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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1 TO ANNUAL REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED DECEMBER 31, 1998
Commission file Number 0-22741
CARRAMERICA REALTY, L.P.
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(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 52-1976308
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(State or other Jurisdiction or (I.R.S. Employer Identification No.)
Incorporation or Organization)
1850 K STREET, N.W. 20006
WASHINGTON, D.C. ----------
---------------------------------------- (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (202) 729-7500
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units of Partnership
Interest
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. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 15, 1999, assuming that each unit of partnership interest has
the same value as a share of common stock of CarrAmerica Realty Corporation
(into which such units may be redeemed) the aggregate market value of the
1,777,587 units of partnership interest held by non-affiliates of the registrant
was approximately $39.0 million, based upon the closing price of a share of
common stock of CarrAmerica Realty Corporation of $21.9375 on the New York Stock
Exchange composite tape on such date.
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<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(3) Exhibits
The purpose of this amendment is to file for the record the exhibit
listed as Exhibit 99.8 in the Exhibit Index. The Exhibit Index appears
immediately after the signature page and is incorporated herein by reference.
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this amendment
to be signed on its behalf by the undersigned, thereunto duly authorized.
CARRAMERICA REALTY, L.P.
a Delaware limited partnership
By: CarrAmerica Realty GP Holdings, Inc.
General Partner
By: /s/ THOMAS A. CARR
-------------------
Thomas A. Carr
President
Date: April 12, 1999
<PAGE>
Exhibit Index*
Exhibit No. Identification of Exhibit
- ----------- --------------------------
<TABLE>
<C> <S>
4.1 Second Amended and Restated Agreement of Limited Partnership of the Partnership, dated May 9, 1997
(incorporated by reference to Exhibit 10.1 to CarrAmerica's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997).
4.2 First Amendment to Second Amended and Restated Agreement of Limited Partnership, dated October 6, 1997
(incorporated by reference to Exhibit 10.2 to CarrAmerica's Annual Report on Form 10-K for the year
ended December 31, 1997).
4.3 Second Amendment to Second Amended and Restated Agreement of Limited Partnership, dated October 6,
1997 (incorporated by reference to Exhibit 10.3 to CarrAmerica's Annual Report on Form 10-K for the
year ended December 31, 1997).
4.4 Third Amendment to Second Amended and Restated Agreement of Limited Partnership, dated October 6, 1997
(incorporated by reference to Exhibit 10.3 to CarrAmerica's Annual Report on Form 10-K for the year
ended December 31, 1997).
4.5 Fourth Amendment to Second Amended and Restated Agreement of Limited Partnership, dated December 31,
1998 (incorporated by reference to Exhibit 10.5 to CarrAmerica's Annual Report on Form 10-K for the
year ended December 31, 1998).
4.6 Indenture, dated as of July 1, 1997, by and among CarrAmerica, as Issuer, the Partnership, as
Guarantor, and Bankers Trust Company, as Trustee, relating to CarrAmerica's 7.20% Notes due 2004 and
7.375% Notes due 2007 (incorporated by reference to Exhibit 4.1 to CarrAmerica's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997).
4.7 Indenture, dated as of February 23, 1998, by and among CarrAmerica, as Issuer, the Partnership, as
Guarantor, and Bankers Trust Company, as Trustee, relating to CarrAmerica's 6.625% Notes due 2005 and
6.875% Notes due 2008 (incorporated by reference to Exhibit 4.2 to CarrAmerica's Annual Report on Form
10-K for the year ended December 31, 1997).
4.8 Indenture, dated as of October 1, 1998, by and among CarrAmerica, as Issuer, the Partnership, as
Guarantor, and Bankers Trust Company, as Trustee (incorporated by reference to Exhibit 4.1 to the
CarrAmerica's Current Report on Form 8-K filed on October 2, 1998).
10.1 Stockholders Agreement, dated April 30, 1996, by and among CarrAmerica, Carr Realty, L.P., Security
Capital Holdings, S.A. and Security Capital U.S. Realty (incorporated by reference to Exhibit 2.2 of
Security Capital U.S. Realty's Schedule 13D dated April 30, 1996).
10.2 Fourth Amended and Restated Credit Agreement, dated August 27, 1998, by and among CarrAmerica, Carr
Realty, L.P., the Partnership, Morgan Guaranty Trust Company of New York, Commerzbank
Aktiengesellschaft, New York Branch, NationsBank, N.A., Wells Fargo Bank, National Association, Bank
of America National Trust and Savings Association, and the other banks listed therein (incorporated by
reference to Exhibit 10.1 to CarrAmerica's Annual Report on Form 10-Q for the quarter ended September
30, 1998).
10.3 Agreements of Purchase and Sale and Contribution Agreement dated September 30, 1997 by and among the
Partnership, Phoenixwest Associates, Ltd., Versailles Associates Limited Partnership, Lakeview 436
Associates Ltd., Pines Realty Associates, Ltd., and certain other parties thereto (incorporated by
reference to Exhibit 10.3 to the CarrAmerica's Annual Report on Form 10-K for the year ended December
31, 1998).
21.1 List of Subsidiaries.
23.1 Consent of KPMG LLP.
27 Financial Data Schedule.
99.1 Certificate of Incorporation of CarrAmerica GP Holdings, Inc. (incorporated by reference to Exhibit
99.1 to the Partnership's Registration Statement on Form 10/A, filed on October 1, 1997 (File No.
0-22741)).
99.2 Bylaws of CarrAmerica GP Holdings, Inc. (incorporated by reference to Exhibit 99.2 to the
Partnership's Registration Statement on Form 10/A, filed on October 1, 1997 (File No. 0-22741)).
99.3 'Item 1--Business--The Company--Risk Factors' (from CarrAmerica's Annual Report on Form 10-K for
the year ended December 31, 1998).
99.4 'Item 5--Market for Registrant's Common Equity & Related Stockholder Matters' (from CarrAmerica's
Annual Report on Form 10-K for the year ended December 31, 1998).
99.5 'Election of Directors (Proposal 1)' (from CarrAmerica's Proxy Statement to be delivered to its
stockholders in connection with its 1999 Annual Meeting of Stockholders).
99.6 'Item 1--Business--The Company--Directors of the Company' (from CarrAmerica's Annual Report on
Form 10-K for the year ended December 31, 1998).
99.7 'Item 1--Business--The Company--Executive Officers and Certain Key Employees of the Company'
(from CarrAmerica's Annual Report on Form 10-K for the fiscal year ended December 31, 1998).
99.8 'Executive Compensation' (from CarrAmerica's Proxy Statement to be delivered to its stockholders
in connection with its 1999 Annual Meeting of Stockholders).
* Exhibit 99.8 is filed with this Amendment No. 1 to Form 10-K. All other exhibits were filed previously
with the initial Form 10-K filing or incorporated by reference therein.
</TABLE>
Exhibit 99.8
EXECUTIVE COMPENSATION
(from the Proxy Statement to be delivered to the stockholders
of CarrAmerica Realty Corporaton in connection with that company's
1999 Annual Meeting of Stockholders)
The following table provides information on the annual and long-term
compensation for the Company's Chief Executive Officer and the four most highly
compensated other executive officers of the Company (the "Named Executive
Officers") for the periods indicated:
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term Compensation
-----------------------------
Annual Compensation Awards
---------------------------------- -----------------------------
Other Restricted Securities
Annual Stock Unit Underlying All Other
Name and Principal Position Year Salary Bonus Compensation Awards ($)(1) Options (#)(2) Compensation
- --------------------------- ---- ------ ----- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Thomas A. Carr................ 1998 $332,500(3) $350,000 0 $2,000,000 550,000 $ 9,080(4)
President and Chief 1997 $275,000 $300,000 0 0 76,814 $ 8,932(4)
Executive Officer 1996 $225,000 $225,000 0 0 0 $ 8,728(4)
Brian K. Fields............... 1998 $205,000 $205,000 0 0 75,000 $213,909(5)
Chief Financial Officer 1997 $185,000 $185,000 0 0 43,850 $ 8,932(6)
1996 $185,000 $185,000 0 0 0 $ 8,728(6)
Kent C. Gregory............... 1998 $205,000 $153,750 0 $1,000,000 150,000 $ 8,940(8)
Managing Director-- 1997 $136,125(7) $ 97,500 0 0 42,389 $ 220(8)
National Accounts
Philip L. Hawkins............. 1998 $281,975(9) $230,750 0 $1,500,000 400,000 $ 9,080(11)
Chief Operating Officer 1997 $210,000 $250,000 $ 87,422(10) 0 62,389 $ 8,932(11)
1996 $116,731(9) $210,000 $ 91,868(10) 0 20,000 $ 921(11)
Robert E. Peterson............ 1998 $215,000 $161,250 0 $1,000,000 170,000 $ 9,025(12)
Managing Director-- 1997 $190,000 $215,000 0 0 62,389 $ 8,932(12)
Development 1996 $ 26,308(13) $ 15,000 0 0 20,000 $ 921(12)
</TABLE>
(1) Represents the value of grants of restricted stock units made under the
Company's 1997 Stock Option and Incentive Plan on the date of grant. The
restricted stock units vest ratably over a five-year period, assuming the
grantee is still an employee of the Company or otherwise eligible for
vesting on the vesting date. On each vesting date, the grantee will receive
shares representing 20% of the total number of restricted stock units
granted plus an amount equal to the dividends that would have been paid on
such shares had the shares been outstanding since the grant date, or the
cash equivalent thereof, at the Company's option. The grants of restricted
stock units do not entitle the grantees to any current dividend or voting
rights. As of December 31, 1998, the total holdings of restricted stock
units of the Named Executive Officers (with one unit deemed equivalent to
the value of one share) and the market value of such holdings were as
follows: Mr. Thomas A. Carr: 83,553 units ($2,005,272); Mr. Fields: 0 units
($0); Mr. Gregory: 41,776 units ($1,002,624); Mr. Hawkins: 62,663 units
($1,503,912); Mr. Peterson: 41,776 units ($1,002,624). The following table
provides information on grants of restricted stock units during 1998
scheduled to vest in under three years from the date of grant:
No. of Units Vesting on No. of Units Vesting on
Grantee 11/06/99 11/06/00
------- -------- --------
Thomas A. Carr 16,711 16,711
Kent C. Gregory 8,355 8,355
Philip L. Hawkins 12,533 12,533
Robert E. Peterson* 8,355 8,355
* None of the restricted stock units granted to Mr. Peterson during 1998
will vest because he terminated his employment with the Company effective
March 6, 1999. He will therefore not satisfy the condition for vesting of
the units of continued employment by the Company.
(2) All option grants were made under the Company's 1997 Stock Option and
Incentive Plan other than Mr. Hawkins' 1996 option grant. Mr. Hawkins' 1996
grant was made under the 1993 Carr Realty Option Plan at the time he was
hired by the Company, which was before the 1997 plan was approved. The 1993
plan provides for the grant of options to acquire Class A Units of Carr
Realty, L.P., a limited partnership through which the Company conducted
most of its business before 1996. Holders of such Class A Units have the
right to redeem them for cash or common stock of the Company, at the option
of the Company.
(3) Mr. Carr's annual salary was $300,000 from January until October 1998,
when it was increased to $450,000.
1
<PAGE>
(4) Consists of employer contributions for 1998, 1997 and 1996 to the
CarrAmerica Realty Retirement Plan and Trust in the amounts of $8,000,
$7,800, and $7,500 respectively, and life, AD&D and long-term disability
insurance premiums in the amounts of $1,080, $1,132, and $1,228,
respectively.
(5) Includes a severance payment of $205,000 made to Mr. Fields in connection
with his resignation as an executive officer of the Company as of January
4, 1999. Also includes an employer contribution for 1998 to the CarrAmerica
Realty Retirement Plan and Trust in the amount of $8,000 and life, AD&D and
long-term disability insurance premiums in the amount of $909. The
severance payment was made pursuant to a severance agreement between the
Company and Mr. Fields under which, in consideration of certain agreements
by Mr. Fields, the Company agreed to pay him the severance payment and the
bonus for 1998 set forth in this table. In addition, the agreement provided
for immediate vesting of 110,080 options to purchase shares of the
Company's common stock held by Mr. Fields and for the continued
exercisability of all of Mr. Fields' options until January 4, 2001.
(6) Consists of employer contributions for 1998, 1997 and 1996 to the
CarrAmerica Realty Retirement Plan and Trust in the amounts of $8,000,
$7,800, and $7,500, respectively, and life, AD&D and long-term disability
insurance premiums in the amounts of $909, $1,132, and $1,228,
respectively.
(7) Mr. Gregory began his employment with the Company in 1997. The amount set
forth as salary for Mr. Gregory for 1997 represents actual salary paid to
him for work performed from his hire date to December 31, 1997.
His annualized salary for 1997 was $195,000.
(8) Consists of an $8,000 contribution to the CarrAmerica Realty Retirement
Plan and Trust for 1998 and contributions for 1998 and 1997 for life, AD&D
and long-term disability insurance premiums in the amounts of $940 and
$220, respectively.
(9) Mr. Hawkins' annual salary was $250,000 from January until October 1998,
when it was increased to $380,000. Mr. Hawkins began his employment with
the Company in 1996. The amount set forth as salary for him in 1996
represents the actual salary paid to him for work performed from his hire
date to December 31, 1996. His annualized salary for 1996 was $210,000.
(10) Reimbursement for employment-related expenses.
(11) Consists of $8,000 and $7,800 contributions to the CarrAmerica Realty
Retirement Plan and Trust for 1998 and 1997 and contributions for 1998,
1997 and 1996 for life, AD&D and long-term disability insurance premiums in
the amounts of $1,080, $1,132 and $921, respectively.
(12) Consists of $8,000 and $7,800 contributions to the CarrAmerica Realty
Retirement Plan and Trust for 1998 and 1997 and contributions for 1998,
1997 and 1996 for life, AD&D and long-term disability insurance premiums in
the amounts of $1,025, $1,132 and $921, respectively.
(13) Mr. Peterson began his employment with the Company in 1996. The amount set
forth as salary for him for 1996 represents actual salary paid to him for
work performed from his hire date to December 31, 1996. His annualized
salary for 1996 was $190,000.
2
<PAGE>
The following table provides information on options granted to the
Named Executive Officers during the last fiscal year. All such options are
exercisable at the fair market value of a share of the Company's common stock on
the date of grant. The options have no value unless the Company's stock price
appreciates and the holder satisfies all applicable vesting requirements. All
the options granted to the Named Executive Officers and to executive officers of
the Company during 1998 vest 20% per year over five years, except as noted in
the footnotes to the table. Options granted by the Company to other employees
during 1998 vest 25% per year over four years.
Option Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Potential Realizable Value at
Assumed Annual Rates of Stock Price
Individual Grants Appreciation for Option Term
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(a) (b) (c) (d) (e) (f) (g)
Percent of
Total
Number of Options
Securities Granted to
Underlying Employees in Exercise
Options Fiscal Price Expiration
Name Granted Year ($/Share) Date 5%($) 10%($)
---- ------- ------------ --------- ---------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Thomas A. Carr
1st Grant 150,000 $ 29.75 1/21/08 $ 2,806,500 $ 7,111,500
2nd Grant 400,000(1) {Total of 13.1%} 24.00 11/11/08 6,036,000 15,300,000
Brian K. Fields 75,000 1.8% 29.75 1/21/08 1,403,250 3,555,750
Kent C. Gregory
1st Grant 75,000 29.75 1/21/08 1,403,250 3,555,750
2nd Grant 75,000 {Total of 3.6%} 24.00 11/11/08 1,131,750 2,868,750
Philip L. Hawkins
1st Grant 100,000 29.75 1/21/08 1,891,000 4,741,000
2nd Grant 300,000(2) {Total of 9.5%} 24.00 11/11/08 4,527,000 11,475,000
Robert E. Peterson
1st Grant 85,000 29.75 1/21/08 1,590,350 4,029,850
2nd Grant 85,000 {Total of 4.0%} 24.00 11/11/08 1,282,650 3,251,250
</TABLE>
- ----------------
(1) 250,000 of these options vest at the end of five years.
(2) 200,000 of these options vest at the end of five years.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
<TABLE>
<CAPTION>
Number of Securities Values of Unexercised
Underlying Unexercised In-the-Money
Shares Options at FY End(1) Options at FY End(2)
Acquired Value -------------------------- ---------------------------
Name on Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Thomas A. Carr ....... 0 0 135,363 611,451 $168,688 $ 0
Brian K. Fields ...... 0 0 68,770 110,080 84,329 0
Kent C. Gregory....... 0 0 8,478 183,911 0 0
Philip L. Hawkins .... 0 0 20,478 461,911 0 0
Robert E. Peterson.... 0 0 20,478 231,911 0 0
</TABLE>
(1) Number of shares of common stock underlying options granted under the
Company's 1997 Stock Option and Incentive Plan or shares of common stock
for which Class A Units of Carr Realty, L.P. underlying options granted
under the 1993 Carr Realty Option Plan would have been redeemable.
(2) Based on the last reported sale price of the Company's common stock on the
NYSE on December 31, 1998 of $24.00.
Employment Contracts
None of the Named Executive Officers currently has an employment
contract with the Company.
3
<PAGE>
Notwithstanding anything to the contrary set forth in any of the
Company's filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate SEC filings,
in whole or in part, the following Performance Graph and the Report of the
Executive Compensation Committee and Ad Hoc Compensation Committee shall not be
incorporated by reference into any such filings:
PERFORMANCE GRAPH
[Graphic appears in printed copy.]
* Assumes $100 invested on December 31, 1993 in common stock of CarrAmerica
Realty Corporation or in the securities comprising the S&P 500 index or the
NAREIT Equity index, assuming reinvestment of dividends.
The points on the graph represent the following numbers:
<TABLE>
<CAPTION>
Last Trading Day of CarrAmerica S&P 500 NAREIT Equity
- ------------------- ----------- ------- -------------
<S> <C> <C> <C>
1998 ......................................... $152 $294 $160
1997 ......................................... $187 $229 $193
1996 ......................................... $162 $171 $161
1995 ......................................... $126 $139 $119
1994 ......................................... $ 85 $101 $103
1993 ......................................... $100 $100 $100
</TABLE>
4
<PAGE>
REPORT OF EXECUTIVE COMPENSATION COMMITTEE AND
AD HOC COMPENSATION COMMITTEE
The Executive Compensation Committee and the Ad Hoc Compensation
Committee of the Company's Board of Directors present this report on the
Company's compensation policies as they affected the compensation reported above
for the Company's executive officers for fiscal year 1998. In performing their
responsibilities, these committees had the benefit of reports prepared by the
Company's outside compensation consultant. The outside consultant provided
information and advice on competitive compensation policies and practices and on
the reasonableness of the compensation paid to executives of the Company.
Executive Compensation Philosophy
The Company's executive officer compensation policies incorporate a
variety of objectives, including rewarding executive officers commensurate with
the Company's performance, providing competitive compensation opportunities,
recognizing individual performance and responsibility, and assisting the Company
in attracting and retaining a highly motivated, performance-oriented executive
management team. The Company believes that the use of such objectives to
determine compensation for its executive officers serves as an important part of
the foundation from which to enhance shareholder value. The Company implemented
its executive officer compensation policies for 1998 with a compensation program
based on the total direct compensation package of each executive officer. The
Company evaluated each officer's package as a whole and in terms of two
components: an annual component, which included base salary and a cash bonus
opportunity; and a long-term incentive component, which included grants of both
stock options and restricted stock units.
In assessing the competitiveness of the Company's executive officer
compensation, the Executive Compensation Committee reviewed materials brought to
its attention by the Company's outside compensation consultant on the
compensation practices of approximately 10 other large publicly-traded office
REITs and of approximately 20 to 35 other large publicly-traded REITs. The
Committee also reviewed materials on other public companies with capitalizations
of between $1.0 and $3.0 billion. The Company's current capitalization is
approximately $2.1 billion. The REITs whose compensation practices were reviewed
constitute only a portion of the 178 REITs included in the NAREIT Equity Index,
which is used in the Performance Graph above to compare stockholder returns. The
Committee believes that the Company's competitors for executive talent are not
necessarily companies included in the NAREIT Equity Index, most of which have
smaller capitalizations than that of the Company.
Annual Component
Base Salaries. The Company established base salaries for executive
officers for fiscal year 1998 in late 1997 after a formal annual review of base
salaries by the Executive Compensation Committee. An outside compensation
consultant provided advice in the course of the review. The principal elements
that entered into the Company's determination to increase base salaries to the
levels reported for 1998 were the competitiveness of the Company's base salaries
compared to those paid by other large office REITs, the roles and
responsibilities of the individual, the contributions of the individual to the
Company's business, the requirements of the individual's job and the
individual's prior experience and accomplishments. In October 1998, the base
salaries of the Company's CEO and COO were increased by the Executive
Compensation Committee following its review of additional information supplied
by the outside compensation consultant.
5
<PAGE>
Cash Bonuses. The Company uses annual cash bonuses as a primary method
of rewarding executive officers commensurate with the Company's performance and
individual performance. Early in fiscal year 1998, the Company established a
target bonus amount for each executive officer equal to a percentage of the
executive officer's base salary, after review of the proposed targets by the
Executive Compensation Committee. The target bonus amounts for the Named
Executive Officers other than the Chief Executive Officer were equal to 80% of
their base salaries. The target bonus amounts for the other executive officers
were equal to 33% to 80% of their base salaries. Payment of the target bonus
amounts was to be based primarily on three factors, assuming the adequacy of the
Company's cash and capital resources: (i) the Company's attainment of a specific
target in terms of funds from operations (FFO) per share; (ii) each officer's
achievement of individualized quantitative and qualitative financial and
operational goals related to the activities he or she managed; and (iii)
management's discretion. The Company retains the discretion to increase or
decrease annual bonuses in any given year above or below target amounts to take
into account extraordinary performance or events. The Executive Compensation
Committee did not establish a target bonus amount for the Chief Executive
Officer for 1998 because the Committee did not wish to restrict its flexibility
to set the CEO's final bonus at the appropriate level, as discussed below.
In early 1999, the Company determined to pay the executive officers
bonuses at targeted levels after the Company attained its FFO target and the
Executive Compensation Committee reviewed each officer's performance measured
against his or her established quantitative and qualitative financial and
operational goals. In one instance, the Company paid an executive officer a
bonus higher than the targeted level.
Long-Term Incentive Component
The Company used two forms of long-term incentive compensation--stock
options and restricted stock units -- in 1998 as methods of aligning the
financial interests of its executive officers more closely with those of its
stockholders. The long-term compensation reported for 1998 reflects a decision
by the Company to emphasize the retention element of executive officer
compensation. The Executive Compensation Committee believes that emphasizing
executive officer retention will maintain and improve the Company's performance.
In particular, the Company increased long-term incentive compensation to make
its executive compensation more competitive with levels at companies competing
for executive talent. In general, the Company attempted to set total direct
compensation for its executive officers competitive with levels for executive
officers of peer group REITs and peer group public companies based on
capitalization.
Upon the Executive Compensation Committee's recommendation, the Board
of Directors concluded that the Company's long-term incentive opportunities for
executive officers should be increased on an annual basis. A compensation mix
weighted more heavily towards long-term incentive compensation better aligns the
interests of the Company's executive officers with those of its stockholders,
because long-term incentive compensation is more closely linked to long-term
performance and stock price. Increasing long-term incentive opportunities also
provides a more competitive level of compensation. As a general matter, the
Company's long-term incentive compensation grants in 1998 were weighted more
heavily in value towards restricted stock units, as opposed to stock options.
The Company adjusted the percentage of restricted stock units and stock options
granted to each executive officer based on factors that were unique to each
officer.
6
<PAGE>
Stock Options. The Company made two series of stock option grants in
1998, one in January and another in November. The January grants were made
following a review of 1997 performance. The November grants were intended to
replace regular grants of options that the Company ordinarily would have made in
January 1999 following a review of 1998 performance, which review was
preliminarily conducted in November 1998. The early grants provided the grantees
with a favorable exercise price, given what was considered a relatively low
market price of the Company's common stock at the time and the Company's policy
of granting options with an exercise price equal to the market price of its
common stock at the time of grant. The Company currently does not expect to make
any further grants of options to its executive officers in 1999.
To encourage the Company's employees to seek long-term appreciation in
the value of the Company's common stock, stock options generally vest over a
specified period of time, and then only if the employee remains with the
Company. Accordingly, an employee generally must remain with the Company for a
period of years to enjoy the full economic benefit of a stock option. For 1998,
the Company attempted to establish vesting periods for long-term incentive
awards to maximize the retentive potential of such awards. The Company
established five-year pro rata vesting schedules for all stock option awards to
executive officers other than the Chief Executive Officer and the Chief
Operating Officer, and four-year pro rata vesting schedules for stock option
grants to non-executive personnel. In order to increase the retentive value to
the Company of the option grants to the Company's CEO and COO, their vesting
schedules provide five-year pro rata vesting for approximately 35% of the
options and five-year cliff vesting (i.e., no options vest until the end of five
years) for approximately 65% of the options.
Restricted Stock Units. The Company made grants of restricted stock
units to its executive officers in 1998 for the first time. These grants
resulted from a recommendation of the Company's outside compensation consultant.
The consultant reported that it had detected a trend in the Company's REIT peer
group towards granting substantial amounts of restricted stock or restricted
stock units. In years past, the Company and its peer group companies have relied
primarily on stock options for their long-term incentive programs. The Executive
Compensation Committee believes that these restricted stock unit grants bring
the Company's overall long-term incentive compensation payable to its executive
officers more in line with the compensation arrangements that have been
implemented by the Company's competitors for executive talent.
The Company's Board of Directors determined that the restricted stock
unit grants should vest ratably over five years in order to moderate their
negative earnings impact and to increase the retention value of the awards. The
Board approved substantial, one-time restricted stock unit grants to the Named
Executive Officers due to the below market long-term incentives provided to them
by the Company over the past three to five years. The Board determined that
these awards should vest ratably over five years because of the one-time,
catch-up nature of the awards, and to increase their value as a retentive
device.
Chief Executive Officer Compensation
The compensation reported for the Company's Chief Executive Officer for
1998 was determined by the Executive Compensation Committee substantially in
conformity with the policies described above for all other executive officers of
the Company. The Committee, however, provided that a greater percentage of the
CEO's total compensation would be payable through annual bonus and other
incentive compensation, rather than through base salary. Also, not wishing to
restrict its flexibility, the Committee did not establish a target bonus amount
for the CEO at the beginning of 1998, preferring to make a decision after the
end of the year. The Committee granted the CEO a bonus equal to approximately
105% of the base salary reported for him after the end of the year based on his
exceptional performance, as demonstrated by the Company exceeding its target
FFO, effective implementation of the Company's strategic plan, development of
the Company's management team, and successful adaptation of the Company's
business and capital plans, during a
7
<PAGE>
challenging year characterized by a difficult capital market and other
significant management challenges.
Deductibility of Executive Officer Compensation
Section 162(m) of the Internal Revenue Code denies a deduction for
compensation in excess of $1 million paid to certain executive officers, unless
certain performance, disclosure, and stockholder approval requirements are met.
The Company's stock option grants to executive officers in 1998 are intended to
qualify as "performance-based" compensation not subject to the Section 162(m)
deduction limitation. The Company's restricted stock unit grants in 1998 are
subject to the $1 million deduction limitation because they vest over time and
are not considered "performance-based" within the meaning of Section 162(m). The
Executive Compensation Committee believes that a substantial portion of the
compensation awarded to executive officers as annual cash bonuses would be
exempted from the $1 million deduction limitation. The Committee's present
intention is to qualify, to the extent reasonable, a substantial portion of each
executive officer's compensation for deductibility under applicable tax laws.
<TABLE>
<CAPTION>
<S> <C>
Ad Hoc Compensation Committee Executive Compensation Committee
(as to information on option grants of 11/11/98) (as to remainder of information)
Andrew F. Brimmer Ronald Blankenship
Timothy Howard A. James Clark
Wesley S. Williams, Jr. Wesley S. Williams, Jr.
</TABLE>
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS
AND INSIDER PARTICIPATION
A. James Clark, Ronald Blankenship, Todd W. Mansfield and Wesley S.
Williams, Jr. served on the Executive Compensation Committee of the Board of
Directors during 1998. Mr. Mansfield served on the Executive Compensation
Committee until August 6, 1998, when he resigned from the Board of Directors.
Mr. Mansfield was replaced by Mr. Blankenship. Andrew F. Brimmer, Timothy Howard
and Wesley Williams, Jr. served on the Ad Hoc Compensation Committee. None of
these individuals was or ever has been an employee of the Company or any of its
subsidiaries. Mr. Clark and Mr. Blankenship had the relationships described
below that are required to be disclosed in this Proxy Statement.
Mr. Clark owns interests in certain entities that were parties to
certain transactions involving the Company. A wholly owned subsidiary of Clark
Enterprises, Inc., an entity of which Mr. Clark is the majority stockholder and
which is a holder of Class A Units of Carr Realty, L.P., has provided
construction management services to an affiliate of the Company, CarrAmerica
Development, Inc. In connection with these services, the affiliate paid $19.6
million to Clark Enterprises for 1998.
Mr. Blankenship is Vice Chairman and Chief Operating Officer of
Security Capital Group Incorporated, an affiliate of SC-USREALTY, a major
stockholder of the Company. The Company made payments of $0.3 million to
Security Capital Investment Research Incorporated, another affiliate of
SC-USREALTY, for research rendered in connection with the acquisition of
operating and development properties for 1998.
9
