation and amortization....................................... (592,897) (506,225) ------------ ------------ Real estate, net................................................................ 6,645,725 4,183,986 Cash and cash equivalents, including U.S. government obligations under repurchase agreements of $17,901 and $15,235......................................... 171,200 265,584 Escrow deposits and restricted cash..................................................... 249,955 204,463 Marketable securities................................................................... 130,144 126,774 Investments and advances to partially-owned entities, including Alexander's of $185,884 and $188,522................................................. 896,355 1,270,195 Due from Officers....................................................................... 18,151 18,197 Accounts receivable, net of allowance for doubtful accounts of $10,124 and $8,831................................................................ 74,130 47,406 Notes and mortgage loans receivable..................................................... 313,965 258,555 Receivable arising from the straight-lining of rents.................................... 148,222 138,154 Other assets............................................................................ 282,760 264,029 ----------- ------------ $ 8,930,607 $ 6,777,343 =========== ============ LIABILITIES AND SHAREHOLDERS' EQUITY Notes and mortgages payable............................................................. $ 3,970,486 $ 2,477,173 Revolving credit facility............................................................... -- -- Accounts payable and accrued expenses................................................... 178,671 179,597 Officers' compensation payable.......................................................... 9,664 6,708 Deferred leasing fee income............................................................. 11,759 11,940 Other liabilities....................................................................... 51,841 51,895 ----------- ------------ Total liabilities.................................................................... 4,222,421 2,727,313 ----------- ------------ Minority interest of unitholders in the Operating Partnership........................... 2,084,924 1,479,658 ------------ ------------ Commitments and contingencies Shareholders' equity: Preferred shares of beneficial interest: no par value per share; authorized 45,000,000 shares; Series A: liquidation preference $50.00 per share; issued and outstanding 2,314,498 and 5,520,435 shares................................................... 115,728 276,024 Series B: liquidation preference $25.00 per share; issued and outstanding 3,400,000 shares................................................................. 81,805 81,805 Series C: liquidation preference $25.00 per share; issued and outstanding 4,600,000 shares................................................................. 111,148 111,148 Common shares of beneficial interest: $.04 par value per share; authorized, 150,000,000 shares; issued and outstanding, 105,918,233 and 99,035,023 shares...... 4,237 3,961 Additional capital................................................................... 2,420,754 2,162,512 Distributions in excess of net income................................................ (120,368) (95,647) ----------- ------------ 2,613,304 2,539,803 Deferred compensation shares earned but not yet delivered............................ 38,253 38,253 Deferred compensation shares issued but not yet earned............................... (23,536) -- Accumulated other comprehensive loss................................................. (55) (2,980) Due from officers for purchase of common shares of beneficial interest............... (4,704) (4,704) ----------- ------------ Total shareholders' equity...................................................... 2,623,262 2,570,372 ----------- ------------ $ 8,930,607 $ 6,777,343 =========== ============ VORNADO REALTY TRUST CONSOLIDATED STATEMENTS OF INCOME (amounts in thousands except per share amounts) See notes to consolidated financial statements. Page 4
FOR THE THREE MONTHS ENDED MARCH 31, ---------------------- 2002 2001 --------- --------- Revenues: Rentals ............................................................... $ 301,760 $ 204,718 Expense reimbursements ................................................ 37,804 35,092 Other income (including fee income from related parties of $203 and $370) ............................ 6,760 2,800 --------- --------- Total revenues .......................................................... 346,324 242,610 --------- --------- Expenses: Operating ............................................................. 127,446 99,823 Depreciation and amortization ......................................... 47,588 31,865 General and administrative ............................................ 23,467 14,808 Amortization of officer's deferred compensation expense ............... 6,875 -- Costs of acquisitions not consummated ................................. -- 5,000 --------- --------- Total expenses .......................................................... 205,376 151,496 --------- --------- Operating income ........................................................ 140,948 91,114 Income applicable to Alexander's ........................................ 5,568 12,304 Income from partially-owned entities .................................... 13,786 23,990 Interest and other investment income .................................... 9,643 13,473 Interest and debt expense ............................................... (58,018) (49,395) Net gain (loss) on disposition of wholly-owned and partially-owned assets 1,531 (4,723) Minority interest: Perpetual preferred unit distributions ................................ (18,460) (17,326) Minority limited partnership earnings ................................. (14,477) (9,629) Partially-owned entities .............................................. (989) (359) --------- --------- Income before cumulative effect of change in accounting principle and extraordinary item ...................................... 79,532 59,449 Cumulative effect of change in accounting principle ..................... (30,129) (4,110) Extraordinary item ...................................................... -- 1,170 --------- --------- Net income .............................................................. 49,403 56,509 Preferred share dividends (including accretion of issuance expenses of $0 and $719) .............................................. (6,131) (9,673) --------- --------- NET INCOME applicable to common shares .................................. $ 43,272 $ 46,836 ========= ========= NET INCOME PER COMMON SHARE - BASIC ..................................... $ .42 $ .54 ========= ========= NET INCOME PER COMMON SHARE - DILUTED ................................... $ .40 $ .52 ========= ========= DIVIDENDS PER COMMON SHARE .............................................. $ .66 $ .53 ========= ========= VORNADO REALTY TRUST CONSOLIDATED STATEMENTS OF CASH FLOWS (amounts in thousands) See notes to consolidated financial statements. Page 5
FOR THE THREE MONTHS ENDED MARCH 31, ---------------------- CASH FLOWS FROM OPERATING ACTIVITIES: 2002 2001 --------- --------- Net income ................................................................. $ 49,403 $ 56,509 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle ................... 30,129 4,110 Extraordinary item .................................................... -- (1,170) Minority interest ..................................................... 33,926 27,314 Net (gain) loss on disposition of wholly-owned and partially-owned assets .............................................. (1,531) 4,723 Depreciation and amortization ......................................... 47,588 31,865 Amortization of Officer's deferred compensation expense ............... 6,875 -- Straight-lining of rental income ...................................... (10,068) (7,895) Equity in income of Alexander's ....................................... (5,568) (12,304) Equity in income of partially-owned entities .......................... (13,786) (23,990) Changes in operating assets and liabilities ........................... (42,106) 5,215 --------- --------- Net cash provided by operating activities .................................. 94,862 84,377 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Development costs and construction in progress ............................. (22,622) (40,577) Investments in partially-owned entities .................................... (5,352) (13,378) Distributions from partially-owned entities ................................ 44,219 17,163 Investment in notes and mortgage loans receivable .......................... (55,236) (10,069) Repayment of notes and mortgage loans receivable ........................... 2,500 1,000 Cash restricted for tenant improvements .................................... (8,432) 29,095 Additions to real estate ................................................... (16,672) (27,161) Purchases of marketable securities ......................................... -- (5,000) Proceeds from sale of marketable securities ................................ -- 742 Real estate deposits and other ............................................. -- 1,476 --------- --------- Net cash used in investing activities ...................................... (61,595) (46,709) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common shares .................................... 56,658 -- Proceeds from borrowings ................................................... -- 74,160 Repayments of borrowings ................................................... (45,090) (56,513) Distributions to minority partners ......................................... (42,945) (27,290) Dividends paid on common shares ............................................ (99,084) (45,191) Dividends paid on preferred shares ......................................... (6,131) (8,972) Exercise of stock options .................................................. 8,941 1,132 --------- --------- Net cash used in financing activities ...................................... (127,651) (62,674) --------- --------- Net decrease in cash and cash equivalents .................................. (94,384) (25,006) Cash and cash equivalents at beginning of period ........................... 265,584 136,989 --------- --------- Cash and cash equivalents at end of period ................................. $ 171,200 $ 111,983 ========= ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash payments for interest (including capitalized interest of $2,505 in 2002 and $3,570 in 2001) ..................................................... $ 56,005 $ 50,385 ========= ========= NON-CASH TRANSACTIONS: Class A units issued in acquisitions ....................................... $ 607,155 $ -- Financing assumed in acquisitions .......................................... 991,980 -- Unrealized gain on securities available for sale ........................... 2,925 677 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Vornado Realty Trust is a fully-integrated real estate investment trust ("REIT"). Vornado conducts its business through Vornado Realty L.P., a Delaware limited partnership (the "Operating Partnership"). Vornado is the sole general partner of, and owned approximately 79% of the common limited partnership interest in, the Operating Partnership at March 31, 2002. All references to the "Company" and "Vornado" refer to Vornado Realty Trust and its consolidated subsidiaries, including the Operating Partnership. 2. BASIS OF PRESENTATION The consolidated balance sheet as of March 31, 2002, the consolidated statements of income for the three months ended March 31, 2002 and 2001 and the consolidated statements of cash flows for the three months ended March 31, 2002 and 2001 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 accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in Vornado's annual report on Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission. The results of operations for the three months ended March 31, 2002 are not necessarily indicative of the operating results for the full year. The accompanying consolidated financial statements include the accounts of Vornado Realty Trust and its majority-owned subsidiary, Vornado Realty L.P., as well as entities in which the Company has a 50% or greater interest, provided that the Company exercises control (where the Company does not exercise control, such entities are accounted for under the equity method). All significant intercompany amounts have been eliminated. Equity interests in partially-owned corporate entities are accounted for under the equity method of accounting when the Company's ownership interest is more than 20% but less than 50%. When partially-owned investments are in partnership form, the 20% threshold may be reduced. For all other investments, the Company uses the cost method. Equity investments are recorded initially at cost and subsequently adjusted for the Company's share of the net income or loss and cash contributions and distributions to or from these entities. Management has made estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Certain amounts in the prior year's financial statements have been reclassified to conform to the current year presentation. Page 6 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 3. RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended, which establishes accounting and reporting standards requiring every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative instrument's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The Company's investment securities include stock purchase warrants received from companies that provide fiber-optic network and broadband access to the Company's Office division tenants. SFAS No. 133 requires these warrants to be marked-to-market at each reporting period with the change in value recognized currently in earnings. The Company has previously marked-to-market changes in value through accumulated other comprehensive loss. Under SFAS No. 133, those changes are recognized through earnings, and accordingly, the Company has reclassified $4,110,000 from accumulated other comprehensive loss to the consolidated statement of income as of January 1, 2001. Future changes in value of such securities will be recorded through earnings. In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (effective January 1, 2002). SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead be subject to periodic impairment testing. In the first quarter of 2002, the Company wrote-off goodwill of approximately $30,129,000 of which (i) $15,490,000 represents its share of the goodwill arising from the Company's investment in Temperature Controlled Logistics and (ii) $14,639,000 represents goodwill arising from the Company's acquisition of the Hotel Pennsylvania. The write-off has been reflected as a cumulative effect of a change in accounting principle. Earnings allocable to the minority limited partners has been reduced by their pro-rata share of the write-off of goodwill. Previously reported Net Income Applicable to Common Shares for the three months ended March 31, 2001 would have been approximately $300,000 higher if such goodwill was not amortized in the prior year's quarter. In August 2001, FASB issued SFAS No. 143, ACCOUNTING FOR ASSET RETIREMENT OBLIGATIONS (effective January 1, 2003) and SFAS No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (effective January 1, 2002). SFAS No. 143 requires the recording of the fair value of a liability for an asset retirement obligation in the period which it is incurred. SFAS No. 144 supersedes current accounting literature and now provides for a single accounting model for long-lived assets to be disposed of by sale and requires discontinued operations presentation for disposals of a "component" of an entity. The adoption of these statements did not have a material effect on the Company's financial statements; however under SFAS No. 144, if the Company were to dispose of a material operating property, such property's results of operations will have to be separately disclosed as discontinued operations in the Company's financial statements. Page 7 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 4. ACQUISITIONS, DISPOSITIONS AND FINANCINGS ACQUISITIONS CHARLES E. SMITH COMMERCIAL REALTY L.P. On January 1, 2002, the Company completed the combination of Charles E. Smith Commercial Realty L.P. ("CESCR") with Vornado. Prior to the combination, Vornado owned a 34% interest in CESCR. The consideration for the remaining 66% of CESCR was approximately $1,600,000,000, consisting of 15.6 million newly issued Vornado Operating Partnership units (valued at $607,155,000) and $991,980,000 of debt (66% of CESCR's total debt). This acquisition was recorded under the purchase method of accounting. The related purchase costs were allocated to acquired assets and assumed liabilities using their relative fair values as of January 1, 2002 based on valuations and other studies certain of which are not yet complete. Accordingly, the initial valuations are subject to change as such information is finalized. The Company believes that any such change will not be significant since the allocations were principally to real estate. The unaudited pro forma information set forth below presents the condensed consolidated statements of income for the Company for the three months ended March 31, 2001 as if the acquisition of the CESCR described above had occurred on January 1, 2001. CRYSTAL GATEWAY ONE On March 7, 2002, the Company acquired for $55,000,000, a mortgage on a 360,000 square foot office building, which is in the Crystal City complex in Arlington, Virginia, together with an option to purchase the property. The Company presently owns 24 office buildings in Crystal City containing over 6.9 million square feet which it acquired on January 1, 2002, in connection with the Company's acquisition of Charles E. Smith Commercial Realty L.P. described above. The Company exercised its option to acquire the property from a limited partnership, which is approximately 50% owned by Messrs. Robert H. Smith and Robert P. Kogod, trustees of the Company, in exchange for approximately $13,700,000 of Vornado Realty L.P. Operating Partnership units. The acquisition of the building is expected to close within 90 days and is subject to receipt of certain consents from third parties and other customary conditions. Page 8
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share amounts) For the Three Months Ended March 31, ------------------------------------ Pro Forma 2002 2001 ------------ ------------ Revenues........................................... $ 346,324 $ 337,594 ============ ============ Income before cumulative effect of change in accounting principle and extraordinary item................. $ 79,532 $ 62,205 Cumulative effect of change in accounting principle........................................ (30,129) (4,110) Extraordinary item................................. -- 1,170 ------------ ------------ Net income......................................... 49,403 59,265 Preferred share dividends.......................... (6,131) (9,673) ------------ ------------ Net income per applicable to common shares......... $ 43,272 $ 49,592 ============ ============ Net income per common share - basic................ $ .42 $ .57 ============ ============ Net income per common share - diluted.............. $ .40 $ .55 ============ ============ VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) DISPOSITIONS KINZIE PARK CONDOMINIUM UNITS In the first quarter of this year, the Company recognized a $1,531,000 gain from the sale of residential condominiums in Chicago, Illinois, which is included in the income statement caption "net gain on disposition of wholly-owned and partially-owned assets." WRITE-OFF INVESTMENTS IN TECHNOLOGY COMPANIES In the first quarter of 2001, the Company recorded a charge of $4,723,000 resulting from the write-off of an equity investment in a technology company. In the second quarter of 2001, the Company recorded an additional charge of $13,561,000 resulting from the write-off of all of its remaining equity investments in technology companies due to both the deterioration of the financial condition of these companies and the lack of acceptance by the market of certain of their products and services. FINANCINGS On February 25, 2002, the Company sold 1,398,743 common shares based on the closing price of $42.96 on the NYSE. The net proceeds to the Company were approximately $57,042,000. Page 9 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 5. INVESTMENTS AND ADVANCES TO PARTIALLY-OWNED ENTITIES The Company's investments and advances to partially-owned entities and income recognized from such investments are as follows: INVESTMENTS AND ADVANCES ----------- (1) On January 1, 2002, the Company acquired the remaining 66% of CESCR it did not previously own. Accordingly, CESCR is consolidated as of January 1, 2002. (2) The Company's investment in and advances to Newkirk Joint Ventures is comprised of:
(amounts in thousands) March 31, 2002 December 31, 2001 -------------- ----------------- Temperature Controlled Logistics.......................... $ 464,512 $ 474,862 Charles E. Smith Commercial Realty L.P. ("CESCR")(1)...... -- 347,263 Alexander's............................................... 185,884 188,522 Newkirk Joint Ventures (2)................................ 155,225 191,534 Partially-Owned Office Buildings (3)...................... 36,927 23,346 Starwood Ceruzzi Joint Ventures........................... 25,511 25,791 Park Laurel............................................... 4,445 (4,745) Management Companies and Other............................ 23,851 23,622 ----------- ----------- $ 896,355 $ 1,270,195 =========== =========== On January 2, 2002, the Newkirk Joint Ventures' partnership interests were merged into a master limited partnership (the "MLP") in which the Company has a 21% interest. In conjunction with the merger, the MLP completed a $225,000 mortgage financing collateralized by its properties, subject to the existing first and certain second mortgages on those properties. The loan bears interest at LIBOR plus 5.5% with a LIBOR floor of 3% (8.5% at March 31, 2002) and matures on January 31, 2005, with two one-year extension options. As a result of the financing on February 6, 2002, the MLP repaid approximately $28,200 of existing debt and distributed approximately $37,000 to the Company. (3) As at March 31, 2002, includes a 20% interest in a property which was part of the CESCR acquisition in 2002. Page 10
March 31, 2002 December 31, 2001 -------------- ----------------- Investments in limited partnerships.. $ 108,798 $ 145,107 Mortgages and loans receivable....... 39,511 39,511 Other ............................... 6,916 6,916 ------------- ------------- Total ............................... $ 155,225 $ 191,534 ============= ============= VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) INCOME - ---------- (1) Equity in income includes $6,298 representing the Company's share of Alexander's gain on sale of its Fordham Road property on January 12, 2001 and excludes $1,170 representing the Company's share of Alexander's extraordinary gain on the early extinguishment of debt on this property which is reflected as an extraordinary item on the consolidated statements of income. Management and leasing fee income include a fee of $520 paid to the Company in connection with the sale. (2) Equity in net income for the three months ended March 31, 2002, reflects an increase in depreciation expense of $175 and a decrease in other non-recurring income of $260 and a decrease in interest income of $200. (3) On January 1, 2002, the Company acquired the remaining 66% of CESCR. Accordingly, CESCR is consolidated as of January 1, 2002. (4) Equity in income includes a charge of $590 in connection with the formation of the Master Limited Partnership in January 2002. (5) 2002 includes a 20% interest in a property which was part of the acquisition of CESCR, and does not include 570 Lexington Avenue which was sold in May 2001. (6) Includes $1,300 for the Company's share of the Starwood Ceruzzi Joint Venture's gain on the sale of a property. Page 11
For The Three Months (amounts in thousands) Ended March 31, ---------------------- 2002 2001 ------- -------- Income applicable to Alexander's: 33.1% share of equity in income .......... $ 1,019 $ 7,156(1) Interest income .......................... 2,531 3,427 Management and leasing fee income ........ 2,018 1,721 ------- ------- $ 5,568 $12,304 ======= ======= Temperature Controlled Logistics: 60% share of equity in net income (2) .... $ 3,807 $ 4,464 Management fee (40% of 1% per annum of Total Combined Assets, as defined) .... 1,498 1,484 ------- ------- 5,305 5,948 ------- ------- CESCR-34% share of equity in income ........ --(3) 7,367 ------- ------- Newkirk Joint Ventures: Equity in income of limited partnerships 5,429(4) 6,242 Interest and other income .............. 2,271 1,727 ------- ------- 7,700 7,969 ------- ------- Partially-Owned Office Buildings (5) ....... 550 1,264 Management Companies and Other ............. 231 1,442(6) ------- ------- $13,786 $23,990 ======= ======= VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) TEMPERATURE CONTROLLED LOGISTICS On February 22, 2001, the Vornado/Crescent Partnerships ("Landlord") restructured the AmeriCold Logistics leases to among other things, (i) reduce 2001's contractual rent to $146,000,000, (ii) reduce 2002's contractual rent to $150,000,000 (plus additional contingent rent in certain circumstances), (iii) increase the Landlord's share of annual maintenance capital expenditures by $4,500,000 to $9,500,000 effective January 1, 2000 and (iv) allow AmeriCold Logistics to defer rent to December 31, 2003 to the extent cash is not available, as defined in the leases, to pay such rent. Based on the Company's policy of recognizing rental income when earned and collection is assured or cash is received, the Company did not recognize $1,808,000 of rent it was due for the three months ended March 31, 2002, which together with previously deferred rent is $6,809,000. ALEXANDER'S Alexander's is managed by and its properties are leased by the Company, pursuant to agreements with a one-year term expiring in March of each year which are automatically renewable. Under the management and development agreement, the Company has accrued a receivable of $1,031,000 at March 31, 2002 (of which $690,000 is recognized by the Company as income and the balance is reflected in the "Investment" account), which under the terms of the agreement is payable at completion of construction of Alexander's Lexington Avenue project in 2004. The Company is also owed $1,667,000 under the leasing agreement which is payable in 2002. At March 31, 2002, the Company has loans receivable from Alexander's of $119,000,000, including $24,000,000 under the $50,000,000 line of credit the Company granted to Alexander's on August 1, 2000. The loan and the line of credit were extended to April 15, 2003. The interest rates on the loan and line of credit were reset on March 15, 2002, from 13.74% to 12.48%, using a LIBOR index (with a 3% floor) plus the same spread to treasuries as previously existed. On January 12, 2001, Alexander's sold its Fordham Road property for $25,500,000, which resulted in a gain of $19,026,000, of which the Company's share was $6,298,000. In addition, Alexander's paid off the mortgage on this property at a discount, which resulted in an extraordinary gain from the early extinguishment of debt of $3,534,000, of which the Company's share was $1,170,000. The Company also received a commission of $520,000 in connection with this sale. Page 12 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 6. OTHER RELATED PARTY TRANSACTIONS 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 $203,000 and $370,000 for the three months ended March 31, 2002 and 2001. The estate of Bernard Mendik and certain other individuals including Mr. Greenbaum, own an entity which provides cleaning and related services and security services to office properties, including the Company's Manhattan office properties. The Company was charged fees in connection with these contracts of $13,500,000 and $12,900,000 for the three months ended March 31, 2002 and 2001. Effective January 1, 2002, the Company extended its employment agreement with Mr. Fascitelli for a five year period through December 31, 2006. Pursuant to the extended employment agreement, he is entitled to receive a deferred payment on December 31, 2006 of 626,566 Vornado common shares which are valued for compensation purposes at $27,500,000 (the value of the shares on March 8, 2002, the date the extended employment agreement was signed). The number of shares was set by the Company's Compensation Committee in December 2001 to achieve a value of $25,000,000 and had appreciated $2,500,000 as of March 8, 2002. The shares are being held in an irrevocable trust for the benefit of Mr. Fascitelli and will vest on December 31, 2002. Mr. Fascitelli will also receive regular annual cash compensation as determined by the Company's Compensation Committee and will continue as a member of Vornado's Board. Mr. Fascitelli may also borrow up to $20,000,000 from the Company during the term of his 2002 employment agreement reduced by $8,600,000, the amount of his outstanding loans under his 1996 employment agreement. Each loan will bear interest, payable quarterly, at the applicable Federal Rate on the date the loan is made and will mature on the fifth anniversary of the loan. Page 13 VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 7. INCOME PER SHARE The following table sets forth the computation of basic and diluted income per share: Page 14
For The Three Months Ended March 31, ------------------------------ 2002 2001 ------------ ----------- (amounts in thousands except per share amounts) Numerator: Income before cumulative effect of change in accounting principle and extraordinary item................ $ 79,532 $ 59,449 Cumulative effect of change in accounting principle.................................................. (30,129) (4,110) Extraordinary item........................................... -- 1,170 ------------ ---------- Net income................................................... 49,403 56,509 Preferred share dividends.................................... (6,131) (9,673) ------------ ---------- Numerator for basic and diluted income per share - net income applicable to common shares............... $ 43,272 $ 46,836 ============ ========== Denominator: Denominator for basic income per share - weighted average shares............................................. 103,053 86,827 Effect of dilutive securities: Employee stock options..................................... 3,987 2,554 Deferred compensation shares issued but not yet earned..... 177 -- Denominator for diluted income per share - adjusted weighted average shares and assumed conversions........................................ ------------ ---------- 107,217 89,381 ============ ========== INCOME PER COMMON SHARE - BASIC: Income before cumulative effect of change in accounting principle and extraordinary item.............. $ .71 $ .58 Cumulative effect of change in accounting principle................................................ (.29) (.05) Extraordinary item......................................... -- .01 ------------ ---------- Net income per common share................................ $ .42 $ .54 ============ ========== INCOME PER COMMON SHARE - DILUTED: Income before cumulative effect of change in accounting principle and extraordinary item.............. $ .68 $ .56 Cumulative effect of change in accounting principle............................................... (.28) (.05) Extraordinary item......................................... -- .01 ------------ ---------- Net income per common share................................ $ .40 $ .52 ============ ========== VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 8. COMPREHENSIVE INCOME The following table sets forth the Company's comprehensive income: 9. COMMITMENTS AND CONTINGENCIES At March 31, 2002, the Company's revolving credit facility had a zero balance, and the Company utilized $80,510,000 of availability under the facility for letters of credit and guarantees. Each of the Company's properties has been subjected to varying degrees of environmental assessment at various times. The environmental assessments did not reveal any material environmental contamination. However, there can be no assurance that the identification of new areas of contamination, changes 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. The Company carries comprehensive liability and all risk property insurance (fire, flood, extended coverage and rental loss insurance) with respect to its assets. The Company's all risk insurance policies in effect before September 11, 2001 included coverage for terrorist acts, except for acts of war. Since September 11, 2001, insurance companies are excluding terrorist acts from coverage in all risk policies. In 2002, the Company has been unable to obtain all risk insurance which includes coverage for terrorists acts for policies it has renewed including the New York City Office portfolio and may not be able to obtain such coverage for any of its other properties in the future. In March 2002, however, the Company obtained $200 million of separate coverage for terrorist acts for its New York City Office portfolio. Therefore, the Company is at risk for financial loss in excess of $200 million for terrorist acts (as defined) regarding this portfolio, which loss could be material. The Company's debt instruments, consisting of mortgage loans secured by its properties (which are generally non-recourse to the Company) and its revolving credit agreement, contain customary covenants requiring the Company to maintain insurance. There can be no assurance that the lenders under these instruments will not take the position that an exclusion from all risk insurance coverage for losses due to terrorist acts is a breach of these debt instruments that allows the lenders to declare an event of default and accelerate repayment of debt. In addition, if lenders insist on coverage for these risks, it could adversely affect the Company's ability to finance and/or refinance its properties and to expand its portfolio. 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, results of operations or cash flow. Page 15
(amounts in thousands) For The Three Months Ended March 31, ------------------------- 2002 2001 ----------- -------- Net income applicable to common shares................. $ 43,272 $ 46,836 Adjustment to record cumulative effect of change in accounting principle............................ -- 4,110 Other comprehensive income............................. 2,925 518 ----------- -------- Comprehensive income................................... $ 46,197 $ 51,464 =========== ======== VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) 10. SEGMENT INFORMATION The Company has four business segments: Office, Retail, Merchandise Mart Properties and Temperature Controlled Logistics. - ------------------------------------------------ See footnotes 1-7 on page 17. Page 16
FOR THE THREE MONTHS ENDED MARCH 31, --------------------------------------------------------------------------------------------- 2002 2001 ----------------------------------------------------------------------- ------------------- TEMPERATURE MERCHANDISE CONTROLLED (AMOUNTS IN THOUSANDS) TOTAL OFFICE RETAIL MART LOGISTICS OTHER(2) TOTAL OFFICE - ---------------------- -------- -------- -------- ------------ ------------ -------- -------- -------- Rentals............................ $301,760 $213,812 $29,070 $47,010 $ -- $11,868 $204,718 $113,860 Expense reimbursements............. 37,804 21,407 12,017 3,343 -- 1,037 35,092 19,041 Other income....................... 6,760 4,983 214 1,417 -- 146 2,800 572 -------- -------- ------- ------- ------- ------- -------- -------- Total revenues..................... 346,324 240,202 41,301 51,770 -- 13,051 242,610 133,473 -------- -------- ------- ------- ------- ------- -------- -------- Operating expenses................. 127,446 82,233 14,681 21,227 -- 9,305 99,823 55,761 Depreciation and amortization...... 47,588 34,130 3,380 6,480 -- 3,598 31,865 18,644 General and administrative......... 23,467 9,110 570 4,811 -- 8,976 14,808 3,370 Amortization of officer's deferred compensation expense............. 6,875 -- -- -- -- 6,875 -- -- Costs of acquisitions not consummated...................... -- -- -- -- -- -- 5,000 -- -------- -------- ------- ------- ------- ------- -------- -------- Total expenses..................... 205,376 125,473 18,631 32,518 -- 28,754 151,496 77,775 -------- -------- ------- ------- ------- ------- -------- -------- Operating income................... 140,948 114,729 22,670 19,252 -- (15,703) 91,114 55,698 Income applicable to Alexander's... 5,568 -- -- -- -- 5,568 12,304 -- Income from partially-owned entities......................... 13,786 550 229 2 5,305(6) 7,700 23,990 8,695 Interest and other investment income........................... 9,643 1,111 79 135 -- 8,318 13,473 2,298 Interest and debt expense.......... (58,018) (34,762) (13,693) (7,183) -- (2,380) (49,395) (16,607) Net gain on disposition of wholly- owned and partially-owned assets........................... 1,531 -- -- 1,531 -- -- (4,723) -- Minority interest.................. (33,926) (32,705) (3,620) (5,905) 3,972 4,332 (27,314) (13,589) -------- -------- ------- ------- ------- ------- -------- -------- Income before cumulative effect of change in accounting principle and extraordinary item........... 79,532 48,923 5,665 7,832 9,277 7,835 59,449 36,495 Cumulative effect of change in accounting principle............. (30,129) -- -- -- (15,490) (14,639) (4,110) -- Extraordinary item................. -- -- -- -- -- -- 1,170 -- -------- -------- ------- ------- ------- ------- -------- -------- Net income......................... 49,403 48,923 5,665 7,832 (6,213) (6,804) 56,509 36,495 Cumulative effect of change in accounting principle............. 30,129 -- -- -- 15,490 14,639 4,110 -- Extraordinary item................. -- -- -- -- -- -- (1,170) -- Minority interest.................. 33,926 32,705 3,620 5,905 (3,972) (4,332) 27,314 13,589 Interest and debt expense(4)....... 74,293 35,266 14,328 7,183 6,559 10,957 73,254 27,447 Depreciation and amortization(4)... 60,575 34,594 3,650 6,480 8,909 6,942 47,918 23,644 Straight-lining of rents(4)........ (9,039) (7,310) (429) (1,049) -- (251) (7,737) (5,955) Other.............................. (259) (1,300) 700 (123) 464 -- (10,557) (1,590) -------- -------- ------- ------- ------- ------- -------- -------- EBITDA(1).......................... $239,028 $142,878 $27,534 $26,228 $21,237 $21,151 $189,641 $ 93,630 ======== ======== ======= ======= ======= ======= ======== ======== FOR THE THREE MONTHS ENDED MARCH 31, ------------------------------------------------- 2001 ------------------------------------------------- TEMPERATURE MERCHANDISE CONTROLLED (AMOUNTS IN THOUSANDS) RETAIL MART LOGISTICS OTHER(2) - ---------------------- -------- ------------ ------------ -------- Rentals............................ $28,137 $47,005 $ -- $15,716 Expense reimbursements............. 11,295 3,973 -- 783 Other income....................... 1,429 719 -- 80 ------- ------- ------- ------- Total revenues..................... 40,861 51,697 -- 16,579 ------- ------- ------- ------- Operating expenses................. 14,852 21,132 -- 8,078 Depreciation and amortization...... 4,463 6,442 -- 2,316 General and administrative......... 583 4,595 -- 6,260(4) Amortization of officer's deferred compensation expense............. -- -- -- -- Costs of acquisitions not consummated...................... -- -- -- 5,000 ------- ------- ------- ------- Total expenses..................... 19,898 32,169 -- 21,654 ------- ------- ------- ------- Operating income................... 20,963 19,528 -- (5,075) Income applicable to Alexander's... -- -- -- 12,304 Income from partially-owned entities......................... 1,897 113 5,948 7,337 Interest and other investment income........................... -- 663 -- 10,512 Interest and debt expense.......... (14,149) (9,669) -- (8,970) Net gain on disposition of wholly- owned and partially-owned assets........................... -- -- -- (4,723) Minority interest.................. (3,989) (3,644) (3,010) (3,082) ------- ------- ------- ------- Income before cumulative effect of change in accounting principle and extraordinary item........... 4,722 6,991 2,938 8,303 Cumulative effect of change in accounting principle............. -- -- -- (4,110) Extraordinary item................. -- -- -- 1,170 ------- ------- ------- ------- Net income......................... 4,722 6,991 2,938 5,363 Cumulative effect of change in accounting principle............. -- -- -- 4,110 Extraordinary item................. -- -- -- (1,170) Minority interest.................. 3,989 3,644 3,010 3,082 Interest and debt expense(4)....... 14,791 9,669 6,713 14,634 Depreciation and amortization(4)... 4,727 6,442 8,408 4,697 Straight-lining of rents(4)........ (161) (1,108) -- (513) Other.............................. (500) -- 112 (8,579)(5) ------- ------- ------- ------- EBITDA(1).......................... $27,568 $25,638 $21,181 $21,624 ======= ======= ======= ======= VORNADO REALTY TRUST NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) Notes to segment information: (1) EBITDA represents income before interest, taxes, depreciation and amortization, extraordinary or non-recurring items, gains or losses on sales of depreciable real estate, the effect of straight-lining of property rentals for rent escalations and minority interest. Management considers EBITDA a supplemental measure for making decisions and assessing the performance of its segments. EBITDA may not be comparable to similarly titled measures employed by other companies. (2) Other EBITDA is comprised of: (3) Average occupancy and REVPAR for the Hotel Pennsylvania were 49.6% and $58 for the three months ended March 31, 2002 compared to 57.5% and $80 for the prior year's quarter. (4) Interest and debt expense, depreciation and amortization and straight-lining of rents included in the reconciliation of net income to EBITDA reflects amounts which are netted in income from partially-owned entities. (5) Includes the elimination of $6,298 representing the Company's share of Alexander's gain on sale of its Fordham Road property on January 12, 2001. (6) Net of rent not recognized of $1,808 for the three months ended March 31, 2002. (7) No income was recognized on the Company's loans to Primestone Investment Partners, L.P. and Vornado Operating Company for the three months ended March 31, 2002. 11. SUBSEQUENT EVENT On April 30, 2002, the Company acquired 7,944,893 partnership units of Prime Group Realty, L.P., the operating partnership of Prime Group Realty Trust (NYSE:PGE), at a foreclosure auction. The partnership units had been pledged to the Company as collateral for loans to Primestone Investment Partners L.P. (Primestone). The price the Company paid for the units was $8.35 per unit, the April 30, 2002 closing price on The New York Stock Exchange of the PGE shares for which the partnership units are exchangeable on a one-for-one basis. Primestone and its affiliated guarantors remain liable for the deficiency under the loans. As previously reported, a subsidiary of Cadim, Inc. owns a 50% participation interest in the loans to Primestone held by the Company. Under the participation arrangement, the Cadim affiliate has the right to acquire 50% of the partnership units that the Company acquired at the foreclosure auction (or the PGE shares into which they may be exchanged). Page 17
(amounts in thousands) For the Three Months Ended March 31, ------------------------ 2002 2001 --------- ------- Hotel Pennsylvania (3)......................... $ 753 $ 5,280 Newkirk Joint Ventures: Equity in income of limited partnerships..... 15,029 13,372 Interest and other income.................... 2,271 1,727 Alexander's.................................... 8,006 6,200 Unallocated general and administrative expenses................................... (7,720) (7,533) Amortization of Officer's deferred compensation expense.................................... (6,875) -- Investment income and other.................... 9,687(7) 12,301 Costs of acquisitions not consummated.......... -- (5,000) Write-off of investments in technology companies.................................. -- (4,723) --------- --------- Total................................. $ 21,151 $21,624 ========= ======= ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Certain statements contained herein constitute forward-looking statements as such term is defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Our future results, financial condition and business may differ materially form those expressed in these forward-looking statements. You can find may of these statements by looking for words such as "believes," "expects," "anticipates," "intends," "plans" or similar expressions in this quarterly report on Form 10-Q. These forward-looking statements are subject to numerous assumptions, risks and uncertainties. Many of the factors that will determine these items are beyond our ability to control or predict. Factors that may cause actual results to differ materially from those contemplated by the forward-looking statements include, but are not limited to, those set forth in our Annual Report on Form 10-K under "Forward-Looking Statements." For these statements, we claim protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. OVERVIEW Below is a summary of net income and EBITDA(1) by segment for the three months ended March 31, 2002 and 2001. Operating results for the three months ended March 31, 2002, reflect the Company's January 1, 2002 acquisition of the remaining 66% of Charles E. Smith Commercial Realty ("CESCR") it did not previously own and the resulting consolidation of CESCR's operations. See Supplemental Information beginning on page 27 for Condensed Proforma Operating Results for the three months ended March 31, 2001 giving effect to the CESCR acquisition as if it had occurred on January 1, 2001. Further, the Supplemental Information contains data regarding (ii) details of the changes by segment in EBITDA for the three months ended March 31, 2002 compared to the three months ended December 31, 2001 and (iii) leasing activity. Page 18
(amounts in thousands) Three Months Ended March 31, 2002 ----------------------------------------------------------------------------------- Temperature Merchandise Controlled Total Office Retail Mart Logistics Other(2) -------- -------- -------- ---------- ---------- ---------- Rentals....................................... $301,760 $213,812 $ 29,070 $ 47,010 $ -- $ 11,868 Expense reimbursements........................ 37,804 21,407 12,017 3,343 -- 1,037 Other income.................................. 6,760 4,983 214 1,417 -- 146 -------- -------- -------- ---------- ---------- ---------- Total revenues................................ 346,324 240,202 41,301 51,770 -- 13,051 -------- -------- -------- ---------- ---------- ---------- Operating expenses............................ 127,446 82,233 14,681 21,227 -- 9,305 Depreciation and amortization................. 47,588 34,130 3,380 6,480 -- 3,598 General and administrative.................... 23,467 9,110 570 4,811 -- 8,976 Amortization of officer's deferred compensation expense........................ 6,875 -- -- -- -- 6,875 -------- -------- -------- ---------- ---------- ---------- Total expenses................................ 205,376 125,473 18,631 32,518 -- 28,754 -------- -------- -------- ---------- ---------- ---------- Operating income.............................. 140,948 114,729 22,670 19,252 -- (15,703) Income applicable to Alexander's.............. 5,568 -- -- -- -- 5,568 Income from partially-owned entities.......... 13,786 550 229 2 5,305(6) 7,700 Interest and other investment income.......... 9,643 1,111 79 135 -- 8,318 Interest and debt expense..................... (58,018) (34,762) (13,693) (7,183) -- (2,380) Net gain on disposition of wholly-owned and partially-owned assets....................... 1,531 -- -- 1,531 -- -- Minority interest............................. (33,926) (32,705) (3,620) (5,905) 3,972 4,332 --------- -------- -------- ---------- ---------- ---------- Income before cumulative effect of change in accounting principle and extraordinary item.. 79,532 48,923 5,665 7,832 9,277 7,835 Cumulative effect of change in accounting principle.................................... (30,129) -- -- -- (15,490) (14,639) Extraordinary item............................ -- -- -- -- -- -- --------- -------- -------- ---------- ---------- ---------- Net income.................................... 49,403 48,923 5,665 7,832 (6,213) (6,804) Cumulative effect of change in accounting principle.................................... 30,129 -- -- -- 15,490 14,639 Extraordinary item............................ -- -- -- -- -- -- Minority interest............................. 33,926 32,705 3,620 5,905 (3,972) (4,332) Interest and debt expense(4).................. 74,293 35,266 14,328 7,183 6,559 10,957 Depreciation and amortization(4).............. 60,575 34,594 3,650 6,480 8,909 6,942 Straight-lining of rents(4)................... (9,039) (7,310) (429) (1,049) -- (251) Other......................................... (259) (1,300) 700 (123) 464 -- --------- -------- -------- ---------- ---------- ---------- EBITDA(1)..................................... $ 239,028 $142,878 $ 27,534 $ 26,228 $ 21,237 $ 21,151 ========= ======== ======== ========== ========== ========== - ----------- (1) EBITDA represents income before interest, taxes, depreciation and amortization, extraordinary or non-recurring items, gains or losses on sales of depreciable real estate, the effect of straight-lining of property rentals for rent escalations and minority interest. Management considers EBITDA a supplemental measure for making decisions and assessing the performance of its segments. EBITDA may not be comparable to similarly titled measures employed by other companies. (2) Other EBITDA is comprised of:
(amounts in thousands) Three Months Ended March 31, 2001 -------------------------------------------------------------------------------- Temperature Merchandise Controlled Total Office Retail Mart Logistics Other(2) -------- -------- -------- ---------- ---------- ---------- Rentals......................................... $204,718 $113,860 $ 28,137 $ 47,005 $ -- $ 15,716 Expense reimbursements.......................... 35,092 19,041 11,295 3,973 -- 783 Other income.................................... 2,800 572 1,429 719 -- 80 -------- -------- -------- ---------- ---------- ---------- Total revenues.................................. 242,610 133,473 40,861 51,697 -- 16,579 -------- -------- -------- ---------- ---------- ---------- Operating expenses.............................. 99,823 55,761 14,852 21,132 -- 8,078 Depreciation and amortization................... 31,865 18,644 4,463 6,442 -- 2,316 General and administrative...................... 14,808 3,370 583 4,595 -- 6,260(4) Costs of acquisitions not consummated........... 5,000 -- -- -- -- 5,000 -------- -------- -------- ---------- ---------- ---------- Total expenses.................................. 151,496 77,775 19,898 32,169 -- 21,654 -------- -------- -------- ---------- ---------- ---------- Operating income................................ 91,114 55,698 20,963 19,528 -- (5,075) Income applicable to Alexander's................ 12,304 -- -- -- -- 12,304 Income from partially-owned entities............ 23,990 8,695 1,897 113 5,948 7,337 Interest and other investment income............ 13,473 2,298 -- 663 -- 10,512 Interest and debt expense....................... (49,395) (16,607) (14,149) (9,669) -- (8,970) Net gain on disposition of wholly-owned and partially-owned assets........................ (4,723) -- -- -- -- (4,723) Minority interest............................... (27,314) (13,589) (3,989) (3,644) (3,010) (3,082) --------- -------- -------- ---------- ---------- ---------- Income before cumulative effect of change in accounting principle and extraordinary item... 59,449 36,495 4,722 6,991 2,938 8,303 Cumulative effect of change in accounting principle..................................... (4,110) -- -- -- -- (4,110) Extraordinary item.............................. 1,170 -- -- -- -- 1,170 -------- -------- -------- ---------- ---------- ---------- Net income...................................... 56,509 36,495 4,722 6,991 2,938 5,363 Cumulative effect of change in accounting principle..................................... 4,110 -- -- -- -- 4,110 Extraordinary item.............................. (1,170) -- -- -- -- (1,170) Minority interest............................... 27,314 13,589 3,989 3,644 3,010 3,082 Interest and debt expense(4).................... 73,254 27,447 14,791 9,669 6,713 14,634 Depreciation and amortization(4)................ 47,918 23,644 4,727 6,442 8,408 4,697 Straight-lining of rents(4)..................... (7,737) (5,955) (161) (1,108) -- (513) Other........................................... (10,557) (1,590) (500) -- 112 (8,579)(5) -------- -------- -------- ---------- ---------- ---------- EBITDA(1)....................................... $189,641 $ 93,630 $ 27,568 $ 25,638 $ 21,181 $ 21,624 ======== ======== ======== ========== ========= ========= (3) Average occupancy and REVPAR for the Hotel Pennsylvania were 49.6% and $58 for the three months ended March 31, 2002 compared to 57.5% and $80 for the prior year's quarter. (4) Interest and debt expense, depreciation and amortization and straight-lining of rents included in the reconciliation of net income to EBITDA reflects amounts which are netted in income from partially-owned entities. (5) Includes the elimination of $6,298 representing the Company's share of Alexander's gain on sale of its Fordham Road property on January 12, 2001. (6) Net of rent not recognized of $1,808 for the three months ended March 31, 2002. (7) No income was recognized on the Company's loans to Primestone Investment Partners, L.P. and Vornado Operating Company for the three months ended March 31, 2002. Page 19
(amounts in thousands) For the Three Months Ended March 31, ------------------------- 2002 2001 --------- ------- Hotel Pennsylvania (3)................................. $ 753 $ 5,280 Newkirk Joint Ventures: Equity in income of limited partnerships............. 15,029 13,372 Interest and other income............................ 2,271 1,727 Other partially-owned entities (Alexander's and other). 8,006 6,200 Unallocated general and administrative expenses........ (7,720) (7,533) Amortization of Officer's deferred compensation expense............................................ (6,875) -- Investment income and other............................ 9,687(7) 12,301 Costs of acquisitions not consummated.................. -- (5,000) Write-off of investments in technology companies....... -- (4,723) --------- ----------- Total......................................... $ 21,151 $21,624 ========= ======= RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2002 AND MARCH 31, 2001 Below are the details of the changes by segment in EBITDA. - ----------- (1) Represents operations which were owned for the same period in each year and excludes non-recurring income and expenses. (2) EBITDA and the same store percentage increase were $77,098 and 9.5% for the New York City office portfolio and $65,780 and 1.3% for the CESCR portfolio. (3) The Company reflects its 60% share of the Vornado/Crescent Partnerships' ("the Landlord") equity in the rental income it receives from AmeriCold Logistics, its tenant, which leases the underlying temperature controlled warehouses used in its business. On February 22, 2001, the Vornado/Crescent Partnerships ("Landlord") restructured the AmeriCold Logistics leases to among other things, (i) reduce 2001's contractual rent to $146,000,000, (ii) reduce 2002's contractual rent to $150,000,000 (plus additional contingent rent in certain circumstances), (iii) increase the Landlord's share of annual maintenance capital expenditures by $4,500,000 to $9,500,000 effective January 1, 2000 and (iv) allow AmeriCold Logistics to defer rent to December 31, 2003 to the extent cash is not available, as defined in the leases, to pay such rent. Based on the Company's policy of recognizing rental income when earned and collection is assured or cash is received, the Company did not recognize $1,808,000 of rent it was due for the three months ended March 31, 2002, which together with previously deferred rent is $6,809,000. The tenant has advised the Landlord that (i) its revenue for the current quarter ended March 31, 2002 from the warehouses it leases from the Landlord, is lower than last year by 2.2%, and (ii) its gross profit before rent at these warehouses for the corresponding period is higher than last year by $367,000 (a 0.9% increase). The decrease in revenue is primarily attributable to a reduction customer inventory turns. The increase in gross profit is primarily attributable to lower payroll expenses. Page 20
Temperature Merchandise Controlled (amounts in thousands) Total Office Retail Mart Logistics Other - ---------------------- ----- ------ ------ ---- --------- ----- Three months ended March 31, 2001.... $ 189,641 $ 93,630 $ 27,568 $ 25,638 $ 21,181 $ 21,624 2002 Operations: Same store operations(1)........ 9,024 7,099 867 1,100 56(3) (98) Acquisitions, dispositions and non-recurring income and expenses..................... 40,363 42,149 (901) (510) -- (375) ---------- ---------- --------- --------- --------- -------- Three months ended March 31, 2002.... $ 239,028 $ 142,878(2) $ 27,534 $ 26,228 $ 21,237 $ 21,151 ========== ============ ========= ========= ========= ======== % increase (decrease) in same store operations.............. 4.8% 7.6%(2) 3.1% 4.3% 0.3% (0.5%) REVENUES The Company's revenues, which consist of property rentals, tenant expense reimbursements, hotel revenues, trade shows revenues and other income were $346,324,000 for the three months ended March 31, 2002, compared to $242,610,000 in the prior year's quarter, an increase of $103,714,000 of which $99,715,000 resulted from the acquisition of the remaining 66% of CESCR and the resulting consolidation of their operations. Below are the details of the increase (decrease) by segment: - ------------ (1) Average occupancy and REVPAR for the Hotel Pennsylvania were 49.6% and $58.00 for the three months ended March 31, 2002 compared to 57.5% and $80.00 for the prior year's quarter. See supplemental information beginning on page 27 for further details. Page 21
(amounts in thousands) Date of Merchandise Acquisition Total Office Retail Mart Other ----------- -------- -------- --------- ------------- --------- Property rentals: Acquisitions: CESCR (effect of acquisition of 66% and consolidation vs. equity method accounting for 34%).................. January 2002 $ 93,476 $93,476 $ -- $ -- $ -- 715 Lexington Avenue........ July 2001 458 458 -- -- -- Hotel activity................. (3,273) -- -- -- (3,273)(1) Trade Shows activity........... (143) -- -- (143) -- Leasing activity............... 6,524 6,018 933 148 (575) -------- ------- --------- ----------- -------- Total increase (decrease) in property rentals............ 97,04 99,952 933 5 (3,848) -------- ------- --------- ----------- -------- Tenant expense reimbursements: Increase (decrease) due to acquisitions/dispositions... 2,383 2,383 -- -- -- Other.......................... 329 (17) 722 (630) 254 -------- ------- --------- ----------- -------- Total increase (decrease) in tenant expense reimbursements...... 2,712 2,366 722 (630) 254 -------- ------- --------- ----------- -------- Other Income: Increase due to acquisitions/dispositions... 3,856 3,856 -- -- -- Other.......................... 104 555 (1,215) 698 66 -------- ------- --------- ----------- -------- Total increase (decrease) in other income...................... 3,960 4,411 (1,215) 698 66 Total increase (decrease) in revenues.................... $103,714 $106,729 $ 440 $ 73 $ (3,528) ======== ======== ========= =========== ======== EXPENSES The Company's expenses were $205,376,000 for the three months ended March 31, 2002, compared to $151,496,000 in the prior year's quarter, an increase of $53,880,000 of which $31,628,000 resulted from the acquisition of the remaining 66% of CESCR and the resulting consolidation of their operations. Below are the details of the increase (decrease) by segment: - ---------- INCOME APPLICABLE TO ALEXANDER'S Income applicable to Alexander's (loan interest income, management, leasing and development fees, equity in income) was $5,568,000 in the three months ended March 31, 2002, compared to $12,304,000 in the prior year's quarter, a decrease of $6,736,000. This decrease resulted primarily from the Company's $6,298,000 share of Alexander's gain on the sale of its Fordham Road property in the prior year's quarter. Page 22
(amounts in thousands) Merchandise Total Office Retail Mart Other ----- ------ ------ ---- ----- Operating: Acquisitions: CESCR (effect of acquisition of 66% and consolidation vs. equity method accounting for 34%)................. $ 26,974 $ 26,974 $ -- $ -- $ -- -------- --------- ------- ----------- --------- 715 Lexington Avenue.......... 258 258 -- -- -- Hotel activity................ (236) -- -- -- (236) Trade Shows activity.......... (75) -- -- (75) -- Same store operations......... 702 (760) (171) 170 1,463 -------- --------- ------- ----------- --------- 27,623 26,472 (171) 95 1,227 -------- --------- ------- ----------- --------- Depreciation and amortization: Acquisitions.................. 15,580 15,580 -- -- -- Same store operations......... 143 (94) (1,083) 38 1,282 -------- --------- ------- ----------- --------- 15,723 15,486 (1,083) 38 1,282 -------- --------- ------- ----------- --------- General and administrative: Depreciation in value of Vornado shares and other securities held in officers' deferred compensation trust in the three months ended March 31, 2001................ 2,282 -- -- -- 2,282 Acquisitions.................. 5,366 5,366 -- -- -- Other expenses.................. 1,011 374 (13) 216 434 -------- --------- ------- ----------- --------- Total increase (decrease) in general and administrative.... 8,659 5,740 (13) 216 2,716 -------- --------- ------- ----------- --------- Amortization of officer's deferred compensation expense... 6,875 -- -- -- 6,875 -------- --------- ------- ----------- --------- Costs of acquisitions not consummated (5,000) -- -- -- (5,000) -------- --------- ------- ----------- --------- $ 53,880 $ 47,698 $(1,267) $ 349 $ 7,100 ======== ========= ======= =========== ========= INCOME FROM PARTIALLY-OWNED ENTITIES In accordance with accounting principles generally accepted in the United States, the Company reflects the income it receives from (i) entities it owns less than 50% of and (ii) entities it owns more than 50% of, but which have a partner who exercises significant control, on the equity method of accounting resulting in such income appearing on one line in the Company's consolidated statements of income. Below is the detail of income from partially-owned entities by investment as well as the increase (decrease) in income of partially-owned entities for the three months ended March 31, 2002 as compared to the prior year: - ----------- (1) On January 1, 2002, the Company acquired the remaining 66% of CESCR it did not previously own. Accordingly, CESCR is consolidated as of January 1, 2002. (2) Excludes the write-off of goodwill of $25,817 upon the adoption of SFAS 142 - "Goodwill and Other Intangible Assets." The Company's share of this write-off of $15,490 is reflected as a cumulative effect of change in accounting principle on the Company's Consolidated Statements of Income. (3) The prior year's quarter includes a $1,300 for the Company's share of a gain on sale of a property. (4) The quarter ended March 31, 2002 excludes 570 Lexington Avenue which was sold in May 2001. Page 23
(amounts in thousands) Starwood Temperature Newkirk Las Ceruzzi Partially-Owned Management Controlled Joint Catalinas Joint Office Companies/ Total CESCR Logistics Venture Mall Venture Buildings Other ----- ----- --------- ------- ---- ------- --------- ----- MARCH 31, 2002: Revenues................... $121,024 N/A(1) $ 33,566 $ 74,857 $ 3,392 $ -- $ 9,209 $ -- -------- ---------- -------- -------- --------- ---------- ---------- Expenses: Operating, general and administrative......... (12,533) N/A (1,915) (5,180) (909) (550) (3,979) -- Depreciation............. (30,915) N/A (14,816) (13,982) (531) (262) (1,324) -- Interest expense......... (43,467) N/A (10,932) (29,965) (1,043) -- (1,527) -- Other, net............... 1,115 N/A 182 -- -- 462 471 -- -------- ---------- -------- -------- --------- ---------- ---------- Net income/(loss).......... $ 35,224 N/A $ 6,085(2) $ 25,730 $ 909 $ (350) $ 2,850 $ -- ======== ========== ======== ======== ========= ========== ========== Vornado's interest......... N/A 60% 21.1% 50% 80% 19% Equity in net income....... $ 9,861 N/A $ 3,651 $ 5,429 $ 455 $ (280) $ 550 $ 56 Interest and other income.. 2,427 N/A 156 2,271 -- -- -- -- Fee income................. 1,498 N/A 1,498 -- -- -- -- -- -------- ---------- -------- -------- --------- ---------- ---------- Income from partially-owned entities................. $ 13,786 N/A $ 5,305 $ 7,700 $ 455 $ (280) $ 550 $ 56 ======== === ========== ======== ======== ========= ========== ========== MARCH 31, 2001: Revenues................... $214,784 93,937 $ 34,496 $ 70,494 $ 3,091 $ 386 $ 12,380 $ -- -------- ------ ----------- -------- -------- --------- ---------- ---------- Expenses: Operating, general and administrative......... (43,655) (31,654) (2,232) (3,370) (704) (237) (5,458) -- Depreciation............. (43,121) (12,124) (14,642) (13,715) (516) (32) (2,092) -- Interest expense......... (75,465) (28,405) (11,416) (32,283) (1,055) -- (2,306) -- Other, net............... 1,443 (76) 639 (519) -- 1,744 565 (910) -------- ------ ----------- -------- -------- --------- ---------- ---------- Net income/(loss).......... $ 53,986 $ 21,678 $ 6,845 $ 20,607 $ 816 $ 1,861 $ 3,089 $ (910) ======== ======== =========== ======== ======== ========= ========== ========== Vornado's interest......... 34% 60% 30% 50% 80% 41% 50% Equity in net income....... $ 20,423 7,367 $ 4,108 $ 6,242 $ 408 $ 1,489 $ 1,264 $ (455) Interest and other income.. 2,083 -- 356 1,727 -- -- -- -- Fee income................. 1,484 -- 1,484 -- -- -- -- -- -------- ------ ----------- -------- -------- --------- ---------- ---------- Income from partially-owned entities................. $ 23,990 7,367 $ 5,948 $ 7,969 $ 408 $ 1,489 $ 1,264 $ (455) ======== ====== ========== ======== ======== ========= ========== ========== (DECREASE) INCREASE IN INCOME OF PARTIALLY-OWNED ENTITIES................. $(10,204) (7,367)(1) $ (643) $ (269) $ 47 $ (1,769)(3) $ (714)(4)$ 511 ======== ======== =========== ======== ======== ========= ========== ========== INTEREST AND OTHER INVESTMENT INCOME Interest and other investment income (interest income on mortgage loans receivable, other interest income, dividend income and net gains and losses on sale of marketable securities) was $9,643,000 for the three months ended March 31, 2002, compared to $13,473,000 in the prior year's quarter, a decrease of $3,830,000. This decrease resulted primarily from the Company not recognizing income on its loans to Primestone Investment Partners, L.P. and Vornado Operating Company for the three months ended March 31, 2002. In the three months ended March 31, 2001 the Company recognized income of $3,247,000 and $601,000 in connection with these loans. INTEREST AND DEBT EXPENSE Interest and debt expense was $58,018,000 for the three months ended March 31, 2002, compared to $49,395,000 in the prior year's quarter, an increase of $8,623,000. This increase was primarily comprised of (i) $25,029,000 from the acquisition of the remaining 66% of CESCR and the resulting consolidation of their operations, partially offset by (ii) a $11,450,000 savings from a 337 basis point reduction in weighted average interest rates of the Company's variable rate debt and (iii) lower average outstanding debt balances. NET GAIN (LOSS) ON DISPOSITION OF WHOLLY-OWNED AND PARTIALLY-OWNED ASSETS Net gain on disposition of wholly-owned and partially-owned assets of $1,531,000 for the three months ended March 31, 2002, represents a gain from the sale of residential condominiums in Chicago, Illinois. Net loss on disposition of assets of $4,723,000 for the three months ended March 31, 2001 relates to the write-off of the Company's investment in a technology company. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (effective January 1, 2002). SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead be subject to periodic impairment testing. In the first quarter of 2002, the Company wrote-off goodwill of approximately $30,129,000 of which (i) $15,490,000 represents its share of the goodwill arising from the Company's investment in Temperature Controlled Logistics and (ii) $14,639,000 represents goodwill arising from the Company's acquisition of the Hotel Pennsylvania. The write-off has been reflected as a cumulative effect of a change in accounting principle. The Company recorded the cumulative effect of a change in accounting principle of $4,110,000 in the first quarter of 2001. The Company had previously marked-to-market changes in value of stock purchase warrants through accumulated other comprehensive loss. Under SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES, as amended, those changes are recognized through earnings, and accordingly, the Company has reclassified $4,110,000 from accumulated other comprehensive loss to the consolidated statement of income as of January 1, 2001. Future changes in value of such securities will be recorded through earnings. EXTRAORDINARY ITEM The Company recorded an extraordinary item of $1,170,000 in the first quarter of 2001 representing the Company's share of Alexander's extraordinary gain from early extinguishment of debt. Page 24 LIQUIDITY AND CAPITAL RESOURCES THREE MONTHS ENDED MARCH 31, 2002 Cash flow provided by operating activities of $94,862,000 was primarily comprised of (i) income of $49,403,000, (ii) adjustments for non-cash items of $89,096,000, partially offset by (iii) the net change in operating assets and liabilities of $42,106,000. The adjustments for non-cash items were primarily comprised of (i) a cumulative effect of change in accounting principle of $30,129,000, (ii) amortization of Officer's deferred compensation expense of $6,875,000, (iii) depreciation and amortization of $47,588,000, (iv) minority interest of $33,926,000, partially offset by (vi) the effect of straight-lining of rental income of $10,068,000, and (vii) equity in net income of partially-owned entities and income applicable to Alexander's of $19,354,000. Net cash used in investing activities of $61,595,000 was primarily comprised of (i) recurring capital expenditures of $11,303,000, (ii) non-recurring capital expenditures of $5,370,000, (iii) development and redevelopment expenditures of $22,622,000, (iv) investment in notes and mortgages receivable of $55,236,000, (v) investments in partially-owned entities of $5,352,000, partially offset by (v) distributions from partially-owned entities of $44,219,000 and (vi) repayments on notes receivable of $2,500,000. Net cash used in financing activities of $127,651,000 was primarily comprised of (i) dividends paid on common shares of $99,084,000, (ii) dividends paid on preferred shares of $6,131,000, (iii) distributions to minority partners of $42,945,000, (iv) repayments of borrowings of $45,090,000, partially offset by (v) proceeds from the issuance of common shares of $56,658,000, and (vi) proceeds from the exercise of employee share options of $8,941,000. Below are the details of capital expenditures, leasing commissions and development and redevelopment expenditures. Capital expenditures are categorized as follows: Recurring -- capital improvements expended to maintain a property's competitive position within the market and tenant improvements and leasing commissions for costs to re-lease expiring leases or renew or extend existing leases. Non-recurring -- capital improvements completed in the year of acquisition and the following two years which were planned at the time of acquisition and tenant improvements and leasing commissions for space which was vacant at the time of acquisition of a property. Development and Redevelopment expenditures include all hard and soft costs associated with the development or redevelopment of a property, including tenant improvements, leasing commissions and capitalized interest and operating costs until the property is substantially complete and ready for its intended use. - ----------- (1) Does not include $15,421 of Fort Lee development costs funded by a construction loan. Page 25
(amounts in thousands) New York Merchandise Total City Office CESCR Retail Mart Other ----- ----------- ----- ------ ---- ----- Capital Expenditures: Expenditures to maintain the assets: Recurring......................... $ 2,128 $ 1,262 $ 159 $ 35 $ 672 $ -- Non-recurring..................... 4,387 2,032 1,925 -- 430 -- ------- --------- ------- -------- ----------- --------- 6,515 3,294 2,084 35 1,102 -- ------- --------- ------- -------- ----------- --------- Tenant improvements: Recurring......................... 9,175 2,017 5,799 773 586 -- Non-recurring..................... 983 983 -- -- -- -- ------- --------- ------- -------- ----------- --------- 10,158 3,000 5,799 773 586 -- ------- --------- ------- -------- ----------- --------- Total................................ $16,673 $ 6,294 $ 7,883 $ 808 $ 1,688 $ -- ======= ========= ======= ======== =========== ========= Leasing Commissions: Recurring......................... $ 4,826 $ 2,997 $ 1,066 $ 119 $ 644 $ -- Non-recurring..................... 1,415 1,382 -- 33 -- -- ------- --------- ------- -------- ----------- --------- $ 6,241 $ 4,379 $ 1,066 $ 152 $ 644 $ -- ======= ========= ======= ======== =========== ========= Total Capital Expenditures and Leasing Commissions: Recurring......................... $16,129 $ 6,276 $ 7,024 $ 927 $ 1,902 $ -- Non-recurring..................... 6,785 4,397 1,925 33 430 -- ------- --------- ------- -------- ----------- --------- $22,914 $ 10,673 $ 8,949 $ 960 $ 2,332 $ -- ======= ========= ======= ======== =========== ========= Development and Redevelopment Expenditures: Palisades-Fort Lee, NJ........... $ 2,603 $ -- $ -- $ -- $ -- $ 2,603(1) Other............................ 20,019 16,612 -- 1,761 609 1,037 ------- --------- ------- -------- ----------- --------- $22,622 $ 16,612 $ -- $ 1,761 $ 609 $ 3,640 ======= ========= ======= ======== =========== ========= THREE MONTHS ENDED MARCH 31, 2001 Cash flows provided by operating activities of $84,377,000 was primarily comprised of (i) income of $56,509,000 and (ii) adjustments for non-cash items of $22,653,000 partially offset by (iii) the net change in operating assets and liabilities of $5,215,000. The adjustments for non-cash items are primarily comprised of (i) cumulative effect of change in accounting principle of $4,110,000, (ii) the write-off of an investment in marketable securities of $4,723,000, (iii) depreciation and amortization of $31,865,000 and (iv) minority interest of $27,314,000, partially offset by (v) the effect of straight-lining of rental income of $7,895,000 and (vi) equity in net income of partially-owned entities and income applicable to Alexander's of $36,294,000. Net cash used in investing activities of $46,709,000 was primarily comprised of (i) recurring capital expenditures of $14,352,000 (ii) non-recurring capital expenditures of $12,809,000 (iii) development and redevelopment expenditures of $40,577,000, (iv) investment in notes and mortgages receivable of $10,069,000, (v) investments in partially-owned entities of $13,378,000, partially offset by, (vi) distributions from partially-owned entities of $17,163,000 and (vii) a decrease in restricted cash arising primarily from the repayment of mortgage escrows of $29,095,000. Net cash used in financing activities of $62,674,000 was primarily comprised of (i) proceeds from borrowings of $74,160,000, partially offset by, (ii) repayments of borrowings of $56,513,000, (iii) dividends paid on common shares of $45,191,000, (iv) dividends paid on preferred shares of $8,972,000, and (v) distributions to minority partners of $27,290,000. Below are the details of capital expenditures, leasing commissions and development and redevelopment expenditures. - ---------- (1) Does not include $37,592 of Fort Lee development costs funded by a construction loan. Page 26
New York City Merchandise (amounts in thousands) Total Office Retail Mart Other ----- ------ ------ ---- ----- Capital Expenditures: Expenditures to maintain the assets: Recurring............................... $ 4,434 $ 2,922 $ 96 $ 449 $ 967 Non-recurring........................... 12,775 6,694 -- 2,490 3,591 ---------- --------- ----------- -------- -------- 17,209 9,616 96 2,939 4,558 ---------- --------- ----------- -------- -------- Tenant improvements: Recurring............................... 9,918 8,573 244 1,101 -- Non-recurring........................... 34 34 -- -- -- ---------- --------- ----------- -------- -------- 9,952 8,607 244 1,101 -- ---------- --------- ------------ -------- -------- Total..................................... $ 27,161 $ 18,223 $ 340 $ 4,040 $ 4,558 ========== ========= ============ ======== ======== Leasing Commissions: Recurring................................. $ 5,643 $ 2,769 $ 325 $ 2,414 $ 135 Non-recurring............................. 5,527 1,906 -- 3,621 -- ---------- --------- ----------- -------- -------- $ 11,170 $ 4,675 $ 325 $ 6,035 $ 135 ========== ========= =========== ======== ======== Development and Redevelopment: Expenditures: Park Laurel (80% interest).............. $ 18,286 $ -- $ -- $ -- $ 18,286 Market Square on Main Street............ 9,127 -- -- 9,127 -- Other................................... 13,164 6,165 863 -- 6,136(1) ---------- ---------- ------------ -------- -------- $ 40,577 $ 6,165 $ 863 $ 9,127 $ 24,422 =========== ========== ============ ======== ======== SUPPLEMENTAL INFORMATION Below is a summary of net income, EBITDA and funds from operations for the three months ended March 31, 2002 and 2001, giving effect to the CESCR acquisition as if it had occurred on January 1, 2001. - ----------- (1) Funds from operations in the three months ended March 31, 2002, includes (i) a $6,875 charge for one quarter's amortization in connection with the January 1, 2002 extension of the Company's employment agreement with Mr. Fascitelli, its President, which was valued for compensation purposes at $27,500, and (ii) $1,531 from a gain on sale of residential condominium units in Chicago, Illinois. Funds from operations in the three months ended March 31, 2001, includes (i) a charge of $5,000 for the write-off of costs associated with two acquisitions which were not consummated and (ii) a charge of $4,723 resulting from a write-off of an equity investment in a technology company. Funds from operations before these items and after minority interest was $113,474 in the three months ended March 31, 2002, compared to $94,095 in the prior year's quarter, a $19,379 increase, or 5.2% on a per share basis. Below are the details of the changes by segment in EBITDA for the three months ended March 31, 2002 from the three months ended December 31, 2001.
Three Months Ended ------------------------ March 31, March 31, 2001 2002 (Pro Forma) ---------- ----------- (amounts in thousands) Revenues ............................................ $ 346,324 $ 337,594 ========= ========= Net income .......................................... $ 49,403 $ 59,265 Preferred share dividends ........................... (6,131) (9,673) --------- --------- Net income applicable to common shares .............. $ 43,272 $ 49,592 ========= ========= Net income per common share - diluted ............... $ .40 $ .55 ========= ========= EBITDA .............................................. $ 239,028 $ 231,517 ========= ========= Funds from operations(1) ............................ $ 109,246 $ 85,563 ========= ========= Shares used for determining funds from operations per share ............................................. 110,423 97,399 ========= ========= - ---------- (1) Represents operations which were owned for the same period in each year and excludes non-recurring income and expenses. (2) Same store percentage increase was 3.1% for the New York City office portfolio, and 2.3% for the CESCR portfolio. (3) Primarily due to the recognition of percentage rent and seasonal mall store rents in the three months ended December 31, 2001 in the case of the Retail segment and the timing of trade shows in the case of the Merchandise Mart segment. Page 27
Temperature Merchandise Controlled (amounts in thousands) Total Office Retail Mart Logistics Other - ---------------------- ----- ------ ------ ---- --------- ----- Three months ended December 31, 2001............... $ 202,020 $ 95,111 $ 29,731 $ 30,265 $ 19,897 27,016 2002 Operations: Same store operations(1)........ 3,347 2,771 (955)(3) (1,987)(3) 1,340 2,178 Acquisitions, dispositions and other non-recurring income and expenses..................... 33,661 44,996 (1,242) (2,050) -- (8,043) --------- ----------- ---------- --------- ---------- ------- Three months ended March 31, 2002.................. $ 239,028 $ 142,878(2) $ 27,534 $ 26,228 $ 21,237 $21,151 ========= =========== ========== ========= ========== ======= % increase (decrease) in same store operations.............. 1.7% 2.9%(2) (3.2%)(3) (6.6)% (3) 6.7% 8.1% LEASING ACTIVITY The following table sets forth certain information for the properties the Company owns directly or indirectly, including leasing activity for space previously occupied: (square feet and cubic feet in thousands) - ----------- (1) Most leases include periodic step-ups in rent, which are not reflected in the initial rent per square foot leased. (2) In addition to the above, the Company leased 23,000 square feet of previously vacant space (first generation space - space which has been vacant for more than nine months) at an average initial rent per square foot of $57.31. Page 28
Office Merchandise Mart -------------------- ---------------------- Temperature New York Controlled City CESCR Retail Office Showroom Logistics -------- -------- ------ --------- ---------- ----------- As of March 31, 2002: Square feet .................. 14,317 13,008 11,301 2,822 5,490 17,695 Cubic feet ................... -- -- -- -- -- 445,200 Number of properties ......... 22 51 55 9 9 89 Occupancy rate ............... 97% 94% 91% 90% 95% 81% Leasing Activity: For the quarter ended March 31, 2002: Square feet .......... 121(2) 459 114 56 203 -- Rent per square foot: Initial rent (1) ... $ 49.24 $ 31.33 $ 11.91 $ 21.09 $ 19.36 -- Prior escalated rent $ 33.00 $ 29.33 $ 8.14 $ 20.66 $ 17.90 -- Percentage increase 49% 7% 46% 2% 8% -- As of December 31, 2001: Square feet .................. 14,300 4,386 11,301 2,840 5,532 17,695 Cubic feet ................... -- -- -- -- -- 445,200 Number of properties ......... 22 51 55 9 9 89 Occupancy rate ............... 97% 95% 92% 89% 96% 81% As of March 31, 2001: Square feet .................. 14,410 4,248 11,300 2,869 5,044 17,495 Cubic feet ................... -- -- -- -- -- 438,900 Number of properties ......... 22 50 55 9 9 88 Occupancy rate ............... 97% 98% 92% 91% 98% 73% FUNDS FROM OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001 Funds from operations was $109,246,000 in the three months ended March 31, 2002, compared to $81,907,000 in the prior year's quarter, an increase of $27,339,000. Funds from operations in the three months ended March 31, 2002, includes (i) a $6,875,000 charge for one quarter's amortization in connection with the January 1, 2002 extension of the Company's employment agreement with Mr. Fascitelli, its President, which was valued for compensation purposes at $27,500,000, and (ii) a $1,531,000 gain from the sale of residential condominiums in Chicago, Illinois. Funds from operations in the three months ended March 31, 2001, includes (i) a $5,000,000 charge for the write-off of costs associated with two acquisitions which were not consummated and (ii) a $4,723,000 charge resulting from a write-off of an equity investment in a technology company. Funds from operations before these items and after minority interest was $113,474,000 in the three months ended March 31, 2002, compared to $90,439,000 in the prior year's quarter, a $23,035,000 increase over the prior year, a 9.7% increase on a per share basis. Page 29
The following table reconciles funds from operations and net income: (amounts in thousands) For the Three Months Ended March 31, ------------------------------------ 2002 2001 ---- ---- Net income applicable to common shares.................................... $ 43,272 $ 46,836 Cumulative effect of a change in accounting principle..................... 30,129 4,110 Extraordinary item........................................................ -- (1,170) Depreciation and amortization of real property............................ 45,487 31,040 Straight-lining of property rentals for rent escalations.................. (8,677) (7,254) Leasing fees received in excess of income recognized...................... 318 (124) Depreciation of securities held in officer's deferred compensation trust.. -- (2,283) Proportionate share of adjustments to equity in net income of partially-owned entities to arrive at funds from operations: Depreciation and amortization of real property...................... 12,881 16,053 Net gain on sale of real estate (Alexander's Fordham Road property). -- (6,298) Other............................................................... (510) (489) Minority interest in excess of preferential distributions................. (15,535) (3,936) ---------- ----------- 107,365 76,485 Series A preferred shares................................................. 1,881 5,422 ---------- ---------- Funds from operations--diluted (1)........................................ $ 109,246 $ 81,907 ========== ========== The number of shares that should be used for determining funds from operations per share is as follows: (amounts in thousands) For the Three Months Ended March 31, -------------------------- 2002 2001 ---- ---- Weighted average shares used for determining diluted income per share..... 107,217 89,381 Series A preferred shares............................................. 4,303 8,018 ---------- ---------- Shares used for determining diluted funds from operations per share (1)... 111,520 97,399 ========== ========== Funds from operations does not represent cash generated from operating activities in accordance with accounting principles generally accepted in the United States of America 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 supplemental measure of operating performance and along with cash flow from operating activities, financing activities and investing activities, it provides investors with an indication of the ability of the Company to incur and service debt, to make capital expenditures and to fund other cash needs. Funds from operations may not be comparable to similarly titled measures reported by other REITs since a number of REITs, including the Company, calculate funds from operations in a manner 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 from this definition to adjust primarily 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: - ----------- (1) Assuming all of the convertible units of the Operating Partnership were converted to shares, the minority interest in partnership earnings would not be deducted in calculating funds from operations and the shares used in calculating funds from operations per share would be increased to reflect the conversion. Funds from operations per share would not change. The following table reconciles funds from operations as shown above, to the Operating Partnership's funds from operations for the three months ended March 31, 2002 and 2001:
(amounts in thousands) For the Three Months Ended March 31, ------------------------------------ 2002 2001 ---- ---- Operating activities................. $ 94,862 $ 84,377 =========== =========== Investing activities................. $ (61,595) $ (46,709) ============ ============ Financing activities................. $ (127,651) $ (62,674) ============ ============ FINANCINGS The Company anticipates that cash from continuing operations will be adequate to fund business operations and the payment of dividends and distributions on an on-going basis for more than the next twelve months; however, capital outlays for significant acquisitions would require funding from borrowings or equity offerings. Page 30
For the Three Months Ended March 31, ------------------------------------ 2002 2001 ---- ---- Funds from operations, as above.............. $ 109,246 $ 81,907 Addback of minority interest reflected as equity in the Operating Partnership......... 28,562 11,429 ---------- ---------- Operating Partnership funds from operations.. $ 137,808 $ 93,336 ========== ========== The number of shares that should be used for determining Operating Partnership funds from operations per share is as follows: Shares used for determining diluted funds from operations per share, as above.............. 111,520 97,399 Convertible units: Non-Vornado owned Class A units.......... 21,388 5,823 B-1 units................................ 822 822 B-2 units................................ 411 411 C-1 units................................ 855 855 E-1 units................................ 5,680 5,680 ---------- ---------- Shares used for determining Operating Partnership diluted funds from operations per share........................ 140,676 110,990 ========== ========== ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Company's exposure to a change in interest rates on its wholly-owned and partially-owned debt (all of which arises out of non-trading activity) is as follows: (amounts in thousands, except per share amounts) - ----------- (1) Excludes the effect of a $123,500 mortgage financing, cross-collateralized by the Company's 770 Broadway and 595 Madison Avenue office properties, as the proceeds are in a restricted mortgage escrow account which bears interest at the same rate as the loan. Page 31
March 31, 2002 December 31, 2001 ------------------------------------------ -------------------------- Weighted Effect of 1% Weighted Average Change In Average Balance Interest Rate Base Rates Balance Interest Rate ------- ------------- ---------- ------- ------------- Wholly-owned debt: Variable rate.................. $ 1,359,097 $ 3.40% $ 12,356(1) $1,182,605 3.39% Fixed rate..................... 2,611,389 7.19% -- 1,294,568 7.53% ------------ ------------ ---------- $ 3,970,486 5.95% 12,356 $2,477,173 ============ ------------ ========== Partially-owned debt: Variable rate.................. $ 14,775 5.08% 148 $ 85,516 5.63% Fixed rate..................... 774,938 8.59% -- 1,234,019 8.29% ------------ ------------ ---------- $ 789,713 8.52% 148 $1,319,535 ============ ------------ ========== Minority interest..................... (2,626) ------------ Total decrease in the Company's annual net income......... $ 9,878 ============ Per share-diluted................ $ .09 ============ PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company is from time to time involved in legal actions arising in the ordinary course of its business. In the opinion of management, after consultation with legal counsel, the outcome of such matters will not have a material adverse effect on the Company's financial condition, results of operations or cash flows. The following should be read in conjunction with Item 3. Legal Proceedings in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001. On April 2, 2002, the Company filed a motion with the Court of Appeals either to vacate the stay pending Primestone's appeal from the affirmance of the Bankruptcy Court's dismissal of its bankruptcy case or to condition the continuance of the stay on the posting of a substantial bond by Primestone. On April 12, 2002, the Court of Appeals issued an order providing that the stay would be lifted unless Primestone posted a $15,000,000 bond on April 17, 2002. Primestone did not post the bond. On April 17, 2002 Primestone filed a motion to expedite oral argument or, alternatively, reinstate the stay pending appeal without a bond. In a telephone conference call held by the Court of Appeals with counsel for the Company and Primestone on April 18, counsel for the Company stated that it intended to reschedule the foreclosure auction for April 30, 2002. Following the conference call, the Court of Appeals issued an order scheduling oral argument on Primestone's appeal for May 2, 2002 and denying Primestone's request to maintain the stay pending appeal. On April 22, 2002, Primestone filed a motion seeking clarification and modification of the April 18 order to indicate that the Court of Appeals did not intend for Vornado to proceed with the foreclosure auction before the Court heard oral argument on the appeal. On April 26, 2002, the Court of Appeals denied that motion. On April 30, 2002, the Company acquired 7,944,893 partnership units of Prime Group Realty, L.P., the operating partnership of Prime Group Realty Trust (NYSE:PGE), at a foreclosure auction held in New York City. The partnership units had been pledged to the Company as collateral for loans to Primestone Investment Partners L.P. (Primestone). The price the Company paid for the units was $8.35 per unit, the April 30, 2002 closing price on The New York Stock Exchange of the PGE shares for which the partnership units are exchangeable on a one-for-one basis. Primestone and its affiliated guarantors remain liable for the deficiency under the loans. As previously reported, a subsidiary of Cadim, Inc. owns a 50% participation interest in the loans to Primestone held by the Company. Under the participation arrangement, the Cadim affiliate has the right to acquire 50% of the partnership units that the Company acquired at the foreclosure auction (or the PGE shares into which they may be exchanged). If the Court of Appeals decides to reverse the dismissal of Primestone's bankruptcy petition, that decision will not affect the rights to the Units acquired by the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits required by Item 601 of Regulation S-K are incorporated herein by reference and are listed in the attached Exhibit Index. (b) Reports on Form 8-K During the quarter ended March 31, 2002, the Company filed the following reports on Form 8-K and Form 8-K/A: Page 32
Period Covered: (Date of Earliest Event Reported) Items Reported Dated Filed - --------------- -------------- ----------- January 1, 2002 Consummation of merger with Charles E. Smith Commercial January 16, 2002 Realty L.P. January 1, 2002 Financial Statements and Pro Forma Financial Information March 18, 2002 in connection with the consummation of the merger with Charles E. Smith Commercial Realty L.P. February 28, 2002 Announcement of underwriting agreement with Salomon Smith March 1, 2002 Barney Inc., placement agency agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner, and Smith Incorporated, and purchase agreement with Cohen & Steers Quality Income Realty Fund, Inc., each relating to the issuance of common shares. 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: May 1, 2002 By: /s/ Joseph Macnow ----------------------------------------- Joseph Macnow, Executive Vice President - Finance and Administration and Chief Financial Officer Page 33 EXHIBIT INDEX EXHIBIT NO. - ------- 2.1 -- Agreement and Plan of Merger, dated as of October 18, 2001, by and among Vornado, Vornado Merger Sub L.P., Charles E. Smith Commercial Realty L.P., Charles E. Smith Commercial Realty L.L.C., Robert H. Smith, individually, Robert P. Kogod, individually, and Charles E. Smith Management, Inc. - Incorporated by reference to Exhibit 2.1 of Vornado's Current Report on Form 8-K (File No. 001-11954), filed on January 16, 2002..................................................... * 3.1 -- Amended and Restated Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on April 16, 1993 - Incorporated by reference to Exhibit 3(a) of Vornado's Registration Statement on Form S-4 (File No. 33-60286), filed on April 15, 1993................................................. * 3.2 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on May 23, 1996 - Incorporated by reference to Exhibit 3.2 of Vornado's Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 001-11954), filed on March 11, 2002...................... * 3.3 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on April 3, 1997 - Incorporated by reference to Exhibit 3.3 of Vornado's Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 1-11954), filed on March 11, 2002........................ * 3.4 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on October 14, 1997 - Incorporated by reference to Exhibit 3.2 of Vornado's Registration Statement on Form S-3 (File No. 333-36080), filed on May 2, 2000.................................................. * 3.5 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on April 22, 1998 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated April 22, 1998 (File No. 001-11954), filed on April 28, 1998.................................. * 3.6 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on November 24, 1999 - Incorporated by reference to Exhibit 3.4 of Vornado's Registration Statement on Form S-3 (File No. 333-36080), filed on May 2, 2000.................................................. * 3.7 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on April 20, 2000 - Incorporated by reference to Exhibit 3.5 of Vornado's Registration Statement on Form S-3 (File No. 333-36080), filed on May 2, 2000.................................................. * 3.8 -- Articles of Amendment of Declaration of Trust of Vornado, as filed with the State Department of Assessments and Taxation of Maryland on September 14, 2000 - Incorporated by reference to Exhibit 4.6 of Vornado's Registration Statement on Form S-8 (File No. 333-68462), filed on August 27, 2001......................................... * 3.9 -- Articles Supplementary Classifying Vornado's $3.25 Series A Preferred Shares of Beneficial Interest, liquidation preference $50.00 per share - Incorporated by reference to Exhibit 4.1 of Vornado's Current Report on Form 8-K, dated April 3, 1997 (File No. 001-11954), filed on April 8, 1997.................................................. * - ---------- * Incorporated by reference Page 34 EXHIBIT NO. - ------- 3.10 -- Articles Supplementary Classifying Vornado's $3.25 Series A Convertible Preferred Shares of Beneficial Interest, as filed with the State Department of Assessments and Taxation of Maryland on December 15, 1997 - Incorporated by reference to Exhibit 3.10 to Vornado's Annual Report on Form 10-K for the year ended December 31, 2001 (File No. 001-11954), filed on March 31, 2002................. * 3.11 -- Articles Supplementary Classifying Vornado's Series D-1 8.5% Cumulative Redeemable Preferred Shares of Beneficial Interest, no par value (the "Series D-1 Preferred Shares") - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated November 12, 1998 (File No. 001-11954), filed on November 30, 1998.... * 3.12 -- Articles Supplementary Classifying Additional Series D-1 8.5% Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share, no par value - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K/A, dated November 12, 1998 (File No. 001-11954), filed on February 9, 1999..................................................... * 3.13 -- Articles Supplementary Classifying 8.5% Series B Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share, no par value - Incorporated by reference to Exhibit 3.3 of Vornado's Current Report on Form 8-K, dated March 3, 1999 (File No. 001-11954), filed on March 17, 1999............ * 3.14 -- Articles Supplementary Classifying Vornado's Series C 8.5% Cumulative Redeemable Preferred Shares of Beneficial Interest, liquidation preference $25.00 per share, no par value - Incorporated by reference to Exhibit 3.7 of Vornado's Registration Statement on Form 8-A (File No. 001-11954), filed on May 19, 1999........................ * 3.15 -- Articles Supplementary Classifying Vornado Realty Trust's Series D-2 8.375% Cumulative Redeemable Preferred Shares, dated as of May 27, 1999, as filed with the State Department of Assessments and Taxation of Maryland on May 27, 1999 - Incorporated by reference - Incorporated to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No. 001-11954), filed on July 7, 1999..................................................... * 3.16 -- Articles Supplementary Classifying Vornado's Series D-3 8.25% Cumulative Redeemable Preferred Shares, dated September 3, 1999, as filed with the State Department of Assessments and Taxation of Maryland on September 3, 1999 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated September 3, 1999 (File No. 001-11954), filed on October 25, 1999................ * 3.17 -- Articles Supplementary Classifying Vornado's Series D-4 8.25% Cumulative Redeemable Preferred Shares, dated September 3, 1999, as filed with the State Department of Assessments and Taxation of Maryland on September 3, 1999 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated September 3, 1999 (File No. 001-11954), filed on October 25, 1999................ * 3.18 -- Articles Supplementary Classifying Vornado's Series D-5 8.25% Cumulative Redeemable Preferred Shares - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated November 24, 1999 (File No. 001-11954), filed on December 23, 1999.............. * 3.19 -- Articles Supplementary Classifying Vornado`s Series D-6 8.25% Cumulative Redeemable Preferred Shares, dated May 1, 2000, as filed with the State Department of Assessments and Taxation of Maryland on May 1, 2000 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated May 1, 2000 (File No. 001-11954), filed May 19, 2000........................... * - ---------- * Incorporated by reference Page 35 3.20 -- Articles Supplementary Classifying Vornado's Series D-7 8.25% Cumulative Redeemable Preferred Shares, dated May 25, 2000, as filed with the State Department of Assessments and Taxation of Maryland on June 1, 2000 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated May 25, 2000 (File No. 001-11954), filed on June 16, 2000........................ * 3.21 -- Articles Supplementary Classifying Vornado's Series D-8 8.25% Cumulative Redeemable Preferred Shares - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated December 8, 2000 (File No. 001-11954), filed on December 28, 2000............... * 3.22 -- Articles Supplementary Classifying Vornado's Series D-9 8.75% Preferred Shares, dated September 21, 2001, as filed with the State Department of Assessments and Taxation of Maryland on September 25, 2001 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K (File No. 001-11954), filed on October 12, 2001..................................................... * 3.23 -- Amended and Restated Bylaws of Vornado, as amended on March 2, 2000 - Incorporated by reference to Exhibit 3.12 of Vornado's Annual Report on Form 10-K for the year ended December 31, 1999 (File No. 001-11954), filed on March 9, 2000............................................ * 3.24 -- Second Amended and Restated Agreement of Limited Partnership of the Operating Partnership, dated as of October 20, 1997 (the "Partnership Agreement") - Incorporated by reference to Exhibit 3.4 of Vornado's Annual Report on Form 10-K for the year ended December 31, 1997 filed on March 31, 1998......................... * 3.25 -- Amendment to the Partnership Agreement, dated as of December 16, 1997-Incorporated by reference to Exhibit 3.5 of Vornado's Annual Report on Form 10-K for the year ended December 31, 1997 (File No. 001-11954) filed on March 31, 1998........................................... * 3.26 -- Second Amendment to the Partnership Agreement, dated as of April 1, 1998 - Incorporated by reference to Exhibit 3.5 of Vornado's Registration Statement on Form S-3 (File No. 333-50095), filed on April 14, 1998.................. * 3.27 -- Third Amendment to the Partnership Agreement, dated as of November 12, 1998 - Incorporated by reference to Exhibit 3.2 of Vornado's * Incorporated Current Report on Form 8-K, dated November 12, 1998 (File No. 001-11954), filed on November 30, 1998..................................... * 3.28 -- Fourth Amendment to the Partnership Agreement, dated as of November 30, 1998 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated December 1, 1998 (File No. 001-11954), filed on February 9, 1999......................................... * 3.29 -- Exhibit A to the Partnership Agreement, dated as of December 22, 1998 - Incorporated by reference to Exhibit 3.4 of Vornado's Current Report on Form 8-K/A, dated November 12, 1998 (File No. 001-11954), filed on February 9, 1999.................................................. * 3.30 -- Fifth Amendment to the Partnership Agreement, dated as of March 3, 1999 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K, dated March 3, 1999 (File No. 001-11954), filed on March 17, 1999....... * 3.31 -- Exhibit A to the Partnership Agreement, dated as of March 11, 1999 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated March 3, 1999 (File No. 001-11954), filed on March 17, 1999............ * 3.32 -- Sixth Amendment to the Partnership Agreement, dated as of March 17, 1999 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No. 001-11954), filed on July 7, 1999......... * - ---------- * Incorporated by reference Page 36 3.33 -- Seventh Amendment to the Partnership Agreement, dated as of May 20, 1999 - Incorporated by reference to Exhibit 3.3 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No. 001-11954), filed on July 7, 1999..................................................... * 3.34 -- Eighth Amendment to the Partnership Agreement, dated as of May 27, 1999 - Incorporated by reference to Exhibit 3.4 of Vornado's Current Report on Form 8-K, dated May 27, 1999 (File No. 001-11954), filed on July 7, 1999..................................................... * 3.35 -- Ninth Amendment to the Partnership Agreement, dated as of September 3, 1999 - Incorporated by reference to Exhibit 3.3 of Vornado's Current Report on Form 8-K (File No. 001-11954), filed on October 25, 1999.................... * 3.36 -- Tenth Amendment to the Partnership Agreement, dated as of September 3, 1999 - Incorporated by reference to Exhibit 3.4 of Vornado's Current Report on Form 8-K, dated September 3, 1999 (File No. 001-11954), filed on October 25, 1999................................................. * 3.37 -- Eleventh Amendment to the Partnership Agreement, dated as of November 24, 1999 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated November 24, 1999 (File No. 001-11954), filed on December 23, 1999........................................ * 3.38 -- Twelfth Amendment to the Partnership Agreement, dated as of May 1, 2000 - Incorporated by reference to Exhibit 3.2 of Vornado's Incorporated Current Report on Form 8-K, dated May 1, 2000 (File No. 001-11954), filed on May 19, 2000..................................................... * 3.39 -- Thirteenth Amendment to the Partnership Agreement, dated as of May 25, 2000 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated May 25, 2000 (File No. 001-11954), filed on June 16, 2000..................................................... * 3.40 -- Fourteenth Amendment to the Partnership Agreement, dated as of December 8, 2000 - Incorporated by reference to Exhibit 3.2 of Vornado's Current Report on Form 8-K, dated December 8, 2000 (File No. 001-11954), filed on December 28, 2000........................................ * 3.41 -- Fifteenth Amendment to the Partnership Agreement, dated as of December 15, 2000 - Incorporated by reference to Exhibit 4.35 of Vornado Realty Trust's Registration Statement on Form S-8 (File No. 333-68462), filed on August 27, 2001.......................................... * 3.42 -- Sixteenth Amendment to the Partnership Agreement, dated as of July 25, 2001 - Incorporated by reference to Exhibit 3.3 of Vornado Realty Trust's Current Report on Form 8-K (File No. 001-11954), filed on October 12, 2001..................................................... * 3.43 -- Seventeenth Amendment to the Partnership Agreement, dated as of September 21, 2001 - Incorporated by reference to Exhibit 3.4 of Vornado Realty Trust's Current Report on Form 8-K (File No. 001-11954), filed on October 12, 2001..................................................... * 3.44 -- Eighteenth Amendment to the Partnership Agreement, dated as of January 1, 2002 - Incorporated by reference to Exhibit 3.1 of Vornado's Current Report on Form 8-K (File No. 1-11954), filed on March 18, 2002.................... * - ---------- * Incorporated by reference Page 37 10.1** -- Registration Rights Agreement, dated January 1, 2002, between Vornado and the Unit holders named therein - Incorporated by reference to Exhibit 10.1 of Vornado's Current Report on Form 8-K dated January 1, 2002 (File No. 1-11954), filed on March 18, 2002.................... * 10.2** -- Registration Rights Agreement, dated January 1, 2002, between Vornado and the Unit holders named therein - Incorporated by reference to Exhibit 10.2 of Vornado's Current Report on Form 8-K dated January 1, 2002 (File No. 1-11954), filed on March 18, 2002.................... * 10.6** -- Tax Reporting and Protection Agreement, dated December 31, 2001, by and among Vornado, Vornado Realty L.P., Charles E. Smith Commercial Realty L.P. and Charles E. Smith Commercial Realty L.L.C. - Incorporated by reference to Exhibit 10.3 of Vornado's Current Report on Form 8-K (File No. 1-11954), filed on March 18, 2002..... * 10.7** -- Employment agreement between Vornado Realty Trust and Michael D. Fascitelli, dated March 8, 2002 - -------- * Incorporated by reference ** Management contract or compensatory plan Page 38
EXHIBIT 10.7 EMPLOYMENT AGREEMENT AGREEMENT, dated as of March 8, 2002, by and between Vornado Realty Trust, a Maryland real estate investment trust, with its principal offices at 888 Seventh Avenue, New York, New York 10106 (the "Company") and Michael D. Fascitelli ("Executive"). WHEREAS, the Company and Executive entered into an Employment Agreement, dated as of December 2, 1996 (the "1996 Agreement"); WHEREAS, the Company and Executive wish to amend and restate the 1996 Agreement in its entirety; NOW, THEREFORE, in consideration of the premises and the mutual covenants set forth below, the parties hereby amend and restate the 1996 Agreement in its entirety and agree as follows: 1. EMPLOYMENT. The Company hereby agrees to continue Executive's employment as the President of the Company, and Executive hereby accepts such continued employment, on the terms and conditions hereinafter set forth. 2. TERM. The period of employment of Executive by the Company hereunder (the "Employment Period") shall commence on January 1, 2002 (the "Commencement Date") and shall continue through December 31, 2006; PROVIDED that, commencing on January 1, 2006, and on each January 1 thereafter, the Employment Period shall automatically be extended for one (1) additional year unless either party gives written notice not to extend this Agreement prior to three (3) months before such extension would be effectuated. The Employment Period may be sooner terminated by either party in accordance with Section 6 of this Agreement. 3. POSITION AND DUTIES. During the Employment Period, Executive shall serve as President of the Company, and shall report solely and directly to Mr. Steven Roth; PROVIDED that, if Mr. Steven Roth is no longer employed by the Company for any reason, Executive shall report, in respect of his duties and responsibilities at the Company, solely and directly to the board of trustees of the Company (the "Board"). Subject to the supervisory powers of Mr. Steven Roth only, Executive shall have those powers and duties normally associated with the position of President and trustee and such other powers and duties as may be prescribed by Mr. Roth and the Board only, PROVIDED that such other powers and duties are consistent with Executive's position as President and trustee of the Company. Executive shall devote substantially all of his working time, attention and energies during normal business hours (other than absences due to illness or vacation) to the performance of his duties for the Company. Notwithstanding the above, Executive shall be permitted, to the extent such activities do not substantially interfere with the performance by Executive of his duties and responsibilities hereunder or violate Section 10(a), (b) or (c) of this Agreement, to (i) manage Executive's personal, financial and legal affairs, and (ii) serve on civic or charitable boards or committees (it being
expressly understood and agreed that Executive's continuing to serve on any such board and/or committees on which Executive is serving, or with which Executive is otherwise associated, as of the Commencement Date (each of which has been disclosed to the Company prior to the execution of this Agreement), shall be deemed not to interfere with the performance by Executive of his duties and responsibilities under this Agreement). Executive is currently serving as a member of the Board and of the board of directors of certain affiliates of the Company. 4. PLACE OF PERFORMANCE. The principal place of employment of Executive shall be at the Company's principal executive offices in New York, New York. 5. COMPENSATION AND RELATED MATTERS. (a) BASE SALARY. During the Employment Period the Company shall pay Executive a base salary at the rate of not less than $1,000,000 per year ("Base Salary"). Executive's Base Salary shall be paid in approximately equal installments in accordance with the Company's customary payroll practices. If Executive's Base Salary is increased by the Company, such increased Base Salary shall then constitute the Base Salary for all purposes of this Agreement. (b) COMPANY SHARE OPTION. The Company has granted to Executive a non-qualified share option (the "Company Share Option") to acquire 3,500,000 shares of the common shares of beneficial interest of the Company, par value $.04 per share (the "Company Stock"), pursuant to the Company's 1993 Omnibus Share Plan (the "Company Option Plan"). The Company Share Option is subject to the terms set forth in the share option agreement attached to the 1996 Agreement as Exhibit A (the "Company Share Option Agreement") and to the Company Option Plan. The Company hereby represents and warrants to Executive that (a) the Company Option Plan has and will have sufficient shares available to effect the exercise of the Company Share Option and the Company Option Plan has been approved by its shareholders, (b) the Company Share Option was granted by the Board or by a compensation committee of the Board satisfying the conditions for "non-employee directors" under Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended ("Rule16b-3"), (c) the Company Share Option was properly authorized and approved by the Board and/or its compensation committee, (d) the Company Stock underlying the Company Share Option has been registered on Form S-8 and (e) the Company Stock underlying the Company Share Option has been listed on the New York Stock Exchange. The Company hereby undertakes and agrees (at no cost to Executive) to have an effective shelf-registration in place in favor of Executive in respect of the Company Stock underlying the Company Share Option (the "Company Registration Statement"). The Company Registration Statement shall be subject to the terms set forth on Exhibit B to the 1996 Agreement. (c) ALEXANDER'S STOCK OPTION. Alexander's, Inc. ("Alexander's") has granted to Executive a non-qualified stock option (the "Alexander's Stock Option") to acquire 350,000 shares of the common stock of Alexander's, par value $1.00 per share (the "Alexander's Stock"), pursuant to the Alexander's, Inc. Omnibus Stock Plan (the "Alexander's Option Plan"). The Alexander's Option is subject to the 2
terms set forth in the stock option agreement attached to the 1996 Agreement as Exhibit C (the "Alexander's Stock Option Agreement") and to the Alexander's Option Plan. The Company hereby represents and warrants to Executive that (a) the Alexander's Stock Option Plan has sufficient shares available to effect the exercise of the Alexander's Option and the Alexander's Stock Option Plan has been approved by its shareholders, (b) the Alexander's Option was granted by the board of directors of Alexander's or by a compensation committee of the board of directors of Alexander's satisfying the conditions for non-employee directors under Rule 16b-3, (c) the Alexander's Option was properly authorized and approved by the board of directors of Alexander's and/or its compensation committee, (d) the Alexander's Stock underlying the Alexander's Stock Option has been registered on Form S-8, and (e) the Alexander's Stock underlying the Alexander's Stock Option has been properly listed on the New York Stock Exchange. The Company hereby undertakes and agrees (at no cost to Executive) to use its best efforts to cause Alexander's to have an effective shelf-registration in place in favor of Executive in respect of the Alexander's Stock underlying the Alexander's Option (the "Alexander's Registration Statement"). The Alexander's Registration Statement shall be subject to the terms set forth on Exhibit B to the 1996 Agreement. (d) 2002 UNITS AGREEMENT. The Company and Executive shall execute on the date of this Agreement a deferred compensation arrangement in the form of 626,566 convertible units (the "2002 Units") pursuant to an agreement in the form attached hereto as EXHIBIT A (the "2002 Units Agreement"). (e) RABBI TRUST. In connection with the 2002 Units, the Company shall, within 60 days from the date of this Agreement, contribute a certificate for 626,566 shares of Company Stock into the irrevocable "rabbi" trust established pursuant to the Trust Agreement, dated as of December 2, 1996, between the Company and The Chase Manhattan Bank, a New York banking corporation (the "Rabbi Trust"). The Company hereby undertakes and agrees to maintain at no cost to Executive or the trustee under the Rabbi Trust agreement (attached as Exhibit F to the 1996 Agreement) the Rabbi Trust in respect of the 919,540 shares of Company Stock held therein pursuant to the 1996 Agreement, as well as the 626,566 shares of Company Stock to be contributed hereunder. (f) CONDITION TO RECEIPT OF 2002 UNITS. Notwithstanding anything in this Section 5 to the contrary, Executive shall have no right to the amount payable pursuant to the 2002 Units Agreement in the event that, prior to December 31, 2002, he voluntarily terminates employment hereunder (other than for Good Reason); PROVIDED that, under no circumstances shall such amount be forfeited upon Executive's death or a termination of employment due to Executive's Disability. (g) AUTOMOBILE. The Company will provide Executive with an automobile and driver, which automobile shall be a Lincoln Town Car or similar model. (h) EXPENSES. The Company shall promptly reimburse Executive for all reasonable business expenses upon the presentation of reasonably itemized statements of such expenses in accordance with the Company's policies 3
and procedures now in force or as such policies and procedures may be modified with respect to all senior executive officers of the Company. (i) VACATION. Executive shall be entitled to the number of weeks of vacation per year provided to the Company's chief executive officer, but in no event less than four (4) weeks annually. (j) SERVICES FURNISHED. During the Employment Period, the Company shall furnish Executive with office space, stenographic and secretarial assistance and such other facilities and services comparable to those provided to the Company's chief executive officer. (k) COMPANY LOAN. During the Employment Period, upon the written request of Executive, the Company shall disburse to Executive one or more loans in the aggregate amount of $20,000,000, less any loan amounts outstanding pursuant to the 1996 Agreement. Each of such loans shall be on a revolving principal basis subject to the following terms and conditions: (i) the loan must be in an amount of at least $500,000; (ii) the loan shall be full recourse to Executive; (iii) the principal amount of the loan shall be due and payable upon the first to occur of (A) Executive's Date of Termination, (B) the fifth anniversary of the loan's date of disbursement or (C) the final payment to Executive under the 2002 Units Agreement, provided that under no circumstances shall the aggregate principal amount of all outstanding loans (including loans to Executive pursuant to the 1996 Agreement) exceed one-half (1/2) the sum of (x) the product of (1) the fair market value of one share of Company Stock and (2) the sum of the number of Convertible Units (as defined below) and 2002 Units and (y) the total "spread" on all of Executives outstanding stock options to purchase Company Stock (I.E. the positive difference between the aggregate fair market value of the Company Stock underlying all of the Executive's outstanding stock options to purchase Company Stock and the aggregate exercise price of such options), and in the event such aggregate principal amount of outstanding loans does exceed such sum, the excess shall be due and payable immediately; (iv) the loan shall be subject to interest at the applicable Federal rate under Section 1274(d) of the Code on the date the loan is made; (v) interest on the loan shall be payable quarterly as set forth in the agreement evidencing the loan (the intent of which will be to approximate the timing of the Company's regular quarterly dividend payments); (vi) there shall be an agreement evidencing the loan and it shall contain such additional terms and conditions as are reasonably acceptable to the Executive in good faith; and 4
(vii) Executive shall not be required to pledge or otherwise hypothecate or encumber any of Executive's personal assets in connection with the loan. For purposes of clause (iii) of this paragraph, "fair market value" on any given date shall mean the average of the high and low trading prices of the Company Stock on such date, as reported on the New York Stock Exchange composite tape for such date. (l) WELFARE, PENSION AND INCENTIVE BENEFIT PLANS. During the Employment Period, Executive (and his spouse and dependents to the extent provided therein) shall be entitled to participate in and be covered under all the welfare benefit plans or programs maintained by the Company from time to time for the benefit of its senior executives including, without limitation, all medical, hospitalization, dental, disability, accidental death and dismemberment and travel accident insurance plans and programs, other than any such benefits provided solely to Mr. Steven Roth. The Company shall at all times provide to Executive (and his spouse and dependents to the extent provided under the applicable plans or programs) (subject to modifications affecting all senior executive officers) the same type and levels of participation and benefits as are being provided to Mr. Steven Roth (and his spouse and dependents to the extent provided under the applicable plans or programs) on the Commencement Date. In addition, during the Employment Period, Executive shall be eligible to participate in all pension, retirement, savings and other employee benefit plans and programs maintained from time to time by the Company for the benefit of its senior executives, other than any such benefits provided solely to Mr. Steven Roth or any annual incentive or long-term performance plans (other than those specified or referred to in Section 5). (m) OTHER BENEFITS. During the Employment Period, the Company shall provide Executive with the benefits described below: (i) a $3 million five-year renewable term life insurance policy; (ii) a Company-provided medical examination on an annual basis at a medical clinic selected by Executive and reasonably satisfactory to the Company's chief executive officer; (iii) tax preparation and financial planning assistance up to a maximum value of $15,000 per year; and (iv) long-term disability insurance coverage with benefits at a rate of 60% of Base Salary through age sixty-five (65), less any disability benefits paid under any group long-term disability plan of the Company. (n) OFFICES. Executive shall serve, without additional compensation, as a director or trustee of the Company or any of its wholly-owned subsidiaries and affiliates, and in one or more executive positions of any of such subsidiaries and affiliates, PROVIDED that Executive is indemnified for serving in any and 5
all such capacities on a basis no less favorable than is then provided to any other director, trustee, or executive of such entity. (o) ADJUSTMENTS TO THE 2002 UNITS. In the event of a spin-off by the Company to its shareholders, Executive shall receive an appropriate equitable adjustment to the 2002 Units pursuant to the terms of Section 7(j) of the 2002 Units Agreement. 6. TERMINATION. Executive's employment hereunder may be terminated during the Employment Period under the following circumstances: (a) DEATH. Executive's employment hereunder shall terminate upon his death. (b) DISABILITY. If, as a result of Executive's incapacity due to physical or mental illness, Executive shall have been substantially unable to perform his duties hereunder for an entire period of six (6) consecutive months, and within thirty (30) days after written Notice of Termination is given after such six (6) month period, Executive shall not have returned to the substantial performance of his duties on a full-time basis, the Company shall have the right to terminate Executive's employment hereunder for "Disability", and such termination in and of itself shall not be, nor shall it be deemed to be, a breach of this Agreement. (c) CAUSE. The Company shall have the right to terminate Executive's employment for Cause, and such termination in and of itself shall not be, nor shall it be deemed to be, a breach of this Agreement. For purposes of this Agreement, the Company shall have "Cause" to terminate Executive's employment upon Executive's: (i) conviction of, or plea of guilty or nolo contendere to, a felony; (ii) willful and continued failure to use reasonable best efforts to substantially perform his duties hereunder (other than such failure resulting from Executive's incapacity due to physical or mental illness or subsequent to the issuance of a Notice of Termination by Executive for Good Reason) after demand for substantial performance is delivered by the Company in writing that specifically identifies the manner in which the Company believes Executive has not used reasonable best efforts to substantially perform his duties; or (iii) willful misconduct (including, but not limited to, a willful breach of the provisions of Section 10) that is materially economically injurious to the Company or Alexander's or to any entity in control of, controlled by or under common control with the Company or Alexander's ("Affiliates"). For purposes of this Section 6(c), no act, or failure to act, by Executive shall be considered "willful" unless committed in bad faith and without a reasonable belief that the act or omission was in the best interests of the Company, Alexander's or any 6
Affiliates thereof. Cause shall not exist under paragraph (ii) or (iii) above unless and until the Company has delivered to Executive a copy of a resolution duly adopted by a majority of the Board (excluding Executive for purposes of determining such majority) at a meeting of the Board called and held for such purpose (after reasonable (but in no event less than thirty (30) days) notice to Executive and an opportunity for Executive, together with his counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of the conduct set forth in paragraph (ii) or (iii) and specifying the particulars thereof in detail. This Section 6(c) shall not prevent Executive from challenging in any court of competent jurisdiction the Board's determination that Cause exists or that Executive has failed to cure any act (or failure to act) that purportedly formed the basis for the Board's determination. (d) GOOD REASON. Executive may terminate his employment for "Good Reason" within one hundred and twenty (120) days after Executive has actual knowledge of the occurrence, without the written consent of Executive, of one of the following events that has not been cured within thirty (30) days after written notice thereof has been given by Executive to the Company: (i) the failure of Executive to be appointed to the position set forth in Section 3; (ii) the assignment to Executive of duties materially and adversely inconsistent with Executive's status as President of the Company or a material and adverse alteration in the nature of Executive's duties and/or responsibilities, reporting obligations, titles or authority; (iii) a reduction by the Company in Executive's Base Salary or a failure by the Company to pay any such amounts when due or any amounts due under the deferred compensation agreement attached as Exhibit D to the 1996 Agreement (the "Deferred Compensation Agreement"), the convertible units agreement attached as Exhibit E to the 1996 Agreement (the "Convertible Units Agreement or the 2002 Units Agreement; (iv) the relocation of the Company's principal executive offices or Executive's own office location to a location more than thirty (30) miles from New York City; (v) any purported termination of Executive's employment for Cause which is not effected pursuant to the procedures of Section 6(c) (and for purposes of this Agreement, no such purported termination shall be effective); (vi) the Company's material breach of the Company Share Option Agreement, the Convertible Units Agreement, the Deferred Compensation Agreement or the 2002 Units Agreement; (vii) the Company's failure to provide the benefits set forth in Section 5(m)(i) or 5(m)(iv) or the failure of the Company to substantially provide any material employee benefits due to be provided to Executive (other 7
than any such failure not inconsistent with any express provisions contained herein which failure affects all senior executive officers, not including for this purpose benefits provided solely to Mr. Steven Roth); (viii) the Company's failure to provide in all material respects the indemnification set forth in Section 11 of this Agreement; (ix) the material breach of the Alexander's Stock Option Agreement by Alexander's; (x) the failure by the Company or by Alexander's to provide Executive, upon the spin-off or distribution of any property by the Company or Alexander's to their shareholders, with an appropriate equitable adjustment to the Company Share Option, the Alexander's Share Option, the convertible units granted pursuant to the Convertible Units Agreement (the "Convertible Units") or the 2002 Units pursuant to the terms of the Company Share Option Agreement, the Alexander's Stock Option Agreement, the Convertible Units Agreement or the 2002 Units Agreement, as applicable; (xi) a Change in Control of the Company; (xii) the failure of the Company (i) to list (or to maintain such listing) for trading on The New York Stock Exchange or (ii) to register (or to maintain pursuant to the terms set forth on Exhibit B of the 1996 Agreement) the stock underlying the Company Share Option, the Alexander's Stock Option, the Convertible Units Agreement or the 2002 Units Agreement pursuant to an effective shelf registration statement on Form S-3 in favor of Executive and the Rabbi Trust trustee; (xiii) the Company's material failure to disburse the loan amount in accordance with Section 5(k); or (xiv) the Company's failure to contribute the annual Rabbi Trust funding, to the extent such funding is required by the Rabbi Trust agreement. Executive's right to terminate his employment hereunder for Good Reason shall not be affected by his incapacity due to physical or mental illness. Executive's continued employment during the one hundred and twenty (120) day period referred to above in this paragraph (d) shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. (e) WITHOUT CAUSE. The Company shall have the right to terminate Executive's employment hereunder without Cause by providing Executive with a Notice of Termination, and such termination shall not in and of itself be, nor shall it be deemed to be, a breach of this Agreement. 8
(f) WITHOUT GOOD REASON. Executive shall have the right to terminate his employment hereunder without Good Reason by providing the Company with a Notice of Termination, and such termination shall not in and of itself be, nor shall it be deemed to be, a breach of this Agreement. For purposes of this Agreement, a "Change in Control" of the Company means the occurrence of one of the following events: (1) individuals who, on the Commencement Date, constitute the Board (the "Incumbent Trustees") cease for any reason to constitute at least a majority of the Board, PROVIDED that any person becoming a trustee subsequent to the Commencement Date whose election or nomination for election was approved by a vote of at least two-thirds of the Incumbent Trustees then on the Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for trustee, without objection to such nomination) shall be an Incumbent Trustee; PROVIDED, HOWEVER, that no individual initially elected or nominated as a trustee of the Company as a result of an actual or threatened election contest with respect to trustees or as a result of any other actual or threatened solicitation of proxies by or on behalf of any person other than the Board shall be an Incumbent Trustee; (2) any "person" (as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the "Exchange Act") and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) is or becomes, after the Commencement Date, a "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 30% or more of the combined voting power of the Company's then outstanding securities eligible to vote for the election of the Board (the "Company Voting Securities"); PROVIDED, HOWEVER, that an event described in this paragraph (2) shall not be deemed to be a Change in Control if any of following becomes such a beneficial owner: (A) the Company or any majority-owned subsidiary (PROVIDED that this exclusion applies solely to the ownership levels of the Company or the majority-owned subsidiary), (B) any tax-qualified, broad-based employee benefit plan sponsored or maintained by the Company or any majority-owned subsidiary, (C) any underwriter temporarily holding securities pursuant to an offering of such securities, (D) any person pursuant to a Non-Qualifying Transaction (as defined in paragraph (3)), (E) Executive or any group of persons including Executive (or any entity controlled by Executive or any group of persons including Executive); or (F) (i) any of the partners (as of the Commencement Date) in Interstate Properties ("Interstate") including immediate family members and family trusts or family-only partnerships and any charitable foundations of such partners (the "Interstate Partners"), (ii) any entities the majority of the voting interests of which are beneficially owned by the Interstate Partners, or (iii) any "group" (as described in Rule 13d-5(b)(i) under the Exchange Act) including the Interstate Partners, PROVIDED that the Interstate Partners beneficially own a majority of the Company Voting Securities beneficially owned by such group (the persons in (i), (ii) and 9
(iii) shall be individually and collectively referred to herein as, "Interstate Holders"); (3) the consummation of a merger, consolidation, share exchange or similar form of transaction involving the Company or any of its subsidiaries, or the sale of all or substantially all of the Company's assets (a "Business Transaction"), unless immediately following such Business Transaction (i) more than 50% of the total voting power of the entity resulting from such Business Transaction or the entity acquiring the Company's assets in such Business Transaction (the "Surviving Corporation") is beneficially owned, directly or indirectly, by the Interstate Holders or the Company's shareholders immediately prior to any such Business Transaction, and (ii) no person (other than the persons set forth in clauses (A), (B), (C), or (F) of paragraph (2) above or any tax-qualified, broad-based employee benefit plan of the Surviving Corporation or its affiliates) beneficially owns, directly or indirectly, 30% or more of the total voting power of the Surviving Corporation (a "Non-Qualifying Transaction"); or (4) Board approval of a liquidation or dissolution of the Company, unless the voting common equity interests of an ongoing entity (other than a liquidating trust) are beneficially owned, directly or indirectly, by the Company's shareholders in substantially the same proportions as such shareholders owned the Company's outstanding voting common equity interests immediately prior to such liquidation and such ongoing entity assumes all existing obligations of the Company to Executive under this Agreement, the 2002 Units Agreement, the Company Share Option Agreement, the Company Registration Statement, the Alexander's Stock Option Agreement, the Deferred Compensation Agreement, the Convertible Units Agreement and the Rabbi Trust agreement. 7. TERMINATION PROCEDURE. (a) NOTICE OF TERMINATION. Any termination of Executive's employment by the Company or by Executive during the Employment Period (other than termination pursuant to Section 6(a)) shall be communicated by written Notice of Termination to the other party hereto in accordance with Section 14. For purposes of this Agreement, a "Notice of Termination" shall mean a notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. (b) DATE OF TERMINATION. "Date of Termination" shall mean (i) if Executive's employment is terminated by his death, the date of his death, (ii) if Executive's employment is terminated pursuant to Section 6(b), thirty (30) days after Notice of Termination (PROVIDED that Executive shall not have returned to the substantial performance of his duties on a full-time basis during such thirty (30) day period), and (iii) if Executive's employment is terminated for any other reason, the date on which a Notice of Termination is given or any later date (within thirty (30) days after the giving of such notice) set forth in such Notice of Termination. 10
8. COMPENSATION UPON TERMINATION OR DURING DISABILITY. In the event Executive suffers or incurs a Disability as defined in Section 6(b) or his employment terminates during the Employment Period, the Company shall provide Executive with the payments and benefits set forth below. Executive acknowledges and agrees that the payments set forth in this Section 8 constitute liquidated damages for termination of his employment during the Employment Period. (a) TERMINATION BY COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON. If Executive's employment is terminated by the Company without Cause or by Executive for Good Reason: (i) the Company shall pay to Executive (A) his Base Salary and accrued vacation pay through the Date of Termination, as soon as practicable following the Date of Termination, and (B) continued Base Salary (as provided for in Section 5(a)) for a period of three (3) years following the Date of Termination; PROVIDED that during the second and third years following the Date of Termination the Company's obligation to pay continued Base Salary shall be offset by the economic value of any compensation actually received (or deferred) for services rendered by Executive to any other entity; (ii) the Company shall pay any deferred compensation payable in accordance with the terms of the Deferred Compensation Agreement, the Convertible Units Agreement or the 2002 Units Agreement; (iii) the Company shall maintain in full force and effect, for the continued benefit of Executive, his spouse and his dependents for a period of three (3) years following the Date of Termination the medical, hospitalization, dental, and life insurance programs (including without limitation the life insurance policy set forth in Section 5(m), but for no longer than the five-year term of such policy) in which Executive, his spouse and his dependents were participating immediately prior to the Date of Termination at the level in effect and upon substantially the same terms and conditions (including without limitation contributions required by Executive for such benefits) as existed immediately prior to the Date of Termination; PROVIDED that, if Executive, his spouse or his dependents cannot continue to participate in the Company programs providing such benefits, the Company shall arrange to provide Executive, his spouse and his dependents with the economic equivalent of such benefits which they otherwise would have been entitled to receive under such plans and programs ("Continued Benefits"), PROVIDED that such Continued Benefits shall terminate on the date or dates Executive receives equivalent coverage and benefits, without waiting period or pre-existing condition limitations, under the plans and programs of a subsequent employer (such coverage and benefits to be determined on a coverage-by-coverage or benefit-by-benefit, basis); (iv) the Company shall reimburse Executive pursuant to Section 5(h) for reasonable expenses incurred, but not paid prior to such termination of employment; and 11
(v) Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (b) CAUSE OR BY EXECUTIVE WITHOUT GOOD REASON. If Executive's employment is terminated by the Company for Cause or by Executive (other than for Good Reason): (i) the Company shall pay Executive his Base Salary and, to the extent required by law or the Company's vacation policy, his accrued vacation pay through the Date of Termination, as soon as practicable following the Date of Termination; (ii) the Company shall pay any deferred compensation payable in accordance with the terms of the Deferred Compensation Agreement, the Convertible Units Agreement or the 2002 Units Agreement; (iii) the Company shall reimburse Executive pursuant to Section 5(h) for reasonable expenses incurred, but not paid prior to such termination of employment, unless such termination resulted from a misappropriation of Company funds; and (iv) Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (c) DISABILITY. During any period that Executive fails to perform his duties hereunder as a result of incapacity due to physical or mental illness ("Disability Period"), Executive shall continue to receive his full Base Salary set forth in Section 5(a) until his employment is terminated pursuant to Section 6(b). In the event Executive's employment is terminated for Disability pursuant to Section 6(b): (i) the Company shall pay to Executive (A) his Base Salary and accrued vacation pay through the Date of Termination, as soon as practicable following the Date of Termination, and (B) continued Base Salary (as provided for in Section 5(a)) and Continued Benefits for the longer of (i) six (6) months or (ii) the date on which Executive becomes entitled to long-term disability benefits under the applicable plan or program of the Company paying the benefits described in Section 5(m)(iv), up to a maximum of three (3) years of Base Salary continuation; (ii) the Company shall pay any deferred compensation payable in accordance with the terms of the Deferred Compensation Agreement, the Convertible Units Agreement or the 2002 Units Agreement; (iii) the Company shall reimburse Executive pursuant to Section 5(h) for reasonable expenses incurred, but not paid prior to such termination of employment; and 12
(iv) Executive shall be entitled to any other rights, compensation and/or benefits as may be due to Executive in accordance with the terms and provisions of any agreements, plans or programs of the Company. (d) DEATH. If Executive's employment is terminated by his death: (i) the Company shall pay in a lump sum to Executive's beneficiary, legal representatives or estate, as the case may be, Executive's Base Salary through the Date of Termination and one (1) times Executive's annual rate of Base Salary, and shall provide Executive's spouse and dependents with Continued Benefits for one (1) year; (ii) the Company shall pay any deferred compensation payable in accordance with the terms of the Deferred Compensation Agreement, the Convertible Units Agreement or the 2002 Units Agreement; (iii) the Company shall reimburse Executive's beneficiary, legal representatives, or estate, as the case may be, pursuant to Section 5(h) for reasonable expenses incurred, but not paid prior to such termination of employment; and (iv) Executive's beneficiary, legal representatives or estate, as the case may be, shall be entitled to any other rights, compensation and benefits as may be due to any such persons or estate in accordance with the terms and provisions of any agreements, plans or programs of the Company. (e) FAILURE TO EXTEND. A failure to extend the Agreement pursuant to Section 2 by either party shall not be treated as a termination of Executive's employment for purposes of this Agreement. 9. MITIGATION. Executive shall not be required to mitigate amounts payable under this Agreement by seeking other employment or otherwise, and there shall be no offset against amounts due Executive under this Agreement on account of subsequent employment except as specifically provided herein. Additionally, amounts owed to Executive under this Agreement, the 2002 Units Agreement, the Deferred Compensation Agreement or the Convertible Units Agreement shall not be offset by any claims the Company may have against Executive (other than an offset for any due and payable loan amounts under Section 5(k) excluding the Deferred Compensation Agreement) and, except with respect to such loan amounts, as set forth above, the Company's obligation to make the payments provided for in this Agreement, the 2002 Units Agreement, the Deferred Compensation Agreement or the Convertible Units Agreement, and otherwise to perform its obligations hereunder, shall not be affected by any other circumstances, including, without limitation, any counterclaim, recoupment, defense or other right which the Company may have against Executive or others. 10. CONFIDENTIAL INFORMATION, OWNERSHIP OF DOCUMENTS; NON-COMPETITION. 13
(a) CONFIDENTIAL INFORMATION. Executive shall hold in a fiduciary capacity for the benefit of the Company all trade secrets and confidential information, knowledge or data relating to the Company and its businesses and investments, which shall have been obtained by Executive during Executive's employment by the Company and which is not generally available public knowledge (other than by acts by Executive in violation of this Agreement). Except as may be required or appropriate in connection with his carrying out his duties under this Agreement, Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or any legal process, or as is necessary in connection with any adversarial proceeding against the Company (in which case Executive shall use his reasonable best efforts in cooperating with the Company in obtaining a protective order against disclosure by a court of competent jurisdiction), communicate or divulge any such trade secrets, information, knowledge or data to anyone other than the Company and those designated by the Company or on behalf of the Company in the furtherance of its business or to perform duties hereunder. (b) REMOVAL OF DOCUMENTS; RIGHTS TO PRODUCTS. All records, files, drawings, documents, models, equipment, and the like relating to the Company's business, which Executive has control over shall not be removed from the Company's premises without its written consent, unless such removal is in the furtherance of the Company's business or is in connection with Executive's carrying out his duties under this Agreement and, if so removed, shall be returned to the Company promptly after termination of Executive's employment hereunder, or otherwise promptly after removal if such removal occurs following termination of employment. Executive shall assign to the Company all rights to trade secrets and other products relating to the Company's business developed by him alone or in conjunction with others at any time while employed by the Company. (c) PROTECTION OF BUSINESS. During the Employment Period and until the first anniversary of Executive's Date of Termination (but only in the event Executive is terminated by the Company for Cause, Executive terminates employment without Good Reason or Executive is terminated by the Company for Disability), the Executive will not (i) engage, anywhere within the geographical areas in which the Company, Alexander's or any of their Affiliates (the "Designated Entities") are conducting their business operations or providing services as of the Date of Termination, in any business which is being engaged in by the Designated Entities as of the Date of Termination or pursue or attempt to develop any project known to Executive and which the Designated Entities are pursuing, developing or attempting to develop as of the Date of Termination, unless such project has been inactive for over nine (9) months (a "Project"), directly or indirectly, alone, in association with or as a shareholder, principal, agent, partner, officer, director, employee or consultant of any other organization, (ii) divert to any entity which is engaged in any business conducted by the Designated Entities in the same geographic area as the Designated Entities, any Project or any customer of any of the Designated Entities, or (iii) solicit any officer, employee (other than secretarial staff) or consultant of any of the Designated Entities to leave the employ of any of the Designated Entities. Notwithstanding the preceding sentence, Executive shall not be prohibited from owning less than one (1%) percent of any publicly traded 14
corporation, whether or not such corporation is in competition with the Company. If, at any time, the provisions of this Section 10(c) shall be determined to be invalid or unenforceable, by reason of being vague or unreasonable as to area, duration or scope of activity, this Section 10(c) shall be considered divisible and shall become and be immediately amended to only such area, duration and scope of activity as shall be determined to be reasonable and enforceable by the court or other body having jurisdiction over the matter; and Executive agrees that this Section 10(c) as so amended shall be valid and binding as though any invalid or unenforceable provision had not been included herein. (d) INJUNCTIVE RELIEF. In the event of a breach or threatened breach of this Section 10, Executive agrees that the Company shall be entitled to injunctive relief in a court of appropriate jurisdiction to remedy any such breach or threatened breach, Executive acknowledging that damages would be inadequate and insufficient. (e) CONTINUING OPERATION. Except as specifically provided in this Section 10, the termination of Executive's employment or of this Agreement shall have no effect on the continuing operation of this Section 10. 11. INDEMNIFICATION. (a) GENERAL. The Company agrees that if Executive is made a party or a threatened to be made a party to any action, suit or proceeding, whether civil, criminal, administrative or investigative (a "Proceeding"), by reason of the fact that Executive is or was a trustee, director or officer of the Company, Alexander's or any subsidiary of such entities or is or was serving at the request of the Company, Alexander's or any subsidiary as a trustee, director, officer, member, employee or agent of another corporation or a partnership, joint venture, trust or other enterprise, including, without limitation, service with respect to employee benefit plans, whether or not the basis of such Proceeding is alleged action in an official capacity as a trustee, director, officer, member, employee or agent while serving as a trustee, director, officer, member, employee or agent, Executive shall be indemnified and held harmless by the Company to the fullest extent authorized by Maryland law, as the same exists or may hereafter be amended, against all Expenses incurred or suffered by Executive in connection therewith, and such indemnification shall continue as to Executive even if Executive has ceased to be an officer, director, trustee or agent, or is no longer employed by the Company or Alexander's and shall inure to the benefit of his heirs, executors and administrators. (b) EXPENSES. As used in this Agreement, the term "Expenses" shall include, without limitation, damages, losses, judgments, liabilities, fines, penalties, excise taxes, settlements, and costs, attorneys' fees, accountants' fees, and disbursements and costs of attachment or similar bonds, investigations, and any expenses of establishing a right to indemnification under this Agreement. (c) ENFORCEMENT. If a claim or request under this Agreement is not paid by the Company or on its behalf, within thirty (30) days after a written claim or 15
request has been received by the Company, Executive may at any time thereafter bring suit against the Company to recover the unpaid amount of the claim or request and if successful in whole or in part, Executive shall be entitled to be paid also the expenses of prosecuting such suit. All obligations for indemnification hereunder shall be subject to, and paid in accordance with, applicable Maryland law. (d) PARTIAL INDEMNIFICATION. If Executive is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of any Expenses, but not, however, for the total amount thereof, the Company, shall nevertheless indemnify Executive for the portion of such Expenses to which Executive is entitled. (e) ADVANCES OF EXPENSES. Expenses incurred by Executive in connection with any Proceeding shall be paid by the Company in advance upon request of Executive that the Company pay such Expenses; but, only in the event that Executive shall have delivered in writing to the Company (i) an undertaking to reimburse the Company for Expenses with respect to which Executive is not entitled to indemnification and (ii) an affirmation of his good faith belief that the standard of conduct necessary for indemnification by the Company has been met. (f) NOTICE OF CLAIM. Executive shall give to the Company notice of any claim made against him for which indemnification will or could be sought under this Agreement. In addition, Executive shall give the Company such information and cooperation as it may reasonably require and as shall be within Executive's power and at such times and places as are convenient for Executive. (g) DEFENSE OF CLAIM. With respect to any Proceeding as to which Executive notifies the Company of the commencement thereof: (i) The Company will be entitled to participate therein at its own expense; and (ii) Except as otherwise provided below, to the extent that it may wish, the Company will be entitled to assume the defense thereof, with counsel reasonably satisfactory to Executive, which in the Company's sole discretion may be regular counsel to the Company and may be counsel to other officers and directors of the Company, Alexander's or any subsidiary. Executive also shall have the right to employ his own counsel in such action, suit or proceeding if he reasonably concludes that failure to do so would involve a conflict of interest between the Company and Executive, and under such circumstances the fees and expenses of such counsel shall be at the expense of the Company. (iii) The Company shall not be liable to indemnify Executive under this Agreement for any amounts paid in settlement of any action or claim effected without its written consent. The Company shall not settle any action or claim in any manner which would impose any penalty or limitation on 16
Executive without Executive's written consent. Neither the Company nor Executive will unreasonably withhold or delay their consent to any proposed settlement. (h) NON-EXCLUSIVITY. The right to indemnification and the payment of expenses incurred in defending a Proceeding in advance of its final disposition conferred in this Section 11 shall not be exclusive of any other right which Executive may have or hereafter may acquire under any statute, provision of the declaration of trust or certificate of incorporation or by-laws of the Company, Alexander's or any subsidiary, agreement, vote of shareholders or disinterested directors or trustees or otherwise. 12. LEGAL FEES AND EXPENSES. The Company shall reimburse Executive promptly following the Commencement Date for all legal fees and expenses reasonably incurred by Executive in connection with Executive and the Company entering into this Agreement and the 2002 Units Agreement, upon receipt of reasonable written evidence of such fees and expenses. If any contest or dispute shall arise between the Company or Alexander's and Executive regarding any provision of this Agreement, the Rabbi Trust agreement, the Company Registration Statement, the Alexander's Registration Statement, or the Alexander's Stock Option Agreement, the Company shall reimburse Executive for all legal fees and expenses reasonably incurred by Executive in connection with such contest or dispute, but only if Executive is successful in respect of substantially all of Executive's claims brought and pursued in connection with such contest or dispute. Such reimbursement shall be made as soon as practicable following the resolution of such contest or dispute (whether or not appealed) to the extent the Company receives reasonable written evidence of such fees and expenses. 13. SUCCESSORS; BINDING AGREEMENT. (a) COMPANY'S SUCCESSORS. No rights or obligations of the Company under this Agreement may be assigned or transferred except that the Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as herein before defined and any successor to its business and/or assets (by merger, purchase or otherwise) which executes and delivers the agreement provided for in this Section 13 or which otherwise becomes bound by all the terms and provisions of this Agreement by operation of law. (b) EXECUTIVE'S SUCCESSORS. No rights or obligations of Executive under this Agreement may be assigned or transferred by Executive other than his rights to payments or benefits hereunder, which may be transferred only by will or the laws of descent and distribution. Upon Executive's death, this Agreement and all rights of Executive hereunder shall inure to the benefit of and be enforceable by Executive's beneficiary or beneficiaries, personal or legal representatives, or estate, to the extent any 17
such person succeeds to Executive's interests under this Agreement. Executive shall be entitled to select and change a beneficiary or beneficiaries to receive any benefit or compensation payable hereunder following Executive's death by giving the Company written notice thereof. In the event of Executive's death or a judicial determination of his incompetence, reference in this Agreement to Executive shall be deemed, where appropriate, to refer to his beneficiary(ies), estate or other legal representative(s). If Executive should die following his Date of Termination while any amounts would still be payable to him hereunder if he had continued to live, all such amounts unless otherwise provided herein shall be paid in accordance with the terms of this Agreement to such person or persons so appointed in writing by Executive, or otherwise to his legal representatives or estate. 14. NOTICE. For the purposes of this Agreement, notices, demands and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when delivered either personally or by United States certified or registered mail, return receipt requested, postage prepaid, addressed as follows: If to Executive: Michael D. Fascitelli 888 Seventh Avenue New York, New York 10106 with a copy to: Stephen W. Skonieczny Dechert 30 Rockefeller Plaza New York, NY 10112-2200 If to the Company: Vornado Realty Trust 888 Seventh Avenue New York, New York 10106 Attention: Steven Roth or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 15. MISCELLANEOUS. No provisions of this Agreement may be amended, modified, or waived unless such amendment or modification is agreed to in writing signed by Executive and by a duly authorized officer of the Company, and such waiver is set forth in writing and signed by the party to be charged. No waiver by either party hereto at any time of any breach by the other party hereto of any condition or provision of this Agreement to be performed by such other party shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. No 18
agreements or representations, oral or otherwise, express or implied, with respect to the subject matter hereof have been made by either party which are not set forth expressly in this Agreement. The respective rights and obligations of the parties hereunder of this Agreement shall survive Executive's termination of employment and the termination of this Agreement to the extent necessary for the intended preservation of such rights and obligations. The validity, interpretation, construction and performance of this Agreement shall be governed by the laws of the State of New York without regard to its conflicts of law principles. 16. VALIDITY. The invalidity or unenforceability of any provision or provisions of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement, which shall remain in full force and effect. 17. COUNTERPARTS. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together will constitute one and the same instrument. 18. ENTIRE AGREEMENT. This Agreement amends and restates the 1996 Agreement in its entirety and along with the 2002 Units Agreement, the Company Share Option Agreement, the Company Registration Statement, the Alexander's Stock Option Agreement, the Deferred Compensation Agreement, the Convertible Units Agreement and the Rabbi Trust agreement sets forth the entire agreement of the parties hereto in respect of the subject matter contained herein and supersedes all prior agreements, promises, covenants, arrangements, communications, representations or warranties, whether oral or written, by any officer, employee or representative of any party hereto in respect of such subject matter. Any other prior agreement of the parties hereto in respect of the subject matter contained herein is hereby terminated and cancelled, other than any outstanding stock option or restricted stock agreements or any compensatory plan or program in which the Executive is a participant on the Commencement Date. 19. WITHHOLDING. All payments hereunder shall be subject to any required withholding of Federal, state and local taxes pursuant to any applicable law or regulation. 20. NONCONTRAVENTION. The Company represents that the Company is not prevented from entering into, or performing this Agreement by the terms of any law, order, rule or regulation, its by-laws or declaration of trust, or any agreement to which it is a party, other than which would not have a material adverse effect on the Company's ability to enter into or perform this Agreement. 21. TRUSTEE. In the event any successor to the Company is a corporation, all references herein to "trustee" or "Board of Trustees" shall mean "director" or "Board of Directors", respectively. 22. SECTION HEADINGS. The section headings in this Employment Agreement are for convenience of reference only, and they form no part of this Agreement and shall not affect its interpretation. 19
23. ACKNOWLEDGMENT. The Company hereby agrees to perform its obligations under the last sentence of Section 5(b) of the 2002 Units Agreement and Section 23 of the Company Share Option Agreement, and shall use its best efforts to cause Alexander's to perform its obligations under Section 21, of the Alexander's Stock Option Agreement. 24. REIT REPRESENTATIONS AND WARRANTY. The Company hereby represents and warrants to Executive that, if Executive (1) does not (x) Beneficially Own (as such term is defined in the Amended and Restated Declaration of Trust of the Company (the "Declaration)), hereafter come to Beneficially Own, Constructively Own (as such term is defined in the Declaration) or hereafter come to Constructively Own Common Equity Stock (as such term is defined in the Declaration) of the Company other than Company Stock received by Executive pursuant to the terms of the Company Share Option Agreement, the Convertible Units Agreement, the 2002 Units Agreement or share options to purchase Company Stock granted to Executive by the Company prior to the date hereof, as well as Company Stock owned by Executive as of the date hereof or (y) Beneficially Own (as such term is defined in the Amended and Restated Certificate of Incorporation of Alexander's, Inc. (the "Certificate"), hereafter come to Beneficially Own, Constructively Own (as such term is defined in the Certificate) or hereafter come to Constructively Own Alexander's Stock other than Alexander's Stock received by Executive pursuant to the terms of the Alexander's Stock Option Agreement or Beneficially Owned or Constructively Owned as a result of Executive's receipt of Company Stock under the Company Share Option Agreement, the Convertible Units Agreement or the 2002 Units Agreement, (2) complies with the requirements for Existing Constructive Holder status set forth in the Declaration at all times, if any, that Executive Constructively Owns in excess of 9.9 percent of the Company's outstanding Common Equity Stock, and (3) complies with the requirements for Existing Constructive Holder status set forth in the Certificate at all times, if any, that Executive Constructively Owns in excess of 9.9 percent of the Alexander's Stock, (a) any and all issuances or transfers of shares of Company Stock to Executive under the Company Share Option Agreement, the Convertible Units Agreement or the 2002 Units Agreement shall not be voided pursuant to the Declaration and shall not result in (i) the receipt by Executive of shares classified as or exchanged for Excess Stock (as defined in the Declaration) or (ii) Executive not acquiring shareholder rights at all times under such shares of the Company Stock to the fullest extent provided for in the Declaration, the Amended and Restated By-Laws of the Company and Maryland law, and (b) any and all issuances or transfers of shares of Alexander's Stock to Executive under the Alexander's Stock Option Agreement shall not be void under the Certificate and shall not result in (i) the receipt by Executive of Excess Stock (as defined in the Certificate) or (ii) Executive not acquiring stockholder rights under such shares of Alexander's Stock to the fullest extent provided for in the Certificate, the Amended and Restated By-Laws of Alexander's, Inc., and Delaware law. The representation and warranty in clause (a) of the preceding sentence is subject to approval by the Board of an increase in the Ownership Limit (as such term is defined in the Declaration) with respect to Executive in an amount necessary to cover all of the shares of Company Stock referred to in clause (1)(x) of the preceding sentence. The Company will use its best efforts to have such Board approval adopted as soon as practicable, but in no event later than April 30, 2002. 20
25. REMEDY LIMITED TO MONEY DAMAGES. Executive shall not be entitled to specific performance for a breach of the representation and warranty contained in paragraph 24 hereof and shall not be entitled to any other remedy except for an action for money damages. 21
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on the date first above written. VORNADO REALTY TRUST By: /s/ Steven Roth --------------------------------- Steven Roth Chief Executive Officer /s/ Michael D. Fascitelli --------------------------------- Michael D. Fascitelli 22