-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KfUjhqyBntPyhdMMf42aRRF9baRpKTGu1ZIsOEWhc9LNRSp5hy9tUdGY8Cv1K4zE QBhg3V9/fIWP1mZ2uStKlA== 0000928385-02-001912.txt : 20020510 0000928385-02-001912.hdr.sgml : 20020510 ACCESSION NUMBER: 0000928385-02-001912 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020510 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CARRAMERICA REALTY CORP CENTRAL INDEX KEY: 0000893577 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 521796339 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-11706 FILM NUMBER: 02640719 BUSINESS ADDRESS: STREET 1: 1850 K STREET NW STREET 2: SUITE 500 CITY: WASHINGTON STATE: DC ZIP: 20006 BUSINESS PHONE: 2027297500 MAIL ADDRESS: STREET 1: 1700 PENNSYLVANIA AVENUE STREET 2: SUITE 700 CITY: WASHINGTON STATE: DC ZIP: 20006 FORMER COMPANY: FORMER CONFORMED NAME: CARR REALTY CORP DATE OF NAME CHANGE: 19940218 10-Q 1 d10q.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED March 31, 2002 -------------- COMMISSION FILE NO. 1-11706 ------- CARRAMERICA REALTY CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 52-1796339 - ----------------------------------- --------------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 1850 K Street, N.W., Washington, D.C. 20006 - -------------------------------------------------------------------------------- (Address or principal executive office) (Zip code) Registrant's telephone number, including area code (202) 729-1700 -------------- N/A - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Number of shares outstanding of each of the registrant's classes of common stock, as of May 3, 2002: Common Stock, par value $.01 per share: 52,983,261 shares - -------------------------------------------------------------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve (12) months (or such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past ninety (90) days. YES X NO _______ -------- Index -----
Page ---- Part I: Financial Information - ----------------------------- Item 1. Financial Statements Consolidated balance sheets of CarrAmerica Realty Corporation and subsidiaries as of March 31, 2002 (unaudited) and December 31, 2001 .............. 4 Consolidated statements of operations of CarrAmerica Realty Corporation and subsidiaries for the three months ended March 31, 2002 and 2001 (unaudited) ...................................................................... 5 Consolidated statements of cash flows of CarrAmerica Realty Corporation and subsidiaries for the three months ended March 31, 2002 and 2001 (unaudited) ...................................................................... 6 Notes to consolidated financial statements (unaudited) ........................... 7 to 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ........................................................ 12 to 20 Item 3. Quantitative and Qualitative Disclosures About Market Risk ....................... 21 Part II: Other Information - -------------------------- Item 6. Exhibits and Reports on Form 8-K ................................................. 22
2 Part I ------ Item 1. Financial Information --------------------- The information furnished in our accompanying consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows reflects all adjustments which are, in our opinion, necessary for a fair presentation of the aforementioned financial statements for the interim periods. The financial statements should be read in conjunction with the notes to the financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations. The results of operations for the three months ended March 31, 2002 are not necessarily indicative of the operating results to be expected for the full year. 3 CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets As Of March 31, 2002 and December 31, 2001 - --------------------------------------------------------------------------------
March 31, December 31, (In thousands, except share amounts) 2002 2001 --------------- ------------- (unaudited) Assets - ------ Rental property: Land $ 649,001 $ 647,747 Buildings 1,864,888 1,857,775 Tenant improvements 369,558 362,736 Furniture, fixtures and equipment 4,003 3,789 --------------- ------------- 2,887,450 2,872,047 Less: Accumulated depreciation (505,289) (477,694) --------------- ------------- Total rental property 2,382,161 2,394,353 Land held for development or sale 44,674 45,195 Construction in progress 12,505 19,324 Cash and cash equivalents 11,427 5,041 Restricted deposits 4,736 4,596 Accounts and notes receivable,net 25,743 28,551 Investments in unconsolidated entities 121,065 118,479 Accrued straight-line rents 69,684 66,781 Tenant leasing costs, net 50,916 53,894 Deferred financing costs, net 3,079 2,640 Prepaid expenses and other assets, net 34,188 30,688 --------------- ------------- $2,760,178 $2,769,542 =============== ============= Liabilities, Minority Interest, and Stockholders' Equity - -------------------------------------------------------- Liabilities: Mortgages and notes payable, net $1,406,192 $1,399,230 Accounts payable and accrued expenses 66,554 76,786 Rents received in advance and security deposits 30,885 32,326 --------------- ------------- Total liabilities 1,503,631 1,508,342 Minority interest 79,598 83,393 Stockholders' equity: Preferred stock, $.01 par value, authorized 35,000,000 shares: Series A Cumulative Convertible Redeemable Preferred Stock, 80,000 shares issued and outstanding at December 31, 2001 with an aggregate liquidation preference of $2,000 - 1 Series B, C, and D Cumulative Redeemable Preferred Stock, 8,800,000 shares issued and outstanding with an aggregate liquidation preference of $400,000. 88 88 Common Stock, $.01 par value, authorized 180,000,000 shares issued and outstanding 52,759,888 shares at March 31, 2002 and 51,965,066 shares at December 31, 2001. 528 520 Additional paid-in capital 1,373,326 1,356,912 Cumulative dividends in excess of net income (196,993) (179,714) --------------- ------------- Total stockholders' equity 1,176,949 1,177,807 --------------- ------------- Commitments and contingencies $2,760,178 $2,769,542 =============== =============
See accompanying notes to consolidated financial statements. 4 CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations For the Three Months Ended March 31, 2002 and 2001 - -------------------------------------------------------------------------------- (Unaudited and in thousands, except per share amounts)
2002 2001 ------------- -------------- Operating revenues: Rental revenue: Minimum base rent $ 108,243 $ 106,553 Recoveries from tenants 16,168 14,041 Parking and other tenant charges 2,793 3,195 ------------- -------------- Total rental revenue 127,204 123,789 Real estate service revenue 6,127 10,137 ------------- -------------- Total operating revenues 133,331 133,926 ------------- -------------- Operating expenses: Property expenses: Operating expenses 30,874 32,041 Real estate taxes 11,733 9,567 Interest expense 24,388 20,860 General and administrative 11,041 14,184 Depreciation and amortization 34,116 30,825 ------------- -------------- Total operating expenses 112,152 107,477 ------------- -------------- Real estate operating income 21,179 26,449 ------------- -------------- Other (expense) income: Interest income 194 1,104 Obligations under lease guarantees (2,400) - Equity in earnings of unconsolidated entities 2,043 3,354 ------------- -------------- Total other (expense) income (163) 4,458 ------------- -------------- Income before income taxes, minority interest, and gain (loss) on sale of assets and other provisions, net 21,016 30,907 Income taxes (33) (264) Minority interest (2,623) (1,453) Gain (loss) on sale of assets and other provisions, net (860) 1,076 ------------- -------------- Net income $ 17,500 $ 30,266 ============= ============== Basic net income per common share $ 0.17 $ 0.34 ============= ============== Diluted net income per common share $ 0.17 $ 0.32 ============= ==============
See accompanying notes to consolidated financial statements. 5 CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Three Months Ended March 31, 2002 and 2001 - -------------------------------------------------------------------------------- (Unaudited and in thousands)
2002 2001 -------------- -------------- Cash flows from operating activities: Net income $ 17,500 $ 30,266 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 34,116 30,825 Minority interest 2,623 1,453 Equity in earnings of unconsolidated entities (2,043) (3,354) Gain (loss) on sale of assets and other provisions, net 860 (1,076) Obligations under lease guarantees 2,400 - Provision for uncollectible accounts 1,536 4,602 Stock-based compensation 1,064 665 Other 523 927 Changes in assets and liabilities: Decrease in accounts receivable 1,390 7,521 Increase in accrued straight-line rents (2,903) (3,292) Additions to tenant leasing costs (1,514) (3,752) Increase in prepaid expenses and other assets (5,055) (990) Decrease in accounts payable and accrued expenses (12,632) (26,506) (Decrease) increase in rent received in advance and security deposits (1,441) 1,267 -------------- -------------- Total adjustments 18,924 8,290 -------------- -------------- Net cash provided by operating activities 36,424 38,556 -------------- -------------- Cash flows from investing activities: Acquisition and development of rental property (7,552) (5,887) Additions to land held for development or sale (339) (32,667) Additions to construction in progress (1,703) (9,713) Payments on notes receivable - 19,083 Distributions from unconsolidated entities 1,097 2,314 Investments in unconsolidated entities (1,759) (5,433) Acquisition of minority interest (3,371) (665) (Increase) decrease in restricted deposits (140) 9,008 Proceeds from sales of properties - 98,328 -------------- -------------- Net cash (used by) provided by investing activities (13,767) 74,368 -------------- -------------- Cash flows from financing activities: Repurchase of common stock - (104,492) Exercises of stock options 15,710 13,339 Proceeds from issuance of unsecured notes 394,496 - Net (repayments) borrowings on unsecured credit facility (383,000) 53,000 Deferred financing costs (624) - Repayments of mortgages payable (5,023) (11,063) Dividends and distributions to minority interests (37,830) (40,613) -------------- -------------- Net cash used by financing activities (16,271) (89,829) -------------- -------------- Increase in cash and cash equivalents 6,386 23,095 Cash and cash equivalents, beginning of the period 5,041 24,704 -------------- -------------- Cash and cash equivalents, end of the period $ 11,427 $ 47,799 ============== ============== Supplemental disclosure of cash flow information: Cash paid for interest (net of capitalized interest of $872 and $1,792 or the three months ended March 31, 2002 and 2001, respectively) $ 26,411 $ 20,419 ============== ============== Cash paid for income taxes $ 11 $ 25,670 ============== ==============
See accompanying notes to consolidated financial statements. 6 CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) - -------------------------------------------------------------------------------- (1) Description of Business and Summary of Significant Accounting Policies (a) Business We are a fully integrated, self-administered and self-managed publicly traded real estate investment trust ("REIT"), organized under the laws of Maryland. We focus on the acquisition, development, ownership and operation of office properties, located primarily in selected suburban markets across the United States. (b) Basis of Presentation Our accounts and those of our majority-owned/controlled subsidiaries and affiliates are consolidated in the financial statements. We use the equity or cost methods, as appropriate in the circumstances, to account for our investments in and our share of the earnings or losses of unconsolidated entities. These entities are not majority owned or controlled by us. Management has made a number of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements, and the disclosure of contingent assets and liabilities. Estimates are required in order for us to prepare our financial statements in conformity with accounting principles generally accepted in the United States of America. Significant estimates are required in a number of areas, including the evaluation of impairment of long-lived assets and equity and cost method investments and evaluation of the collectibility of accounts and notes receivable. Actual results could differ from these estimates. (c) Interim Financial Statements The financial statements reflect all adjustments, which are, in our opinion, necessary to reflect a fair presentation of the results for the interim periods, and all adjustments are of a normal, recurring nature. (d) New Accounting Pronouncements In June 2001, the FASB issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 2001. SFAS No. 142 changes the accounting for goodwill and intangible assets with indefinite useful lives from an amortization approach to an impairment-only approach. Adoption of SFAS No. 142 in January 2002 did not have a material effect on our financial statements. In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The Statement does not change the fundamental provisions of SFAS No. 121; however, it resolves various implementation issues of SFAS No. 121 and establishes a single accounting model for long-lived assets to be disposed of by sale. It retains the requirement of Opinion No. 30 to report separately discontinued operations buts extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in distribution to owners) or is classified as held for sale. Adoption of SFAS No. 144 in January 2002 did not have a material effect on our financial statements. However, in the event of a future asset sale, we would be required to reclassify portions of previously reported earnings to discontinued operations and to present assets as held for sale and the related liabilities separately in our consolidated balance sheets. (e) Earnings Per Share The following table sets forth information relating to the computations of our basic and diluted earnings per share: 7 CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) - --------------------------------------------------------------------------------
Three Months Ended Three Months Ended March 31, 2002 March 31, 2001 ------------------------------------------------ ------------------------------------------------- (In thousands, Income Shares Per Share Income Shares Per Share except per share amounts) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount --------------- ---------------- --------------- --------------- ---------------- ---------------- Basic EPS $ 8,952 52,326 $ 0.17 $ 21,617 63,186 $ 0.34 ============= ============== Effect of Dilutive Securities Stock options - 1,430 - 1,419 Convertible preferred stock - 12 - - Stock units - - 1,344 6,073 --------------- ---------------- --------------- --------------- ---------------- ---------------- Diluted EPS $ 8,952 53,768 $ 0.17 $ 22,961 70,678 $ 0.32 =============== ================ =============== =============== ================ ================
Net income has been reduced by preferred stock dividends of approximately $8,548,000 and approximately $8,649,000 for the three months ended March 31, 2002 and 2001, respectively. The effects of convertible units in CarrAmerica Realty, L.P. and Carr Realty, L.P. and Series A Convertible Preferred Stock are not included in the computation of diluted earnings per share for any periods in which their effect is antidilutive. (f) Reclassifications Certain reclassifications of prior period amounts have been made to conform to the current period's presentation. (3) Obligations Under Lease Guarantees On January 20, 2000, we, along with HQ Global Workplaces, Inc. (HQ Global), VANTAS Incorporated (VANTAS) and FrontLine Capital Group ("FrontLine"), entered into several agreements that contemplated several transactions including (i) the merger of VANTAS with and into HQ Global, (ii) the acquisition by FrontLine of shares of HQ Global common stock from us and other stockholders of HQ Global, and (iii) the acquisition by VANTAS of our debt and equity interest in OmniOffices (UK) Limited and OmniOffices LUX 1929 Holding Company S.A. On June 1, 2000, we consummated the transactions. On March 13, 2002, HQ Global filed for bankruptcy protection under Chapter 11 of the federal bankruptcy laws. During 1997 and 1998, to assist HQ Global as it grew its business, we provided guarantees of HQ Global's performance under four office leases that it signed. In connection with the HQ Global/VANTAS merger transaction, FrontLine agreed to indemnify us against any losses incurred with respect to these guarantees. However, at this time, FrontLine's principal asset is its interest in HQ Global, and therefore our ability to recover any resulting losses from FrontLine under this indemnity likely will be limited. To our knowledge, all monthly rent payments were made by HQ Global under two of these leases through January 2002, and rental payments under the other two leases were made through February 2002. As a result, we may be liable to the lessors with respect to payments due under two of these leases from and after February 2002 and under the other two leases from and after March 2002. In the course of the bankruptcy proceedings, HQ Global has filed motions to reject two of these four leases. One lease is for space in San Jose, California. This lease is for approximately 22,000 square feet of space at two adjacent buildings and runs through October 2008. Total aggregate remaining payments under this lease as of February 1, 2002 were approximately $6.2 million (approximately $0.7 million of which is payable in 2002); however, our liability under this guarantee is limited to approximately $2.0 million. Although we have not yet determined the extent to which we will be able to mitigate any potential exposure we may have through subletting the space or otherwise, we have recognized an expense of $2.0 million, our maximum potential exposure under the guarantee, in the first quarter of 2002. As of March 31, 2002, we had not made any payments under this guarantee. 8 CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) - -------------------------------------------------------------------------------- The second lease is a sublease for space in downtown Manhattan. This lease is for approximately 26,000 square feet of space and runs through March 2008, with total aggregate remaining lease payments as of February 1, 2002 of approximately $5.4 million (approximately $0.8 million of which is payable in 2002). In light of defenses against payment that may be available to us, we have not recognized any expense on this guarantee. As of March 31, 2002, we had not made any payments under this guarantee. HQ Global has not filed a motion seeking to reject the remaining two leases that we have guaranteed, although it could do so in the future. Even if the leases are not rejected, we may ultimately be liable to the lessors for payments due under the leases. In one case, the lease is for approximately 25,000 square feet of space in midtown Manhattan, and our liability is currently capped at approximately $0.6 million, which liability reduces over the life of the lease until its expiration in September 2007. We have not accrued any expense as of March 31, 2002. As of March 31, 2002, we had not made any payments under this guarantee. The remaining lease is for space in San Mateo, California. This lease is for approximately 19,000 square feet of space and runs through January 2013, with total aggregate remaining lease payments as of March 1, 2002 of approximately $10.4 million (approximately $0.6 million of which is payable in 2002). We are in negotiations with HQ Global with respect to this lease and are considering terms that would result in cash losses to us of up to $0.4 million. Based on the status of these negotiations, we have recognized an expense of $0.4 million under this guarantee in the first quarter of 2002. Any agreement with HQ Global will have to be approved by the bankruptcy court. Even if approved, there can be no assurance that we will not be required to recognize further expense or to make full payment under the guarantee. As of March 31, 2002, we had not made any payments under this guarantee. (4) Gain (Loss) on Sale of Assets and Other Provisions, Net We dispose of assets that are inconsistent with our long-term strategic or return objectives or where market conditions for sale are favorable. During the three months ended March 31, 2002, we did not dispose of any assets. We recognized an impairment loss of $0.9 million on a parcel of land held for development. During the three months ended March 31, 2001, we disposed of seven operating properties, one property under development and one parcel of land that was being held for development. We recognized a gain of $2.0 million, net of $2.0 million in income taxes. During that period, we also recognized an impairment loss of $0.9 million on a parcel of land held for development. (5) Segment Information Our reportable operating segments are real estate property operations and development operations. Other business activities and operating segments that are not reportable are included in other operations. The real estate property operations segment includes the operation and management of rental properties. The development operations segment includes the development of new rental properties for us and for other companies. Our reportable segments offer different products and services and are managed separately because each requires different business strategies and management expertise. Our operating segments' performance is measured using funds from operations. Funds from operations is defined by the National Association of Real Estate Investment Trusts (NAREIT) as follows: * Net income (loss) - computed in accordance with accounting principles generally accepted in the United States of America (GAAP); * Less gains (or plus losses) from sales of depreciable operating properties and items that are classified as extraordinary items under GAAP; * Plus depreciation and amortization of assets uniquely significant to the real estate industry; * Plus or minus adjustments for unconsolidated partnerships and joint ventures (to reflect funds from operations on the same basis). 9 CARRAMERICA REALTY CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) - -------------------------------------------------------------------------------- Funds from operations does not represent net income or cash flow generated from operating activities in accordance with GAAP. As such, it should not be considered an alternative to net income as an indication of our performance or to cash flows as a measure of our liquidity or our ability to make distributions. Operating results of our reportable segments and our other operations for the three months ended March 31, 2002 and 2001 are summarized and reconciled to net income for the applicable period as follows:
For the three months ended March 31, 2002 ------------------------------------------------------------ Real Estate Property Development Other (In millions) Operations Operations Operations Total -------------- --------------- --------------- ------------- Operating revenue $ 127.2 2.7 3.4 $ 133.3 Segment expense 42.6 2.0 9.0 53.6 -------------- --------------- --------------- ------------- Net segment revenue (expense) 84.6 0.7 (5.6) 79.7 Interest expense 8.3 - 16.1 24.4 Other income (expense), net 5.2 - (3.8) 1.4 -------------- --------------- --------------- ------------- Funds from operations $ 81.5 0.7 (25.5) 56.7 ============== =============== =============== Depreciation and amortization (35.7) ------------- Income from operations before minority interest and gain (loss) on sale of assets and other provisions, net 21.0 Minority interest and gain (loss) on sale of assets and other provisions, net (3.5) ------------- Net income $ 17.5 =============
For the three months ended March 31, 2001 ------------------------------------------------------------ Real Estate Property Development Other (In millions) Operations Operations Operations Total -------------- --------------- --------------- ------------- Operating revenue $ 123.8 6.2 3.9 $ 133.9 Segment expense 41.7 1.5 12.9 56.1 -------------- --------------- --------------- ------------- Net segment revenue (expense) 82.1 4.7 (9.0) 77.8 Interest expense 11.1 - 9.8 20.9 Other income (expense), net 7.0 0.2 (1.0) 6.2 -------------- --------------- --------------- ------------- Funds from operations $ 78.0 4.9 (19.8) 63.1 ============== =============== =============== Depreciation and amortization (32.4) ------------- Income from operations before minority interest and gain (loss) on sale of assets and other provisions net, net 30.7 Minority interest and gain (loss) on sale of assets and other provisions, net (0.4) ------------- Net income $ 30.3 =============
10 CARRAMERICA REALTY CORPORATION AND SUBSIDARIES Notes to Consolidated Financial Statements (Unaudited) - -------------------------------------------------------------------------------- (6) Supplemental Cash Flow Information In the first quarter of 2002, 80,000 shares of our Series A Cumulative Convertible Redeemable Preferred Stock were converted to shares of common stock. Our employees converted approximately $0.7 million and $0.8 million in units to 31,797 shares and 25,131 shares of common stock during the three months ended March 31, 2002 and 2001, respectively. 11 Management's Discussion and Analysis - -------------------------------------------------------------------------------- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The discussion that follows is based primarily on our consolidated financial statements as of March 31, 2002 and December 31, 2001 and for the three months ended March 31, 2002 and 2001 and should be read along with the consolidated financial statements and related notes. The ability to compare one period to another may be significantly affected by acquisitions completed, development properties placed in service and dispositions made during those periods. Critical Accounting Policies Critical accounting policies are those that are both important to the presentation of our financial condition and results of operations and require management's most difficult, complex or subjective judgments. Our critical accounting policies relate to the evaluation of impairment of long-lived assets and the evaluation of the collectibility of accounts and notes receivable. If events or changes in circumstances indicate that the carrying value of a rental property to be held and used or land held for development may be impaired, we perform a recoverability analysis based on estimated undiscounted cash flows to be generated from the property in the future. If the analysis indicates that the carrying value is not recoverable from future cash flows, the property is written down to estimated fair value and an impairment loss is recognized. If we decide to sell rental properties or land held for development, we evaluate the recoverability of the carrying amounts of the assets. If the evaluation indicates that the carrying value is not recoverable from estimated net sales proceeds, the property is written down to estimated fair value less costs to sell and an impairment loss is recognized within income from continuing operations. Our estimates of cash flows and fair values of the properties are based on current market conditions and consider matters such as rental rates and occupancies for comparable properties, recent sales data for comparable properties and, where applicable, contracts or the results of negotiations with purchasers or prospective purchasers. Our estimates are subject to revision as market conditions and our assessments of them change. Our allowance for doubtful accounts receivable is established based on analysis of the risk of loss on specific accounts. The analysis places particular emphasis on past-due accounts and considers information such as the nature and age of the receivable, the payment history of the tenant or other debtor, the financial condition of the tenant and our assessment of its ability to meet its lease obligations, the basis for any disputes and the status of related negotiations, etc. Our estimate of the required allowance, which is reviewed on a quarterly basis, is subject to revision as these factors change and is sensitive to the effects of economic and market conditions on our tenants, particularly in our largest markets (i.e., the San Francisco Bay and Washington, D.C. areas). For example, due to economic conditions and analysis of our accounts receivable, we increased our provision for uncollectible accounts by approximately $5.5 million in 2001 and by an additional $1.5 million in the first quarter of 2002. Results Of Operations The discussion and analysis of operating results focuses on our segments as management believes that segment analysis provides the most effective means of understanding the business. Our reportable operating segments are real estate property operations and development operations. Other business activities and operations, which are not reported separately, are included in other operations. Our operating segments' performance is measured using funds from operations. Funds from operations is defined by the National Association of Real Estate Investment Trusts (NAREIT) as follows: * Net income (loss) - computed in accordance with accounting principles generally accepted in the United States of America (GAAP); * Less gains (or plus losses) from sales of depreciable operating properties and items that are classified as extraordinary items under GAAP; * Plus depreciation and amortization of assets uniquely significant to the real estate industry; * Plus or minus adjustments for unconsolidated partnerships and joint ventures (to reflect funds from operations on the same basis). 12 Management's Discussion and Analysis - -------------------------------------------------------------------------------- Funds from operations does not represent net income or cash flow generated from operating activities in accordance with GAAP. As such, it should not be considered an alternative to net income as an indication of our performance or to cash flows as a measure of our liquidity or our ability to make distributions. Real Estate Property Operations Operating results of real estate property operations are summarized as follows:
---------------------------------------------------------------------------- For the three months ended Variance ------------- March 31, 2002 vs. --------------------------------- (in millions) 2002 2001 2001 ---- ---- ---- Operating revenue $ 127.2 $ 123.8 $ 3.4 Segment expense 42.6 41.7 0.9 Interest expense 8.3 11.1 (2.8) Other income, net 5.2 7.0 (1.8) ----------------------------------------------------------------------------
Real estate operating revenues increased $3.4 million (2.7%) for the three months ended March 31, 2002 as compared to 2001. This increase resulted from development properties being placed in service and "same store" rental growth, partially offset by sold properties. Same store rental revenues grew by approximately 0.8% (approximately $1.0 million). This increase was due primarily to an increase in rental rates and stable occupancy in properties in the Washington, D.C. market, partially offset by declining occupancies and rents in other markets. Real estate operating expenses increased $0.9 million (2.2%) for the first quarter of 2002 as compared to the same period in 2001. This increase was due primarily to an increase in real estate taxes of $2.2 million and an addition to the provision for uncollectible accounts receivable of approximately $1.5 million due to tenant bankruptcies and collection issues. In 2001, the addition to the provision for uncollectible accounts for the first quarter was $4.6 million. Other expenses related to real estate property operations, including insurance, repairs and maintenance and utilities, increased $1.8 million in the first quarter of 2002 compared to the same period a year ago. Real estate interest expense decreased $2.8 million (25.2%) in the first quarter of 2002 as compared to the same period in 2001. This decrease was principally the result of the retirement of mortgages due to maturities or dispositions of related properties. Real estate other income decreased $1.8 million (25.7%) for the three months ended March 31, 2002 as compared to the three months ended March 31, 2001. This decrease was primarily the result of a decline of $1.1 million from equity in earnings of unconsolidated entities (excluding depreciation), primarily from reduced earnings from our investment in Carr Office Park, L.L.C. In June 2001, Carr Office Park, L.L.C. obtained third party financing on its properties resulting in increased interest expense. As a result of the economic climate in 2001, the real estate markets materially softened. Demand for office space declined significantly and vacancy rates increased in each of our core markets. During the first quarter of 2002, our core markets continued to be weak. As a result, occupancy in our portfolio of operating properties decreased to 93.9% at March 31, 2002, as compared to 95.3% at December 31, 2001 and 97.0% at March 31, 2001. Market rental rates have declined in most markets from peak levels. Rental rates on space that was re-leased in the first quarter of 2002 decreased an average of 5.2% compared to rates that were in effect under expiring leases. We expect vacancy rates to continue to increase in most of our markets although we expect that the rate of deterioration will slow in the latter half of the year. As a result, we expect occupancy levels in our portfolio to average approximately 93.0% for 2002. Development Operations Operating results of development operations are summarized as follows: 13 Management's Discussion and Analysis - --------------------------------------------------------------------------------
------------------------------------------------------------------------------- For the three months ended Variance ---------------- March 31, 2002 vs. --------------------------------- (in millions) 2002 2001 2001 ---- ---- ---- Operating revenue $ 2.7 $ 6.2 $ (3.5) Segment expense 2.0 1.5 0.5 Interest expense - - - Other income, net - 0.2 (0.2) -------------------------------------------------------------------------------
Revenue from our development operations decreased $3.5 million (56.5%) for the first quarter of 2002 compared to the first quarter of 2001 primarily because we earned one-time incentive fees ($2.6 million) related to the development of properties during the first quarter of 2001. Operating expenses for our development operations increased $0.5 million (33.3%) for the three months ended March 31, 2002 as compared to the three months ended March 31, 2001 due to a decline in capitalized personnel and related costs as a result of development operations focus on third party activity in 2002. Other Operations Operating results of other operations are summarized as follows:
--------------------------------------------------------------------------------- For the three months ended Variance ----------------- March 31, 2002 vs. -------------------------------- (in millions) 2002 2001 2001 ---- ---- ---- Operating revenue $ 3.4 $ 3.9 $ (0.5) Segment expense 9.0 12.9 (3.9) Interest expense 16.1 9.8 6.3 Other expense, net 3.8 1.0 2.8 ---------------------------------------------------------------------------------
Revenues from our other operations decreased $0.5 million (12.8%) in the first quarter of 2002 as compared to the first quarter of 2001. The decrease in 2002 resulted primarily from declines in leasing fee revenue as a result of the increasing vacancies rates and reduced rental activity. Expenses of our other operations decreased $3.9 million (30.2%) in the three months ended March 31, 2002 compared to the three months ended March 31, 2001. The decrease was due primarily to the completion of portions of our internal process improvement efforts. Interest expense increased $6.3 million (64.2%) during the first quarter of 2002 compared to the first quarter of 2001 due primarily to higher debt levels partially offset by a decrease in short-term interest rates on variable rate debt. Other expense increased $2.8 million (280%) due primarily to the accrual of costs related to obligations under lease guarantees for HQ Global Workplaces, Inc. Depreciation and Amortization Depreciation and amortization increased $3.3 million (10.7%) in the first quarter of 2002 compared to the first quarter of 2001. This increase was due primarily to development properties being placed into service, partially offset by dispositions of interests in properties. Gain (Loss) on Sale of Assets and Other Provisions, Net We dispose of assets that are inconsistent with our long-term strategic or return objectives or where market conditions for sale are favorable. The proceeds from the sales are redeployed into other properties or used to fund development operations or to support other corporate needs. During the three months ended March 31, 2002, we did not dispose of any assets. We recognized an impairment loss of $0.9 million on a parcel of land that is held for development. During the three months ended March 31, 2001, we disposed of seven operating properties, one property 14 Management's Discussion and Analysis - -------------------------------------------------------------------------------- under development and one parcel of land that was being held for development. We recognized a gain of $2.0 million, net of $2.0 million in income taxes. During that period, we also recognized an impairment loss of $0.9 million on a parcel of land held for development. Consolidated Cash Flows Consolidated cash flow information is summarized as follows:
----------------------------------------------------------------------------------------------- For the three months ended Variance -------------- March 31, 2002 vs. ---------------------------- (in millions) 2002 2001 2001 ---- ---- ---- Cash provided by operating activities $ 36.4 $ 38.6 $ (2.2) Cash (used by) provided by investing activities (13.8) 74.4 (88.2) Cash used by financing activities (16.3) (89.8) 73.5 -----------------------------------------------------------------------------------------------
Operations generated $36.4 million of net cash in 2002 compared to $38.6 million in 2001. The changes in cash flow from operating activities were primarily the result of factors discussed above in the analysis of operating results. The level of net cash provided by operating activities is also affected by the timing of receipt of revenues and payment of expenses. Our investing activities used net cash of $13.8 million in 2002 and provided net cash of $74.4 million in 2001. The decrease in net cash provided by investing activities in 2002 is due primarily to the fact that in 2001 we sold properties ($98.3 million) and received payment on a note receivable ($19.1 million). The effect of these transactions was partially offset by a reduction in acquisition of land held for development ($32.3 million), a decrease in development activities ($8.0 million) and a reduction in investment in unconsolidated entities ($3.7 million). Our financing activities used net cash of $16.3 million in 2002 and $89.8 million in 2001. The decrease in net cash used by financing activities in 2002 is due primarily to a suspension of our stock buyback program ($104.5 million). The effect of the reduced stock buyback activity was partially offset by lower net borrowings. We paid down $383.0 million on our line of credit facility in 2002 using proceeds from issuance of unsecured notes in January 2002. LIQUIDITY AND CAPITAL RESOURCES As of March 31, 2002, we had approximately $11.4 million in available cash and cash equivalents. As a REIT, we are required to distribute at least 90% of our taxable income to our stockholders on an annual basis. In addition, we and our affiliates require capital to invest in our existing portfolio of operating assets for capital projects. These capital projects can include such things as large-scale renovations, routine capital improvements, deferred maintenance on properties we have recently acquired and tenant related matters, including tenant improvements, allowances and leasing commissions. Therefore, as a general matter, it is unlikely our cash balances would satisfy our liquidity needs. Instead, these needs must be met from cash generated from rental and real estate service revenue and external sources of capital. We derive substantially all of our revenue from tenants under existing leases at our properties. Our operating cash flow therefore depends materially on the rents that we are able to charge to our tenants, and the ability of these tenants to make their rental payments. We believe that the diversity of our tenant base (no tenant accounted for more than 5% of annualized revenue as of March 31, 2002) helps insulate us from the negative impact of tenant defaults and bankruptcies. However, general economic downturns, or economic downturns in one or more of our core markets, still may adversely impact the ability of our tenants to make lease payments and our ability to re-lease space on favorable terms as leases expire. In either of these cases, our cash flow and therefore our ability to meet our capital needs would be adversely affected. We seek to create and maintain a capital structure that will enable us to diversify our capital resources. This should allow us to obtain additional capital from a number of different sources. These sources could include additional equity offerings of common stock and/or preferred stock, public and private debt financings and possible asset dispositions. Our management believes that we will have access to the capital resources necessary to expand and develop our business, to fund our operating and administrative expenses, to continue to meet our debt service obligations, to pay dividends in accordance with REIT requirements, to acquire additional properties and land and to pay for construction in progress. 15 Management's Discussion and Analysis - -------------------------------------------------------------------------------- We have three investment grade ratings. As of March 31, 2002, Fitch Rating Services and Standard & Poors have each assigned their BBB rating to our prospective senior unsecured debt offerings and their BBB- rating to our prospective cumulative preferred stock offerings. Moody's Investor Service has assigned a negative outlook and its Baa2 rating to our prospective senior unsecured debt offerings and its Ba2 rating to our prospective cumulative preferred stock offerings. A downgrade in outlook or rating by any one of these rating agencies could result from, among other things, a change in our financial position or a downturn in general economic conditions. Any such downturn could adversely affect our ability to obtain future financing or could increase costs of existing debt. Our total debt at March 31, 2002 was approximately $1.4 billion, of which $74.0 million (5.3%) bore a LIBOR-based floating interest rate. The interest rate on borrowings on our unsecured credit facility at March 31, 2002 was 2.6%. Our fixed rate mortgage payable debt bore an effective weighted average interest rate of 8.02% at March 31, 2002. The weighted average term of this debt is 6.6 years. At March 31, 2002, our debt represented 38.7% of our total market capitalization of $3.7 billion. Our primary external source of liquidity is our credit facility. We have a three-year $500 million unsecured credit facility expiring in June 2004 with J.P. Morgan Chase, as agent for a group of banks. We can extend the life of the line an additional year at our option. The line carries an interest rate of 70 basis points over 30-day LIBOR. As of March 31, 2002, $74.0 million was drawn on the credit facility, $2.2 million in letters of credit were outstanding and we had $423.8 million available for borrowing. Our unsecured credit facility contains financial and other covenants with which we must comply. Some of these covenants include: * A minimum ratio of annual EBITDA (earnings before interest, taxes, depreciation and amortization) to interest expense; * A minimum ratio of annual EBITDA to fixed charges; * A maximum ratio of total debt to tangible fair market value of our assets; and * Restrictions on our ability to make dividend distributions in excess of 90% of funds from operations. Availability under the unsecured credit facility is also limited to a specified percentage of the fair value of our unmortgaged properties. In January 2002, we issued $400.0 million of senior unsecured notes. The notes bear interest at 7.125% per annum payable semi-annually beginning on July 15, 2002. The notes mature on January 15, 2012. The notes are unconditionally guaranteed by CarrAmerica Realty, L.P., one of our subsidiaries. Our senior unsecured notes also contain covenants with which we must comply. These include: * Limits on our total indebtedness on a consolidated basis; * Limits on our secured indebtedness on a consolidated basis; and * Limits on our required debt service payments. As a result of the economic climate in 2001, the real estate markets materially softened. Demand for office space declined significantly and vacancy rates increased in each of our core markets. During the first quarter of 2002, our core markets continued to be weak. As a result, occupancy in our portfolio of operating properties decreased to 93.9% at March 31, 2002, as compared to 95.3% at December 31, 2001 and 97.0% at March 31, 2001. Market rental rates have declined in most markets from peak levels. Rental rates on space that was re-leased in the first quarter of 2002 decreased an average of 5.2% in comparison to rates that were in effect under expiring leases. We expect vacancy rates to continue to increase in most of our markets although the rate of deterioration will slow in the latter half of the year. As a result, we expect occupancy levels in our portfolio to average approximately 93.0% for 2002. We will require capital for development projects currently underway and in the future. As of March 31, 2002, we had approximately 124,000 square feet of office space in two development projects in progress. Our total expected investment on these projects is $17.5 million. Through March 31, 2002, we had invested $10.9 million or 62.3% of the 16 Management's Discussion and Analysis - -------------------------------------------------------------------------------- total expected investment for these projects. We also have a residential project under development as part of a development project in a joint venture. Our total expected investment in the residential project is expected to be $20.0 million. As of March 31, 2002, we had invested $1.6 million in this project. As of March 31, 2002, we also had 1.0 million square feet of office space under construction in five projects in which we own minority interests. These projects are expected to cost $276.2 million, of which our total investment is expected to be approximately $81.0 million. Through March 31, 2002, approximately $132.3 million or 47.9% of total project costs had been expended on these projects. We have financed our investment in projects under construction at March 31, 2002 primarily from borrowings under our credit facility. We expect that this source and project-specific financing of selected assets will provide additional funds required to complete development and to finance the costs of additional projects. We also regularly incur expenditures in connection with the re-leasing of office space, principally in the form of tenant improvements and leasing commissions. The amounts of these expenditures can vary significantly, depending on negotiations with tenants and the willingness of tenants to pay higher base rents over the life of the leases. We expect to pay for these capital expenditures out of excess cash from operations or, to the extent necessary, draws on our line of credit. We believe that a significant portion of these expenditures is recouped in the form of continuing lease payments. In the future, if, as a result of general economic downturns, a rating downgrade or otherwise, our properties do not perform as expected, or we cannot raise the expected funds from the sale of properties and/or if we are unable to obtain capital from other sources, we may not be able to make required principal and interest payments or make necessary routine capital improvements with respect to our existing portfolio of operating assets. While we believe that we would continue to have sufficient funds to pay our operating and debt service expenses and our regular quarterly dividends, our ability to expand our development activity or to fund additional development in our joint ventures could be adversely affected. In addition, if a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments, the holder of the mortgage lender could foreclose on the property, resulting in loss of income and asset value. An unsecured lender could also attempt to foreclose on some of our assets in order to receive payment. In many cases, very little of the principal amount that we borrow is repaid prior to the maturity of the loan. We generally expect to refinance that debt when it matures, although in some cases we may pay off the loan. If principal amounts due at maturity cannot be refinanced, extended or paid with proceeds of other capital transaction, such as new equity capital, our cash flow may be insufficient to repay all maturing debt. Prevailing interest rates or other factors at the time of a refinancing (such as possible reluctance of lenders to make commercial real estate loans) may result in higher interest rates and increased interest expense. Our ability to raise funds through sales of debt and equity securities is dependent on, among other things, general market conditions for REITS, market perceptions about us, our debt rating and the current trading price of our stock. We will continue to analyze which source of capital is most advantageous to us at any particular point in time, but the capital markets may not consistently be available on terms that are attractive. Our Board of Directors has authorized us to spend up to $325 million to repurchase our common shares, preferred shares and debt securities excluding the 9.2 million shares repurchased from Security Capital in November 2001 which were separately approved. Since the start of this program in mid-2000 through March 31, 2002, we have acquired approximately 8.7 million of our common shares for an aggregate purchase price of approximately $253.4 million. We do not currently anticipate repurchasing any common stock in 2002, although market conditions could cause us to reevaluate this determination at any time. We pay dividends quarterly. The maintenance of these dividends is subject to various factors, including the discretion of the Board of Directors, the ability to pay dividends under Maryland law, the availability of cash to make the necessary dividend payments and the effect of REIT distribution requirements, which require at least 90% of our taxable income to be distributed to stockholders. In addition, under our line of credit, we generally are restricted from paying dividends that would exceed 90% of our funds from operations during any four-quarter period. Although we believe our properties are adequately covered by insurance, we cannot predict at this time if we will be able to obtain full coverage at a reasonable cost in the future. After the events of September 11, 2001, property and casualty insurance markets began to exclude terrorist acts as an insured peril for renewing policies. Although separate terrorist coverage for real estate is now available from a limited number of insurers, available limits, cost, and higher deductibles are a concern not only to us but also to our lenders. Trophy and high-rise properties are expected to be difficult to insure. Through our insurance broker, we are exploring various options for addressing the terrorism risk and will decide upon a method of risk management before our June 30, 2002 renewal date. 17 Management's Discussion and Analysis - -------------------------------------------------------------------------------- On January 20, 2000, we, along with HQ Global Workplaces, Inc. (HQ Global), VANTAS Incorporated (VANTAS) and FrontLine Capital Group ("FrontLine"), entered into several agreements that contemplated several transactions including (i) the merger of VANTAS with and into HQ Global, (ii) the acquisition by FrontLine of shares of HQ Global common stock from us and other stockholders of HQ Global, and (iii) the acquisition by VANTAS of our debt and equity interest in OmniOffices (UK) Limited and OmniOffices LUX 1929 Holding Company S.A. On June 1, 2000, we consummated the transactions. On March 13, 2002, HQ Global filed for bankruptcy protection under Chapter 11 of the federal bankruptcy laws. During 1997 and 1998, to assist HQ Global as it grew its business, we provided guarantees of HQ Global's performance under four office leases that it signed. In connection with the HQ Global/VANTAS merger transaction, FrontLine agreed to indemnify us against any losses incurred with respect to these guarantees. However, at this time, FrontLine's principal asset is its interest in HQ Global, and therefore our ability to recover any resulting losses from FrontLine under this indemnity likely will be limited. To our knowledge, all monthly rent payments were made by HQ Global under two of these leases through January 2002, and rental payments under the other two leases were made through February 2002. As a result, we may be liable to the lessors with respect to payments due under two of these leases from and after February 2002 and under the other two leases from and after March 2002. In the course of the bankruptcy proceedings, HQ Global has filed motions to reject two of these four leases. One lease is for space in San Jose, California. This lease is for approximately 22,000 square feet of space at two adjacent buildings and runs through October 2008. Total aggregate remaining payments under this lease as of February 1, 2002 were approximately $6.2 million (approximately $0.7 million of which is payable in 2002); however, our liability under this guarantee is limited to approximately $2.0 million. Although we have not yet determined the extent to which we will be able to mitigate any potential exposure we may have through subletting the space or otherwise, we have recognized an expense of $2.0 million, our maximum potential exposure under the guarantee, in the first quarter of 2002. As of March 31, 2002, we had not made any payments under this guarantee. The second lease is a sublease for space in downtown Manhattan. This lease is for approximately 26,000 square feet of space and runs through March 2008, with total aggregate remaining lease payments as of February 1, 2002 of approximately $5.4 million (approximately $0.8 million of which is payable in 2002). In light of defenses against payment that may be available to us, we have not recognized any expense on this guarantee. As of March 31, 2002, we had not made any payments under this guarantee. HQ Global has not filed a motion seeking to reject the remaining two leases that we have guaranteed, although it could do so in the future. Even if the leases are not rejected, we may ultimately be liable to the lessors for payments due under the leases. In one case, the lease is for approximately 25,000 square feet of space in midtown Manhattan, and our liability is currently capped at approximately $0.6 million, which liability reduces over the life of the lease until its expiration in September 2007. We have not accrued any expense as of March 31, 2002. As of March 31, 2002, we had not made any payments under this guarantee. The remaining lease is for space in San Mateo, California. This lease is for approximately 19,000 square feet of space and runs through January 2013, with total aggregate remaining lease payments as of March 1, 2002 of approximately $10.4 million (approximately $0.6 million of which is payable in 2002). We are in negotiations with HQ Global with respect to this lease and are considering terms that would result in cash losses to us of up to $0.4 million. Based on the status of these negotiations, we have recognized an expense of $0.4 million under this guarantee in the first quarter of 2002. Any agreement with HQ Global will have to be approved by the bankruptcy court. Even if approved, there can be no assurance that we will not be required to recognize further expense or to make full payment under the guarantee. As of March 31, 2002, we had not made any payments under this guarantee. We have investments in real estate joint ventures in which we hold 15%-50% interests. These investments are accounted for using the equity or cost method, as appropriate, and therefore, the assets and liabilities of the joint ventures are not included in our consolidated financial statements. Most of these joint ventures own and operate office buildings financed by non-recourse debt obligations that are secured only by the real estate and other assets of the joint ventures. We have no obligation to repay this debt and the lenders have no recourse to our other assets. As of March 31, 2002, we guaranteed $34.5 million of debt related to joint ventures and $5.2 million of debt related to a development project we have undertaken with a third party. 18 Management's Discussion and Analysis - -------------------------------------------------------------------------------- Our investments in these joint ventures are subject to risks not inherent in our majority owned properties, including: * Absence of exclusive control over the development, financing, leasing, management and other aspects of the project; * Possibility that our co-venturer or partner might: * become bankrupt; * have interests or goals that are inconsistent with ours; * take action contrary to our instructions, requests or interests (including those related to our qualification as a REIT for tax purposes); or * otherwise impede our objectives; and * Possibility that we, together with our partners, may be required to fund losses of the investee which losses would not necessarily appear on our consolidated financial statements (e.g. for cost method investments). In addition to making investments in these ventures, we provide construction management, leasing, development and architectural and other services to them. We earned fees for these services of $2.1 million for the three months ended March 31, 2002 and $5.1 million for the three months ended March 31, 2001. We also earn fees for services provided to third party properties. Some members of our Board of Directors have ownership interests in these third party properties. During the first quarter of 2002 and 2001, we earned fees of $0.5 million and $0.8 million, respectively from properties in which members of our Board of Directors, Mr. A. J. Clark and Mr. O. Carr, had an interest. Other material related party transactions include general contracting and other services from Clark Enterprises, Inc., an entity in which one of our directors is the majority stockholder. We, including our unconsolidated affiliates, paid $4.1 million and $4.7 million in the first quarter of 2002 and 2001, respectively, to Clark Enterprises, Inc. for these services. Substantially all of the payments are related to our unconsolidated affiliates. Funds From Operations We believe that funds from operations is helpful to investors as a measure of the performance of an equity REIT. Based on our experience, funds from operations, along with information about cash flows from operating activities, investing activities and financing activities, provides investors with an indication of our ability to incur and service debt, to make capital expenditures and to fund other cash needs. Funds from operations is defined by the National Association of Real Estate Investment Trusts (NAREIT) as follows: * Net income (loss) - computed in accordance with accounting principles generally accepted in the United States of America (GAAP); * Less gains (or plus losses) from sales of depreciable operating properties and items that are classified as extraordinary items under GAAP; * Plus depreciation and amortization of assets uniquely significant to the real estate industry; * Plus or minus adjustments for unconsolidated partnerships and joint ventures (to reflect funds from operations on the same basis). Our funds from operations may not be comparable to funds from operations reported by other REITs. These other REITs may not define the term in accordance with the current NAREIT definition or may interpret the current NAREIT definition differently than us. Funds from operations does not represent net income or cash flow generated from operating activities in accordance with GAAP. As such, it should not be considered an alternative to net income as an indication of our performance or to cash flows as a measure of our liquidity or our ability to make distributions. The following table provides the calculation of our funds from operations for the periods presented: 19 Management's Discussion and Analysis - --------------------------------------------------------------------------------
Three Months Ended March 31, ----------------------------- (In thousands) 2002 2001 -------------- ------------- Net income from continuing operations before minority interest $ 20,123 $ 31,719 Adjustments to derive funds from operations: Add depreciation and amortization 35,903 32,706 Deduct: Minority interests' (non Unitholders) share of depreciation, amortization and net income (226) (282) (Gain) loss on sale of assets and other provisions, net 860 (1,076) ---------- --------- Funds from operations before allocations to the minority Unitholders 56,660 63,067 Less: Funds from operations allocable to the minority Unitholders (4,321) (3,837) ---------- --------- Funds from operations allocable to CarrAmerica Realty Corporation 52,339 59,230 Less: Preferred stock dividends (8,548) (8,649) ---------- --------- Funds from operations allocable to common shareholders $ 43,791 $ 50,581 ========== =========
FORWARD-LOOKING STATEMENTS Certain statements contained herein constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform Act"). Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our, and our affiliates, or the industry's actual results, performance, achievements or transactions to be materially different from any future results, performance, achievements or transactions expressed or implied by such forward-looking statements. Such factors include, among others, the following: * National and local economic, business and real estate conditions that will, among other things, affect: * Demand for office properties * The ability of the general economy to recover timely from the current economic conditions * The availability and creditworthiness of tenants * The level of lease rents * The availability of financing for both tenants and us; * Adverse changes in the real estate markets, including, among other things: * Competition with other companies, and * Risks of real estate acquisition and development (including the failure of pending developments to be completed on time and within budget); * Possible charges or payments resulting from our guarantees of certain leases of HQ Global Workplaces, Inc; * Actions, strategies and performance of affiliates that we may not control or companies in which we have made investments; * Ability to maintain our status as a REIT for federal and state income tax purposes; * Governmental actions and initiatives; and * Environmental/safety requirements. For further discussion of these and other factors that could impact our future results, performance, achievements or transactions, see the documents we file from time to time with the Securities and Exchange Commission, and in particular, the section titled "The Company - Risk Factors" in our Annual Report on Form 10-K. 20 Quantitative and Qualitative Disclosures About Market Risk - -------------------------------------------------------------------------------- Item 3. Quantitative and Qualitative Disclosures About Market Risk Any significant changes in our market risk that have occurred since the filing of our Annual Report on Form 10-K for the year ended December 31, 2001 are summarized in the Liquidity and Capital Resources section of the Management's Discussion and Analysis of Financial Condition and Results of Operations. 21 Part II OTHER INFORMATION - ----------------- Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.1 Retirement agreement by and between CarrAmerica Realty Corporation and Richard F. Katchuk dated March 8, 2002. 10.2 Change of control employment agreement by and between CarrAmerica Realty Corporation and Stephen E. Riffee dated April 1, 2002. (b) Reports on Form 8-K Current Report on Form 8-K filed on January 11, 2002 regarding underwriting agreement between CarrAmerica Realty Corporation and J.P. Morgan Securities Inc. in connection with a proposed public offering of $400,000,000 of 7.125% Senior Notes due 2012. Current Report on Form 8-K filed on March 18, 2002 regarding lease guarantees given by CarrAmerica Realty Corporation for the benefit of HQ Global Workplaces, Inc. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CARRAMERICA REALTY CORPORATION /s/ Stephen E. Riffee - ------------------------------------ Stephen E. Riffee, Chief Financial Officer, Controller/Treasurer Date: May 10, 2002 23 Exhibit Index 10.2 Retirement agreement by and between CarrAmerica Realty Corporation and Richard F. Katchuk dated March 8, 2002. 10.2 Change of control employment agreement by and between CarrAmerica Realty Corporation and Stephen E. Riffee dated April 1, 2002 24 EX-10.1 3 dex101.txt RETIREMENT AGREEMENT Exhibit 10.1 RETIREMENT AGREEMENT THIS RETIREMENT AGREEMENT (this "Agreement") is entered into as of March 8, 2002 (the "Effective Date") by and between CarrAmerica Realty Corporation (the "Company") and Richard F. Katchuk ("Katchuk"). RECITALS A. Katchuk currently is Chief Financial Officer of the Company. B. Katchuk desires to retire as Chief Financial Officer and provide for a smooth transition for a new Chief Financial Officer of the Company. AGREEMENT In consideration of the foregoing and the mutual covenants hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which hereby is acknowledged, the parties hereto agree as follows: 1. Resignation. In connection with Katchuk's retirement, the Company ----------- and Katchuk agree that Katchuk hereby resigns as (i) Chief Financial Officer of the Company, effective as of March 31, 2002 (the "CFO Resignation Date"), and (ii) as an officer, director, trustee or any other similar position of any subsidiary, affiliate or benefit plan of the Company, effective as of the CFO Resignation Date. Notwithstanding the foregoing resignations, Katchuk shall remain an employee of the Company pursuant to the terms outlined in Section 2 below. 2. Transition Employment Period. ---------------------------- (a) Katchuk shall remain employed by the Company from and after the CFO Resignation Date until March 31, 2003 (the "Retirement Date") unless such employment is earlier terminated in accordance with Section 9 below (the "Transition Employment Period"). During the Transition Employment Period, Katchuk shall render to Thomas Carr, or his successor as Chief Executive Officer of the Company, and any person who is subsequently appointed as Chief Financial Officer of the Company (the "New CFO") such services of an advisory or consultative nature as such officers may reasonably request, to enable the Company to continue to have the benefit of his experience and knowledge of the affairs of the Company and to assist in the transition of Katchuk's duties to the New CFO. During the Transition Employment Period, Katchuk shall devote at least 10 hours per week but no more than 15 hours per week to performing his duties for the Company. The Company, acting through Thomas Carr, or his successor as Chief Executive Officer of the Company, or the New CFO shall have sole control of the manner and means of Katchuk performing his services under this Agreement, and Katchuk shall complete such services in accordance with the Company's means and methods of work. (b) The parties acknowledge and agree that the Katchuk's fulfillment of his obligations to the Company hereunder will not require the Employee's full business time. In the time that the Employee is not providing services to the Company, he may accept other employment or engagements and may participate in any other activities without obtaining the Company's approval thereof; provided, however, that such other employment, engagements and activities (i) do not materially interfere with his ability to perform the services contemplated hereby, (ii) do not involve any violation of this Agreement, (iii) would not otherwise be injurious to the business or reputation of the Company or any of its subsidiaries, and (iv) are reasonably and generally (subject to confidentiality considerations) disclosed in advance by Katchuk to Tom Carr. 3. Compensation and Related Matters. -------------------------------- (a) Base Salary. From and after the Effective Date until the ----------- Retirement Date, the Company shall continue to pay Katchuk a base salary at the annual rate of $380,000 per year, payable at the same time and in the same manner as payments are made to other senior executive officers of the Company (the "Base Salary"). (b) Bonus. For the year ended December 31, 2002, the Company ----- shall pay to Katchuk a bonus of $80,750 (representing the pro rated target bonus for Katchuk for January 1, 2002 through March 31, 2002). The bonus amount shall be paid no later than February 28, 2003 at the same time and in the same manner as bonus payments are made to other senior executive officers of the Company. (c) Restricted Stock Units. All restricted stock units held by ---------------------- Katchuk shall remain unaffected by the terms of this Agreement (i.e., they will continue to vest on the same schedule through the Transition Employment Period). Upon termination of Katchuk's employment either upon expiration of the Transition Employment Period or earlier pursuant to Section 9 hereof), the terms of the agreement governing Katchuk's restricted stock units shall govern. (d) Stock Options. All stock options held by Katchuk shall ------------- remain unaffected by the terms of this Agreement (i.e., they will continue to vest on the same schedule from and after the Effective Date through the Transition Employment Period); provided, that if (x) the closing trading price -------- of the Company's common stock is less than $27.90 on the Floor Commencement Date (as defined below), and (y) Katchuk exercises options on or before the Floor Termination Date (as defined below), the Company will pay to Katchuk, promptly after the exercise by him of any stock options outstanding as of the Retirement Date, an amount equal to (i) the difference between $27.90 and the closing trading price of the Company's common stock on the Retirement Date, multiplied by (ii) the number of stock options exercised by Katchuk. As used herein, "Floor Commencement Date" means the first trading day after February 16, 2003 on which the Company's trading window for executive officers and other designated employees is not closed and "Floor Termination Date" means the tenth trading day following the Floor Commencement Date on which the Company's trading window for executive officers and other designated employees is not closed. After termination of Katchuk's employment at the end of the Transition Employment Period, the stock options held by Katchuk, to the extent then 2 exercisable, shall remain exercisable for the one year period currently provided in the stock option agreements. (e) Welfare and Pension Plans. From and after the Effective Date ------------------------- through the Retirement Date, Katchuk shall participate in and be covered under all the welfare benefit plans or programs maintained by the Company from time to time for the benefit of its senior executives, including, without limitation, all medical, hospitalization, disability, dental, life insurance, accidental death and dismemberment and travel accident insurance plans and programs (subject to the terms of those plans) to the extent Katchuk satisfies the eligibility requirements of those plans and programs. In addition, from and after the Effective Date and through the Retirement Date, Katchuk shall be eligible to participate in all pension, retirement, savings and other employee benefit plans and programs maintained from time to time by the Company for the benefit of its senior executives (to the extent Katchuk satisfies the eligibility requirements of those plans ); provided, that Katchuk shall not be -------- entitled to receive any new stock option or restricted stock unit grants during such period; and provided further, that Katchuk shall not be entitled to -------- ------- participate in the Company's Amended and Restated Executive Deferred Compensation Plan. If Katchuk becomes entitled to continuation coverage (COBRA), prior to the Retirement Date and while this Agreement is in full force and effect, the Company's will pay the difference between the cost of COBRA coverage and the amount of premiums charged to full time employees under any medical, hospitalization and dental insurance plan maintained by the Company for the remaining term of this Agreement. (f) Expenses. From and after the Effective Date and through -------- the Retirement Date, the Company shall continue to promptly reimburse Katchuk for all reasonable business expenses relating to services provided under this Agreement upon the presentation of reasonably itemized statements of such expenses in accordance with the Company's policies and procedures now in effect or as such policies and procedures may be modified with respect to all senior executive officers of the Company. (g) Relocation Expenses. The Company shall reimburse Katchuk for ------------------- expenses incurred by him in connection with the sale of his residence in Washington, D.C. (i.e., brokerage commissions and other sale-related costs and transportation of household goods to Richmond, Virginia); provided, that the -------- amount to be reimbursed shall not exceed $25,000. 4. Release. ------- (a) Katchuk, on behalf of himself and his heirs, executors, administrators, successors and assigns, forever releases and discharges the Company and its stockholders and affiliates, and the Company's and its stockholders' and affiliates' respective agents, officers, employees and directors, and their respective successors and assigns, from and against any and all claims, damages, lawsuits, actions, causes of action, and liabilities whatsoever, whether known or unknown, absolute or contingent, accrued or unaccrued, including but not limited to, all claims arising from or in any way connected with Katchuk's employment by the Company and the termination of Katchuk's employment with the Company, but excluding any claims, damages or liabilities associated with (i) the continuing option and restricted stock unit agreements, (ii) benefits payable under the terms of employee benefit plans maintained by the Company or its subsidiaries, or (iii) any breach by the Company of the terms 3 of this Agreement. This release includes, but is not limited to, rights or claims arising under Title VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act of 1967, as amended, the Employee Retirement Income Security Act of 1974, as amended, the Americans with Disabilities Act, and any other federal, state or local statutes or common-law rights of action prohibiting employment discrimination based on age, sex, race, color, national origin, religion, handicap or veteran status or otherwise concerning Katchuk's employment. Katchuk also agrees not to sue or otherwise institute or cause to be instituted or in any way voluntarily participate in the prosecution of any complaints or charges against any person or entity released herein in any federal, state, District of Columbia or other court, administrative agency or other forum concerning any claims released herein. (b) Katchuk acknowledges that he has carefully read this Agreement which includes the release set forth in Section 4(a) (the "Release of Claims") and fully understands all of its terms. Katchuk is signing this Agreement voluntarily and with full knowledge of its significance and acknowledges that he has not relied upon any representation or statement, written or oral, not set forth in this Agreement. (c) Katchuk acknowledges that he received this Agreement on March 5, 2002, and that he understands that he has twenty-one (21) days after the foregoing date within which to consider this Agreement, including the Release of Claims, before signing it. Katchuk understands that he has been given the opportunity to and has in fact consulted with legal counsel of his own choosing and that if he signs this Agreement prior to the twenty-first day, he does so on a purely voluntary basis. (d) Katchuk further understands that for a period of seven (7) days after he signs this Agreement, which includes the Release of Claims, that he may revoke or cancel it by written notification to the Company and by returning any sums paid to Katchuk under this Agreement, and that this Agreement, including the Release of Claims, will not become effective or enforceable until that seven-day period has passed. 5. Confidentiality. Except as authorized or directed by the Company, --------------- Katchuk shall not, at any time during or subsequent to the term of his employment or this Agreement directly or indirectly publish or disclose any confidential information of the Company or any of its affiliates or confidential information of others that has come into the possession of the Company or of any its affiliates or into his possession in the course of his employment with the Company to any person or entity, and Katchuk shall not use any such confidential information for his own personal use or advantage or make it available to others for use. All information, whether written or oral, regarding the business or affairs of the Company or its affiliates, including, without limitation, information as to their products, services, systems, software, finances (including prices, costs and revenues), marketing plans, programs, methods of operation, prospective and existing contracts and other business arrangements or business plans, procedures, and strategies, shall be deemed confidential information, except to the extent the same shall have been lawfully and without breach of confidential obligation made available to the general public without restriction. The Company shall be under no obligation to specifically identify any information as to which the protection of this Section 5 extends by any notice or other action. The parties acknowledge and agree that the foregoing restriction is not intended to prohibit Katchuk from making personal investments in the Company or other public companies; provided, that (i) such investments -------- are 4 made in compliance with Section 6 of this Agreement, and (ii) such investments are not made in violation of federal or state securities laws relating to purchases or sales of securities while in the possession of material non-public information. 6. Non-Compete. During the period in which Katchuk is receiving any ----------- payments from the Company or any of its subsidiaries and for a period of one year thereafter, without the consent of the Company, acting though Thomas Carr, or his successor as Chief Executive Officer of the Company, Katchuk will not, directly or indirectly, as a stockholder owning beneficially or of record more than five percent of the outstanding shares of any class of stock of any issuer, or as an officer, director, employee, consultant, partner, joint venturer, proprietor or otherwise, engage in or become interested in (a) office real estate management, leasing, development or construction services in the markets in the United States where the Company is engaged in business or (b) any other service that then is directly or indirectly in competition with the Company or any of its subsidiaries (or any of their successors). During the period in which Katchuk is receiving any payments from the Company or any of its subsidiaries and for a period of two years thereafter, Katchuk shall not, without the prior written consent of the Company, solicit or hire or induce the termination of employment of any employees or other personnel providing services to the Company, or any of its subsidiaries, for any business activity, other than a business activity owned or controlled, directly or indirectly, by the Company or any of its subsidiaries. 7. No Disparagement. During the period in which Katchuk is receiving ---------------- payments from the Company or any affiliate and for a period of two years thereafter, Katchuk shall not make disparaging statements, whether oral or written, regarding the Company or any subsidiary, its business, officers, directors or employees; provided, that the foregoing shall not prohibit Katchuk -------- from making statements regarding the Company as testimony if Katchuk is subpoenaed or otherwise compelled to provide testimony to any legislative, administrative or judicial body. The Company will not assert that disparagement has occured unless the Board, using reasonable judgment, adopts a resolution identifying the specific words or action(s) that constitute disparagement. 8. Injunctive Relief. Katchuk acknowledges and agrees that the ----------------- compensation, benefits and other entitlements provided to him under this Agreement are adequate consideration for Sections 5, 6 and 7. Katchuk acknowledges and warrants that he will be fully able to earn an adequate livelihood for himself and his dependents if Sections 5, 6 and 7 should be specifically enforced against him. Katchuk also acknowledges that the restrictions contained in Sections 5, 6 and 7 are reasonable and necessary to protect the business and interests of the Company, the Company has relied and is relying upon the enforceability of such restrictions in entering into this Agreement, and any violation of these restrictions will cause substantial irreparable injury to the Company. Therefore, Katchuk agrees that the Company is entitled, in addition to other remedies, to preliminary and permanent injunctive relief to secure specific performance, and to prevent a breach or contemplated breach, of Sections 5, 6 and 7. The restrictions set forth in Sections 5, 6 and 7 shall be construed as independent covenants, and the existence of any claim or cause of action against the Company, whether predicated upon this Agreement or otherwise, shall not constitute a defense to the enforcement by the Company of the restrictions contained in Sections 5, 6 and 7. Katchuk hereby consents to the jurisdiction over his person of any courts within the 5 District of Columbia with respect to any proceedings in law or in equity arising out of this Agreement. If any court of competent jurisdiction shall hold that the restrictions contained in Section 6 are unreasonable as to time or geographical area, said restrictions shall be deemed to be reduced to the extent necessary in the opinion of such court to make them reasonable. 9. Termination of Employment. ------------------------- (a) The Company may not terminate Katchuk`s employment hereunder except for Cause as defined in Section 10 below. If Katchuk's employment is terminated by the Company for Cause, the effective date of Katchuk's termination of employment shall be the date (which may not be retroactive) of written notice of termination given by or on behalf of the Board of Directors of the Company (the "Board") to Katchuk. (b) Katchuk's employment hereunder shall also terminate (i) upon Katchuk's death or permanent and total disability (as that term is used in the Company's 1997 Stock Option and Incentive Plan), in which event the effective date of Katchuk's termination of employment shall be the date of Katchuk's death or the commencement of the disability, and (ii) upon 15 days' prior written notice by Katchuk to the Company. (c) In the event Katchuk's employment is terminated by the Company for Cause (as defined in Section 10), in the event of Katchuk's total disability, or in the event Katchuk terminates his employment, the Company shall promptly thereafter pay to Katchuk, or his legal representatives, all compensation and expense reimbursement to which he was entitled hereunder only through the date of termination and shall have no further obligation to Katchuk or his legal representatives for compensation and expense reimbursement hereunder. (d) If Katchuk's employment is terminated in the event of Katchuk's death, the Company shall promptly pay to Katchuk's estate (i) all compensation and expense reimbursement to which he was entitled hereunder through the date of termination, plus (ii) the extent to which (if at all), the amount of compensation Katchuk would have received pursuant to Section 3(a) and 3(b) hereof had he remained alive exceeds the life insurance proceeds to which Katchuk's beneficiaries are entitled to receive under the Company's life insurance program. (e) If Katchuk's employment is terminated in the event of Katchuk's disability, the Company shall promptly pay to Katchuk (i) all compensation and expense reimbursement to which he was entitled hereunder through the date of termination, plus (ii) the extent to which the amount of compensation Katchuk would have received pursuant to Section 3(a) and 3(b) hereof had he remained employed exceeds disability benefits which Katchuk is entitled to receive under the Company's disability insurance program (if any). (f) Katchuk and the Company shall use their best efforts to provide for a proper transition and wind-down of the Katchuk's activities hereunder in connection with any termination of Katchuk's employment hereunder. 10. Cause. For purposes of this Agreement, "Cause" for termination ----- of Katchuk's employment by the Company hereunder shall be deemed to exist if (a) Katchuk is found guilty by a court of competent jurisdiction of having committed fraud or theft against the 6 Company or having committed a felony; (b) Katchuk is found guilty by a court of competent jurisdiction of having committed a crime involving moral turpitude; (c) Katchuk shall have compromised trade secrets or other proprietary information of the Company; (d) Katchuk shall have breached in any material respect the provisions of Section 5, 6 or 7 of this Agreement; (e) Katchuk shall have willfully failed or refused to perform material assigned duties; or (f) Katchuk shall have engaged in gross or willful misconduct that causes substantial and material harm to the business and operations of the Company or an affiliate thereof, the continuation of which will continue to substantially and materially harm the business and operations of the Company or an affiliate thereof in the future. In the case of a termination of this Company of this Agreement for Cause pursuant to clause (c), (d), (e) or (f) above, such termination shall not occur unless the Board, using reasonable judgment, approves such a termination pursuant to a resolution identifying the specific action(s) on which such termination is based. 11. No Assignments. This Agreement is personal to each of the -------------- parties hereto. Neither party may assign or delegate any rights or obligations hereunder without first obtaining the written consent of the other party hereto. However, in the event of the death of Katchuk all rights to receive payments hereunder shall become rights of Katchuk's estate. 12. Amendment; Modification; Waiver. No amendments or additions to ------------------------------- this Agreement shall be binding unless in writing and signed by both of the parties hereto. No delay or failure at any time on the part of the Company in exercising any right, power or privilege under this Agreement, or in enforcing any provision of this Agreement, shall impair any such right, power, or privilege, or be construed as a waiver of any default or as any acquiescence therein, or shall affect the right of the Company thereafter to enforce each and every provision of this Agreement in accordance with its terms. 13. Successors. The Company will require any successor (whether ---------- direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 14. Section Headings. The section headings used in this Agreement ---------------- are included solely for convenience and shall not affect, or be used in connection with, the interpretation of this Agreement. 15. Severability. The provisions of this Agreement shall be deemed ------------ severable and the invalidity or unenforceability of any provision shall not affect the validity or enforceability of the other provisions hereof. 16. Notices. For purposes of this Agreement, notices and all other ------- communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when hand delivered, sent by overnight courier, or mailed by first-class, 7 registered or certified mail, return receipt requested, postage prepaid, or transmitted by telegram, telecopy or telex, addressed as follows: If to the Company: CarrAmerica Realty Corporation 1850 K Street, NW Washington, D.C. 20006 Telecopy No.: (202) 729-1080 Attention: Thomas A. Carr, Chief Executive Officer with a copy (which shall not constitute notice) to: CarrAmerica Realty Corporation 1850 K Street, NW Washington, D.C. 20006 Telecopy No.: (202) 729-1160 Attention: Linda A. Madrid, General Counsel If to Katchuk: Richard F. Katchuk 5305 Clipper Cove Rd. Midlothian, VA 23112 or to such other address as either party may have furnished to the other in writing in accordance herewith, except that notices of change of address shall be effective only upon receipt. 17. Entire Agreement. This Agreement constitutes the entire ---------------- agreement between the parties hereto, and supersedes all prior oral or written agreements, commitments or understandings, with respect to the matters provided for herein, except as otherwise specifically provided herein. 18. Further Assurance. Each of the Company and Katchuk shall at any ----------------- time, and from time to time, execute and deliver such further documents as the other may reasonably request to effect fully the purposes of this Agreement. 19. Interpretation. Each party hereto hereby acknowledges that: -------------- (a) it or he was represented by counsel and had an opportunity to participate equally in the drafting and negotiations of this Agreement; (b) such negotiations were extensive and have been conducted on an arm's length basis; (c) Katchuk is sophisticated and has substantial experience in business and financial matters; and 8 (d) there are no circumstances surrounding the drafting or negotiations of this Agreement and no other reason that would or should require a court construing this Agreement to construe it more strictly or stringently against one party than against the other party. 20. Governing Law. This Agreement shall be governed by the laws of ------------- the District of Columbia, excluding the choice of law rules thereof. 21. Counterparts. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed to be an original, but all of which taken together shall constitute one and the same instrument. 9 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered in their names and on their behalf as of the date first above written. Attest: CARRAMERICA REALTY CORPORATION /s/Linda Madrid By: /s/Thomas A. Carr - -------------------------------------- -------------- Secretary Name: Thomas A. Carr Title: Chief Executive Officer Date of Execution: March 8, 2002 /s/Richard F. Katchuk ------------------ RICHARD F. KATCHUK Date of Execution: March 8, 2002 10 EX-10.2 4 dex102.txt CHANGE IN CONTROL EMPLOYMENT AGREEMENT Exhibit 10.2 CHANGE IN CONTROL EMPLOYMENT AGREEMENT -------------------------------------- AGREEMENT by and between CarrAmerica Realty Corporation, a Maryland corporation (the "Company") and Stephen E. Riffee (the "Executive"), effective as of the 1st day of April, 2002. The Board of Directors of the Company (the "Board"), has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the continued dedication of the Executive, notwithstanding the possibility, threat or occurrence of a Change in Control (as defined below) of the Company. The Board believes it is imperative to diminish the inevitable distraction of the Executive by virtue of the personal uncertainties and risks created by a pending or threatened Change in Control and to encourage the Executive's full attention and dedication to the Company currently and in the event of any threatened or pending Change in Control, and to provide the Executive with compensation and benefits arrangements upon a Change in Control which ensure that the compensation and benefits expectations of the Executive will be satisfied and which are competitive with those of other corporations. Therefore, in order to accomplish these objectives, the Board has caused the Company to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: 1. Certain Definitions. ------------------- (a) The "Effective Date" shall mean the first date during the Change in Control Period (as defined in Section 1(b)) on which a Change in Control (as defined in Section 2) occurs. Anything in this Agreement to the contrary notwithstanding, if a Change in Control occurs and if the Executive's employment with the Company is terminated prior to the date on which the Change in Control occurs, and if it is reasonably demonstrated by the Executive that such termination of employment (i) was at the request of a third party who has taken steps reasonably calculated to effect a Change in Control or (ii) otherwise arose in connection with or anticipation of a Change in Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination of employment. (b) The "Change in Control Period" shall mean the period commencing on the date hereof and ending on the third anniversary of the date hereof; provided, however, that commencing on the date three years after the -------- date hereof, and on each annual anniversary of such date (such date and each annual anniversary thereof shall be hereinafter referred to as the "Renewal Date"), unless at least 12 months prior to the Renewal Date the Company shall give notice to the Executive that the Change in Control Period shall not be so extended, the Change in Control Period shall be automatically extended so as to terminate one year from such Renewal Date. 2. Change in Control. For the purpose of this Agreement, a ----------------- "Change in Control" shall mean: (a) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (b) Consummation of a reorganization, merger or consolidation involving the Company (a "Business Combination") unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the then outstanding shares of common stock of the Company (the "Outstanding Company Common Stock") and the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities") immediately prior to such Business Combination beneficially own, directly or indirectly, at least 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, and (ii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; (c) the sale or other disposition of more than 50% of the operating assets of the Company; or (d) Approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 3. Employment Period. The Company hereby agrees to continue ----------------- the Executive in its employ, and the Executive hereby agrees to remain in the employ of the Company subject to the terms and conditions of this Agreement, for the period commencing on the Effective Date and ending on the second anniversary of such date (the "Employment Period"). 4. Terms of Employment. ------------------- (a) Position and Duties. ------------------- (i) During the Employment Period, (A) the Executive's position (including status, offices, titles and reporting requirements), authority, duties and responsibilities shall be performed for the senior surviving company following a Change in Control as described in Section 2(b) of this Agreement, and such position shall be at least commensurate in all material respects with the most significant of those held, exercised and assigned at any time during the 120-day period immediately preceding the Effective Date and (B) the Executive's services shall be performed at the location where the Executive was employed immediately preceding the Effective Date or any office or location less than 35 miles from such location. 2 (ii) During the Employment Period, and excluding any periods of vacation and personal leave to which the Executive is entitled, the Executive agrees to devote reasonable attention and time during normal business hours to the business and affairs of the Company and, to the extent necessary to discharge the responsibilities assigned to the Executive hereunder, to use the Executive's reasonable best efforts to perform faithfully and efficiently such responsibilities. During the Employment Period, it shall not be a violation of this Agreement for the Executive to (A) serve on corporate, civic or charitable boards or committees, (B) deliver lectures, fulfill speaking engagements or teach at educational institutions and (C) manage personal investments, so long as such activities do not significantly interfere with the performance of the Executive's responsibilities as an employee of the Company in accordance with this Agreement. It is expressly understood and agreed that to the extent that any such activities have been conducted by the Executive prior to the Effective Date, the continued conduct of such activities (or the conduct of activities similar in nature and scope thereto) subsequent to the Effective Date shall not thereafter be deemed to interfere with the performance of the Executive's responsibilities to the Company. (b) Compensation. ------------ (i) Base Salary. During the Employment Period, the ----------- Executive shall receive an annual base salary ("Annual Base Salary"), which shall be paid at a monthly rate, at least equal to twelve times the highest monthly base salary paid or payable, including any base salary which has been earned but deferred, to the Executive by the Company and its affiliated companies in respect of the twelve-month period immediately preceding the month in which the Effective Date occurs. During the Employment Period, the Annual Base Salary shall be reviewed no more than 12 months after the last salary increase awarded to the Executive prior to the Effective Date and thereafter at least annually. Any increase in Annual Base Salary shall not serve to limit or reduce any other obligation to the Executive under this Agreement. Annual Base Salary shall not be reduced after any such increase and the term Annual Base Salary as utilized in this Agreement shall refer to Annual Base Salary as so increased. As used in this Agreement, the term "affiliated companies" shall include any company controlled by, controlling or under common control with the Company. (ii) Annual Bonus. In addition to Annual Base Salary, the ------------ Executive shall be awarded, for each fiscal year ending during the Employment Period, an annual bonus (the "Annual Bonus") in cash at least equal to the greater of (x) Executive's highest actual bonus under the Company's annual bonus plan, or any comparable bonus under any predecessor or successor plan, for the last three full fiscal years prior to the Effective Date (annualized in the event that the Executive was not employed by the Company for the whole of such fiscal year) (the "Recent Annual Bonus") or (y) the target annual bonus for the fiscal year which includes the Effective Date. Each such Annual Bonus shall be paid no later than the end of the third month of the fiscal year next following the fiscal year for which the Annual Bonus is awarded, unless the Executive shall elect to defer the receipt of such Annual Bonus. (iii) Incentive, Savings and Retirement Plans. During the --------------------------------------- Employment Period, the Executive shall be entitled to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with incentive opportunities (measured with respect to both regular and special incentive opportunities, to the extent, if any, that such distinction is 3 applicable), savings opportunities and retirement benefit opportunities, in each case, less favorable, in the aggregate, than the most favorable of those provided by the Company and its affiliated companies for the Executive under such plans, practices, policies and programs as in effect at any time during the 120-day period immediately preceding the Effective Date or if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (iv) Welfare Benefit Plans. During the Employment --------------------- Period, the Executive and/or the Executive's family, as the case may be, shall be eligible for participation in and shall receive all benefits under welfare benefit plans, practices, policies and programs provided by the Company and its affiliated companies (including, without limitation, medical, prescription, dental, vision, disability, employee split dollar life, group life, accidental death and travel accident insurance plans and programs) to the extent applicable generally to other peer executives of the Company and its affiliated companies, but in no event shall such plans, practices, policies and programs provide the Executive with benefits which are less favorable, in the aggregate, than the most favorable of such plans, practices, policies and programs in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, those provided generally at any time after the Effective Date to other peer executives of the Company and its affiliated companies. (v) Expenses. During the Employment Period, the -------- Executive shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by the Executive in accordance with the most favorable policies, practices and procedures of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vi) Fringe Benefits. During the Employment Period, --------------- the Executive shall be entitled to fringe benefits in accordance with the most favorable plans, practices, programs and policies of the Company and its affiliated companies in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (vii) Office and Support Staff. During the ------------------------ Employment Period, the Executive shall be entitled to an office or offices of a size and with furnishings and other appointments, and to exclusive personal secretarial and other assistance, at least equal to the most favorable of the foregoing provided to the Executive by the Company and its affiliated companies at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as provided generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. (viii) Vacation. During the Employment Period, the -------- Executive shall be entitled to paid vacation in accordance with the most favorable plans, policies, programs and practices of the Company and its affiliated companies as in effect for the Executive at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies. 4 5. Termination of Employment. ------------------------- (a) Death or Disability. The Executive's employment shall ------------------- terminate automatically upon the Executive's death during the Employment Period. If the Company determines in good faith that the Disability of the Executive has occurred during the Employment Period (pursuant to the definition of Disability set forth below), it may give to the Executive written notice in accordance with Section 14(b) of this Agreement of its intention to terminate the Executive's employment. In such event, the Executive's employment with the Company shall terminate effective on the 30th day after receipt of such notice by the Executive (the "Disability Effective Date"), provided that, within the 30 days after such receipt, the Executive shall not have returned to full-time performance of the Executive's duties. For purposes of this Agreement, "Disability" shall mean the absence of the Executive from the Executive's duties with the Company on a full-time basis for 180 consecutive business days as a result of incapacity due to mental or physical illness which is determined to be total and permanent by a physician selected by the Company or its insurers and acceptable to the Executive or the Executive's legal representative. (b) Cause. The Company may terminate the Executive's ----- employment during the Employment Period for Cause. For purposes of this Agreement, "Cause" shall mean: (i) the willful and continued failure of the Executive to perform substantially the Executive's duties with the Company or one of its affiliates (other than any such failure resulting from incapacity due to physical or mental illness), after a written demand for substantial performance is delivered to the Executive by the Board or the Chief Executive Officer of the Company which specifically identifies the manner in which the Board or Chief Executive Officer believes that the Executive has not substantially performed the Executive's duties, or (ii) the willful engaging by the Executive in illegal conduct or gross misconduct which is materially and demonstrably injurious to the Company. For purposes of this provision, no act or failure to act, on the part of the Executive, shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or without reasonable belief that the Executive's action or omission was in the best interests of the Company. Any act, or failure to act, based upon authority given pursuant to a resolution duly adopted by the Board or upon the instructions of the Chief Executive Officer or a senior officer of the Company or based upon the advice of counsel for the Company shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company. The cessation of employment of the Executive shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of not less than three-quarters of the entire membership of the Board at a meeting of the Board called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board), finding that, in the good faith opinion of the Board, the Executive is guilty of the conduct described in subparagraph (i) or (ii) above, and specifying the particulars thereof in detail. (c) Good Reason. The Executive's employment may be ----------- terminated by the Executive for Good Reason. For purposes of this Agreement, "Good Reason" shall mean: (i) the assignment to the Executive of any duties inconsistent in any respect with the Executive's position (including status, offices, titles and reporting requirements), 5 authority, duties or responsibilities as contemplated by Section 4(a) of this Agreement, or any other action by the Company which results in a diminution in such position, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (ii) any failure by the Company to comply with any of the provisions of Section 4(b) of this Agreement, other than an isolated, insubstantial and inadvertent failure not occurring in bad faith and which is remedied by the Company promptly after receipt of notice thereof given by the Executive; (iii) the Company's requiring the Executive to be based at any office or location other than as provided in Section 4(a)(i)(B) hereof or the Company's requiring the Executive to travel on Company business to a substantially greater extent than required immediately prior to the Effective Date; (iv) any purported termination by the Company of the Executive's employment otherwise than as expressly permitted by this Agreement; or (v) any failure by the Company to comply with and satisfy Section 14(c) of this Agreement. For purposes of this Section 5(c), any good faith determination of "Good Reason" made by the Executive shall be conclusive. (d) Notice of Termination. Any termination by the Company --------------------- for Cause, or by the Executive for Good Reason, shall be communicated by Notice of Termination to the other party hereto given in accordance with Section 14(b) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision in this Agreement relied upon, (ii) to the extent applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated and (iii) if the Date of Termination (as defined below) is other than the date of receipt of such notice, specifies the termination date (which date shall be not more than thirty days after the giving of such notice). The failure by the Executive or the Company to set forth in the Notice of Termination any fact or circumstance which contributes to a showing of Good Reason or Cause shall not waive any right of the Executive or the Company, respectively, hereunder or preclude the Executive or the Company, respectively, from asserting such fact or circumstance in enforcing the Executive's or the Company's rights hereunder. (e) Date of Termination. "Date of Termination" means (i) ------------------- if the Executive's employment is terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be, (ii) if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and (iii) if the Executive's employment is terminated by reason of death or Disability, the Date of Termination shall be the date of death of the Executive or the Disability Effective Date, as the case may be. 6 6. Obligations of the Company upon Termination. ------------------------------------------- (a) Good Reason; Other Than for Cause, Death or Disability. ------------------------------------------------------ If, during the Employment Period, the Company shall terminate the Executive's employment other than for Cause or Disability or the Executive shall terminate employment for Good Reason: (i) the Company shall pay to the Executive in a lump sum in cash within 30 days after the Date of Termination the aggregate of the following amounts: A. the sum of (1) the Executive's Annual Base Salary through the Date of Termination to the extent not theretofore paid, (2) the product of (x) the greater of (i) the Recent Annual Bonus or (ii) the target annual bonus for the fiscal year which includes the Date of Termination and (y) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365 and (3) any compensation previously deferred by the Executive (together with any accrued interest or earnings thereon) and any accrued vacation pay, in each case to the extent not theretofore paid (the sum of the amounts described in clauses (1), (2), and (3) shall be hereinafter referred to as the "Accrued Obligations"); and B. the amount equal to the product of (1) two and (2) the sum of (x) the Executive's Annual Base Salary and (y) the greater of (i) the Recent Annual Bonus or (ii) the target annual bonus for the fiscal year which includes the Date of Termination; and C. the amount equal to the company's contributions to all incentive, savings and retirement plans, practices, policies and programs applicable generally to the Executive as in effect at any time during the 120-day period immediately preceding the Effective Date, which would have been made on behalf of the Executive if the Executive's employment continued for two years after the Date of Termination assuming for this purpose that all benefits are fully vested, and, assuming that the Executive's compensation in each of the two years is that required by Section 4(b)(i) and Section 4 (b)(ii); (ii) for two years after the Executive's Date of Termination, or such longer period as may be provided by the terms of the appropriate plan, program, practice or policy, the Company shall continue benefits to the Executive and/or the Executive's family at least equal to those which would have been provided to them in accordance with the plans, programs, practices and policies described in Section 4(b)(iv) of this Agreement if the Executive's employment had not been terminated or, if more favorable to the Executive, as in effect generally at any time thereafter with respect to other peer executives of the Company and its affiliated companies and their families, provided, however, that if the Executive becomes reemployed with another employer and is eligible to receive medical or other welfare benefits under another employer provided plan, the medical and other welfare benefits described herein shall be secondary to those provided under such other plan during such applicable period of eligibility. For purposes of determining eligibility (but not the time of commencement of benefits) of the Executive for retiree benefits pursuant to such plans, practices, programs and policies, the Executive shall be considered to have remained employed until two years after the Date of Termination and to have retired on the last day of such period; 7 (iii) for a period of six months after the Executive's Date of Termination, the Company shall, at its sole expense as incurred, provide the Executive with temporary office space or reasonable outplacement services, the scope and provider of which shall be selected by the Executive in his sole discretion; and (iv) for two years after the Executive's Date of Termination, to the extent not theretofore paid or provided, the Company shall timely pay or provide to the Executive any other amounts or benefits required to be paid or provided or which the Executive is eligible to receive under any plan, program, policy or practice or contract or agreement including, without limitation, any employee split dollar life insurance plan of the Company and its affiliated companies (such other amounts and benefits shall be hereinafter referred to as the "Other Benefits"). (b) Death. If the Executive's employment is terminated by ----- reason of the Executive's death during the Employment Period, this Agreement shall terminate without further obligations to the Executive's legal representatives under this Agreement, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive's estate or beneficiary, as applicable, in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(b) shall include, without limitation, and the Executive's estate and/or beneficiaries shall be entitled to receive, benefits at least equal to the most favorable benefits provided by the Company and affiliated companies to the estates and beneficiaries of peer executives of the Company and such affiliated companies under such plans, programs, practices and policies relating to death benefits, if any, as in effect with respect to other peer executives and their beneficiaries at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive's estate and/or the Executive's beneficiaries, as in effect on the date of the Executive's death with respect to other peer executives of the Company and its affiliated companies and their beneficiaries. (c) Disability. If the Executive's employment is terminated by ---------- reason of the Executive's Disability during the Employment Period, this Agreement shall terminate without further obligations to the Executive, other than for payment of Accrued Obligations and the timely payment or provision of Other Benefits. Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. With respect to the provision of Other Benefits, the term Other Benefits as utilized in this Section 6(c) shall include, and the Executive shall be entitled after the Disability Effective Date to receive, disability and other benefits at least equal to the most favorable of those generally provided by the Company and its affiliated companies to disabled executives and/or their families in accordance with such plans, programs, practices and policies relating to disability, if any, as in effect generally with respect to other peer executives and their families at any time during the 120-day period immediately preceding the Effective Date or, if more favorable to the Executive and/or the Executive's family, as in effect at any time thereafter generally with respect to other peer executives of the Company and its affiliated companies and their families. (d) Cause; Other than for Good Reason. If the Executive's --------------------------------- employment shall be terminated for Cause during the Employment Period, this Agreement shall terminate without further obligations to the Executive other than the obligation to pay to the Executive (x) his Annual Base Salary through the Date of Termination, (y) the amount of any compensation previously deferred by the Executive, and (z) Other Benefits, in each case to the extent theretofore unpaid. If the Executive voluntarily terminates employment during the Employment Period, excluding a termination for Good Reason, this Agreement shall terminate without further obligations to the Executive, other than for 8 Accrued Obligations and the timely payment or provision of Other Benefits. In such case, all Accrued Obligations shall be paid to the Executive in a lump sum in cash within 30 days of the Date of Termination. 7. Effect on Option, Restricted Stock and Restricted Unit ------------------------------------------------------ Agreements. Immediately prior to a Change in Control, all stock options, - ---------- restricted stock unit grants or other equity awards made to the Executive by Company or any affiliate thereof which are outstanding at the time of such event shall be accelerated and vest. Accordingly, all stock options, restricted stock unit grants or other equity awards shall be exercisable at such time in accordance with their terms. This Agreement is intended to amend all stock options, restricted stock unit grants or other equity awards previously awarded to the Executive to accelerate vesting as described above to the extent vesting would not otherwise be accelerated under the terms of such stock options, restricted stock unit grants or other equity awards. This Agreement is also intended to expressly exclude application of Section 13 of the CarrAmerica Realty Corporation 1997 Stock Option and Incentive Plan and any similar provision of any stock option, restricted stock unit grant or other equity award of the Company or any affiliate thereof and to amend all stock options, restricted stock unit grants or other equity awards previously awarded to the Executive to provide the Executive with certain additional payments in accordance with the terms of Section 10 of this Agreement to the extent the Executive would not otherwise receive a Gross-Up Payment (as defined in Section 10 of this Agreement). 8. Non-Exclusivity of Rights. Nothing in this Agreement shall ------------------------- prevent or limit the Executive's continuing or future participation in any plan, program, policy or practice provided by the Company or any of its affiliated companies and for which the Executive may qualify, nor, subject to Section 14(f), shall anything herein limit or otherwise affect such rights as the Executive may have under any contract or agreement with the Company or any of its affiliated companies. Amounts which are vested benefits or which the Executive is otherwise entitled to receive under any plan, policy, practice or program of or any contract or agreement with the Company or any of its affiliated companies at or subsequent to the Date of Termination shall be payable in accordance with such plan, policy, practice or program or contract or agreement except as explicitly modified by this Agreement. 9. Full Settlement. The Company's obligation to make the --------------- payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Executive or others. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced whether or not the Executive obtains other employment. The Company agrees to pay as incurred, to the full extent permitted by law, all legal fees and expenses which the Executive may reasonably incur as a result of any contest (regardless of the outcome thereof) by the Company, the Executive or others of the validity or enforceability of, or liability under, any provision of this Agreement or any guarantee of performance thereof (including as a result of any contest by the Executive about the amount of any payment pursuant to this Agreement), plus in each case interest on any delayed payment at the applicable Federal rate provided for in Section 7872(f) (2) (A) of the Internal Revenue Code of 1986, as amended (the "Code"). 10. Certain Additional Payments by the Company. ------------------------------------------ (a) Anything in this Agreement to the contrary notwithstanding and except as set forth below, in the event it shall be determined that any payment or distribution by the Company to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms 9 of this Agreement or otherwise, but determined without regard to any additional payments required under this Section 10) (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Notwithstanding the foregoing provisions of this Section 10(a), if it shall be determined that the Executive is entitled to a Gross-Up Payment, but that the Executive, after taking into account the Payments and the Gross-Up Payment, would not receive a net after-tax benefit of at least $25,000 (taking into account both income taxes and any Excise Tax) as compared to the net after-tax proceeds to the Executive resulting from an elimination of the Gross-Up Payment and a reduction of the Payments, in the aggregate, to an amount (the "Reduced Amount") such that the receipt of Payments would not give rise to any Excise Tax, then no Gross-Up Payment shall be made to the Executive and the Payments, in the aggregate, shall be reduced to the Reduced Amount. (b) Subject to the provisions of Section 10(c), all determinations required to be made under this Section 10, including whether and when a Gross-Up Payment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by Arthur Andersen LLP or such other certified public accounting firm as may be designated by the Executive (the "Accounting Firm") which shall provide detailed supporting calculations both to the Company and the Executive within 15 business days of the receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. In the event that the Accounting Firm is serving as accountant or auditor for the individual, entity or group effecting the Change in Control, the Executive shall appoint another nationally recognized accounting firm to make the determinations required hereunder (which accounting firm shall then be referred to as the Accounting Firm hereunder). All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 10, shall be paid by the Company to the Executive within five days of the receipt of the Accounting Firm's determination. Any determination by the Accounting Firm shall be binding upon the Company and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that Gross-Up Payments which will not have been made by the Company should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to Section 10(c) and the Executive thereafter is required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Executive. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable after the Executive is informed in writing of such claim and shall apprise the Company of the nature of such claim and the date on which such claim is requested to be paid. The Executive shall not pay such claim prior to the expiration of the 30-day period following the date on which it gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: 10 (i) give the Company any information reasonably requested by the Company relating to such claim, (ii) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (iii) cooperate with the Company in good faith in order effectively to contest such claim, and (iv) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and - -------- expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation and payment of costs and expenses. Without limitation on the foregoing provisions of this Section 10(c), the Company shall control all proceedings taken in connection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the taxable year of the Executive with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 10(c), the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of Section 10(c)) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the receipt by the Executive of an amount advanced by the Company pursuant to Section 10(c), a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of 30 days after such determination, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 11. Confidential Information. The Executive shall hold in ------------------------ a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the 11 Company or any of its affiliated companies, and their respective businesses, which shall have been obtained by the Executive during the Executive's employment by the Company or any of its affiliated companies and which shall not be or become public knowledge (other than by acts by the Executive or representatives of the Executive in violation of this Agreement). After termination of the Executive's employment with the Company, the Executive shall not, without the prior written consent of the Company or as may otherwise be required by law or legal process, communicate or divulge any such information, knowledge or data to anyone other than the Company and those designated by it. In no event shall an asserted violation of the provisions of this Section 11 constitute a basis for deferring or withholding any amounts otherwise payable to the Executive under this Agreement. 12. Pooling of Interests Accounting Treatment. ----------------------------------------- Notwithstanding anything to the contrary contained herein, to the extent that any payment or other benefit under this Agreement would prevent a Change in Control transaction involving the Company which would otherwise qualify for pooling of interests accounting treatment from so qualifying, then the provision setting forth such payment or benefit shall be deemed amended or revoked to the extent required to preserve such pooling of interests treatment. The Board will use good faith efforts to provide the Executive with a substitute benefit that is as comparable as possible under the circumstances and which will not limit or otherwise restrict the use of pooling of interests accounting treatment. The Executive will, upon advice from the Company, take (or refrain from taking, as appropriate) all actions necessary or desirable to ensure that pooling of interests accounting is available for such transaction. 13. Successors. ---------- (a) This Agreement is personal to the Executive and without the prior written consent of the Company shall not be assignable by the Executive otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Executive's legal representatives. (b) This Agreement shall inure to the benefit of and be binding upon the Company and its successors and assigns. (c) The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 14. Miscellaneous. ------------- (a) This Agreement shall be governed by and construed in accordance with the laws of the District of Columbia, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. 12 (b) All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed as follows: If to the Executive: -------------------- Stephen E. Riffee 2410 Stryker Avenue Vienna, VA 22181 If to the Company: ----------------- CarrAmerica Realty Corporation 1850 K Street, NW Washington, DC 20006 Attention: Linda A. Madrid, Managing Director, General Counsel and Secretary with a copy (which shall not constitute notice) to: Hogan & Hartson L.L.P. 555 13th Street, NW Washington, DC 20004 Attention: J. Warren Gorrell, Jr. or to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (c) The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (d) The Company may withhold from any amounts payable under this Agreement such Federal, state, local or foreign taxes as shall be required to be withheld pursuant to any applicable law or regulation. (e) The Executive's or the Company's failure to insist upon strict compliance with any provision of this Agreement or the failure to assert any right the Executive or the Company may have hereunder, including, without limitation, the right of the Executive to terminate employment for Good Reason pursuant to Section 5(c)(i)-(v) of this Agreement, shall not be deemed to be a waiver of such provision or right or any other provision or right of this Agreement. (f) The Executive and the Company acknowledge that, except as may otherwise be provided under any other written agreement between the Executive and the Company, the employment of the Executive by the Company is "at will" and, subject to Section 1(a) hereof, prior to the Effective Date, the Executive's employment and/or this Agreement may be terminated by either the Executive or the Company at any time prior to the Effective Date, in which case the Executive shall have no further rights under this Agreement. From and after the Effective Date this Agreement shall supersede any other agreement between the parties with respect to the subject matter hereof. 13 IN WITNESS WHEREOF, the Executive has hereunto set the Executive's hand and, pursuant to the authorization from its Board of Directors, the Company has caused these presents to be executed in its name on its behalf, all as of the day and year first above written. Signature: /s/ Stephen E. Riffee Stephen E. Riffee Date: April 1, 2002 ---------------------- CARRAMERICA REALTY CORPORATION By: /s/ Linda A. Madrid Name: Linda A. Madrid Title: Managing Director, General Counsel, & Corporate Secretary Date: April 1, 2002 ---------------------- 14 -----END PRIVACY-ENHANCED MESSAGE-----