<PAGE> 1
SCHEDULE 14A
(Rule 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material under Rule 14a-12
PACIFIC GULF PROPERTIES INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
----------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
----------------------------------------------------------------------
(5) Total fee paid:
----------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
----------------------------------------------------------------------
(3) Filing Party:
----------------------------------------------------------------------
(4) Date Filed:
----------------------------------------------------------------------
<PAGE> 2
PACIFIC GULF PROPERTIES INC.
4220 VON KARMAN, SECOND FLOOR
NEWPORT BEACH, CALIFORNIA 92660
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 11, 2000
------------------------
To our Shareholders:
The 2000 annual meeting of shareholders of Pacific Gulf Properties Inc.
(the "Company") will be held at The Four Seasons Hotel, 690 Newport Center
Drive, Newport Beach, California, on May 11, 2000, beginning at 10:00 a.m. local
time. At the meeting, shareholders will act on the following matters:
(1) Election of three Class III directors, each for a term of three years;
(2) To consider and vote upon a proposal to adopt the Company's 1999 Long
Term Stock Compensation Plan; and
(3) Any other matters that properly come before the meeting.
All holders of record of shares at the close of business on April 3, 2000
are entitled to vote at the meeting or any postponements or adjournments of the
meeting.
We encourage you to read this Proxy Statement carefully. In addition, you
may obtain information about the Company from the Annual Report to Stockholders
included with this mailing and from the documents that we have filed with the
SEC.
This Notice and Proxy Statement was first mailed to stockholders on or
about April 17, 2000.
By order of the Board of Directors,
Donald G. Herrman
Executive Vice President and Secretary
April 17, 2000
Newport Beach, California
YOUR VOTE IS IMPORTANT. PLEASE PROMPTLY MARK, DATE, SIGN AND RETURN YOUR PROXY
IN THE ENCLOSED ENVELOPE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ABOUT THE MEETING........................................... 1
What is the purpose of the annual meeting?................ 1
Who is entitled to vote at the meeting?................... 1
Who can attend the meeting?............................... 1
What constitutes a quorum?................................ 1
How do I vote?............................................ 1
Can I change my vote after I return my proxy card?........ 2
What are the Board's recommendations?..................... 2
What vote is required to approve each item?............... 2
STOCK OWNERSHIP............................................. 3
Who are the largest owners of the Company's stock?........ 3
How much stock do the Company's directors and executive
officers own?.......................................... 3
Section 16(a) Beneficial Ownership Reporting Compliance... 4
ITEM 1 -- ELECTION OF DIRECTORS............................. 4
Directors Standing for Election........................... 4
Directors Continuing in Office............................ 5
How are the Directors Compensated?........................ 6
How often did the Board meet during 1999?................. 6
What Committees has the Board established?................ 6
Board Committee Membership................................ 6
ITEM 2 -- APPROVAL OF 1999 LONG TERM STOCK COMPENSATION
PLAN...................................................... 7
OFFICERS AND KEY EMPLOYEES.................................. 11
EXECUTIVE COMPENSATION...................................... 12
Summary Compensation Table................................ 12
Share Option Plans........................................ 13
Option Grants in Last Fiscal Year......................... 13
Aggregated Options Exercises in Fiscal 1999 and Fiscal
Year-End Option Values................................. 14
Deferred Compensation Plan................................ 14
Retirement Income Plan.................................... 15
Thrift Plan............................................... 16
Employment Agreement...................................... 16
Change of Control Agreement............................... 17
REPORT OF THE COMPENSATION COMMITTEE........................ 18
COMPARATIVE STOCK PERFORMANCE............................... 21
ANNUAL REPORT............................................... 21
ADVANCE NOTICE PROCEDURES................................... 21
PROPOSALS FOR INCLUSION IN 2001 PROXY STATEMENT............. 22
INDEPENDENT AUDITORS........................................ 22
OTHER MATTERS............................................... 22
EXHIBIT A................................................... A-1
</TABLE>
i
<PAGE> 4
PACIFIC GULF PROPERTIES INC.
4220 VON KARMAN, SECOND FLOOR
NEWPORT BEACH, CALIFORNIA 92660
------------------------
PROXY STATEMENT
------------------------
This proxy statement contains information related to the annual meeting of
shareholders of Pacific Gulf Properties, Inc., to be held on Thursday, May 11,
2000, beginning at 10:00 a.m. at The Four Seasons Hotel, 690 Newport Center
Drive, Newport Beach, California, and at any postponements or adjournments
thereof.
ABOUT THE MEETING
WHAT IS THE PURPOSE OF THE ANNUAL MEETING?
At the Company's annual meeting, shareholders will act upon the matters
outlined in the notice of meeting on the cover page of this proxy statement,
including the election of directors and the adoption of the 1999 Long Term Stock
Compensation Plan. In addition, the company's management will report on the
performance of the Company during 1999 and respond to questions from
shareholders.
WHO IS ENTITLED TO VOTE AT THE MEETING?
Only shareholders of record at the close of business on the record date,
April 3, 2000, are entitled to receive notice of the annual meeting and to vote
the shares of common stock that they held on that date at the meeting, or any
postponements or adjournments of the meeting. In addition, the holders of the
Company's Class A Preferred Stock are entitled to vote with the holders of the
common shares on all matters, including the election of Directors. Each
outstanding share of Common Stock and Class A Preferred Stock is entitled to one
vote on each matter to be presented at the meeting.
WHO CAN ATTEND THE MEETING?
All shareholders as of the record date, or their duly appointed proxies,
may attend the meeting. Registration will begin at 9:45 a.m., and the meeting
will begin at 10:00 a.m.
Please note that if you hold your shares in "street name" (that is, through
a broker or other nominee), you will need to bring a copy of a brokerage
statement reflecting your stock ownership as of the record date and check in at
the registration desk at the meeting.
WHAT CONSTITUTES A QUORUM?
The presence at the meeting, in person or by proxy, of the holders of a
majority of the aggregate number of shares of common stock and Class A Preferred
Stock outstanding on the record date will constitute a quorum, allowing us to
conduct the business of the meeting. As of the record date, 20,704,495 shares of
common stock of the Company were outstanding, and there were 2,763,116 shares of
Class A Preferred Stock outstanding. Proxies received but marked as abstentions
and broker non-votes will be included in the calculation of the number of shares
considered to be present at the meeting.
HOW DO I VOTE?
If you complete and properly sign the accompanying proxy card and return it
to the Company, it will be voted as you direct. If you are a registered
shareholder and attend the meeting, you may deliver your completed proxy card in
person. "Street name" shareholders who wish to vote at the meeting will need to
obtain a proxy form from the institution that holds their shares.
<PAGE> 5
CAN I CHANGE MY VOTE AFTER I RETURN MY PROXY CARD?
Yes. Even after you have submitted your proxy, you may change your vote at
any time before the proxy is exercised by filing with the Secretary of the
Company either a notice of revocation or a duly executed proxy bearing a later
date. The powers of the proxy holders will be suspended if you attend the
meeting in person and so request, although attendance at the meeting will not by
itself revoke a previously granted proxy.
WHAT ARE THE BOARD'S RECOMMENDATIONS?
Unless you give other instructions on your proxy card, the persons named as
proxy holders on the proxy card will vote in accordance with the recommendations
of the Board of Directors. The Board's recommendation is set forth together with
the description of each item in this proxy statement. In summary, the board
recommends a vote:
- FOR election of each of the nominated directors (see page 4):
- FOR the approval the 1999 Long Term Stock Compensation Plan (See pages
7 - 10)
With respect to any other matter that properly comes before the meeting,
the proxy holder[s] will vote as recommended by the Board of Directors or, if no
recommendation is given, in their own discretion.
WHAT VOTE IS REQUIRED TO APPROVE EACH ITEM?
Election of Directors. The three nominees for election as directors who
receive the highest number of votes at the meeting will be elected as Directors.
A properly executed proxy marked "WITHHOLD AUTHORITY" with respect to the
election of one or more directors will not be voted for the director or
directors indicated, although it will be counted for purposes of determining
whether there is a quorum.
Adoption of 1999 Long-Term Stock Compensation Plan and any Other Items. The
affirmative vote of the holders of a majority of the shares represented in
person or by proxy and entitled to vote on the item will be required for
approval. A properly executed proxy marked "ABSTAIN" with respect to such matter
will not be voted, although it will be counted for purposes of determining
whether there is a quorum. Accordingly, an abstention will have the effect of a
negative vote.
If you hold your shares in "street name" through a broker or other nominee,
your broker or nominee may not be permitted to exercise voting discretion with
respect to some of the matters to be acted upon. Thus, if you do not give your
broker or nominee specific instructions, your shares may not be voted on those
matters and will not be counted in determining the number of shares necessary
for approval. Shares represented by such "broker non-votes" will, however, be
counted in determining whether there is a quorum.
The cost of soliciting proxies will be borne by the Company. In addition to
solicitation by mail, and without additional compensation for such services,
proxies may be solicited personally, or by telephone or telecopy, by officers or
employees of the Company. The Company will also request that banking
institutions, brokerage firms, custodians, trustees, nominees, fiduciaries and
other like parties to forward the solicitation materials to the beneficial
owners of common shares held of record by such persons, and the Company will
upon request of such record holders reimburse forwarding charges and expenses.
2
<PAGE> 6
STOCK OWNERSHIP
WHO ARE THE LARGEST OWNERS OF THE COMPANY'S STOCK?
Except as set forth below, the Company knows of no single person or group
that is the beneficial owner of more than 5% of the Company's common stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP CLASS
------------------------------------ -------------------- ----------
<S> <C> <C> <C>
Five Arrows Realty 1251 Avenue of the Americas 2,763,116 11.8%
Securities L.L.C.(1) 44th Floor
New York, NY 10020
Morgan, Stanley 1585 Broadway 1,806,001 8.7%
Dean Witter & Co.(2) New York, NY 10036
</TABLE>
- ---------------
(1) As holder of all of the outstanding shares of preferred stock, Five Arrows
Realty Securities L.L.C. ("Five Arrows") maintains the contractual right to
elect one director to the Board, and Five Arrows has previously elected Mr.
James Quigley, 3rd, as a Class II director. The shares of Class A Preferred
Stock held by Five Arrows are convertible at any time into Common shares.
Pursuant to the Company's Charter, Five arrows has the right to vote such
shares at the Annual Meeting. The percent of class with respect to Five
Arrows has been calculated assuming that all of the shares of Class A
Preferred Stock were converted into Common Stock.
(2) Information regarding ownership of common shares by Morgan Stanley is
included in reliance upon information set forth in an Amended Schedule 13G
filed by Morgan Stanley on February 7, 2000. Morgan Stanley has indicated in
such Schedule 13G that all shares are owned by various investment advisory
clients of Morgan Stanley and that Morgan Stanley is deemed to be the
beneficial owner of such shares pursuant to Rule 13d-3 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act").
HOW MUCH STOCK DO THE COMPANY'S DIRECTORS AND EXECUTIVE OFFICES OWN?
The following table shows the amount of common stock of the Company
beneficially owned (unless otherwise indicated) by the Company's directors, the
executive officers of the Company named in the Summary Compensation Table below
and the directors and executive officers of the Company as a group. Except as
otherwise indicated, all information is as of April 3, 2000.
COMMON SHARES BENEFICIALLY OWNED
<TABLE>
<CAPTION>
AGGREGATE NUMBER OF
SHARES BENEFICIALLY ACQUIRABLE WITHIN PERCENT OF
BENEFICIAL OWNER OWNED(1) 60 DAYS(2) CLASS
---------------- ------------------- ----------------- ----------
<S> <C> <C> <C>
Glenn L. Carpenter............... 230,663(3) 166,133 1.1%
Donald G. Herrman................ 130,686(4) 91,588 *
J.R. Wetzel...................... 53,667(5) 38,667 *
Lonnie P. Nadal.................. 75,383(6) 36,805 *
Robert A. Dewey.................. 45,814(7) 22,400 *
Angela M. Wixted................. 45,816(8) 38,933 *
Kimberly G. Solbakk.............. 37,359(9) 34,683 *
Peter L. Eppinga................. 33,296 20,000 *
Christina Garvey................. 15,000 15,000 *
Carl C. Gregory, III............. 25,500 19,000 *
John F. Kooken................... 36,800 20,000 *
Donald E. Lange.................. 17,000 15,000 *
Robert E. Morgan................. 52,854 13,600 *
James E. Quigley, 3rd............ 19,500 19,000 *
Keith W. Renken.................. 29,000 20,000 *
All officers and directors as a
group (15 persons)............. 848,338 570,809 4.0%
</TABLE>
3
<PAGE> 7
- ---------------
* Represents less than 1% of the Company's outstanding common stock.
(1) The number of shares shown includes shares that (i) are individually or
jointly owned, as well as shares over which the individual has either sole
or shared investment or voting authority and (ii) could be purchased by the
exercise of options exercisable as of April 3, 2000 or within 60 days
thereafter under the Company's stock option plans.
(2) The number of shares listed sets forth the number of shares that each person
may acquire pursuant to the exercise of options exercisable at April 3, 2000
or within 60 days thereafter. All options listed in this column were granted
under the Company's 1993 Share Option Plan, except that the following
amounts were granted pursuant to the Company's 1999 Long Term Stock
Compensation Plan: 250,000 for Mr. Carpenter, 135,000 for Mr. Herrman,
135,000 for Mr. Wetzel, 70,000 for Mr. Nadal, 70,000 for Mr. Dewey, 70,000
for Ms. Wixted, 70,000 for Ms. Solbakk. (See Item 2 "Approval of 1999 Long
Term Stock Compensation Plan" and "EXECUTIVE COMPENSATION -- Share Option
Plans".)
(3) Includes 56,987 shares of restricted stock granted under the company's 1993
share Option Plan, and 5,366 shares allocated to Mr. Carpenter in the
company's Thrift Plan.
(4) Includes 24,476 shares of restricted stock granted under the company's 1993
Share Option Plan, and 3,643 shares allocated to Mr. Herrman in the
Company's Thrift Plan.
(5) Includes 15,000 shares of restricted stock granted under the company's 1993
Share Option Plan.
(6) Includes 10,683 shares of restricted stock granted under the company's 1993
Share Option Plan.
(7) Includes 8,521 shares of restricted stock granted under the company's 1993
Share Option Plan, and 817 shares allocated to Mr. Dewey in the Company's
Thrift Plan.
(8) Includes 5,246 shares of restricted stock granted under the company's 1993
Share Option Plan, and 149 shares allocated to Ms. Wixted in the Company's
Thrift Plan.
(9) Includes 2,000 shares of restricted stock granted under the company's 1993
Share Option Plan, and 360 shares allocated to Ms. Solbakk in the Company's
Thrift Plan.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities and Exchange Act of 1934 requires the
Company's directors and officers, and persons who own more than ten percent
(10%) of a registered class of its equity securities, to file with the
Securities and Exchange Commission and the New York Stock Exchange initial
reports of ownership and reports of changes in ownership of common stock and
other equity securities of the Company. Such officers, directors, and beneficial
owners are also required by Securities and Exchange Commission rules and
regulations to furnish the Company with the copies of all Section 16(a) forms
they file. Based upon a review of filings with the SEC, the Company believes
that all of the Company's directors and executive officers complied during
fiscal 1999 with the reporting requirements of Section 16(a) of the Exchange
Act.
ITEM 1 -- ELECTION OF DIRECTORS
DIRECTORS STANDING FOR ELECTION
The Board of Directors is divided into three classes, having three-year
terms that expire in successive years.
The current term of office of directors in Class III expires at the 2000
annual meeting. The Board of Directors proposes that the nominees described
below, all of whom are currently serving as Class III directors, be re-elected
for a new term of three years and until their successors are duly elected and
qualified.
Each of the nominees has consented to serve a three-year term. If any of
them becomes unavailable to serve as a director, the Board may designate a
substitute nominee. In that case, the persons named, as proxies will vote for
the substitute nominee designated by the Board.
4
<PAGE> 8
The Directors standing for election are:
PETER L. EPPINGA DIRECTOR SINCE 1994
Mr. Eppinga, 58, is a practicing attorney specializing in corporate
securities and real estate; former President of Laguna Hills Properties, 1991 to
1994. He is a former Senior Vice President of Sears Savings Bank.
JOHN F. KOOKEN DIRECTOR SINCE 1994
Mr. Kooken, 68, is retired. He is former Vice Chairman and Chief Financial
Officer of Security Pacific Corporation, 1987 to 1992; Director, Glendale
Federal Bank, Southern California Healthcare Systems, Huntington Memorial
Hospital, Golden State Bancorp and California Federal Bank.
ROBERT E. MORGAN DIRECTOR SINCE 1993
Mr. Morgan, 80, is retired. He is former President, Coldwell Banker First
Newport Corporation; former President, Coldwell Banker Real Estate Finance
Services; former director of Santa Anita Realty Enterprises and Operating
Company, 1975 to 1995.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR EACH OF THE
DIRECTOR NOMINEES LISTED ABOVE.
DIRECTORS CONTINUING IN OFFICE
Class I Directors. The following Class I directors were elected for terms
ending in 2001:
GLENN L. CARPENTER DIRECTOR SINCE 1993
Mr. Carpenter, 57, has been Chairman of the Board since 1996 and President,
Chief Executive Officer and a director of the Company since its formation in
1993. Mr. Carpenter served as Chief Executive Officer of Santa Anita Realty
Enterprises, Inc. ("Realty") from January 1992 until February 1994, and as
President of Realty from December 1989 until February 1994. He was Chief
Operating Officer of Realty from 1989 until 1991, and was Executive Vice
President of Realty from 1988 until 1989. From 1986 until 1988, Mr. Carpenter
served a Senior Vice President -- Operations of Realty, and has held a number of
other positions with Realty since 1979. Mr. Carpenter has been a member of the
National Association of Real Estate Investment Trusts ("NAREIT") since 1980, has
served on NAREIT's board of governors and is a member of the Urban Land
Institute.
CHRISTINE GARVEY DIRECTOR SINCE 1998
Ms. Garvey, 54, is Vice President Real Estate and Workplace Resources at
CISCO Systems, Inc. She served as the Group Executive Vice President, Head of
Commercial Real Estate Services of Bank of America from 1992 to 1998. She serves
as a Director of each of Catellus Development Corporation, Timberland Growth
Corporation, San Francisco Architectural Heritage Foundation and Philharmonia
Baroque Orchestra.
KEITH W. RENKEN DIRECTOR SINCE 1994
Mr. Renken, 65, is retired and formerly served as Managing Partner of Los
Angeles office of Deloitte & Touche 1983-1990. He served as a Director of Coast
Federal Bank and U.S. Rentals. He is also associated with the graduate program
at the University of Southern California Kenneth Leventhal School of Accounting
and is an "Executive In Residence".
Class II Directors. The following Class II directors were elected for terms
ending in 2002:
CARL C. GREGORY III DIRECTOR SINCE 1997
Mr. Gregory, 55, is the Chairman and Chief Executive Officer of West
Capital Financial Services Corp. and has served in this capacity since 1997. He
is the former Chairman and Chief Executive Officer of MIP Properties, Inc.,
formerly a publicly-traded real estate investment trust (from 1991 to 1995) and
is a Director of Apex Mortgage Capital, Inc.
5
<PAGE> 9
DONALD E. LANGE DIRECTOR SINCE 1998
Mr. Lange, 54, is the immediate past President of Mortgage Bankers
Association. He serves as President and Chief Executive Officer of Pacific
Financial Services; and was formerly President and Chief Executive Officer of
Weyerhaeuser Financial from 1971 - 1999.
JAMES E. QUIGLEY, 3RD DIRECTOR SINCE 1997
Mr. Quigley, 43, has been the Senior Vice President and Treasurer of
Rothschild Realty since 1988; Director, Charter Oak, a subsidiary of Rothschild
Realty, since 1989.
HOW ARE DIRECTORS COMPENSATED?
Base Compensation. Each non-employee director receives a retainer based on
an annualized rate of $20,000, together with a fee of $1,000, per board or
committee meeting attended ($1,250 for the chairman of each meeting). Directors
who are also employees of the Company receive no additional compensation for
service as directors.
Options. Each non-employee director receives an automatic grant, on
December 31st of each year, of options to purchase 5,000 shares of common stock.
Each option grant permits the holder to purchase shares at their fair market
value on the date of grant, which was $20.25 in the case of options granted in
1999. Upon appointment to the Board, non-employee directors receive a grant of
options to purchase 5,000 shares of common stock at an exercise price equal to
the fair market value of the common stock on the date of grant.
HOW OFTEN DID THE BOARD MEET DURING 1999?
The board of directors met 8 times during 1999. Each director attended more
than 75% of the total number of meetings of the Board and committees on which he
or she served.
WHAT COMMITTEES HAS THE BOARD ESTABLISHED?
The Board of directors has standing Executive, Compensation, Audit, and
Nominating and Corporate Governance Committees.
BOARD COMMITTEE MEMBERSHIP
<TABLE>
<CAPTION>
NOMINATING &
CORPORATE
EXECUTIVE COMPENSATION AUDIT GOVERNANCE
NAME COMMITTEE COMMITTEE COMMITTEE COMMITTEE
---- --------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Peter L. Eppinga........................... -- --
Christine Garvey........................... --
Carl C. Gregory III........................ -- --
John F. Kooken............................. -- -- --
Donald E. Lange............................ --
Robert E. Morgan........................... -- -- --
James E. Quigley, 3rd...................... -- --
Keith Renken............................... -- -- --
</TABLE>
Executive Committee. The Executive Committee has the authority to perform
all the functions of the full Board, including approval of all real estate
investments, subject to certain limitations prescribed by the Board and by
Maryland law. The Executive Committee held eight meetings during 1999.
Audit Committee. The Audit Committee performs numerous functions, including
review of the annual financial statements with both management and the
independent auditors. The Audit Committee also recommends the engagement of the
independent accounting firm and meets with the independent accountants regarding
the scope and conduct of the annual audit. In addition, the committee may
inquire about and discuss policies and procedures with respect to principles of
business conduct, financial and accounting controls,
6
<PAGE> 10
compliance with the Foreign Corrupt Practices Act of 1977, areas of special
concern and other related matters. The Audit Committee met five times during
1999.
Compensation Committee. The Compensation Committee reviews the performance
and effectiveness of the Chief Executive Officer and recommends an annual
compensation level for the Chief Executive Officer to the Board of Directors.
The Committee also sets the compensation level of all other officers, approves
all grants of stock options and restricted stock and administers the Company's
stock option and other employee benefit programs and plans. The Compensation
Committee met 11 times during 1999.
Nominating and Corporate Governance Committee. The Nominating and Corporate
Governance Committee reviews governance issues and makes recommendations to the
Board for committee assignments and chairmanships of the committees. The
committee also considers candidates for appointment to the Board and other such
duties delegated to it. The Nominating and Corporate Governance Committee met
three times during 1999.
ITEM 2 -- APPROVAL OF 1999 LONG TERM STOCK COMPENSATION PLAN
On September 9, 1999, the Board of Directors unanimously adopted, subject
to shareholder approval, the 1999 Long Term Stock Compensation Plan (the "1999
Plan"). The purpose of the 1999 Plan is to provide incentives for the Company's
executives to improve the long-term performance of the Company. The 1999 Plan is
intended to be an addition to, and not a substitution of, any other stock option
or incentive plan of the Company.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE FOR THE APPROVAL OF
THE 1999 LONG TERM STOCK COMPENSATION PLAN.
The 1999 Plan, attached to this Proxy as Exhibit A, covers the period July
1, 1999 through December 31, 2001 and is administered by the Compensation
Committee of the Board of Directors. The maximum number of shares that may be
issued pursuant to options granted under the 1999 Plan is 845,000, and all
options available under the 1999 Plan were issued on September 9, 1999. The
maximum number of shares subject to options permitted to be granted to any one
individual under the 1999 Plan is 250,000. Options granted under the 1999 Plan
are intended to qualify as incentive stock options under federal tax law to the
extent possible.
Two types of option grants may be made under the 1999 Plan:
(a) Fixed Option Grants -- a fixed number of options that will vest in
equal thirds at the end of each of years 1999, 2000 and 2001; and
(b) Variable Option Grants -- a variable number of options that vest at the
end of the period covered by the 1999 Plan, subject to achievement of
certain performance measures during the 1999 Plan period.
The Variable Option Grants have two separate and independent components,
each of which is subject to vesting based on different performance criteria. The
performance criteria for each component will be measured for the six months
ended December 31, 1999, the year 2000 and the year 2001. The results for each
of those three periods will then be averaged (without weighting) to determine
the level of achievement of that performance criteria.
The performance criteria for 65% of each Variable Option Grant is the
average percentage growth rate in the Company's funds from operations ("FFO")
per share. The performance criteria for the remaining 35% of each Variable
Option Grant is the average total shareholder return, calculated as a fraction,
the numerator of which is the sum of dividends paid and stock price change, and
the denominator of which is the stock price at
7
<PAGE> 11
the end of the prior year. The amount of vesting for each type of variable
option will be based on the following tables:
FFO PER SHARE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
IF THE COMPANY THEN THE EXECUTIVE WILL BE
ACHIEVES AN VESTED WITH THE FOLLOWING
AVERAGE FFO PER SHARE PERCENTAGE OF THE TOTAL
PERCENTAGE GROWTH RATE NUMBER OF OPTIONS
OVER ALLOCATED TO THE FFO PER
LEVEL THE PLAN PERIOD OF: SHARE COMPONENT:
<S> <C> <C>
- ---------------------------------------------------------------------------------------------
1. MINIMUM -- (Also, the Company's at least 8% up to 10% 75%(1)
average FFO growth rate must at
least equal the average for the
Company's peer group)
- ---------------------------------------------------------------------------------------------
2. TARGET at least 10% up to 11% 100%(1)
- ---------------------------------------------------------------------------------------------
3. TARGET PLUS at least 11% up to 13% 120%(1)
- ---------------------------------------------------------------------------------------------
4. MAXIMUM at least 13% 150%(1)
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Note that the number of options granted to each officer as shown in the
"Executive Compensation" tables below reflects the "Maximum" number of
options that may vest if the highest level of performance-based vesting
criteria are achieved.
TOTAL SHAREHOLDER RETURN
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
THEN THE EXECUTIVE WILL BE
VESTED WITH THE FOLLOWING
IF THE COMPANY PERCENTAGE OF THE TOTAL
ACHIEVES AN NUMBER OF OPTIONS
AVERAGE TOTAL ALLOCATED TO THE TOTAL
SHAREHOLDER SHAREHOLDER RETURN
LEVEL RETURN PERCENTAGE OF: COMPONENT:
<S> <C> <C>
- ---------------------------------------------------------------------------------------------
1. MINIMUM -- (Also, the Company's at least 16% up to 18% 75%(1)
average Total Shareholder Return
percentage must at least equal the
average for the Company's peer
group)
- ---------------------------------------------------------------------------------------------
2. TARGET at least 18% up to 20% 100%(1)
- ---------------------------------------------------------------------------------------------
3. TARGET PLUS at least 20% up to 23% 120%(1)
- ---------------------------------------------------------------------------------------------
4. MAXIMUM at least 23% 150%(1)
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Note that the number of options granted to each officer as shown in the
"Executive Compensation" tables below reflects the "Maximum" number of
options that may vest if the highest level of performance-based vesting
criteria are achieved.
Both the Fixed Option Grants and the Variable Option Grants are subject to
accelerated vesting. (Capitalized terms are defined in the attached 1999 Plan.)
- Fixed Option Grants will vest upon the termination of employment of the
participant within 24 months after a Change of Control if such
termination was by the participant for Good Reason or if such termination
was for reasons other than participant's death, total disability or the
Company's termination of such employment for Cause;
- Variable Option Grants will vest upon the date of a Change of Control and
the performance criteria levels under the Variable Option Grants will be
determined at that time based on a Shortened Final Year; and
- Variable Option Grants will vest also upon the date of a participant's
death or Total Disability and the performance criteria levels under the
Variable Option Grants will be determined at that time based on a
Shortened Final Year.
Accelerated vesting of Fixed Option Grants upon the termination of a
participant's employment after a Change of Control, and accelerated vesting of
Variable Option Grants upon a Change of Control, could result
8
<PAGE> 12
in "excess parachute payments" under the Internal Revenue Code of 1986, as
amended. A participant will be subject to a 20% excise tax on the amount of any
excess parachute payment. Under the Company's Change of Control Agreements,
described under "Executive Compensation -- Change of Control Agreements" below,
the Company will be required to gross-up certain participants who have been
granted options under the 1999 Plan for any such excise tax, as well as for any
income tax and excise tax resulting from the gross-up. Thus, a Change of Control
could result in significant costs to the Company. For further discussion of the
effect of the gross-up provision in the Change of Control Agreements, see
"Federal Income Tax Treatment -- Effect of Accelerated Vesting."
The 1999 Plan is available to officers of the Company only. The
Compensation Committee has granted, subject to shareholder approval, options to
the officers of the Company including those options listed under Option Grants
in Last Fiscal Year on page 13.
The 1999 Plan authorizes the Board of Directors to grant Options at an
exercise price determined by the Compensation Committee, but not less than one
hundred percent (100%) of the fair market value of the common stock on the date
on which the Option is granted. The exercise price is generally payable in cash
or, in certain circumstances, by the surrender, at the fair market value on the
date on which the Option is exercised, of shares of common stock or by
requesting that the Company withhold a number of shares with a fair market value
equal to the aggregate option exercise price. All Options must expire no later
than ten years after the date of grant. Generally, the right of any participant
to exercise an Option may not be transferred in any way other than by will or
the laws of descent and distribution.
The Company may loan to an Option holder funds sufficient to exercise all
or a portion of any Options, such loans to be made at the absolute discretion of
the Compensation Committee. Each such loan shall be evidenced by a promissory
note of the Option holder bearing interest equal to the then prevailing yield to
maturity on U.S. Treasury obligations having a maturity that most closely
matches the maturity date of the note. The note shall be unsecured with full
recourse against the Option holder. The note shall be repaid over a period of
time not to exceed five years, with ten percent (10%) minimum annual installment
payments of principal. The remaining unpaid principal shall be payable at the
end of the fifth year; provided that the Company may demand payment, in addition
to such installments, as may be required for it to remain in compliance with any
applicable state or federal regulation.
FEDERAL INCOME TAX TREATMENT
The following is a brief description of the federal income tax treatment
that will generally apply to options issued under the 1999 Plan, based on
federal income tax laws in effect on the date hereof. Participants in the 1999
Plan should not rely on this discussion for individual tax advice, as each
participant's situation and the tax consequences will vary depending upon the
specific facts and circumstances involved. Each participant is advised to
consult with his or her own tax advisor for particular federal, as well as state
and local, income and any other tax advice.
Incentive Options. As discussed above, options granted under the 1999 Plan
are intended to constitute incentive stock options ("Incentive Options") under
federal tax law to the extent possible. Generally, a participant is not taxed on
the grant or the exercise of an Incentive Option. However, a participant's
"alternative minimum taxable income" for the year of exercise will be increased
by the excess of the fair market value of the shares acquired upon the exercise
of an Incentive Option ("ISO Shares") over the exercise price, and thus exercise
of an Incentive Option may subject a participant to the "alternative minimum
tax" in the year of exercise.
If a participant sells the ISO Shares at any time within (a) one year after
the date of transfer of ISO Shares to such participant pursuant to the exercise
of the Incentive Option or (b) two years after the date of grant of the
Incentive Option (a "Disqualifying Disposition"), then, at the time of such
Disqualifying Disposition, the participant will (1) recognize capital gain equal
to the excess, if any, of the sales price over the fair market value of the ISO
Shares on the date of exercise, (2) recognize ordinary income equal to the
excess, if any, of the lesser of the sales price or the fair market value of the
ISO Shares on the date of exercise, over the exercise price of such Incentive
Option, and (3) recognize capital loss equal to the excess, if any, of
9
<PAGE> 13
the exercise price of such Incentive Option over the sales price of the ISO
Shares. If a participant sells the ISO Shares at any time after the one-year and
two-year periods described above, then the participant will recognize long-term
capital gain or loss equal to the difference between the sales price and the
exercise price of such Incentive Option, and the Company will not be entitled to
any deduction.
Nonqualified Options. The grant of an option that does not qualify for
treatment as an Incentive Option (a "Nonqualified Option") is generally not a
taxable event. Upon exercise of a Nonqualified Option, a participant will
generally recognize ordinary income equal to the excess of the fair market value
of the stock acquired upon exercise (determined as of the date of the exercise)
over the exercise price of the option. See "SPECIAL RULES FOR AWARDS GRANTED TO
INSIDERS," below.
Special Rules for Awards Granted to Insiders. If a participant is a
director, officer or stockholder of the Company subject to Section 16 of the
Securities Exchange Act of 1934, as amended (an "Insider"), the timing of the
recognition of any ordinary income and the date used to determine the fair
market value of the underlying stock may be deferred. Insiders should consult
their tax advisors to determine the tax consequences to them of exercising
options granted to them pursuant to the 1999 Plan.
Effect of Accelerated Vesting. The 1999 Plan provides for accelerated
vesting of the Fixed Option Grants and Variable Option Grants in connection with
a Change of Control, as defined in the 1999 Plan. Accelerated vesting of these
grants could, depending on the circumstances surrounding the Change of Control,
result in significant amounts being treated as "excess parachute payments" under
the "golden parachute" provisions of the Internal Revenue Code of 1986, as
amended. Pursuant to these provisions, a participant will be subject to a 20%
excise tax on any "excess parachute payments" and the Company will be denied any
deduction with respect to such payments.
The Company has entered into Change of Control Agreements, discussed more
fully below, which require the Company to reimburse, or "gross up," Covered
Employees (as defined in the Change of Control Agreements) for the 20% excise
tax, as well as any interest and penalties thereon, and any income taxes or
excise taxes imposed on the gross-up payments. Reimbursements relating to this
excise tax, therefore, could be substantial, since the reimbursements would be
subject to income taxes and would be treated as additional excess parachute
payments subject to the 20% excise tax.
Miscellaneous Tax Issues. Generally, the Company will be required to make
arrangements for withholding applicable taxes with respect to any ordinary
income recognized by a participant in connection with awards made under the 1999
Plan.
A participant's tax basis in shares of Common Stock acquired pursuant to
the 1999 Plan generally will equal the exercise price of the option plus any
amount recognized as ordinary income with respect to the shares. Other than
ordinary income recognized with respect to shares and included in such
participant's tax basis, any subsequent gain or loss upon the disposition of
such shares generally will be capital gain or loss (long-term or short-term,
depending on the participant's holding period).
Special rules will apply in cases where a participant pays the exercise or
purchase price of an option or applicable withholding tax obligations under the
1999 Plan by delivering previously owned shares of Common Stock or by reducing
the amount of shares otherwise issuable pursuant to the option. The surrender or
withholding of such shares will in certain circumstances result in the
recognition of income with respect to the shares or a carryover basis in the
shares acquired, and may constitute a Disqualifying Disposition with respect to
ISO Shares.
The Company generally obtains a deduction equal to the ordinary income
recognized by a participant. However, the Company's deduction for such amounts
may be limited to $1,000,000 (per person) annually. Nevertheless, the 1999 Plan
has been structured with the intent to qualify deductions arising from the 1999
Plan as "performance-based compensation" not subject to this $1,000,000 limit.
The Company does not obtain a deduction for any amount treated as an "excess
parachute payment" as discussed above.
The foregoing description of the 1999 Plan is qualified in its entirety by
reference to the definitive terms of the 1999 Plan in the form attached as
Exhibit A to this Proxy Statement.
10
<PAGE> 14
OFFICERS AND KEY EMPLOYEES
The executive officers and key employees of the Company are:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Glenn L. Carpenter 57 Chairman of the Board, President, Chief Executive
Officer and Director
Donald G. Herrman 43 Executive Vice President, Chief Financial Officer
and Secretary
J.R. Wetzel 42 Executive Vice President of Operations and Chief
Operating Officer
Lonnie P. Nadal 44 Senior Vice President of Acquisitions
Robert A. Dewey 40 Senior Vice President of Industrial Operations
Kimberly G. Solbakk 44 Senior vice President of Apartment Operations
Angela M. Wixted 45 Senior Vice President and Treasurer
</TABLE>
The following is a biographical summary of experience for the executive
officers, and key employees of the Company, other than Mr. Carpenter, whose
information appears on page 5.
DONALD G. HERRMAN has been Executive Vice President of the Company since
May 1995, Senior Vice President, Secretary, and Chief Financial Officer of the
Company since its formation in 1993, and served as Treasurer of the Company from
February 1994 to October 1994. Mr. Herrman served as Vice President -- Finance
and Secretary of Realty from January 1992 until February 1994, and as Realty's
Treasurer from 1989 until February 1994. From 1985 until 1990, Mr. Herrman
served as Controller of Realty. Mr. Herrman is a certified public accountant in
California.
J.R. WETZEL has been Chief Operating Officer of the Company since December
1999, and Executive Vice President of Operations since he joined the Company in
May 1998. Mr. Wetzel is currently President of the Southern California Chapter
of the National Association of Industrial and Office Properties. Prior to that
time, Mr. Wetzel had served as Vice President -- Development/Western Region for
Industrial Developments International since April 1996, and had served in
various executive positions for O'Donnell Property Services since January 1994.
LONNIE P. NADAL has been Senior Vice President of Acquisitions since 1996
and Vice President of Acquisitions since the Company's formation in 1993. Mr.
Nadal served as Vice President -- Acquisitions of Realty from January 1992 to
February 1994, and as a Director of Operations from August 1991 until February
1994. From 1991 until 1993, Mr. Nadal was a partner of Lincoln Property Company,
a development and property management company.
ROBERT A. DEWEY has served as Senior Vice President of Industrial
Operations since May 1998, Vice President of Industrial Operations since January
1995, and Vice President of Operations of the Company since its formation in
1993. Mr. Dewey served as Director of Asset Management for Realty from 1992
until February 1994. From 1991 to 1992, he was oversight manager of the Newport
Beach office of the Resolution Trust Corporation. From 1988 to 1990, Mr. Dewey
was a Commercial Manager for a development company.
KIMBERLY G. SOLBAKK has served as Senior Vice President of Apartment
Operations since December 1998, and Vice President of Apartment Operations since
January 1996. Mr. Solbakk served as Director of Apartment Operations and
Regional Manager for the Pacific Northwest apartment communities owned by the
Company from August 1993 to December 1995. From 1991 to August of 1993, Ms.
Solbakk served as a district manager for Lexford Properties in Irving, Texas.
ANGELA M. WIXTED has served as Senior Vice President and Treasurer since
December 1998, and Vice President and Treasurer since March 1997. From October
1994 to March 1997, she served as Treasurer and Controller. Ms. Wixted served as
a financial consultant for various clients from 1993 to 1994. From 1992 to 1993,
Ms. Wixted was Controller for O'Donnell Property Services. From 1986 to 1992,
Ms. Wixted served as CFO/Controller of SDC Investment, Inc. Ms. Wixted is a
certified public accountant in California.
11
<PAGE> 15
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning total compensation
earned or paid to its Chief Executive Officer and to each of the four other most
highly compensated officers and key employees of the Company whose cash
compensation exceeded $100,000 on an annualized basis for services rendered to
the Company during each of the last three fiscal years.
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL ---------------------------
COMPENSATION(1) AWARDS/
FISCAL ------------------- OPTIONS RESTRICTED ALL OTHER
NAME PRINCIPAL POSITIONS YEAR SALARY BONUS GRANTED(2) STOCK GRANTED COMPENSATION
---- ------------------- ------ -------- -------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
GLENN L. CARPENTER Chairman of the 1999 $350,000 $252,494 265,000 -- $15,530
Board, Chief 1998 330,000 203,000 40,000 $70,000 7,500
Executive Officer 1997 330,000 95,000 100,000 -- 2,025
and President
DONALD G. HERRMAN Executive Vice 1999 220,000 139,000 145,000 -- 9,900
President/Chief 1998 200,000 106,800 25,000 115,000 6,057
Financial Officer 1997 175,000 55,000 70,000 -- 2,025
and Secretary
J.R. WETZEL(4) Executive Vice 1999 225,000 141,250 145,000 -- 5,063
President of 1998 200,000 91,000 75,000 301,000 --
Operations 1997 -- -- -- -- --
LONNIE P. NADAL Senior Vice 1999 200,000 95,000 80,000 -- 9,000
President of 1998 188,800 97,320 15,000 15,000 7,500
Acquisitions 1997 160,000 49,000 65,000 -- 1,825
ROBERT A. DEWEY Senior Vice 1999 150,000 90,000 80,000 -- 6,750
President of 1998 150,000 74,300 15,000 15,000 6,750
Industrial 1997 125,000 22,500 45,000 42,250 1,544
Operations
</TABLE>
- ---------------
(1) The Company provides automobiles and club memberships to certain key
employees, including certain officers listed above, the value of which is
not included in the table above and which in any case did not exceed the
lesser of $50,000 or 10% of the annual salary and bonus of any individual
for the applicable year.
(2) The amount shown represents the number of shares purchasable upon exercise
of options granted under the Company's share option plans. The options shown
as granted in 1999 were granted effective as of three dates: (a) February
25, 1999 with an exercise price of $20.125 with vesting occurring in equal
installments on each of the first five anniversaries of the date of grant;
(b) March 11, 1999 with an exercise price of $18.938 and vesting in equal
installments on each of the first five anniversaries of the date of grant;
(c) September 9, 1999 with an exercise price of $20.75. The September 9,
1999 options consist of fixed and variable stock options. The fixed options
vest in three equal installments at the end of years 1999, 2000 and 2001.
The variable options reflect the "Maximum" number that may vest if the
highest level of performance based vesting criteria are achieved. See "Item
2 -- Approval of 1999 Long Term Stock Compensation Plan." The options shown
as granted in 1998 were granted effective as of the three dates: (a) May 11,
1998 with an exercise price of $22.563 with vesting occurring in equal
installments on each of the first five anniversaries of the date of grant;
(b) December 2, 1998 with an exercise price of $19.50 and vesting in equal
installments on each of the first five anniversaries of the date of grant;
and (c) December 2, 1998 with an exercise price of $19.938 and vesting in
equal installments on each of the first five anniversaries of the date of
the grant. The options granted in 1997 were granted effective as of two
dates: (a) March 5, 1997 with an exercise price of $23.125 with vesting
occurring in equal installments on each of the first five anniversaries of
the date of the grant and (b) December 1, 1997 with the exercise price of
$22.625 and vesting in equal installments on each of the first five
anniversaries of the date of the grant.
(3) The amounts shown are those expensed for financial reporting purposes under
the Company's Thrift Plan. See "Thrift Plan" below for a description of such
Plan.
(4) J.R. Wetzel commenced employment with the Company on May 10, 1998.
12
<PAGE> 16
SHARE OPTION PLANS
The Company adopted the 1993 Share Option Plan (the "1993 Plan") to provide
incentives to attract and retain officers and employees. In 1998, the Company
amended the 1993 Plan to increase the number of shares for which options may be
granted from 1,050,000 shares to 2,300,000 shares. The 1993 Plan provides for
grants of options to purchase a specified number of shares of common stock,
awards of restricted common stock, and grants of stock appreciation rights.
Under the 1993 Plan the total number of common shares available to be granted is
2,300,000, 300,000 shares of which have been reserved for awards to non-employee
directors. Participants in the 1993 Plan who are officers or any other employees
of the Company are selected by the Compensation Committee. Directors of the
Company are also eligible to participate, but in the case of directors who are
not also employees, only pursuant to automatic grants under a specified formula
set forth in the 1993 Plan. No employee may receive a grant of options for more
than 100,000 shares of common Stock in any calendar year.
In addition, subject to the approval of the shareholders at this annual
meeting, the Board of Directors approved a long-term stock compensation plan
("1999 Plan"). Under this plan, options to acquire 845,000 shares at an exercise
price of $20.75 per share were granted to officers of the Company. Of the
options, 210,000 are fixed options, which vest in three equal installments at
the end of years 1999, 2000 and 2001. The remaining 635,000 options are variable
and reflect the "Maximum" number that may vest if the highest level of
performance-based vesting criteria are achieved. Any vesting of such options
will only occur after December 31, 2001 (subject to earlier vesting in the event
of a change in control of the Company or the death or disability of a
participant). See "Item 2 -- Approval of 1999 Long Term Stock Compensation
Plan."
Stock Options. The following table sets forth (i) all individual grants of
stock options made by the Company during 1999 to each of the named officers and
key employees (all of which grants were made under the 1993 Plan or the 1999
Plan), (ii) the ratio that the number of options granted to each individual
bears to the total number of options granted to all employees of the Company,
(iii) the exercise price and expiration date of these options, and (iv) the
estimated potential realizable values assuming either a 5% or 10% annualized
rate of appreciation from the relevant date of grant.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED ANNUAL
OPTIONS RATES OF STOCK PRICE
NUMBER OF GRANTED TO APPRECIATION FOR OPTION
COMMON SHARES EMPLOYEES TERM(1)
UNDERLYING IN FISCAL EXERCISE PRICE -----------------------
NAME OPTIONS GRANTED YEAR ($/SH) EXPIRATION DATE 5% 10%
---- --------------- ----------- -------------- --------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Glenn L. Carpenter......... $ 15,000 29% $18,935 03/09/09 $ 179,000 $ 453,000
100,000(2) 20.750 09/08/09 1,305,000 3,307,000
150,000(3) 20.750 09/08/09 1,957,000 4,961,000
J.R. Wetzel................ 10,000 16% 20.125 02/24/09 127,000 321,000
35,000(2) 20.750 09/08/09 457,000 1,157,000
100,000(3) 20.750 09/08/09 1,305,000 3,307,000
Donald G. Herrman.......... 10,000 16% 20.125 02/24/09 127,000 321,000
35,000(2) 20.750 09/08/09 457,000 1,157,000
100,000(3) 20.750 09/08/09 1,305,000 3,307,000
Lonnie P. Nadal............ 10,000 16% 20.125 02/24/09 127,000 321,000
10,000(2) 20.750 09/08/09 130,000 331,000
60,000(3) 20.750 09/08/09 783,000 1,984,000
Robert A. Dewey............ 10,000 9% 20.125 02/24/09 127,000 321,000
10,000(2) 20.750 09/08/09 130,000 331,000
60,000(3) 20.750 09/08/09 783,000 1,984,000
</TABLE>
- ---------------
(1) The amounts shown in these columns are based upon assumed rates of
appreciation over the option term, which are prescribed by applicable SEC
regulations. Actual gains, if any, on stock option exercises are
13
<PAGE> 17
dependent on the future performance of the Company's common stock, overall
market conditions and the option holder's continued employment through the
applicable vesting periods.
(2) Represents fixed options, which vest in three equal installments at the end
of years 1999, 2000 and 2001, subject to shareholder approval.
(3) Represents variable options, which reflect the "Maximum" number that may
vest if the highest level of performance-based vesting criteria are
achieved, subject to shareholder approval. See "Item 2 -- Approval of 1999
Long Term Stock Compensation Plan."
AGGREGATED OPTIONS EXERCISES IN FISCAL 1999 AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF COMMON SHARES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT DECEMBER 31, 1999 AT DECEMBER 31, 1999
------------------------------ ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- --------------- ----------- -------------
<S> <C> <C> <C> <C>
Glenn Carpenter..................... $135,133 $197,867 $212,680 $34,380
Donald G. Herrman................... 130,167 162,333 145,000 28,750
J. R. Wetzel........................ 71,667 148,333 20,000 20,000
Lonnie P. Nadal..................... 51,200 50,800 93,250 8,050
Robert A. Dewey..................... 23,400 33,600 28,750 2,450
</TABLE>
- ---------------
(1) Market value of underlying securities at December 31, 1999 minus the
exercise price of the "in-the-money" option.
DEFERRED COMPENSATION PLAN
The Company has established a deferred compensation plan (the "Deferred
Compensation Plan") pursuant to which certain highly-compensated or management
employees of the Company may elect to defer payment of a percentage of the
compensation payable to them by the Company. Pursuant to the Deferred
Compensation Plan, the Company may make certain matching contributions equal to
the amounts of compensation elected to be deferred under the Deferred
Compensation Plan, and may also make other discretionary contributions. All
amounts deferred by employees and all contributions made by the Company under
the Deferred Compensation Plan are held in an investment fund. The Deferred
Compensation Plan is intended to be a nonqualified plan under the Code.
Mr. Carpenter received credit under the Deferred Compensation Plan for
years of service with Realty. The Company assumed the obligations of Realty and
Mr. Carpenter is fully vested. Annualized examples of the benefits, commencing
at age 65, are set forth below. The examples assume retirement as of December
31, 1999 after assumed years of service.
14
<PAGE> 18
DEFERRED COMPENSATION PLAN
ESTIMATED ANNUAL BENEFITS PAYABLE AT AGE 65
YEARS OF SERVICE
<TABLE>
<CAPTION>
SALARY 5 10 15 20 25 30
- -------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
$100,000 $21,225 $17,450 $13,674 $ 9,899 $ 6,124 $ 7,348
125,000 26,438 21,626 16,814 12,001 7,189 8,627
150,000 31,651 25,802 19,953 14,104 8,255 9,906
175,000 37,486 31,223 24,959 18,695 12,431 14,917
200,000 43,736 37,473 31,209 24,945 18,681 22,417
225,000 49,986 43,723 37,459 31,195 24,931 29,917
250,000 56,236 49,973 43,709 37,445 31,181 37,417
275,000 62,486 56,223 49,959 43,695 37,431 44,917
300,000 68,736 62,473 56,209 49,945 43,681 52,417
325,000 74,986 68,723 62,459 56,195 49,931 59,917
350,000 81,236 74,973 68,709 62,445 56,181 67,417
</TABLE>
RETIREMENT INCOME PLAN
The Company has established a defined benefit retirement income plan (the
"Retirement Income Plan") that is noncontributory. Benefits are determined
regardless of position under a formula applied uniformly to all employees of the
Company (except as otherwise required under the Code's "top-heavy" rules
relating to "key" employees), and depend upon the employee's length of service,
and the employee's highest consecutive five year average earnings up to $160,000
less certain social security benefits.
Employees are eligible to participate in the plan after attaining age 21
and completing one year of service. The plan currently provides for 100% vesting
of an employee's interest after five years of service, except to the extent
faster vesting is required under the Code's "top-heavy" rules.
The following table illustrates the estimated annual retirement benefit
payable under their Retirement Income Plan at age 65, after reduction for
certain social security benefits, for participants with compensation and
credited years of service shown. The benefits shown assume retirement at age 65
as of December 31, 1999, subject to maximum annual benefit of $130,000 shown
below. This maximum annual amount is actuarially increased as participants who
retire after age 65.
YEARS OF SERVICE
<TABLE>
<CAPTION>
SALARY 5 10 15 20 25 30
-------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
$100,000 $ 9,557 $19,115 $28,637 $38,231 $47,788 $57,346
125,000 12,182 24,365 36,548 48,731 60,913 73,096
150,000 14,807 29,615 44,423 59,231 74,038 88,846
175,000** 15,857 31,715 47,573 63,431 79,288 95,146
200,000 15,857 31,715 47,573 63,431 79,288 95,146
</TABLE>
- ---------------
** As the annual compensation increases, the estimated annual retirement benefit
payable will remain constant due to the $160,000 compensation limited invoked
by the IRS.
15
<PAGE> 19
Participants will receive credit under the Retirement Income Plan for
employment by Realty. The officers and their salaries covered under these plans
and their years of service for the purposes of these plans are as follows:
<TABLE>
<CAPTION>
DEFERRED
ANNUAL YEARS OF RETIREMENT COMPENSATION
NAME SALARY SERVICE(1) INCOME PLAN AGREEMENT
---- -------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
Mr. Carpenter................................ $350,000 28 Yes Yes
Mr. Herrman.................................. $220,000 15 Yes No
Mr. Wetzel................................... $225,000 1 Yes No
</TABLE>
- ---------------
(1) Includes years of service at Realty.
THRIFT PLAN
The Company has established a thrift plan under which employees may elect
to contribute up to 21% of their annual compensation on a combination
before-and-after tax basis, excluding bonuses. Contributions by the employee are
matched by the Company at 75% rate with total matching contributions not
exceeding a maximum of 4 1/2% of the contributing employee's annual compensation
up to a maximum of 6% of compensation. Matching contributions and employee
contributions are invested in a fixed income fund, various growth funds, or a
combination thereof, according to the employee's choice. The Plan provides for
20% vesting of contributions by the Company for each full year of service,
increasing to 100% vesting of contributions by the Company for each full year of
service, increasing to 100% vesting after five years of service. (See
"Compensation" above for the amounts contributed by the Company during 1999 for
the benefit of its officers.)
EMPLOYMENT AGREEMENT
Mr. Carpenter has an employment agreement with the Company that has an
initial term of five years, which commenced September 1, 1998, and is subject to
an automatic one-year extension at the end of each year during the initial term
of the agreement unless terminated by the Company or Mr. Carpenter. The
agreement provides for annual base compensation, subject to any increases in
base compensation recommended by the Compensation Committee and approved by the
Board of Directors. Mr. Carpenter and the other officers of the Company will
also receive incentive compensation in accordance with criteria to be
established by the Compensation Committee and approved by the Board of
Directors, which the Company expects will be determined primarily on the basis
of Funds From Operations growth per common share and in some cases on the basis
of division or other performance goals.
Mr. Carpenter's employment agreement provides for certain severance
payments in the event of death or disability or upon termination by the Company
without good cause or termination by Mr. Carpenter with good reason. Mr.
Carpenter's employment agreement also provides for certain payments and other
benefits in the event he is terminated following a "Change of Control," which is
defined in the employment agreement to include (i) certain acquisitions by
persons not affiliated with the Company of 20% or more of the Company's
outstanding voting securities; (ii) the replacement of a least a majority of the
individuals who were members of the Company's Board of Directors on the
effective date of Mr. Carpenter's employment agreement (the "Incumbent Board");
(iii) a merger, consolidation or reorganization involving the Company, unless:
(x) the outstanding voting securities of the corporation resulting from such
transaction (the "Surviving Corporation") in substantially the same proportion
to their ownership to the Company's voting securities prior to the transaction,
(y) the individuals who comprised the Incumbent Board immediately prior to the
execution of the agreement relating to such a transaction constitute at least a
majority of the board of the Surviving Corporation and (z) other than certain
persons and plans affiliated with the Company and persons who beneficially owned
15% or more of the Company's outstanding voting securities immediately prior to
such transaction, no person owns 15% or more of the Surviving Corporation; (iv)
a complete liquidation or dissolution of the voting securities of the Surviving
Corporation; and (v) a sale of substantial all of the Company's assets to any
person other than a subsidiary of the Company. If Mr. Carpenter's employment
were
16
<PAGE> 20
to be terminated for any reason within 36 months following a Change of Control,
Mr. Carpenter would be entitled to certain benefits, including the immediate
vesting of all stock options and other awards issued by the Company to Mr.
Carpenter and all unvested employer contributions in Mr. Carpenter's 401(k)
account, as well as the payment of cash of a severance payment equal to the
three times the sum of (I) Mr. Carpenter's base salary then in effect and (ii)
the highest annual bonus received by Mr. Carpenter during the five fiscal years
ended prior to the Change of Control.
CHANGE OF CONTROL AGREEMENTS
The Company has entered into Change of Control Agreements (the "Change of
Control Agreements") with the following executive officers: Mr. Herrman, Mr.
Wetzel, Mr. Nadal, Mr. Dewey, Ms. Solbakk and Ms. Wixted (each, a "Covered
Executive" and collectively, the "Covered Executives"). The following summary of
the material terms of the Change of Control Agreement is qualified in its
entirety by reference to the full text of the Form of Change of Control
Agreement, a copy of which has been filed as an exhibit to the Company's Annual
Report on Form 10-K filed with the Commission on about March 30, 1998.
The Change of Control Agreements were effective as of March 16, 1998 and
expire on December 31, 2000, subject to automatic one-year extensions unless
terminated by either the Company or a Covered Executive; provided, however, that
the Change of Control Agreements may not expire prior to the expiration of 24
months after the occurrence of a "Change of Control." A Change of Control, for
purposes of the Change of Control Agreements, includes (i) certain acquisitions
by persons not affiliated with the Company of 20% (as distinguished from 35%
under the 1999 Plan) or more of the Company's outstanding voting securities;
(ii) such time as directors whose election or appointment to the Board was not
approved by a 2/3 vote of the incumbent directors or who joined the Board under
the threat of a proxy contest constitute 50% or more of the total number of
directors; (iii) a merger, consolidation or reorganization involving the
Company, unless: (x) the Company's stockholders as constituted immediately prior
to such transaction own at least 50% of the outstanding voting securities of the
corporation resulting from such transaction (the "Surviving Corporation") in
substantially the same proportion to their ownership of the Company's voting
securities prior to the transaction, (y) the individuals who comprised the
Incumbent Board immediately prior to the execution of the agreement relating to
such a transaction constitute at least a majority of the board of the Surviving
Corporation and (z) other than certain persons and plans affiliated with the
Company and persons who beneficially owned 15% or more of the Company's
outstanding voting securities immediately prior to such transaction, no person
owns 15% or more of the outstanding voting securities of the Surviving
Corporation; (iv) a complete liquidation or dissolution of the Company; and (v)
a sale of substantially all of the Company's assets to any person other than a
subsidiary of the Company.
The Change of Control Agreements provide for the payment of certain
benefits to any Covered Executive whose employment with the Company is
terminated within 24 months following a Change of Control. The Change of Control
Agreements provide that, if a covered Executive's employment with the Company is
terminated within such period for any reason other than for "Cause,"
"Disability," death or by the Covered Executive other than for "Good Reason"
(all terms as defined in the Change of Control Agreement), the Covered Executive
shall be entitled to certain benefits, including the immediate vesting of all
stock options issued under the Company's Share Plan and the payment of a
severance payment equal to twice the sum of (i) the Covered Executive's annual
base salary and (ii) the Covered Executive's annual bonus for the fiscal year
immediately preceding the fiscal year in which the Change of Control occurred.
The Change of Control Agreements also contain an excise tax gross-up
provision that requires the Company to reimburse each Covered Employee for any
excise tax imposed under Section 4999 of the Internal Revenue Code ("Excise
Tax"), any interest and penalties thereon, and any income taxes or excise taxes
imposed on the gross-up payments (the "Excise Tax"). This provision is intended
to put the Covered Executive in the same position as if no excise tax had been
imposed. The gross-up provision applies to any payments to the Covered Employee
with respect to the Company, whether or not such payments are made pursuant to a
Change of Control Agreement.
17
<PAGE> 21
The Excise Tax is equal to 20% of any "excess parachute payment". A payment
to a Covered Employee is an excess parachute payment to the extent that total
"parachute payments" to the Covered Employee exceed his or her "base amount",
except that the Excise Tax is not imposed unless the total parachute payments to
the Covered Employee exceed three times the Covered Employee's base amount.
"Parachute payments" are compensatory payments contingent on a change in
ownership or effective control of the Company or a substantial portion of its
assets, and the "base amount" for any Covered Employee is equal to his or her
average annual compensation for the five-year period preceding the year of the
change in control (or such shorter period as the individual has been employed by
the Company).
Severance payments and certain other payments under the Change of Control
Agreements would constitute parachute payments for purposes of the Excise Tax.
In addition, acceleration of vesting under the Company's option, restricted
stock and other plans, whether the acceleration occurs pursuant to such plans or
pursuant to the Change of Control Agreements, would be treated as parachute
payments to the extent of the value of the acceleration.
REPORT OF THE COMPENSATION COMMITTEE
The following Report of the Compensation Committee and the Executive
Performance Subcommittee and the performance graphs included elsewhere in this
proxy statement do not constitute soliciting material and should not be deemed
filed or incorporated by reference into any other Company filing under the
Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent the Company specifically incorporates this Report or the performance
graphs by reference therein.
The Compensation Committee of the Board of Directors has furnished the
following report on executive compensation for 1999.
GENERAL
The Compensation Committee of the Board of Directors (the "Committee")
administers the Company's executive compensation program. The Committee is
composed entirely of outside directors. The Compensation Committee was appointed
following the closing of the Company's Initial Public Offering on February 18,
1994 and the appointment of the Company's independent directors. Accordingly,
the Compensation Committee did not participate in the determination of
compensation for the Company's officers and managerial employees at the outset,
or in the negotiation of the employment contracts with any of the Company's
officers or in the award of stock options to any such persons in connection with
the Company's Initial Public Offering.
The objective the Company's executive compensation program is to develop
and maintain reward programs which contribute to the enhancement for shareholder
value, while attracting, motivating and retaining key personnel who are
essential to the long-term success of the Company. As discussed in detail below,
the Company's executive compensation program consists of both fixed (base
salary) and variable (incentive) compensation elements. Variable compensation
consists of annual cash incentive, restricted share grants, and stock option
grants, and may be in the form of short term and long-term arrangements. These
elements are designed to operate on an integrated basis and together comprise
total compensation value.
The Compensation Committee believes that competitive base salaries are
necessary to retain and attract talented officers and managerial employees.
Subject to minimal levels specified in employment contracts, the Compensation
Committee intends that the base salaries paid to officers and managerial
employees of the Company will continue to be comparable to the base salaries
received by employees occupying positions of similar responsibility in
comparable companies in the same industry. To ensure comparability, the
Compensation Committee has in the past retained, and expects in the future to
retain, the services of one or more independent compensation consultants.
The Committee reviewed executive compensation in light of the Company's
performance during 1999 and compensation data relating to companies that were
considered comparable. In this regard, the Committee considered a variety of
factors, including the achievement of operational and financial goals during
1999.
18
<PAGE> 22
It is the Compensation Committee's belief that none of the Company's
officers or key employees will be affected by the provisions of Section 162(m)
of the Internal Revenue Code (the "Code"), which limits the deductibility of
certain executive compensation during 1999. Therefore, the Committee has not
adopted a policy as to compliance with the requirements of Section 162(m).
However, the Variable Option Grants under the 1999 Plan have been designed to
comply with the requirements of Section 162(m).
BASE SALARY
Base salary levels for the Company's officers are determined through annual
employment evaluations, submitted to the Committee by the Chief Executive
Officer (CEO), along with comparisons of companies in the real estate industry.
Salary information about comparable companies is surveyed by reference to public
disclosures made by companies in the real estate industry. In addition, the
Committee from time to time obtains information about comparable salary levels
from an outside compensation consultant. The base salary level for the CEO is
determined by the Board of Directors based upon an annual evaluation of the
performance of the CEO and recommendation from the Compensation Committee.
ANNUAL CASH INCENTIVES
The annual cash incentive is designed to provide a short-term (one-year)
incentive to officers and key employees based on a percentage of the individuals
base salary. Incentive awards are based on the achievement of predetermined
corporate and individual performance goals. For the CEO, the relative weights of
the corporate and individual performance measures are 100% to the Company's
goals. For the Executive Vice Presidents, the relative weights are 90% of the
Company's goals and 10% to the individual goals; for the Senior Vice
President -- Acquisitions, the relative weights are 80% Company's goals and 20%
to the individual's goals; for the Senior Vice President -- Operations the
relative weights are 70% Company's goals and 30% to the individual's goals.
Specific individual goals for each individual are established at the beginning
of the year (by the Committee in the case of the CEO and by the CEO in all other
cases) and are tied to the functional responsibilities of each individual.
Individual goals may include objective and subjective factors, such as improving
the performance of assets managed by the individual, successful acquisitions or
sales, development of leadership skills and personal training and education. The
Company's goals are based on operating performance, as measured by a
predetermined increase in Funds From Operations. Other than the allocation
between individual and Company goals, no specific weights are assigned to the
individual goals. In addition, no bonus awards are made if a minimum level of
Funds From Operations is not met.
In addition to the annual cash incentive described above, a discretionary
incentive award will be awarded if the Company exceeds its predetermined
corporate performance goal. The total incentive pool available to the officers
and key employees will be determined based on a variable percentage of the total
annual cash incentive available to the officers and key employees. The
percentage will be calculated based on the amount the company exceeds the
predetermined corporate performance goal. The discretionary incentive award may
be awarded in cash or restricted stock or a combination of cash and restricted
stock. The discretionary incentive award is awarded at the sole and absolute
discretion of the Compensation Committee as to all officers and key employees
other than the CEO and the Board of Directors as to the CEO.
In 1999, the Company exceeded its performance objectives and the individual
officers' performance targets. Cash bonuses of $969,000 were awarded to the
officers, including the CEO for 1999.
STOCK OPTIONS AND RESTRICTED SHARES
Stock options are designed to provide long-term (up to ten year) incentives
and rewards tied to the price of the Company's common shares. Given the
fluctuations of the stock market, stock price performance and financial
performance are not always consistent. The Committee believes that stock
options, which provide value to participants only when the Company's
shareholders benefit from the stock price appreciation, are an important
component of the Company's annual executive compensation program. The number of
options or shares currently held by an officer is not a factor in determining
individual grants, and the Committee has not
19
<PAGE> 23
established any target level of ownership of company stock by the Company's
officers. However, accumulation and retention of shares of Company stock by
officers is encouraged.
In 1999, the Committee and the Board of Directors approved, subject to
shareholder approval, the 1999 Long Term Stock Compensation Plan (the "1999
Plan"). The plan is intended to provide incentives for the Company's officers to
improve the long-term performance of the Company.
The 1999 Plan, which is more fully described in Item 2 of the Proxy, covers
the period from July 1, 1999 to December 31, 2001. The 1999 Plan contains fixed
option grants, which vest in three equal installments at the end of years 1999,
2000 and 2001. The remaining option grants (75% of the total number of options
under the 1999 Plan) are variable option grants, which will vest at the end of
the plan period. The variable option grants will only vest if the Company
achieves certain minimum levels of performance based on funds from operation
growth and average total shareholder return.
Stock options under the 1993 Plan may be awarded annually. Stock options
under the 1999 Plan were awarded in 1999 and no further options are eligible to
be granted under the 1999 Plan. The Company does not adhere to firmly
established formulas for the issuance of options. During fiscal 1999, each
officer received stock option grants. The summary Compensation Table shows the
options granted to the named officers for the past three years, including the
CEO. In determining the size of the grants to the CEO and the other named
officers, the Committee assessed relative levels of responsibility and the
long-term incentive practices of other comparable companies.
In accordance with the provisions of the 1993 Plan and the 1999 Plan, the
exercise price of all options granted was equal to the market value of the
underlying shares on the date of grant. Accordingly, the value of these grants
to the officers was dependent solely upon the future growth and share value of
the Company's common shares.
The foregoing report is given by the members of the Compensation Committee,
namely;
Peter Eppinga
John F. Kooken
Robert E. Morgan
Keith W. Renken
20
<PAGE> 24
COMPARATIVE STOCK PERFORMANCE
The line graph below compares the cumulative total share holder return on
Common Stock of the Company since December 31, 1994 with the cumulative total
return on the S&P 500 Index and the NAREIT All Equity REIT Total Return Index
over the same period. This comparison assumes that the value of the investment
in the Company's common shares and on each index was $100 on December 31, 1994
and that all dividends were reinvested.
[Performance Graph]
<TABLE>
<CAPTION>
NAREIT ALL EQUITY REIT
PACIFIC GULF PROPERTIES INC. S&P 500 INDEX
---------------------------- ------- ----------------------
<S> <C> <C> <C>
12/31/94 100.00 100.00 100.00
12/31/95 122.44 137.58 115.27
12/31/96 160.31 169.03 155.92
12/31/97 209.89 225.44 187.51
12/31/98 192.17 289.79 154.69
12/31/99 211.40 350.78 147.54
</TABLE>
ANNUAL REPORT
The Annual Report of the Company for the year ended December 31, 1999,
including financial statements audited by Ernst & Young, LLP, independent
auditors, and their report thereon, is being mailed to all shareholders with
this Proxy Statement. The Annual Report dos not constitute a part of the proxy
solicitation material. In addition, a copy of the Company's Annual Report on
Form 10-K for the year ended December 31, 1999, as filed with the SEC, will be
sent to any shareholder without charge upon written request to the Company, 4220
Von Karman, Second Floor, Newport Beach, California 92660, Attn: Secretary.
ADVANCE NOTICE PROCEDURES
Under the Company's Bylaws, no business may be conducted at the annual
meeting unless brought before the meeting by or at the direction of a majority
of the Board or by a stockholder entitled to vote at the meeting (i) whose
proposal was included in the Company's proxy statement pursuant to Rule 14a-8
under the Securities Exchange Act, as amended, or (ii) who has delivered notice
to the Company (containing certain information specified in the Bylaws) not less
than 75 days nor more than 180 days prior to the first anniversary of the
preceding year's annual meeting.
The Bylaws contain a similar provision with respect to the nominations by
stockholders for election to the Board of Directors. The Bylaws provide that, in
order for a stockholder's nomination to be considered, the stockholder must
notify the Company's Secretary not less than 75 days but not more than 180 days
prior to the anniversary of the preceding year's annual meeting. Any stockholder
nomination must include the following information regarding the nominee: name,
age, business and home address of the nominee, principal
21
<PAGE> 25
occupation for past five years, number of shares of stock owned, and the
nominee's written consent to be named as nominee in proxy statement and to serve
as a director if elected. Additionally, the notice must include the following
information relating to the nominating stockholder: name and address, name and
address of other stockholders known to support the nomination, and the class of
and number of shares of stock held by such stockholder(s).
A copy of the full text of the Bylaw provisions relating to matters to be
considered at the annual meeting can be obtained by writing to the Company's
Secretary at the address set forth above under "Annual Report."
PROPOSALS FOR INCLUSION IN 2001 PROXY STATEMENT
Any proposal by a shareholder intended to be presented at the 2001 Annual
meeting of shareholders and included in the Company's Proxy Statement must be
received by the Company at its principal executive offices not later than
December 18, 2000 for inclusion in the Company's proxy statement and form of
proxy relating to that meeting.
INDEPENDENT AUDITORS
Ernst & Young LLP served as the Company's independent auditors for the 1999
fiscal year. A representative of Ernst & Young, LLP will be present at the
Annual Meeting to respond to appropriate questions and to make such statements
as they may desire. The Company's Board of Directors will, consistent with past
practice, appoint the independent auditors for 2000 in the third quarter of
2000.
OTHER MATTERS
The Company is not aware of any business or matter other than those
indicated above which may properly be presented at the Annual Meeting. If,
however, any other matter properly comes before the Annual Meeting, the proxy
holders will, in their discretion, vote thereon in accordance with their best
judgment.
By Order of the Board of Directors
DONALD G. HERRMAN
Executive Vice President
Chief Financial Officer and Secretary
April 17, 2000
22
<PAGE> 26
EXHIBIT A
PACIFIC GULF PROPERTIES INC.
1999 LONG TERM STOCK COMPENSATION PLAN
I. ESTABLISHMENT, PURPOSE AND DURATION.
1.1 There is hereby adopted the 1999 Long Term Stock Compensation Plan
(the "PLAN") of Pacific Gulf Properties Inc. (the "COMPANY"). THE GRANT OF
OPTIONS UNDER THE PLAN IS CONDITIONED ON APPROVAL OF THE PLAN BY THE AFFIRMATIVE
VOTE OF THE HOLDERS OF AT LEAST A MAJORITY OF THE OUTSTANDING SHARES OF VOTING
STOCK OF THE COMPANY, VOTING IN PERSON OR BY PROXY AT A STOCKHOLDERS' MEETING
DULY HELD WITHIN 12 MONTHS OF ITS ADOPTION. No option granted hereunder shall be
exercisable unless and until the Plan has been so approved. Capitalized terms
are defined in Article VIII.
1.2 The purpose of the Plan is to provide incentives for the Company's
executives to improve the long term performance of the Company.
1.3 This Plan is intended to be in addition to, and not in substitution
of, any other stock option or incentive plan of the Company.
1.4 Each option granted under the Plan may be either an option intended to
be an Incentive Stock Option or an option not so intended, as specified in the
applicable Option Agreement. No participant may be granted options to purchase
more than two hundred fifty thousand (250,000) shares in any year.
1.5 The period covered by the Plan is July 1, 1999 through December 31,
2001 (the "PLAN PERIOD").
II. ADMINISTRATION OF THE PLAN.
2.1 Subject to any contrary decision of the Board of Directors (the
"BOARD"), the Plan shall be administered by the Compensation Committee of the
Board (the "COMMITTEE"). The Committee shall consist solely of two or more
Non-Employee and Outside directors. The Board may from time to time remove
members from, or add members to, the Committee. Vacancies on the Committee,
howsoever caused, shall be filled by the Board. The Committee shall select one
of its members as chairman and shall hold meetings at such times and places as
it may determine. A majority of the Committee shall constitute a quorum, and
acts of the Committee at which a quorum is present, or acts reduced to or
approved in writing by all the members of the Committee, shall be the valid acts
of the Committee.
2.2 Subject to the terms and conditions and within the limitations of the
Plan, the Committee shall have the sole authority, in its absolute discretion,
to adopt, amend, and rescind such rules and regulations as, in its opinion, may
be advisable in the administration of the Plan and to construe and interpret the
Plan, the rules and regulations and the instruments evidencing options granted
under the Plan and to make all other determinations deemed necessary or
advisable for the administration of the Plan. All decisions, determinations, and
interpretations of the Committee shall be binding on all holders of options.
2.3 The Board may determine which key employees of the Company or of any
affiliate should be granted options under the Plan, the terms thereof (to the
extent not specified in the Plan), thenumber of shares subject to such option or
options, and the time or times at which options should be granted; provided,
however, that no options shall be granted after December 31, 1999. The Board
shall have the authority to grant options under the Plan.
2.4 Subject to the terms and conditions and within the limitations of the
Plan, the Committee may modify, extend or renew outstanding options granted
under the Plan. Notwithstanding the foregoing, however, no modification of an
option shall, without the consent of the option holder, alter or impair any
rights or obligations under any option theretofore granted under the Plan.
A-1
<PAGE> 27
2.5 In making any determination or in taking or not taking any action
under this Plan, the Committee or the Board, as the case may be, may obtain and
may rely on the advice of experts, including professional advisors to the
Company. No director, officer or agent of the Company shall be liable for any
such determination made, or action or inaction undertaken, in good faith.
2.6 In lieu of the foregoing, if the Board, in its discretion, so
determines, the Plan shall be solely administered by the Board. In such a case,
the term "Committee" when used in this Plan and in any option agreement shall
refer to the Board and the Board shall have the authority to perform any and all
actions that the Committee is authorized to perform including, without
limitation, the authority to act on all matters concerning the Plan and its
administration.
III. STOCK SUBJECT TO THE PLAN.
Subject to the provisions of Section 5.12, the maximum number and kind of
shares of stock as to which options may be granted under the Plan are eight
hundred forty-five thousand (845,000) shares of Common Stock, par value $.01 per
share ("COMMON STOCK"), of the Company. As the Committee may determine from time
to time, the shares subject to options may consist either in whole or in part of
authorized but unissued shares, or authorized and issued shares reacquired by
the Company and held in its treasury.
IV. ELIGIBILITY AND EXERCISE.
4.1 Eligibility for Grant. Options may be granted to such officers of the
Company or its affiliates as the Board, in its discretion, shall designate.
Members of the Board of Directors of the Company or of an affiliate who are not
officers of the Company or of any affiliate may not participate in the Plan.
4.2 Options Available for Exercise. Only vested options may be exercised,
and a vested option may only be exercised prior to its expiration.
V. TERMS AND CONDITIONS OF OPTIONS.
5.1 Option Agreement. Each option granted pursuant to the Plan shall be
evidenced by a written stock option agreement ("OPTION AGREEMENTS") executed by
the Company and the person to whom such option is granted. Such Option
Agreements shall be in such form, not inconsistent with the Plan, as the
Committee shall from time to time determine in its discretion, provided that
such agreements shall comply with and be subject to the terms and conditions of
this Plan.
5.2 Option Term. Subject to Section 5.4, the term of each option shall be
for such period of time, not more than ten (10) years from the date it is
granted, as the Committee may determine in itsdiscretion. Notwithstanding
anything to the contrary herein contained, no option, or any portion thereof,
shall be exercised later than the date of expiration of the option term.
5.3 Option Price. Subject to Section 5.4, the purchase price to be paid
upon exercise of each option shall be determined by the Committee in its
discretion, but such price shall not be less than 100% of the Fair Market Value
of the shares subject to such option on the date the option is granted.
5.4 Incentive Stock Options. Any options granted under the Plan and
intended to be Incentive Stock Options shall be subject to the following
provisions:
(a) An option may be granted to any person who, at the time the option
is granted, owns stock (as determined in accordance with the Code
provisions relating to Incentive Stock Options) possessing more than ten
percent (10%) of the total combined voting power of all classes of stock of
the Company or of an affiliate (a "10% SHAREHOLDER") only if, at the time
the option is granted, the option price is at least 110% of the Fair Market
Value of the stock subject to the option and the option, by its terms, is
not exercisable after the expiration of five years from the date such
option is granted.
(b) To the extent that the aggregate "fair market value" of stock with
respect to which incentive stock options first become exercisable by a
Participant in any calendar year exceeds $100,000, taking into account both
Common Stock subject to Incentive Stock Options under this Plan and stock
subject to
A-2
<PAGE> 28
incentive stock options under all other plans of the Company, such options
shall be treated as nonqualified stock options. For this purpose, the "fair
market value" of the stock subject to options shall be determined as of the
date the options were awarded. In reducing the number of options treated as
incentive stock options to meet the $100,000 limit, the most recently
granted options shall be reduced first. To the extent a reduction of
simultaneously granted options is necessary to meet the $100,000 limit, the
Committee may, in the manner and to the extent permitted by law, designate
which shares of Common Stock are to be treated as shares acquired pursuant
to the exercise of an Incentive Stock Option.
(c) There shall be imposed in any Option Agreement relating to
Incentive Stock Options such terms and conditions as from time to time are
required in order that the option be an "incentive stock option" as that
term is defined in Section 422 of the Code.
5.5 Manner of Exercise. Any exercisable Award shall be deemed to be
exercised when the Secretary of the Company receives written notice of such
exercise from the Participant, together with any required payment made in
accordance with Section 5.6.
5.6 Payment of Exercise Price. The purchase price of any shares purchased
on exercise of an option shall be paid in full at the time of each purchase in
one or a combination of the following methods: (i) in cash or by electronic
funds transfer; (ii) by check payable to the order of the Company; (iii) if
authorized by the Committee or specified in the applicable Option Agreement, in
cash in an amount equal to the par value of the shares being purchased, and, in
the form of a promissory note (consistent with the requirements of Section 5.7)
of the Participant in an amount equal to the difference between said cash amount
and the purchase price of such shares; (iv) by notice and third party payment in
such manner as may be authorized by the Committee; (v) by the delivery of shares
of Common Stock of the Company already owned by the Participant, provided,
however, that the Committee may in its absolute discretion limit the
Participant's ability to exercise an option by delivering such shares; or (vi)
if authorized by the Committee or specified in the applicable Option Agreement,
by reduction in the number of shares of Common Stock otherwise deliverable upon
exercise by that number of sharesthat have a then Fair Market Value equal to
such purchase price. Previously owned shares of Common Stock used to satisfy the
exercise price of an option under clauses (v) and (vi) shall be valued at their
Fair Market Value on the date of exercise.
5.7 Acceptance of Notes to Finance Exercise. The Company may, with the
Committee's approval, accept one or more notes from any Participant in
connection with the exercise or receipt of any outstanding Award, provided that
any such note shall be subject to the following terms and conditions:
(a) The principal of the note shall not exceed the amount required to
be paid to the Company upon the exercise of options under the Plan and the
note shall be delivered directly to the Company in consideration of such
exercise.
(b) The note shall be repaid over a period of time not to exceed five
(5) years, with annual installments of at least 10% of principal during the
first four (4) years and a balloon payment of the remaining principal
amount at the end of the fifth (5th) year; provided, however, that the
Company may demand any payment, in addition to such installments, as may be
required for the note to remain in compliance with any applicable federal
or state regulation.
(c) The note shall provide for full recourse to the Participant and
shall bear interest at a rate equal to the then-prevailing yield to
maturity on U.S. Treasury obligations having a maturity that most closely
matches the maturity date of such note; provided, however, that in no event
shall the interest rate charged be less than the applicable imputed
interest rate specified by the Code.
(d) Except as otherwise provided by the Committee, if the employment
of the Participant terminates, the unpaid principal balance of the note
shall become due and payable on the 10th business day after such
termination; provided, however, that if a sale of shares securing such note
would cause such Participant to incur liability under Section 16(b) of the
Exchange Act, the unpaid balance shall become due and payable on the 10th
business day after the first day on which a sale of such shares could
A-3
<PAGE> 29
have been made without incurring such liability assuming for these purposes
that there are no other transactions by the Participant subsequent to such
termination.
(e) If required by the Committee or by applicable law, the note shall
be secured by a pledge of any shares or rights financed thereby in
compliance with applicable law.
(f) The terms, repayment provisions, and collateral release provisions
of the note and the pledge securing the note shall conform with applicable
rules and regulations of the Federal Reserve Board as then in effect.
5.8 Effect of Termination of Employment, Death or Total Disability. A
Participant's options and all of such Participant's rights under this Plan, to
the extent not exercised, shall terminate and become null and void at such time
as the Participant ceases to be employed by either the Company or any
Subsidiary. Notwithstanding the preceding, if the Participant's employment is
not terminated for Cause, the Participant (or, in the event of the Participant's
death, his or her Beneficiary) may exercise any option within any applicable
period specified in clauses (i), (ii), or (iii) below to the extent the option
was vested and exercisable at the date of the Participant's termination of
employment (for any reason other than termination for Cause), either by its
terms or pursuant to a determination by the Committee (within a reasonable
period after such termination) to accelerate vesting, as follows:
(i) if the Participant terminates employment by reason of voluntary
resignation, the Participant may exercise vested options at any time within
a period of three (3) months after such termination;
(ii) if the Participant terminates employment by reason of Total
Disability or voluntary Retirement, the Participant may exercise vested
options at any time within a period of thirty-six (36) months after such
termination;
(iii) if the Participant dies while in the employ of the Company or
any Subsidiary, or during the period referred to in clause (a) or (b) of
this Section 5.8, then vested options may be exercised by the Participant's
Beneficiary within a period of thirty-six (36) months after the
Participant's date of death;
provided, however, that in no event may an option be exercised by anyone after
the date of its expiration. If a Participant is employed by an entity that
ceases to be a Subsidiary, such event shall be deemed for purposes of this
Section 5.8 to be a termination of employment described in clause (i) above in
respect of that Participant. Absence from work caused by military service or
authorized sick leave shall not be considered as a termination of employment for
purposes of this Section. Notwithstanding the preceding, in the event that all
or a portion of an option is exercised after the periods permitted by or
pursuant to Section 422 of the Code regarding incentive stock options, the
portion of the option that is then exercised shall be treated as a nonqualified
stock option.
5.9 No Transferability. Options may be exercised only by, and shares
issuable pursuant to an option shall be issued only to (or registered only in
the name of), the Participant or, if the Participant has died, the Participant's
Beneficiary or, if the Participant has suffered a Total Disability, the
Participant's Personal Representative, if any, or if there is none, the
Participant, or (to the extent permitted by applicable law and Rule 16b-3) to a
third party pursuant to such conditions and procedures as the Committee may
establish. Other than by will or the laws of descent and distribution or
pursuant to a QDRO or other exception to transfer restrictions under Rule 16b-3
(except to the extent not permitted in the case of an Incentive Stock Option),
no right or benefit under this Plan or any option shall be transferable by the
Participant or shall be subject in any manner to anticipation, alienation, sale,
transfer, assignment, pledge, encumbrance or charge (other than to the Company)
and any such attempted action shall be void. The Company shall disregard any
attempt at transfer, assignment or other alienation prohibited by the preceding
sentences and shall pay or deliver such cash or shares of Common Stock in
accordance with the provisions of this Plan. The designation of a Beneficiary
hereunder shall not constitute a transfer for these purposes.
5.10 Holding of Stock by Option Holder. At the discretion of the
Committee, any Option Agreement may provide that the Participant shall, by
accepting such option, represent and agree that all shares of stock purchased
upon exercise of the option will be acquired and held in accordance with the
restrictions of the
A-4
<PAGE> 30
Securities Act and shall not be further transferred except as permitted by the
Securities Act and the rules and regulations of the Commission thereunder, that
the Company may instruct its transfer agent to restrict further transfer of said
stock in its records except upon receipt of satisfactory evidence that such
restrictions have been satisfied, that upon each exercise of any portion of an
option the certificates evidencing said stock shall bear an appropriate legend
on the face thereof evidencing such restrictions, and that the person entitled
to exercise the same shall furnish evidence satisfactory to the Company
(including a written and signed representation) to the effect that the shares of
stock are being acquired subject to such restrictions.
5.11 Restrictions on Transfer of Stock. The transfer of stock received
pursuant to the exercise of an option granted under the Plan is prohibited
unless such transfer is exempt from registration under the Securities Act, or
unless a registration statement covering such transfer is in effect at the time
the transfer is to occur. The certificates evidencing said stock shall bear an
appropriate legend on the face thereof evidencing such restrictions.
5.12 Adjustment Provisions. If the outstanding shares of Common Stock are
increased, decreased, changed into or exchanged for a different number or kind
of shares or other securities of the Company by reason of reorganization,
recapitalization, reclassification, stock dividend, stock split or reverse stock
split, upon proper authorization by the Board of Directors, an appropriate and
proportionate adjustment shall be made in the maximum number and kind of shares
or other securities as to which options may be granted under the Plan and the
number or kind of shares or other securities as to which the unexercised
portions of any options that shall have been granted prior to such change shall
be exercisable. Any such adjustments in the outstanding options shall be made
without change in the aggregate purchase price applicable to the unexercised
portion of any option, but with corresponding adjustment in the purchase price
for each share or other unit of any security covered by the option. Any such
changes shall be made solely in order to preserve, but not increase, the
benefits of the holders of any options granted under the Plan. No adjustment
shall be made to the number of shares of Common Stock that may be acquired
pursuant to outstanding Incentive Stock Options or the maximum number of shares
of Common Stock with respect to which Incentive Stock Options may be granted
under this Plan to the extent such adjustment would result in such options being
treated as other than Incentive Stock Options, and no such adjustment shall be
made to the extent the Committee determines that such adjustment would result in
the disallowance of a federal income tax deduction for compensation attributable
to any option that is intended to qualify as "performance-based compensation"
for purposes of Section 162(m) of the Code by causing such compensation not to
so qualify as performance based compensation.
VI. TYPES OF OPTION GRANTS AND VESTING.
6.1 Types of Option Grants. Each grant of options under the Plan shall, at
the discretion of the Committee, be comprised of one or both of the following
components:
(a) Fixed Option Grant -- a fixed number of options that vest over the
period covered by the Plan; and
(b) Variable Option Grant -- a variable number of options that vest at
the end of the period covered by the Plan, subject to the Company's
achievement of certain performance measures during the Plan Period.
6.2 Fixed Option Grant. The Fixed Option Grant shall consist of a fixed
number of options that will vest over the Plan Period. One-third of the number
of Fixed Options granted to each Participant shall vest at the end of each of
years 1999 through 2001 without regard to the financial performance of the
Company.
6.3 Variable Option Grant; Cliff Vesting. The number of options, if any,
that will vest under the Variable Option Grant shall be variable in amount,
depending on the Company's satisfaction of specified Performance Criteria over
the Plan Period. The determination of the Company's satisfaction of the
Performance Criteria, and therefore the determination of the number of options,
if any, that will vest under the Variable Option Grant, shall be made by the
Committee only afterDecember 31, 2001 (i.e., these options will only vest if
target criteria are met at that date, and there will be no periodic vesting).
A-5
<PAGE> 31
6.4 Variable Option Grant Performance Criteria. The vesting of options
under the Variable Option Grant shall be based on two separate and independent
performance criteria components ("PERFORMANCE CRITERIA"):
(a) The average percentage growth rate in the Company's funds from
operations per share (as defined in Section 6.6(b), "FFO PER SHARE"); and
(b) TOTAL SHAREHOLDER RETURN (as defined in Section 6.7(a)),
calculated based on dividends paid and stock price change.
6.5 Allocation of Variable Option Grant. Of the total number of options
available to each Participant in the Variable Option Grant,
(a) The vesting of 65% of those options will be based on the growth in
FFO per Share; and
(b) The vesting of the remaining 35% of those options will be based on
the Total Shareholder Return.
Depending on the Company's performance during the Plan Period on each of the two
Performance Criteria, it is possible for Participants to vest in either all or
some portion of the Variable Option Grant or none of such options (if the
Company's performance falls below the minimums for both performance criteria).
It is also possible for Participants to vest in the options allocated to the FFO
per Share component and not vest in the options allocated to Total Shareholder
Return, and vice versa.
6.6 Vesting of FFO Per Share Component.
(a) During the Plan Period, the targeted average FFO per Share percentage
growth rate is 10%. The average percentage growth rate of FFO per share will be
calculated by averaging the following: (a) the percentage increase in FFO per
Share for the six months ending December 31, 1999 compared to that for the six
months ended December 31, 1998; (b) the percentage increase in FFO per Share for
the year 2000 compared to that for 1999; and (c) the percentage increase in FFO
per Share for the year 2001 compared to that for 2000. The three percentages
will then be averaged (without weighting) to determine the average FFO per Share
percentage growth rate during the Plan Period.
(b) FFO per share will be calculated (using the definition of the National
Association of Real Estate Investment Trusts as in effect at August 31, 1999) on
a fully diluted basis (i.e., assuming conversion of all of the Company's
convertible subordinated debentures and preferred stock, but excluding the
conversion of limited partnership units until they are actually converted).
(c) Individuals receiving the Variable Option Grant will be eligible for
vesting of the following portions of the options attributable to the FFO per
Share component depending on the Company's average FFO per Share percentage
growth rate over the Plan Period. Four different vesting levels apply as
described below:
<TABLE>
<CAPTION>
THEN THE EXECUTIVE WILL BE VESTED WITH THE
IF THE COMPANY ACHIEVES AN AVERAGE FOLLOWING PERCENTAGE OF THE TOTAL NUMBER OF
FFO PER SHARE PERCENTAGE GROWTH OPTIONS ALLOCATED TO THE FFO PER SHARE
LEVEL RATE OVER THE PLAN PERIOD OF: COMPONENT:
----- ---------------------------------- -------------------------------------------
<S> <C> <C>
1. MINIMUM -- (Also, the AT LEAST 8% UP TO 10% 75%
Company's average FFO
growth rate must at least
equal the average for the
Company's peer group*).....
2. TARGET..................... AT LEAST 10% UP TO 11% 100%
3. TARGET PLUS................ AT LEAST 11% UP TO 13% 120%
4. MAXIMUM.................... AT LEAST 13% 150%
</TABLE>
- ---------------
* The Board shall, in its sole discretion, select the companies comprising the
Company's peer group and the measurement data concerning such peers to be used
in making such comparison. Notwithstanding the fact that the Plan commences as
of July 1, 1999, in calculating the average FFO per share percentage growth
rate of each peer, the following percentage growth rates of such peer will be
averaged: (i) the percentage
A-6
<PAGE> 32
increase in FFO per share for the full year 1999 compared to that for full
year 1998; (ii) the percentage increase for the full year 2000 compared to
full year 1999; and (iii) the percentage increase for the full year 2001
compared to full year 2000.
6.7 Vesting of Total Shareholder Return Component.
(a) During the Plan Period, the targeted average Total Shareholder Return
percentage is 18%. The Total Shareholder Return for a given period during the
Plan Period will be measured by:
- Adding:
- the dividends per share paid in respect of that period (attributing
dividends to the fiscal quarter immediately preceding their payment and
annualizing dividends paid in respect of a partial year), plus
- the increase or decrease (expressed as a negative number) (in each case
measured in dollars and cents) in the Average Fair Market Value per
share of Common Stock as of the last day of that period from the Average
Fair Market Value per share of Common Stock as of the last day of the
preceding year, except that the change in the Average Fair Market Value
per share of Common Stock as of the last day of 1999 shall be measured
against $19.78 per share;
- Then dividing that sum by the Average Fair Market Value per share of
Common Stock as of the last day of the preceding year, except that, for
the calculation of Total Shareholder Return for the six months ending
December 31, 1999, the foregoing sum shall be divided by $19.78 per
share.
(b) Individuals receiving the Variable Option Grant will be eligible for
vesting of the following portions of the options attributable to the Total
Shareholder Return component depending on the Company's average Total
Shareholder Return percentage over the Plan Period. Four different vesting
levels apply as described below:
<TABLE>
<CAPTION>
THEN THE EXECUTIVE WILL BE VESTED WITH THE
FOLLOWING PERCENTAGE
IF THE COMPANY ACHIEVES AN OF THE TOTAL NUMBER OF OPTIONS
AVERAGE TOTAL SHAREHOLDER RETURN ALLOCATED TO THE TOTAL SHAREHOLDER
LEVEL PERCENTAGE OF: RETURN COMPONENT:
----- -------------------------------- ------------------------------------------
<S> <C> <C>
1. MINIMUM -- (Also, the AT LEAST 16% UP TO 18% 75%
Company's average Total
Shareholder Return
percentage must at least
equal the average for the
Company's peer group*)......
2. TARGET...................... AT LEAST 18% UP TO 20% 100%
3. TARGET PLUS................. AT LEAST 20% UP TO 23% 120%
4. MAXIMUM..................... AT LEAST 23% 150%
</TABLE>
- ---------------
* The Board shall, in its sole discretion, select the companies comprising the
Company's peer group and the measurement data concerning such peers to be used
in making such comparison. Notwithstanding the fact that the Plan commences as
of July 1, 1999, in calculating the average Total Shareholder Return of each
peer, such peer's full year 1999 dividend data shall be utilized and the 1999
data shall be compared against the Average Fair Market Value per share of such
peer's common stock as of the last day of 1998, and the calculations for 2000
and 2001 shall be in the same manner as that for the Company.
6.8 Fixed Option Grant Vesting Upon Termination of Employment After a
Change of Control.
(a) If, within twenty-four months (24) following a CHANGE OF CONTROL (as
defined in Appendix A hereto), a Participant's employment with the Company shall
be terminated (i) by such Participant for Good Reason or (ii) for reasons other
than (x) such Participant's death or Total Disability or (y) the Company's
termination of such employment for Cause, then such Participant's unvested
options in the Fixed Option Grant component of this Plan shall immediately vest
upon such termination of employment.
A-7
<PAGE> 33
(b) If a Participant's employment with the Company shall be terminated
other than under the circumstances described in Section 6.8(a), then no further
vesting of such Participant's options shall occur under the Fixed Option Grant
from and after the date of termination of such employment.
6.9 Variable Option Grant Vesting Upon a Change of Control. Upon a Change
of Control, the Variable Option Grant component of this Plan will be subject to
the following vesting provisions. Upon a Change of Control, the Plan Period will
terminate in respect of the Variable Option Grant, and the performance levels
under the Variable Option Grant component of the Plan will be determined at that
time based on the shortened Plan Period as follows. Any vesting of options under
the Variable Option Grant component of the Plan pursuant to the following
calculations shall occur on the date of the Change of Control.
(a) Change of Control Before March 31. If the Change of Control occurs
on or before March 31 of a year during the Plan Period, the Plan Period
will be deemed to have terminated as of the immediately preceding December
31. The average growth rate in FFO per Share and the average Total
Shareholder Return calculations shall be made over the shortened Plan
Period, and the full number of options allocated to each Participant under
the Variable Option Grant component will be available for vesting on the
Change of Control date based on the same minimum, target, target plus and
maximum performance levels as specified in Sections 6.6 and 6.7.
(b) Change of Control After March 31. If the Change of Control occurs
after March 31 of a year during the Plan Period:
- The FFO per Share calculation for the year in which the Change of
Control occurs ("Shortened Final Year") will be made through the end
of the most recently completed quarter prior to the Change of Control,
and the percentage growth rate for the Shortened Final Year will be
based on a comparison to the comparable period of the prior year. The
average FFO per Share percentage growth rate over the entire shortened
Plan Period will be calculated by averaging the percentage increase in
FFO per Share for all prior periods and for the Shortened Final Year
without weighting.
- The Total Shareholder Return calculation for the Shortened Final Year
will be made using the Average Fair Market Value per share of Common
Stock as of the day preceding the date of the Change of Control and
using an annualized amount of dividends per share based on the most
recently declared dividend per share; then comparing the result for
the Shortened Final Year to the Average Fair Market Value per share of
Common Stock that would have been used for a comparison if the
Shortened Final Year had been a full year. The average Total
Shareholder Return over the entire shortened Plan Period will be
calculated by averaging the Total Shareholder Return for all prior
periods and for the Shortened Final Year without weighting.
The full number of options allocated to each Participant under the Variable
Option Grant component will be available for vesting on the Change of Control
date based on the same minimum, target, target plus and maximum performance
levels as specified in Sections 6.6 and 6.7.
6.10 Death or Total Disability. In the event of the death or Total
Disability of a Participant, (a) no further vesting of such Participant's
options shall occur under the Fixed Option Grant from and after the date of such
Participant's death or Total Disability, and (b) the vesting of such
Participant's options shall occur under the Variable Option Grant in the same
manner as if a Change of Control had occurred on the date of such Participant's
death or Total Disability.
VII. OTHER PROVISIONS.
7.1 Rights of Participants and Beneficiaries.
(a) Employment Status. Status as an employee of the Company shall not be
construed as a commitment that any option will be granted under this Plan to
such employee.
(b) No Employment Contract. Nothing contained in this Plan (or in any other
documents related to this Plan or to any Option Agreement) shall (i) confer upon
any employee or other Participant any right to
A-8
<PAGE> 34
continue in the employ or other service of the Company or constitute any
contract or agreement of employment or other service, or (ii) interfere in any
way with the right of the Company to change such person's compensation or other
benefits or to terminate the employment of such person, with or without cause,
but nothing contained in this Plan or any document related hereto shall
adversely affect any independent contractual right of such person without his or
her consent thereto.
(c) No Fiduciary Relationship. Neither the provisions of this Plan (or of
any related documents), nor the creation or adoption of this Plan, nor any
action taken pursuant to the provisions of this Plan, shall create, or be
construed to create, a trust of any kind or a fiduciary relationship between the
Company and any Participant, Beneficiary or other person.
7.2 Compliance with Laws. This Plan, the granting and vesting of options
under this Plan and the offer, issuance and delivery of shares of Common Stock
and/or the payment of money under this Plan or under options granted hereunder
are subject to compliance with all applicable federal and state laws, rules and
regulations (including, but not limited to, state and federal securities laws
and federal margin requirements) and to such approvals by any listing,
regulatory or governmental authority as may, in the opinion of counsel for the
Company, be necessary or advisable in connection therewith. Any securities
delivered under this Plan shall be subject to such restrictions, and the person
acquiring such securities shall, if requested by the Company, provide such
assurances and representations to the Company as the Company may deem necessary
or desirable to assure compliance with all applicable legal requirements.
7.3 Tax Withholding.
(a) Shares or Cash. Upon any exercise, vesting, or payment in respect of
any option, the Company shall have the right at its option to require the
Participant (or Personal Representative or Beneficiary, as the case may be) to
pay or provide for payment of the amount of any taxes that the Company may be
required to withhold with respect to such transaction. In any case where a tax
is required to be withheld in connection with the delivery of shares of Common
Stock under this Plan, the Committee may grant (either at the time of the option
grant or thereafter) to the Participant the right to elect, pursuant to such
rules and subject to such conditions as the Committee may establish, to have the
Company reduce the number of shares to be delivered by (or otherwise reacquire)
the appropriate number of shares valued at their then Fair Market Value, to
satisfy such withholding obligation.
(b) Tax Loans. The Committee may, in its discretion, authorize a loan to a
Participant in the amount of any taxes that the Company may be required to
withhold with respect to shares of Common Stock received (or disposed of, as the
case may be) pursuant to a transaction described in Section 7.3(a). Such a loan
shall be on the terms set forth in Section 5.7.
7.4 Privileges of Stock Ownership. Except as otherwise expressly
authorized by the Committee or this Plan, a Participant shall not be entitled to
any privilege of stock ownership as to any shares of Common Stock not actually
delivered to and held of record by him or her. No adjustment will be made for
dividends or other rights as a shareholder for which a record date is prior to
such date of delivery.
7.5 Effective Date of the Plan. This Plan shall be effective as of July 1,
1999, subject to shareholder approval.
7.6 Governing Law; Construction; Severability.
(a) Governing Law. This Plan, the options, all Option Agreements and all
other related documents shall be governed by, and construed in accordance with,
the laws of the State of California applicable to contracts made and performed
within such State, except as such laws may be supplanted by the laws of the
United States of America, which laws shall then govern its effect and its
construction to the extent they supplant California law.
(b) Severability. If any provision shall be held by a court of competent
jurisdiction to be invalid and unenforceable, the remaining provisions of this
Plan shall continue in effect.
A-9
<PAGE> 35
(c) Plan Construction. It is the intent of the Company that this Plan and
options hereunder satisfy and be interpreted in a manner that in the case of
Participants who are or may be subject to Section 16 of the Exchange Act
satisfies the applicable requirements of Rule 16b-3 so that such persons will be
entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16
of the Exchange Act and will not be subjected to avoidable liability thereunder.
If any provision of this Plan or of any option or any prior action by the
Committee would otherwise frustrate or conflict with the intent expressed above,
that provision to the extent possible shall be interpreted and deemed amended so
as to avoid such conflict, but to the extent of any remaining irreconcilable
conflict with such intent as to such persons in the circumstances, such
provision shall be deemed void.
7.7 Captions. Captions and headings are given to the sections and
subsections of this Plan solely as a convenience to facilitate reference. Such
headings shall not be deemed in any way material or relevant to the construction
or interpretation of the Plan or any provision thereof.
7.8 Effect of Change of Subsidiary Status. For purposes of this Plan and
any option hereunder, if an entity ceases to be a Subsidiary, a termination of
employment shall be deemed to have occurred with respect to each employee of
such Subsidiary who does not continue as an employee of another entity within
the Company.
7.9 Non-Exclusivity of Plan. Nothing in this Plan shall limit or be deemed
to limit the authority of the Board or the Committee to grant options or
authorize any other compensation, with or without reference to the Common Stock,
under any other plan or authority.
VIII. DEFINITIONS.
8.1 Definitions.
"Average Fair Market Value," as of any date, shall mean the average of the
per share closing prices of the stock on the Composite Tape, as published in the
Western Edition of The Wall Street Journal, of the principal national securities
exchange on which the stock is so listed or admitted to trade, on the twenty
(20) consecutive trading days preceding and including such date; provided,
however, if the stock is not listed or admitted to trade on a national
securities exchange, the Committee may designate such other exchange, market or
source of data as it deems appropriate for determining such value for Plan
purposes
"Beneficiary" shall mean the person, persons, trust or trusts entitled by
will or the laws of descent and distribution to receive the benefits specified
in the Option Agreement and under this Plan in the event of a Participant's
death, and shall mean the Participant's executor or administrator if no other
Beneficiary is identified and able to act under the circumstances.
"Board" shall mean the Board of Directors of the Company.
"Cause"
(a) For purposes of this Agreement, except as set forth in paragraph
(b) below, a termination of a Participant's employment is for "Cause" if
such Participant has been convicted of a felony involving moral turpitude
or the termination is evidenced by a resolution adopted in good faith by
two-thirds of the Board that the Participant (i) intentionally and
continually failed substantially to perform his or her reasonably assigned
duties with the Company (other than a failure resulting from the
Participant's death or incapacity due to physical or mental illness or from
the Participant's assignment of duties that would constitute "Good Reason"
as hereinafter defined) which failure continued for a period of at least
thirty (30) days after a written notice of demand for substantial
performance has been delivered to the Participant specifying the manner in
which the Participant has failed substantially to perform; or (ii)
intentionally engaged in conduct that is demonstrably and materially
injurious to the Company; provided, however, that no termination of the
Participant's employment shall be for Cause as set forth in clause (ii)
above until (x) there shall have been delivered to the Participant written
notice setting forth that the Participant was guilty of the conduct set
forth in clause (ii) and specifying the particulars thereof in detail and
(y) the Participant shall have been provided an opportunity to be heard in
person by the
A-10
<PAGE> 36
Board (with the assistance of the Participant's counsel if the Participant
so desires). Neither an act nor a failure to act, on the Participant's
part, shall be considered "intentional" unless the Participant has acted or
failed to act with a lack of good faith and with a lack of reasonable
belief that the Participant's action or failure to act was in the best
interest of the Company. Notwithstanding anything contained in this
Agreement to the contrary, no failure to perform by the Participant after
the Participant has delivered to the Company a notice of termination of
employment for Good Reason shall constitute Cause.
(b) In the event a written employment agreement is in place between
the Participant and the Company, the definition of "Cause" set forth in
such employment agreement shall apply for all purposes of this Plan in lieu
of the provisions of paragraph (a) above.
"Code" shall mean the Internal Revenue Code of 1986, as amended from time
to time.
"Commission" shall mean the Securities and Exchange Commission.
"Committee" shall mean the Compensation Committee of the Board.
"Common Stock" shall mean the Common Stock of the Company and such other
securities or property as may become the subject of options pursuant to an
adjustment made under this Plan.
"Company" shall mean, collectively, the Pacific Gulf Properties Inc. and
its Subsidiaries.
"Non-Employee and Outside" shall mean "non-employee" within the meaning of
any applicable regulatory requirements, including Rule 16b-3, and "outside"
within the meaning of Section 162(m) of the Code.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended
from time to time.
"Fair Market Value", as of any date, shall mean the per share closing price
of the stock on the Composite Tape, as published in the Western Edition of The
Wall Street Journal, of the principal national securities exchange on which the
stock is so listed or admitted to trade, on such day, or, if such day is not a
trading day, on the last trading day preceding such date; provided, however, if
the stock is not listed or admitted to trade on a national securities exchange,
the Committee may designate such other exchange, market or source of data as it
deems appropriate for determining such value for Plan purposes.
"Good Reason"
(a) Subject to paragraph (b) below, "Good Reason" shall mean the
occurrence after a Change of Control of any of the events or conditions
described in clauses (i) through (vii) hereof:
(i) a change in Participant's status, position or responsibilities
(including reporting responsibilities) that, in Participant's reasonable
judgment, represents a substantial adverse change from his or her
status, position or responsibilities as in effect at any time within 90
days preceding the date of a Change of Control or at any time
thereafter; the assignment to Participant of any duties or
responsibilities that, in Participant's reasonable judgment, are
inconsistent with his or her status, title, position or responsibilities
as in effect at any time within ninety (90) days preceding the date of a
Change of Control or at any time thereafter; or any removal of
Participant from or failure to reappoint or reelect Participant to any
of such offices or positions held prior to the Change of Control, except
in connection with the termination of Participant's employment for Total
Disability, Cause, as a result of his or her death or by Participant
other than for Good Reason;
(ii) a reduction in Participant's base salary or any failure to pay
Participant any compensation or benefits to which Participant is
entitled within five days of notice from Participant of such non-
payment;
A-11
<PAGE> 37
(iii) the Company's requiring Participant to be based at any place
outside a 30-mile radius from Newport Beach, California, except for
reasonably required travel on the Company's business that is not
materially greater than such travel requirements prior to the Change of
Control;
(iv) the failure by the Company to provide Participant with
compensation and benefits, in the aggregate, at least equal (in terms of
benefit levels and/or reward opportunities) to those provided for under
each other employee benefit plan, program and practice in which
Participant was participating at any time within ninety (90) days
preceding the date of a Change of Control or at any time thereafter;
(v) the insolvency or the filing (by any party, including the
Company) of a petition for bankruptcy of the Company, which petition is
not dismissed within sixty (60) days;
(vi) any material breach by the Company of any provision of this
Plan; or
(vii) any purported termination of Participant's employment for
Cause by the Company which does not comply with the requirements set
forth in the definition of "Cause."
(b) Any event or condition described in paragraph (a) above that
occurs prior to a Change of Control but that the subject Participant
reasonably demonstrates (i) was at the request of a third party who has
indicated an intention or taken steps reasonably calculated to effect a
Change of Control and who effectuates a Change of Control, or (ii)
otherwise arose in connection with, or in anticipation of, a Change of
Control that actually occurs, shall constitute Good Reason for such
Participant notwithstanding that it occurred prior to the Change of
Control.
"Incentive Stock Option" shall mean an option that is designated as an
incentive stock option within the meaning of Section 422 of the Code and that
contains such provisions as are necessary to comply with that section.
"Nonqualified Stock Option" shall mean an option that is designated as a
Nonqualified Stock Option and shall include any option intended as an Incentive
Stock Option that fails to meet the applicable legal requirements thereof. Any
option granted hereunder that is not designated as an incentive stock option
shall be deemed to be designated a nonqualified stock option under this Plan and
not an incentive stock option under the Code.
The term "option" shall mean an option to purchase Common Stock under this
Plan. The Committee shall designate any option granted to a Participant as a
Nonqualified Stock Option or an Incentive Stock Option.
"Option Agreement" shall mean any writing setting forth the terms of an
option grant under this Plan that has been authorized by the Committee.
"Participant" shall mean an employee who has been granted an option under
this Plan.
"Personal Representative" shall mean the person or persons who, upon the
Total Disability or incompetence of a Participant, shall have acquired on behalf
of the Participant, by legal proceeding or otherwise, the power to exercise the
rights or receive benefits under this Plan and who shall have become the legal
representative of the Participant.
"Plan" shall mean this Long Term Stock Compensation Plan.
"QDRO" shall mean a qualified domestic relations order as defined in
Section 414(p) of the Code or Title I, Section 206(d)(3) of ERISA (to the same
extent as if this Plan were subject thereto), or the applicable rules
thereunder.
"Retirement" shall mean retirement from active service as an employee or
officer of the Company on or after attaining age 65.
"Rule 16b-3" shall mean Rule 16b-3 as promulgated by the Commission
pursuant to the Exchange Act.
"Securities Act" shall mean the Securities Act of 1933, as amended from
time to time.
A-12
<PAGE> 38
"Subsidiary" shall mean any corporation or other entity a majority of whose
outstanding voting stock or voting power is beneficially owned directly or
indirectly by the Company.
"Total Disability" shall mean a "permanent and total disability" within the
meaning of Section 22(e)(3) of the Code and such other disabilities,
infirmities, afflictions or conditions as the Committee by rule may include.
8.2 Other Definitions Provided in the Text.
"Change of Control" -- Appendix A
"FFO per Share" -- Section 6.6(b)
"Performance Criteria" -- Section 6.4
"Plan Period" -- Section 1.5
"Shortened Final Year" -- Section 6.9(b)
"10% Shareholder" -- Section 5.4(a)
"Total Shareholder Return" -- Section 6.7(a)
APPENDIX A
DEFINITION OF CHANGE OF CONTROL
For purposes of the Company's 1999 Long Term Stock Compensation Plan, a
Change of Control shall have the meaning set forth below. This definition
intentionally differs from that used in executives' Change of Control Agreements
with the Company.
"CHANGE OF CONTROL" shall mean any of the following events or
circumstances:
(a) An acquisition (other than directly from the Company) of any voting
securities (the "Voting Securities") of the Company by any "Person" (as the term
person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act")), immediately after which such
Person has "Beneficial Ownership" (within the meaning of Rule 13d-3 promulgated
under the Exchange Act) of thirty five percent (35%) or more of the combined
voting power of the Company's then outstanding Voting Securities; provided,
however, that in determining whether a Change of Control has occurred, Voting
Securities that are acquired in a "Non-Control Acquisition" (as hereinafter
defined) shall not constitute an acquisition that would cause a Change of
Control. A "Non-Control Acquisition" shall mean an acquisition of Voting
Securities of the Company by (i) an employee benefit plan (or a trust forming a
part thereof) maintained by (x) the Company or (y) any corporation or other
Person of which a majority of its voting power or its equity securities or
equity interests is owned directly or indirectly by the Company (a
"Subsidiary"), (ii) the Company or any Subsidiary or (iii) any Person as a
result of a "Non-Control Transaction" (as hereinafter defined).
(b) The individuals who, as of July 1, 1999, are members of the Board
(the "Incumbent Board"), cease for any reason to constitute at least a
majority of the Board; provided, however, that if the election, or
nomination for election by the Company's stockholders, of any new director
was approved by a vote of at least two-thirds ( 2/3) of the Incumbent
Board, such new director shall be considered as a member of the Incumbent
Board; provided, further, however, that no individual shall be considered a
member of the Incumbent Board if such individual initially became a
director on the Board as a result of either an actual or threatened
"Election Contest" (as described in Rule 14a-11 promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board (a "Proxy
Contest") including by reason of any agreement intended to avoid or settle
any Election Contest or Proxy Contest; or
A-13
<PAGE> 39
(c) Approval by stockholders of the Company of:
(i) A merger, consolidation or reorganization involving the
Company, unless, after giving effect to such merger, consolidation or
reorganization, all of the following criteria are met:
(A) the stockholders of the Company, as constituted immediately
prior to such merger, consolidation or reorganization, own, directly
or indirectly, immediately following such merger, consolidation or
reorganization, at least fifty percent (50%) of the combined voting
power of the outstanding Voting Securities of the corporation
resulting from such merger or consolidation or reorganization (the
"Surviving Corporation") in substantially the same proportion as
their ownership of the Voting Securities of the Company immediately
prior to such merger, consolidation or reorganization;
(B) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for
such merger, consolidation or reorganization constitute at least a
majority of the members of the board of directors of the entity whose
Voting Securities are held directly by the former stockholders of the
Company in satisfaction of the criterion set forth in Section
(c)(i)(A) above; and
(C) no Person (other than the Company, any Subsidiary, any
employee benefit plan (or any trust forming a part thereof)
maintained by the Company, the Surviving Corporation or any
Subsidiary, or any Person who, immediately prior to such merger,
consolidation or reorganization, had Beneficial Ownership of thirty
five percent (35%) or more of the then outstanding Voting Securities
of the Company) owns, directly or indirectly, thirty five percent
(35%) or more of the combined voting power of the Surviving
Corporation's then outstanding Voting Securities.
A merger, consolidation or reorganization meeting all of the criteria
set forth in clauses (A) through (C) of this Section (c)(i) is herein
referred to as a "Non-Control Transaction;"
(ii) A complete liquidation or dissolution of the Company; or
(iii) An agreement for the sale or other disposition of all or
substantially all of the assets of the Company to any Person (other than
a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change of Control shall not be deemed to occur
solely because any Person (the "Subject Person") acquired Beneficial Ownership
of more than the permitted amount of the outstanding Voting Securities as a
result of the acquisition by the Company of its own Voting Securities which, by
reducing the number of Voting Securities outstanding, increases the proportional
number of shares Beneficially Owned by the Subject Person; provided, however,
that if a Change of Control would occur (but for the operation of this sentence)
as a result of the acquisition by the Company of its own Voting Securities, and
after such share acquisition by the Company the Subject Person becomes the
Beneficial Owner of any additional Voting Securities of the Company that
increases the percentage of the then outstanding Voting Securities of the
Company Beneficially Owned by the Subject Person, then a Change of Control shall
be deemed to have occurred.
(d) If an executive's employment is terminated prior to a Change of
Control and such executive reasonably demonstrates that such termination
(i) was at the request of a third party who has indicated an intention or
taken steps reasonably calculated to effect a Change of Control and who
effectuates a Change of Control (a "Third Party") or (ii) otherwise
occurred in connection with, or in anticipation of, a Change of Control
that actually occurs, then the date of a Change of Control with respect to
such executive shall mean the date immediately prior to the date of such
termination of such executive's employment.
A-14
<PAGE> 40
PROXY PROXY
PACIFIC GULF PROPERTIES INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
2000 ANNUAL MEETING OF SHAREHOLDERS -- MAY 11, 2000
Glenn L. Carpenter and Donald G. Herrman, and each of them, are hereby
appointed proxies, with full power of substitution, and are hereby authorized to
represent and vote all shares of common stock of the undersigned at the Annual
Meeting of Shareholders of Pacific Gulf Properties Inc. to be held at the Four
Seasons Hotel, Newport Beach, California, on May 11, 2000, and at any
postponements or adjournments thereof, in the manner indicated below, and in
their discretion on any other matter which may properly come before the Meeting.
This Proxy will be voted in accordance with the instructions given. In this
absence of instructions, the Proxy will be voted "FOR" Proposal No. 1, "FOR"
Proposal No. 2 and in the discretion of the persons hereby appointed as proxies
with respect to any other matters that may properly come before the Meeting or
any postponements or adjournments thereof.
SHAREHOLDERS ARE URGED TO COMPLETE, DATE, SIGN AND RETURN THIS PROXY
PROMPTLY IN THE ENVELOPE PROVIDED WHICH REQUIRES NO POSTAGE
IF MAILED WITHIN THE UNITED STATES
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
/\ FOLD AND DETACH HERE /\
<PAGE> 41
PACIFIC GULF PROPERTIES INC.
PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY. O
The Board of Directors recommends a vote "FOR" Proposals No. 1 and No. 2.
1. Election of three Class III Directors:
For Withheld For All
All All Except
O O O
_____________________________________________________________________________
(Instruction: to withhold authority to vote for any one or more nominee(s),
write the name(s) of such nominee(s) above.)
Nominees: 01 - Peter L. Eppinga, 02 - John F. Kooken, 03 - Robert E. Morgan
2. Approval of 1999 Long Term Stock Compensation Plan.
For Against Abstain
O O O
3. In their discretion, upon such other matter or matters which may properly
come before the meeting or any postponements or adjournments thereof.
The undersigned hereby revokes any proxy heretofore
given to vote at the Annual Meeting and acknowledges
receipt of the Notice of Annual Meeting of Shareholders
and Proxy Statement dated _________________, 2000, and
the Company's 1999 Annual Report to Shareholders.
_______________________________________________________
Signature of Shareholder(s)
Dated:_________________________________________, 2000
Please sign exactly as your name or names appears
herein. A proxy executed by a corporation should be
signed in the name(s) of its authorized officer(s).
Executors, administrators and trustees should so
indicate when signing.
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
/\ FOLD AND DETACH HERE /\
