-----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, Q9oEXfoRteD7meUjzCJwCfZRT4jf9P4/Q7O38pV2nlWXiIxLBqGsbpyfhLcmDam9 bLUFKv37Vk9arJPIgNY/1A== 0001095811-00-000685.txt : 20000327 0001095811-00-000685.hdr.sgml : 20000327 ACCESSION NUMBER: 0001095811-00-000685 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000324 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PACIFIC GULF PROPERTIES INC CENTRAL INDEX KEY: 0000912597 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 330577520 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-12768 FILM NUMBER: 578422 BUSINESS ADDRESS: STREET 1: 4220 VON KARMAN STREET 2: SECOND FLOOR CITY: NEWPORT BEACH STATE: CA ZIP: 92660-2002 BUSINESS PHONE: 9492235000 MAIL ADDRESS: STREET 1: 4220 VON KARMAN STREET 2: SECOND FLOOR CITY: NEWPORT BEACH STATE: CA ZIP: 92660-2002 10-K 1 FORM 10-K YEAR ENDED DECEMBER 31, 1999 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ . COMMISSION FILE NUMBER 1-12546 PACIFIC GULF PROPERTIES INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MARYLAND 33-0577520 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 4220 VON KARMAN, NEWPORT BEACH, CALIFORNIA 92660 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 223-5000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF SECURITY NAME OF EACH EXCHANGE ON WHICH REGISTERED ----------------- ----------------------------------------- Common Stock, $0.01 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of Common Stock held by non-affiliates of the registrant as of March 17, 2000 was approximately $416,972,000. On March 17, 2000, the registrant had 20,656,121 shares of Common Stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the proxy statement for the annual meeting of shareholders of Pacific Gulf Properties Inc. to be held on May 11, 2000 are incorporated by reference into Part III of this report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 TABLE OF CONTENTS
PAGE ----- PART I Item 1. Business.................................................... 3 Item 2. Properties.................................................. 10 Item 3. Legal Proceedings........................................... 16 Item 4. Submission of Matters to a Vote of Security Holders......... 16 PART II Item 5. Market for the Company's Common Equity and Related Stockholder Matters......................................... 17 Item 6. Selected Financial and Operating Data....................... 18 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................... 20 Item 7A Quantitative and Qualitative Disclosures About Market Risk........................................................ 26 Item 8. Financial Statements and Supplementary Data................. 27 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................... 27 PART III Item 10. Directors and Management.................................... 28 Item 11. Executive Compensation...................................... 28 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 28 Item 13. Certain Relationships and Related Transactions.............. 28 PART IV Item 14. Exhibits, Financial Statement Schedule and Reports on form 8-K......................................................... 28
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS This report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1993, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Pacific Gulf Properties Inc. (together with its consolidated operating partnerships, PGP Inland Communities, L.P., Pacific Inland Communities, L.L.C., Terrace Gardens PGP L.P., Morning View Terrace PGP L.P., PGP Northern Industrial L.P., PGP Southern Industrial II, L.P. and PGP Von Karman Properties, collectively the "Company") intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of complying with those safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," "prospects" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Company on a consolidated basis include, but are not limited to: changes in economic conditions generally and the real estate market specifically, legislative/ regulatory changes (including changes to laws governing the taxation of REITs), availability of capital, interest rates, competition, supply and demand for industrial and multifamily properties in the Company's current and proposed market areas and general accounting principles, policies and guidelines applicable to REITs. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included herein and in the Company's other filings with the Securities and Exchange Commission. 2 3 PART I ITEM 1. BUSINESS OVERVIEW Pacific Gulf Properties Inc. operates as a self-administered and self-managed equity real estate investment trust (a "REIT") which owns, operates, leases, acquires, rehabilitates and develops primarily light industrial and business park properties ("Industrial Properties") in the Western United States. In addition to its Industrial Properties, the Company owns, operates, acquires and develops rental housing for active seniors age 55 and older, focusing mainly in California. The Company also owns and operates family-style apartment communities. As of December 31, 1999, the Company owned a portfolio of 74 industrial properties, including five properties under development and rehabilitation, containing an aggregate of 15.6 million leasable square feet, one of which is being rehabilitated containing approximately 118,000 leasable square feet and four which are being developed that will contain approximately 709,000 leasable square feet (the "Industrial Properties"). As of December 31, 1999, the Industrial Properties experienced a combined occupancy rate of 96%. As of December 31, 1999, the Company also owned a portfolio of 18 multifamily properties (the "Multifamily Properties") containing 3,069 units. Of these units, 1,438 units in eight properties are active senior rental apartment communities (the "Active Senior" properties). The remaining 10 properties are family-style apartment communities which the Company continues to operate. The Company is negotiating contracts with listing brokers for the sale of the remaining family-style apartment communities. At year end 1999, occupancy rates at the Active Senior properties and the remaining family-style apartment communities were 94% and 96%, respectively. The Company was incorporated in August 1993 in the State of Maryland and completed its initial public offering on February 18, 1994 (the "Offering"). Prior to February 18, 1994, the Company was a wholly-owned subsidiary of Santa Anita Realty Enterprises, Inc. ("Realty"). Its executive offices are located at 4220 Von Karman Drive, Newport Beach, California 92660. BUSINESS STRATEGY The Company's primary objective is to seek investment opportunities in the industrial and active senior apartment segments of the real estate industry which may be either upgraded by capital improvements and intensive management; developed, and or acquired at or below replacement cost. The Company strives to maximize the growth potential of its portfolio to obtain the highest level of funds from operations while increasing the value of its real estate holdings for the overall benefit and profit of its shareholders. INDUSTRIAL PROPERTIES The Company focuses on multi tenant business parks and mid-size warehouse/distribution facilities. It specializes in serving small to mid-size industrial tenants ranging from 1,000 to 100,000 square feet of space. The average tenant of the Company's Industrial Properties leases approximately 6,500 square feet of space. Over 2,300 tenants currently occupy the Industrial Properties and no one tenant accounts for more than 1% of the Company's total revenue. Management believes that its properties are located in strong markets and intends to continue to focus its activities in the Western United States. The Company believes these regions possess diverse and vibrant economies with good prospects for continued economic growth due to their Pacific Rim location, quality of life, well developed transportation infrastructures, high technology industries, well-educated employee base and excellent universities. Within these regions, the Company focuses on sub-markets within the major metropolitan areas of Orange County, San Bernardino/Riverside Counties, Sacramento, the East Bay area of Northern California, Los Angeles, San Diego, Seattle, Phoenix and Las Vegas. 3 4 In each specific local submarket in which it operates, the Company generally seeks to own a number of properties and to be a significant commercial landlord in that market for the Company's product type. Through this approach, the Company can offer prospective tenants a variety of property options and can provide existing tenants, who are growing, additional space in properties owned by the Company in the same area. The Company believes that this strategy gives it a measure of control over the rental rates it charges for its properties. The Company also believes that it has achieved significant market penetration within a number of submarkets in which it operates. Such market focus enables the Company to maximize synergistic opportunities and economies of scale and allows management to concentrate its expertise on specific markets and local conditions. The Company manages all of its existing Industrial Properties in California, Nevada and the Pacific Northwest using its network of eight regional offices, each of which is headed by a Regional Manager who reports directly to the Senior Vice President of Industrial Operations. The Company offers industrial leases in the one- to five-year range. Lease terms include, in most cases, annual adjustments based on changes in the consumer price index. The standard lease also includes some refurbishing and tenant improvement allowance with the amount varying depending upon the length of the lease, the size of the space leased and the use. The Company will seek tenants primarily involved in warehouse, distribution, assembly and light manufacturing activities. Standard lease terms include a stipulated due date for rent payment, late charges (typically with no grace period), no offset or withholding provisions, security deposit clause, as well as many other provisions considered favorable to the landlord. MULTIFAMILY PROPERTIES In 1998, the Company began to execute its strategy to exit the family-style apartment segment of the multifamily market and to focus only on industrial and active senior apartment properties. The Company exited out of the Pacific Northwest market when it sold its portfolio of five family-style apartment communities containing 1,322 units in Washington state in December of 1998 and subsequently used the proceeds to purchase seven industrial properties encompassing approximately 1.3 million square feet in various western markets. As a continuation of its strategy, in February of 1999, the Company sold a 196 unit family-style apartment community in Orange County, California and used the proceeds to repay a portion of its line of credit. After the above-referenced sales, the Company continues to own a portfolio of 10 family-style apartments consisting of 1,631 units all located in Southern California. The Company is negotiating contracts with listing brokers to sell all of these properties. There can be no assurance that the Company will actually dispose of such properties, nor can there be any assurance as to the timing of any such dispositions. Any such decision by the Company will be subject to numerous factors, including prices offered for the Company's family-style apartment communities and the availability of suitable alternate investment for the proceeds of such dispositions. The Company intends to focus on active senior housing for individuals ages 55 and older, where seniors can be involved in activities, social gatherings and other types of entertainment with residents of their own age group. The Company offers no assisted living or related services. The Company's properties are oriented to those seniors interested in renting versus owning and who are able to care for themselves. The Company believes that the senior population will continue to grow and that the market for rental housing for active seniors will be strong. In addition, management believes that active senior housing typically has lower operating and management costs due to lower tenant turnover and maintenance cost. The Company is focusing its active senior activities primarily in the California marketplace. The Company currently manages all of its Multifamily Properties in each of its regions. Each of the regions is managed by a Regional Manager who reports directly to the Senior Vice President of Operations -- Apartments. Within each region, each of the Multifamily Properties is operated by a staff of approximately six to seven individuals (three to four at the Active Senior communities), including a manager, assistant manager and/or leasing agents, and a maintenance and apartment preparation staff. The Company locates prospective tenants for its Multifamily Properties primarily by advertising in magazines listing available rentals and by 4 5 using firms that assist tenants in locating apartments. The Company also does magazine and direct mail advertising. Policies and procedures utilized at the property sites, including procedures concerning lease contracts, on-site marketing, credit collection standards and eviction standards, follow established federal and state laws. Individual property lease programs are structured to respond to local market conditions. The Company attempts to balance rent increases with high occupancy and low turnover. None of the Multifamily Properties are currently subject to rent control or rent stabilization regulations. However, certain of these properties are subject to restrictions based on tax-exempt loan requirements. Standard lease terms stipulate due dates for rent payments, late charges, no offset or withholding provisions, security deposits and damage reimbursement clauses, as well as many other provisions considered favorable to the property owner. Nonpayment of rent is generally handled at the properties within 15 days from the beginning of the month, with either commencement of collection or eviction proceedings occurring within that time period. REHABILITATION PROGRAM As part of its acquisition program, the Company seeks properties whose financial performance can be enhanced through physical renovation and rehabilitation. The Company also periodically renovates and rehabilitates the properties it already owns. Rehabilitation activity generally involves updating older properties to conform to current market standards and may include the installation of additional loading facilities, sprinkler upgrades, mezzanine level upgrades, parking lot upgrades and cosmetic rehabilitation of the property. The Company capitalizes on senior management's experience with renovation and rehabilitation projects, as well as third party expertise, to expedite the renovation and rehabilitation process. 5 6 1999 DEVELOPMENTS PROPERTY ACQUISITION ACTIVITY During 1999, the Company acquired approximately $11.5 million of industrial operating properties. The Company also acquired $4.7 million and $9.0 million of industrial development and rehabilitation and active senior apartment development properties, respectively. The following table sets forth information regarding these properties.
NET RENTABLE SQUARE TOTAL DATE FOOTAGE/ ACQUISITION ESTIMATED INITIAL PROPERTY NAME LOCATION ACQUIRED UNITS COST COST(1) OCCUPANCY(2) ------------- ----------------- -------- ------------ ----------- --------- ------------ (000'S) (000'S) INDUSTRIAL Operating Properties PGDC -- Las Vegas........ Las Vegas, NV November 79,274 $ 3,525 $ 3,645 82% Broadwood Business Center................. Mesa, AZ November 156,197 7,950 7,960 94% ------- ------- ------- 235,471 11,475 11,605 Development and Rehabilitation Properties PGBP -- Renton........... Renton, WA December 107,000 1,553 6,715 n/a PGBP -- Geneva........... Tempe, AZ August 117,792 3,108 5,600 n/a ------- ------- ------- 224,792 4,661 12,315 MULTIFAMILY -- ACTIVE SENIORS Development Properties The Fountains............ Anaheim Hills, CA March 259 5,461 23,878 n/a The Fountains............ Temecula, CA August 244 2,390 16,098 n/a The Fountains............ Sacramento, CA December 166 1,141 10,191 n/a ------- ------- ------- 669 8,992 50,167 ------- ------- Total Acquisitions.... $25,128 $74,087 ======= =======
- --------------- (1) Total capitalized acquisition cost, including closing and anticipated development or rehabilitation costs. (2) Occupancy is reported as of closing date of acquisition. 6 7 PROPERTY DISPOSITION ACTIVITY During 1999, the Company disposed of approximately $15.7 million of industrial properties and $7.6 million of multifamily properties. The following table sets forth information regarding these properties and does not include a deferred gain of $.9 million related to collection of a note receivable.
ACRES/ SQUARE FOOTAGE/ MONTH OF SALES COST OF GAIN ON PROPERTY NAME LOCATION UNITS DISPOSITION PRICE SALE SALE ------------- --------------- --------------- ----------- ------- ------- ------- (000'S) (000'S) (000'S) INDUSTRIAL Pacific Gulf Spectrum Center(1).... Lake Forest, CA 1.05 April $ 850 $ 850 $ -- PGDC -- Anaheim.................... Anaheim, CA 91,200 June 4,680 3,521 1,159 Seattle Industrial 8th Avenue...... Seattle, WA 42,240 August 1,900 1,408 492 Goldenwest -- Etiwanda(2).......... Ontario, CA 302,020 October 11,160 8,646 2,514 Contra Costa Diablo(2)............. Concord, CA 16,848 December 1,400 1,294 106 ------- ------- ------ MULTIFAMILY 19,990 15,719 4,271 Park Place Apartments.............. Santa Ana, CA 196 February 11,000 7,649 3,351 ------- ------- ------ Total Dispositions........ $30,990 $23,368 $7,622 ======= ======= ======
- --------------- (1) Sale of excess acreage at development site. (2) Sale of single building in a multi-building project. COMPLETION OF INDUSTRIAL PROPERTY REHABILITATION During 1999, the Company completed rehabilitation on a 382,000 square foot warehouse in San Diego, California. The total rehabilitation cost for the property was $2.6 million. The project is 100% occupied at December 31, 1999. During 1999, the Company also completed development of a 209,000 square foot industrial park in Lake Forest, California for a cost of $11.8 million, excluding land costs of $3.6 million. The property is 97% occupied at December 31, 1999. FINANCING ACTIVITY The Company has a $150.0 million unsecured revolving credit agreement (the "Line of Credit") which matures in April 2001. The interest rate payable under the Line of Credit is based on the leverage level of the Company and at December 31, 1999 is LIBOR plus 1.30%. In 1997, the Company established a pool agreement with the Federal National Mortgage Associations ("FNMA") to provide 30-year credit enhancement on the Company's tax-exempt projects. In 1999, the Company replaced the existing credit enhancement which was maturing with FNMA to finance Tyler Springs senior apartment community in Riverside, California. The $9.0 million in bonds secured by Tyler Springs have a variable interest rate, after giving effect to credit enhancement and other costs, of 5.04% as of December 31, 1999. In December 1998 in conjunction with the sale of the Company's Washington apartment communities, the Company restructured the existing indebtedness on the Hampton Bay apartment community. The lender, a life insurance company, released the Hampton Bay property as collateral and accepted a letter of credit in the amount of $9.4 million as substitution collateral. The Company replaced the letter of credit by providing its City of Industry industrial project as replacement collateral in May 1999. In February 1999, the Company borrowed $9.0 million at an interest rate of LIBOR + 1.375% for a term of one year. The proceeds of this loan were used to repay $9.0 million of indebtedness under the Company's Line of Credit. The loan is secured by a 359,000 square foot industrial property acquired in June 1998. In November 1999, the Company borrowed $6.5 million at an interest rate of LIBOR + 1.65% for a term of one year. The proceeds of this loan were used to acquire a 156,000 square foot industrial property located in Mesa, Arizona. The loan is secured by this property. 7 8 INDEBTEDNESS The following table presents information on indebtedness encumbering the Industrial and Multifamily Properties, excluding borrowings outstanding under the Company's Line of Credit, as of December 31, 1999:
OUTSTANDING BALANCE MATURITY PROPERTY (IN 000'S) DATE INTEREST RATE -------- ----------- -------------- -------------- INDUSTRIAL Baldwin Industrial Park.................................. $ 11,270 October 2005 8.150% PGBP -- Tukwila.......................................... 11,004 December 2002 Libor + 1.5%(d) Vista Distribution Center(a)............................. 7,789 October 2010 8.000% PGBP -- Rancho Cucamonga(a).............................. 3,795 October 2010 8.000% Garden Grove Industrial Center(a)........................ 5,293 October 2010 8.000% Horn Road Business Park.................................. 2,725 February 2006 7.950% Various(b)............................................... 33,973 October 2007 7.110% Eden Plaza/Eden Industrial............................... 11,639 December 2002 7.050% PGDC -- Bell Ranch Road(c)............................... 2,475 December 2012 7.750% PGBP -- Pacific Park(c).................................. 4,425 December 2012 7.750% PGBP -- North County(c).................................. 4,125 December 2012 7.750% PGBP -- Bay San Marcos(c)................................ 2,700 December 2012 7.750% PGBC -- Escondido(c)..................................... 6,300 December 2012 7.750% PGBP -- Riverview Industrial Park(c)..................... 4,475 December 2012 7.750% PGDC -- Miramar Village(e)............................... 10,974 October 2001 Libor + 1.375% PGDC -- Algona 2(f)...................................... 4,625 October 2001 Libor + 1.375% PGDC -- City of Industry................................. 7,406 April 2006 7.300% PGDC -- Las Vegas........................................ 4,365 January 2004 8.380% PGDC -- Garden Grove II.................................. 2,259 June 2011 8.000% PGBP -- Lake Forest(j)................................... 10,027 March 2000 Libor + 1.5% Pacific Gulf Spectrum Center(k).......................... 14,599 August 2000 Libor + 1.3% PGBC -- Tustin(n)........................................ 9,000 February 2000 Libor + 1.375% Broadwood Business Center................................ 6,500 November 2000 Libor + 1.65% PGDC -- Whittier(l)...................................... 7,587 September 2001 Libor + 1.525% -------- Total Industrial.................................. $189,330 -------- MULTIFAMILY Inn at Laguna Hills...................................... 4,556 August 2024 7.250% Daisy V.................................................. 1,253 September 2025 7.466%(g) Daisy VII................................................ 10,028 August 2000 6.780% Daisy XII................................................ 3,570 September 2025 7.466%(g) Daisy XVI................................................ 11,305 August 2000 6.780% Daisy XVII............................................... 6,542 August 2000 6.780% Lariat................................................... 1,155 September 2025 7.466%(g) Daisy XIX(h)............................................. 6,444 December 2026 6.300% Daisy XX(h).............................................. 7,396 December 2026 6.300% Sunnyside I(h)........................................... 5,453 December 2026 6.300% Sunnyside II(h).......................................... 1,760 December 2026 6.300% Sunnyside III(h)......................................... 2,847 December 2026 6.300% Raintree(h).............................................. 6,695 January 2026 6.400% Tyler Springs(h)......................................... 8,981 January 2027 5.040%(i) Terrace Gardens(h)....................................... 7,837 January 2026 6.385% Morning View Terrace(h).................................. 10,644 January 2026 6.375% The Fountains at Rancho Santa Margarita(h)............... 6,277 December 2026 6.400% The Fountains at Anaheim Hills(m)........................ 2,620 September 2001 Libor + 1.525% -------- Total Multifamily................................. 105,363 -------- TOTAL............................................. $294,693 ========
- --------------- (a) Vista Distribution Center, PGBP -- Rancho Cucamonga and Garden Grove Industrial Center jointly collateralize the $16,900,000 note payable. (b) PGDC -- Fontana, PGDC -- Chino, Pacific Gulf Warm Springs Industrial, PGDC -- Downey and PGDC -- Rancho Bernardo jointly collateralize the $34,000,000 note payable. 8 9 (c) PGDC -- Bell Ranch Road, PGBP -- Pacific Park, PGBP -- North County, PGBP -- Bay San Marcos, PGBC -- Escondido and PGBP -- Riverview Industrial Park jointly collateralize the $24,500,000 note payable. (d) The Company entered into an interest rate swap agreement that fixed the interest rate on $11,500,000 of the principal balance at 7.35% for five years commencing July 1, 1996. (e) Construction loan relating to rehabilitation of PGDC -- Miramar Village. The maximum loan amount under the agreement was modified to $13,930,000. The current interest rate at December 31, 1999 is 7.88%. (f) Construction loan relating to rehabilitation of PGDC -- Algona 2. The maximum loan amount under the agreement was modified to $4,625,000. The current interest rate at December 31, 1999 is 7.25%. (g) Interest rate is subject to periodic adjustments beginning March 10, 1996 based on the monthly weighted average 11th District Cost of Funds plus 2.8%. (h) These tax-exempt mortgage loans are financed using tax-exempt bond financing supported by credit enhancement from FNMA. The collateral properties, which also include Applewood, not listed above, are subject to restrictions requiring that a specified percentage of the apartment units in such properties be made available to persons with lower and moderate income. As of December 31, 1999, 349 apartment units, or 11% of the total apartments owned, were required to have been made available to persons with lower or moderate income pursuant to these requirements, and the Company has complied with such requirements. In addition, state and local authorities in some cases impose certain restrictions on the amount of rent that can be charged. (i) Interest rate is subject to periodic adjustments based on the pass through interest rate in addition to a set rate interest component. (j) Represents construction loan relating to development and construction of the PGBP -- Lake Forest project with a maximum loan amount of $10,500,000. The current interest rate at December 31, 1999 is 8.00%. An option to extend the loan for one year was exercised in March of 2000. (k) Represents construction loan relating to development and construction of the Pacific Gulf Spectrum Center with a maximum loan amount of $16,800,000. The current interest rate at December 31, 1999 is 7.80%. (l) Construction loan relating to the development and construction of the PGDC -- Whittier project with a maximum loan amount of $10,250,000. The current interest rate at December 31, 1999 is 8.03%. (m) Construction loan relating to the development and construction of the Fountains at Anaheim Hills senior apartments with a maximum loan amount of $16,350,000. The current interest rate at December 31, 1999 is 8.03%. (n) In February 2000, this loan was extended to February 2001. CORPORATE OFFICES AND EMPLOYEES The Corporate offices are located in Newport Beach, California in approximately 16,000 square feet of a 26,000 square foot office building, which is owned by the Company. At December 31, 1999, the Company employed approximately 166 persons, of which 116 were onsite or property related and 50 were corporate office employees. COMPETITIVE AND OTHER CONDITIONS Competition. Within its geographic areas of operation, the Company is subject to competition from a variety of investors, including insurance companies, pension funds, corporate and individual real estate developers and investors and other REITs with investment objectives similar to those of the Company. Some of these competitors have more substantial financial resources and longer operating histories than the Company. As an owner of industrial and apartment real estate properties, the Company competes with other owners of similar properties in connection with their financing, sale, lease or other disposition and use. 9 10 While the Company has not experienced material competitive pressures confined to specific geographic regions, it is possible that material adverse changes in regional economies or in the operations of major regional employers (such as Boeing in the Pacific Northwest) could have a material adverse effect on the ability of the Company to lease its properties and on the rents charged. Conversely, if any of the regional geographic areas in which the Company owns properties experiences economic growth, the Company is likely to experience increased competition for acquisition and development projects, thereby increasing the Company's costs of acquisition and development and potentially reducing the Company's returns therefrom. Insurance. The Company carries comprehensive liability, fire, extended coverage and rental loss insurance with respect to its Industrial, Active Senior and Multifamily Properties, with policy specifications, insured limits and deductibles customarily carried for similar properties which the Company believes are adequate and appropriate under the circumstances. These are certain types of losses, such as those arising from acts of war, which are not generally insured because they are either uninsurable or not economically insurable. Currently the Company carries earthquake disaster insurance on its California properties, which comprise 89% of the Company's total portfolio (as a percentage of total revenues); however, such insurance is also subject to deductible amounts that must be paid by the Company in the event of such an occurrence, and may not be available in the future or may only be available at rates that, in the opinion of the Company, are prohibitive. In the event that an uninsured disaster or a loss in excess of insured limits should occur, the Company could suffer a substantial loss, including loss of anticipated future revenues, while remaining obligated on related mortgage indebtedness. The Company believes its properties were constructed in compliance with applicable construction standards in effect at the time of construction. The Company obtained customary title insurance insuring fee title to its properties upon their acquisition. ITEM 2. PROPERTIES The following table presents information on the composition of the Company's operating properties based on the percentage of rental revenue at December 31, 1999 and 1998.
1999 1998 --------------------------- --------------------------- NUMBER PERCENTAGE OF NUMBER PERCENTAGE OF OF RENTAL OF RENTAL PROPERTIES REVENUE PROPERTIES REVENUE ---------- ------------- ---------- ------------- PROPERTY TYPE Industrial................................. 69 79% 68 67% Active Senior.............................. 8 10 8 9 Family..................................... 10 11 11 24 -- --- -- --- Total.............................. 87 100% 87 100% == === == === GEOGRAPHIC LOCATION California................................. 77 89% 77 82% Pacific Northwest.......................... 6 8 7 16 Southwest.................................. 4 3 3 2 -- --- -- --- Total.............................. 87 100% 87 100% == === == ===
10 11 The tables below set forth certain information relating to the Company's operating Industrial and Multifamily Properties by location and type as of December 31, 1999.
NUMBER PERCENT OF OF LEASABLE INDUSTRIAL GROSS PROPERTIES SQUARE FEET RENTAL REVENUE(1) OCCUPANCY ---------- ----------- ----------------- --------- INDUSTRIAL California Inland Empire(2)............ 7 1,827,194 8% 95% San Diego........................... 7 1,585,285 11 99 Orange County....................... 23 3,882,717 30 95 Los Angeles......................... 5 1,507,120 8 100 Northern California................. 17 3,709,506 29 96 Pacific Northwest(4)................... 6 1,313,642 9 100 Southwest(3)........................... 4 858,271 5 95 -- ---------- --- --- Total or Weighted Average...... 69 14,683,735 100% 96% == ========== === === MULTIFAMILY California Inland Empire(2)(5)................. 13 1,806 58% 95% Orange County(5).................... 3 712 26 96 San Diego(5)........................ 2 551 16 96 -- ---------- --- --- Total or Weighted Average...... 18 3,069 100% 95% == ========== === ===
- --------------- (1) Based on rental revenues for the fourth quarter of 1999. (2) Includes the eastern portion of Los Angeles County adjacent to the Riverside-San Bernardino metropolitan statistical area. (3) Includes Nevada and Arizona. (4) Includes Washington and Oregon. (5) Includes Active Senior properties. INDUSTRIAL PROPERTIES The following table presents information concerning the Industrial Operating Properties, including the actual average rent per square foot and percentage of the leasable square footage occupied by tenants, as of December 31, 1999:
GROSS AVERAGE LEASABLE MONTHLY DATE SQUARE BASE RENT INDUSTRIAL LOCATION COMPLETED FOOTAGE PER SQ. FT. OCCUPANCY ---------- -------- --------------- ---------- ------------- --------- INLAND EMPIRE PGBP -- Rancho Cucamonga................ Rancho Cucamonga, CA 1990 296,821 $0.45 96% PGDC -- Etiwanda........... Ontario, CA 1991 274,307 0.50 100% Crescent Business Center... Rancho Cucamonga, CA 1981 136,066 0.45 94% PGBP -- Riverview Industrial Park.......... San Bernardino, CA 1980 297,180 0.32 76% PGDC -- Chino.............. Chino, CA 1988 302,166 0.31 100% PGDC -- Fontana............ Fontana, CA 1988 380,634 0.31 100% Mountain Avenue Business Park..................... Upland, CA 1977 140,020 0.44 95%
11 12
GROSS AVERAGE LEASABLE MONTHLY DATE SQUARE BASE RENT INDUSTRIAL LOCATION COMPLETED FOOTAGE PER SQ. FT. OCCUPANCY ---------- -------- --------------- ---------- ------------- --------- SAN DIEGO, CA Vista Distribution Center................... Vista, CA 1990 356,800 $0.48 100% PGBP -- Bay San Marcos..... San Marcos, CA 1988 121,768 0.53 100% PGBC -- Escondido.......... Escondido, CA 1988 - 92 251,464 0.62 97% PGBP -- San Marcos......... San Marcos, CA 1985 72,050 0.52 95% PGBP -- Miramar(1)......... San Diego, CA 1981 186,022 0.79 100% PGDC -- Rancho Bernardo.... Rancho Bernardo, CA 1990 215,502 0.56 100% PGDC -- Miramar Village.... San Diego, CA 1981, 1999 381,679 0.50 100% ORANGE COUNTY, CA Garden Grove Industrial Center................... Garden Grove, CA 1979 252,184 0.48 100% PGBP -- Hoover............. Garden Grove, CA 1986 189,526 0.71 96% PGBP -- Pacific Park....... Aliso Viejo, CA 1988 99,622 1.08 98% PGBP -- North County....... Yorba Linda, CA 1987 - 89 105,516 0.62 95% Harbor Business Park....... Santa Ana, CA 1974 - 76 193,136 0.66 93% Harbor Warner Business Park..................... Santa Ana, CA 1974 - 76 127,836 0.69 90% PGBP -- Lake Forest........ Lake Forest, CA 1999 208,584 0.70 97% PG Commerce Park -- Anaheim.................. Anaheim, CA 1972 145,745 0.66 83% Acacia Business Center..... Fullerton, CA 1980 202,551 0.42 100% PGDC -- Anaheim............ Anaheim, CA 1961 129,426 0.41 100% Tower Park................. Anaheim, CA 1986, 1998 245,192 0.44 78% PGBC -- Fullerton.......... Fullerton, CA 1977 110,900 0.57 94% PGBP -- Irvine(1).......... Irvine, CA 1979 170,305 0.86 96% PGBP -- Cerritos(1)........ Anaheim, CA 1985 213,755 0.55 98% PGBP -- Los Alamitos....... Los Alamitos, CA 1975 124,924 0.75 92% PGBC -- Garden Grove II.... Garden Grove, CA 1973 208,200 0.62 98% PGBC -- Irvine Cartwright............... Irvine, CA 1979 129,015 0.73 100% PGBC -- Tustin(1).......... Tustin, CA 1974 - 76 358,807 0.77 95% Garden Grove Industrial Hunt Avenue(3)........... Garden Grove, CA 1979 168,390 0.48 100% LOS ANGELES, CA Baldwin Industrial Park.... Baldwin Park, CA 1986 567,605 0.39 100% PGDC -- Bell Ranch Road.... Santa Fe Springs, CA 1981 128,640 0.38 100% PGDC -- City of Industry... City of Industry, CA 1973 - 77, 1998 382,245 0.34 100% PGDC -- Downey............. Downey, CA 1988 289,294 0.37 100% PGBP -- La Mirada.......... La Mirada, CA 1975 82,010 0.64 82% PGBP -- Montebello......... Montebello, CA 1985 143,391 0.41 100% Lurline Industrial Park.... Chatsworth, CA 1976 - 78 124,585 0.62 97% Walnut Avenue Business Park..................... Signal Hill, CA 1990 74,453 0.70 100% PGDC -- Whittier........... Whittier, CA 1959, 1998 214,000 0.40 100% NORTHERN CALIFORNIA PG -- Commerce Park -- Eden Landing.................. Hayward, CA 1972 - 74 193,358 0.80 92% Woodland Distribution Center................... Woodland, CA 1986 570,000 0.19 100% PG Warm Springs Industrial Park..................... Fremont, CA 1980, 1987 344,416 0.46 100% Concord Business Park...... Concord, CA 1989 141,792 0.67 89% PG -- Commerce Park -- Sacramento............... Sacramento, CA 1973 269,146 0.81 87%
12 13
GROSS AVERAGE LEASABLE MONTHLY DATE SQUARE BASE RENT INDUSTRIAL LOCATION COMPLETED FOOTAGE PER SQ. FT. OCCUPANCY ---------- -------- --------------- ---------- ------------- --------- PG -- Commerce Park -- San Tomas.................... Santa Clara, CA 1972 188,777 1.49 97% PG -- Commerce Park -- Sunnyvale................ Sunnyvale, CA 1972 129,513 1.48 96% Bradshaw Business Center... Sacramento, CA 1988 114,473 0.84 90% Horn Road Business Park.... Sacramento, CA 1988 221,300 0.46 97% Norwood Industrial Park.... Sacramento, CA 1988 168,292 0.34 97% Madison West Business Park..................... North Highlands, CA 1987 - 88 147,089 0.64 88% Contra Costa Diablo Business Park............ Concord, CA 1980, 1984 129,478 0.68 78% Sierra Trinity Industrial Park..................... Dublin, CA 1985 223,371 1.31 93% Hesperian Industrial Park..................... Hayward, CA 1981 - 86 152,962 0.58 98% West Sacramento Industrial Center................... Sacramento, CA 1981 214,900 0.32 100% PGBP -- Eden Plaza(2)...... Hayward, CA 1974 101,084 0.99 100% PG Eden Industrial(2)...... Hayward, CA 1973 399,555 0.37 100% PACIFIC NORTHWEST Seattle Industrial -- 16th Avenue................... Seattle, WA 1981 64,077 0.63 100% Seattle Industrial -- South 200th.................... Seattle, WA 1981 78,720 0.59 100% PGBP -- Tukwila............ Tukwila, WA 1975 - 79 475,629 0.79 99% PGDC -- Algona............. Algona, WA 1989 200,401 0.35 100% PGDC -- Algona 2........... Algona, WA 1988 266,305 0.32 100% PGBP -- Airport Business Center................... Portland, OR 1979 - 86 228,510 0.45 99% SOUTHWEST Hohokam 10 Industrial Park East..................... Phoenix, AZ 1980 256,920 0.68 100% Hohokam 10 Industrial Park West..................... Tempe, AZ 1980 65,880 0.59 100% Broadwood Business Center................... Mesa, AZ 1986 156,197 0.56 94% PGDC -- Las Vegas.......... Las Vegas, NV 1976 - 79 379,274 0.40 92% ---------- ----- --- Sub-Total or Weighted Average for Industrial Properties............... 14,683,735 $0.55 96% ========== ===== ===
- --------------- (1) Subject to ground lease. (2) Owned by PGP Northern Industrial, L.P., a limited partnership in which the Company has an ownership interest of approximately 59%, full management and control, and the right to substantially all of the cash flow. (3) Owned by PGP Southern Industrial II, L.P., a limited partnership in which the Company has an ownership interest of approximately 49%, and full management and control. 13 14 The following tables present information concerning the Company's Industrial Properties under rehabilitation and development as of December 31, 1999. REHABILITATION AND DEVELOPMENT PROPERTIES REHABILITATION PROPERTIES
ESTIMATED ESTIMATED RENTABLE ESTIMATED TOTAL DATE COMPLETION SQUARE ACQUISITION DEVELOPMENT ESTIMATED PROPERTY NAME LOCATION ACQUIRED DATE FOOTAGE COST COST COST ------------- --------- -------- ---------- --------- ----------- ----------- --------- (000'S) (000'S) (000'S) INDUSTRIAL PGBP -- Geneva(1)...... Tempe, AZ Aug-99 Jan-01 117,792 $3,108 $2,492 $5,600
DEVELOPMENT PROPERTIES
ESTIMATED NET ESTIMATED RENTABLE ESTIMATED TOTAL DATE COMPLETION SQUARE ACQUISITION DEVELOPMENT ESTIMATED PROPERTY NAME LOCATION ACQUIRED DATE FOOTAGE COST COST COST ------------- --------------- -------- ---------- --------- ----------- ----------- --------- (000'S) (000'S) (000'S) INDUSTRIAL Pacific Gulf Spectrum Center.............. Lake Forest, CA Jul-97 Apr-99 227,000 $6,516 $16,959 $23,475 PGDC -- Miramar Village(2).......... San Diego, CA Aug-97 June-00 85,000 -- 4,961 4,961 PGDC -- Whittier(2)... Whittier, CA May-98 Jan-00 290,000 -- 14,629 14,629 PGBP -- Renton........ Renton, WA Dec-99 Dec-00 107,000 1,553 5,162 6,715 ------- ------ ------- ------- 709,000 $8,069 $41,711 $49,780 ======= ====== ======= =======
- --------------- (1) Includes rehabilitation of existing building and development of excess land. (2) No acquisition cost is reflected because the property being developed by the Company is the excess portion of a property previously acquired by the Company. The following table shows scheduled lease expirations for all leases for the Industrial Operating Properties (excluding properties under development) as of December 31, 1999.
PERCENTAGE LEASABLE ANNUAL BASE PERCENTAGE OF ANNUAL NUMBER OF SQUARE FEET OF RENT OF GROSS LEASABLE BASE RENT YEAR LEASES EXPIRING EXPIRING LEASES EXPIRING LEASES AREA EXPIRING EXPIRING ---- --------------- --------------- --------------- -------------- ---------- 2000................... 920 3,501,000 $24,743,000 41.1% 28.2% 2001................... 715 3,191,000 22,582,000 31.9 25.8 2002................... 333 2,855,000 16,947,000 14.9 19.3 2003................... 148 1,699,000 10,810,000 6.6 12.3 2004................... 103 921,000 6,173,000 4.6 7.0 2005................... 10 989,000 4,701,000 0.5 5.4 2006................... 3 7,000 49,000 0.1 0.1 2007................... 2 10,000 110,000 0.1 0.1 2008................... 4 278,000 1,163,000 0.2 1.3 2009................... 1 55,000 404,000 -- 0.5 ----- ---------- ----------- ----- ----- Totals....... 2,239 13,506,000(1) $87,682,000 100.0% 100.0% ===== ========== =========== ===== =====
- --------------- (1) As of December 31, 1999, 608,000 square feet of tenants were on month-to-month leases (which are not included above) and 570,000 square feet were unoccupied. 14 15 MULTIFAMILY PROPERTIES The following table presents information concerning the Multifamily Operating Properties, including average gross scheduled rents per unit and percentage of units occupied as of December 31, 1999:
AVERAGE AVERAGE UNIT SIZE RENT MULTIFAMILY LOCATION COMPLETED UNITS (SQ. FT.) PER UNIT OCCUPANCY ----------- -------- --------- ----- --------- -------- --------- ACTIVE SENIOR Inn at Laguna Hills(1)........ Laguna Hills, CA 1994 140 500 $717 92% The Fountains(1).............. Rancho Santa Marg., CA 1998 166 600 773 98 Tyler Springs(1).............. Riverside, CA 1987 273 714 563 92 Terrace Gardens(1)(4)......... Escondido, CA 1985 225 780 654 96 Morning View Terrace(1)(5).... Escondido, CA 1986 326 649 638 97 Sunnyside I(1)(3)............. San Dimas, CA 1984 164 495 580 94 Sunnyside II(1)(3)............ Ontario, CA 1983 60 493 508 83 Sunnyside III(1)(3)........... Ontario, CA 1985 84 504 519 89 FAMILY Applewood..................... Santa Ana, CA 1972 406 801 834 96 Raintree(2)................... Ontario, CA 1984 165 846 672 92 Daisy 5(2)(3)................. Covina, CA 1977 38 897 763 95 Daisy 7(2)(3)................. Diamond Bar, CA 1978 204 950 919 100 Daisy 12(2)(3)................ San Dimas, CA 1979 102 952 827 96 Daisy 16(2)(3)................ West Covina, CA 1981 250 986 809 95 Daisy 17(2)(3)................ San Dimas, CA 1981 156 962 846 98 Lariat(2)(3).................. San Dimas, CA 1981 30 970 823 100 Daisy 19(3)................... Ontario, CA 1983 125 1,019 836 99 Daisy 20(3)................... Ontario, CA 1982 155 1,000 756 94 ----- --- Sub-Total or Weighted Average for Multifamily Properties............................................ 3,069 95% ===== ===
- --------------- (1) Properties serving active senior tenants (individuals 55 and older). (2) Under rehabilitation. (3) Owned by PGP Inland Communities, L.P., a limited partnership in which the Company has a 84% equity interest, full management and control, and the right to 100% of cash flow until certain net operating income levels are achieved. (4) Owned by Terrace Gardens -- PGP L.P., a limited partnership in which the Company has an ownership interest of approximately 58%, full management and control, and the right to substantially all of the cash flow. (5) Owned by Morning View Terrace -- PGP L.P., a limited partnership in which the Company has an ownership interest of approximately 59%, full management and control, and the right to substantially all of the cash flow. 15 16 DEVELOPMENT PROPERTIES The following table presents information concerning the Company's Multifamily Properties under development as of December 31, 1999:
ESTIMATED TOTAL ACQUISITION DEVELOPMENT ESTIMATED COMPLETED UNITS COST COSTS COST --------- ----- ----------- ----------- --------- MULTIFAMILY -- ACTIVE SENIORS The Fountains........ Anaheim Hills, CA Mar-99 Sep-00 259 $5,461 $18,437 $23,878 The Fountains........ Temecula, CA Aug-99 Nov-00 244 2,390 13,708 16,098 The Fountains........ Sacramento, CA Dec-99 Mar-01 166 1,141 9,050 10,191 --- ------ ------- ------- 669 $8,992 $41,195 $50,167 === ====== ======= =======
ITEM 3. LEGAL PROCEEDINGS The Company is not presently subject to any litigation nor is any litigation threatened against the Company, other than routine litigation arising in the ordinary course of business. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. 16 17 PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The common stock of the Company has traded on the New York Stock Exchange ("NYSE") since October 29, 1996 under the symbol "PAG". Prior to that date and since its formation, the Company traded on the American Stock Exchange ("ASE"). The following table sets forth the high and low closing prices for the common stock on the respective exchange.
CASH RECORD HIGH LOW DISTRIBUTION DATE DATE PAID ---- --- ------------ --------------- ---------------- 1997 1st Quarter............... 23 3/8 19 1/4 0.41(1) April 1, 1997 April 11, 1997 2nd Quarter............... 22 1/8 20 1/2 0.41(1) July 1, 1997 July 11, 1997 3rd Quarter............... 24 5/16 20 7/8 0.41(1) October 1, 1997 October 10, 1997 4th Quarter............... 24 5/16 20 3/4 0.42(2) January 1, 1998 January 9, 1998 1998 1st Quarter............... 23 5/16 22 1/8 0.42(2) April 1, 1998 April 10, 1998 2nd Quarter............... 23 1/4 21 0.42(2) July 1, 1998 July 10, 1998 3rd Quarter............... 22 5/16 18 3/8 0.42(2) October 1, 1998 October 9, 1998 4th Quarter............... 20 1/2 16 1/4 0.43(3) January 1, 1999 January 8, 1999 1999 1st Quarter............... 21 17 11/16 0.43(3) April 1, 1999 April 9, 1999 2nd Quarter............... 23 5/16 17 3/4 0.43(3) July 1, 1999 July 9, 1999 3rd Quarter............... 23 19 3/4 0.43(3) October 1, 1999 October 15, 1999 4th Quarter............... 21 5/16 19 1/2 0.44 January 1, 2000 January 14, 2000
- --------------- (1) 28.6% of the distributions paid to beneficial owners in 1997 are estimated to represent a capital gain distribution. (2) 12.6% of the distributions paid to beneficial owners in 1998 represents a return of capital ($.21 per share) (3) 2.1% of the distributions paid to beneficial owners in 1999 represents a return of capital ($.01 per share), 9.1% represent capital gains ($.04 per share). The minimum distribution requirement to maintain REIT status was approximately $22,834,000 for 1997, $31,276,000 for 1998 and $36,426,000 for 1999. A regular quarterly distribution of $.44 per share was paid on January 14, 2000. The closing price of the common stock on the New York Stock Exchange on March 17, 2000 was $20 7/16 per share. As of March 17, 2000, there were approximately 10,366 beneficial owners of common stock. Future distributions by the Company will be at the discretion of the Board of Directors and will depend upon the actual Funds From Operations of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code, applicable legal restrictions and such other factors as the Board of Directors deems relevant. Although the Company intends to continue to make quarterly distributions to its stockholders, no assurances can be given as to the amount of distributions, if any, made in the future. The statement on the face of this Annual Report on Form 10-K regarding the aggregate market value of voting stock of the Company held by non-affiliates of the Company is based on the assumption that all directors and officers of the Company were, for purposes of this calculation only (and not for any other purpose), affiliates of the Company. 17 18 ITEM 6. SELECTED FINANCIAL AND OPERATING DATA The following table and footnotes set forth selected historical financial and operating data for the Company:
YEARS ENDED DECEMBER 31, ------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- --------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) OPERATING DATA Rental income Industrial properties.............. $ 98,288 $ 76,271 $ 36,410 $ 20,783 $ 12,193 Multifamily properties(a).......... 25,880 36,858 33,096 29,104 24,898 ---------- ---------- ---------- --------- --------- 124,168 113,129 69,506 49,887 37,091 ---------- ---------- ---------- --------- --------- Rental property expenses Industrial properties......................... 21,570 16,746 8,212 5,308 2,567 Multifamily properties............... 9,334 13,751 12,754 11,554 10,215 ---------- ---------- ---------- --------- --------- 30,904 30,497 20,966 16,862 12,782 Depreciation......................... 26,117 20,386 12,008 8,236 6,081 Interest............................. 27,242 25,758 17,337 18,411 14,066 General and administrative........... 7,165 5,903 3,159 2,974 2,423 Minority interest in earnings of partnerships....................... 1,342 1,024 172 -- -- Nonrecurring loss on exchange of debentures for common stock........ -- -- -- 3,596(b) -- ---------- ---------- ---------- --------- --------- 92,770 83,568 53,642 50,079 35,352 ---------- ---------- ---------- --------- --------- Income (loss) before gains on sale of real estate........................ 31,398 29,561 15,864 (192) 1,739 Gains on sale of real estate......... 8,472 35,292 5,594 74 6,664 ---------- ---------- ---------- --------- --------- Net income (loss).................... 39,870 64,853 21,458 (118) 8,403 Less preferred dividend requirements(d).................... 4,971 4,856 855 -- -- ---------- ---------- ---------- --------- --------- Income available (loss attributable) to common shareholders............. $ 34,899 $ 59,997 $ 20,603 $ (118) $ 8,403 ========== ========== ========== ========= ========= Earnings (loss) per share(c) Basic.............................. $ 1.73 $ 3.01 $ 1.51 $ (0.02) $ 1.74 Diluted............................ $ 1.71 $ 2.76 $ 1.47 $ (0.02) $ 1.68 Weighted average common shares outstanding........................ 20,216,704 19,939,014 13,685,693 6,311,963 4,830,723
- --------------- (a) Includes Active Senior apartment properties. (b) Reflects the $3,596,000 nonrecurring loss incurred on the exchange of $42,069,000 aggregate principal amount of convertible subordinated debentures into 2,440,002 shares of common stock in December 1996. (c) Earnings per share data for all periods presented reflects basic and diluted calculations in accordance with Statement No. 128 and has been restated from the previous accounting standard of primary and fully diluted earnings per share. (See Part IV -- Financial Statements.) (d) Represents dividends on Class A Preferred Stock which was issued during 1997. (See Part IV -- Financial Statements) 18 19
YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 1999 1998 1997 1996 1995 -------- --------- --------- -------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BALANCE SHEET DATA Operating properties, net of accumulated depreciation: Industrial properties........... $667,285 $ 654,004 $ 455,045 $170,731 $102,813 Multifamily properties(a)....... 150,012 159,408 206,756 179,965 175,879 -------- --------- --------- -------- -------- 817,297 813,412 661,801 350,696 278,692 Properties under development...... 52,815 39,926 32,107 2,171 -- -------- --------- --------- -------- -------- Total real estate................. 870,112 853,338 693,908 352,867 278,692 Total assets...................... 891,921 875,127 712,471 364,640 288,591 Senior debt....................... 418,343 403,845 283,852 197,401 149,847 Convertible subordinated debentures...................... -- 12,244 12,592 14,227(b) 55,659 Total equity............ 427,891 415,554 388,840 139,822 71,980 PROPERTY DATA (END OF PERIOD) Total industrial properties....... 69 68 49 21 10 Industrial leasable area (Sq. Ft.)............................ 14,684 14,310 10,676 4,573 2,902 Industrial -- Occupancy %......... 96% 95% 95% 98% 96% Total multifamily properties(a)... 18 19 24 22 21 Total apartment units(a).......... 3,069 3,265 4,655 4,110 3,945 Apartment -- Occupancy %.......... 95% 95% 94% 93% 92% SUPPLEMENTAL DATA Funds from operations(c).......... $ 52,544 $ 45,091 $ 27,017 $ 8,044 $ 7,820 Cash flow information: Operating activities............ $ 56,149 $ 50,701 $ 27,736 $ 8,523 $ 7,138 Investing activities............ $(31,488) $(140,700) $(350,597) $(81,918) $(84,480) Financing activities............ $(24,760) $ 90,809 $ 322,804 $ 72,071 $ 76,674 Ratio of Earnings to Fixed Charges......................... 1.80 1.76 1.75 --(d) 1.12
- --------------- (a) Includes Active Senior apartment properties. (b) Reflects the exchange of $42,069,000 aggregate principal amount of convertible subordinated debentures into 2,440,002 shares of common stock in December 1996. (c) We consider funds from operations, as defined by the National Association of Real Estate Investment Trusts, or NAREIT to be a useful financial measure of our operating performance. We believe that funds from operations provides investors with an additional basis to evaluate our ability to service debt and to fund acquisitions and other capital expenditures. Funds from operations should not be considered an alternative to net income determined in accordance with GAAP, as an indicator of our financial performance or as a substitute for cash flow from operating activities determined in accordance with GAAP as a measure of our liquidity. Funds from operations also is not necessarily indicative of funds available to fund our cash needs, including our ability to service our debt. The White Paper on funds from operations approved by the Board of Governors of NAREIT in October 1999 defines funds from operations as net income or loss computed in accordance with GAAP, excluding gains or losses from extraordinary items, as defined by GAAP, and gains and losses from sales of depreciable operating property plus real estate-related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. We compute funds from operations in accordance with standards established by the White Paper which may differ from the standards used by other real estate companies and, accordingly, our funds from operations may not be comparable to those companies' funds from operations. 19 20 (d) Earnings for the year ended December 31, 1996 were inadequate to cover fixed charges by approximately $0.2 million as a result primarily of the nonrecurring loss of $3,596,000 relating to the Company's exchange of debentures for common stock. The ratio of earnings to fixed charges excluding this $3.6 million non-cash item is 1.18 to 1. CALCULATION OF FFO
YEARS ENDED DECEMBER 31, ------------------------------------------------ 1999 1998 1997 1996 1995 ------- -------- ------- ------- ------- (IN THOUSANDS, EXCEPT PER SHARE DATA) Income available (loss attributable) to common shareholders.................................. $34,899 $ 59,997 $20,603 $ (118) $ 8,403 Depreciation.................................... 26,117 20,386 12,008 8,236 6,081 Gains on sale of real estate.................... (8,472) (35,292) (5,594) (74) (6,664) ------- -------- ------- ------- ------- Funds from operations........................... 52,544 45,091 27,017 8,044 7,820 Preferred dividend requirements................. 4,971 4,856 855 -- -- Interest expense on debentures.................. 615 1,041 1,100 4,720 4,736 Amortization of debenture discount and costs.... 87 130 141 570 552 ------- -------- ------- ------- ------- Proforma funds from operations(a)............... $58,217 $ 51,118 $29,113 $13,334 $13,108 ======= ======== ======= ======= =======
- --------------- (a) Proforma funds from operations assumes the conversion of the Company's convertible subordinated debentures and preferred stock and excludes the conversion of limited partnership units. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The following discussion should be read in conjunction with the financial statements and notes thereto of the Company and the "Selected Financial and Operating Data" appearing elsewhere in this report. Such financial statements and information have been prepared to reflect the Company's financial position as of December 31, 1999, 1998 and 1997 together with the results of its operations and its cash flows. Historical results and trends should not be taken as indicative of future operations. Management's statements contained in this report that are not historical facts are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Actual results may differ materially from those included in the forward-looking statements. The Company intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and is including this statement for purposes of complying with those safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project," "prospects" or similar expressions. The Company's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse affect on the operations and future prospects of the Company on a consolidated basis include, but are not limited to: changes in economic conditions generally and the real estate market specifically, legislative/regulatory changes (including changes to laws governing the taxation of REITs), availability of capital, interest rates, competition, supply and demand for industrial and multifamily properties in the Company's current and proposed market areas and general accounting principles, policies and guidelines applicable to REITs. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Further information concerning the Company and its business, including additional factors that could materially affect the Company's financial results, is included herein and in the Company's other filings with the Securities and Exchange Commission. The comparability of the financial information discussed below is impacted by a significant amount of property acquisitions, developments, rehabilitations and dispositions, as follows: during 1999, the acquisitions 20 21 of three industrial properties totaling 304,000 leasable square feet, the completion of two industrial projects containing 591,000 square feet previously under development or rehabilitation, the disposition of two industrial properties containing 133,000 square feet, the disposition of two individual buildings located within existing projects totaling 319,000 square feet, the disposition of 1.05 acres of improved land, the disposition of a multifamily property containing 196 apartment units and the redemption of debentures for common stock and cash; during 1998, the acquisition of 18 operating industrial properties containing approximately 3,278,000 leasable square feet, the completion of an active senior property containing 166 apartment units and three industrial projects containing 464,000 square feet previously under development, and the disposition of six multifamily properties containing 1,556 apartment units; and during 1997, the acquisition of 27 operating industrial properties containing approximately 5,776,000 leasable square feet, the acquisition of three multifamily properties containing 824 apartment units, and the disposition of one multifamily property containing 279 apartment units. RESULTS OF OPERATIONS Comparison of the Year Ended December 31, 1999 to the Year Ended December 31, 1998. Industrial rental income increased by $22,017,000 or 29%, from $76,271,000 in 1998 to $98,288,000 in 1999. This increase was primarily attributable to the acquisition of seven industrial properties in the fourth quarter of 1998 and three industrial properties in 1999. Industrial rental income for the year ended December 31, 1999 included $10,041,000 related to fourth quarter 1998 and 1999 acquisitions. Multifamily rental income decreased by $10,978,000 or 30%, from $36,858,000 in 1998 to $25,880,000 in 1999. This decrease was primarily attributable to the sale of six multifamily properties at the end of 1998 and one multifamily property in 1999, offset partially by an increase in rental rates. As a result of these changes total revenues increased by $11,039,000 or 10%, from $113,129,000 in 1998 to $124,168,000 in 1999. Industrial rental property expenses increased by $4,824,000, or 29%, from $16,746,000 in 1998 to $21,570,000 in 1999. This increase was primarily related to the Company's acquisitions in the fourth quarter of 1998 and the three acquisitions in 1999. Industrial rental property expenses for the year ended December 31, 1999 included $2,265,000 related to fourth quarter 1998 and 1999 acquisitions. Multifamily rental property expenses decreased by $4,417,000, or 32%, from $13,751,000 in 1998 to $9,334,000 in 1999. This decrease was primarily related to the disposition of six multifamily properties at the end of 1998 and one multifamily property in 1999. Depreciation increased by $5,731,000 or 28%, from $20,386,000 in 1998 to $26,117,000 in 1999. The increases relate primarily to the acquisitions described above and the capital improvements made to rehabilitate existing properties. Interest expense (including amortization of financing costs) increased by $1,484,000, or 6%, from $25,758,000 in 1998 to $27,242,000 in 1999. This increase was primarily attributable to an increase in outstanding borrowings due to new acquisitions made during 1998, offset by a lower interest rate on the Company's line of credit and a decrease in the outstanding debentures due to the August and November 1999 redemptions. Interest resulting from the amortization of financing costs decreased by $328,000 or 29% from $1,129,000 in 1998 to $801,000 in 1999. This decrease is attributable to the redemptions of the Company's outstanding debentures offset by the write off of deferred financing costs in August and November 1999. General and administrative expenses increased by $1,262,000, or 21%, from $5,903,000 in 1998 to $7,165,000 in 1999. This increase was primarily attributable to staff additions, staff retention costs and inflation. Minority interests in earnings of consolidated partnerships increased by $318,000 or 31% from $1,024,000 in 1998 to $1,342,000 in 1999. Minority interest represents earnings allocated to the minority partners in the partnerships in which the Company has a controlling general partner interest. 21 22 For the year ended December 31, 1999, the Company had income available to common shareholders of $34,899,000 compared to income of $59,997,000 in 1998. The results in each year were impacted by the sale of real estate. In 1998, a $35,292,000 net gain on sale of real estate was recognized primarily from the sale of six apartment communities with 1,556 apartment units located in Washington, while in 1999 an $8,472,000 net gain on sale of real estate was recognized as described in Note 9 to the financial statements. Comparison of the Year Ended December 31, 1998 to the Year Ended December 31, 1997. Industrial rental income increased by $39,861,000 or 109%, from $36,410,000 in 1997 to $76,271,000 in 1998. This increase was primarily attributable to the acquisition of 18 industrial properties in 1998. Industrial rental income for the year ended December 31, 1998 included $25,530,000 related to fourth quarter 1997 and 1998 acquisitions. Multifamily rental income increased by $3,762,000 or 11%, from $33,096,000 in 1997 to $36,858,000 in 1998. This increase was primarily attributable to an increase in rental rates and the completion of an active senior property previously under development. As a result of these changes total revenues increased by $43,623,000 or 63%, from $69,506,000 in 1997 to $113,129,000 in 1998. Industrial rental property expenses increased by $8,534,000, or 104%, from $8,212,000 in 1997 to $16,746,000 in 1998. This increase was primarily related to the Company's acquisitions in 1998. Industrial rental property expenses for the year ended December 31, 1998 included $6,282,000 related to fourth quarter 1997 and 1998 acquisitions. Multifamily rental property expenses increased by $997,000, or 8%, from $12,754,000 in 1997 to $13,751,000 in 1998. This increase was primarily related to an increase in operating expenses and the completion of an active senior property previously under development. Depreciation increased by $8,378,000 or 70%, from $12,008,000 in 1997 to $20,386,000 in 1998. The increases relate primarily to the acquisitions described above and the capital improvements made to rehabilitate existing properties. Interest expense (including amortization of financing costs) increased by $8,421,000, or 49%, from $17,337,000 in 1997 to $25,758,000 in 1998. This increase was due to an increase in outstanding borrowings due to new acquisitions made during 1997 and 1998. Interest resulting from the amortization of financing costs increased by $302,000 or 37% from $827,000 in 1997 to $1,129,000 in 1998. This increase is attributable to the additional finance costs incurred as a result of the Company's new unsecured credit facility. General and administrative expenses increased by $2,744,000, or 87%, from $3,159,000 in 1997 to $5,903,000 in 1998. This increase was primarily attributable to personnel increases and expensing of certain costs of abandoned projects. Minority interests in earnings of consolidated partnerships increased by $852,000 from $172,000 in 1997 to $1,024,000 in 1998. Minority interest represents earnings allocated to the minority partners in four partnerships in which the Company has a controlling general partner interest. For the year ended December 31, 1998, the Company had net income of $59,997,000 compared to net income of $20,603,000 in 1997. The results in each year were impacted by non-recurring items. In 1997, a $5,594,000 net gain on sale of real estate was recognized primarily from the sale of a 279 unit apartment community in Oregon, while in 1998 a $35,292,000 net gain on sale of real estate was recognized primarily from the sale of six apartment communities with 1,556 apartment units located in Washington. 22 23 LIQUIDITY AND CAPITAL RESOURCES Liquidity At December 31, 1999, the Company had $2,177,000 of cash to meet its immediate short-term liquidity requirements. Future short-term liquidity requirements are anticipated to be met through the net cash flow from operations, existing working capital and, if necessary, funding from the Company's Line of Credit. The Company anticipates that adequate cash will be available to fund its operating and administrative expenses, continuing debt service obligations and the payment of dividends in accordance with REIT requirements in the foreseeable future. Cash provided by operating activities increased from $27,736,000 for the year ended December 31, 1997 to $50,701,000 for the year ended December 31, 1998 and $56,149,000 for the year ended December 31, 1999. The primary reason for this increase relates to the additional rental income contributed by properties acquired during 1997, 1998 and 1999. Cash used in investing activities decreased from $350,597,000 for the year ended December 31, 1997 to $140,700,000 for the year ended December 31, 1998 and then decreased to $31,488,000 for the year ended December 31, 1999 primarily as a result of the reduction on acquisitions and improvements to properties. Acquisitions and improvements decreased from $332,324,000 in 1997 to $201,160,000 in 1998, and then decreased to $32,265,000 in 1999, and were offset by $15,115,000 from the sale of a multifamily community in Oregon in 1997, and $92,025,000 from the sale of a multifamily property and a multifamily portfolio in the Pacific Northwest in 1998 and $31,840,000 from the sale of two industrial properties, two individual industrial buildings, a multifamily property and a parcel of improved land in 1999. Cash provided by financing activities decreased from $322,804,000 for the year ended December 31, 1997 to $90,809,000 for the year ended December 31, 1998 and then decreased to $24,760,000 for the year ended December 31, 1999. The fluctuations were primarily a result of decreased capital funding from equity offerings in 1998 as compared to 1997, and decreased borrowing activity associated with acquisitions in 1999 as compared to 1998. In order to qualify as a REIT for federal income tax purposes, the Company is required to make distributions to its shareholders of at least 95% of REIT taxable income. The Company expects to use its cash flow from operating activities for distributions to shareholders and for payment of other expenditures. The Company intends to invest amounts accumulated for distribution in short-term investments. Unsecured Line of Credit The Company has a $150,000,000 unsecured revolving credit agreement (the "Line of Credit") which matures in April 2001. The interest rate payable under the Line of Credit is based on the leverage level of the Company and at December 31, 1999 is LIBOR plus 1.30%. As of December 31, 1999, the Company had borrowed $123,650,000 under this line. Acquisitions and Improvements to Properties During 1999 the Company invested $32,265,000 in real estate assets. Proceeds for these investments were generated primarily from the sale of two industrial properties, two individual industrial buildings, a multifamily property and a parcel of improved land in 1999 which generated proceeds of $30,990,000 and borrowings from the Line of Credit. The Company intends to acquire additional properties and may seek to fund these acquisitions through proceeds received from a combination of its Line of Credit, equity offerings, debt financings or asset dispositions. 23 24 Dispositions In 1999, the Company sold for a gross sales price of $30,990,000 -- a 91,200 square foot industrial property, a 302,020 square foot individual industrial building, a 1.05 acre parcel of improved land and a 196 unit multifamily property all located in Southern California, a 42,240 square foot industrial property in Washington, and a 16,848 square foot individual industrial building located in Northern California. The Company also recognized a deferred gain of $850,000 as a result of the collection of a note receivable relating to the sale of the Company's Texas properties in 1995. The Company reported a gain on the sales after all costs of $8,472,000. After the above-referenced sales, the Company continues to own a portfolio of 10 family-style apartments consisting of 1,631 units all located in Southern California. The Company has entered into contracts with listing brokers to sell all of these properties. There can be no assurance that the Company will actually dispose of such properties, nor can there be any assurance as to the timing of any such dispositions. Any such decision by the Company will be subject to numerous factors, including prices offered for the Company's family-style apartment communities and the availability of suitable alternate investment for the proceeds of such dispositions. Developments During 1999, the Company completed and transferred to operating properties a 382,000 square foot warehouse in San Diego, California. The total rehabilitation cost for the property was $2,600,000. The project is currently 100% occupied at December 31, 1999. During 1999, the Company also developed a 209,000 square foot industrial park in Lake Forest, California for a cost of $11,800,000, excluding land costs of $3,600,000. The property is 97% occupied at December 31, 1999. As of December 1999, the Company has under development four industrial properties that will contain approximately 709,000 leasable square feet. Three of the properties are located in Southern California and one is located in Washington. The Company also has one industrial property which upon rehabilitation and development will contain approximately 118,000 leasable square feet located in Arizona. Development and rehabilitation costs for these properties totaled $27,105,000 through December 31, 1999. As of December 1999, the Company has under development three multifamily apartment properties for active seniors containing 669 units. Two are located in Southern California and one is located in Northern California. Development costs, excluding land costs of $8,992,000, for these properties totaled $3,505,000 through December 31, 1999. Debt Financings In 1997, the Company established a pool agreement with the Federal National Mortgage Associations ("FNMA") to provide 30-year credit enhancement on the Company's tax-exempt projects. In 1999, the Company replaced the existing credit enhancement which was maturing with FNMA to finance Tyler Springs senior apartment community in Riverside, California. The $9.0 million in bonds secured by Tyler Springs have a variable interest rate, after giving effect to credit enhancement and other costs, of 5.00% as of December 31, 1999. In December 1998 in conjunction with the sale of the Company's Washington apartment communities, the Company restructured the existing indebtedness on the Hampton Bay apartment community. The lender, a life insurance company, released the Hampton Bay property as collateral and accepted a letter of credit in the amount of $9.4 million as substitution collateral. The Company to replaced the letter of credit by providing its City of Industry industrial project as replacement collateral in May 1999. 24 25 Convertible Subordinated Debentures The Company called for redemption of $6,500,000 of its outstanding debentures on August 18, 1999. As of that date, $6,300,000 of the debentures called had converted into 338,301 shares of Common Stock. The Company redeemed the remaining $200,000 for cash. The Company called for redemption of the remaining outstanding debenture of $5,273,000 on November 10, 1999. As of that date, $5,110,000 of the debentures called had converted into 274,373 shares of Common Stock. The Company redeemed the remaining $163,000 for cash. Shelf Registration During 1998, the Company filed a shelf registration statement with the Securities and Exchange Commission for an aggregate amount of $300,000,000, covering the proposed issuance of debt, preferred or common stock securities and warrants to purchase securities of the Company (the "1998 Shelf Registration Statement"). The 1998 Shelf Registration Statement was declared effective in April of 1998. At December 31, 1999, the Company has $300,000,000 available under the 1998 Shelf Registration Statement. Year 2000 Readiness In 1999, we completed our remediation and testing of systems with respect to the Year 2000 date change. As a result of our planning and implementation efforts, we experienced no disruptions in mission critical information technology and non-information technology systems and believe those systems successfully responded to the Year 2000 date change. We incurred costs of less than $100,000 during 1999 in connection with remediating our systems. We are not aware of any material problems resulting from Year 2000 issues, either with our products, our internal systems or the products and services of third parties. We will continue to monitor our mission critical computer applications and those of our suppliers and vendors throughout the year to ensure that any latent Year 2000 matters that may arise are addressed promptly. Capital Expenditures The Company capitalizes the direct and indirect cost of expenditures for the acquisition of development properties or rehabilitation of its multifamily and industrial properties. The Company also capitalizes the direct cost of capital expenditures that are considered revenue producing ("Revenue Producing") and other expenditures that increase the service life of the Company's properties ("Restorations"). Revenue Producing expenditures are improvements which significantly increase the revenue-producing capability of the asset including tenant improvements at industrial properties, installation of washers and dryers at multifamily properties, and other value-added additions. Rehabilitation expenditures are costs the Company determines are necessary during the due diligence phase immediately preceding the acquisition of a property. At newly acquired properties, the Company often finds it necessary to upgrade the physical appearance of such properties and to complete the maintenance and repair work that had been deferred by prior owners. Restorations are nonrevenue-producing capital expenditures which recur on a regular basis, and have estimated useful lives of more than one year. Make ready costs incurred after a property's rehabilitation, such as carpet and appliance replacement, interior painting and window coverings are expensed as incurred. 25 26 The following table summarizes capital expenditures incurred by the Company related to its operating properties for the years ended December 31, 1999 and 1998 (all amounts are in thousands):
1999 1998 ------- -------- INDUSTRIAL Development................................................. $ 2,400 $ 832 Acquisitions................................................ 14,744 181,780 Revenue-Producing........................................... 7,718 5,427 Rehabilitation.............................................. -- 6,820 Restorations................................................ 5,140 2,373 ------- -------- 30,002 197,232 ------- -------- MULTIFAMILY Development................................................. -- 1,639 Acquisitions................................................ -- -- Revenue-Producing........................................... 25 123 Rehabilitation.............................................. 1,135 1,955 Restorations................................................ 1,103 211 ------- -------- 2,263 3,928 ------- -------- $32,265 $201,160 ======= ========
The Company expects such expenditures will be funded from available cash balances, revolving lines of credit, equity offerings, and proceeds from refinancing. IMPACT OF INFLATION Substantially all of the Company's leases on its Industrial Properties, which have terms generally ranging from one to five years, contain provisions providing for rental increases based either on fixed increases or on increases in the Consumer Price Index. All of the Company's leases on its Multifamily Properties are for a period of one year or less. Substantially all of the Company's leases allow at the time of renewal, for adjustments in the rent payable thereunder. Accordingly, management believes the provisions contained in its industrial leases and the nature of its multifamily leases tend to mitigate the adverse impact of inflation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's exposure to market risk for changes in interest rates relates primarily to the Company's current and future debt obligations. The Company is vulnerable to significant fluctuations of interest rates on its floating rate debt, repricing on its fixed rate debt at various points in the future and future debt. 26 27 The following table provides information about the Company's financial instruments that are sensitive to changes in interest rates. The table below presents principal cash flows and related weighted-average interest rates by expected maturity dates.
INTEREST RATE SENSITIVITY PRINCIPAL AMOUNT AND AVERAGE INTEREST RATE BY EXPECTED MATURITY ------------------------------------------------------------------------- 2000 2001 2002 2003 2004 THEREAFTER ----------------- -------------- ------- ---- ------ ---------- (IN THOUSANDS, EXCEPT INTEREST RATES) Mortgage Notes................ $43,375 $ -- $22,644 $ -- $4,366 $109,543 Construction Loans............ 24,626 25,806 -- -- -- -- Tax Exempt Mortgage Debt...... -- -- -- -- -- 64,333 Line of Credit -- Unsecured... -- 123,650 -- -- -- -- ------- -------- ------- ---- ------ -------- Total............... $68,001 $149,456 $22,644 $ -- $4,366 $173,876 ======= ======== ======= ==== ====== ======== Weighted Average Interest Rates Mortgage Notes................ 7.25% -- 7.20% -- 8.38% 7.58% Construction Loans............ Libor + 1.30, Libor + 1.375, -- -- -- Libor + 1.50 Libor + 1.525 or reference rate Tax Exempt Mortgage Debt...... -- -- -- -- 6.30% Line of Credit................ -- Libor + 1.30 -- -- --
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Financial Statements for a listing of the financial statements and supplementary data filed with this report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND DISCLOSURE None. 27 28 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS The information required by this item is hereby incorporated by reference from the Company's proxy statement for the Year 2000 Annual Meeting ("Proxy Statement") under the caption "Election of Directors -- Nominees" and "Officers and Key Employees." ITEM 11. EXECUTIVE COMPENSATION The information required by this item is hereby incorporated by reference from the Proxy Statement under the caption "Officers and Key Employees -- Compensation." ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is hereby incorporated by reference from the Proxy Statement under the caption "Security Ownership of Certain Beneficial Owners and Management." ITEM 13. CERTAIN RELATIONSHIPS AND OTHER TRANSACTIONS The information required by this item is hereby incorporated by reference from the Proxy Statement under the caption "Certain Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this report 1. Financial Statements. See Index to Financial Statements. 2. Financial Statement Schedule. See Index to Financial Statements. 3. Exhibits. See Exhibit Index on pages F-28 and F-29. (b) Reports on Form 8-K. None. 28 29 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PACIFIC GULF PROPERTIES INC. By: /s/ GLENN L. CARPENTER ------------------------------------ Glenn L. Carpenter Chairman of the Board of Directors President and Chief Executive Officer By: /s/ DONALD G. HERRMAN ------------------------------------ Donald G. Herrman Executive Vice President, Secretary, and Chief Financial Officer (Principal Financial and Accounting Officer) Date: March 17, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities and on the date indicated.
NAME TITLE ---- ----- /s/ GLENN L. CARPENTER Chairman of the Board of Directors - ------------------------------------------ President, Chief Executive Officer Glenn L. Carpenter (Principal Executive Officer) /s/ PETER L. EPPINGA Director - ------------------------------------------ Peter L. Eppinga /s/ CHRISTINE GARVEY Director - ------------------------------------------ Christine Garvey /s/ CARL C. GREGORY, III Director - ------------------------------------------ Carl C. Gregory, III /s/ JOHN F. KOOKEN Director - ------------------------------------------ John F. Kooken /s/ DONALD E. LANGE Director - ------------------------------------------ Donald E. Lange /s/ ROBERT E. MORGAN Director - ------------------------------------------ Robert E. Morgan /s/ JAMES E. QUIGLEY, 3RD Director - ------------------------------------------ James E. Quigley, 3rd /s/ KEITH W. RENKEN Director - ------------------------------------------ Keith W. Renken
29 30 PACIFIC GULF PROPERTIES INC. INDEX TO FINANCIAL STATEMENTS AND SCHEDULE DECEMBER 31, 1999
PAGE ------- FINANCIAL STATEMENTS FILED AS PART OF THIS REPORT Report of Independent Auditors............................ F-2 Consolidated Balance Sheets............................... F-3 Consolidated Statements of Operations..................... F-4 Consolidated Statements of Shareholders' Equity........... F-5 Consolidated Statements of Cash Flows..................... F-6 Notes to Consolidated Financial Statements................ F-7 SCHEDULE FILED AS PART OF THIS REPORT Schedule III -- Real Estate and Accumulated Depreciation........................................... F-25
F-1 31 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Shareholders Pacific Gulf Properties Inc. We have audited the accompanying consolidated balance sheets of Pacific Gulf Properties Inc. as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. Our audits also included the financial statement schedule listed in the Index on page F-1. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pacific Gulf Properties Inc. at December 31, 1999 and 1998, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. ERNST & YOUNG LLP Newport Beach, California February 10, 2000 F-2 32 PACIFIC GULF PROPERTIES INC. CONSOLIDATED BALANCE SHEETS ASSETS
DECEMBER 31, ---------------------- 1999 1998 --------- --------- (IN THOUSANDS, EXCEPT SHARE DATA) Real estate assets Operating properties Land................................................... $232,665 $229,920 Buildings.............................................. 657,347 633,268 -------- -------- 890,012 863,188 Accumulated depreciation............................... (72,715) (49,776) -------- -------- 817,297 813,412 Properties under development, including land.............. 52,815 39,926 -------- -------- 870,112 853,338 Cash and cash equivalents................................... 2,177 2,276 Accounts and other receivables.............................. 4,005 4,984 Other assets................................................ 15,627 14,529 -------- -------- $891,921 $875,127 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Loans payable............................................. $418,343 $403,845 Accounts payable and accrued liabilities.................. 17,244 15,828 Dividends payable......................................... 10,366 9,844 Convertible subordinated debentures....................... -- 12,244 -------- -------- 445,953 441,761 Minority interests in consolidated partnerships............. 18,077 17,812 Commitments and contingencies............................... -- -- Shareholders' equity Preferred shares, $.01 par value; 10,000,000 shares authorized; 2,763,116 Senior Cumulative Convertible Class A shares outstanding at December 31, 1999, and December 31, 1998...................................... 28 28 Preferred shares, $.01 par value; 300,000 shares authorized; Class C Junior Participating Cumulative Preferred Stock; no shares outstanding................. -- -- Common shares, $.01 par value; 100,000,000 shares authorized; 20,685,402 and 20,017,814 shares outstanding at December 31, 1999 and December 31, 1998, respectively........................................... 207 201 Outstanding restricted stock.............................. (1,193) (1,203) Additional paid-in capital................................ 424,632 412,093 Retained earnings......................................... 4,217 4,435 -------- -------- 427,891 415,554 -------- -------- $891,921 $875,127 ======== ========
See accompanying notes. F-3 33 PACIFIC GULF PROPERTIES INC. CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, ------------------------------------- 1999 1998 1997 ---------- ---------- --------- (IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUES Rental income Industrial properties..................................... $ 98,288 $ 76,271 $36,410 Multifamily properties.................................... 25,880 36,858 33,096 -------- -------- ------- 124,168 113,129 69,506 EXPENSES Rental property expenses Industrial properties..................................... 21,570 16,746 8,212 Multifamily properties.................................... 9,334 13,751 12,754 -------- -------- ------- 30,904 30,497 20,966 Depreciation................................................ 26,117 20,386 12,008 Interest (including amortization of debenture discount and financing costs of $801, $1,129 and $827, respectively)... 27,242 25,758 17,337 General and administrative.................................. 7,165 5,903 3,159 Minority interests in earnings of consolidated partnerships.............................................. 1,342 1,024 172 -------- -------- ------- 92,770 83,568 53,642 -------- -------- ------- INCOME BEFORE GAINS ON SALE OF REAL ESTATE.................. 31,398 29,561 15,864 Gains on sale of real estate................................ 8,472 35,292 5,594 -------- -------- ------- NET INCOME.................................................. 39,870 64,853 21,458 Less preferred dividend requirements...................... 4,971 4,856 855 -------- -------- ------- INCOME AVAILABLE TO COMMON SHAREHOLDERS..................... $ 34,899 $ 59,997 $20,603 ======== ======== ======= EARNINGS PER SHARE Basic..................................................... $ 1.73 $ 3.01 $ 1.51 ======== ======== ======= Diluted................................................... $ 1.71 $ 2.76 $ 1.47 ======== ======== =======
See accompanying notes. F-4 34 PACIFIC GULF PROPERTIES INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
COMMON STOCK PREFERRED STOCK OUTSTANDING ADDITIONAL RETAINED EARNINGS --------------- --------------- RESTRICTED PAID-IN (DISTRIBUTIONS IN SHARES AMOUNT SHARES AMOUNT STOCK CAPITAL EXCESS OF EARNINGS) TOTAL ------ ------ ------ ------ ----------- ---------- ------------------- -------- Balance -- December 31, 1996...... 9,758 $ 98 -- $ -- $ (878) $157,896 $(17,294) $139,822 Common shares issued.............. 10,189 102 -- -- -- 200,787 -- 200,889 Preferred shares issued........... -- -- 2,763 28 -- 52,504 -- 52,532 Net issuance of restricted stock........................... 21 -- -- -- 60 -- -- 60 Dividends on common shares........ -- -- -- -- -- -- (25,066) (25,066) Dividends on preferred shares..... -- -- -- -- -- -- (855) (855) Net income........................ -- -- -- -- -- -- 21,458 21,458 ------ ---- ----- ---- ------- -------- -------- -------- Balance -- December 31, 1997...... 19,968 200 2,763 28 (818) 411,187 (21,757) 388,840 Common shares issued.............. 50 1 -- -- -- 932 -- 933 Preferred shares issued........... -- -- -- -- -- (26) -- (26) Net issuance of restricted stock........................... -- -- -- -- (385) -- -- (385) Dividends on common shares........ -- -- -- -- -- -- (33,805) (33,805) Dividends on preferred shares..... -- -- -- -- -- -- (4,856) (4,856) Net income........................ -- -- -- -- -- -- 64,853 64,853 ------ ---- ----- ---- ------- -------- -------- -------- Balance -- December 31, 1998...... 20,018 201 2,763 28 (1,203) 412,093 4,435 415,554 Common shares issued.............. 667 6 -- -- -- 12,357 -- 12,363 Net issuance of restricted stock/compensation earned on options......................... -- -- -- -- 10 182 -- 192 Dividends on common shares........ -- -- -- -- -- -- (35,117) (35,117) Dividends on preferred shares..... -- -- -- -- -- -- (4,971) (4,971) Net income........................ -- -- -- -- -- -- 39,870 39,870 ------ ---- ----- ---- ------- -------- -------- -------- Balance -- December 31, 1999...... 20,685 $207 2,763 $ 28 $(1,193) $424,632 $ 4,217 $427,891 ====== ==== ===== ==== ======= ======== ======== ========
See accompanying notes. F-5 35 PACIFIC GULF PROPERTIES INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, -------------------------------- 1999 1998 1997 -------- --------- --------- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES Net income................................................ $ 39,870 $ 64,853 $ 21,458 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................................... 26,117 20,386 12,008 Amortization of debenture discount and financing costs................................................ 801 1,129 827 Minority interests in earnings of consolidated partnerships......................................... 1,342 1,024 172 Gains on sale of real estate........................... (8,472) (35,292) (5,594) Compensation recognized related to restricted stock issued to employees.................................. 10 (385) 59 Compensation recognized related to options issued to employees............................................ 182 -- -- Net increase in other assets........................... (3,849) (7,370) (4,532) Net increase in liabilities............................ 148 6,356 3,338 -------- --------- --------- Net cash provided by operating activities......... 56,149 50,701 27,736 -------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisitions and improvements to properties............... (32,265) (201,160) (332,324) Development expenditures.................................. (31,063) (31,565) (29,936) Proceeds from sale of real estate......................... 31,840 92,025 15,115 Purchase of property and equipment, net................... -- -- (3,452) -------- --------- --------- Net cash used in investing activities..................... (31,488) (140,700) (350,597) -------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from unsecured line of credit.................... 36,150 236,419 158,278 Repayment of unsecured line of credit..................... (46,250) (119,869) (154,764) Proceeds from mortgage notes payable...................... 15,500 18,300 97,921 Repayment of mortgage notes payable....................... (9,355) (28,411) (19,784) Proceeds from construction loans.......................... 18,453 19,515 4,800 Repayment of construction loans........................... -- (5,962) -- Debentures converted to common shares..................... (304) (348) (1,635) Issuance of common shares................................. 424 907 200,891 Issuance of preferred shares.............................. -- -- 52,531 Minority interests contributions.......................... (1,077) 7,462 5,636 Dividends on common shares................................ (34,623) (33,583) (20,215) Dividends on preferred shares............................. (3,678) (3,621) (855) -------- --------- --------- Net cash (used in) provided by financing activities....... (24,760) 90,809 322,804 -------- --------- --------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (99) 810 (57) CASH AND CASH EQUIVALENTS -- BEGINNING OF PERIOD............ 2,276 1,466 1,523 -------- --------- --------- CASH AND CASH EQUIVALENTS -- END OF PERIOD.................. $ 2,177 $ 2,276 $ 1,466 ======== ========= =========
See accompanying notes. F-6 36 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION Pacific Gulf Properties Inc. was incorporated in Maryland in August 1993. The Company operates as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended, which owns, operates, leases, acquires, rehabilitates and develops light industrial and business park properties and multifamily properties including active senior and family-style apartment communities. The Company commenced operations on February 18, 1994 upon the completion of its initial public offerings and consummation of certain formation transactions. BASIS OF PRESENTATION The consolidated financial statements include the Company's accounts and all subsidiaries and partnerships over which it has control. The Company's controlled partnerships and subsidiaries include PGP Inland Communities, L.P., PGP -- Terrace Gardens Holdings Inc., PGP -- Morning View Terrace Holdings Inc., PGP Northern Industrial, L.P., PGP Southern Industrial II, L.P., Pacific Inland Communities LLC and PGP Von Karman Properties. Minority interests represent the ownership interests of outside limited partners in certain of the partnerships controlled by the Company. All intercompany accounts and transactions have been eliminated in consolidation. REAL ESTATE ASSETS Real estate assets consist of operating properties and properties under development. Operating properties are held for investment and carried at cost less accumulated depreciation. Cost includes the cost of land and completed buildings and related improvements. Expenditures that increase the service life of properties are capitalized; the cost of maintenance and repairs is charged to expense as incurred. Depreciation is generally provided on a straight-line basis over the estimated useful lives of the buildings and improvements, ranging primarily from 15 to 40 years. When depreciable property is retired or disposed of, the related costs and accumulated depreciation are removed from the accounts and any gain or loss reflected in operations. Properties under development are carried at cost. The cost of development includes land acquisition and infrastructure costs, direct and indirect construction costs and carrying costs including interest and taxes. Land acquisition and infrastructure costs are allocated to components of properties based on relative fair value. Interest and property taxes are capitalized to properties while development activities are in progress. When a project or property under development is completed, all related holding and operating costs are expensed as incurred. Impairment losses are recorded on long-lived assets used in operations and properties under development when indicators of impairment are present and the assets' carrying amount is greater than the sum of the future undiscounted cash flows, excluding interest, estimated to be generated by those assets. As of December 31, 1999, no indicators of impairment existed and no impairment losses have been recorded. The Company follows the provisions of EITF 97-11, Accounting for Internal Costs Related to Real Estate Property Acquisitions. Accordingly, effective April 1, 1998, the Company ceased capitalizing its internal acquisition costs incurred in conjunction with the identification and acquisition of properties to be held for operations. The Company continues capitalizing internal acquisition costs associated with properties which are under development. CASH AND CASH EQUIVALENTS Certificates of deposit and short-term investments with remaining maturities of three months or less when acquired are considered cash equivalents. F-7 37 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS Accounts receivable are net of an allowance for uncollectible accounts totaling $1,012,000 and $298,000 at December 31, 1999 and 1998, respectively. FINANCING COSTS Financing costs are included in other assets and consist of loan fees, other loan costs and deferred debenture costs. Loan fees and other loan costs are amortized over the term of the respective loan. Costs relating to the convertible subordinated debentures offering are amortized over the term of the debentures using a method that approximates the effective interest method. Amortization of financing costs is included in interest expense. CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to a concentration of credit risk are primarily cash investments and accounts receivable from tenants. Cash is generally invested in investment-grade short- term instruments and the amount of credit exposure to any one commercial issuer is limited. Concentration of credit risk with respect to accounts receivable from tenants is limited. The Company performs credit evaluations of prospective tenants and security deposits are also obtained. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of the Company's short-term investments and loans payable approximate their fair values as of December 31, 1999. DIVIDEND REINVESTMENT PLAN During the years ended December 31, 1999 and 1998, the Company issued 3,330 and 2,156 shares, respectively, under the Company's Dividend Reinvestment Plan. RENTAL INCOME Rental income from multifamily leases is recognized when due from tenants. Apartment units are rented under lease agreements with terms of one year or less. Rental income from industrial leases is recognized on a straight-line basis over the related lease term. As a result, deferred rent is created when rental income is recognized during free rent periods of a lease. The deferred rent is included in other assets, evaluated for collectibility and amortized over the lease term. INTEREST Interest incurred for the years ended December 31, 1999, 1998 and 1997 totaled $29,757,000, $28,810,000 and $19,469,000, respectively. Interest incurred in 1999, 1998 and 1997 includes $615,000, $1,041,000 and $1,100,000 related to the Company's convertible subordinated debentures. For the years ended December 31, 1999, 1998 and 1997, the Company capitalized $2,515,000, $3,052,000 and $2,132,000 of interest related to properties under development Interest paid for the years ended December 31, 1999, 1998 and 1997 totaled $29,448,000, $27,732,000 and $18,932,000, respectively. F-8 38 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) GAINS ON SALE OF REAL ESTATE Gains on sale of real estate are recognized by the Company when title to the real estate passes to the buyer, an adequate down payment is received, the collectibility of notes received from buyers is reasonably assured, and all other conditions necessary for profit recognition have been satisfied. INCOME TAXES The Company has elected to be taxed as a REIT. As a REIT, the Company is generally not subject to income taxes. To maintain its REIT status, the Company is required to distribute annually as dividends at least 95% of its REIT taxable income, as defined by the Internal Revenue Code ("IRC"), to its shareholders, among other requirements. PER SHARE DATA The Company reports earnings per share pursuant to Statement of Financial Accounting Standards No. 128 ("Statement No. 128"). All earnings per share amounts for all periods presented reflect basic and diluted earnings per share and have been restated from the previous standard of primary and fully diluted earnings per share. (See Note 10 for additional information.) USE OF ESTIMATES The preparation of the Company's financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the assets and liabilities as of December 31, 1999 and 1998 and revenues and expenses for each of the three years in the period ended December 31, 1999. Actual results could differ from those estimates in the near term. STOCK-BASED COMPENSATION During 1999, the Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which establishes a fair value method of accounting for stock-based compensation plans. The Company follows SFAS No. 123 for all plans adopted after January 1, 1999. For stock-based compensation plans established prior to January 1, 1999, the Company continues to follow the intrinsic value method set forth in APB Opinion 25, "Accounting for Stock Issued to Employees." The adoption of this Standard in 1999 had no material effect on the Company's financial statements (see Note 5). RECENTLY ISSUED ACCOUNTING STANDARDS The Financial Accounting Standards Board has issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities as amended", which is required to be adopted on June 15, 2000. At that time, the Company will be required to report the fair value of derivatives and reflect adjustments to the carrying amount of hedged items as gains or losses. The Company does not believe the additional requirements will have a significant impact on its financial position or results of operations. RECLASSIFICATIONS Certain prior year financial statement amounts have been reclassified to conform to the current year presentation. F-9 39 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. REAL ESTATE ASSETS The Company's real estate assets consist of the following at December 31: OPERATING PROPERTIES
1999 1998 ------------ ------------ INDUSTRIAL PROPERTIES Land.................................................. $191,650,000 $187,416,000 Buildings and improvements............................ 529,381,000 500,837,000 ------------ ------------ 721,031,000 688,253,000 Accumulated depreciation.............................. (53,747,000) (34,249,000) ------------ ------------ 667,284,000 654,004,000 ------------ ------------ MULTIFAMILY PROPERTIES Active Senior Apartments Land.................................................. 14,116,000 14,116,000 Buildings and improvements............................ 57,083,000 56,270,000 ------------ ------------ 71,199,000 70,386,000 Accumulated depreciation.............................. (5,259,000) (3,303,000) ------------ ------------ 65,940,000 67,083,000 ------------ ------------ Family Apartments Land.................................................. 26,899,000 28,388,000 Buildings and improvements............................ 70,883,000 76,161,000 97,782,000 104,549,000 Accumulated depreciation.............................. (13,709,000) (12,224,000) ------------ ------------ 84,073,000 92,325,000 ------------ ------------ TOTAL OPERATING PROPERTIES Land.................................................. 232,665,000 229,920,000 Buildings and improvements............................ 657,347,000 633,268,000 ------------ ------------ 890,012,000 863,188,000 Accumulated depreciation.............................. (72,715,000) (49,776,000) ------------ ------------ $817,297,000 $813,412,000 ============ ============
OPERATING PROPERTIES Industrial Properties At December 31, 1999, the Company owns and operates 69 operating industrial properties containing an aggregate of 14,684,000 leasable square feet located in the states of California, Washington, Nevada, Arizona and Oregon. During 1999, the Company purchased three industrial properties located in Nevada and Arizona containing an aggregate of 304,000 leasable square feet. F-10 40 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company's industrial properties are leased to tenants under operating leases with terms ranging from 1 to 5 years. The minimum future lease payments to be received from noncancelable industrial leases for each of the next five years ending December 31 and thereafter, are summarized as follows: 2000........................................................ $24,743,000 2001........................................................ 22,582,000 2002........................................................ 16,947,000 2003........................................................ 10,810,000 2004........................................................ 6,173,000 Thereafter.................................................. 6,427,000 ----------- $87,682,000 ===========
Multifamily Properties At December 31, 1999, the Company owns and operates 18 multifamily properties containing 3,069 apartment units located in Southern California, including 8 multifamily properties with 1,438 units for active seniors. During 1999, the Company sold a multifamily property containing 196 apartment units located in Southern California. (See Note 9.) PROPERTIES UNDER DEVELOPMENT
1999 1998 ----------- ----------- INDUSTRIAL PROPERTIES Land.................................................... $13,662,000 $16,467,000 Buildings and improvements.............................. 26,656,000 23,459,000 ----------- ----------- 40,318,000 39,926,000 =========== =========== MULTIFAMILY PROPERTIES Active Senior Apartments Land.................................................... 8,992,000 -- Buildings and improvements.............................. 3,505,000 -- ----------- ----------- 12,497,000 -- =========== =========== TOTAL PROPERTIES UNDER DEVELOPMENT Land.................................................... 22,654,000 16,467,000 Buildings and improvements.............................. 30,161,000 23,459,000 ----------- ----------- $52,815,000 $39,926,000 =========== ===========
PROPERTIES UNDER DEVELOPMENT Industrial Properties During 1999, the Company completed and transferred to operating properties one rehabilitation project; a 382,000 square foot warehouse in San Diego, California. The total rehabilitation cost for the property was $2,572,000. The project is 100% occupied at December 31, 1999. During 1999, the Company also completed development of a 209,000 square foot industrial park in Lake Forest, California for a cost of $11,793,000, excluding land costs of $3,554,000. The property is 97% occupied at December 31, 1999. As of December 1999, the Company has under development in Southern California and Washington, four industrial properties that will contain approximately 709,000 leasable square feet, and one industrial F-11 41 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) property in Arizona under rehabilitation containing approximately 118,000 leasable square feet. Development costs, excluding land costs of $8,992,000, for these properties totaled $27,105,000 through December 31, 1999. Multifamily Properties As of December 1999, the Company has under development three multifamily properties for active seniors in California (two in Southern California and one in Northern California) that will contain 669 units. Development costs for these properties totaled $3,505,000. 3. LOANS PAYABLE The Company's loans payable at December 31, 1999 and 1998 consist of the following:
1999 1998 ------------ ------------ MORTGAGE NOTES Conventional mortgage debt Industrial............................................ $141,519,000 $141,629,000 Active Senior......................................... 4,556,000 4,620,000 Family................................................ 33,853,000 26,355,000 ------------ ------------ 179,928,000 172,604,000 Tax exempt mortgage debt Industrial............................................ -- -- Active Senior......................................... 43,799,000 44,697,000 Family................................................ 20,534,000 20,815,000 ------------ ------------ 64,333,000 65,512,000 Construction loans...................................... 50,432,000 31,979,000 Unsecured line of credit................................ 123,650,000 133,750,000 ------------ ------------ $418,343,000 $403,845,000 ============ ============
MORTGAGE NOTES At December 31, 1999, the Company's conventional mortgage debt consists of 21 notes secured by industrial properties and active senior and multifamily apartments, due in monthly installments and maturing at various dates through September 2025. Certain of the Company's conventional mortgage note agreements contain cross-collateralization provisions (see schedule III). Approximately $173,951,000 or 18 conventional mortgage notes bear fixed rates of interest ranging from 6.78% to 8.50% per annum. The remaining three conventional mortgage notes totaling $5,977,000 bear a variable rate of interest based on the Federal Home Loan Bank 11th District Rate plus 2.8%. The weighted average interest rate of the Company's conventional mortgage debt at December 31, 1999 was 7.51%. During the year ended December 31, 1999, the Federal Home Loan Bank 11th District Rate ranged from 4.48% to 4.69% and was 4.67% at December 31, 1999. At December 31, 1999, the Company's tax-exempt mortgage debt consists of eight notes totaling $64,333,000 that are secured by active senior properties and multifamily apartment properties. Seven of the tax-exempt mortgage notes totaling $55,352,000 and related bond financings are in a 30 year refunding agreement, which is backed by credit and liquidity support from guaranteed mortgage pass-through certificates issued by the Federal National Mortgage Association ("FNMA"). Standard & Poor's Rating Group assigned a rating of AAA to the bonds based on a collateral agreement with FNMA. The Company makes monthly principal and interest payments on the loans to a trustee, which in turn pays the bondholders when interest is due. The bonds are remarketed periodically and bear interest at fixed rates scheduled to increase from 3.75% to 5.20% through 2007. Principal payments on the loans are amortized based on F-12 42 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) scheduled amounts over a 30-year period. As part of the refunding agreement, the Company is required to deposit impounds with the trustee for property taxes, property and liability insurance and reserves for capital replacements on a semiannual basis. Unamortized finance costs and fees related to the refunding agreement are included in other assets and totaled $2,976,000 and $1,462,000 at December 31, 1999 and 1998, respectively. The weighted average interest rate of the Company's tax-exempt mortgage notes backed by FNMA, at December 31, 1999, was 6.35%. The Company's eighth tax-exempt mortgage note is a variable rate obligation supported by letters of credit from financial institutions. In 1999, the Company replaced the existing credit enhancement which was maturing with FNMA. At December 31, 1999 the principal amount of the debt was $8,981,000 and the interest rate was 5.04% at December 31, 1999. CONSTRUCTION LOANS At December 31, 1999 the Company has six construction loans, which are payable to a bank, and are secured by industrial properties under development. The construction loans bear interest at LIBOR + 1.30% to 1.525% or the reference rate payable monthly and mature between March 2000 and October 2001. Undisbursed funds on the construction loans at December 31, 1999 total $22,023,000. Upon completion of the properties, the Company has the option to convert the interest rate on the loans into a fixed rate of interest upon meeting certain conditions. At December 31, 1999, LIBOR was 5.835%. UNSECURED LINE OF CREDIT The Company has a $150,000,000 unsecured revolving credit agreement (the "Line of Credit") which matures in April 2001. The interest rate payable under the Line of Credit is based on the leverage level of the Company and at December 31, 1999 is LIBOR plus 1.30%. The Company's Line of Credit contains certain debt covenants. The most significant covenants require the Company to maintain a minimum net worth, a leverage ratio based on a calculated asset value no greater than 50%, an interest coverage ratio in excess of 2.00 (measured on a quarterly basis) and a fixed charge coverage ratio of not less than 1.75. In addition, the Line of Credit contains a provision which limits the loan availability amount to approximately 58% of the value of the Company's unencumbered assets, less unsecured debt. As of December 31, 1999, the Company was in compliance with all debt covenants. INTEREST RATE SWAP AGREEMENTS The Company has interest rate swap agreements that effectively convert certain floating rate mortgage notes to a fixed-rate basis, thus reducing the impact on future earnings of fluctuations in interest rates. At December 31, 1999, the Company's interest rate swap agreements have notional amounts totaling $34,500,000 under which the Company pays fixed rates of interest and receives floating rates of interest based on an index that is reset weekly. The swap counterparties are all financial institutions rated AAA by Standard & Poor's. The rate differences to be paid or received are accrued and included in interest expense as a yield adjustment and the related payable or receivable from counterparties is included in accrued liabilities or other assets. The interest rate swap agreements mature in August, 2000. F-13 43 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) LOANS PAYABLE MATURITIES The principal payments due on loans payable for each of the next five years ending December 31 and thereafter are summarized as follows: 2000........................................................ $ 68,001,000 2001........................................................ 149,456,000 2002........................................................ 22,644,000 2003........................................................ -- 2004........................................................ 4,366,000 Thereafter.................................................. 173,876,000 ------------ $418,343,000 ============
4. CONVERTIBLE SUBORDINATED DEBENTURES The Company called for redemption of $6,500,000 of its outstanding debentures on August 18, 1999. As of that date, $6,300,000 of the debentures called had converted into 338,301 shares of Common Stock. The Company redeemed the remaining $200,000 for cash. The Company called for redemption of its remaining outstanding debenture of $5,273,000 on November 10, 1999. As of that date, $5,110,000 of the debentures called had converted into 274,373 shares of Common Stock. The Company redeemed the remaining $163,000 for cash. 5. BENEFIT PLANS SHARE OPTION PLANS The Company has stock options outstanding under share option plans as more fully described in the Company's proxy filed with the Securities and Exchange Commission. The Company's stock options consist of fixed and variable stock options as listed below. Fixed options vest over a specified period. Variable options are subject to performance based vesting criteria. Available shares under the Company's share option plans totaled 3,145,000 (including 300,000 reserved for non-employee directors). Approximately 845,000 of the Company's options, at an exercise price of $20.75 per share, were granted under a plan approved by the Board of Directors and is subject to shareholder approval. F-14 44 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) FIXED STOCK OPTIONS The stock options listed in the table below, except as noted, primarily vest in equal installments over a five-year period from the date of the grant and expire ten years from the original grant date.
NUMBER OF EXERCISE PRICE OPTIONS PER SHARE --------- ---------------- Outstanding at December 31, 1996........................ 241,200 $15.00 - $18.25 Granted............................................... 468,000 $20.75 - $23.75 Canceled.............................................. (4,000) $18.25 Exercised............................................. (13,550) $16.25 - $21.38 --------- ---------------- Outstanding at December 31, 1997........................ 691,650 $15.00 - $23.75 Granted............................................... 340,000 $19.50 - $22.56 Canceled.............................................. (3,500) $18.25 Exercised............................................. (900) $21.38 --------- ---------------- Outstanding at December 31, 1998........................ 1,027,250 $15.00 - $23.75 Granted(a)............................................ 285,000 $18.94 - $20.75 Canceled.............................................. (17,850) $19.00 - $22.625 Exercised............................................. (8,486) $15.00 - $20.06 --------- ---------------- Outstanding at December 31, 1999........................ 1,285,914 $15.00 - $23.75 =========
- --------------- (a) 210,000 of options vest in equal installments over a three-year period from the date of the grant and expire ten years from the original grant date. VARIABLE STOCK OPTIONS A summary of the status of the Company's variable stock options as of December 31, 1999 and changes during the year is presented below:
NUMBER OF EXERCISE SHARES PRICE --------- -------- Outstanding at December 31, 1998............................ -- -- Granted................................................... 635,000 20.75 Canceled.................................................. -- -- Exercised................................................. -- -- ------- ----- Outstanding at December 31, 1999............................ 635,000 20.75 ======= =====
Variable stock options will vest depending on achieving certain specified performance measures of the Company during the period July 1, 1999 through December 31, 2001. Subject to the shareholders approval discussed above vesting of such options will occur after December 31, 2001 (subject to earlier vesting in the event of a change in control of the Company or the death or disability of a participant). Measurement of the specified performance criteria and the determination of the number of options that will vest, if any, will occur at the end of 2001. Any variable options that do not vest will expire. As described in Note 1, the Company adopted Statement SFAS No. 123 effective January 1, 1999. Accordingly, the Company accounts for all options granted after January 1, 1999 using the fair value method which resulted in compensation expense totaling $182,000 for the year ended December 31, 1999. Stock options granted after January 1, 1999 and accounted under SFAS No. 123 totaled 920,000, all of which are outstanding at December 31, 1999. F-15 45 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company continues to account for options granted prior to January 1, 1999 using the previous standard (APB No. Opinion 25) which has resulted in no compensation costs being recorded. Stock options granted prior to January 1, 1999 and accounted under this Opinion No. 25 totaled 1,070,700, of which 1,000,914 are outstanding at December 31, 1999. For disclosure purposes only, the Company has measured the compensation cost which would have been recognized had the fair value of the these pre-1999 options been used at the date of their grant for accounting purposes in accordance with SFAS No. 123. Based on such calculations, net income and earnings per share amounts would be approximately the same as the amounts reported by the Company. The fair value of all options at date of grant was estimated using a Black-Scholes option pricing model with the following weighted average assumptions: risk-free interest of 5.51%; a dividend yield of 8.60%; a volatility factor for the price of the Company's common shares of .210 and expected lives for the options of ten years. RESTRICTED STOCK AWARDS The Company awards restricted stock to its employees for compensation purposes. Compensation expense related to restricted stock awards is measured based on the market price of the stock on the date of the grant, and is expensed ratably over the vesting period of each award with the unamortized portion reflected as outstanding restricted stock in the shareholders' equity section in the Company's balance sheets. The restricted stock awards listed in the table below were awarded to employees based on performance and vest over periods ranging between one to seven years.
NUMBER OF AWARDS --------- Outstanding at December 31, 1997.......................... 48,796 Granted................................................... 25,261 ------ Outstanding at December 31, 1998.......................... 74,057 Granted................................................... 15,000 ------ Outstanding at December 31, 1999.......................... 89,057 ------ Vested at December 31, 1999............................... 41,549 ======
At December 31, 1999 and 1998, the unamortized amount of outstanding restricted stock issued to employees which will be charged to compensation expense in future periods totaled $1,193,000 and $1,203,000, respectively. THRIFT PLAN The Company has a thrift plan under which employees may elect to contribute up to 21% of their annual compensation, excluding bonuses, on a combination before-and-after tax basis. Contributions by the employee are matched by the Company at a 75% rate with total matching contributions not exceeding 4 1/2% of the contributing employee's annual compensation up to a maximum of 6% of compensation. Matching contributions and employee contributions are invested in a fixed income fund, various growth funds, or a combination thereof, according to the employee's choice. The thrift plan provides for 20% vesting of contributions by the Company for each full year of service, increasing to 100% vesting after five years of service. Contributions made by the Company to the thrift plan for the years ended December 31, 1999, 1998 and 1997 totaled $107,000, $113,000, and $29,000 respectively. F-16 46 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) RETIREMENT INCOME PLAN The Company has a defined benefit retirement plan for full time employees who are at least 21 years of age with one or more years of service. Plan assets consist of investments in a life insurance group annuity contract. Plan benefits are based primarily on years of service and qualifying compensation during the final years of employment. Funding requirements comply with federal requirements that are imposed by law. The Company has adopted Statement No. 132, Employers' Disclosures About Pensions and Other Post-Retirement Benefits, in 1998. Accordingly, the following information reflects the required disclosures pursuant to that Statement. Net periodic pension cost related to the retirement income plan includes amortization of past service cost over a remaining period of 26 years. Based upon actuarial valuation dates as of December 31, 1999 and 1998, the benefit obligations were $2,040,000 and $1,878,000, respectively, and the plan's net assets available for benefits were $1,392,000 in 1999 and $1,142,000 in 1998. The Company's net periodic pension cost included in general and administrative expenses for the years ended December 31, 1999, 1998, and 1997 consists of the following components:
1999 1998 1997 --------- -------- -------- Service cost.......................................... $ 288,000 $275,000 $116,000 Interest cost on projected benefit obligation......... 122,000 112,000 65,000 Expected return on plan assets........................ (103,000) (63,000) (41,000) Amortization of transition/obligation................. 7,000 7,000 -- Amortization of unrecognized prior service costs and unrecognized net obligation......................... 13,000 24,000 1,000 --------- -------- -------- Net periodic pension cost............................. $ 327,000 $355,000 $141,000 ========= ======== ========
F-17 47 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The following table sets forth the plan's funded status for the fiscal years ending December 31, 1999 and 1998:
1999 1998 ---------- ---------- CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year..................... $1,878,000 $1,598,000 Service cost................................................ 288,000 275,000 Interest cost............................................... 122,000 112,000 Plan participant contributions.............................. -- -- Actuarial gain.............................................. (150,000) (107,000) Benefits paid............................................... -- -- Other....................................................... (98,000) -- ---------- ---------- Benefit obligation at end of year........................... $2,040,000 $1,878,000 ========== ========== CHANGE IN PLAN ASSETS Fair value of plan assets at beginning of year.............. $1,142,000 $ 704,000 Actual return on plan assets................................ (41,000) 109,000 Employer contributions...................................... 291,000 329,000 Plan participant contributions.............................. -- -- Benefits paid............................................... -- -- Other....................................................... -- -- ---------- ---------- Fair value of plan assets at end of year.................... $1,392,000 $1,142,000 ========== ========== RECONCILIATION OF FUNDED STATUS Funded status underfunded................................... $ (648,000) $ (735,000) Unrecognized net actuarial loss............................. 281,000 293,000 Unrecognized transition obligation.......................... 153,000 160,000 Unrecognized prior service cost............................. 19,000 124,000 ---------- ---------- Accrued benefit cost........................................ $ (195,000) $ (158,000) ========== ========== ADDITIONAL MINIMUM LIABILITY DISCLOSURES Accrued benefit liability................................... $ -- $ -- Intangible asset............................................ -- -- Other comprehensive income, not adjusted for applicable income tax................................................ $ -- $ --
Assumptions used in determining the status of the Company's retirement income plan are as follows:
1999 1998 1997 ---- ---- ---- Weighted average discount rate.............................. 7.0% 6.5% 7.0% Weighted average rate of increase in compensation levels.... 4.8% 4.9% 4.9% Expected long-term rate of return on plan assets............ 7.5% 7.5% 7.5%
DEFERRED COMPENSATION AGREEMENTS In conjunction with its initial public offerings, the Company assumed the deferred compensation obligations attributable to employees who were previously employed by its predecessor. Deferred compensation agreements were provided to selected management employees with a fixed benefit at retirement. Benefits were based primarily on years of service and qualifying compensation during the final years of employment. During 1995, the deferred compensation agreements were substantially replaced with restricted stock. F-18 48 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. CONSOLIDATED REAL ESTATE PARTNERSHIPS The Company's consolidated partnerships include the following: PGP Inland Communities, L.P. PGP Inland Communities, L.P., a Delaware limited partnership (the "Partnership") was formed by the Company in August 1995 for the purpose of acquiring and operating 11 multifamily properties consisting of 1,368 apartment units located in Southern California (the "Properties") which were contributed by unrelated parties. In exchange for contributing the Properties to the Partnership, the unrelated parties received approximately 225,452 limited partnership units representing an initial ownership interest of approximately 22%. The Company is the sole general partner in the Partnership and currently holds an ownership interest of approximately 84%. The terms of the Partnership agreement provide that all net income (and cash flow) from the Properties be allocated (distributed) to the Company until the Properties have achieved a threshold net operating income of $6,200,000 for any given year, and cumulatively for all prior years. The Partnership's results of operations since 1995 have been fully allocated to the Company. Beginning in August 1997, the Partnership's limited partnership units can be tendered for redemption on a one-for-one basis for cash or for shares of common stock at the election of the Company. As of December 31, 1999, 55,920 of these units have been tendered for cash, the cost of which has been capitalized to the properties. Terrace Gardens -- PGP L.P. and Morning View Terrace -- PGP L.P. In June 1997, the Company, through its subsidiaries, PGP Terrace Gardens Holdings Inc. and PGP Morning View Terrace Holdings Inc., acquired a controlling general partner interest in two existing limited partnerships ("Terrace Gardens" and "Morning View") that own two adjacent active seniors apartment communities located in Escondido, California. The properties contain an aggregate of 551 apartment units. Following the acquisition, the Company became the sole general partner of the existing limited partnerships (Terrace Gardens -- PGP L.P. and Morning View Terrace -- PGP L.P.) that own and manage the properties. The existing partners of the partnerships received an aggregate of approximately 266,000 limited partnership units in such partnerships valued at $5,596,000. Beginning in June 1999, the limited partnership units can be tendered for redemption to the Company. Upon tender, the Company, at its election, may either issue common shares for the units on a one-for-one basis (subject to certain adjustments) or pay cash for the units based on the then fair market value of the Company's common shares. Since 1997, approximately 129,000 limited partnership units were tendered for cash, the cost of which was capitalized to the properties. As a result of the tender, the Company currently holds an ownership interest of approximately 58% and 59% in Terrace Gardens -- PGP L.P and Morning View Terrace -- PGP L.P., respectively. Net income from the partnerships is allocated to the limited partners based on an amount equal to the Company's dividend rate on common stock applied to the number of limited partnership units held by stock partners and the remaining income is allocated to the Company. Distributions are made to the extent of cash flow available. PGP Northern Industrial L.P. On October 20, 1997, the Company acquired a controlling general partner interest in PGP Northern Industrial L.P., a California limited partnership ("PGP Northern")which owns two industrial properties ("Eden Plaza/Eden Industrial") containing approximately 501,000 leasable square feet located in Hayward, California. The Company acquired such interest for a cash contribution of approximately $3,977,000. The previous owners of Eden Plaza/Eden Industrial became limited partners in PGP Northern and received 143,391 limited partnership units valued at $2,869,000 in exchange for the contribution of the two industrial properties. The limited partnership units can be tendered for redemption to the Company. Upon tender, the Company, at its election, may either issue common shares for the units on a one-for-one basis (subject to certain adjustments) or pay cash for the units based on the then fair market value of the common shares. At F-19 49 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) December 31, 1999, the Company holds an ownership interest of approximately 59%. Net income from the partnership is allocated to the limited partners based on an amount equal to the Company's dividend rate on common stock applied to the number of limited partnership units held by such partners and the remaining income is allocated to the Company. Distributions are made to the extent of cash flow available. PGP Southern Industrial II, L.P. On March 13, 1998, the company acquired a controlling general partner interest in PGP Southern Industrial II, L.P., a California limited partnership ("PGP Southern") which owns a 168,000 square foot distribution facility located in Garden Grove, California. The other partner in the partnership received an aggregate of 404,950 limited partnership units in the partnership for an aggregate value of $9,000,000. Beginning in March, 1999 the limited partnership units can be tendered for redemption to the Company. Upon tender, the Company, at its election, may either issue common shares for the units on a one-for-one basis (subject to certain adjustments) or pay cash for the units based on the then fair market value of the common shares. Net income from the partnerships is allocated to the limited partners based on an amount equal to the Company's dividend rate on common stock applied to the number of limited partnership units held by stock partners and the remaining income is allocated to the Company. Distributions are made to the extent of cash flow available. Condensed unaudited combined financial information for the consolidated real estate partnerships as of December 31, 1999 and 1998 and for the years ended December 31, 1999, 1998 and 1997 follows:
1999 1998 ------------ ------------ Real Estate Assets Land.................................................. $ 34,903,000 $ 34,903,000 Building.............................................. 97,632,000 96,087,000 ------------ ------------ 132,535,000 130,990,000 Accumulated depreciation................................ (10,491,000) (6,886,000) ------------ ------------ 122,044,000 124,104,000 Cash and other assets................................... 10,933,000 8,404,000 ------------ ------------ $132,977,000 $132,508,000 ============ ============ Liabilities (primarily tax-exempt and mortgage notes)... $ 89,600,000 $ 90,749,000 Partners' Capital Company............................................... 25,300,000 23,947,000 Minority interests.................................... 18,077,000 17,812,000 ------------ ------------ 43,377,000 41,759,000 ------------ ------------ $132,977,000 $132,508,000 ============ ============
YEARS ENDED DECEMBER 31, --------------------------------------- 1999 1998 1997 ----------- ----------- ----------- Revenues........................................ $20,159,000 $18,505,000 $12,999,000 Expenses........................................ 16,606,000 13,575,000 12,129,000 ----------- ----------- ----------- Net income...................................... $ 3,553,000 $ 4,930,000 $ 870,000 =========== =========== =========== Company's share of net income................... $ 2,211,000 $ 3,906,000 $ 698,000 Minority partners' interest in earnings of consolidated partnerships..................... 1,342,000 1,024,000 172,000 ----------- ----------- ----------- $ 3,553,000 $ 4,930,000 $ 870,000 =========== =========== ===========
F-20 50 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES GENERAL MATTERS The Company's commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In the opinion of management, these matters will not have a material adverse effect on the Company's consolidated financial statements. As of December 31, 1999, 11% of the apartment units within the Company's multifamily properties were required to be set aside for residents within certain income levels and had limitations on the rent that could be charged to such tenants. GROUND LEASE COMMITMENTS One of the Company's industrial properties is subject to a ground lease that expires in July 2035 which is accounted for as an operating lease. Monthly ground lease payments total $22,000 and are subject to increases based on the Consumer Price Index, with the next adjustment in September 2000. Ground lease payments during 1999 and 1998 totaled $261,000 in each year. Two other ("PGBP -- Irvine" and "PGBP -- Cerritos") industrial properties acquired in December 1997 are subject to ground leases which expire in August 2029 and April 2034, respectively. Monthly ground lease payments total $36,000 and $43,000 and are subject to increases based on the Consumer Price Index, with the next adjustment in April 2009 and October 2004 for Irvine and Cerritos, respectively. Ground lease payments during 1999 and 1998 on the Irvine property totaled $430,000 and $303,000 respectively and ground lease payments on the Cerritos property totaled $473,000 and $455,000, respectively. During June 1998, the Company acquired a property in Tustin which is subject to a ground lease which expires in January 2044. Annual ground lease payments in the amount of $101,000 are due in January of each year; such payments are expected to increase in January 2001 based on a reappraisal of the land value. The minimum future ground lease payments to be made for each of the next five years ending December 31 and thereafter, are summarized as follows: 2000........................................................ $ 1,303,000 2001........................................................ 1,303,000 2002........................................................ 1,303,000 2003........................................................ 1,303,000 2004........................................................ 1,303,000 Thereafter.................................................. 37,149,000
LETTER OF CREDIT In December 1998 in conjunction with the sale of the Company's Washington apartment communities, the Company restructured the existing indebtedness on the Hampton Bay apartment community. The lender, a life insurance company, released the Hampton Bay property as collateral and accepted a letter of credit in the amount of $9,400 000 as substitution collateral. The Company replaced the letter of credit by providing its City of Industry industrial project as replacement collateral in May 1999. 8. CAPITAL STOCK COMMON SHARES In May 1998, the shareholders voted to approve an amendment to the Company's Articles of Amendment and Restatement as filed with Maryland's State Department of Assessments and Taxation (the "Charter") that increased the number of authorized shares of Common Stock, par value $.01 per share from 25,000,000 shares to 100,000,000 shares, and to eliminate the 30,000,000 of Excess Stock authorized. F-21 51 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SHELF REGISTRATION STATEMENT During 1998, the Company filed a shelf registration statement with the Securities and Exchange Commission for the aggregate amount of $300,000,000, covering the proposed issuance of debt, preferred or common stock securities and warrants to purchase such securities of the Company (the "1998 Shelf Registration Statement"). The 1998 Shelf Registration Statement was declared effective April 23, 1998 by the Securities and Exchange Commission. Availability under the 1998 Shelf Registration Statement at December 1999 was $300,000,000. During 1997, the Company filed a shelf registration statement with the Securities and Exchange Commission for an aggregate amount of $250,000,000, covering the proposed issuance of debt, preferred or common stock securities and warrants to purchase such securities of the Company (the "1997 Shelf Registration Statement"). The 1997 Shelf Registration Statement was declared effective April 11, 1997 by the Securities and Exchange Commission. Availability under the 1997 Shelf Registration Statement at December 31, 1999 was $56,126,000. PREFERRED STOCK In May 1998, the shareholders voted to approve an amendment to the Company's Charter that (a) increased the authorized number of shares of Preferred Stock, par value $.01 per share (the "Preferred Stock"), from 5,000,000 shares to 10,000,000 shares and (b) reclassified the issued and outstanding shares of Class B Preferred Stock as additional shares of Class A Preferred Stock and changed the liquidation preference of the Class A Preferred Stock to $19.91 per share to reflect the economic terms of such reclassification of the Class B Preferred Stock. The Class A Preferred Stock are convertible into shares of common stock, on a one-for-one basis, subject to adjustment upon certain events. The annual dividend per share on the Class A Preferred Stock is $1.70 from the date of issuance until December 31, 1997 and thereafter, the greater of $1.70 per share or 104% of the then current dividend on the Company's common stock. At its option, the Company may redeem the Class A Preferred Stock beginning December 31, 2001 for cash at a premium of 6% over the initial $18.50 per share liquidation value, decreasing to zero % by December 31, 2009. The Class A Preferred Stock, or any shares of common stock into which such Class A Preferred Stock could be converted, were nontransferable until June 30, 1998. 9. GAINS ON SALE OF REAL ESTATE In December 1999, the Company sold a 16,848 square foot industrial property located in Concord, California for $1,400,000. The net gain recognized was $106,000. In October 1999, the Company sold a 302,020 square foot industrial property located in Ontario, California for $11,160,000. The net gain recognized was $2,514,000. In August 1999, the Company sold a 42,240 square foot industrial property located in Seattle, Washington for $1,900,000. The net gain recognized was $492,000. In August 1999, the Company recognized a deferred gain of $850,000 as a result of the collection of a note receivable relating to the sale of the Company's Texas properties in 1995. During the second quarter of 1999, the Company sold a 91,200 square foot single-tenant industrial property locate in Anaheim, California and a 1.05 acre parcel of land in Lake Forest, California, for $4,680,000 and $850,000, respectively. The net gain recognized from these sales was $1,159,000. In February 1999, the Company sold a multifamily apartment property located in Santa Ana, California, consisting of 196 apartment units for $11,000,000 and recognized a gain on sale of $3,351,000. F-22 52 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) In December 1998, the Company sold five apartment properties located in Washington consisting of 1,322 apartment units for $78,500,000 and recognized a gain on sale of $28,913,000. In September 1998, the Company sold an apartment property located in Washington consisting of 234 apartment units for $13,525,000 and recognized a gain on sale of $6,379,000. In December 1997, the Company sold an apartment property located in Oregon consisting of 279 apartment units for $15,575,000 and recognized a gain on sale of $5,705,000. In April 1997, the Company sold its 7,000 square foot Corporate office in Newport Beach, California for $850,000 and recognized a loss on the sale of $111,000. The Company has relocated to a newly acquired 26,000 square foot facility also located in Newport Beach, California. 10. EARNINGS PER SHARE The following table sets forth the computation of basic and diluted earnings (loss) per share which have been restated to comply with Statement No. 128:
1999 1998 -------------------------------------- -------------------------------------- WEIGHTED WEIGHTED AVERAGE EARNINGS AVERAGE EARNINGS EARNINGS SHARES PER EARNINGS SHARES PER (NUMERATOR) (DENOMINATOR) SHARE (NUMERATOR) (DENOMINATOR) SHARE ----------- ------------- -------- ----------- ------------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC EPS Income available to Common shareholders....... $34,899 20,148 $1.73 $59,997 19,939 $3.01 ===== ===== EFFECT OF DILUTIVE SECURITIES Stock options........ 11 31 Restricted stock..... 98 86 Limited partnership units.............. 1,342 868 1,024 811 Convertible subordinated debentures......... 697 470 1,171 660 Convertible preferred stock.............. 4,856 2,763 ------- ------ ------- ------ DILUTED EPS.......... $36,938 21,595 $1.71 $67,048 24,290 $2.76 ======= ====== ===== ======= ====== ===== 1997 -------------------------------------- WEIGHTED AVERAGE EARNINGS EARNINGS SHARES PER (NUMERATOR) (DENOMINATOR) SHARE ----------- ------------- -------- (IN THOUSANDS, EXCEPT PER SHARE DATA) BASIC EPS Income available to Common shareholders....... $20,603 13,686 $1.51 ===== EFFECT OF DILUTIVE SECURITIES Stock options........ 17 Restricted stock..... 63 Limited partnership units.............. 172 363 Convertible subordinated debentures......... Convertible preferred stock.............. ------- ------ DILUTED EPS.......... $20,775 14,129 $1.47 ======= ====== =====
Shares of senior cumulative convertible preferred stock, convertible into 2,763,116 shares of common stock, were issued and outstanding during 1999 and 1997 but were not included in computing diluted earnings per share. Including these shares of preferred stock in the computations increases earnings per share $.01, and are therefore considered antidilutive. Convertible subordinated debentures, convertible into 682,000 shares of common stock, were outstanding during 1997, but were not included in the computation of diluted earnings per share because the effect would be antidilutive. 11. REPORTABLE SEGMENTS During the fourth quarter of 1998, the Company adopted the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information ("Statement No. 131"). Statement No. 131 superseded FASB Statement No. 14, Financial Reporting for Segments of a Business Enterprise. Statement No. 131 establishes standards for the way that public business enterprises report information regarding reportable operating segments. The adoption of Statement No. 131 did not affect the results of operations or financial position of the Company. F-23 53 PACIFIC GULF PROPERTIES INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Company operates and develops industrial properties and multifamily properties (consisting of active senior and family apartments). The properties generate rental and other income through the leasing of industrial space and apartment units to a diverse base of tenants. The Company separately evaluates the performance both of its industrial and multifamily operating segments and allocates resources primarily based on net operating income ("NOI"). NOI is defined by the Company as rental income less rental property expenses. Accordingly, NOI excludes certain expenses such as interest, depreciation and minority interests in consolidated partnerships which are included in the determination of Net Income under generally accepted accounting principles. NOI from industrial properties totaled $76,718,000, $59,525,000 and $28,198,000 for the years ended December 31, 1999, 1998 and 1997, respectively. NOI from multifamily properties totaled $16,546,000, $23,107,000 and $20,342,000 for the years ended 1999, 1998 and 1997, respectively. All revenues are from external customers and no revenues are generated from transactions between segments. There are no tenants which contributed 10% or more of the Company's total revenues during 1999, 1998 or 1997. Interest expense on debt is not allocated to the segments or individual properties even if such debt is secured by the properties. Certain items in the consolidated statements of operations such as minority interest in consolidated partnerships are not allocated to the properties. Additionally, there is no provision for income taxes as the Company is organized as a REIT under the Internal Revenue Code. 12. SELECTED QUARTERLY DATA (UNAUDITED) The following tables set forth the quarterly results of operations of the Company for the years ended December 31, 1999 and 1998:
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1999 Revenues.......................................... $29,690 $30,864 $31,557 $32,057 Income before gains on sale of real estate........ $ 7,656 $ 8,064 $ 7,685 $ 7,993 Gains on sale of real estate...................... $ 3,351 $ 1,273 $ 1,228 $ 2,620 Income available to common shareholders........... $ 9,771 $ 8,102 $ 7,677 $ 9,349 Earnings per share: Basic........................................... $ 0.49 $ 0.41 $ 0.38 $ 0.46 Diluted......................................... $ 0.48 $ 0.40 $ 0.38 $ 0.45 1998 Revenues.......................................... $25,318 $27,799 $29,792 $30,220 Income before gains on sale of real estate........ $ 7,415 $ 7,643 $ 7,221 $ 7,282 Gains on sale of real estate...................... $ -- $ -- $ 6,427 $28,865 Income available to common shareholders........... $ 6,208 $ 6,436 $12,441 $34,912 Earnings per share: Basic........................................... $ 0.31 $ 0.32 $ 0.62 $ 1.75 Diluted......................................... $ 0.31 $ 0.32 $ 0.58 $ 1.51
F-24 54 SCHEDULE III PACIFIC GULF PROPERTIES INC. REAL ESTATE AND ACCUMULATED DEPRECIATION
COSTS CAPITALIZED INITIAL COSTS TO SUBSEQUENT TO GROSS AMOUNT AT WHICH COMPANY ACQUISITION CARRIED AT CLOSE OF PERIOD ----------------------- ------------- --------------------------------- BUILDINGS LAND AND BUILDINGS AND BUILDING AND ENCUMBRANCE LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL ----------- ------- ------------- ------------- ------- ------------- ------- INDUSTRIAL PROPERTIES CALIFORNIA Baldwin Industrial Park.......... 11,270 999 27,876 1,042 8,155 21,762 29,917 Garden Grove Industrial Center... 5,293 4,230 4,564 973 4,230 5,537 9,767 PGDC -- Etiwanda................. 5,310 10,801 (6,606) 2,549 6,956 9,505 PGBP -- Rancho Cucamonga......... 3,795 1,610 8,196 898 1,610 9,094 10,704 Crescent Business Center......... 1,666 3,367 726 1,666 4,093 5,759 Vista Distribution Center........ 7,789 3,465 7,896 1,126 3,465 9,022 12,487 PGBP -- Hoover................... 3,905 3,016 1,193 3,905 4,209 8,114 PGDC -- Bell Ranch Road.......... 2,475(d) 1,725 2,041 473 1,725 2,514 4,239 PGBP -- La Mirada................ 1,541 2,057 464 1,541 2,521 4,062 PGBP -- Pacific Park............. 4,425(d) 2,760 4,142 749 2,760 4,891 7,651 PGBP -- North County............. 4,125(d) 2,713 3,625 369 2,713 3,994 6,707 PGBP -- Bay San Marcos........... 2,700(d) 1,827 2,907 132 1,827 3,039 4,866 PGBC -- Escondido................ 6,300(d) 3,782 6,614 919 3,782 7,533 11,315 PG Commerce Park -- Eden Landing......................... 2,239 5,107 1,261 2,239 6,368 8,607 PGBP -- San Marcos............... 825 1,838 406 825 2,244 3,069 PGBP -- Riverview Industrial Park............................ 4,475(d) 1,147 5,320 846 1,147 6,166 7,313 PGDC -- City of Industry......... 7,406 5,774 2,155 8,427 6,686 9,670 16,356 PGBP -- Miramar.................. -- 7,287 774 -- 8,061 8,061 Harbor Business Park............. 1,924 7,231 683 1,924 7,914 9,838 Harbor Warner Business Park...... 1,299 4,257 409 1,299 4,666 5,965 Woodland Distribution Center..... 1,824 11,002 82 1,824 11,084 12,908 PGDC -- Chino.................... 33,973(f) 2,208 8,483 277 2,208 8,760 10,968 PGDC -- Downey................... (f) 3,568 8,027 173 3,568 8,200 11,768 PGDC -- Fontana.................. (f) 2,801 11,422 66 2,801 11,488 14,289 PG Warm Springs Industrial Park............................ (f) 4,985 12,034 558 4,985 12,592 17,577 PGDC -- Rancho Bernardo.......... (f) 4,737 9,467 384 4,737 9,851 14,588 PG -- Spectrum Center............ (c) -- -- 113 -- 113 113 PGDC -- Miramar Village.......... (g) 5,518 10,581 5,507 5,520 16,086 21,606 Concord Busn Park................ 1,593 6,054 541 1,593 6,595 8,188 PG -- Commerce Park Anaheim...... 1,589 5,333 506 1,589 5,839 7,428 PG -- Commerce Park Sacramento... 2,642 12,928 1,097 2,642 14,025 16,667 PG -- Commerce Park San Tomas.... 6,279 14,694 985 6,279 15,679 21,958 PG -- Commerce Park Sunnyvale.... 2,864 11,482 332 2,864 11,814 14,678 Acacia Busn Center............... 1,967 7,141 12 1,967 7,153 9,120 PGDC -- Anaheim.................. 2,509 3,630 51 2,509 3,681 6,190 Tower Park....................... 2,069 7,515 2,675 2,069 10,190 12,259 PGBC -- Fullerton................ 1,197 4,336 217 1,197 4,553 5,750 Bradshaw Busn Center............. 2,725 2,087 6,637 164 2,087 6,801 8,888 Horn Road Busn Park.............. 2,788 6,739 326 2,788 7,065 9,853 PGBP -- Irvine................... -- 7,020 432 -- 7,452 7,452 PGBP -- Cerritos................. -- 8,485 338 -- 8,823 8,823 PGBP -- Montebello............... 2,338 2,471 125 2,338 2,596 4,934 Norwood Indrl Pk................. 1,216 3,500 345 1,216 3,845 5,061 Eden Plaza....................... 11,639(e) 2,062 4,617 962 2,062 5,579 7,641 Eden Rock #5..................... (e) 653 1,462 54 653 1,516 2,169 Eden Rock #9..................... (e) 653 1,462 52 653 1,514 2,167 Eden Rock #10.................... (e) 2,614 5,847 1,279 2,614 7,126 9,740 PGBP -- Lake Forest.............. 3,555 10,677 1,116 3,555 11,793 15,348 Mountain Ave Busn Park........... 1,110 4,038 118 1,110 4,156 5,266 Lurline Industrial Park.......... 2,374 5,270 489 2,374 5,759 8,133 PGBP -- Los Alamitos............. 1,082 6,169 375 1,082 6,544 7,626 MAXIMUM LIFE ON WHICH DEPRECIATION IN LATEST INCOME ACCUMULATED DATE OF DATE STATEMENT IS DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED ------------ ------------ -------- ------------ INDUSTRIAL PROPERTIES CALIFORNIA Baldwin Industrial Park.......... 9,917 1983, 1985 1994 30 Years Garden Grove Industrial Center... 949 1979 1994 40 Years PGDC -- Etiwanda................. 1,525 1991 1994 40 Years PGBP -- Rancho Cucamonga......... 1,842 1987, 1990 1994 40 Years Crescent Business Center......... 663 1981 1994 40 Years Vista Distribution Center........ 1,756 1990 1994 40 Years PGBP -- Hoover................... 771 1986 1996 40 Years PGDC -- Bell Ranch Road.......... 224 1981 1996 40 Years PGBP -- La Mirada................ 456 1975 1996 30 Years PGBP -- Pacific Park............. 556 1988 1996 40 Years PGBP -- North County............. 486 1987, 1988 1996 40 Years PGBP -- Bay San Marcos........... 345 1988 1996 40 Years PGBC -- Escondido................ 944 1988-92 1996 40 Years PG Commerce Park -- Eden Landing......................... 1,063 1972-74 1996 30 Years PGBP -- San Marcos............... 288 1985 1996 30 Years PGBP -- Riverview Industrial Park............................ 703 1980 1996 30 Years PGDC -- City of Industry......... 1,706 n/a 1996 n/a PGBP -- Miramar.................. 756 1981 1996 30 Years Harbor Business Park............. 795 1974, 1976 1997 40 Years Harbor Warner Business Park...... 491 1974, 1976 1997 40 Years Woodland Distribution Center..... 808 n/a 1997 40 Years PGDC -- Chino.................... 798 1988 1997 30 Years PGDC -- Downey................... 721 1988 1997 30 Years PGDC -- Fontana.................. 955 1989 1997 30 Years PG Warm Springs Industrial Park............................ 1,109 1980 1997 30 Years PGDC -- Rancho Bernardo.......... 864 1990 1997 30 Years PG -- Spectrum Center............ -- 1989 1999 40 Years PGDC -- Miramar Village.......... 1,143 1980, 1997 1997 30 Years Concord Busn Park................ 577 1989 1997 30 Years PG -- Commerce Park Anaheim...... 405 1972 1997 40 Years PG -- Commerce Park Sacramento... 800 1972 1997 40 Years PG -- Commerce Park San Tomas.... 906 1972 1997 40 Years PG -- Commerce Park Sunnyvale.... 683 1972 1997 40 Years Acacia Busn Center............... 511 1980 1997 30 Years PGDC -- Anaheim.................. 202 1961 1997 40 Years Tower Park....................... 616 1951 1997 40 Years PGBC -- Fullerton................ 259 1979 1997 40 Years Bradshaw Busn Center............. 487 1988, 1989 1997 30 Years Horn Road Busn Park.............. 537 1988 1997 30 Years PGBP -- Irvine................... 485 1979 1997 40 Years PGBP -- Cerritos................. 654 1985 1997 30 Years PGBP -- Montebello............... 200 1985 1997 30 Years Norwood Indrl Pk................. 309 1988 1997 30 Years Eden Plaza....................... 591 1974 1997 40 Years Eden Rock #5..................... 105 1973 1997 40 Years Eden Rock #9..................... 109 1973 1997 40 Years Eden Rock #10.................... 643 1973 1997 40 Years PGBP -- Lake Forest.............. 681 1998 1998 40 Years Mountain Ave Busn Park........... 215 1977 1998 30 Years Lurline Industrial Park.......... 335 1976-78 1998 30 Years PGBP -- Los Alamitos............. 348 1975 1998 30 Years
F-25 55 SCHEDULE III PACIFIC GULF PROPERTIES INC. REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED)
COSTS CAPITALIZED INITIAL COSTS TO SUBSEQUENT TO GROSS AMOUNT AT WHICH COMPANY ACQUISITION CARRIED AT CLOSE OF PERIOD ----------------------- ------------- --------------------------------- BUILDINGS LAND AND BUILDINGS AND BUILDING AND ENCUMBRANCE LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL ----------- ------- ------------- ------------- ------- ------------- ------- Walnut Ave Busn Park............. 1,686 3,148 153 1,686 3,301 4,987 Madison West Busn Park........... 2,107 3,789 373 2,107 4,162 6,269 PGBC -- Garden Grove II.......... 2,259 6,098 5,625 554 6,098 6,179 12,277 PBGC -- Irvine Cartwright........ 3,803 7,464 8 3,803 7,472 11,275 PGBC -- Tustin................... 9,000 -- 19,069 527 -- 19,596 19,596 PGDC -- Whittier................. 2,505 6,625 46 2,505 6,671 9,176 Contra Costa Diablo Busn Park.... 3,243 4,835 (623) 2,765 4,691 7,455 Sierra Trinity Industrial Park... 8,233 14,873 696 8,233 15,569 23,802 Hesperian Industrial Park........ 3,193 4,877 207 3,193 5,084 8,277 West Sacramento Industrial Center.......................... 1,288 5,158 130 1,288 5,288 6,576 Garden Grove Industrial-Hunt Ave............................. 2,920 6,096 154 2,920 6,250 9,170 Hohokam 10 Industrial Park East............................ 4,527 10,870 282 4,527 11,152 15,679 Hohokam 10 Industrial Park West............................ 1,270 3,039 23 1,270 3,062 4,332 PGBP -- Geneva................... 1,520 1,588 129 1,520 1,717 3,237 Broadwood Business Center........ 6,500 2,333 5,617 23 2,333 5,640 7,973 PGDC -- Las Vegas................ 4,365 4,707 9,511 4,520 6,149 12,589 18,738 Seattle Industrial -- 16th Avenue.......................... 401 1,028 293 401 1,321 1,722 Seattle Industrial -- South 200th........................... 974 2,497 488 974 2,985 3,959 PGBP -- Tukwila.................. 11,004 6,684 10,677 3,020 6,684 13,697 20,381 PGDC -- Algona 1................. 2,490 7,002 30 2,490 7,032 9,522 PGDC -- Algona 2................. 2,864 5,916 2,781 2,864 8,697 11,561 PGBP -- Airport Busn Center...... 2,910 8,265 432 2,910 8,697 11,607 ------- ------- ------- ------ ------- ------- ------- 141,518 185,379 486,389 49,263 191,651 529,380 721,031 ------- ------- ------- ------ ------- ------- ------- MULTIFAMILY PROPERTIES Inn @ Laguna Hills............... 4,556 1,798 5,981 567 1,795 6,551 8,345 Terrace Gardens.................. 7,837 2,064 8,075 407 2,064 8,482 10,546 Morning View Terrace............. 10,644 4,108 11,059 588 4,182 11,573 15,755 Tyler Springs.................... 8,981 2,394 11,064 396 2,394 11,460 13,854 Sunnyside I...................... 5,453 1,306 5,448 356 1,331 5,779 7,110 Sunnyside II..................... 1,760 322 2,232 162 326 2,390 2,716 Sunnyside III.................... 2,847 385 3,223 199 391 3,416 3,807 Fountains........................ 6,277 1,642 -- 7,492 1,642 7,492 9,134 Applewood........................ -- 6,985 18,581 2,025 6,985 20,606 27,591 Daisy 5.......................... 1,253 558 1,466 113 569 1,568 2,137 Daisy 7.......................... 10,028 3,958 8,048 831 4,034 8,803 12,837 Daisy 12......................... 3,570 1,695 3,520 332 1,727 3,820 5,547 Daisy 16......................... 11,305 3,856 9,848 831 3,930 10,605 14,535 Daisy 17......................... 6,542 2,390 6,123 621 2,436 6,698 9,134 Lariat........................... 1,155 432 1,312 146 440 1,450 1,890 Daisy 19......................... 6,444 2,273 5,626 577 2,316 6,160 8,476 Daisy 20......................... 7,396 2,654 5,671 701 2,705 6,321 9,026 Raintree......................... 6,695 1,749 4,525 267 1,749 4,792 6,541 ------- ------- ------- ------ ------- ------- ------- 102,743 40,569 111,802 16,611 41,014 127,967 168,981 ------- ------- ------- ------ ------- ------- ------- 244,261(g) 225,948 598,191 65,874 232,665 657,347 890,012 ======= ======= ======= ====== ======= ======= ======= MAXIMUM LIFE ON WHICH DEPRECIATION IN LATEST INCOME ACCUMULATED DATE OF DATE STATEMENT IS DEPRECIATION CONSTRUCTION ACQUIRED COMPUTED ------------ ------------ -------- ------------ Walnut Ave Busn Park............. 215 1990 1998 40 Years Madison West Busn Park........... 311 1987, 1988 1998 40 Years PGBC -- Garden Grove II.......... 411 1973 1998 30 Years PBGC -- Irvine Cartwright........ 354 1979 1998 30 Years PGBC -- Tustin................... 969 1974, 1976 1998 30 Years PGDC -- Whittier................. 258 1959, 1998 1998 40 Years Contra Costa Diablo Busn Park.... 121 1980, 1984 1998 40 Years Sierra Trinity Industrial Park... 431 1985 1998 40 Years Hesperian Industrial Park........ 133 1981-86 1998 40 Years West Sacramento Industrial Center.......................... 143 1981 1998 40 Years Garden Grove Industrial-Hunt Ave............................. 363 1979 1998 40 Years Hohokam 10 Industrial Park East............................ 298 1980 1998 40 Years Hohokam 10 Industrial Park West............................ 79 1980 1998 40 Years PGBP -- Geneva................... 10 1981 1999 40 Years Broadwood Business Center........ 3 1986 1999 40 Years PGDC -- Las Vegas................ 534 1976-79 1998 30 Years Seattle Industrial -- 16th Avenue.......................... 534 1981 1994 24 Years Seattle Industrial -- South 200th........................... 1,275 1981 1994 24 Years PGBP -- Tukwila.................. 2,379 1975-79 1995 40 Years PGDC -- Algona 1................. 645 1989 1997 30 Years PGDC -- Algona 2................. 774 1998 1997 40 Years PGBP -- Airport Busn Center...... 213 1979-86 1998 40 Years ------ 53,747 ------ MULTIFAMILY PROPERTIES Inn @ Laguna Hills............... 927 1987 1994 40 Years Terrace Gardens.................. 743 1985 1997 30 Years Morning View Terrace............. 974 1986 1997 30 Years Tyler Springs.................... 793 1987 1997 30 Years Sunnyside I...................... 672 1984 1995 40 Years Sunnyside II..................... 292 1983 1995 40 Years Sunnyside III.................... 440 1985 1995 40 Years Fountains........................ 417 1997-98 1998 40 Years Applewood........................ 7,588 1972 1994 33 Years Daisy 5.......................... 197 1978-79 1995 40 Years Daisy 7.......................... 1,075 1979 1995 40 Years Daisy 12......................... 464 1981 1995 40 Years Daisy 16......................... 1,293 1981 1995 40 Years Daisy 17......................... 831 1981 1995 40 Years Lariat........................... 181 1981 1995 40 Years Daisy 19......................... 778 1983 1995 40 Years Daisy 20......................... 851 1982 1995 40 Years Raintree......................... 451 1984 1996 40 Years ------ 18,968 ------ 72,715(b) ======
F-26 56 SCHEDULE III PACIFIC GULF PROPERTIES INC. REAL ESTATE AND ACCUMULATED DEPRECIATION (CONTINUED) (a) The changes in total real estate for the years ended December 31, 1999, 1998 and 1997 area as follows:
1999 1998 1997 -------- -------- -------- Balance at beginning of period....................... $863,188 $700,949 $379,540 Acquisitions developments/improvements............... 32,265 201,160 332,324 Transfer of costs from properties under development........................................ 18,175 23,746 -- Retirement of Washington family apartments........... (62,667) -- Sale of Oregon multifamily property.................. -- (10,915) Sale of California multifamily property.............. (8,196) -- -- Sale of California industrial properties............. (13,828) -- -- Sale of Washington industrial property............... (1,592) -- -- -------- -------- -------- Balance at end of period............................. $890,012 $863,188 $700,949 ======== ======== ========
(b) The changes in accumulated depreciation for the years ended December 31, 1999, 1998 and 1997 are as follows: Balance at beginning of period.......................... $49,776 $39,148 $28,844 Additions -- depreciation expense....................... 25,198 20,386 11,809 Retirement of Washington family apartments.............. -- (9,409) -- Retirement of Oregon multifamily property............... -- -- (1,505) Sale of California industrial properties................ (971) -- -- Sale of California multifamily property................. (846) -- -- Sale of Washington industrial property.................. (442) -- -- Other................................................... -- (349) -- ------- ------- ------- Balance at end of period................................ $72,715 $49,776 $39,148 ======= ======= =======
(c) A portion of this property is currently under development. (d) These properties collateralize borrowings under the same mortgage note payable totaling $24,500,000. (e) These properties collateralize borrowings under the same mortgage note payable totaling $11,639,000. (f) These properties collateralize borrowings under the same mortgage note payable totaling $33,973,000. (g) Excludes construction loans of $50,432,000. F-27 57 EXHIBIT INDEX 3.1 Articles of Amendment and Restatement of Charter(1) 3.2 Bylaws(2) 10.1 1999 Long-Term Stock Compensation Plan. 10.2 Employment Contract by and between the Company and Glenn L. Carpenter dated September 1, 1998.(1) 10.3 1993 Share Option Plan. 10.4 Amended and Restated Agreement of Limited Partnership of PGP Inland Communities, L.P., dated as of August 15, 1995.(3) 10.5 Master Contribution Agreement, dated as of August 15, 1995, regarding formation of PGP Inland Communities, L.P.(3) 10.6 Dividend Reinvestment Plan of the Company dated May 9, 1995.(4) 10.7 Investment Agreement, dated December 31, 1996, between the Company and Five Arrows Realty Securities L.L.C.(5) 10.8 Articles Supplementary, dated January 1997, classifying 1,351,351 Shares of Preferred Stock as Class A Senior Cumulative Convertible Preferred Stock of the Company.(5) 10.9 Operating Agreement, dated January 1997, between the Company and Five Arrows Realty Securities L.L.C.(5) 10.10 Amendment to 1993 Share Option Plan dated May 8, 1996.(6) 10.11 Amendment to 1993 Share Option Plan dated May 7, 1997.(12) 10.12 Investment Agreement, dated May 27, 1997, between Company and Five Arrows Realty Securities L.L.C.(7) 10.13 Articles Supplementary classifying 1,411,765 Shares of Preferred Stock as Class B Senior Cumulative Convertible Preferred Stock.(7) 10.14 Form of Amended and Restated Agreement and Waiver, between the Company and Five Arrows Realty Securities L.L.C.(7) 10.15 Rights Agreement, dated December 11, 1997, between the Company and Harris Trust Company of California, as Rights Agent.(8) 10.16 Form of Restricted Stock Agreement. 10.17 Form of Change of Control Agreement.(2) 10.18 Agreement of Limited Partnership of PGP Northern Industrial, L.P.(2) 10.19 Agreement of Limited Partnership of Morning View Terrace -- PGP, L.P.(2) 10.20 Agreement of Limited Partnership Terrace Gardens -- PGP, L.P.(2) 10.21 Agreement of Limited Partnership of PGP Southern Industrial II, L.P.(9) 10.22 Credit Agreement among Pacific Gulf Properties Inc., a Maryland corporation, as Borrower and Wells Fargo Bank, National Association Together with the other Lenders named herein and such other assignees becoming parties hereto pursuant to Section 11.12, as Lenders and Wells Fargo Bank, National Association, as Agent dated as of April 9, 1998.(9) 10.23 Purchase Agreement and Escrow Instructions and related amendments between Pacific Gulf Properties Inc. (as seller) and SAP II Originating LLC (as buyer) for the sale of the Northwest Multifamily Properties.(10) 10.24 Amendment to 1993 Share Option Plan dated May 13, 1998.(11) 21.01 Subsidiaries.(4)
F-28 58 23.01 Consent of Ernst & Young LLP 27.00 Financial Data Schedule
- --------------- (1) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1998. (2) Incorporated by reference from the Company's Annual Report on Form 10-K of the Company for the year ended December 31, 1997. (3) Incorporated by reference from the Company's Annual Report on Form 10-K of the Company for the year ended December 31, 1995. (4) Incorporated by reference from the Company's registration statement on Form S-3 (33-92082) filed on May 9, 1995. (5) Incorporated by reference from the Company's Current Report on Form 8-K filed on January 14, 1997. (6) Incorporated by reference from the Company's Proxy Statement filed on or about April 5, 1996. (7) Incorporated by reference form the Company's Current Report on Form 8-K filed on June 26, 1997. (8) Incorporated by reference from the Company's registration statement on Form 8-A filed on December 17, 1997. (9) Incorporated by reference from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1998. (10) Incorporated by reference from the Company's Current Report on Form 8-K filed on January 7, 1999. (11) Incorporated by reference from the Company's Proxy Statement filed on or about April 16, 1998. (12) Incorporated by reference from the Company's Proxy Statement filed on or about April 7, 1997. F-29 EX-10.1 2 MATERIAL CONTRACT 1 EXHIBIT 10.1 PACIFIC GULF PROPERTIES INC. 1999 LONG TERM STOCK COMPENSATION PLAN I. ESTABLISHMENT, PURPOSE AND DURATION. 1.1 There is hereby adopted the 1999 Long Term Stock Compensation Plan (the "PLAN") of Pacific Gulf Properties Inc. (the "COMPANY"). THE GRANT OF OPTIONS UNDER THE PLAN IS CONDITIONED ON APPROVAL OF THE PLAN BY THE AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST A MAJORITY OF THE OUTSTANDING SHARES OF VOTING STOCK OF THE COMPANY, VOTING IN PERSON OR BY PROXY AT A STOCKHOLDERS' MEETING DULY HELD WITHIN 12 MONTHS OF ITS ADOPTION. No option granted hereunder shall be exercisable unless and until the Plan has been so approved. Capitalized terms are defined in Article VIII. 1.2 The purpose of the Plan is to provide incentives for the Company's executives to improve the long term performance of the Company. 1.3 This Plan is intended to be in addition to, and not in substitution of, any other stock option or incentive plan of the Company. 1.4 Each option granted under the Plan may be either an option intended to be an Incentive Stock Option or an option not so intended, as specified in the applicable Option Agreement. No participant may be granted options to purchase more than two hundred fifty thousand (250,000) shares in any year. 1.5 The period covered by the Plan is July 1, 1999 through December 31, 2001 (the "PLAN PERIOD"). II. ADMINISTRATION OF THE PLAN. 2.1 Subject to any contrary decision of the Board of Directors (the "BOARD"), the Plan shall be administered by the Compensation Committee of the Board (the "COMMITTEE"). The Committee shall consist solely of two or more Non-Employee and Outside directors. The Board may from time to time remove members from, or add members to, the Committee. Vacancies on the Committee, howsoever caused, shall be filled by the Board. The Committee shall select one of its members as chairman and shall hold meetings at such times and places as it may determine. A majority of the Committee shall constitute a quorum, and acts of the Committee at which a quorum is present, or acts reduced to or approved in writing by all the members of the Committee, shall be the valid acts of the Committee. 2.2 Subject to the terms and conditions and within the limitations of the Plan, the Committee shall have the sole authority, in its absolute discretion, to adopt, amend, and rescind such rules and regulations as, in its opinion, may be advisable in the administration of the Plan and to construe and interpret the Plan, the rules and regulations and the instruments evidencing options granted under the Plan and to make all other determinations deemed necessary or advisable for the administration of the Plan. All decisions, determinations, and interpretations of the Committee shall be binding on all holders of options. 2.3 The Board may determine which key employees of the Company or of any affiliate should be granted options under the Plan, the terms thereof (to the extent not specified in the Plan), the 2 number of shares subject to such option or options, and the time or times at which options should be granted; provided, however, that no options shall be granted after December 31, 1999. The Board shall have the authority to grant options under the Plan. 2.4 Subject to the terms and conditions and within the limitations of the Plan, the Committee may modify, extend or renew outstanding options granted under the Plan. Notwithstanding the foregoing, however, no modification of an option shall, without the consent of the option holder, alter or impair any rights or obligations under any option theretofore granted under the Plan. 2.5 In making any determination or in taking or not taking any action under this Plan, the Committee or the Board, as the case may be, may obtain and may rely on the advice of experts, including professional advisors to the Company. No director, officer or agent of the Company shall be liable for any such determination made, or action or inaction undertaken, in good faith. 2.6 In lieu of the foregoing, if the Board, in its discretion, so determines, the Plan shall be solely administered by the Board. In such a case, the term "Committee" when used in this Plan and in any option agreement shall refer to the Board and the Board shall have the authority to perform any and all actions that the Committee is authorized to perform including, without limitation, the authority to act on all matters concerning the Plan and its administration. III. STOCK SUBJECT TO THE PLAN. Subject to the provisions of Section 5.12, the maximum number and kind of shares of stock as to which options may be granted under the Plan are eight hundred forty-five thousand (845,000) shares of Common Stock, par value $.01 per share ("COMMON STOCK"), of the Company. As the Committee may determine from time to time, the shares subject to options may consist either in whole or in part of authorized but unissued shares, or authorized and issued shares reacquired by the Company and held in its treasury. IV. ELIGIBILITY AND EXERCISE. 4.1 Eligibility for Grant. Options may be granted to such officers of the Company or its affiliates as the Board, in its discretion, shall designate. Members of the Board of Directors of the Company or of an affiliate who are not officers of the Company or of any affiliate may not participate in the Plan. 4.2 Options Available for Exercise. Only vested options may be exercised, and a vested option may only be exercised prior to its expiration. V. TERMS AND CONDITIONS OF OPTIONS. 5.1 Option Agreement. Each option granted pursuant to the Plan shall be evidenced by a written stock option agreement ("OPTION AGREEMENTS") executed by the Company and the person to whom such option is granted. Such Option Agreements shall be in such form, not inconsistent with the Plan, as the Committee shall from time to time determine in its discretion, provided that such agreements shall comply with and be subject to the terms and conditions of this Plan. 5.2 Option Term. Subject to Section 5.4, the term of each option shall be for such period of time, not more than ten (10) years from the date it is granted, as the Committee may determine in its 2 3 discretion. Notwithstanding anything to the contrary herein contained, no option, or any portion thereof, shall be exercised later than the date of expiration of the option term. 5.3 Option Price. Subject to Section 5.4, the purchase price to be paid upon exercise of each option shall be determined by the Committee in its discretion, but such price shall not be less than 100% of the Fair Market Value of the shares subject to such option on the date the option is granted. 5.4 Incentive Stock Options. Any options granted under the Plan and intended to be Incentive Stock Options shall be subject to the following provisions: (a) An option may be granted to any person who, at the time the option is granted, owns stock (as determined in accordance with the Code provisions relating to Incentive Stock Options) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company or of an affiliate (a "10% SHAREHOLDER") only if, at the time the option is granted, the option price is at least 110% of the Fair Market Value of the stock subject to the option and the option, by its terms, is not exercisable after the expiration of five years from the date such option is granted. (b) To the extent that the aggregate "fair market value" of stock with respect to which incentive stock options first become exercisable by a Participant in any calendar year exceeds $100,000, taking into account both Common Stock subject to Incentive Stock Options under this Plan and stock subject to incentive stock options under all other plans of the Company, such options shall be treated as nonqualified stock options. For this purpose, the "fair market value" of the stock subject to options shall be determined as of the date the options were awarded. In reducing the number of options treated as incentive stock options to meet the $100,000 limit, the most recently granted options shall be reduced first. To the extent a reduction of simultaneously granted options is necessary to meet the $100,000 limit, the Committee may, in the manner and to the extent permitted by law, designate which shares of Common Stock are to be treated as shares acquired pursuant to the exercise of an Incentive Stock Option. (c) There shall be imposed in any Option Agreement relating to Incentive Stock Options such terms and conditions as from time to time are required in order that the option be an "incentive stock option" as that term is defined in Section 422 of the Code. 5.5 Manner of Exercise. Any exercisable Award shall be deemed to be exercised when the Secretary of the Company receives written notice of such exercise from the Participant, together with any required payment made in accordance with Section 5.6. 5.6 Payment of Exercise Price. The purchase price of any shares purchased on exercise of an option shall be paid in full at the time of each purchase in one or a combination of the following methods: (i) in cash or by electronic funds transfer; (ii) by check payable to the order of the Company; (iii) if authorized by the Committee or specified in the applicable Option Agreement, in cash in an amount equal to the par value of the shares being purchased, and, in the form of a promissory note (consistent with the requirements of Section 5.7) of the Participant in an amount equal to the difference between said cash amount and the purchase price of such shares; (iv) by notice and third party payment in such manner as may be authorized by the Committee; (v) by the delivery of shares of Common Stock of the Company already owned by the Participant, provided, however, that the Committee may in its absolute discretion limit the Participant's ability to exercise an option by delivering such shares; or (vi) if authorized by the Committee or specified in the applicable Option Agreement, by reduction in the number of shares of Common Stock otherwise deliverable upon exercise by that number of shares 3 4 that have a then Fair Market Value equal to such purchase price. Previously owned shares of Common Stock used to satisfy the exercise price of an option under clauses (v) and (vi) shall be valued at their Fair Market Value on the date of exercise. 5.7 Acceptance of Notes to Finance Exercise. The Company may, with the Committee's approval, accept one or more notes from any Participant in connection with the exercise or receipt of any outstanding Award, provided that any such note shall be subject to the following terms and conditions: (a) The principal of the note shall not exceed the amount required to be paid to the Company upon the exercise of options under the Plan and the note shall be delivered directly to the Company in consideration of such exercise. (b) The note shall be repaid over a period of time not to exceed five (5) years, with annual installments of at least 10% of principal during the first four (4) years and a balloon payment of the remaining principal amount at the end of the fifth (5th) year; provided, however, that the Company may demand any payment, in addition to such installments, as may be required for the note to remain in compliance with any applicable federal or state regulation. (c) The note shall provide for full recourse to the Participant and shall bear interest at a rate equal to the then-prevailing yield to maturity on U.S. Treasury obligations having a maturity that most closely matches the maturity date of such note; provided, however, that in no event shall the interest rate charged be less than the applicable imputed interest rate specified by the Code. (d) Except as otherwise provided by the Committee, if the employment of the Participant terminates, the unpaid principal balance of the note shall become due and payable on the 10th business day after such termination; provided, however, that if a sale of shares securing such note would cause such Participant to incur liability under Section 16(b) of the Exchange Act, the unpaid balance shall become due and payable on the 10th business day after the first day on which a sale of such shares could have been made without incurring such liability assuming for these purposes that there are no other transactions by the Participant subsequent to such termination. (e) If required by the Committee or by applicable law, the note shall be secured by a pledge of any shares or rights financed thereby in compliance with applicable law. (f) The terms, repayment provisions, and collateral release provisions of the note and the pledge securing the note shall conform with applicable rules and regulations of the Federal Reserve Board as then in effect. 5.8 Effect of Termination of Employment, Death or Total Disability. A Participant's options and all of such Participant's rights under this Plan, to the extent not exercised, shall terminate and become null and void at such time as the Participant ceases to be employed by either the Company or any Subsidiary. Notwithstanding the preceding, if the Participant's employment is not terminated for Cause, the Participant (or, in the event of the Participant's death, his or her Beneficiary) may exercise any option within any applicable period specified in clauses (i), (ii), or (iii) below to the extent the option was vested and exercisable at the date of the Participant's termination of employment (for any reason other than termination for Cause), either by its terms or pursuant to a determination by the Committee (within a reasonable period after such termination) to accelerate vesting, as follows: 4 5 (i) if the Participant terminates employment by reason of voluntary resignation, the Participant may exercise vested options at any time within a period of three (3) months after such termination; (ii) if the Participant terminates employment by reason of Total Disability or voluntary Retirement, the Participant may exercise vested options at any time within a period of thirty-six (36) months after such termination; (iii) if the Participant dies while in the employ of the Company or any Subsidiary, or during the period referred to in clause (a) or (b) of this Section 5.8, then vested options may be exercised by the Participant's Beneficiary within a period of thirty-six (36) months after the Participant's date of death; provided, however, that in no event may an option be exercised by anyone after the date of its expiration. If a Participant is employed by an entity that ceases to be a Subsidiary, such event shall be deemed for purposes of this Section 5.8 to be a termination of employment described in clause (i) above in respect of that Participant. Absence from work caused by military service or authorized sick leave shall not be considered as a termination of employment for purposes of this Section. Notwithstanding the preceding, in the event that all or a portion of an option is exercised after the periods permitted by or pursuant to Section 422 of the Code regarding incentive stock options, the portion of the option that is then exercised shall be treated as a nonqualified stock option. 5.9 No Transferability. Options may be exercised only by, and shares issuable pursuant to an option shall be issued only to (or registered only in the name of), the Participant or, if the Participant has died, the Participant's Beneficiary or, if the Participant has suffered a Total Disability, the Participant's Personal Representative, if any, or if there is none, the Participant, or (to the extent permitted by applicable law and Rule 16b-3) to a third party pursuant to such conditions and procedures as the Committee may establish. Other than by will or the laws of descent and distribution or pursuant to a QDRO or other exception to transfer restrictions under Rule 16b-3 (except to the extent not permitted in the case of an Incentive Stock Option), no right or benefit under this Plan or any option shall be transferable by the Participant or shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge (other than to the Company) and any such attempted action shall be void. The Company shall disregard any attempt at transfer, assignment or other alienation prohibited by the preceding sentences and shall pay or deliver such cash or shares of Common Stock in accordance with the provisions of this Plan. The designation of a Beneficiary hereunder shall not constitute a transfer for these purposes. 5.10 Holding of Stock by Option Holder. At the discretion of the Committee, any Option Agreement may provide that the Participant shall, by accepting such option, represent and agree that all shares of stock purchased upon exercise of the option will be acquired and held in accordance with the restrictions of the Securities Act and shall not be further transferred except as permitted by the Securities Act and the rules and regulations of the Commission thereunder, that the Company may instruct its transfer agent to restrict further transfer of said stock in its records except upon receipt of satisfactory evidence that such restrictions have been satisfied, that upon each exercise of any portion of an option the certificates evidencing said stock shall bear an appropriate legend on the face thereof evidencing such restrictions, and that the person entitled to exercise the same shall furnish evidence satisfactory to the Company (including a written and signed representation) to the effect that the shares of stock are being acquired subject to such restrictions. 5 6 5.11 Restrictions on Transfer of Stock. The transfer of stock received pursuant to the exercise of an option granted under the Plan is prohibited unless such transfer is exempt from registration under the Securities Act, or unless a registration statement covering such transfer is in effect at the time the transfer is to occur. The certificates evidencing said stock shall bear an appropriate legend on the face thereof evidencing such restrictions. 5.12 Adjustment Provisions. If the outstanding shares of Common Stock are increased, decreased, changed into or exchanged for a different number or kind of shares or other securities of the Company by reason of reorganization, recapitalization, reclassification, stock dividend, stock split or reverse stock split, upon proper authorization by the Board of Directors, an appropriate and proportionate adjustment shall be made in the maximum number and kind of shares or other securities as to which options may be granted under the Plan and the number or kind of shares or other securities as to which the unexercised portions of any options that shall have been granted prior to such change shall be exercisable. Any such adjustments in the outstanding options shall be made without change in the aggregate purchase price applicable to the unexercised portion of any option, but with corresponding adjustment in the purchase price for each share or other unit of any security covered by the option. Any such changes shall be made solely in order to preserve, but not increase, the benefits of the holders of any options granted under the Plan. No adjustment shall be made to the number of shares of Common Stock that may be acquired pursuant to outstanding Incentive Stock Options or the maximum number of shares of Common Stock with respect to which Incentive Stock Options may be granted under this Plan to the extent such adjustment would result in such options being treated as other than Incentive Stock Options, and no such adjustment shall be made to the extent the Committee determines that such adjustment would result in the disallowance of a federal income tax deduction for compensation attributable to any option that is intended to qualify as "performance-based compensation" for purposes of Section 162(m) of the Code by causing such compensation not to so qualify as performance based compensation. VI. TYPES OF OPTION GRANTS AND VESTING. 6.1 Types of Option Grants. Each grant of options under the Plan shall, at the discretion of the Committee, be comprised of one or both of the following components: (a) FIXED OPTION GRANT - a fixed number of options that vest over the period covered by the Plan; and (b) VARIABLE OPTION GRANT - a variable number of options that vest at the end of the period covered by the Plan, subject to the Company's achievement of certain performance measures during the Plan Period. 6.2 Fixed Option Grant. The Fixed Option Grant shall consist of a fixed number of options that will vest over the Plan Period. One-third of the number of Fixed Options granted to each Participant shall vest at the end of each of years 1999 through 2001 without regard to the financial performance of the Company. 6.3 Variable Option Grant; Cliff Vesting. The number of options, if any, that will vest under the Variable Option Grant shall be variable in amount, depending on the Company's satisfaction of specified Performance Criteria over the Plan Period. The determination of the Company's satisfaction of the Performance Criteria, and therefore the determination of the number of options, if any, that will vest under the Variable Option Grant, shall be made by the Committee only after 6 7 December 31, 2001 (i.e., these options will only vest if target criteria are met at that date, and there will be no periodic vesting). 6.4 Variable Option Grant Performance Criteria. The vesting of options under the Variable Option Grant shall be based on two separate and independent performance criteria components ("PERFORMANCE CRITERIA"): (a) The average percentage growth rate in the Company's funds from operations per share (as defined in Section 6.6(b), "FFO PER SHARE"); and (b) TOTAL SHAREHOLDER RETURN (as defined in Section 6.7(a)), calculated based on dividends paid and stock price change. 6.5 Allocation of Variable Option Grant. Of the total number of options available to each Participant in the Variable Option Grant, (a) The vesting of 65% of those options will be based on the growth in FFO per Share; and (b) The vesting of the remaining 35% of those options will be based on the Total Shareholder Return. Depending on the Company's performance during the Plan Period on each of the two Performance Criteria, it is possible for Participants to vest in either all or some portion of the Variable Option Grant or none of such options (if the Company's performance falls below the minimums for both performance criteria). It is also possible for Participants to vest in the options allocated to the FFO per Share component and not vest in the options allocated to Total Shareholder Return, and vice versa. 6.6 Vesting of FFO Per Share Component. (a) During the Plan Period, the targeted average FFO per Share percentage growth rate is 10%. The average percentage growth rate of FFO per share will be calculated by averaging the following: (a) the percentage increase in FFO per Share for the six months ending December 31, 1999 compared to that for the six months ended December 31, 1998; (b) the percentage increase in FFO per Share for the year 2000 compared to that for 1999; and (c) the percentage increase in FFO per Share for the year 2001 compared to that for 2000. The three percentages will then be averaged (without weighting) to determine the average FFO per Share percentage growth rate during the Plan Period. (b) FFO PER SHARE will be calculated (using the definition of the National Association of Real Estate Investment Trusts as in effect at August 31, 1999) on a fully diluted basis (i.e., assuming conversion of all of the Company's convertible subordinated debentures and preferred stock, but excluding the conversion of limited partnership units until they are actually converted). (c) Individuals receiving the Variable Option Grant will be eligible for vesting of the following portions of the options attributable to the FFO per Share component depending on the Company's average FFO per Share percentage growth rate over the Plan Period. Four different vesting levels apply as described below: 7 8
=========================================================================================================================== THEN THE EXECUTIVE WILL BE VESTED WITH THE IF THE COMPANY ACHIEVES AN AVERAGE FOLLOWING PERCENTAGE OF THE TOTAL NUMBER OF FFO PER SHARE PERCENTAGE GROWTH OPTIONS ALLOCATED TO THE FFO PER SHARE LEVEL RATE OVER THE PLAN PERIOD OF: COMPONENT: - --------------------------------------------------------------------------------------------------------------------------- 1. MINIMUM - (Also, the Company's AT LEAST 8% UP TO 10% 75% average FFO growth rate must at least equal the average for the Company's peer group*) - --------------------------------------------------------------------------------------------------------------------------- 2. TARGET AT LEAST 10% UP TO 11% 100% - --------------------------------------------------------------------------------------------------------------------------- 3. TARGET PLUS AT LEAST 11% UP TO 13% 120% - --------------------------------------------------------------------------------------------------------------------------- 4. MAXIMUM AT LEAST 13% 150% ===========================================================================================================================
6.7 Vesting of Total Shareholder Return Component. (a) During the Plan Period, the targeted average Total Shareholder Return percentage is 18%. The TOTAL SHAREHOLDER RETURN for a given period during the Plan Period will be measured by: o Adding: o the dividends per share paid in respect of that period (attributing dividends to the fiscal quarter immediately preceding their payment and annualizing dividends paid in respect of a partial year), plus o the increase or decrease (expressed as a negative number) (in each case measured in dollars and cents) in the Average Fair Market Value per share of Common Stock as of the last day of that period from the Average Fair Market Value per share of Common Stock as of the last day of the preceding year, except that the change in the Average Fair Market Value per share of Common Stock as of the last day of 1999 shall be measured against $19.78 per share; o Then dividing that sum by the Average Fair Market Value per share of Common Stock as of the last day of the preceding year, except that, for the calculation of Total Shareholder Return for the six months ending December 31, 1999, the foregoing sum shall be divided by $19.78 per share. - -------------------- * The Board shall, in its sole discretion, select the companies comprising the Company's peer group and the measurement data concerning such peers to be used in making such comparison. Notwithstanding the fact that the Plan commences as of July 1, 1999, in calculating the average FFO per share percentage growth rate of each peer, the following percentage growth rates of such peer will be averaged: (i) the percentage increase in FFO per share for the full year 1999 compared to that for full year 1998; (ii) the percentage increase for the full year 2000 compared to full year 1999; and (iii) the percentage increase for the full year 2001 compared to full year 2000. 8 9 (b) Individuals receiving the Variable Option Grant will be eligible for vesting of the following portions of the options attributable to the Total Shareholder Return component depending on the Company's average Total Shareholder Return percentage over the Plan Period. Four different vesting levels apply as described below:
============================================================================================================================= THEN THE EXECUTIVE WILL BE VESTED WITH THE FOLLOWING PERCENTAGE IF THE COMPANY ACHIEVES AN OF THE TOTAL NUMBER OF OPTIONS AVERAGE TOTAL SHAREHOLDER RETURN ALLOCATED TO THE TOTAL SHAREHOLDER LEVEL PERCENTAGE OF: RETURN COMPONENT: - ----------------------------------------------------------------------------------------------------------------------------- 1. MINIMUM - (Also, the Company's average AT LEAST 16% UP TO 18% 75% Total Shareholder Return percentage must at least equal the average for the Company's peer group*) - ----------------------------------------------------------------------------------------------------------------------------- 2. TARGET AT LEAST 18% UP TO 20% 100% - ----------------------------------------------------------------------------------------------------------------------------- 3. TARGET PLUS AT LEAST 20% UP TO 23% 120% - ----------------------------------------------------------------------------------------------------------------------------- 4. MAXIMUM AT LEAST 23% 150% =============================================================================================================================
6.8 Fixed Option Grant Vesting Upon Termination of Employment After a Change of Control. (a) If, within twenty-four months (24) following a CHANGE OF CONTROL (as defined in Appendix A hereto), a Participant's employment with the Company shall be terminated (i) by such Participant for Good Reason or (ii) for reasons other than (x) such Participant's death or Total Disability or (y) the Company's termination of such employment for Cause, then such Participant's unvested options in the Fixed Option Grant component of this Plan shall immediately vest upon such termination of employment. - ----------- * The Board shall, in its sole discretion, select the companies comprising the Company's peer group and the measurement data concerning such peers to be used in making such comparison. Notwithstanding the fact that the Plan commences as of July 1, 1999, in calculating the average Total Shareholder Return of each peer, such peer's full year 1999 dividend data shall be utilized and the 1999 data shall be compared against the Average Fair Market Value per share of such peer's common stock as of the last day of 1998, and the calculations for 2000 and 2001 shall be in the same manner as that for the Company. 9 10 (b) If a Participant's employment with the Company shall be terminated other than under the circumstances described in Section 6.8(a), then no further vesting of such Participant's options shall occur under the Fixed Option Grant from and after the date of termination of such employment. 6.9 Variable Option Grant Vesting Upon a Change of Control. Upon a Change of Control, the Variable Option Grant component of this Plan will be subject to the following vesting provisions. Upon a Change of Control, the Plan Period will terminate in respect of the Variable Option Grant, and the performance levels under the Variable Option Grant component of the Plan will be determined at that time based on the shortened Plan Period as follows. Any vesting of options under the Variable Option Grant component of the Plan pursuant to the following calculations shall occur on the date of the Change of Control. (a) Change of Control Before March 31. If the Change of Control occurs on or before March 31 of a year during the Plan Period, the Plan Period will be deemed to have terminated as of the immediately preceding December 31. The average growth rate in FFO per Share and the average Total Shareholder Return calculations shall be made over the shortened Plan Period, and the full number of options allocated to each Participant under the Variable Option Grant component will be available for vesting on the Change of Control date based on the same minimum, target, target plus and maximum performance levels as specified in Sections 6.6 and 6.7. (b) Change of Control After March 31. If the Change of Control occurs after March 31 of a year during the Plan Period: o The FFO per Share calculation for the year in which the Change of Control occurs ("SHORTENED FINAL YEAR") will be made through the end of the most recently completed quarter prior to the Change of Control, and the percentage growth rate for the Shortened Final Year will be based on a comparison to the comparable period of the prior year. The average FFO per Share percentage growth rate over the entire shortened Plan Period will be calculated by averaging the percentage increase in FFO per Share for all prior periods and for the Shortened Final Year without weighting. o The Total Shareholder Return calculation for the Shortened Final Year will be made using the Average Fair Market Value per share of Common Stock as of the day preceding the date of the Change of Control and using an annualized amount of dividends per share based on the most recently declared dividend per share; then comparing the result for the Shortened Final Year to the Average Fair Market Value per share of Common Stock that would have been used for a comparison if the Shortened Final Year had been a full year. The average Total Shareholder Return over the entire shortened Plan Period will be calculated by averaging the Total Shareholder Return for all prior periods and for the Shortened Final Year without weighting. The full number of options allocated to each Participant under the Variable Option Grant component will be available for vesting on the Change of Control date based on the same minimum, target, target plus and maximum performance levels as specified in Sections 6.6 and 6.7. 10 11 6.10 Death or Total Disability. In the event of the death or Total Disability of a Participant, (a) no further vesting of such Participant's options shall occur under the Fixed Option Grant from and after the date of such Participant's death or Total Disability, and (b) the vesting of such Participant's options shall occur under the Variable Option Grant in the same manner as if a Change of Control had occurred on the date of such Participant's death or Total Disability. VII. OTHER PROVISIONS. 7.1 Rights of Participants and Beneficiaries. (a) Employment Status. Status as an employee of the Company shall not be construed as a commitment that any option will be granted under this Plan to such employee. (b) No Employment Contract. Nothing contained in this Plan (or in any other documents related to this Plan or to any Option Agreement) shall (i) confer upon any employee or other Participant any right to continue in the employ or other service of the Company or constitute any contract or agreement of employment or other service, or (ii) interfere in any way with the right of the Company to change such person's compensation or other benefits or to terminate the employment of such person, with or without cause, but nothing contained in this Plan or any document related hereto shall adversely affect any independent contractual right of such person without his or her consent thereto. (c) No Fiduciary Relationship. Neither the provisions of this Plan (or of any related documents), nor the creation or adoption of this Plan, nor any action taken pursuant to the provisions of this Plan, shall create, or be construed to create, a trust of any kind or a fiduciary relationship between the Company and any Participant, Beneficiary or other person. 7.2 Compliance with Laws. This Plan, the granting and vesting of options under this Plan and the offer, issuance and delivery of shares of Common Stock and/or the payment of money under this Plan or under options granted hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including, but not limited to, state and federal securities laws and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Company, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Company, provide such assurances and representations to the Company as the Company may deem necessary or desirable to assure compliance with all applicable legal requirements. 7.3 Tax Withholding. (a) Shares or Cash. Upon any exercise, vesting, or payment in respect of any option, the Company shall have the right at its option to require the Participant (or Personal Representative or Beneficiary, as the case may be) to pay or provide for payment of the amount of any taxes that the Company may be required to withhold with respect to such transaction. In any case where a tax is required to be withheld in connection with the delivery of shares of Common Stock under this Plan, the Committee may grant (either at the time of the option grant or thereafter) to the Participant the right to elect, pursuant to such rules and subject to such conditions as the Committee may establish, to have the Company reduce the number of shares to be delivered by (or otherwise 11 12 reacquire) the appropriate number of shares valued at their then Fair Market Value, to satisfy such withholding obligation. (b) Tax Loans. The Committee may, in its discretion, authorize a loan to a Participant in the amount of any taxes that the Company may be required to withhold with respect to shares of Common Stock received (or disposed of, as the case may be) pursuant to a transaction described in Section 7.3(a). Such a loan shall be on the terms set forth in Section 5.7. 7.4 Privileges of Stock Ownership. Except as otherwise expressly authorized by the Committee or this Plan, a Participant shall not be entitled to any privilege of stock ownership as to any shares of Common Stock not actually delivered to and held of record by him or her. No adjustment will be made for dividends or other rights as a shareholder for which a record date is prior to such date of delivery. 7.5 Effective Date of the Plan. This Plan shall be effective as of July 1, 1999, subject to shareholder approval. 7.6 Governing Law; Construction; Severability. (a) Governing Law. This Plan, the options, all Option Agreements and all other related documents shall be governed by, and construed in accordance with, the laws of the State of California applicable to contracts made and performed within such State, except as such laws may be supplanted by the laws of the United States of America, which laws shall then govern its effect and its construction to the extent they supplant California law. (b) Severability. If any provision shall be held by a court of competent jurisdiction to be invalid and unenforceable, the remaining provisions of this Plan shall continue in effect. (c) Plan Construction. It is the intent of the Company that this Plan and options hereunder satisfy and be interpreted in a manner that in the case of Participants who are or may be subject to Section 16 of the Exchange Act satisfies the applicable requirements of Rule 16b-3 so that such persons will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 of the Exchange Act and will not be subjected to avoidable liability thereunder. If any provision of this Plan or of any option or any prior action by the Committee would otherwise frustrate or conflict with the intent expressed above, that provision to the extent possible shall be interpreted and deemed amended so as to avoid such conflict, but to the extent of any remaining irreconcilable conflict with such intent as to such persons in the circumstances, such provision shall be deemed void. 7.7 Captions. Captions and headings are given to the sections and subsections of this Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. 7.8 Effect of Change of Subsidiary Status. For purposes of this Plan and any option hereunder, if an entity ceases to be a Subsidiary, a termination of employment shall be deemed to have occurred with respect to each employee of such Subsidiary who does not continue as an employee of another entity within the Company. 7.9 Non-Exclusivity of Plan. Nothing in this Plan shall limit or be deemed to limit the authority of the Board or the Committee to grant options or authorize any other compensation, with or without reference to the Common Stock, under any other plan or authority. 12 13 VIII. DEFINITIONS. 8.1 Definitions. "Average Fair Market Value," as of any date, shall mean the average of the per share closing prices of the stock on the Composite Tape, as published in the Western Edition of The Wall Street Journal, of the principal national securities exchange on which the stock is so listed or admitted to trade, on the twenty (20) consecutive trading days preceding and including such date; provided, however, if the stock is not listed or admitted to trade on a national securities exchange, the Committee may designate such other exchange, market or source of data as it deems appropriate for determining such value for Plan purposes "Beneficiary" shall mean the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive the benefits specified in the Option Agreement and under this Plan in the event of a Participant's death, and shall mean the Participant's executor or administrator if no other Beneficiary is identified and able to act under the circumstances. "Board" shall mean the Board of Directors of the Company. "Cause" (a) For purposes of this Agreement, except as set forth in paragraph (b) below, a termination of a Participant's employment is for "Cause" if such Participant has been convicted of a felony involving moral turpitude or the termination is evidenced by a resolution adopted in good faith by two-thirds of the Board that the Participant (i) intentionally and continually failed substantially to perform his or her reasonably assigned duties with the Company (other than a failure resulting from the Participant's death or incapacity due to physical or mental illness or from the Participant's assignment of duties that would constitute "Good Reason" as hereinafter defined) which failure continued for a period of at least thirty (30) days after a written notice of demand for substantial performance has been delivered to the Participant specifying the manner in which the Participant has failed substantially to perform; or (ii) intentionally engaged in conduct that is demonstrably and materially injurious to the Company; provided, however, that no termination of the Participant's employment shall be for Cause as set forth in clause (ii) above until (x) there shall have been delivered to the Participant written notice setting forth that the Participant was guilty of the conduct set forth in clause (ii) and specifying the particulars thereof in detail and (y) the Participant shall have been provided an opportunity to be heard in person by the Board (with the assistance of the Participant's counsel if the Participant so desires). Neither an act nor a failure to act, on the Participant's part, shall be considered "intentional" unless the Participant has acted or failed to act with a lack of good faith and with a lack of reasonable belief that the Participant's action or failure to act was in the best interest of the Company. Notwithstanding anything contained in this Agreement to the contrary, no failure to perform by the Participant after the Participant has delivered to the Company a notice of termination of employment for Good Reason shall constitute Cause. (b) In the event a written employment agreement is in place between the Participant and the Company, the definition of "Cause" set forth in such employment agreement shall apply for all purposes of this Plan in lieu of the provisions of paragraph (a) above. "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. 13 14 "Commission" shall mean the Securities and Exchange Commission. "Committee" shall mean the Compensation Committee of the Board. "Common Stock" shall mean the Common Stock of the Company and such other securities or property as may become the subject of options pursuant to an adjustment made under this Plan. "Company" shall mean, collectively, the Pacific Gulf Properties Inc. and its Subsidiaries. "Non-Employee and Outside" shall mean "non-employee" within the meaning of any applicable regulatory requirements, including Rule 16b-3, and "outside" within the meaning of Section 162(m) of the Code. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended from time to time. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. "Fair Market Value", as of any date, shall mean the per share closing price of the stock on the Composite Tape, as published in the Western Edition of The Wall Street Journal, of the principal national securities exchange on which the stock is so listed or admitted to trade, on such day, or, if such day is not a trading day, on the last trading day preceding such date; provided, however, if the stock is not listed or admitted to trade on a national securities exchange, the Committee may designate such other exchange, market or source of data as it deems appropriate for determining such value for Plan purposes. "Good Reason" (a) Subject to paragraph (b) below, "Good Reason" shall mean the occurrence after a Change of Control of any of the events or conditions described in clauses (i) through (vii) hereof: (i) a change in Participant's status, position or responsibilities (including reporting responsibilities) that, in Participant's reasonable judgment, represents a substantial adverse change from his or her status, position or responsibilities as in effect at any time within 90 days preceding the date of a Change of Control or at any time thereafter; the assignment to Participant of any duties or responsibilities that, in Participant's reasonable judgment, are inconsistent with his or her status, title, position or responsibilities as in effect at any time within ninety (90) days preceding the date of a Change of Control or at any time thereafter; or any removal of Participant from or failure to reappoint or reelect Participant to any of such offices or positions held prior to the Change of Control, except in connection with the termination of Participant's employment for Total Disability, Cause, as a result of his or her death or by Participant other than for Good Reason; (ii) a reduction in Participant's base salary or any failure to pay Participant any compensation or benefits to which Participant is entitled within five days of notice from Participant of such non-payment; 14 15 (iii) the Company's requiring Participant to be based at any place outside a 30-mile radius from Newport Beach, California, except for reasonably required travel on the Company's business that is not materially greater than such travel requirements prior to the Change of Control; (iv) the failure by the Company to provide Participant with compensation and benefits, in the aggregate, at least equal (in terms of benefit levels and/or reward opportunities) to those provided for under each other employee benefit plan, program and practice in which Participant was participating at any time within ninety (90) days preceding the date of a Change of Control or at any time thereafter; (v) the insolvency or the filing (by any party, including the Company) of a petition for bankruptcy of the Company, which petition is not dismissed within sixty (60) days; (vi) any material breach by the Company of any provision of this Plan; or (vii) any purported termination of Participant's employment for Cause by the Company which does not comply with the requirements set forth in the definition of "Cause." (b) Any event or condition described in paragraph (a) above that occurs prior to a Change of Control but that the subject Participant reasonably demonstrates (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control and who effectuates a Change of Control, or (ii) otherwise arose in connection with, or in anticipation of, a Change of Control that actually occurs, shall constitute Good Reason for such Participant notwithstanding that it occurred prior to the Change of Control. "Incentive Stock Option" shall mean an option that is designated as an incentive stock option within the meaning of Section 422 of the Code and that contains such provisions as are necessary to comply with that section. "Nonqualified Stock Option" shall mean an option that is designated as a Nonqualified Stock Option and shall include any option intended as an Incentive Stock Option that fails to meet the applicable legal requirements thereof. Any option granted hereunder that is not designated as an incentive stock option shall be deemed to be designated a nonqualified stock option under this Plan and not an incentive stock option under the Code. The term "option" shall mean an option to purchase Common Stock under this Plan. The Committee shall designate any option granted to a Participant as a Nonqualified Stock Option or an Incentive Stock Option. "Option Agreement" shall mean any writing setting forth the terms of an option grant under this Plan that has been authorized by the Committee. "Participant" shall mean an employee who has been granted an option under this Plan. "Personal Representative" shall mean the person or persons who, upon the Total Disability or incompetence of a Participant, shall have acquired on behalf of the Participant, by legal proceeding or otherwise, the power to exercise the rights or receive benefits under this Plan and who shall have become the legal representative of the Participant. 15 16 "Plan" shall mean this Long Term Stock Compensation Plan. "QDRO" shall mean a qualified domestic relations order as defined in Section 414(p) of the Code or Title I, Section 206(d)(3) of ERISA (to the same extent as if this Plan were subject thereto), or the applicable rules thereunder. "Retirement" shall mean retirement from active service as an employee or officer of the Company on or after attaining age 65. "Rule 16b-3" shall mean Rule 16b-3 as promulgated by the Commission pursuant to the Exchange Act. "Securities Act" shall mean the Securities Act of 1933, as amended from time to time. "Subsidiary" shall mean any corporation or other entity a majority of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Company. "Total Disability" shall mean a "permanent and total disability" within the meaning of Section 22(e)(3) of the Code and such other disabilities, infirmities, afflictions or conditions as the Committee by rule may include. 8.2 Other Definitions Provided in the Text. "Change of Control" - Appendix A "FFO per Share" - Section 6.6(b) "Performance Criteria" - Section 6.4 "Plan Period" - Section 1.5 "Shortened Final Year" - Section 6.9(b) "10% Shareholder" - Section 5.4(a) "Total Shareholder Return" - Section 6.7(a) 16 17 APPENDIX A DEFINITION OF CHANGE OF CONTROL For purposes of the Company's 1999 Long Term Stock Compensation Plan, a CHANGE OF CONTROL shall have the meaning set forth below. This definition intentionally differs from that used in executives' Change of Control Agreements with the Company. "CHANGE OF CONTROL" shall mean any of the following events or circumstances: (a) An acquisition (other than directly from the Company) of any voting securities (the "VOTING Securities") of the Company by any "PERSON" (as the term person is used for purposes of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")), immediately after which such Person has "BENEFICIAL OWNERSHIP" (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of thirty five percent (35%) or more of the combined voting power of the Company's then outstanding Voting Securities; provided, however, that in determining whether a Change of Control has occurred, Voting Securities that are acquired in a "Non-Control Acquisition" (as hereinafter defined) shall not constitute an acquisition that would cause a Change of Control. A "NON-CONTROL ACQUISITION" shall mean an acquisition of Voting Securities of the Company by (i) an employee benefit plan (or a trust forming a part thereof) maintained by (x) the Company or (y) any corporation or other Person of which a majority of its voting power or its equity securities or equity interests is owned directly or indirectly by the Company (a "Subsidiary"), (ii) the Company or any Subsidiary or (iii) any Person as a result of a "Non-Control Transaction" (as hereinafter defined). (b) The individuals who, as of July 1, 1999, are members of the Board (the "INCUMBENT BOARD"), cease for any reason to constitute at least a majority of the Board; provided, however, that if the election, or nomination for election by the Company's stockholders, of any new director was approved by a vote of at least two-thirds (2/3) of the Incumbent Board, such new director shall be considered as a member of the Incumbent Board; provided, further, however, that no individual shall be considered a member of the Incumbent Board if such individual initially became a director on the Board as a result of either an actual or threatened "ELECTION CONTEST" (as described in Rule 14a-11 promulgated under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board (a "PROXY CONTEST") including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest; or (c) Approval by stockholders of the Company of: (i) A merger, consolidation or reorganization involving the Company, unless, after giving effect to such merger, consolidation or reorganization, all of the following criteria are met: (A) the stockholders of the Company, as constituted immediately prior to such merger, consolidation or reorganization, own, directly or indirectly, immediately following such merger, consolidation or reorganization, at least fifty percent (50%) of the combined voting power of the outstanding Voting Securities of the corporation resulting from such merger or consolidation or reorganization (the "SURVIVING CORPORATION") in substantially the same proportion as their ownership of the Voting -1- 18 Securities of the Company immediately prior to such merger, consolidation or reorganization; (B) the individuals who were members of the Incumbent Board immediately prior to the execution of the agreement providing for such merger, consolidation or reorganization constitute at least a majority of the members of the board of directors of the entity whose Voting Securities are held directly by the former stockholders of the Company in satisfaction of the criterion set forth in Section (c)(i)(A) above; and (C) no Person (other than the Company, any Subsidiary, any employee benefit plan (or any trust forming a part thereof) maintained by the Company, the Surviving Corporation or any Subsidiary, or any Person who, immediately prior to such merger, consolidation or reorganization, had Beneficial Ownership of thirty five percent (35%) or more of the then outstanding Voting Securities of the Company) owns, directly or indirectly, thirty five percent (35%) or more of the combined voting power of the Surviving Corporation's then outstanding Voting Securities. A merger, consolidation or reorganization meeting all of the criteria set forth in clauses (A) through (C) of this Section (c)(i) is herein referred to as a "NON-CONTROL TRANSACTION;" (ii) A complete liquidation or dissolution of the Company; or (iii) An agreement for the sale or other disposition of all or substantially all of the assets of the Company to any Person (other than a transfer to a Subsidiary). Notwithstanding the foregoing, a Change of Control shall not be deemed to occur solely because any Person (the "SUBJECT PERSON") acquired Beneficial Ownership of more than the permitted amount of the outstanding Voting Securities as a result of the acquisition by the Company of its own Voting Securities which, by reducing the number of Voting Securities outstanding, increases the proportional number of shares Beneficially Owned by the Subject Person; provided, however, that if a Change of Control would occur (but for the operation of this sentence) as a result of the acquisition by the Company of its own Voting Securities, and after such share acquisition by the Company the Subject Person becomes the Beneficial Owner of any additional Voting Securities of the Company that increases the percentage of the then outstanding Voting Securities of the Company Beneficially Owned by the Subject Person, then a Change of Control shall be deemed to have occurred. (d) If an executive's employment is terminated prior to a Change of Control and such executive reasonably demonstrates that such termination (i) was at the request of a third party who has indicated an intention or taken steps reasonably calculated to effect a Change of Control and who effectuates a Change of Control (a "THIRD PARTY") or (ii) otherwise occurred in connection with, or in anticipation of, a Change of Control that actually occurs, then the date of a Change of Control with respect to such executive shall mean the date immediately prior to the date of such termination of such executive's employment. -2- EX-10.3 3 MATERIAL CONTRACT 1 EXHIBIT 10.3 PACIFIC GULF PROPERTIES INC. 1993 SHARE OPTION PLAN I. THE PLAN 1.1 Purpose The purpose of this Plan is to promote the success of the Company by providing an additional means through the grant of Awards to attract, motivate, retain and reward key employees, including officers, whether or not directors, of the Company with awards and incentives for high levels of individual Performance and improved financial performance of the Company and to attract, motivate and retain experienced and knowledgeable independent directors through the benefits provided under Article VII. "Corporation" means Pacific Gulf Properties Inc. and "Company" means the Corporation and its Subsidiaries, collectively. These terms and other capitalized terms are defined in Article VI. 1.2 Administration and Authorization; Power and Procedure. (a) Committee. This Plan shall be administered by, and all Awards to Eligible Employees shall be authorized by, the Committee. Action of the Committee with respect to the administration of this Plan shall be taken pursuant to a majority vote or by written consent of its members. (b) Plan Awards; Interpretation; Powers of Committee. Subject to the express provisions of this Plan, the Committee shall have the authority: (i) to determine from among those persons eligible the particular Eligible Employees who will receive any Awards; (ii) to grant Awards to Eligible Employees, determine the price at which securities will be offered or awarded and the amount of securities to be offered or awarded to any of such persons, and determine the other specific terms and conditions of such Awards consistent with the express limits of this Plan, and establish the installments (if any) in which such Awards shall become exercisable or shall vest, or determine that no delayed exercisability or vesting is required, and establish the events of termination or reversion (if any) of such Awards; 1 2 (iii) to approve the forms of Award Agreements (which need not be identical either as to type of Award or among Participants); (iv) to construe and interpret this Plan and any agreements defining the rights and obligations of the Company and Eligible Employee Participants under this Plan, further define the terms used in this Plan, and prescribe, amend and rescind rules and regulations relating to the administration of this Plan; (v) to cancel, modify, or waive the Corporation's rights with respect to, or modify, discontinue, suspend, or terminate any or all outstanding Awards held by Eligible Employees, subject to any required consent under Section 5.6; (vi) to accelerate or extend the exercisability or vesting extend the term of any or all such outstanding Awards within the maximum ten-year term of Awards under Section 1.6; and (vii) to make all other determinations and take such other action as contemplated by this Plan or as may be necessary or advisable for the administration of this Plan and the effectuation of its purposes. Notwithstanding the foregoing, the provisions of Article VII relating to Non-Employee Director Awards shall be automatic and, to the maximum extent possible, self-effectuating, and the discretion of the Committee shall not extend to such Awards in any manner that would be impermissible under Rule 16b-3(c)(2). (c) Binding Determinations. Any action taken by, or inaction of, the Corporation, any Subsidiary, the Board or the Committee relating or pursuant to this Plan shall be within the absolute discretion of that entity or body and shall be conclusive and binding upon all persons. No member of the Board or Committee, or officer of the Corporation or any Subsidiary, shall be liable for any such action or inaction of the entity or body, of another person or, except in circumstances involving bad faith, of himself or herself. Subject only to compliance with the express provisions hereof, the Board and Committee may act in their absolute discretion in matters within their authority related to this Plan. (d) Reliance on Experts. In making any determination or in taking or not taking any action under this Plan, the Committee or the Board, as the case may be, may obtain and may rely upon the advice of experts, including professional advisors to the Corporation. No 2 3 director, officer or agent of the Company shall be liable for any such action or determination taken or made or omitted in good faith. (e) Delegation. The Committee may delegate ministerial, non-discretionary functions to individuals who are officers or employees of the Company. 1.3 Participation. Awards may be granted by the Committee only to those persons that the Committee determines to be Eligible Employees. An Eligible Employee who has been granted an Award may, if otherwise eligible, be granted additional Awards if the Committee shall so determine. Non-Employee Directors shall not be eligible to receive any Awards except for Nonqualified Stock Options granted automatically without action of the Committee under the provisions Of Article VII. 1.4 Shares Available for Awards. Subject to the provisions of Section 5.2, the capital stock that may be delivered under this Plan shall be shares of the Corporation's authorized but unissued Common Stock and any shares of its Common Stock held as treasury shares. The shares may be delivered for any lawful consideration. (a) Number of Shares. The maximum number of shares of Common Stock that may be delivered pursuant to Awards granted to Eligible Employees under this Plan shall not exceed 305,000 shares, and the maximum number of shares of Common Stock that may be delivered under the provisions of Article VII shall not exceed 45,000 shares, in each case subject to adjustments contemplated by Section 5.2. The maximum number of shares subject to options which may be granted to an Eligible Employee during any one-year period shall not exceed 100,000, subject to adjustment as contemplated in Section 5.2. (b) Calculation of Available Shares and Replenishment. Shares subject to outstanding Awards of derivative securities (as defined in Rule 16a-l(c) under the Exchange Act) shall be reserved for issuance. If any option or other right to acquire shares of Common Stock under an Award shall expire or be cancelled or terminated without having been exercised in full, or any Common Stock subject to a Restricted Stock Award or other Award shall not vest or be delivered, the unpurchased, unvested or undelivered shares subject thereto shall again be available for the purposes of the Plan, subject to any applicable limitations under Rule 16b-3. If a Stock Appreciation Right or similar 3 4 right is exercised, the number of shares of Common Stock to which such exercise or payment relates under the applicable Award shall be charged against the maximum amount of Common Stock that may be delivered pursuant to Awards under this Plan and, if applicable, such Award. If the Corporation withholds shares of Common Stock pursuant to Section 5.5, the number of shares that would have been deliverable with respect to an Award shall be reduced by the number of shares withheld and such shares shall not be available for additional Awards under this Plan. Notwithstanding the foregoing provisions, but subject to Sections 5.10(c) and 3.2(b), Awards payable solely in cash shall not reduce the number of shares available for Awards under this Plan and any imputed charges to the maximum number of shares deliverable under this Plan shall be reversed in the case of Awards actually paid in cash. Thus, to the extent any shares were previously reserved in respect of such Awards, the number of shares not issued shall again be available for purposes of this Plan. 1.5 Grant of Awards. Subject to the express provisions of this Plan, the Committee shall determine the number of shares of Common Stock subject to each Award, and the price (if any) to be paid for the shares or the Award. Each Award shall be evidenced by an Award Agreement signed by the Corporation and, if required by the Committee, by the Participant. 1.6 Award Period. Each Award and all executory rights or obligations under the related Award Agreement shall expire on such date (if any) as shall be determined by the Committee, but in the case of Options or other rights to acquire Common Stock not later than ten (10) years after the Award Date. 1.7 Limitations on Exercise and Vesting of Awards. (a) Provisions for Exercise. Except as may otherwise be provided in an Award Agreement, no Award shall be exercisable or shall vast until at least six months after the initial Award Date, and once exercisable an Award shall remain exercisable until the expiration or earlier termination of the Award, unless the Committee otherwise provides. (b) Procedure. Any exercisable Award shall be deemed to be exercised when the Secretary of the Corporation receives written notice of such exercise from the Participant, together with any required payment made in accordance with Section 2.2(b) or 7.3, as the case may be. 4 5 (c) Fractional Shares/Minimum Issue. Fractional share interests shall be disregarded, but may be accumulated. The Committee, however, may determine in the case of Eligible Employees that cash, other securities or other property will be paid or transferred in lieu of any fractional share interests. No fewer than 10 shares may be purchased on exercise of any Award at one time unless the number purchased is the total number at the time available for purchase under the Award. 1.8 Acceptance of Notes to Finance Exercise. The Corporation may, with the Committee's approval, accept one or more notes from any Eligible Employee in connection with the exercise or receipt of any outstanding Award; provided that any such note shall be subject to the following terms and conditions: (a) The principal of the note shall not exceed the amount required to be paid to the Corporation upon the exercise or receipt of one or more Awards under the Plan and the note shall be delivered directly to the Corporation in consideration of such exercise or receipt. (b) The note shall be repaid over a period of time not to exceed five years, with annual installments of at least 10% of principal the first four years and a balloon payment of the remaining principal amount at the end of the fifth year; provided that the Corporation may demand any payment, in addition to such installments, as may be required for the note to remain in compliance with any applicable federal or state regulation. (c) The note shall provide for full recourse to the Eligible Employee Participant and shall bear interest at a rate equal to the then prime rate of interest charged by Bank of America to its most credit-worthy customers, which interest rate shall be adjusted annually to reflect the then prime interest rate; provided that in no event shall the interest rate charged be less than the applicable imputed interest rate specified by the Code. (d) Except as otherwise provided by the Committee, if the employment of the Eligible Employee Participant terminates, the unpaid principal balance of the note shall become due and payable on the 10th business day after such termination; provided, however, that if a sale of such shares would cause such Eligible Employee Participant to incur liability under Section 16(b) of the Exchange Act, the unpaid balance shall 5 6 become due and payable an the 10th business day after the first day on which a sale of such shares could have been made without incurring such liability assuming for these purposes that there are no other transactions by the Employee Participant subsequent to such termination. (e) If required by the Committee or by applicable law, the note shall be secured by a pledge of any shares or rights financed thereby in compliance with applicable law. (f) The terms, repayment provisions, and collateral release provisions of the note and the pledge securing the note shall conform with applicable rules and regulations of the Federal Reserve Board as then in effect. 1.9 No Transferability. Awards may be exercised only by, and amounts payable or shares issuable pursuant to an Award shall be paid only to (or registered only in the name of), the Participant or, if the Participant has died, the Participant's Beneficiary or, if the Participant has suffered a Total Disability, the Participant's Personal Representative, if any, or if there is none, the Participant, or (to the extent permitted by applicable law and Rule 16b-3) to a third party pursuant to such conditions and procedures as the Committee may establish. Other than by will or the laws of descent and distribution or pursuant to a QDRO or other exception to transfer restrictions under Rule 16b-3 (except to the extent not permitted in the case of an Incentive Stock Option), no right or benefit under this Plan or any Award, including, without limitation, any Option or share of Restricted Stock that has not vested, shall be transferrable by the Participant or shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or charge (other than to the Corporation) and any such attempted action shall be void. The Corporation shall disregard any attempt at transfer, assignment or other alienation prohibited by the preceding sentences and shall pay or deliver such cash or shares of Common Stock in accordance with the provisions of this Plan. The designation of a Beneficiary hereunder shall not constitute a transfer for these purposes. 6 7 II. EMPLOYEE OPTIONS. 2.1 Grants. One or more Options may be granted under this Article to any Eligible Employee. Each Option granted may be either an Option intended to be an Incentive Stock Option, or an option not so intended, and such intent shall be indicated in the applicable Award Agreement. No Eligible Employee may be granted an Option to purchase more than 100,000 shares in any year. 2.2 Option Price. (a) Pricing Limits. Subject to Section 2.4, the purchase price per share of the Common Stock covered by each Option shall be determined by the Committee at the time the Option is granted, but shall not be less than 100% of the Fair Market Value of the Common Stock on the date of grant. (b) Payment Provisions. The purchase price of any shares purchased on exercise of an Option granted under this Article shall be paid in full at the time of each purchase in one or a combination of the following methods: (i) in cash or by electronic funds transfer; (ii) by check payable to the order of the Corporation; (iii) if authorized by the Committee or specified in the applicable Award Agreement, in cash in an amount equal to the par value of the shares being purchased, and, in the form of a promissory note (consistent with the requirements of Section 1.8) of the Participant in an amount equal to the difference between said cash amount and the purchase price of such shares; (iv) by notice and third party payment in such manner as may be authorized by the Committee; (v) by the delivery of shares of Common stock of the Corporation already owned by the Participant, provided, however, that the Committee may in its absolute discretion limit the Participant's ability to exercise an Award by delivering such shares; or (vi) if authorized by the Committee or specified in the applicable Award Agreement, by reduction in the number of shares of Common Stock otherwise deliverable upon exercise by that number of shares which have a then Fair Market Value equal to such purchase price. Previously owned shares of Common Stock used to satisfy the exercise price of an Option under clauses (v) and (vi) shall be valued at their Fair Market Value on the date of exercise. 2.3 Limitations on Grant and Terms of Incentive Stock Options. (a) $100,000 Limit. To the extent that the aggregate "fair market value" of stock with respect to which incentive stock options first become exercisable by a 7 8 Participant in any calendar year exceeds $100,000, taking into account both Common Stock subject to Incentive Stock Options under this Plan and stock subject to incentive stock options under all other plans of the Company, such options shall be treated as nonqualified stock options. For this purpose, the "fair market value" of the stock subject to options shall be determined as of the date the options were awarded. In reducing the number of options treated as incentive stock options to meet the $100,000 limit, the most recently granted options shall be reduced first. To the extent a reduction of simultaneously granted options is necessary to meet the $100,000 limit, the Committee may, in the manner and to the extent permitted by law, designate which shares of Common Stock are to be treated as shares acquired pursuant to the exercise of an Incentive Stock Option. (b) Option Period. Subject to Section 2.4, each Option and all rights thereunder shall expire no later than ten years after the Award Date. (c) Other Code Limits. There shall be imposed in any Award Agreement relating to Incentive Stock Options such terms and conditions as from time to time are required in order that the Option be an "incentive stock option" as that term is defined in Section 422 of the Code. 2.4 Limits on 10% Holders. No Incentive Stock Option may be granted to any person who, at the time the Option is granted, owns (or is deemed to own under Section 424(d) of the Code) shares of outstanding Common Stock possessing more than 10% of the total combined voting power of all classes of stock of the Corporation, unless the exercise price of such Option is at least 110% of the Fair Market Value of the stock subject to the Option and such Option by its terms is not exercisable after the expiration of five years from the date such Option is granted. 2.5 Option Repricing; Cancellation and Regrant; Waiver of Restrictions. Subject to Section 1.4 and Section 5.6 and the specific limitations on Awards contained in this Plan, the Committee from time to time may authorize, generally or in specific cases only, for the benefit of any Eligible Employee any adjustment in the exercise or purchase price, the number of shares subject to, the restrictions upon or the term of, an Award granted under this Article by cancellation of an outstanding Award and a subsequent regranting of an Award, by amendment, by substitution of an outstanding Award, by waiver or by other legally valid 8 9 means. Such amendment or other action may result among other changes in an exercise or purchase price which is higher or lower than the exercise or purchase price of the original or prior Award, provide for a greater or lesser number of shares subject to the Award, or provide for a longer or shorter vesting or exercise period. III. STOCK APPRECIATION RIGHTS. 3.1 Grants. In its discretion, the Committee may grant to any Eligible Employee Stock Appreciation Rights either concurrently with the grant of another Award or in respect of an outstanding Award, in whole or in part, or independently of any other Award. Any Stock Appreciation Right granted in connection with an Incentive Stock Option shall contain such terms as may be required to comply with the provisions of Section 422 of the Code and the regulations promulgated thereunder. 3.2 Exercise of Stock Appreciation Rights. (a) Exercisability. Unless the Award Agreement or the Committee otherwise provides, a Stock Appreciation Right related to another Award shall be exercisable at such time or times, and to the extent, that the related Award shall be exercisable. (b) Effect on Available Shares. In the event that a Stock Appreciation Right is exercised, the number of shares of Common Stock subject to a related Award shall be charged against the maximum amount of Common Stock that may be delivered pursuant to Awards under this Plan. The number of shares subject to the Stock Appreciation Right and the related Option of the Participant shall also be reduced by such number of shares. (c) Stand-Alone SARs. A Stock Appreciation Right granted independently of any other Award shall be exercisable pursuant to the terms of the Award Agreement but in no event earlier than six months after the Award Date, except in the case of death or Total Disability. 3.3 Payment. (a) Amount. Unless the Committee otherwise provides, upon exercise of a Stock Appreciation Right and surrender of an exercisable portion of any related Award, the Participant shall be entitled to receive payment of an amount determined by multiplying 9 10 (i) the difference obtained by subtracting the exercise price per share of Common stock under the related Award (if applicable) or the initial share value specified in the Award from the Fair Market Value of a share of Common Stock an the date of exercise of the stock Appreciation Right, by (ii) the number of shares with respect to which the Stock Appreciation Right shall have been exercised. (b) Form of Payment. The Committee, in its sole discretion, shall determine the form in which payment shall be made of the amount determined under paragraph (a) above, either solely in cash, solely in shares of Common Stock (valued at Fair Market Value on the date of exercise of the Stock Appreciation Right), or partly in such shares and partly in cash, provided that the Committee shall have determined that such exercise and payment are consistent with applicable law. If the Committee permits the Participant to elect to receive cash or shares (or a combination thereof) on such exercise, any such election shall be subject to such conditions as the Committee may impose and, in the case of any Section 16 Person, any election to receive cash shall be subject to any applicable limitations under Rule 16b-3. IV. RESTRICTED STOCK AWARDS. 4.1 Grants. The Committee may, in its discretion, grant one or more Restricted Stock Awards to any Eligible Employee. Each Restricted Stock Award Agreement shall specify the number of shares of Common Stock to be issued to the Participant, the date of such issuance, the consideration for such shares (but not less than the minimum lawful consideration under applicable state law) by the Participant and the restrictions imposed on such shares and the conditions of release or lapse of such restrictions. Such restrictions shall not lapse earlier than six months after the Award Date, except to the extent the Committee may otherwise provide. Stock certificates evidencing shares of Restricted Stock pending the lapse of the restrictions ("restricted shares") shall bear a legend making appropriate reference to the restrictions imposed hereunder and shall be held by the Corporation or by a third party designated by the Committee until the restrictions on such shares shall have lapsed and the shares shall have vested in accordance with the provisions of the Award and Section 1.7. Upon issuance of the Restricted Stock Award, the Participant may be required 10 11 to provide such further assurance and documents as the Committee may require to enforce the restrictions. 4.2 Restrictions. (a) Pre-Vesting Restraints. Except as provided in Section 1.9 and 4.1, restricted shares comprising any Restricted Stock Award may not be sold, assigned, transferred, pledged or otherwise disposed of or encumbered, either voluntarily or involuntarily, until such shares have vested. (b) Dividend and Voting Rights. Unless otherwise provided in the applicable Award Agreement, a Participant receiving a Restricted Stock Award shall be entitled to cash dividend and voting rights for all shares issued even though they are not vested, provided that such rights shall terminate immediately as to any restricted shares which cease to be eligible for vesting. (c) Cash Payments. If the Participant shall have paid or received cash (including any dividends) in connection with the Restricted Stock Award, the Award Agreement shall specify whether and to what extent such cash shall be returned (with or without an earnings factor) as to any restricted shares which cease to be eligible for vesting. 4.3 Return to the Corporation. Unless the Committee otherwise expressly provides, shares of Restricted Stock that are subject to restrictions at the time of termination of employment or are subject to other conditions to vest that have not been satisfied by the time specified in the applicable Award Agreement shall not vest and shall be returned to the Corporation in such manner and an such terms as the Committee shall therein provide. V. OTHER PROVISIONS. 5.1 Rights of Eligible Employees, Participants And Beneficiaries (a) Employment Status. Status as an Eligible Employee shall not be construed as a commitment that any Award will be made under this Plan to an Eligible Employee or to Eligible Employees generally. (b) No Employment Contract. Nothing contained in this Plan (or in any other documents related to this Plan or to any Award) shall confer upon any Eligible Employee or other Participant any right to continue in the employ or 11 12 other service of the Company or constitute any contract or agreement of employment or other service, nor shall interfere in any way with the right of the Company to change such person's compensation or other benefits or to terminate the employment of such person, with or without cause, but nothing contained in this Plan or any document related hereto shall adversely affect any independent contractual right of such person without his or her consent thereto. (c) Plan Not Funded. Awards payable under this Plan shall be payable in shares or from the general assets of the Corporation, and no special or separate reserve, fund or deposit shall be made to assure payment of such Awards. No Participant, Beneficiary or other person shall have any right, title or interest in any fund or in any specific asset (including shares of Common Stock, except as expressly otherwise provided) of the Company by reason of any Award hereunder. Neither the provisions of this Plan (or of any related documents), nor the creation or adoption of this Plan, nor any action taken pursuant to the provisions of this Plan shall create, or be construed to create, a trust of any kind or a fiduciary relationship between the Company and any Participant, Beneficiary or other person. To the extent that a Participant, Beneficiary or other person acquires a right to receive payment pursuant to any Award hereunder, such right shall be no greater than the right of any unsecured general creditor of the Company. 5.2 Adjustments; Acceleration. (a) Adjustments. If the outstanding shares of Common Stock are changed into or exchanged for cash, other property or a different number or kind of shares or securities of the Corporation, or if additional shares or new or different securities are distributed with respect to the outstanding shares of the Common Stock, through a reorganization or merger in which the Corporation is the surviving entity, or through a combination, consolidation, recapitalization, reclassification, stock split, stock dividend, reverse stock split, stock consolidation, dividend or distribution of cash or property to the shareholders of the Corporation, or if there shall occur any other extraordinary corporate transaction or event in respect of the Common Stock or a sale of substantially all the assets of the Corporation as an entirety which in the judgment of the Committee materially affects the Common Stock, then the Committee shall, in such manner and to such extent (if any) as it deems appropriate and equitable (1) proportionately adjust any or all of (A) the number and kind of shares of Common Stock or other consideration that is subject to or may be delivered under this Plan and pursuant to outstanding Awards, (B) the consideration payable with respect to Awards granted prior to any such change and the price, if any, paid 12 13 in connection with Restricted Stock Awards; or (2) in the case of an extraordinary dividend or other distribution, merger, reorganization, consolidation, combination, sale of assets, split up, exchange, or spin off, make provision for a cash payment or for the substitution or exchange of any or all outstanding Awards or the cash, securities or property deliverable to the holder of any or all outstanding Awards based upon the distribution or consideration payable to holders of the Common Stock of the Corporation upon or in respect of such event; provided, however, in each case, that with respect to Awards of Incentive Stock Options, no such adjustment shall be made which would cause the Plan to violate Section 422 or 424(a) of the Code or any successor provisions thereto. Corresponding adjustments shall be made with respect to any Stock Appreciation Rights based upon the adjustments made to the Options to which they are related. (b) Acceleration of Awards Upon Change in Control. As to any or all Eligible Employee Participants, the Committee may provide by express provision in an Award Agreement or otherwise that upon or in anticipation of the occurrence of a change in control (as that term is defined by the Committee), benefits under Awards shall be accelerated to the extent permitted and subject to such conditions as may be imposed by the Committee; provided, however, that in no event shall any Award be accelerated as to any Section 16 Person to a date less than six months after the Award Date of such Award. (c) Possible Early Termination of Accelerated Awards. If any Option or other right to acquire Common Stock under this Plan (other than under Article VII) has not been exercised prior to (i) a dissolution or the Corporation, or (ii) a reorganization event described in Section 5.2(a) that the Corporation does not survive, and no provision has been made for the survival, substitution, exchange or other settlement of such Option or right, such Option or right shall thereupon terminate. 5.3 Effect of Termination of Employment. The Committee shall establish in respect of each Award granted to an Eligible Employee the effect of a termination of employment on the rights and benefits thereunder and in so doing may make distinctions based upon the cause of termination, e.g., Retirement, early retirement, termination for cause, disability or death. Notwithstanding any terms to the contrary in an Award Agreement or this Plan, the Committee may decide in its complete discretion at the time of termination (or within a reasonable time thereafter) to extend the exercise period of an Award (although not beyond the period described in Section 2.3(b)) and the number of shares covered by the 13 14 Award with respect to which the Award is exercisable or vested. 5.4 Compliance with Laws. This Plan, the granting and vesting of Awards under this Plan and the offer, issuance and delivery of shares of Common Stock and/or the payment of money under this Plan or under Awards granted hereunder are subject to compliance with all applicable federal and state laws, rules and regulations (including, but not limited to, state and federal securities laws and federal margin requirements) and to such approvals by any listing, regulatory or governmental authority as may, in the opinion of counsel for the Corporation, be necessary or advisable in connection therewith. Any securities delivered under this Plan shall be subject to such restrictions, and the person acquiring such securities shall, if requested by the Corporation, provide such assurances and representations to the Corporation as the Corporation may deem necessary or desirable to assure compliance with all applicable legal requirements. 5.5 Tax Withholding. (a) Cash or Shares. Upon any exercise, vesting, or payment of any Award, the Company shall have the right at its option to (i) require the Participant (or Personal Representative or Beneficiary, as the case may be) to pay or provide for payment of the amount of any taxes which the Company may be required to withhold with respect to such transaction or (ii) deduct from any amount payable in cash the amount of any taxes which the Company may be required to withhold with respect to such cash amount. In any case where a tax is required to be withheld in connection with the delivery of shares of Common Stock under this Plan, the Committee may grant (either at the time of the Award or thereafter) to the Participant the right to elect, pursuant to such rules and subject to such conditions as the Committee may establish, to have the Corporation reduce the number of shares to be delivered by (or otherwise reacquire) the appropriate number of shares valued at their then Fair Market Value, to satisfy such withholding obligation. (b) Tax Loans. The Committee may, in its discretion, authorize a loan to an Eligible Employee in the amount of any taxes which the Company may be required to withhold with respect to shares of common stock received (or disposed of, as the case may be) pursuant to a transaction described in subsection (a) above. Such a loan shall be for a term, at a rate of interest and pursuant to such other terms and conditions as the Committee, under applicable law 14 15 may establish and such loan need not comply with the provisions of Section 1.8. 5.6 Plan Amendment, Termination and Suspension. (a) Board Authorization. The Board may, at any time, terminate or, from time to time, amend, modify or suspend this Plan, in whole or in part. No Awards may be granted during any suspension of this Plan or after termination of this Plan, but the Committee shall retain jurisdiction as to Awards then outstanding in accordance with the terms of this Plan. (b) Shareholder Approval. If any amendment would (i) materially increase the benefits accruing to Participants under this Plan, (ii) materially increase the aggregate number of securities that may be issued under this Plan, or (iii) materially modify the requirements as to eligibility for participation in this Plan, then to the extent then required by Rule 16b-3 to secure benefits thereunder or to avoid liability under Section 16 of the Exchange Act (and Rules thereunder) or required under Section 425 of the Code or any other applicable law, or deemed necessary or advisable by the Board, such amendment shall be subject to shareholder approval. (c) Amendments to Awards. Without limiting any other express authority of the Committee under but subject to the express limits of this Plan, the Committee by agreement or resolution may waive conditions of or limitations on Awards to Eligible Employees that the Committee in the prior exercise of its discretion has imposed, without the consent of an Eligible Employee Participant, and may make other changes to the terms and conditions of Awards that do not affect in any manner materially adverse to the Eligible Employee Participant, his or her rights and benefits under an Award. (d) Limitations on Amendments to Plan and Awards. No amendment, suspension or termination of the Plan or change of or affecting any outstanding Award shall, without written consent of the Participant, affect in any manner materially adverse to the Participant any rights or benefits of the Participant or obligations of the Corporation under any Award granted under this Plan prior to the effective date of such change. Changes contemplated by Section 5.2 shall not be deemed to constitute changes or amendments for purposes of this Section 5.6. 15 16 5.7 Privileges of Stock Ownership. Except as otherwise expressly authorized by the Committee or this Plan, a Participant shall not be entitled to any privilege of stock ownership as to any shares of Common Stock not actually delivered to and held of record by him or her. No adjustment will be made for dividends or other rights as a shareholder for which a record date is prior to such date of delivery. 5.8 Effective Date of the Plan. This Plan shall be effective as of October 27, 1993, the date of Board approval, subject to shareholder approval within 12 months thereafter. 5.9 Term of the Plan. No Award shall be granted more than ten years after the effective date of this Plan (the "termination date"). Unless otherwise expressly provided in this Plan or in an applicable Award Agreement, any Award theretofore granted may extend beyond such date, and all authority of the Committee with respect to Awards hereunder shall continue during any suspension of this Plan and in respect of outstanding Awards on such termination date. 5.10 Governing Law; Construction; Severability. (a) Choice of Law. This Plan, the Awards, all documents evidencing Awards and all other related documents shall be governed by, and construed in accordance with the laws of the State of California applicable to contracts made and performed within such State, except as such laws may be supplanted by the laws of the United States of America, which laws shall then govern its effect and its construction to the extent they supplant California law. (b) Severability. If any provision shall be held by a court of competent jurisdiction to be invalid and unenforceable, the remaining provisions of this Plan shall continue in effect. (c) Plan Construction. It is the intent of the Corporation that this Plan and Awards hereunder satisfy and be interpreted in a manner that in the case of Participants who are or may be subject to Section 16 of the Exchange Act satisfies the applicable requirements of Rule 16b-3 so that such persons will be entitled to the benefits of Rule 16b-3 or other exemptive rules under Section 16 of the Exchange Act and will not be subjected to avoidable liability thereunder. If any provision of this Plan or of any Award or any prior action by the Committee would otherwise 16 17 frustrate or conflict with the intent expressed above, that provision to the extent possible shall be interpreted and deemed amended so as to avoid such conflict, but to the extent of any remaining irreconcilable conflict with such intent as to such persons in the circumstances, such provision shall be deemed void. 5.11 Captions. Captions and headings are given to the sections and subsections of this Plan solely as a convenience to facilitate reference. Such headings shall not be deemed in any way material or relevant to the construction or interpretation of the Plan or any provision thereof. 5.12 Effect of Change of Subsidiary Status. For purposes of this Plan and any Award hereunder, if an entity ceases to be a Subsidiary, a termination of employment shall be deemed to have occurred with respect to each employee of such Subsidiary who does not continue as an employee of another entity within the Company. 5.13 Non-Exclusivity of Plan. Nothing in this Plan shall limit or be deemed to limit the authority of the Board or the Committee to grant Awards or authorize any other compensation, with or without reference to the Common Stock, under any other plan or authority. VI. DEFINITIONS. 6.1 Definitions. (a) "Award" shall mean an award of any Option, Stock Appreciation Right, Restricted Stock Award, or other right or security that would constitute a "derivative security" under Rule 16a-l(c) of the Exchange Act, or any combination thereof, whether alternative or cumulative, authorized by and granted under this Plan. (b) "Award Agreement" shall mean any writing setting forth the terms of an Award that has been authorized by the Committee. (c) "Award Date" shall mean the date upon which the Committee took the action granting an Award or such later date as the Committee designates as the Award Date at the time of the Award or, in the case of Awards under Article VII, the applicable dates set forth therein. 17 18 (d) "Award Period" shall mean the period beginning on an Award Date and ending on the expiration date of such Award. (e) "Beneficiary" shall mean the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive the benefits specified in the Award Agreement and under this Plan in the event of a Participant's death, and shall mean the Participant's executor or administrator if no other Beneficiary is identified and able to act under the circumstances. (f) "Board" shall mean the Board of Directors of the Corporation. (q) "Code" shall mean the Internal Revenue Code of 1986, as amended from time to time. (h) "Commission" shall mean the Securities and Exchange Commission. (i) "Committee" shall mean a committee appointed by the Board to administer this Plan, which committee shall be comprised only of two or more directors or such greater number of directors as may be required under applicable law, each of whom, during such time as one or more Participants may be subject to Section 16 of the Exchange Act, shall be a Disinterested and Outside director; provided, however, that until such time as the Corporation has a class of Common Stock which is registered under Section 12 of the Exchange Act, the Board an a whole or any committee the Board may designate may serve as the Committee. (j) "Common Stock" shall mean the Common Stock of the Corporation and such other securities or property as may become the subject of Awards, or become subject to Awards, pursuant to an adjustment made under Section 5.2 of this Plan. (k) "Company" shall mean, collectively, the Corporation and its Subsidiaries. (1) "Corporation" shall mean Pacific Gulf Enterprises, Inc., a Maryland corporation, and its successors. (m) "Disinterested and Outside" shall mean "disinterested" within the meaning of any applicable regulatory requirements, including Rule 16b-3, and "outside" within the meaning of Section 162(m) of the code. (n) "Eligible Employee" shall mean an officer (whether or not a director) or any other employee of the 18 19 Company, or any Other Eligible Person, as determined by the Committee in its discretion. (o) "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended. (p) "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended from time to time. (q) "Fair Market Value" shall mean the closing price of the stock on the Composite Tape, as published in the Western Edition of The Wall Street Journal, of the principal national securities exchange on which the stock is so listed or admitted to trade, on such date, or, if there is no trading of the stock on such date, then the closing price of the stock as quoted on such Composite Tape on the next preceding date on which there was trading in such shares; provided, however, if the stock is not listed or admitted to trade on a national securities exchange, the Committee may designate such other exchange, market or source of data as it deems appropriate for determining such value for Plan purposes. (r) "Incentive Stock Option" shall mean an Option which is designated as an incentive stock option within the meaning of Section 422 of the Code and which contains such provisions as are necessary to comply with that section. (s) "Nonqualified Stock Option" shall mean an Option that is designated as a Nonqualified Stock Option and shall include any Option intended as an Incentive Stock Option that fails to meet the applicable legal requirements thereof. Any Option granted hereunder that is not designated as an incentive stock option shall be deemed to be designated a nonqualified stock option under this Plan and not an incentive stock option under the Code. (t) "Non-Employee Director" shall mean a member of the Board of Directors of the Corporation who is not an officer or employee of the Company. (u) "Non-Employee Director Participant" shall mean a Non-Employee Director who has been granted an Award under the provisions of Article VII. (v) "Option" shall mean an option to purchase Common Stock under this Plan. The Committee shall designate any Option granted to an Eligible Employee as a Nonqualified Stock Option or an Incentive Stock Option. Options granted under Article VII shall be Nonqualified Stock Options. (w) "Other Eligible Person" shall mean any other person (including significant agents and consultants) who 19 20 performs substantial services for the Company of a nature similar to those performed by key employees, selected to participate in this Plan by the Committee from time to time; provided that in no event shall a Non-Employee Director be selected as an Other Eligible Person. (x) "Participant" shall mean an Eligible Employee who has been granted an Award under this Plan and a Non-Employee Director who has received an Award under Article VII of this Plan. (y) "Personal Representative" shall mean the person or persons who, upon the Total Disability or incompetence of a Participant, shall have acquired on behalf of the Participant, by legal proceeding or otherwise, the power to exercise the rights or receive benefits under this Plan and who shall have become the legal representative of the Participant. (aa) "Plan" shall mean this 1993 Share Option Plan. (bb) "QDRO" shall mean a qualified domestic relations order as defined in Section 414(p) of the Code or Title I, Section 206(d)(3) of ERISA (to the same extent as if this Plan were subject thereto), or the applicable rules thereunder. (cc) "Restricted Stock" shall mean shares of Common Stock awarded to a Participant subject to payment of such consideration, if any, and such conditions on vesting and such transfer and other restrictions as are established in or pursuant to this Plan, for so long as such shares remain unvested under the terms of the applicable Award Agreement. (dd) "Retirement" shall mean retirement from active service as an employee or officer of the Company on or after attaining age 65, or, in the case of a Non-Employee Director, a retirement or resignation as a director after at least ten years of service as a director. (ee) "Rule 16b-3" shall mean Rule 16b-3 as promulgated by the Commission pursuant to the Exchange Act. (ff) "Section 16 Person" shall mean a person subject to Section 16(a) of the Exchange Act. (gg) "Securities Act" shall mean the Securities Act of 1933, as amended from time to time. (hh) "Stock Appreciation Right" shall mean a right to receive a number of shares of Common Stock or an amount 20 21 of cash, or a combination of shares and cash, the aggregate amount or value of which is determined by reference to a change in the Fair Market Value of the Common Stock that is authorized under this Plan. (ii) "Subsidiary" shall mean any corporation or other entity a majority of whose outstanding voting stock or voting power is beneficially owned directly or indirectly by the Corporation. (jj) "Total Disability" shall mean a "permanent and total disability" within the meaning of Section 22(e)(3) of the Code and (except in the case of a Non-Employee Director) such other disabilities, infirmities, afflictions or conditions as the committee by rule may include. VII. NON-EMPLOYEE DIRECTOR OPTIONS 7.1 Participation. Awards under this Article VII shall be made only to Non-Employee Directors. 7.2 Annual Option Grants. (a) Initial Options. Persons who are Non-Employee Directors at the time this Plan is first approved by the shareholders of the Corporation shall be granted without further action an Option to purchase 2,500 shares of Common Stock (the Award Date of which shall be the date of shareholder approval of this Plan). After approval of this Plan by the shareholders of the Corporation, if any person who is not then an officer or employee of the Corporation shall become a Director of the Corporation, there shall be granted automatically to such person (without any action by the Board or Committee) a Nonqualified Stock Option (the Award Date of which shall be the date such person becomes a Non-Employee Director) to purchase 2,500 shares of Common Stock. (b) Subsequent Options. On each December 31 occurring during the term of this Plan, commencing December 31, 1994, there shall be granted automatically (without any action by the Committee or the Board) a Nonqualified Stock Option to each Non-Employee Director then in office to purchase 500 shares of Common Stock. (c) Maximum Number of Shares. Annual grants that would otherwise exceed the maximum number of shares under Section 1.4(a) shall be prorated within such limitation among the number of Non-Employee Directors entitled thereto. A Non-Employee Director shall not receive 21 22 more than one Nonqualified Stock Option under this Section 7.2 in any calendar year and no more than 7,000 shares on exercise of all Options awarded under this Section 7.2. 7.3 Option Price. The purchase price per share of the Common Stock covered by each Option granted pursuant to Section 7.2 hereof shall be 100 percent of the Fair Market Value of the Common Stock on the Award Date. The exercise price of any Option granted under this Article shall be paid in full at the time of each purchase in cash or by check or in shares of Common Stock valued at their Fair Market Value on the date of exercise of the Option, or partly in such shares and partly in cash, provided that any such shares used in payment shall have been owned by the Participant at least six months prior to the data of exercise. 7.4 Option Period and Exercisability. Each Option granted under this Article VII and all rights or obligations thereunder shall commence on the Award Date and expire ten years thereafter and shall be subject to earlier termination as provided below. Each Option granted under Section 7.2 shall be immediately exercisable after the Award Date. 7.5 Effect of Termination of Service. If a Non-Employee Director's services as a member of the Board of Directors terminate by reason of death, Total Disability or Retirement, an Option granted pursuant to this Article held by such Participant shall remain exercisable for two years after the date of such termination or until the expiration of the stated term at such Option, whichever first occurs. If a Non-Employee Director's services as a member of the Board of Directors terminate for any other reason, an Option granted pursuant to this Article held by such Participant shall remain exercisable for three months after the date of such termination or until the expiration of the stated term, whichever first occurs. 7.6 Adjustments. Options granted under this Article VII shall be subject to adjustment as provided in Section 5.2, but only to the extent that (a) such adjustment and the Committee's actions in respect thereof satisfy applicable criteria under Rule 16b-3, and (b) such adjustment is consistent with adjustments to Options held by persons other than executive officers or directors of the Corporation. 22 23 7.7 Limitation on Amendments. The provisions of this Article VII shall not be amended more than once every six months (other than as may be necessary to conform to any applicable changes in the Code or the rules thereunder), unless such amendment would be consistent with the provisions of Rule 16b-3(c)(2)(ii) (or any successor provision). 23 EX-10.16 4 MATERIAL CONTRACT 1 EXHIBIT 10.16 PACIFIC GULF PROPERTIES INC. RESTRICTED STOCK AWARD AGREEMENT THIS AGREEMENT dated as of the day of , , is between Pacific Gulf Properties Inc., a Maryland corporation (the "Corporation") and (the "Employee"). W I T N E S S E T H - - - - - - - - - - WHEREAS, the Corporation has adopted the Pacific Gulf Properties Inc. 1993 Share Option Plan (the "Plan") in order to retain, motivate and reward employees of the Corporation by providing incentives related to equity interests in and the financial performance of the Corporation; and WHEREAS, pursuant to the Plan, the Corporation has determined to grant to the Employee effective as of the day of , , (the "Award Date") an award of restricted shares of common stock of the Corporation, $0.01 par value, upon the terms and conditions set forth herein and in the Plan; and WHEREAS, Employee is willing to accept such restricted common stock upon the terms and conditions set forth herein and in the Plan. NOW, THEREFORE, in consideration of the mutual promises and covenants made herein and the mutual benefits to be derived herefrom, the parties agree as follows: 1. Defined Terms. Capitalized terms used herein and not otherwise defined herein shall have the meaning assigned to such terms in the Plan. Page 1 2 2. Grant of Award As additional compensation, the Corporation hereby grants to the Employee the right to purchase, and Employee hereby agrees to purchase, within sixty (60) days of the Award Date and pursuant to the terms and conditions set forth herein and in the Plan, an aggregate of FIVE THOUSAND (5,000) shares of common stock of the Corporation (the "Bonus Shares") for a price (the "Purchase Price") equal to the par value of the Bonus Shares calculated at $0.01 per share. The Employee shall pay the Purchase Price in cash or by check at the office of the Corporation's Chief Financial Officer. To the extent that Employee fails to pay the Purchase Price in the foregoing manner within sixty (60) days of the Award Date, Employee's right to purchase the Bonus Shares under this Agreement shall lapse. 3. Restrictions on Bonus Shares. (a) The Bonus Shares so purchased and any additional shares or securities attributable thereto received by Employee as a result of any stock dividend, stock split, recapitalization, merger, reorganization or any other similar event (which additional shares and securities shall also be treated as Bonus Shares) shall be subject to the restrictions set forth in this Section 3. During the Restricted Period as hereinafter defined, except as permitted by this Agreement or the Plan, the Bonus Shares and the rights and privileges conferred hereby are not transferable or assignable and may not be offered, sold, pledged, hypothecated or otherwise disposed of in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment, garnishment, levy or similar process. Page 2 3 (b) Except as earlier permitted by or pursuant to the Plan or by resolution of the Committee adopted after the date hereof, the Restricted Period shall commence on the Award Date and shall terminate on the FIFTH anniversary of the Award Date. The Bonus Shares vest equally over a FIVE-YEAR period with the FIRST VESTING to occur ON , , and annually thereafter. Upon termination of the Restricted Period, all of the Bonus Shares shall become free of all restrictions contained in this Section 3. (c) Notwithstanding any contrary provision contained in Subsection 3(b) hereof: (1) If the Corporation terminates the Employee's employment for other than Cause prior to the fifth anniversary of the Award Date, then upon such termination the Restricted Period with respect to all of the Bonus Shares held by Employee shall terminate and all such shares shall then become free from the restrictions contained in this Section 3. For purposes of this Agreement, "Cause" shall mean (i) an act or acts of dishonesty (including but not limited to conviction of a felony) taken by Employee which materially injures or damages the Corporation or (ii) Employee's willful failure to substantially perform Employee's duties where such willful failure results in demonstrable material injury and damage to the Corporation. (2) If Employee terminates his employment with the Corporation because of Employee's death or Total Disability, the Restricted Period with respect to all of the Bonus Stock held by Employee under this Agreement shall end on the date of such termination and all of such shares shall then become free from the restrictions contained in this Section 3. Page 3 4 4. Corporation Right of Reacquisition. (a) Employee hereby agrees that the Corporation shall have the right and option to reacquire the Bonus Shares, or any portion thereof, if Employee's employment with the Corporation is terminated during the Restricted Period (i) for Cause (a "For Cause Termination") or (ii) for any other reason other than the death of Employee, the Total Disability of Employee or the Qualified Termination of Employee as described in Section 11 hereof (a "Nonqualified Termination"). In the event of a For Cause Termination or a Nonqualified Termination, the Corporation may exercise its right and option to reacquire all or any portion of the Bonus Shares for a price equal to the price that Employee paid for such shares as appropriately adjusted for any stock dividend, stock split or any other similar transaction which has occurred with respect to the Bonus Shares subsequent to the Award Date (the "Reacquisition Price"). No additional consideration shall be payable by the Corporation in connection with such reacquisition. Such right and option shall be exercised by giving written notice of exercise to Employee and tendering the Reacquisition Price in cash or by check of the Corporation to Employee within 180 days of the date of such termination of employment. (b) If the Corporation exercises its right and option to reacquire Bonus Shares, stock certificates representing such shares shall be promptly transferred to the Corporation. In that connection, Employee authorizes the Corporation and its officers to effect such transfer by completing the stock power with respect to such reacquired Bonus Shares which Employee has deposited with the Corporation pursuant to Section 5 hereof in favor of the Corporation or its nominee and to take all other action necessary to complete such transfer. Page 4 5 (c) If the Corporation fails to exercise its option to reacquire any of the Bonus Shares or tender the Reacquisition Price within such 180-day period, the Restricted Period with respect to the Bonus Shares which are not so reacquired shall terminate on the last day of the 180-day period and such non-reacquired shares shall then become free of all of the restrictions contained in Section 3 hereof. (d) References to the Corporation in this Agreement shall include each Subsidiary of the Corporation. A transfer of Employee's employment between Subsidiaries of the Corporation, or between any Subsidiary and the Corporation, shall not be considered a termination of employment for purposes of this Agreement. If Employee is employed by an entity which ceases to be a Subsidiary, such event shall be deemed for purposes of this Section 4 to be a Nonqualified Termination with respect to Employee. Absence from work caused by military service or authorized sick leave shall not be considered as a termination of employment for purposes of this Agreement. 5. Stock Certificates. (a) Upon the purchase of the Bonus Shares by Employee, stock certificates issued with respect to such Bonus Shares shall be registered in the name of Employee on the books of the Corporation and shall be deposited by Employee with the Corporation, together with a stock power endorsed in blank in the form attached as Attachment 1. (b) All stock certificates representing shares of Bonus Shares during the Restricted Period shall bear the following legend: Page 5 6 "The transferability of this certificate and the shares of stock represented hereby are subject to the terms and conditions contained in a Restricted Stock Award Agreement entered into between the registered owner and Pacific Gulf Properties Inc. A copy of such Agreement is on file in the office of the Secretary of Pacific Gulf Properties Inc., 4220 Von Karman, Second Floor, Newport Beach, California 92660." (c) With regard to any shares of Bonus Shares which cease to be subject to the restrictions contained in Section 3 hereof, the Corporation shall, within sixty (60) days of the date that such shares cease to be subject to such restrictions, deliver a stock certificate representing such Bonus Shares free of the foregoing legend to Employee or, in the event of such Employee's death, to Employee's personal representative, heir or successor, in exchange for the legended stock certificate which previously represented such Bonus Shares. 6. Shareholder's Rights. Subject to the terms of this Agreement, including but not limited to the transfer restrictions contained in Subsection 3(a) hereof, during the Restricted Period the Employee shall have all of the rights of a shareholder of the Corporation with respect to the Bonus Shares, including the right to vote all of such shares and the right to receive all cash dividends paid with respect to all of the Bonus Shares. 7. Regulatory Compliance. The issue and sale of all of the Bonus Shares shall be subject to full compliance with all then applicable requirements of law and Page 6 7 the requirements of any stock exchange upon which the Bonus Shares may be listed. 8. Withholding Tax. Employee agrees that, in the event that the purchase of the Bonus Shares or the expiration of restrictions thereon results in Employee's realization of income which is subject to withholding of tax at source by Employee's employer for federal, state or local income tax purposes, either (a) Employee will pay to such Employee's employer an amount in cash or previously owned shares of the Corporation (valued at their Fair Market Value at the time of payment) equal to such withholding tax or (b) such employer on behalf of the Corporation may withhold such amount from Employee's salary. In addition, and notwithstanding any other provision of this Agreement which may be construed to the contrary, if permitted by applicable law, to the extent that withholding is required at the time of the expiration of restrictions contained in Section 3 hereof, withholding may at the election of Employee be satisfied by the reduction of the number of Bonus Shares to be delivered to Employee at the time such restrictions lapse and the transfer to the Corporation of Bonus Shares with a Fair Market Value at the time of such transfer equal to such withholding tax. Notwithstanding any provision of this Agreement which may be construed to the contrary, Company agrees to loan Employee sufficient funds to pay such withholding tax if the Employee is unable to sell Bonus Shares sufficient to pay such withholding tax due to any of the following: (i) such shares may not be sold by Employee because Employee possesses material non-public information with respect to the Company at the time that such restrictions lapse; (ii) Employee is precluded from advantageously selling such shares because of Rule 16b-3 promulgated by the Securities and Exchange Commission; or (iii) if for any other reason Page 7 8 the Company requests Employee not to sell such shares. The term of any loan required to be made to Employee hereunder shall be for a one-year period or, if the reason precluding the sale of the Bonus Shares has not ceased by the end of that one-year term, three months subsequent to the date of the cessation of such precluding reason. Such loan shall bear interest at the prime rate in existence at the time that the loan is granted. 9. Investment Representation. Employee represents and agrees that if Employee purchases any Bonus Shares at a time when there is not in effect under the Securities Act of 1933 a registration statement relating to such shares and there is not available for delivery a prospectus meeting the requirements of section 10(a)(3) of said Act, (a) Employee will acquire such shares upon such purchase for the purpose of investment and not with a view to their resale or distribution; (b) upon such purchase, Employee will furnish to the Corporation an investment letter in form and substance satisfactory to the Corporation; (c) if and when Employee proposes to publicly offer or sell any of such Bonus Shares, Employee shall notify the Corporation prior to any such offering or sale and shall abide by the opinion of counsel to the Corporation as to whether and under what conditions and circumstances, if any, Employee may offer and sell such Bonus Shares; and (d) the certificate or certificates representing the Bonus Shares shall bear a legend referring to the foregoing matters and any limitations under the Act and state securities laws with respect to the transfer of such Bonus Shares, and the Corporation may impose stop transfer instructions to implement such limitations, if applicable. 10. Federal Income Tax Election. Employee hereby acknowledges receipt of advice that pursuant to current federal income tax laws, (a) Employee has 30 Page 8 9 days in which to elect to be taxed in the current taxable year on the Fair Market Value of the Bonus Shares in excess of the Purchase Price paid by Employee for such shares in accordance with the provisions of Section 83(b) of the Code or any successor thereto; and (b) if no such election is made, a taxable event will occur when the Bonus Shares cease to be subject to the Corporation's right of repurchase, and that taxable income tax will then be incurred by Employee in the amount by which the Fair Market Value of the Bonus Shares on the date of the taxable event exceeds the Purchase Price paid by Employee for such shares. 11. Special Rules if a Change of Control Occurs. (a) If there is a Change in Control Event and a Qualifying Termination with respect to Employee occurs on or prior to the fifth anniversary of the date of the Change in Control Event, the Restricted Period for all shares of Bonus Shares owned by the Employee shall expire on the date of the Qualifying Termination and all of such shares shall thereupon become free of all of the restrictions contained in Section 3 hereof. Such acceleration of the expiration of the Restricted Period shall comply with applicable regulatory requirements, including, without limitation, Rule 16b-3 promulgated by the Securities and Exchange Commission. For purposes of this Section 11 only, Committee shall mean the Committee of the Corporation as constituted immediately prior to the Change in Control Event. (b)(1) Notwithstanding any provision of Subsection 11(a) hereof to the contrary, the Restricted Period shall not expire on account of a Qualifying Termination to the extent that the Committee determines that such expiration would cause the deduction Page 9 10 limitations of Section 28OG of the Code to come into effect. In the event that the Restricted Period does not expire for any of the Bonus Shares, the Employee may request independent verification of the Committee's calculations with respect to the application of Section 280G. In such case, the Committee will provide to the Employee within 15 business days after such a request an opinion from a nationally recognized accounting firm selected by Employee (the "Accounting Firm"). The opinion shall state the Accounting Firm's opinion that the limitation on the expiration of the Restricted Period hereunder is necessary to avoid the limits of Section 28OG and contain supporting calculations. The cost of such opinion shall be paid for by the Corporation. To the extent that such opinion concludes that the expiration of the Restricted Period with respect to all or some of the Bonus Shares would not cause the limits of Section 280G to come into effect, the Restricted Period with respect to such shares shall thereupon terminate and such shares shall then become free of all of the restrictions contained in Section 3 hereof. (2) To the extent that the Corporation and the Employee enter into an Employment Agreement which provides for certain severance payments in the event of a Qualified Termination after a Change in Control Event, and to the extent that such Employment Agreement provides limitations on the amount of such severance payments if such severance payments, together with all other "parachute payments" (as defined in the Employment Agreement), would cause the deduction limitations of Section 28OG of the Code to come into effect, if the Employee so chooses, Employee may elect that the Restricted Period not expire with respect to all or part of a Bonus Shares prior to any reductions of payments under the Employment Agreement. Page 10 11 (c) For purposes of this Agreement, a "Change in Control Event" shall mean any of the following events: (1) The acquisition by an individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (A) the then outstanding shares of common stock of the Corporation or any successor thereto (the "Outstanding Common Stock") or (B) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Voting Securities"); provided, however, that the following acquisitions shall not constitute a Change in Control Event: (A) any acquisition directly from the Corporation (except that an acquisition by virtue of the exercise of a conversion privilege shall not be considered within this clause (A) unless the converted security was itself acquired directly from the Corporation); (B) any acquisition by the Corporation; (C) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any corporation controlled by the Corporation; or (D) any acquisition by any corporation pursuant to a reorganization, merger or consolidation if, following such reorganization, merger or consolidation, the conditions described in clauses (A) and (B) of Subsection 11(c)(3) hereof are satisfied; or (2) The cessation for any reason of the individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") to continue to constitute at least a majority of the Board; provided, however, that any individual who becomes a director subsequent to the Award Date whose election, or nomination for Page 11 12 election by the Corporation'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 either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) or other actual or threatened solicitation under the Exchange Act) or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (3) Approval by the shareholders of the Corporation of a reorganization, merger or consolidation (a "transaction"), unless, following such transaction in each case, (A) more than 80% of, respectively, the then outstanding shares of common stock of the corporation resulting from such transaction and the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors is then beneficially owned, directly or indirectly by all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Common Stock and Outstanding Voting Securities immediately prior to such transaction and (B) no Person (excluding the Corporation, any employee benefit plan (or related trust) of the Corporation or such corporation resulting from such transaction, and any Person beneficially owning, immediately prior to such transaction, directly or indirectly, 20% or more of the Outstanding Common Stock or Outstanding Voting Securities, as the case may be) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of Page 12 13 the corporation resulting from such transaction or the combined voting power of the then outstanding voting securities of such corporation entitled to vote generally in the election of directors; or (4) Approval by the shareholders of the Corporation of (A) a complete liquidation or dissolution of the Corporation or (B) the sale or other disposition of all or substantially all of the assets of the Corporation, unless such assets are sold to a corporation and following such sale or other disposition, the conditions described in clauses (A) and (B) of Subsection 11(c)(3) hereof are satisfied. (d) If, subsequent to a Change in Control Event and during the period described in Section 11(a) hereof, Employee's employment terminates, such termination shall be considered a "Qualifying Termination" if either of the following events occurs: (1) Employee voluntarily terminates employment for Good Reason. For purposes of this Section, "Good Reason" shall mean the occurrence of one of the following events without Employee's consent: (i) The assignment to Employee of any duties inconsistent in any material respect with the Employee's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as they existed in their most significant form during the 90 days preceding the Change in Control Event or any other action by the Corporation 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 Corporation promptly after receipt of notice thereof given by the Employee; Page 13 14 (ii) Any reduction in Employee's total compensation not agreed to by Employee, which reduction shall be deemed to occur if there is a reduction in (I) Employee's base salary or (II) Employee's ability to participate in employee benefit plans, receive expense reimbursements, receive other fringe benefits, receive office and support staff, or receive paid vacation, on the same terms as such benefits were applicable during the 90 days preceding the Change in Control Event, provided that, (aa) an isolated, insubstantial, and inadvertent failure not occurring in bad faith and which is promptly remedied after notice by the Employee shall not be deemed a violation of this Subsection 11(d)(1)(ii) and (bb) a reduction in one element of Employee's total compensation shall not be deemed a violation of this Subsection 11(d)(1)(ii) if a counterbalancing increase in another element of Employee's total compensation occurs (the determination of whether the increase is counterbalancing shall be determined by Employee in good faith); or (iii) The transfer of Employee's job location to a site which is more than 30 miles away from his or her place of employment prior to the Change in Control Event of the Corporation, unless the transfer is to the headquarters of Pacific Gulf Properties Inc. (2) Employee is involuntarily terminated without "Cause" as defined in Subsection 3(c)(1) hereof. Page 14 15 (e) In the event that a Change in Control Event occurs before Employee's termination from the Corporation, the following rules shall apply: (1) Because it is agreed that time will be of the essence in determining the extent to which the Bonus Shares become free of the restrictions contained in Section 3 hereof, Employee or his or her Beneficiary may, if he or she desires, submit any claim for payment under this Agreement or dispute regarding the interpretation of this Agreement to arbitration. This right to select arbitration shall be solely that of Employee or his or her Beneficiary and Employee or his or her Beneficiary may decide whether or not to arbitrate in his or her discretion. The "right to select arbitration" is not mandatory on Employee or on his or her Beneficiary and Employee or his or her Beneficiary may choose in lieu thereof to bring an action in an appropriate civil court. Once an arbitration is commenced, however, it may not be discontinued without the mutual consent of both parties to the arbitration. During the lifetime of the Employee only he or she can use the arbitration procedure set forth in this Subsection 11(e). (2) Any claim for arbitration may be submitted as follows: if Employee or Employee's Beneficiary disagrees with the Corporation regarding the interpretation of this Agreement and the claim is finally denied by the Corporation in whole or in part, such claim may be filed in writing with an arbitrator of Employee's or Employee's Beneficiary's choice who is selected by the method described in the next four sentences. The first step of the selection shall consist of Employee or Employee's Beneficiary submitting a list of five potential arbitrators to the Corporation. Each of the five arbitrators must be either (i) a member of the National Academy of Arbitrators located in the State of California or (ii) a retired California superior Court or Appellate Court judge. Within one week after receipt of the list, the Corporation shall select one of the five Page 15 16 arbitrators as the arbitrator for the dispute in question. If the Corporation fails to select an arbitrator in a timely manner, Employee or Employee's Beneficiary shall then designate one of the five arbitrators as the arbitrator for the dispute in question. (3) The arbitration hearing shall be held within seven days (or as soon thereafter as possible) after the picking of the arbitrator. No continuance of said hearing shall be allowed without the mutual consent of Employee or Employee's Beneficiary and the Corporation. Absence from or nonparticipation at the hearing by either party shall not prevent the issuance of an award. Hearing procedures which will expedite the hearing may be ordered at the arbitrators discretion, and the arbitrator may close the hearing in his or her sole discretion when he or she decides he or she has heard sufficient evidence to satisfy issuance of an award. (4) The arbitrator's award shall be rendered as expeditiously as possible and in no event later than one week after the close of the hearing. In the event the arbitrator finds that the Corporation has breached this Agreement, he or she shall order the Corporation to immediately take the necessary steps to remedy the breach. The award of the arbitrator shall be final and binding upon the parties. The award may be enforced in any appropriate court as soon as possible after its rendition. If an action is brought to confirm the award, both the Corporation and Employee agree that no appeal shall be taken by either party from any decision rendered in such action. (5) Solely for purposes of determining the allocation of the costs described in this Subsection, the Corporation will be considered the prevailing party in a dispute if the arbitrator determines (i) that the Corporation has not breached this Page 16 17 Agreement and (ii) the claim by Employee or Employee's Beneficiary was frivolous; otherwise, Employee or Employee's Beneficiary will be held to be the prevailing party. In the event that the Corporation is the prevailing party, the fee of the arbitrator and all necessary expenses of the hearing (excluding any attorneys' fees incurred by the Corporation) including stenographic reporter, if employed, shall be paid by the other party. In the event that Employee or Employee's Beneficiary is the prevailing party, the fee of the arbitrator and all necessary expenses of the hearing (including all attorneys' fees incurred by Employee or Employee's Beneficiary in pursuing his or her claim), including the fees of a stenographic reporter if employed, shall be paid by the Corporation. (6) If the arbitrator determines that (i) the Corporation has breached this Agreement and (ii) the Corporation was unjustified in failing to make the Bonus Shares free of restrictions as required under this Agreement for the benefit of Employee or Employee's Beneficiary, Corporation shall pay to Employee or Employee's Beneficiary, as liquidated damages and not as a penalty, an additional amount equal to 10% of the amount involved in the arbitration with respect to this Agreement. 12. Continuance of Employment. Nothing contained herein or in the Plan shall confer upon Employee any right with respect to the continuation of Employee's employment by the Corporation or any Subsidiary or interfere in any way with the right of the Corporation or of any Subsidiary at any time to terminate such employment or to increase or decrease the compensation of Employee from the rate in existence at any time. 13. Notices. Any notice, request, demand, instruction, other document or tender to be given hereunder or pursuant hereto to any party shall be in writing and shall Page 17 18 either be personally delivered (in which event such notice or tender shall be deemed effective only upon such delivery), delivered by facsimile transmission or delivered by mail, sent by registered or certified mail, postage prepaid, return receipt requested to Employee or Employee's Beneficiary at the address set forth beneath Employee's signature hereto and, if to the Corporation, to the address set forth below: Pacific Gulf Properties Inc. 4220 Von Karman, Second Floor Newport Beach, California 92660 Attention: Chief Executive Officer Mailed notices and tenders shall be deemed to have been given three (3) days after the deposit of same in any United States mail, postage prepaid, addressed as set forth above. A party's notice and tender address may be changed for purposes of this Agreement by giving written notice of such change in the manner herein provided for giving notice. Unless and until such written notice is received, the last address stated by written notice, or as provided herein if no written notice of change has been sent or received, shall be deemed to continue in effect for all purposes hereunder. Notice given by facsimile transmission ("FAX") shall be deemed given only if the Employee Signature Page sets forth a FAX number or the Employee to whom such notice is given has provided a FAX number to the Corporation, and such notice shall be deemed delivered upon receipt by the Corporation of a FAX confirmation or other form of confirmation that the FAX sent was in fact received by the addressee. 14. Plan. This award and all rights of Employee thereunder are subject to, and the Employee agrees to be bound by, all of the terms and conditions of the Page 18 19 provisions of the Plan, incorporated herein by this reference, to the extent such provisions are applicable to restricted stock awards granted to Eligible Employees. The Employee acknowledges receipt of a copy of the Plan, which is incorporated herein and made a part hereof by this reference, and agrees to be bound by the terms thereof. Unless otherwise expressly provided in other Sections of this Agreement, provisions of the Plan that confer discretionary authority on the Committee do not (and shall not be deemed to) create any rights in the Employee unless such rights are expressly set forth herein or are otherwise in the sole discretion of the Committee so conferred by appropriate action of the Committee under the Plan after the date hereof. Page 19 20 IN WITNESS WHEREOF, the Corporation has caused this Agreement to be executed on its behalf by a duly authorized officer as of the date first above written and the Employee has hereunto set his or her hand. PACIFIC GULF PROPERTIES INC. (a Maryland corporation) By: ---------------------------------------- Donald G. Herrman Executive Vice President, Chief Financial Officer and Secretary EMPLOYEE -------------------------------------------- (Signature) -------------------------------------------- (Typed Name of Employee) -------------------------------------------- (Address) -------------------------------------------- (City, State, Zip Code) Page 20 21 CONSENT OF SPOUSE In consideration of the execution of the foregoing Restricted Stock Award Agreement by Pacific Gulf Properties Inc., I, ____________________, the spouse of the Employee herein named, do hereby join with my spouse in executing the foregoing Restricted Stock Award Agreement and do hereby agree to be bound by all of the terms and provisions thereof and of the Plan. DATED: , 19 . ------------- ---- ----------------------------------- Signature of Spouse Page 21 22 ATTACHMENT 1 STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE FOR VALUE RECEIVED, does hereby sell, assign and transfer unto PACIFIC GULF PROPERTIES INC. ( ) Shares of the Common Stock of PACIFIC GULF PROPERTIES INC. (the "Corporation") standing in his name on the books of said Corporation and represented by Certificate Number CH _______ herewith, and does hereby irrevocably constitute and appoint Cox, Castle & Nicholson, attorneys, to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated: , 19 . ------------------- ---- ----------------------------------- IN PRESENCE OF: ----------------------------------- ----------------------------------- (Type or Print Name) Page 22 EX-23.01 5 CONSENT OF EXPERTS AND COUNSEL 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in (1) the Registration Statements (Form S-3 No. 333-23611 dated April 10, 1997 and No. 333-45597 dated February 4, 1998) and the related Prospectuses of Pacific Gulf Properties Inc. (the "Company") for the registration of $250,000,000 and $300,000,000, respectively, of the Company's common stock, preferred stock, debt securities and warrants; and (2) the Registration Statement (Form S-8, No. 33-73688) pertaining to the Pacific Gulf Properties Inc. 1993 Share Option Plan, and the Registration Statement (Form S-3 No. 33-92082) pertaining to the Pacific Gulf Properties Inc. Dividend Reinvestment Plan of our report dated February 10, 2000, with respect to the consolidated financial statements and related financial statement schedule of Pacific Gulf Properties Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 1999. /s/ ERNST & YOUNG, LLP Newport Beach, California March 24, 2000 EX-27.00 6 FINANCIAL DATA SCHEDULE
5 1,000 YEAR DEC-31-1999 JAN-01-1999 DEC-31-1999 2,177 0 4,005 0 0 6,182 942,827 72,715 891,921 27,610 418,343 0 28 207 427,656 891,921 0 124,168 0 65,311 1,342 0 27,242 31,398 0 31,398 0 8,472 0 34,899 1.73 1.71
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