AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 1997
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ALEXANDRIA REAL ESTATE EQUITIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
251 SOUTH LAKE AVENUE, SUITE 700
PASADENA, CALIFORNIA 91101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
JOEL S. MARCUS
CHIEF EXECUTIVE OFFICER
ALEXANDRIA REAL ESTATE EQUITIES, INC.
251 SOUTH LAKE AVENUE, SUITE 700
PASADENA, CALIFORNIA 91101
TELEPHONE: 818-578-0777
FACSIMILE: 818-578-0770
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
MICHAEL A. WORONOFF, ESQ. DAVID W. WATSON, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM GOODWIN, PROCTER & HOAR LLP
LLP EXCHANGE PLACE
300 SOUTH GRAND AVENUE BOSTON, MASSACHUSETTS 02109
LOS ANGELES, CALIFORNIA 90071 TELEPHONE: (617) 570-1000
TELEPHONE: (213) 687-5000 FACSIMILE: (617) 523-1231
FACSIMILE: (213) 687-5600
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APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + |
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 5, 1997
[LOGO OF ALEXANDRIA 6,750,000 SHARES
REAL ESTATE
EQUITIES, INC.] ALEXANDRIA REAL ESTATE EQUITIES, INC.
COMMON STOCK
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Alexandria Real Estate Equities, Inc. (the "Company") is a real estate investment trust ("REIT") formed in October 1994 to acquire, manage, expand and selectively develop high quality, strategically located properties containing office and laboratory space designed and improved for lease principally to pharmaceutical, biotechnology, diagnostic and personal care products companies, major scientific research institutions and related government agencies (collectively, the "Life Science Industry"). Upon consummation of the Offering and the transactions described in "Formation and Structure" (the "Formation Transactions"), the Company will own 15 properties (the "Properties"), including three properties to be acquired in connection with the Offering, containing approximately 1.5 million rentable square feet of office and laboratory space. The Properties are located in California (in the San Diego and San Francisco Bay areas), Seattle, Washington and suburban Washington, D.C. (including Maryland and Virginia), each of which is a leading market for the Life Science Industry. The Company believes that it will be the first publicly traded entity focusing primarily on this property type.
All of the shares (the "Shares") of Common Stock, par value $.01 per share (the "Common Stock"), of the Company offered hereby (the "Offering") are being sold by the Company. It is currently anticipated that the initial public offering price will be between $20.00 and $22.00 per Share. See "Underwriting" for a discussion of factors relating to the determination of the initial public offering price. The Shares will represent approximately 65.0% of all outstanding shares of Common Stock. Prior to this Offering, there has been no public market for the Common Stock.
To ensure that the Company maintains its qualification as a REIT, the Company's charter (the "Charter") provides, with exceptions for certain of the Company's continuing investors (the "Continuing Investors"), that no person may own more than 9.8% of the outstanding shares of any class or series of capital stock of the Company. See "Description of Capital Stock--Restrictions on Transfer." The Company currently intends to make regular quarterly distributions and initially to distribute annually approximately 83.4% of estimated cash available for distribution. See "Distributions." The Common Stock has been approved for listing on the New York Stock Exchange ("NYSE"), subject to official notice of issuance, under the symbol "ARE."
SEE "RISK FACTORS" STARTING ON PAGE 16 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE SHARES, INCLUDING:
. The lack of industry diversification and the Company's reliance on the Life
Science Industry;
. Reliance on a limited number of major tenants and on the ability of such
tenants to make rental payments, and related property management risks,
including nonrenewal of space or inability to relet space;
. The concentration of the Properties in a limited number of markets;
. Conflicts of interest in connection with the Offering and the Formation Transactions, including material benefits to the Continuing Investors;
. Benefits to PaineWebber Incorporated ("PaineWebber"), the lead managing underwriter of the Offering, and certain of its affiliates, including, in addition to underwriting discounts and commissions and a fee for structural and advisory services, approximately $60.6 million in connection with the sale to the Company of the Acquisition LLC (defined herein), and $44.4 million as repayment of debt under the PaineWebber Facility (defined herein);
. The rapid growth of the Company, its limited operating history and the limited experience of current management in REIT operations;
. Real estate financing risks, including that the Company's cash flows may be insufficient to meet required payments of principal and interest on outstanding indebtedness and that interest rates could increase on variable rate indebtedness;
. Economic and other conditions affecting the value of the Company's properties, the relative illiquidity of real estate, increases in taxes and potential liabilities for unknown or future environmental problems; and
. Taxation of the Company as a corporation if the Company fails to qualify as a REIT and the resulting decrease in amounts available for distribution to stockholders.
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL
OFFENSE.
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Price to Underwriting Discounts Proceeds to
Public and Commissions(1) Company(2)
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Per Share.................................. $ $ $
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Total...................................... $ $ $
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Total Assuming Full Exercise of Over-
Allotment Option(3)....................... $ $ $
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(1) See "Underwriting."
(2) Before deducting expenses estimated at $2,600,000, which are payable by the Company.
(3) Assuming exercise in full of the 30-day option granted by the Company to the Underwriters to purchase up to 1,012,500 additional shares of Common Stock on the same terms and conditions, solely to cover over-allotments. See "Underwriting."
The Shares are offered by the Underwriters, subject to prior sale, when, as and if delivered to and accepted by the Underwriters, and subject to their right to reject orders in whole or in part. It is expected that delivery of the Shares will be made in New York City on or about , 1997.
LEHMAN BROTHERS
SMITH BARNEY INC.
EVEREN SECURITIES, INC.
THE DATE OF THIS PROSPECTUS IS , 1997
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF THE COMMON STOCK TO STABILIZE
ITS MARKET PRICE, THE PURCHASE OF THE COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
TABLE OF CONTENTS
PAGE
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PROSPECTUS SUMMARY........................................................ 1
The Company.............................................................. 1
Risk Factors............................................................. 2
Growth Strategies........................................................ 4
The Properties........................................................... 7
Market Studies........................................................... 9
Structure of the Company................................................. 10
The Offering............................................................. 12
Distributions............................................................ 12
Tax Status of the Company................................................ 13
Summary Financial Information............................................ 13
RISK FACTORS.............................................................. 16
Lack of Industry Diversification; Reliance on Life Science Industry
Tenants................................................................. 16
Environmental Matters................................................... 16
Uncertainty of Government Regulatory Requirements and Funding........... 16
Dependence on Reimbursement............................................. 16
Dependence on Tenants.................................................... 17
Geographic Concentration; Dependence on Certain Markets.................. 17
Conflicts of Interest.................................................... 18
Benefits to Managing Underwriter......................................... 18
Rapid Growth............................................................. 19
Limited Operating History................................................ 19
Experience of Management................................................. 19
Real Estate Financing.................................................... 19
Debt Financing and Existing Debt Maturities............................. 19
Requirement of Additional Financing..................................... 20
Rising Interest Rates................................................... 20
Acquisition and Renovation............................................... 20
Real Estate Investment................................................... 21
General................................................................. 21
Operations.............................................................. 21
Bankruptcy.............................................................. 21
Development............................................................. 21
Market Illiquidity...................................................... 22
Competition............................................................. 22
Adverse Consequences of Failure to Qualify as a REIT..................... 22
Influence of Certain Stockholders........................................ 23
Anti-takeover Effect of Ownership Limit and Power to Issue Additional
Stock................................................................... 23
Uninsured Loss........................................................... 24
Possible Environmental Liabilities....................................... 24
Costs of Compliance with Americans with Disabilities Act................. 25
Changes in Laws.......................................................... 26
Reliance on Key Personnel................................................ 26
Change in Policies Without Stockholder Approval.......................... 26
No Limitation on Debt.................................................... 26
Inability to Sustain Distributions....................................... 27
Absence of Prior Market for Shares....................................... 27
Effect of Market Interest Rates on Price of Shares....................... 27
Effect of Future Offerings on Price of Shares............................ 27
Immediate and Substantial Dilution....................................... 28
Shares Eligible for Future Sale.......................................... 28
THE COMPANY............................................................... 29
Growth Strategies........................................................ 30
Tenant Demand............................................................ 33
TARGET MARKETS............................................................ 35
Existing Markets......................................................... 35
Additional Target Markets................................................ 36
Market Studies........................................................... 36
DISTRIBUTIONS............................................................. 38
USE OF PROCEEDS........................................................... 41
CAPITALIZATION............................................................ 42
DILUTION.................................................................. 43
SELECTED FINANCIAL DATA................................................... 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................ 46
Overview................................................................. 46
Results of Operations.................................................... 46
Pro Forma Results of Operations.......................................... 48
Liquidity and Capital Resources.......................................... 48
Historical Cash Flows.................................................... 50
Funds from Operations.................................................... 51
Inflation................................................................ 52
THE PROPERTIES............................................................ 53
General.................................................................. 53
Location and Type of Space............................................... 56
Lease Expirations........................................................ 56
Lease Expirations--Property by Property.................................. 57
Tenants.................................................................. 60
Property Descriptions.................................................... 61
California............................................................... 61
Seattle, Washington...................................................... 63
Suburban Washington, D.C. ............................................... 64
Acquisition LLC Properties............................................... 65
Competition.............................................................. 65
Insurance................................................................ 65
Environmental Matters.................................................... 66
Legal Proceedings........................................................ 67
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PAGE
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES................................ 68
Investment Policies....................................................... 68
Disposition Policy........................................................ 68
Financing Policies........................................................ 69
Conflict of Interest Policies............................................. 69
Policies with Respect to Other Activities................................. 70
FORMATION AND STRUCTURE.................................................... 70
Formation and Related Transactions........................................ 70
New Mortgage Debt......................................................... 72
Benefits to Related Parties............................................... 72
MANAGEMENT................................................................. 74
Directors, Executive Officers and Senior Management....................... 74
Election of Directors and Director Compensation........................... 76
Committees of the Board of Directors...................................... 77
Executive Compensation.................................................... 77
Benefit Plans............................................................. 78
Employment Agreements..................................................... 79
Compensation Committee Interlocks and Insider Participation............... 80
Limitation of Liability and Indemnification............................... 80
CERTAIN TRANSACTIONS....................................................... 82
SHARE OWNERSHIP............................................................ 84
Principal Stockholders of Alexandria...................................... 84
Certain Beneficial Ownership in Holdings.................................. 85
DESCRIPTION OF CAPITAL STOCK............................................... 86
General................................................................... 86
Common Stock.............................................................. 86
Preferred Stock........................................................... 86
Power to Issue Additional Shares of Common Stock and Preferred Stock...... 87
Restrictions on Transfer.................................................. 87
Transfer Agent and Registrar.............................................. 89
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND
BYLAWS.................................................................... 89
Board of Directors........................................................ 89
Business Combinations..................................................... 90
Control Share Acquisitions................................................ 90
Advance Notice of Director Nominations and New Business .................. 91
Amendment to the Charter or Bylaws........................................ 91
Dissolution of the Company................................................ 91
Anti-takeover Effect of Certain Provisions of Maryland Law and of the
Charter and Bylaws....................................................... 91
SHARES ELIGIBLE FOR FUTURE SALE............................................ 91
FEDERAL INCOME TAX CONSIDERATIONS.......................................... 93
Taxation of the Company................................................... 93
Taxation of Taxable Domestic Stockholders................................. 98
Taxation of Tax-Exempt Stockholders....................................... 98
Taxation of Non-U.S. Holders.............................................. 98
Other Tax Consequences.................................................... 100
UNDERWRITING............................................................... 102
LEGAL MATTERS.............................................................. 104
EXPERTS.................................................................... 104
ADDITIONAL INFORMATION..................................................... 105
GLOSSARY................................................................... 106
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed information appearing elsewhere in this Prospectus. Capitalized and certain other terms used herein shall have the meanings assigned to them in the Glossary. Unless the context otherwise requires, references in this Prospectus to the "Company" mean, collectively, (i) Alexandria Real Estate Equities, Inc. ("Alexandria"), (ii) ARE-QRS Corp. ("QRS"), a wholly owned subsidiary of Alexandria, (iii) a special purpose entity to be formed by the Company prior to consummation of the Offering ("GSA-QRS"), and (iv) PW Acquisitions I, LLC (the "Acquisition LLC"). See "Formation and Structure." Unless otherwise indicated, the information in this Prospectus assumes that: (i) the Underwriters' over- allotment option is not exercised; (ii) the Formation Transactions have occurred; and (iii) the initial public offering price is $21.00 per Share (the midpoint of the price range set forth on the cover page of this Prospectus).
THE COMPANY
Alexandria was formed in October 1994 to acquire, manage, expand and selectively develop high quality, strategically located properties containing office and laboratory space designed and improved for lease principally to pharmaceutical, biotechnology, diagnostic and personal care products companies, major scientific research institutions and related government agencies (collectively, the "Life Science Industry"). The Company's tenant base is broad and diverse within the Life Science Industry and reflects the Company's focus on regional, national and international tenants with substantial financial and operational resources. Significant tenants include affiliates of major pharmaceutical companies (e.g., Johnson & Johnson and Novartis AG, the company resulting from the merger of Ciba-Geigy AG and Sandoz AG); biotechnology companies and their affiliates (e.g., Chiron Corporation, Agouron Pharmaceuticals, Inc. and Advanced Tissue Sciences, Inc.); affiliates of personal care products companies (The Gillette Company); major scientific research institutions (e.g., the Fred Hutchinson Cancer Research Center and The Scripps Research Institute); clinical laboratories (American Medical Laboratories, Inc.); and government agencies (e.g., the U.S. Food and Drug Administration and the U.S. Army Corps of Engineers). See "The Properties-- Tenants" for the percentage of the aggregate portfolio Annualized Net Effective Rent contributed by each of the foregoing tenants.
Upon consummation of the Offering and the Formation Transactions, the Company will own 15 Properties, including three Properties to be acquired in connection with the Offering, containing approximately 1.5 million rentable square feet of office and laboratory space located in California (in the San Diego and San Francisco Bay areas), Seattle, Washington and suburban Washington, D.C. (including Maryland and Virginia), each of which is a leading market in the United States for the Life Science Industry. To facilitate research and development, technology transfer and recruitment of scientific professionals, Life Science Industry companies generally cluster near major scientific research institutions, universities and government agencies, all of which drive demand for properties combining office and laboratory space suitable for such tenants. As a result, the Company focuses its operations and acquisition activities principally in a limited number of target markets, including all of the Company's existing markets and certain other markets where Life Science Industry tenants are concentrated, including Boston/Cambridge and the New York/New Jersey and suburban Philadelphia areas. As of April 30, 1997, the Properties were approximately 98% leased, at an average Annualized Net Effective Rent per leased square foot of $18.20.
The multibillion dollar Life Science Industry comprises some of the fastest growing segments of the U.S. economy and includes thousands of public and private companies and scientific research institutions engaged principally in the research, development, testing, manufacture, sale and regulation of pharmaceuticals, diagnostics, personal care products, medical devices, laboratory instrumentation and other related applications. Properties leased to tenants in the Life Science Industry typically consist of suburban office buildings containing scientific research and development laboratories and other improvements that are generic to tenants operating in
the Life Science Industry (such properties, "Life Science Facilities"). Unlike traditional office space, the location of and improvements to Life Science Facilities are generally considered essential to a tenant's business. The Company believes that, as a result of these factors, occupancy levels in Life Science Facilities within its markets have been higher and tenant turnover has been lower than in traditional office properties.
Despite increasing competition for the acquisition of traditional office properties, the Company believes that, based on market conditions and prospective acquisitions currently under review, it can continue to purchase high quality Life Science Facilities at initial Capitalization Rates generally ranging from 10.0% to 12.5% and at prices significantly below replacement cost. The initial Capitalization Rate is the initial annual projected property earnings, before interest, taxes, depreciation and amortization ("EBITDA"), for the 12 months following acquisition, divided by the consideration paid by the Company for the property, including closing costs and budgeted capital improvements. In 1996, the Company completed the acquisition of eight Life Science Facilities (the "1996 Acquired Properties") for an aggregate purchase price (including closing costs and budgeted capital improvements) of approximately $95.2 million and an average initial Capitalization Rate of over 12%. In addition, the Company believes that opportunities exist for internal growth through contractual rental rate escalations (included in approximately 65% of the Company's leases on a square footage basis), the retenanting and releasing of space at higher rental rates upon the expiration of existing leases, the expansion of existing Properties and the conversion of existing office space to higher rent generic laboratory space.
The Company is led by a senior management team with extensive experience in
both the real estate and Life Science industries and is supported by a highly
experienced board of directors. Management believes that it has achieved
favorable returns on its Properties as a result of: (i) the strong and growing
demand by tenants for Life Science Facilities; (ii) the constrained supply and
lack of speculative development of Life Science Facilities due to the expertise
generally required to develop and manage this property type; (iii) the highly
fragmented and inefficient market for ownership of Life Science Facilities;
(iv) the Company's adherence to strict evaluation criteria and due diligence
review when assessing prospective properties and tenants; and (v) the Company's
knowledge and understanding of Life Science Industry tenants and their real
estate needs. Additionally, the personal and business relationships that
management has developed over time within the real estate and Life Science
industries have contributed significantly to the Company's ability to identify
and consummate favorable acquisitions and to lease space to high quality Life
Science Industry tenants. Management believes that the Company will be the
first publicly traded entity focusing primarily on the acquisition, management,
expansion and selective development of Life Science Facilities.
Upon consummation of the Offering and the Formation Transactions, Health Science Properties Holding Corporation ("Holdings"), which is owned principally by founding stockholders (including officers and directors) of the Company, will own approximately 17.0% of the outstanding shares of Common Stock. The Company's Continuing Investors, consisting of Holdings, AEW Partners II, L.P. and certain of its affiliates (collectively, "AEW"), and officers, directors and certain employees of the Company, will own an aggregate of approximately 35.0% of the outstanding shares of Common Stock. See "Formation and Structure" for a detailed discussion of the Formation Transactions. See also "Share Ownership."
RISK FACTORS
An investment in the Shares involves various risks, and prospective investors should carefully consider the matters discussed under "Risk Factors" prior to an investment in the Company. Such risks include, among others:
. The lack of industry diversification and the Company's reliance on the Life Science Industry, including the extensive government regulation of Life Science Industry tenants and certain related environmental concerns, and the potential inability of the Company to identify suitable Life Science Industry tenants. See "Risk Factors--Lack of Industry Diversification; Reliance on Life Science Industry Tenants."
. Reliance on a limited number of major tenants, of which the three largest (American Medical Laboratories, Inc., the Fred Hutchinson Cancer Research Center and Agouron Pharmaceuticals, Inc.) account for approximately 37.5% of the Company's Annualized Base Rent from the Properties, and on the ability of such tenants to make rental payments, and related property management risks, including nonrenewal of space or inability to relet space. Leases representing 21.2% of Annualized Base Rent will expire by the end of 1999. See "Risk Factors--Dependence on Tenants."
. The concentration of the Properties in a limited number of markets and the resulting dependence of the Company on economic conditions in such markets. See "Risk Factors--Geographic Concentration; Dependence on Certain Markets."
. Conflicts of interest in connection with the Offering and the Formation Transactions, including material benefits to certain officers, directors and affiliates of the Company (including the increase in the net tangible book value of the shares of Common Stock held by them). See "Risk Factors--Conflicts of Interest."
. Benefits to PaineWebber, the lead managing underwriter of the Offering, and certain of its affiliates, including, in addition to underwriting discounts and commissions and a fee for structural and advisory services, approximately $60.6 million in connection with the sale to the Company of the Acquisition LLC and $44.4 million as repayment of amounts outstanding under the PaineWebber Facility. See "Risk Factors--Benefits to Managing Underwriter," "Use of Proceeds" and "Underwriting."
. The rapid growth of the Company and its limited operating history, including the risk that the Company may not be able to effectively integrate new acquisitions into its operations and that the Properties may have characteristics or deficiencies unknown to the Company that could adversely affect such Properties, and the limited experience of current management in REIT operations. See "Risk Factors--Rapid Growth"; "--Limited Operating History" and "--Experience of Management."
. Real estate financing risks, including that the Company's cash flows may be insufficient to meet required payments of principal and interest on outstanding indebtedness and that interest rates could increase on variable rate indebtedness. See "Risk Factors--Real Estate Financing."
. Acquisition risks, including that acquired properties will fail to perform in accordance with expectations, that the Company has overpaid for such properties, that the Company may have underestimated costs of improvements, or that the Company may not be able to acquire desired properties. See "Risk Factors--Acquisition and Renovation."
. Economic and other conditions affecting the value of the Company's properties, competition, the relative illiquidity of real estate, increases in taxes and other operating expenses and potential liabilities for unknown or future environmental problems. See "Risk Factors--Real Estate Investment Risks."
. Taxation of the Company as a corporation if the Company fails to qualify as a REIT and the resulting decrease in the amounts available for distribution to stockholders. See "Risk Factors--Adverse Consequences of Failure to Qualify as a REIT."
. Significant stock ownership by Holdings and AEW (approximately 17.0% and 16.0%, respectively) after the Offering and limitations on ownership of the capital stock by other stockholders of the Company, which may delay, defer or prevent third parties from seeking to control or acquire the Company in transactions that may otherwise be beneficial to the stockholders. See "Risk Factors--Influence of Certain Stockholders" and "--Anti-takeover Effect of Ownership Limit and Power to Issue Additional Stock."
. Certain types of losses, such as from earthquakes, could exceed the Company's insurance coverage. See "Risk Factors--Uninsured Loss."
GROWTH STRATEGIES
The Company seeks to maximize growth in funds from operations ("FFO") and
cash available for distribution to stockholders through effective management,
operation, acquisition, expansion and selective development of Life Science
Facilities. The Company believes that opportunities exist to increase FFO and
cash available for distribution per share by (i) acquiring high quality Life
Science Facilities at attractive returns in its target markets, (ii) realizing
contractual rental rate escalations (which are included in 65% of the Company's
leases on a square footage basis), (iii) retenanting and releasing space within
its portfolio at higher rental rates and with minimal tenant improvement costs,
(iv) expanding existing Properties or converting existing office space to
generic laboratory space that can be leased at higher rental rates, (v)
selectively developing properties on a retrofit or build-to-suit basis, where
the Company can secure leases prior to construction and where such development
is expected to result in returns on investment that the Company believes will
exceed returns on comparable acquisitions, and (vi) continuing to implement
effective cost control measures, including expense pass-through provisions in
tenant leases. In pursuing its growth strategy, the Company intends to maintain
significant financial flexibility, enabling it to take advantage of growth
opportunities as they arise.
Tenant demand for Life Science Facilities in the Company's target markets is driven largely by the size and growth of the Life Science Industry and its various segments, and particularly by the Life Science Industry's expenditures on research and development. Growth in the Life Science Industry creates demand for Life Science Facilities because traditional office space is generally inadequate to meet the needs of Life Science Industry tenants. The Life Science Industry has experienced significant growth over the past 25 years and the Company believes such growth should continue. For example, according to Pharmaceutical Research and Manufacturers of America ("PhRMA"), the principal industry trade group for major pharmaceutical research companies, U.S. pharmaceutical industry sales and exports by PhRMA member firms have grown at a compound annual rate of 10.5% since 1985, and are estimated to have totaled over $66.7 billion in 1996. Further, domestic research and development expenditures by PhRMA member firms have increased at a compound annual rate of over 13% since 1985, and are estimated to have totaled approximately $13.3 billion in 1996 and to total approximately $15.0 billion in 1997. According to PhRMA, research and development expenditures as a percentage of U.S. sales and exports for PhRMA member firms were approximately 19.4% in 1995, versus approximately 3.8% for U.S. industries generally. Although the PhRMA data is based on information compiled principally from the nation's largest pharmaceutical companies, the Company believes this data reflects growth in research-based pharmaceutical companies generally. In addition, private sector spending in the Life Science Industry augments extensive public sector funding for scientific research. For example, the estimated fiscal 1997 budget for the National Institutes of Health ("NIH") is approximately $12.7 billion.
The Company believes that several factors should continue to drive increases in research and development expenditures, and thus increase the demand for Life Science Facilities. These factors include (i) the aging of the U.S. population resulting from the transition of baby boomers to senior citizens, which has increased demand for new drugs, (ii) increased competition resulting from generic drug penetration and the loss of patent protection on billions of dollars worth of drugs, both of which have increased the need for proprietary drug manufacturers to develop new products, (iii) the desire of companies to reduce research and development lead times to bring new products to market faster, (iv) modifications to the U.S. Food and Drug Administration (the "FDA") approval process, which have reduced the effective cost of new drug development and (v) increased collaborative efforts among major pharmaceutical and biotechnology companies, which have increased capital availability to Life Science Industry participants.
Acquisitions. The Company seeks to identify and acquire high quality Life Science Facilities in its target markets. Management believes that it has been able to maximize returns on acquisitions as a result of its expertise in understanding the real estate needs of Life Science Industry tenants, its ability to identify and acquire those properties with generic laboratory infrastructure that appeal to a wide range of Life Science Industry tenants and its expertise in identifying and evaluating Life Science Industry tenants. The Company also seeks to utilize the
extensive personal and business relationships that management has developed over time with owners of Life Science Facilities and with major Life Science Industry participants to identify prospective acquisition opportunities and to consummate favorable acquisitions prior to the active marketing of the subject properties.
The Company believes that the ownership of Life Science Facilities is highly fragmented and that such fragmentation often creates pricing inefficiencies in the sale of such properties. Life Science Facilities are generally owned by numerous local developers and institutions, many of whom own or operate a single facility. Additionally, management believes that many Life Science Facilities are occupied by owners who desire to focus their investments on and attention to their respective core businesses, and not on ownership of real estate.
Critical evaluation of prospective property acquisitions is an essential component of the Company's acquisition strategy. When evaluating acquisition opportunities, the Company assesses a full range of matters relating to the properties, including the quality of the tenants, the condition and capacity of building infrastructure, the quality and generic characteristics of laboratory facilities and the physical condition of the shell structure and common area improvements. Management also considers opportunities available for leasing vacant space and retenanting occupied space. In addition, the Company is developing a proprietary database that will contain information on Life Science Facilities and Life Science Industry tenants located in each of the Company's target markets. The database is designed to enhance the Company's ability to identify and evaluate prospective acquisitions in such markets.
In connection with the Offering, the Company will purchase the Acquisition LLC, thereby acquiring three Properties (the "Acquisition LLC Properties"), aggregating approximately 424,000 square feet of office and laboratory space, for a purchase price of approximately $60.6 million. The Acquisition LLC Properties are 14225 Newbrook Drive in Chantilly, Virginia, 1330 Piccard Drive in Rockville, Maryland and 1550 East Gude Drive in Rockville, Maryland. See "The Properties."
Internal Growth. The Company's strategy is to achieve internal growth from several sources. Approximately 65% of the Company's leases (on a square footage basis) contain effective annual rent escalations that are either fixed (ranging from 2.5% to 4.0%) or indexed based on a CPI or other index. The Company will seek to include similar escalation provisions in its future leases. Although most of the Company's recent acquisitions have been fully leased, the Company also seeks to acquire undervalued or underperforming properties where it can improve investment returns through releasing of vacant space and replacement of existing tenants with new tenants at higher rental rates. Further, the Company believes that a significant percentage of its existing leases contain below- market rental rates and that opportunities should exist to achieve higher rental rates as these leases expire. The Company believes that retenanting and releasing costs for existing improved space at its Properties should be relatively low, as a result of the favorable demand and supply characteristics for Life Science Facilities in the Company's target markets and the generic infrastructure improvements that are already in place at the Properties. Since 1994, the Company has retenanted approximately 241,000 square feet of space at a weighted average cost for non-revenue enhancing tenant improvements and leasing commissions of $7.87 per square foot. The Company's ability to negotiate contractual rent escalations in future leases and to achieve increases in rental rates will depend upon market conditions and demand for Life Science Facilities at the time such leases are negotiated and such increases are proposed.
The Company also intends to pursue internal growth through the expansion of existing facilities that are fully leased and the conversion of existing office space to higher rent generic laboratory space. The Company is currently evaluating expansion opportunities at several of its Properties, including 1413 Research Boulevard in Rockville, Maryland, which is designed to accommodate an additional 60,000 square feet of office and laboratory space, and 14225 Newbrook Drive in Chantilly, Virginia, which can accommodate three additional floors or up to approximately 50,000 square feet of additional office and laboratory space. The Company is also currently considering the conversion of office space into higher rent generic laboratory space at 300 Professional Drive in Gaithersburg, Maryland, 25, 35 and 45 West Watkins Mill Road in Gaithersburg, Maryland, and 1311 Harbor Bay Parkway in Alameda, California. In the first quarter of 1997, the Company completed the conversion of
approximately 21,000 square feet into higher rent generic laboratory space at 1102 and 1124 Columbia Street in Seattle, Washington, and in 1998 the Company will convert an additional approximately 28,000 square feet of space into higher rent generic laboratory space at this Property. The Company has invested approximately $1.2 million and will invest an additional $3.6 million in these conversion projects, which funds have been set aside in a separate cash account pursuant to the terms of the Company's lease with Corixa Corporation, which will occupy all of the converted space. Based on this lease and the planned expenditures, the Company estimates a return on investment of approximately 14% on these conversion projects. The Company intends to pursue expansion and conversion projects only where the Company can secure signed leases for a significant portion of such space prior to construction and where it expects to achieve investment returns that equal or exceed its returns on acquisitions.
Development. Given the current favorable acquisition environment for Life Science Facilities, the Company intends to emphasize acquisitions over development in pursuing its growth objectives. However, the Company intends to pursue selective build-to-suit and retrofit development projects where it expects to achieve investment returns that will equal or exceed its returns on acquisitions. Build-to-suit projects involve the construction of new Life Science Facilities for specified tenants. Retrofit projects involve the conversion of existing office space for use by Life Science Industry tenants, generally through the addition of laboratory space and other generic infrastructure improvements. The Company intends to undertake build-to-suit and retrofit projects only if it can secure long-term leases (generally 10 years or more) with high quality Life Science Industry tenants prior to construction and the Company's investment in infrastructure will be generic in nature and not tenant specific.
The Company's 10933 North Torrey Pines Road Property in San Diego, California, is situated on approximately 16 acres of land. The Company has rights to construct up to an additional 163,000 square feet of office and laboratory space on this parcel. The Company also has entered into a purchase agreement to acquire two parcels of land, aggregating approximately 4.2 acres, adjacent to the Company's 3535 and 3565 General Atomics Court Properties, also in the Torrey Pines area of San Diego, California. The purchase price for the land is approximately $2.7 million, of which the Company has paid a deposit of $200,000. The Company will have the ability (subject to receipt of necessary governmental approvals and licenses) to develop and construct two buildings on the land, containing an aggregate of approximately 90,000 square feet of office and laboratory space. There can be no assurance, however, that the Company will acquire the land or will be able to enter into desirable build-to-suit arrangements.
Financing. Upon consummation of the Offering and the Formation Transactions, the Company will have a debt to total market capitalization ratio (i.e., total consolidated debt of the Company as a percentage of the market value of outstanding shares of capital stock of the Company and total consolidated debt) of approximately 20%. The Company has a commitment from the Bank of America National Trust and Savings Association (the "Bank of America") to provide, upon consummation of the Offering, an unsecured revolving credit facility (the "Credit Facility") for up to $150 million, which will be used primarily for the acquisition of additional properties. The Company has adopted a policy of incurring debt in the future only if, upon such incurrence, its debt to total market capitalization ratio will not exceed 50%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for a description of certain conditions to borrowing and other provisions applicable to the Credit Facility and "Policies With Respect to Certain Activities" for a discussion of the Company's policy of incurring debt.
The Company expects to finance future acquisitions initially through the Credit Facility and then to refinance such indebtedness with debt or equity capital. The Company may also issue Common Stock or interests in subsidiaries as consideration for acquisitions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company believes that its access to capital should provide it with a competitive advantage in acquisitions over other bidders that qualify their bids with financing or other contingencies.
THE PROPERTIES
Upon consummation of the Offering and the Formation Transactions, the Company will own 15 Properties, including the Acquisition LLC Properties, containing approximately 1.5 million rentable square feet of office and laboratory space. The buildings are generally one or two stories and are built primarily of concrete tilt-up or block and steel frame construction. Building exteriors typically resemble traditional suburban office properties, but interior infrastructures are enhanced with generic improvements designed to meet the needs of Life Science Industry tenants. These improvements include, for each Property, reinforced concrete floors, upgraded roof loading capacity and increased floor to ceiling heights; heavy-duty heating, ventilation and air conditioning ("HVAC") systems and advanced environmental control technology; significantly upgraded electrical, gas and plumbing infrastructure; and laboratory benches.
The following table summarizes the Properties by geographic region:
ANNUALIZED
YEAR APPROXIMATE ANNUALIZED BASE NET EFFECTIVE
BUILT/ RENTABLE PERCENTAGE PERCENTAGE RENT PER LEASED RENT PER LEASED
PROPERTIES RENOVATED(1) SQUARE FEET LAB SPACE LEASED(2) SQUARE FOOT(3) SQUARE FOOT(4) MAJOR TENANTS
- ---------- ------------ ----------- ----------- ---------- --------------- --------------- -----------------------------
San Diego
- ---------
10933 North 1971/1994 108,133 71% 100% $21.35 $15.84 The Scripps Research
Torrey Pines Institute
Road Advanced Tissue
San Diego, CA Sciences, Inc.
11099 North 1986/1996 86,962 71 100 25.38 23.66 Agouron Pharmaceuticals, Inc.
Torrey Pines Sequana Therapeutics, Inc.
Road
San Diego, CA
3535 General 1991 76,084 77 100 32.99 32.11 The Scripps Research
Atomics Court Institute
San Diego, CA The R.W. Johnson
Research Institute(5)
Syntro Corporation(6)
3565 General 1991 43,600 80 100 35.02 35.02 Agouron Pharmaceuticals, Inc.
Atomics Court
San Diego, CA
San Francisco
Bay Area
- -------------
1311 Harbor Bay 1984 30,000 17 30(7) 16.48 16.48 Chiron Corporation
Parkway
Alameda, CA
1401 Harbor Bay 1986/1994 47,777 50 100 10.87 10.87 Chiron Diagnostics
Parkway
Alameda, CA
1431 Harbor Bay 1985/1994 70,000 50 100 20.22 12.87 FDA
Parkway
Alameda, CA
|
ANNUALIZED
YEAR APPROXIMATE ANNUALIZED BASE NET EFFECTIVE
BUILT/ RENTABLE PERCENTAGE PERCENTAGE RENT PER LEASED RENT PER LEASED
PROPERTIES RENOVATED(1) SQUARE FEET LAB SPACE LEASED(2) SQUARE FOOT(3) SQUARE FOOT(4) MAJOR TENANTS
- ---------- ------------ ----------- ----------- ---------- --------------- --------------- ----------------------
Seattle,
Washington
- -----------
1102/1124 Columbia 1975/1997 213,397 64 100 23.24 23.01 Fred Hutchinson Cancer
Street Research Center
Seattle, WA Corixa Corporation
Swedish Medical
Center
Suburban Washington, D.C.
- -------------------------
300 Professional 1989 48,440 23 100 13.83 13.83 Mobile Telesystems,
Drive Inc.
Gaithersburg, MD Antex Biologics Inc.
401 Professional 1987 62,739 75 100 16.55 16.55 Gillette Capital
Drive Corporation(8)
Gaithersburg, MD
25/35/45 West 1989/1997 138,938 39 93 13.56 13.56 Genetic Therapy,
Watkins Mill Road Inc.(9)
Gaithersburg, MD MedImmune, Inc.
1413 Research 1967/1996 105,000 75 100 14.89 13.29 U.S. Army Corps of
Boulevard Engineers
Rockville, MD
--------- --- --- ------ ------
Subtotal/Weighted
Average(12): 1,031,070 61% 97% $20.61 $19.07
ACQUISITION LLC
PROPERTIES(10)
- ---------------
Suburban Washington, D.C.
- -------------------------
1550 East Gude 1981/1995 44,500 40 100 13.42 13.42 Quest Diagnostics,
Drive Inc.(11)
Rockville, MD
1330 Piccard Drive 1978/1995 131,511 75 100 14.48 14.48 PerImmune, Inc.
Rockville, MD
14225 Newbrook 1992 248,186 60 100 17.49 17.49 American Medical
Drive Laboratories, Inc.
Chantilly, VA
--------- --- --- ------ ------
Subtotal/Weighted
Average(12): 424,197 63% 100% $16.13 $16.13
--------- --- --- ------ ------
Total/Weighted
Average(12): 1,455,267 61% 98% $19.28 $18.20
========= === === ====== ======
|
(2) Based on all leases at the respective Property in effect as of April 30, 1997.
(3) Annualized Base Rent means the annualized fixed base rental amount (determined in accordance with generally accepted accounting principles ("GAAP")) in effect as of April 30, 1997. In the case of triple net leases, Annualized Base Rent does not include real estate taxes and insurance, common area and other operating expenses, substantially all of which are borne by the tenants. This amount, divided by the rentable square feet leased at the Property as of April 30, 1997, is the Annualized Base Rent per Leased Square Foot.
(4) Annualized Net Effective Rent is the Annualized Base Rent in effect as of
April 30, 1997, less (for gross leases) real estate taxes and insurance,
common area and other operating expenses and (for all leases) amortized
tenant improvements and leasing commissions. This amount, divided by the
rentable square feet leased at the Property as of April 30, 1997, is the
Annualized Net Effective Rent per Leased Square Foot.
(5) The R.W. Johnson Research Institute is a wholly owned subsidiary of Johnson
& Johnson.
(6) Syntro Corporation is a wholly owned subsidiary of Mallinckrodt, Inc.
(7) Vacancy represents 20,973 square feet of office space. The Company is in
lease negotiations with respect to all of the vacant office space.
(8) Gillette Capital Corporation is a wholly owned subsidiary of The Gillette
Company.
(9) Genetic Therapy, Inc. is a wholly owned subsidiary of Novartis AG.
(10) Represents Properties to be acquired through the acquisition of the
Acquisition LLC in connection with the Offering and the Formation
Transactions. See "Formation and Structure."
(11) Quest Diagnostics, Inc. subleases its space to Shire Laboratory, Inc., a
wholly owned subsidiary of Shire Pharmaceuticals Group p.l.c.
(12) Weighted Average based on a percentage of aggregate leased square feet.
MARKET STUDIES
In connection with the Offering, the Company has obtained a market study from Rosen Consulting Group, dated May 1, 1997 (the "RCG Study"), regarding each of the Company's existing markets (San Diego, the San Francisco Bay Area, Seattle and Suburban Washington, D.C.). The study focused on scientific research facilities, defined as properties containing both office and a significant component of laboratory space leased principally to pharmaceutical and biotechnology companies, non-profit research institutions and related government agencies engaged in scientific research. As a result, the RCG Study did not include all Life Science Facilities, such as those facilities leased primarily to diagnostic and medical instrumentation companies, personal care products companies and other less intensive laboratory users.
The RCG Study indicated that scientific research facilities were substantially fully leased (98-100%) in each of the Company's existing markets. The RCG Study further indicated that the limited availability of scientific research space in the Company's markets was putting upward pressure on rental rates. Set forth below are market annual triple net effective rental rates from the RCG Study for prototype scientific research facilities in each market.
SCIENTIFIC RESEARCH FACILITIES TRIPLE
NET EFFECTIVE RENTAL RATES
MARKET PER SQUARE FOOT(1)
------ -------------------------------------
San Diego
Torrey Pines Area................. $23.50 - $33.50
Other Areas....................... $20.00 - $27.50
San Francisco Bay Area
West Bay (2)...................... $20.00 - $34.50
East Bay (3)...................... $14.00 - $23.00
Seattle............................. $21.00 - $28.50
Suburban Washington, D.C. .......... $17.00 - $23.50
|
(1) Rental rates reflect current market rates for a prototype scientific research facility with 50-70% laboratory space and generic laboratory infrastructure (of $75 to $100 per square foot) in place, located in a "favorable" location in each market.
(2) West Bay includes the area from South San Francisco to Palo Alto.
(3) East Bay includes the area from Berkeley to Fremont, including Alameda.
The RCG Study also indicated that tenant turnover in scientific research
facilities was low, due to the limited amount of available space and the
essential nature of the facilities to tenants. The RCG Study noted that
(i) tenants usually renew upon expiration of their leases (either through
signing of a new lease or, where applicable, exercise of an option to extend an
existing lease) unless they have outgrown their space, (ii) available space is
frequently released before it is put on the market and (iii) there is minimal
downtime between leases.
STRUCTURE OF THE COMPANY
FORMATION AND STRUCTURE
Prior to consummation of the Offering, each outstanding share of Common Stock will be split into 1,765.923 shares of Common Stock. In addition, in connection with the Offering, the Company will redeem all of the outstanding shares of its Series T Preferred Stock, and will convert into shares of Common Stock all of the outstanding shares of its Series U Preferred Stock and its Series V Preferred Stock, as more fully described in "Formation and Structure." As a result, upon consummation of the Offering and the Formation Transactions, Holdings, which is owned principally by founding stockholders (including officers and directors) of the Company, will hold 1,765,923 shares of Common Stock, the officers, directors and certain employees of the Company will directly own 209,615 shares of Common Stock, and AEW will hold 1,659,239 shares of Common Stock, representing approximately 17.0%, 2.0% and 16.0% of the outstanding shares of Common Stock, respectively. Upon consummation of the Offering, the Company also will acquire 100% of the membership interests in the Acquisition LLC, thereby acquiring the Acquisition LLC Properties. The purchase price of the Acquisition LLC was determined through arm's-length negotiations. None of the Continuing Investors has any direct or indirect interest in the Acquisition LLC or the Acquisition LLC Properties. See "Formation and Structure" for a detailed discussion of the Formation Transactions.
The following diagram illustrates the resulting structure of the Company and the approximate ownership of Alexandria upon consummation of the Offering and the Formation Transactions.
[CHART APPEARS HERE]
(1) Represents shares of Common Stock to be issued upon conversion of 27,500 shares of Series V Preferred Stock.
(2) Does not include shares beneficially owned by officers and directors by virtue of their ownership interests in Holdings or shares issuable upon the exercise of options to be granted to officers, directors and certain employees under the Company's 1997 Stock Option Plan (as defined in "Management--Benefit Plans").
(3) Includes 7,071 shares of Common Stock to be issued upon conversion of 220 shares of Series U Preferred Stock. Excludes 900,000 shares reserved for issuance pursuant to the Company's 1997 Stock Option Plan, of which options to purchase 600,000 shares will be granted in connection with the Offering.
BENEFITS TO RELATED PARTIES
As a result of the Offering and the Formation Transactions, Holdings and the officers and directors of the Company directly will realize an immediate accretion in the net tangible book value per share of Common Stock of their investment in Alexandria of $9.11 and $14.94 per share of Common Stock, respectively.
In connection with the Offering, officers, directors and certain employees of the Company will be granted (i) an aggregate of 152,615 shares of Common Stock and (ii) options to purchase 57,000 shares of Common Stock pursuant to the Company's existing stock option plan in substitution for previously granted Holdings Stock Options (such stock options will be exercised in connection with the Offering at a nominal exercise price, and thereafter no further stock options will be issued under this plan). In addition, officers, directors and certain employees of the Company will be granted options to purchase 600,000 shares of Common Stock at the initial public offering price pursuant to the Company's 1997 Stock Option Plan, to be adopted in connection with the Offering. See "Formation and Structure--Benefits to Related Parties." Options granted to officers and directors of the Company under the 1997 Stock Option Plan will vest ratably over a three-year period. Options granted to non- employee directors under the 1997 Stock Option Plan will vest immediately upon the date of grant.
In connection with the Offering, the Company will grant to Holdings customary transferable registration rights with respect to the shares of Common Stock held by it. See "Shares Eligible for Future Sale."
Holdings will receive $2.5 million from the proceeds of the Offering as repayment of an advance made to the Company for general working capital purposes. Such proceeds will be used by Holdings to repay certain loans from stockholders of Holdings. See "Use of Proceeds" and "Formation and Structure-- Benefits to Related Parties."
Upon consummation of the Offering and the Formation Transactions, Bernardo Capital, Inc. (a corporation of which Messrs. Gold, Kreitzer and Stone are stockholders) will receive from Holdings approximately $517,000 as reimbursement for certain expenses, including accrued salaries and benefits paid to each of Messrs. Gold, Kreitzer and Stone, incurred in connection with the formation of Holdings in 1993. These funds will be paid by Holdings, and no proceeds of the Offering will be used for this purpose. See "Formation and Structure--Benefits to Related Parties."
PaineWebber, the lead managing Underwriter of the Offering, and certain of its affiliates, will receive material benefits from the Offering and the Formation Transactions in addition to underwriting discounts and commissions and a fee for structural and advisory services. Certain affiliates of PaineWebber are expected to receive approximately $60.6 million of the net proceeds as consideration for the sale of the Acquisition LLC to the Company, and will receive $44.4 million of the net proceeds as repayment of amounts outstanding under the Company's acquisition facility (the "PaineWebber Facility"). See "Use of Proceeds," "Formation and Structure" and "Underwriting."
THE OFFERING
Common Stock Offered by the
Company.......................... 6,750,000 shares
Common Stock to be Outstanding
after the Offering(1)............ 10,391,848 shares
Use of Proceeds................... The net proceeds of the Offering will be
used as follows: (i) approximately $62.7
million to repay mortgage and other
indebtedness (including approximately $2.5
million of indebtedness to Holdings); (ii)
approximately $60.6 million to acquire the
Acquisition LLC, as more fully described in
"Formation and Structure"; and (iii) the
remainder for general corporate purposes.
See "Use of Proceeds."
New York Stock Exchange Symbol.... "ARE"
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(1) Excludes 900,000 shares reserved for issuance pursuant to the Company's 1997 Stock Option Plan, of which options to purchase 600,000 shares will be granted in connection with the Offering.
DISTRIBUTIONS
Distributions by the Company will be determined by the Board of Directors and will be dependent upon a number of factors, including the federal income tax requirement that a REIT must distribute annually at least 95% of its taxable income. The Company intends to make regular quarterly distributions to the holders of the Common Stock and initially to distribute annually approximately 83.4% of estimated cash available for distribution. The Company expects to pay a pro rata distribution with respect to the period commencing upon consummation of the Offering and ending on June 30, 1997.
Based on its estimated cash available for distribution, the Company initially expects to make distributions of $1.60 per share on an annualized basis, or an annual distribution rate of approximately 7.62%, based on an assumed initial public offering price of $21.00 per share. The Company currently intends to maintain its initial distribution rate for the 12-month period following consummation of the Offering, unless actual results of operations, economic conditions or other factors differ materially from the assumptions used in its estimate. The Company does not intend to reduce the expected distribution rate if the Underwriters' over-allotment option is exercised. See "Risk Factors-- Inability to Sustain Distributions." Approximately 19.3% of the distributions anticipated to be paid by the Company for the 12 months following the Offering are expected to represent a return of capital for federal income tax purposes.
The Company's estimate of cash available for distribution after the Offering is based upon pro forma FFO for the 12 months ended March 31, 1997. See "Distributions" for information as to how this estimate was derived. FFO does not represent cash generated from operating activities in accordance with GAAP and should not be considered as an alternative to net income as an indication of the Company's financial performance or to cash flows from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is it indicative of funds available to fund the Company's cash needs, including its ability to make distributions. The Company computes FFO in accordance with standards established by the White Paper on FFO approved by the Board of Governors of the National Association of Real Estate Investment Trusts ("NAREIT") in March 1995 (the "White Paper"), which may differ from the methodology for calculating FFO utilized by other equity REITs, and, accordingly, may not be comparable to such other REITs. The Company believes that its estimate of cash available for distribution constitutes a reasonable basis for setting the initial distribution; however, no assurance can be given that the estimate will prove accurate or that actual distributions will not vary significantly from the expected distributions. See "Distributions."
TAX STATUS OF THE COMPANY
The Company intends to make an election to be taxed as a REIT under sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year ended December 31, 1996. Skadden, Arps, Slate, Meagher & Flom LLP will issue an opinion as to the Company's qualification as a REIT. For each taxable year that the Company qualifies as a REIT, it will generally not be subject to federal income tax to the extent it distributes in such year 95% of its net taxable income to its stockholders. Notwithstanding the Company's qualification as a REIT, the Company may be subject to certain federal, state and local taxes on its income and property. See "Risk Factors-- Adverse Consequences of Failure to Qualify as a REIT" and "Federal Income Tax Considerations."
SUMMARY FINANCIAL INFORMATION
The following pro forma and historical information should be read in conjunction with, and is qualified in its entirety by, the historical consolidated financial statements and notes thereto of the Company included elsewhere in this Prospectus. The selected historical financial information of the Company at December 31, 1996 and 1995, for the years ended December 31, 1996 and 1995, and for the period October 27, 1994 (inception) through December 31, 1994, has been derived from the historical consolidated financial statements of the Company audited by Ernst & Young LLP, independent auditors, whose report with respect thereto is included elsewhere in this Prospectus. The summary financial and operating information for the three months ended March 31, 1997 and March 31, 1996 has been derived from the unaudited financial statements of the Company included elsewhere in this Prospectus.
The unaudited pro forma information as of March 31, 1997 and for the year ended December 31, 1996 and the three months ended March 31, 1997 is presented as if the Offering, the application of the net proceeds thereof as set forth in "Use of Proceeds," the Formation Transactions and the acquisition of the membership interests in the Acquisition LLC all had occurred at March 31, 1997 for the pro forma balance sheet, and the Formation Transactions and the acquisition of the 1996 Acquired Properties and the Acquisition LLC all had occurred at January 1, 1996 for the pro forma statement of operations. The pro forma information is not necessarily indicative of what the actual financial position or results of the Company would have been as of and for the period indicated, nor does it purport to represent the Company's future financial position or results of operations.
SUMMARY FINANCIAL INFORMATION
HISTORICAL
FOR THE PERIOD
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, OCTOBER 27, 1994
-------------------------------- -------------------------------- (INCEPTION) THROUGH
PRO FORMA HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL DECEMBER 31,
1997 1997 1996 1996 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- -------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Revenue:
Rental................. $ 6,925 $ 5,175 $ 2,090 $ 27,121 $ 12,941 $ 8,020 $ 834
Tenant recoveries...... 1,897 1,897 486 6,669 4,169 1,699 87
Other.................. 129 89 34 658 563 204 90
---------- -------- ------- ---------- -------- ------- -------
Total revenue........... 8,951 7,161 2,610 34,448 17,673 9,923 1,011
Expenses:
Rental operations...... 1,893 1,830 554 7,195 4,356 2,228 252
General and
administrative........ 725 954 406 2,900 1,972 1,608 1,016
Post retirement
benefit............... 632 632 -- 438 438 -- --
Interest............... 1,180 2,509 918 4,717 6,327 3,553 328
Depreciation and
amortization.......... 1,330 1,003 413 4,953 2,405 1,668 63
---------- -------- ------- ---------- -------- ------- -------
Total expenses.......... 5,760 6,928 2,291 20,203 15,498 9,057 1,659
Income (loss) from
operations............. 3,191 233 319 14,245 2,175 866 (648)
Charge in lieu of
taxes.................. -- -- -- -- -- 105 --
---------- -------- ------- ---------- -------- ------- -------
Net income (loss)....... $ 3,191 $ 233 $ 319 $ 14,245 $ 2,175 $ 761 $ (648)
========== ======== ======= ========== ======== ======= =======
Net income allocated to
preferred
stockholders........... -- $ 1,378 -- -- $ 1,256 -- --
========== ======== ======= ========== ======== ======= =======
Net income (loss)
allocated to common
stockholders........... $ 3,191 $ (1,145) $ 319 $ 14,245 $ 919 $ 761 $ (648)
========== ======== ======= ========== ======== ======= =======
Pro forma net income per
share of Common
Stock(1)............... $ 0.31 $ 1.37
========== ==========
Pro forma shares of
Common Stock
outstanding............ 10,391,848 10,391,848
========== ==========
BALANCE SHEET DATA (AT
PERIOD END):
Rental properties--net
of accumulated
depreciation........... $198,984 $147,315 $146,960 $54,353 $54,366
Total assets............ 216,136 161,690 160,392 58,702 56,600
Mortgage loans payable
and unsecured lines of
credit................. 55,381 115,315 113,182 40,894 39,164
Total liabilities....... 60,932 123,315 120,819 42,369 40,119
Mandatorily redeemable
Series V Preferred
Stock.................. -- 25,929 25,042 -- --
Stockholders' equity.... 155,204 12,446 14,531 16,333 16,481
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SUMMARY FINANCIAL INFORMATION (CONTINUED)
HISTORICAL
FOR THE PERIOD
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, OCTOBER 27, 1994
-------------------------------- -------------------------------- (INCEPTION) THROUGH
PRO FORMA HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL DECEMBER 31,
1997 1997 1996 1996 1996 1995 1994
--------- ---------- ---------- --------- ---------- ---------- -------------------
(DOLLARS IN THOUSANDS)
OTHER DATA:
Net income.............. $ 3,191 $ 233 $ 319 $ 14,245 $ 2,175 $ 761 $ (648)
Add:
Accrual of a post-
retirement
benefit(2)............ 632 632 -- 438 438 -- --
Depreciation and
amortization of
Properties,
improvements and
leasing costs......... 1,330 1,003 413 4,953 2,405 1,668 63
--------- --------- ------- --------- --------- ------- -------
Funds from
Operations(3)......... $ 5,153 $ 1,868 $ 732 $ 19,636 $ 5,018 $ 2,429 $ (585)
========= ========= ======= ========= ========= ======= =======
Cash flows from
operating activities... -- 3,160 972 -- (1,646) 355 (1,024)
Cash flows from
investing activities... -- (1,319) (86) -- (94,900) (1,554) (29,924)
Cash flows from
financing activities... -- (787) (52) -- 97,323 927 32,139
Number of properties
owned at period end.... 15 12 4 15 12 4 4
Rentable square feet of
properties owned at
period end............. 1,455,267 1,031,070 313,042 1,455,267 1,031,070 313,042 313,042
Occupancy at period end
of properties owned at
period end............. -- 97% 96% -- 97% 96% 88%
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(1) Pro forma net income per share includes pro forma net income from the Acquisition LLC Properties. If such net income (and the related shares of Common Stock to be sold in the Offering, the net proceeds of which will be used for the purchase of the Acquisition LLC) were excluded, pro forma net income would be $1,778,000 and $7,464,000, respectively, for the three months ended March 31, 1997 and the year ended December 31, 1996, and pro forma net income per share would be $0.25 and $1.04, respectively, for the three months ended March 31, 1997 and the year ended December 31, 1996.
(2) This adjustment relates solely to the elimination of a non-cash accrual of a one-time post-retirement benefit for an officer of the Company.
(3) The White Paper defines FFO as net income (loss) (computed in accordance
with GAAP), excluding gains (or losses) from debt restructuring and sales
of property, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures.
Management considers FFO an appropriate measure of performance of an equity
REIT because it is predicated on cash flow analyses. The Company computes
FFO in accordance with standards established by the White Paper, which may
differ from the methodology for calculating FFO utilized by other equity
REITs, and, accordingly, may not be comparable to such other REITs.
Further, FFO does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
service obligations, or other commitments and uncertainties. See notes (6)
(7) and (8) to the table under the caption "Distributions" and the notes to
the Company's historical financial statements. FFO should not be considered
as an alternative to net income (determined in accordance with GAAP) as an
indication of the Company's financial performance or to cash flows from
operating activities (determined in accordance with GAAP) as a measure of
the Company's liquidity, nor is it indicative of funds available to fund
the Company's cash needs, including its ability to make distributions.
RISK FACTORS
An investment in the Shares involves various risks. Prospective investors should carefully consider the following information in conjunction with the other information contained in this Prospectus before making a decision to purchase the Shares.
LACK OF INDUSTRY DIVERSIFICATION; RELIANCE ON LIFE SCIENCE INDUSTRY TENANTS
The Company's strategy is to invest in Life Science Facilities. Consequently, the Company is subject to the risks associated with an investment in real estate in the Life Science Industry, and is subject to the risks generally associated with investment in a single industry. Accordingly, the effects on cash available for distribution to the Company's stockholders may be more pronounced than if the Company had diversified investments. Although laboratory facilities typically are generic in nature, certain facilities may be better suited for particular Life Science Industry tenants and could require modification prior to or at the commencement of a lease term if the property has to be released to another Life Science Industry tenant. Further, such facilities may not be suitable for lease to traditional office tenants.
ENVIRONMENTAL MATTERS. Life Science Industry tenants, including certain of the Company's tenants, engage in various research and development activities involving the controlled use of hazardous materials, chemicals, biological and radioactive compounds. The Company and such tenants are subject to federal, state and local laws and regulations governing the use, manufacture, storage, handling and disposal of such materials and certain waste products. Although the Company believes that the tenants' activities involving such materials comply in all material respects with applicable laws and regulations, the risk of contamination or injury from these materials cannot be completely eliminated. In the event of such contamination or injury, the Company could be held liable for any damages that result, and any such liability could exceed the Company's resources and its environmental remediation coverage. See "-- Possible Environmental Liabilities" and "The Properties--Environmental Matters."
UNCERTAINTY OF GOVERNMENT REGULATORY REQUIREMENTS AND FUNDING. The products of certain Life Science Industry tenants, including certain of the Company's tenants, typically require regulatory approval by domestic or foreign governmental agencies before they can be marketed and sold. The process of obtaining such approvals is costly and time-consuming and is subject to unanticipated delays. There can be no assurance that required approvals for any of such products will be granted. Any failure to obtain or any delay in obtaining such approvals could adversely affect the ability of a tenant to market and sell its products successfully, thereby adversely affecting its ability to generate revenues and to make lease payments to the Company. Furthermore, approval of a pharmaceutical product is subject to the requirement that the manufacturer's quality control and manufacturing procedures conform to current Good Manufacturing Practices ("GMP"), which must be followed at all times. The FDA strictly enforces GMP requirements through periodic unannounced inspections, and there can be no assurance that the FDA will determine that the facilities and manufacturing procedures of any of the Company's tenants who manufacture pharmaceutical products will conform to GMP requirements. Additionally, a manufacturer of pharmaceutical products must pass a preapproval inspection of its manufacturing facilities by the FDA before obtaining marketing approval. Failure to comply with applicable regulatory requirements may result in penalties such as restrictions on a product's marketing or withdrawal of a product from the market. In addition, many approved products are subject to continuing regulation. Regulation could result in limitations or restrictions on a tenant's ability to utilize its technology, thereby adversely affecting such tenant's ability to generate revenues and to make lease payments to the Company. Certain of the Company's tenants are also subject to regulation under the Occupational Safety and Health Act, federal restrictions on technology transfer, import, export and customs regulations, and other federal, state and local regulations. In addition, certain of the Company's tenants receive significant funding from federal, state and local governments. If any of such funding were decreased or discontinued, the affected tenant may experience difficulty meeting its obligations under its lease. See "--Dependence on Tenants."
DEPENDENCE ON REIMBURSEMENT. The healthcare industry in the United States is undergoing significant changes, resulting from political, economic and regulatory influences. Successful commercial sales of the
products of certain of the Company's tenants may depend in part on the availability of reimbursement to consumers from third-party payors, such as government and private insurance plans, that may be affected by changes in the healthcare industry. There can be no assurance that adequate third-party reimbursement will be available for the products of the Company's tenants. If adequate reimbursement is not provided by government and third-party payors for the products or services of the Company's tenants, such tenants' business and ability to generate revenues and make lease payments to the Company could be adversely affected. Consequently, the Company's ability to make distributions to its stockholders could similarly be adversely affected.
DEPENDENCE ON TENANTS
The Company's revenues are derived primarily from rental payments under its leases. Therefore, if a significant tenant failed to make rental payments under its lease, the Company's financial condition and its ability to make distributions to stockholders could be adversely affected. While the Company evaluates the creditworthiness of its tenants based upon a due diligence review of available financial and other pertinent information, there can be no assurances that any such tenant will not default in the payment of rent under its lease. In addition, U.S. government tenants are subject to annual appropriations, and defaults under leases with such tenants are governed by federal statute and not state eviction or rent deficiency laws. At April 30, 1997, the leases with U.S. government tenants at the Properties accounted for approximately 10.9% of the Company's aggregate Annualized Base Rent. The Company's leases with U.S. government tenants at each of 1431 Harbor Bay Parkway in Alameda, California and 1413 Research Boulevard in Rockville, Maryland provide that the government tenant may terminate the lease in the event of a default by the Company or the landlord thereunder that continues for a stated period.
To the extent the Company is dependent on rental payments from a limited number of tenants, the inability of any single tenant to make its lease payments could adversely affect the Company and its ability to make distributions to stockholders. The Company currently has approximately 31 leases with a total of approximately 26 tenants. Eight of the Properties are currently single-tenant Properties, although the Company believes that all such Properties are capable of being converted to use by multiple tenants. At April 30, 1997, three of the Company's tenants, American Medical Laboratories, Inc., the Fred Hutchinson Cancer Research Center and Agouron Pharmaceuticals, Inc., accounted for approximately 37.5% of the Company's aggregate Annualized Base Rent, or approximately 15.8%, 13.3% and 8.4%, respectively.
No assurance can be given that a lessee will exercise any option to renew its lease upon the expiration of the initial term or that upon expiration or termination of a lease the Company will be able to locate a qualified replacement tenant. Consequently, the Company could lose the cash flow from such property and, in order to prevent a foreclosure, the Company might be required to divert cash flow generated by other properties to meet mortgage payments, if any, and pay other expenses associated with owning the property with respect to which the expiration or termination occurred. Leases at the Properties representing approximately 0.2%, 7.6% and 13.4% of Annualized Base Rent will expire in the years 1997, 1998 and 1999, respectively. See "The Properties--Lease Expirations." In addition, the Company may enter into or acquire leases for properties that are specially suited to the needs of a particular tenant. Such properties may require renovations, tenant improvements or other concessions in order to lease it to another tenant if the initial lease is terminated or not renewed. See "--Lack of Industry Diversification; Reliance on Life Science Industry Tenants."
GEOGRAPHIC CONCENTRATION; DEPENDENCE ON CERTAIN MARKETS
The Properties are located in California (in the San Diego and San Francisco Bay areas), Seattle, Washington and suburban Washington D.C. The Company also has identified Boston/Cambridge and the New York/New Jersey and suburban Philadelphia areas as target markets, consistent with its growth strategy. As a result of this geographic concentration, the Company's performance, its ability to make distributions to stockholders and the value of its properties are dependent upon the performance of the Life Science Industry and on economic conditions in these markets, including local real estate conditions and competition. There can be no assurance that these markets will continue to grow or will remain favorable to the Life Science Industry. The
performance of the Life Science Industry and the economy in general in each geographic market in which the Company owns or acquires properties may affect occupancy, market rental rates and expenses and, consequently, may affect the Company's performance and the value of its properties.
CONFLICTS OF INTEREST
In connection with the Formation Transactions, Holdings and AEW, as well as officers (Messrs. Sudarsky, Marcus, Gold, Nelson, Kreitzer, Stone and Ciruzzi) and directors (Messrs. Sudarsky, Marcus, Gold, Elmaleh, Mehta, Petrone and Solomon) of the Company, will realize certain benefits that will not be received by other persons. See "Formation and Structure--Benefits to Related Parties." In addition, Messrs. Sudarsky, Marcus and Gold are officers of Holdings and Messrs. Sudarsky, Marcus, Gold and Elmaleh are directors of Holdings. In connection with the Offering, officers, directors and certain employees of the Company will be granted (i) an aggregate of 152,615 shares of Common Stock and (ii) options to purchase 57,000 shares of Common Stock under the 1996 Plan in substitution for previously granted Holdings Stock Options (such stock options will be exercised in connection with the Offering at a nominal exercise price, and thereafter no further stock options will be issued under the 1996 Plan). In addition, officers, directors and certain employees of the Company will be granted options to purchase 600,000 shares of Common Stock at the initial public offering price pursuant to the 1997 Stock Option Plan, to be adopted in connection with the Offering.
In connection with the conversion of Series U Preferred Stock into shares of Common Stock, certain officers, directors and affiliates of the Company (and members of their immediate families) will receive an aggregate of 7,071 shares of Common Stock. In connection with the conversion of the Series V Preferred Stock AEW will receive an aggregate of 1,659,239 shares of Common Stock.
Because certain officers, directors and affiliates of the Company were involved in structuring the terms of these transactions, they had the ability to influence the type and level of benefits they will receive. See "Formation and Structure." As a result, the type and level of benefits these persons will receive may have been different if they had not participated in structuring the terms. These persons may have interests that conflict with the interests of persons acquiring Shares in the Offering. The net tangible book value of officers' and directors' and Holdings' initial investment in the Company upon consummation of the Offering and the Formation Transactions will increase by approximately $3.1 million and $16.1 million, respectively, based on the difference between the net tangible book value prior to the Offering and the net tangible book value subsequent to the Offering.
BENEFITS TO MANAGING UNDERWRITER
PaineWebber and certain of its affiliates will receive material benefits from the Offering and certain of the Formation Transactions, in addition to underwriting discounts and commissions and a fee for structural and advisory services. Certain affiliates of PaineWebber are expected to receive approximately $60.6 million of the net proceeds as consideration for the sale of the Acquisition LLC to the Company and will receive $44.4 million of the net proceeds as repayment of amounts outstanding under the PaineWebber Facility. See "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources," "Formation and Structure" and "Underwriting." In accordance with Rules 2710(c)(8) and 2720(c)(3) of the Conduct Rules of the National Association of Securities Dealers, Inc. (the "Conduct Rules"), Lehman Brothers Inc. is assuming the responsibilities of acting as "qualified independent underwriter" and will recommend the maximum initial public offering price of the Shares in compliance with the requirements of the Conduct Rules. Lehman Brothers Inc. is performing due diligence investigations and is reviewing and participating in the preparation of this Prospectus and the Registration Statement of which this Prospectus forms a part (the "Registration Statement"). The initial public offering price of the Shares will be no higher than the price recommended by the "qualified independent underwriter." See "Underwriting."
RAPID GROWTH
The Company is currently experiencing a period of rapid growth. As the Company acquires additional properties, it will be subject to risks associated with managing new properties, including lease-up and tenant retention. In addition, the Company's ability to manage its growth effectively will require it to successfully integrate new acquisitions into its existing management structure. No assurances can be given that the Company will be able to succeed with such integration or effectively manage additional properties or that newly acquired properties will perform as expected. Additionally, there can be no assurance that the Company will be able to maintain its current rate of growth in the future.
LIMITED OPERATING HISTORY
Upon consummation of the Offering and the Formation Transactions, the Company will own 15 Properties, including the Acquisition LLC Properties, consisting of approximately 1.5 million rentable square feet of office and laboratory space. All of the Properties have been under the Company's management for less than three years, and a substantial majority of the Properties have been owned for less than one year. The Properties may have characteristics or deficiencies unknown to the Company that could affect such Properties' valuation or revenue potential. There can be no assurance that the operating performance of the Properties will not decline under the Company's management.
EXPERIENCE OF MANAGEMENT
Although certain of the Company's officers and directors have extensive experience in the acquisition, leasing, operation, financing and development of real properties, prior to commencement of the Company's operations, no officer had significant experience in operating a business in accordance with the requirements for maintaining qualification as a REIT under the Code. See "--Adverse Consequences of Failure to Qualify as a REIT."
REAL ESTATE FINANCING
DEBT FINANCING AND EXISTING DEBT MATURITIES. The Company is subject to the risks normally associated with debt financing, including the risk that the Company's cash flow from operations will be insufficient to meet required payments of principal and interest, that existing indebtedness will not be able to be refinanced or extended, and that the terms of any such refinancing will not be as favorable as the terms of existing indebtedness. Upon consummation of the Offering and the Formation Transactions, the Company will have outstanding mortgage indebtedness of approximately $55.2 million, of which approximately $18.3 million will be secured by 3535 General Atomics Court and 3565 General Atomics Court; $8.5 million will be secured by 1431 Harbor Bay Parkway; and two mortgages of approximately $21.5 million and $6.9 million will be secured by 1102 and 1124 Columbia Street. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." In the event of a default by the Company, the lender may be able to foreclose on or otherwise transfer such Properties to the mortgagee, resulting in a loss of income and asset value to the Company. As a result, the Company's financial condition and its ability to make distributions to stockholders may be adversely affected.
The Credit Facility will contain conditions to borrowing and cross-default provisions. The conditions to borrowing will include compliance with customary financial covenants and restrictions on certain activities, such as incurring indebtedness, making investments and distributions to stockholders, as well as a requirement to maintain a pool of unencumbered assets approved by the lenders. Under the cross default provisions, a default under the terms of any Company indebtedness in excess of $5 million, with the exception of non- recourse debt, could result in a default under the Credit Facility and could lead to acceleration of the outstanding indebtedness under the Credit Facility. Similarly, under the terms of the $6.9 million mortgage secured by 1102 and 1124 Columbia Street, a default under the terms of the $21.5 million mortgage secured by the same Property could result in a default under the $6.9 million mortgage.
The Company has financed the acquisition of the Properties in part, and may finance future investments, with debt obligations that provide for the repayment of principal in a lump-sum or "balloon" payment at maturity. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." In addition, certain of the Company's lenders may insist on the right to demand repayment prior to the maturity date of a loan if certain events of default occur. The ability to repay indebtedness at maturity or otherwise may depend upon the ability of the Company either to refinance or extend such indebtedness, to repay such indebtedness with proceeds of other capital transactions, such as the issuance of equity capital, or to sell properties. There can be no assurance that such refinancing or extension will be available on reasonable terms or at all, that additional capital will be issued, or that a sale of property will occur. The inability to repay such indebtedness could adversely affect the financial condition of the Company and its ability to make distributions to stockholders.
REQUIREMENT OF ADDITIONAL FINANCING. The Company's ability to acquire or develop properties is subject to the Company's ability to obtain debt or equity financing. The Company could be delayed or prevented from acquiring, structuring and closing desirable investments by an inability to obtain financing on acceptable terms. In addition, the issuance of additional shares of capital stock to obtain financing for the acquisition of additional properties could result in a dilution of ownership for the then existing stockholders.
RISING INTEREST RATES. Upon consummation of the Offering and the Formation Transactions, the Company will have approximately $6.9 million of variable rate indebtedness outstanding which the Company anticipates converting into a fixed rate loan in August 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." In addition, borrowings under the Credit Facility will bear interest at a variable rate, as may other indebtedness incurred by the Company in the future. Accordingly, increases in market interest rates could increase the Company's debt service requirements, which could adversely affect the financial position of the Company and its ability to make distributions to stockholders. In addition, the Company may enter into swap agreements or other hedging transactions to further limit its exposure to rising interest rates as appropriate and cost effective, although there can be no assurance that it will be able to do so on terms acceptable to the Company. Swap agreements or other hedging transactions also may expose the Company to the risk that the counterparty may not perform, which could cause the Company to lose the benefits of the hedging transactions.
ACQUISITION AND RENOVATION
The success of the Company is dependent in part upon its ability to acquire additional properties on satisfactory terms. Moreover, the acquisition of Life Science Facilities generally involves higher per square foot acquisition prices than traditional suburban office properties. If debt or equity financing were not available on acceptable terms, further acquisitions or development activities may be curtailed, and the Company's ability to make distributions to its stockholders may be adversely affected. There is also a risk that the Company will not be able to acquire properties that meet the Company's acquisition criteria.
In addition, the acquisition of real estate entails risks that investments may fail to perform in accordance with expectations (including projected occupancy and rental rates), that the Company may overpay for its properties, or that the Company may underestimate the cost of improvements required to bring an acquired property up to standards established for the market position intended for that property. To the extent that the Company might otherwise benefit from the conversion of a single tenant facility into a multi-tenant facility, the cost of such conversion may be substantial and the Company may deem such conversion to be impracticable. Moreover, although the costs associated with tenant-specific improvements are generally borne by the tenant, such improvements to Life Science Facilities typically involve higher costs per square foot than similar improvements to office space, and there can be no assurance that all such costs will be borne by tenants in the future. In addition, there are general investment risks associated with any new real estate investment. See "--Real Estate Investment."
REAL ESTATE INVESTMENT
GENERAL. The Company's investments in real property are subject to varying degrees of risk. The yields the Company receives from equity investments in real estate depend in large part on the amount of income generated and expenses incurred. Approximately 80% of the Company's leases (on a square footage basis) are triple net leases. To the extent that the Company's lease for a property is not a triple net lease, the Company will have greater expenses associated with that property and will bear some or all of the risk of any increase in such expenses, unless the lease provides for a rent adjustment based on escalations in operating expenses. If the Company's properties do not generate revenues sufficient to meet operating expenses, including debt service and other capital expenditures, the Company may have to borrow additional amounts to cover fixed costs and cash flow needs, and the Company's ability to make distributions to its stockholders could be adversely affected.
The revenues from and the value of the Company's properties may be adversely affected by a number of factors, including the national and local economic climate; real estate conditions in the Company's markets; the Company's ability to provide adequate management, maintenance and insurance; and increased operating costs (including real estate taxes and utilities). Certain significant expenditures associated with the Company's investments (such as mortgage payments, if any, real estate taxes, insurance and maintenance costs) are generally not reduced when circumstances cause a reduction in income from the investment. If a property is mortgaged to secure payment of indebtedness, and if the Company is unable to meet its mortgage payments, a loss could be sustained as a result of foreclosure on the property or the exercise of other remedies by the mortgagee. In addition, real estate revenues and values are also affected by the cost of compliance with government regulation, including zoning and tax laws, interest rate levels and the availability of financing.
OPERATIONS. The Company's properties will be subject to operating risks common to commercial properties in general, any or all of which may adversely affect occupancy or rental rates. In addition, the Company's properties contain generic infrastructure improvements (such as reinforced concrete floors, upgraded roof loading capacity, heavy-duty HVAC systems and laboratory benches) that are more capital intensive than other property types. To the extent that leases are not triple net leases, increases in operating costs due to inflation and other factors may not necessarily be offset by increased rental rates.
BANKRUPTCY. The financial failure of one of the Company's tenants could cause the tenant to become subject to a case under Title 11 of the U.S. Code (the "Bankruptcy Code"). Under the Bankruptcy Code, a tenant has the option of assuming (continuing) or rejecting (terminating) an unexpired lease. If the tenant assumes its lease with the Company, the tenant must cure all defaults under the lease and provide the Company with adequate assurance of its future performance under the lease. If the tenant rejects the lease, the Company may experience a reduction in cash flow, and the Company's claim for breach of the lease would (absent collateral securing the claim) be treated as a general unsecured claim. The amount of the claim would be capped at the amount owed for unpaid pre-petition lease payments unrelated to the rejection, plus the greater of one year's lease payments or 15% of the remaining lease payments payable under the lease (but not to exceed the amount of three years' lease payments). Although the Company has not experienced material losses from tenant bankruptcies, no assurance can be given that tenants will not file for bankruptcy protection in the future or, if any tenants file, that they will assume their leases and continue to make rental payments in a timely manner. If tenant leases are not assumed following bankruptcy, the Company's financial condition and its ability to make distributions to its stockholders may be adversely affected.
DEVELOPMENT. The Company may engage in expansion of existing Properties and development activities through build-to-suit and retrofit projects. Such activities subject the Company to risks related to development and redevelopment projects, possible delays in construction, the cost of materials, financing availability, volatility in interest rates, labor availability, the timing of the commencement of rental payments and other property development uncertainties. In addition, such activities, regardless of whether they are ultimately successful, typically require a substantial portion of management's time and attention and are subject to risks relating to the inability to obtain, or delays in obtaining, all necessary zoning, land-use, building, occupancy and other required governmental permits and authorizations.
MARKET ILLIQUIDITY. The illiquidity of the Company's investments will limit the ability of the Company to vary its portfolio promptly in response to changes in economic or other conditions. There can be no assurance that the Company will be able to dispose of an investment when it finds disposition advantageous or necessary or that the sale price of any disposition will recoup or exceed the amount of the Company's investment. In addition, the Code limits the Company's ability to sell properties held for fewer than four years, which may affect the Company's ability to sell properties without adversely affecting distributions to stockholders.
COMPETITION. The Company competes for investment opportunities with various entities, including insurance companies, pension and investment funds, partnerships, developers, investment companies and other REITs. Many of these entities have substantially greater financial resources than the Company. These entities generally may be able to accept more risk than the Company can prudently manage, including risks with respect to the creditworthiness of a tenant or the geographic proximity of its investments. Competition generally may reduce the number of suitable investment opportunities offered to the Company or increase the bargaining power of property owners seeking to sell.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Qualification as a REIT involves the application of highly technical and complex provisions of the Code, for which there are only limited judicial or administrative interpretations, and the determination of various factual matters and circumstances not entirely within the Company's control. Although the Company believes that it has operated since January 1, 1996 in a manner so as to qualify as a REIT, no assurance can be given that the Company is or will remain so qualified. For example, under the REIT provisions of the Code, if rent attributable to personal property, leased in connection with real property, is greater than 15% of the total rent received under any particular lease, then all of the rent attributable to such personal property will constitute non-qualifying income for purposes of the 75% and 95% gross income tests. The determination of whether an item of property constitutes real property or personal property under the REIT provisions of the Code is subject to both legal and factual considerations and, as such, is subject to differing interpretations. Counsel has advised the Company with respect to the legal considerations underlying such determination. After consulting with counsel and considering such advice, the Company has reviewed its properties and has determined that rents attributable to personal property do not exceed 15% of the total rent with respect to any particular lease. Due to the specialized nature of the Company's properties, there can be no assurance that the Internal Revenue Service (the "IRS") will not assert that the rent attributable to personal property with respect to a particular lease is greater than 15% of the total rent with respect to such lease. If the amount of any such non-qualifying income, together with other non-qualifying income, exceeds 5% of the Company's taxable income, the Company may fail to qualify as a REIT. See "Federal Income Tax Considerations--Taxation of the Company-- Income Tests." In addition, although the Company is not aware of any pending tax legislation that would adversely affect the Company's ability to operate as a REIT, no assurance can be given that new legislation, regulations, administrative interpretations or court decisions will not change the tax laws or interpretations thereof with respect to qualification as a REIT or the federal income tax consequences of such qualification.
On or before the effectiveness of the Registration Statement, the Company will receive an opinion of Skadden, Arps, Slate, Meagher and Flom LLP, tax counsel to the Company, concerning the qualification of the Company as a REIT. In rendering this opinion, Skadden, Arps, Slate, Meagher & Flom LLP will rely on certain assumptions and representations by the Company as to factual matters (including representations of the Company concerning, among other things, its business and properties, the amounts of rents attributable to personal property and other items regarding the Company's ability to meet the various requirements for qualification as a REIT) and on opinions of local counsel with respect to matters of local law. The opinion will be expressed based upon facts, representations and assumptions as of its date and Skadden, Arps, Slate, Meagher & Flom LLP will have no obligation to advise holders of Common Stock of any subsequent change in the matters stated, represented or assumed or any subsequent change in applicable law. No assurance can be given that the Company has met or will continue to meet these requirements in the future, and a legal opinion is not binding on the IRS.
If in any taxable year the Company fails to qualify as a REIT, the Company would not be allowed a deduction for distributions to stockholders in computing taxable income and would be subject to federal income tax on its taxable income at regular corporate rates. Unless entitled to relief under certain statutory provisions, the Company would also be disqualified from treatment as a REIT for the four taxable years following the year during which qualification is lost. As a result of the additional tax liability, the Company might need to borrow funds or liquidate certain investments in order to pay the applicable tax and the funds available for investment or distribution to the Company's stockholders would be reduced for each of the years involved. In addition, the Company would no longer be required by the Code to make any distributions. Although the Company currently intends to operate in a manner designed to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause the Company to fail to qualify as a REIT or may cause the Board of Directors to revoke the REIT election. See "Federal Income Tax Considerations."
INFLUENCE OF CERTAIN STOCKHOLDERS
Upon consummation of the Offering and the Formation Transactions, Holdings and AEW will own approximately 17.0% and 16.0%, respectively, of the outstanding shares of Common Stock of the Company. These stockholders will have significant influence over the election of directors of the Company and other matters to be voted on by the stockholders of the Company. Pursuant to an agreement with the Company, AEW has the right to include two nominees on the ballot for the election of directors of the Company, and one nominee on the ballot for the election of directors of QRS, so long as AEW owns Common Stock representing more than 15% of the voting securities of the Company, and the right to include one nominee on the ballot for the election of directors of the Company so long as AEW owns Common Stock representing more than 7% of such securities. Holdings has agreed to vote its shares of Common Stock for the AEW nominees included on the ballot for the election of directors of the Company. No directors currently serve on the board of directors of the Company or QRS pursuant to such arrangement, although AEW may, at its discretion, exercise its right to include nominees on the ballot in the future. See "Management--Election of Directors and Director Compensation." Additionally, the concentration of ownership by Holdings and AEW may have the effect of delaying, deferring or preventing a change in control of the Company and may result in significant influence and control over the Board of Directors and various corporate actions. See "Management" and "Share Ownership--Principal Stockholders of Alexandria."
ANTI-TAKEOVER EFFECT OF OWNERSHIP LIMIT AND POWER TO ISSUE ADDITIONAL STOCK
In order for the Company to maintain its qualification as a REIT, not more than 50% of the value of its outstanding capital stock may be owned, directly or constructively, by five or fewer individuals or entities (as defined in the Code). The Company's Charter prohibits, with exceptions for certain Continuing Investors, direct or constructive ownership of shares of stock representing more than 9.8% of the combined total value of outstanding shares of the Company's stock by any person (the "Ownership Limit"). The constructive ownership rules are complex and may cause shares of the Common Stock owned directly or constructively by a group of related individuals or entities to be constructively owned by one individual or entity. A transfer of shares to a person who, as a result of the transfer, violates the Ownership Limit may be void or may be transferred to a trust, for the benefit of one or more qualified charitable organizations designated by the Company, with the intended transferee having only a right to share (to the extent of the transferee's original purchase price for such shares) in proceeds from the trust's sale of such shares. See "Description of Capital Stock--Restrictions on Transfer."
The Ownership Limit may have the effect of delaying, deferring or preventing a transaction or a change in control of the Company that might involve a premium price for the Common Stock or otherwise be in the best interest of the stockholders. See "Description of Capital Stock--Restrictions on Transfer."
The Company's Charter authorizes the Board of Directors to cause the Company to issue additional authorized but unissued shares of Common Stock or preferred stock, par value $.01 per share (the "Preferred Stock"), and to classify or reclassify any unissued shares of Common Stock or Preferred Stock and to set the
preferences, rights and other terms of such classified or reclassified shares. See "Description of Capital Stock--Common Stock" and "--Preferred Stock." Preferred Stock will be available for possible future financing of, or acquisitions by, the Company and for general corporate purposes without any legal requirement that further stockholder authorization for issuance be obtained. The issuance of Preferred Stock could make more difficult any attempt to gain control of the Company by means of a merger, tender offer, proxy contest or otherwise. Although the Board of Directors has no present intention to do so, it could establish a series of Preferred Stock that could, depending on the terms of such series, delay, defer or prevent a transaction or a change in control of the Company that might involve a premium price for the Common Stock or otherwise be in the best interest of the stockholders. Preferred Stock could also be issued with a preference on dividend payments, which could affect the ability of the Company to pay dividends or make other distributions to the holders of Common Stock. The Charter and the Amended and Restated Bylaws of the Company (the "Bylaws") also contain other provisions that may delay, defer or prevent a transaction or a change in control of the Company that involves a premium price for the Common Stock or may otherwise be in the best interest of the stockholders. See "Certain Provisions of Maryland Law and of the Company's Charter and Bylaws," "--Control Share Acquisitions" and "--Advance Notice of Director Nominations and New Business."
UNINSURED LOSS
The Company carries comprehensive liability, fire, extended coverage and rental loss insurance with respect to the Properties, with policy specifications, insured limits and deductibles that the Company believes are consistent with those customarily carried for similar properties. The Company also has obtained environmental remediation insurance for the Properties. The insurance, subject to certain exclusions and deductibles, covers the cost to remediate environmental damage caused by unintentional future spills or the historic presence of previously undiscovered hazardous substances. The Company intends to carry similar insurance with respect to future acquisitions, as appropriate. In addition, the Company requires its tenants to maintain comprehensive insurance, including liability and casualty insurance, that is customarily obtained for similar properties. There are, however, certain types of losses that are not generally insured because they are either uninsurable or not economically insurable. In addition, certain disaster-type insurance (covering catastrophic events, such as earthquakes) may not be available or may only be available at rates that, in the opinion of management of the Company, are prohibitive. Many of the Properties are located in the vicinity of potentially active earthquake faults. The Company has obtained earthquake insurance for all of the Properties. Should an uninsured disaster or a loss in excess of insured limits occur, including losses resulting from earthquake or other seismic activity, the Company could lose its capital invested in the affected properties, as well as the anticipated future revenues from such properties, and would continue to be obligated on any mortgage indebtedness or other obligations related to the properties. Any such loss could adversely affect the Company and its ability to make distributions to stockholders.
The Company will obtain updates of or endorsements to its existing title insurance policies bringing such policies current through the closing of the Offering. However, because such policies were originally obtained at the time the applicable Property was acquired in an amount equal to the initial purchase price of the Property, any such policy may be in an amount less than the current value of the Property at the closing of the Offering. In the event of an underinsured loss with respect to a Property relating to a title defect, the Company could lose a portion of its capital invested in, and anticipated profits from, such Property, which could adversely affect the Company and its ability to make distributions to stockholders.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws and regulations, a current or previous owner or operator of real estate, as well as certain other parties, may be required to investigate and remediate the effects of hazardous or toxic substances or petroleum product releases on, under, in or from such property, and may be held liable to a governmental entity or to third parties for investigation and cleanup costs and certain damages resulting from such releases. Such laws and regulations typically impose responsibility and liability without
regard to whether such person knew of or caused the releases, and the liability under such laws and regulations has been interpreted to be joint and several unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The cost of investigating and remediating such contamination may be substantial, and the presence of such contamination, or the failure to properly remediate it, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. In addition, the owner of a site may be subject to governmental fines and common law claims by third parties seeking to recover damages and costs resulting from such contamination.
Certain other federal, state and local laws and regulations govern the management and disposal of asbestos-containing materials ("ACMs"). Such laws and regulations may impose liability for the release of ACMs and may provide for third parties to seek recovery from owners or operators of such property for personal injury associated with ACMs. In connection with the ownership and operation of its properties, the Company may be potentially liable for such costs. ACMs have been detected at certain of the Properties, but are not expected to result in material environmental costs or liabilities to the Company. Federal, state and local laws and regulations also require the removal or upgrading of certain underground storage tanks and regulate the discharge of storm water, wastewater and any water pollutants, the emission of air pollutants, the generation, management and disposal of hazardous or toxic chemicals, substances or wastes, and workplace health and safety.
The Company's leases generally provide that (i) the tenant is responsible for all environmental liabilities relating to the tenant's operations, (ii) the Company is indemnified for such liabilities and (iii) the tenant must comply with all environmental laws and regulations. Such a contractual arrangement, however, does not eliminate the Company's statutory liability or preclude claims against the Company by governmental authorities or persons who are not parties to such an arrangement. Noncompliance with environmental or health and safety requirements may also result in the need to cease or alter operations at a property, which could affect the financial health of a tenant and its ability to make lease payments. In addition, if there is a violation of such a requirement in connection with a tenant's operations, it is possible that the Company, as the owner of the property, could be held accountable by governmental authorities for such violation and could be required to correct the violation and pay related fines.
All of the Properties have been, and it is contemplated that all future acquisitions will be, subjected to a Phase I or similar environmental assessment (which generally includes a site inspection, interviews and a records review, but no subsurface sampling). These assessments and certain follow-up investigations (including, as appropriate, asbestos, radon and lead surveys, additional public records review, subsurface sampling and other testing) of the Properties have not revealed any environmental liability that the Company believes would have a material adverse effect on the Company's business or results of operations. Nevertheless, it is possible that the assessments on the Properties have not revealed, or that the assessments on future acquisitions will not reveal, all environmental liabilities and that there may be material environmental liabilities of which the Company is unaware. No assurances can be given that (i) the Company will not incur material liability under current or future laws and regulations or (ii) the current environmental condition of the Properties will not be adversely affected by tenant operations or by environmental conditions in the vicinity of such Properties. See "The Properties--Environmental Matters."
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
Under the Americans with Disabilities Act of 1990 (the "ADA"), places of public accommodation and/or commercial facilities are required to meet certain federal requirements related to access and use by disabled persons. Although management of the Company believes that the Properties are substantially in compliance with the present requirements of the ADA, the Company may incur additional costs in connection with such compliance in the future. In addition, a number of additional federal, state and local laws and regulations exist that may require modifications to the Company's properties, or affect certain future renovations thereof, with respect to access by disabled persons. Non-compliance with the ADA could result in the imposition of fines or an award of damages to private litigants, and also could result in an order to correct any non-complying feature. Under certain of the Company's leases, the tenant is responsible for ensuring that the property complies with all
laws and regulations, including the ADA. Notwithstanding the foregoing, the Company may be required to make substantial capital expenditures to comply with this law. In addition, provisions of the ADA may impose limitations or restrictions on the completion of certain renovations and thus may limit the overall returns on the Company's investments.
CHANGES IN LAWS
Because increases in taxes (including income, service and transfer taxes) are generally not passed through to tenants under leases, such increases may adversely affect the Company and its ability to make distributions to stockholders. The Properties are also subject to various federal, state and local regulatory requirements and to state and local fire and life-safety requirements. Failure to comply with these requirements could result in the imposition of fines by governmental authorities or awards of damages to private litigants. The Company believes that the Properties are currently in compliance with all such regulatory requirements. However, there can be no assurance that these requirements will not be changed or that new requirements will not be imposed which would require significant unanticipated expenditures by the Company and could have an adverse effect on the Company and its distributions to stockholders.
RELIANCE ON KEY PERSONNEL
The Company will depend upon the services of its executive officers, particularly Messrs. Marcus, Gold and Nelson. The loss of the services of any one of these officers could have an adverse effect on the Company's business and financial condition. The Company has entered into employment agreements with each of Messrs. Marcus, Gold and Nelson. See "Management--Employment Agreements."
CHANGE IN POLICIES WITHOUT STOCKHOLDER APPROVAL
The Company's policies with respect to all activities, including qualification as a REIT, its investment, growth, debt, financing, capitalization, distribution and operating policies, will be determined by the Board of Directors upon the recommendations of management. See "Policies with Respect to Certain Activities." These policies may be amended or revised at any time and from time to time without a vote of the stockholders of the Company. A change in these policies could adversely affect the Company and its ability to make distributions to stockholders. In addition, the Company expects to acquire additional real estate assets in the future. The stockholders of the Company will not be entitled to consider historical financial statements regarding, or to vote upon, these acquisitions and, instead, will be required to rely entirely on the decisions of management.
NO LIMITATION ON DEBT
Upon consummation of the Offering and the Formation Transactions, the Company's debt to total market capitalization ratio will be approximately 20%. Although the Company has adopted a policy to incur debt only if upon such incurrence the debt to total market capitalization ratio would not exceed 50%, the Charter does not contain any limitation on the amount of indebtedness the Company may incur. Accordingly, the Board of Directors could alter or eliminate this policy. If this policy were changed, the Company could become more highly leveraged, resulting in an increase in debt service obligations that could adversely affect the Company's cash flow and, consequently, the amount available for distribution to stockholders, and could increase the risk of default on the Company's indebtedness. See "The Company--Growth Strategies."
The Company has established its debt policy relative to the total market capitalization of the Company rather than relative to the book value of its assets because it believes that the book value of its assets (which to a large extent is the depreciated original cost of real property, the Company's primary tangible assets) does not accurately reflect its ability to borrow and to meet debt service requirements. The market capitalization of the Company, however, is more variable than book value, and does not necessarily reflect the fair market value of the underlying assets of the Company at all times. The Company also will consider factors other than market capitalization in making decisions regarding the incurrence of indebtedness, such as the purchase price of
properties to be acquired with debt financing, the estimated market value of its properties upon refinancing and the ability of particular properties and the Company as a whole to generate cash flow to cover expected debt service.
INABILITY TO SUSTAIN DISTRIBUTIONS
Distributions will be determined by the Board of Directors and will be dependent on a number of factors, including the amount of the Company's cash available for distribution, the Company's financial condition, any decision by the Board of Directors to reinvest funds rather than to distribute such funds, the Company's capital expenditures, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors deems relevant. See "Distributions."
The Company's initial distribution level is based on a number of assumptions, including assumptions relating to the future operations of the Company. These assumptions concern, among other matters, occupancy levels, capital expenditures and other costs relating to the Properties, the level of rental activity and decisions by the Company to reinvest rather than distribute cash available for distribution. The Company expects to maintain its distribution level for at least the 12-month period following consummation of the Offering. However, certain of the assumptions described above are beyond the control of the Company, and a significant change in any such assumption could cause a reduction in cash available for distributions, which could affect the Company's ability to sustain the initial distribution level. See "Distributions." Moreover, the Company has not attempted to estimate the sustainability of its distribution level past the first anniversary of the Offering. As a result, no assurance can be given that the Company will be able to maintain its initial distribution level. Any such failure to do so could result in a decrease in the market price of the Common Stock.
ABSENCE OF PRIOR MARKET FOR SHARES
Prior to the Offering, there has been no public market for shares of the Common Stock. The shares of Common Stock have been approved for listing on the NYSE, subject to official notice of issuance. There can be no assurance that, upon listing, the Company will continue to meet the criteria for continued listing of the Common Stock on the NYSE. See "Underwriting." The initial public offering price may not be indicative of the market price for the Common Stock after the Offering, and there can be no assurance that an active public market for the Common Stock will develop or continue after the Offering. The market value of the Common Stock could be substantially affected by general market conditions, including changes in interest rates. Moreover, numerous other factors, such as governmental regulatory action and changes in tax laws, could have significant effects on the future market price of the Common Stock. See "Underwriting" for a discussion of factors considered in establishing the initial public offering price.
EFFECT OF MARKET INTEREST RATES ON PRICE OF SHARES
One of the factors that may influence the market price of the Common Stock in public trading markets will be the annual yield on the Common Stock compared to yields on other financial instruments. Thus, an increase in market interest rates will result in higher yields on other financial instruments, which may lead prospective purchasers of the Common Stock to demand a higher annual distribution rate from the Company. The requirement for a higher distribution rate may have an adverse effect on the market price of the Common Stock.
EFFECT OF FUTURE OFFERINGS ON PRICE OF SHARES
The Company in the future may increase its capital resources by making additional private or public offerings of its Common Stock, securities convertible into its Common Stock, Preferred Stock or debt securities. See "Description of Capital Stock--Power to Issue Additional Shares of Common Stock and Preferred Stock." The actual or perceived effect of such offerings, the timing of which cannot be predicted, may be the dilution of the book value or earnings per share of the Common Stock outstanding, which may result in a reduction of the market price of the Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION
As set forth more fully under "Dilution," the pro forma net tangible book value per share after the Offering will be substantially less than the expected initial public offering price per Share in the Offering. Accordingly, stockholders acquiring Shares in the Offering will experience immediate and substantial dilution of $4.96 per Share in the net tangible book value of the Shares. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, of future sales of shares of Common Stock, or the availability of shares of Common Stock for future sale, on the market price of the Common Stock prevailing from time to time. Sales of substantial amounts of capital stock (including Common Stock issued upon the exercise of stock options), or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. Upon consummation of the Offering and the Formation Transactions, 3,634,777 shares of Common Stock will be owned by the Continuing Investors. The Company and the Continuing Investors have agreed with the Underwriters, subject to certain limited exceptions, not to offer, sell, contract to sell, pledge, grant any option to purchase or otherwise dispose of any shares of Common Stock (or any securities convertible into, or exercisable, exchangeable or redeemable for, shares of Common Stock) for a period of 360 days from the date of this Prospectus, without the prior written consent of PaineWebber. Management of the Company, including Messrs. Sudarsky, Marcus, Gold, Nelson, Kreitzer, Stone and Ciruzzi, have agreed with the Underwriters, subject to certain limited exceptions, not to offer, sell, contract to sell, pledge, or otherwise dispose of any shares of Common Stock (or any securities convertible into, or exercisable, exchangeable or redeemable for, shares of Common Stock), including any shares of Common Stock that any such persons may have the right to receive by virtue of their ownership interest in Holdings, for a period of two years from the date of this Prospectus, without the prior written consent of PaineWebber. After such time, such shares of Common Stock may be sold in the public market, subject to applicable securities law restrictions or exemptions from registration, if available. The Company has agreed to prepare and file a shelf registration statement or such other registration statement as may then be available within a specified time period after the Offering, and the expiration of the applicable lock-up period, with respect to the resale from time to time of shares of Common Stock issued to AEW in connection with the Offering and the Formation Transactions. Accordingly, AEW will have the ability to sell its shares of Common Stock at such time pursuant to such registration statement or any applicable exemption then available under the Securities Act of 1933, as amended (the "Securities Act"), including Rule 144 promulgated thereunder. The Company also will grant to Holdings customary transferable registration rights with respect to the shares of Common Stock held by it. See "Shares Available for Future Sale" and "Underwriting." In addition, the Company has reserved 900,000 shares of Common Stock for issuance to officers, directors and certain employees of the Company pursuant to the Company's 1997 Stock Option Plan, of which options for 600,000 shares will be issued in connection with the Offering. These shares of Common Stock will be available for sale in the public markets from time to time pursuant to exemptions from registration requirements or upon registration. See "Management--Executive Compensation."
THE COMPANY
Alexandria was formed in October 1994 to acquire, manage, expand and selectively develop high quality, strategically located properties containing office and laboratory space designed and improved for lease principally to pharmaceutical, biotechnology, diagnostic and personal care products companies, major scientific research institutions and related government agencies. The Company's tenant base is broad and diverse within the Life Science Industry and reflects the Company's focus on regional, national and international tenants with substantial financial and operational resources. Significant tenants include affiliates of major pharmaceutical companies (e.g., Johnson & Johnson and Novartis AG, the company resulting from the merger of Ciba-Geigy AG and Sandoz AG); biotechnology companies and their affiliates (e.g., Chiron Corporation, Agouron Pharmaceuticals, Inc. and Advanced Tissue Sciences, Inc.); affiliates of personal care products companies (The Gillette Company); major scientific research institutions (e.g., the Fred Hutchinson Cancer Research Center and The Scripps Research Institute); clinical laboratories (American Medical Laboratories, Inc.); and government agencies (e.g. the FDA and the U.S. Army Corps of Engineers). See "The Properties--Tenants" for the percentage of the aggregate portfolio Annualized Net Effective Rent contributed by each of the foregoing tenants.
Upon consummation of the Offering and the Formation Transactions, the Company will own 15 Properties containing approximately 1.5 million rentable square feet of office and laboratory space located in California (in the San Diego and San Francisco Bay areas), Seattle, Washington and suburban Washington, D.C. (including Maryland and Virginia), each of which is a leading market in the United States for the Life Science Industry. To facilitate research and development, technology transfer and recruitment of scientific professionals, Life Science Industry companies generally cluster near major scientific research institutions, universities and government agencies, all of which drive demand for properties combining office and laboratory space suitable for such tenants. As a result, the Company focuses its operations and acquisition activities principally in a limited number of target markets, including all of the Company's existing markets and certain other markets where Life Science Industry tenants are concentrated, including Boston/Cambridge and the New York/New Jersey and suburban Philadelphia areas. As of April 30, 1997, the Properties were approximately 98% leased, at an average Annualized Net Effective Rent per leased square foot of $18.20.
The multibillion dollar Life Science Industry comprises some of the fastest growing segments of the U.S. economy and includes thousands of public and private companies and scientific research institutions engaged principally in the research, development, testing, manufacture, sale and regulation of pharmaceuticals, diagnostics, personal care products, medical devices, laboratory instrumentation and other related applications. Properties leased to tenants in the Life Science Industry typically consist of suburban office buildings containing scientific research and development laboratories and other improvements that are generic to tenants operating in the Life Science Industry. Unlike traditional office space, the location of and improvements to Life Science Facilities are generally considered essential to a tenant's business. The Company believes that, as a result of these factors, occupancy levels in Life Science Facilities within its markets have been higher and tenant turnover has been lower than in traditional office properties.
Despite increasing competition for the acquisition of traditional office properties, the Company believes that, based on market conditions and prospective acquisitions currently under review, it can continue to purchase high quality Life Science Facilities at initial Capitalization Rates generally ranging from 10.0% to 12.5% and at prices significantly below replacement cost. In 1996, the Company completed the acquisition of the 1996 Acquired Properties for an aggregate purchase price (including closing costs and budgeted capital improvements) of approximately $95.2 million and an average initial Capitalization Rate of over 12%. In addition, the Company believes that opportunities exist for internal growth through contractual rental rate escalations (included in approximately 65% of the Company's leases on a square footage basis), the retenanting and releasing of space at higher rental rates upon the expiration of existing leases, the expansion of existing Properties and the conversion of existing office space to higher rent generic laboratory space.
The Company is led by a senior management team with extensive experience in both the real estate and Life Science industries and is supported by a highly experienced board of directors. Management believes that it has achieved favorable returns on its Properties as a result of: (i) the strong and growing demand by tenants for Life Science Facilities; (ii) the constrained supply and lack of speculative development of Life Science Facilities due to the expertise generally required to develop and manage this property type; (iii) the highly fragmented and inefficient market for ownership of Life Science Facilities; (iv) the Company's adherence to strict evaluation criteria and due diligence review when assessing prospective properties and tenants; and (v) the Company's knowledge and understanding of Life Science Industry tenants and their real estate needs. Additionally, the personal and business relationships that management has developed over time within the real estate and Life Science industries have contributed significantly to the Company's ability to identify and consummate favorable acquisitions and to lease space to high quality Life Science Industry tenants. Management believes that the Company will be the first publicly traded entity focusing primarily on the acquisition, management, expansion and selective development of Life Science Facilities.
The Company's principal executive office is located at 251 South Lake
Avenue, Suite 700, Pasadena, California 91101, and its telephone number is
(818) 578-0777.
GROWTH STRATEGIES
The Company seeks to maximize growth in FFO and cash available for distribution to stockholders through effective management, operation, acquisition, expansion and selective development of Life Science Facilities. The Company believes that opportunities exist to increase FFO and cash available for distribution per share by (i) acquiring high quality Life Science Facilities at attractive returns in its target markets, (ii) realizing contractual rental rate escalations (which are included in 65% of the Company's leases on a square footage basis), (iii) retenanting and releasing space within its portfolio at higher rental rates, and with minimal tenant improvement costs, (iv) expanding existing Properties or converting existing office space to generic laboratory space that can be leased at higher rental rates, (v) selectively developing properties on a retrofit or build-to-suit basis, where the Company can secure leases prior to construction and where such development is expected to result in returns on investment that the Company believes will exceed returns on comparable acquisitions, and (vi) continuing to implement effective cost control measures, including expense pass-through provisions in tenant leases. In pursuing its growth strategy, the Company intends to maintain significant financial flexibility, enabling it to take advantage of growth opportunities as they arise.
The Company believes that its focus on Life Science Facilities presents an attractive investment opportunity, given the strong and growing demand for Life Science Facilities coupled with constraints on new supply. The Company believes that these factors, combined with management's expertise and knowledge of Life Science Industry tenants and their facility needs, present opportunities for the Company to achieve returns on its property investments that are often higher than returns available on other types of commercial real estate. There can be no assurance, however, that the Company will be able to achieve such higher returns.
Acquisitions. The Company seeks to identify and acquire high quality Life Science Facilities in its target markets. Management believes that it has been able to maximize returns on acquisitions as a result of its expertise in understanding the real estate needs of Life Science Industry tenants, its ability to identify and acquire those properties with generic laboratory infrastructure that appeal to a wide range of Life Science Industry tenants and its expertise in identifying and evaluating Life Science Industry tenants. The Company also seeks to utilize the extensive personal and business relationships that management has developed over time with owners of Life Science Facilities and with major Life Science Industry participants to identify prospective acquisition opportunities and to consummate favorable acquisitions prior to the active marketing of the subject properties.
The Company believes that the ownership of Life Science Facilities is highly fragmented and that such fragmentation often creates pricing inefficiencies in the sale of such properties. Life Science Facilities are generally owned by numerous local developers and institutions, many of whom own or operate a single facility. Additionally, management believes that many Life Science Facilities are occupied by owners who desire to focus their investments on and attention to their respective core businesses, and not on ownership of real estate.
Critical evaluation of prospective property acquisitions is an essential component of the Company's acquisition strategy. When evaluating acquisition opportunities, the Company assesses a full range of matters relating to the properties, including the quality of the tenants, the condition and capacity of building infrastructure, the quality and generic characteristics of laboratory facilities and the physical condition of the shell structure and common area improvements. Management also considers opportunities available for leasing vacant space and retenanting occupied space. In addition, the Company is developing a proprietary database that will contain information on Life Science Facilities and Life Science Industry tenants located in each of the Company's target markets. The database is designed to enhance the Company's ability to identify and evaluate prospective acquisitions in such markets.
The Company acquired the 1996 Acquired Properties for an aggregate purchase price (including closing costs and budgeted capital improvements) of approximately $95.2 million and a weighted average initial Capitalization Rate of over 12.0%. The 1996 Acquired Properties are:
PROPERTY (1) DATE OF ACQUISITION TOTAL ACQUISITION COSTS
------------ ------------------- -----------------------
1102/1124 Columbia Street May 1996 $31,755,000
Seattle, Washington
1413 Research Boulevard July 1996 11,966,000
Rockville, Maryland
300/401 Professional Drive September 1996 14,342,000
Gaithersburg, Maryland
25/35/45 West Watkins Mill Road October 1996 17,746,000
Gaithersburg, Maryland
1311/1401/1431 Harbor Bay Parkway December 1996 19,353,000
Alameda, California
-----------
Total $95,162,000
===========
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(1) Based on their respective configurations, the Company considers 1102/1124 Columbia Street to be one Property, 25/35/45 West Watkins Mill Road to be one Property, 300 Professional Drive and 401 Professional Drive each to be a Property and 1311 Harbor Bay Parkway, 1401 Harbor Bay Parkway and 1431 Harbor Bay Parkway each to be a Property.
In connection with the Offering, the Company will purchase the Acquisition LLC, thereby acquiring the Acquisition LLC Properties, aggregating approximately 424,000 square feet of office and laboratory space, for a purchase price of approximately $60.6 million.
Internal Growth. The Company's strategy is to achieve internal growth from several sources. Approximately 65% of the Company's leases (on a square footage basis) contain effective annual rent escalations that are either fixed (ranging from 2.5% to 4.0%) or indexed based on a CPI or other index. The Company will seek to include similar escalation provisions in its future leases. Although most of the Company's recent acquisitions have been fully leased, the Company also seeks to acquire undervalued or underperforming properties where it can improve investment returns through releasing of vacant space and replacement of existing tenants with new tenants at higher rental rates. Further, the Company believes that a significant percentage of its existing leases contain below-market rental rates and that opportunities should exist to achieve higher rental rates as these leases expire. The Company believes that retenanting and releasing costs for existing improved space at its Properties should be relatively low, as a result of the favorable demand and supply characteristics for Life Science Facilities in the Company's target markets and the generic infrastructure improvements that are already in place at the Properties. Since 1994, the Company has retenanted approximately 241,000 square feet of space at a weighted average cost for non-revenue enhancing tenant improvements and leasing commissions of $7.87 per square foot. The Company's ability to negotiate contractual rent escalations in future leases and to achieve increases in rental rates will depend upon market conditions and demand for Life Science Facilities at the time such leases are negotiated and such increases are proposed.
The Company also intends to pursue internal growth through the expansion of existing facilities that are fully leased and the conversion of existing office space to higher rent generic laboratory space. The Company is currently evaluating expansion opportunities at several of its Properties, including 1413 Research Boulevard in Rockville, Maryland, which is designed to accommodate an additional 60,000 square feet of office and laboratory space, and 14225 Newbrook Drive in Chantilly, Virginia, which can accommodate three additional floors or up to approximately 50,000 square feet of additional office and laboratory space. The Company is also currently considering the conversion of office space into higher rent generic laboratory space at 300 Professional Drive in Gaithersburg, Maryland, 25, 35 and 45 West Watkins Mill Road in Gaithersburg, Maryland, and 1311 Harbor Bay Parkway in Alameda, California. In the first quarter of 1997 the Company completed the conversion of approximately 21,000 square feet into higher rent generic laboratory space at 1102 and 1124 Columbia Street in Seattle, Washington, and in 1998 the Company will convert an additional approximately 28,000 square feet of space into higher rent generic laboratory space at this Property. The Company has invested approximately $1.2 million and will invest an additional $3.6 million in these conversion projects, which funds have been set aside in a separate cash account pursuant to the terms of the Company's lease with Corixa Corporation, which will occupy all of the converted space. Based on this lease and the planned expenditures, the Company estimates a return on investment of approximately 14% on these conversion projects. The Company intends to pursue expansion and conversion projects only where the Company can secure signed leases for a significant portion of such space prior to construction and where it expects to achieve investment returns that equal or exceed its returns on acquisitions.
The Company believes that its internal growth strategy will be enhanced by effective cost control measures, including expense pass-through provisions that are included in a significant percentage of the Company's leases. Approximately 80% of the Company's leases (on a square footage basis) are triple net leases, requiring tenants to pay substantially all real estate taxes and insurance, common area and other operating expenses (including increases thereto). Further, approximately 80% of the Company's leases (on a square footage basis) provide for the recapture of certain non-revenue enhancing capital expenditures (including roof replacements, parking lot resurfacing and HVAC maintenance expenditures), which the Company believes would typically be borne by the landlord in traditional office leases.
Development. Given the current favorable acquisition environment for Life Science Facilities, the Company intends to emphasize acquisitions over development in pursuing its growth objectives. However, the Company intends to pursue selective build-to-suit and retrofit development projects where it expects to achieve investment returns that will equal or exceed its returns on acquisitions. Build-to-suit projects involve the construction of new Life Science Facilities for specified tenants. Retrofit projects involve the conversion of existing office space for use by Life Science Industry tenants, generally through the addition of laboratory space and other generic infrastructure improvements. The Company intends to undertake build-to-suit and retrofit projects only if it can secure long-term leases (generally 10 years or more) with high quality Life Science Industry tenants prior to construction and the Company's investment in infrastructure will be generic in nature and not tenant specific.
The Company's 10933 North Torrey Pines Road Property in San Diego, California, is situated on approximately 16 acres of land. The Company has rights to construct up to an additional 163,000 square feet of office and laboratory space on this parcel. The Company also has entered into a purchase agreement to acquire two parcels of land, aggregating approximately 4.2 acres, adjacent to the Company's 3535 and 3565 General Atomics Court Properties, also in the Torrey Pines area of San Diego, California. The purchase price for the land is approximately $2.7 million, of which the Company has paid a deposit of $200,000. The Company will have the ability (subject to receipt of necessary governmental approvals and licenses) to develop and construct two buildings on the land, containing an aggregate of approximately 90,000 square feet of office and laboratory space. There can be no assurance, however, that the Company will acquire the land or will be able to enter into desirable build- to-suit arrangements.
Financing. Upon consummation of the Offering and the Formation Transactions, the Company will have a debt to total market capitalization ratio of approximately 20%. The Company has a commitment from the Bank
of America to provide, upon consummation of the Offering, the Credit Facility for up to $150 million, which will be used primarily for the acquisition of additional properties. The Company has adopted a policy of incurring debt in the future only if, upon such incurrence, its debt to total market capitalization ratio will not exceed 50%. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources" for a description of certain conditions to borrowing and other provisions applicable to the Credit Facility and "Policies With Respect to Certain Activities" for a discussion of the Company's policy of incurring debt.
The Company expects to finance future acquisitions initially through the Credit Facility and then to refinance such indebtedness with debt or equity capital. The Company may also issue Common Stock or interests in subsidiaries as consideration for acquisitions. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." The Company believes that its access to capital should provide it with a competitive advantage in acquisitions over other bidders that qualify their bids with financing or other contingencies.
TENANT DEMAND
Life Science Industry participants are engaged principally in the research, development, testing, manufacture, sale and regulation of pharmaceuticals, diagnostics, personal care products, medical devices, laboratory instrumentation and other related applications. Tenant demand for Life Science Facilities in the Company's target markets is driven largely by the size and growth of the Life Science Industry and its various segments and particularly by the Life Science Industry's expenditures on research and development. Growth in the Life Science Industry creates demand for Life Science Facilities because traditional office space is generally inadequate to meet the needs of Life Science Industry tenants.
Research and development expenditures within the pharmaceutical industry, the largest segment of the Life Science Industry, have grown dramatically since 1985, and the Company believes that this growth should continue. According to PhRMA, the principal industry trade group for major pharmaceutical research companies, domestic research and development expenditures by PhRMA member firms have increased at a compound annual rate of over 13% since 1985. The following graph indicates the growth of domestic research and development expenditures by PhRMA member firms from 1985 through 1995 and includes estimates of such research and development expenditures for 1996 and 1997.
DOMESTIC RESEARCH AND DEVELOPMENT EXPENDITURES
BY PHRMA MEMBER FIRMS
[CHART APPEARS HERE]
DOMESTIC RESEARCH AND
DEVELOPMENT EXPENDITURES
------------------------
(DOLLARS IN BILLIONS)
1985 $3.4
1986 $3.9
1987 $4.5
1988 $5.2
1989 $6.0
1990 $6.8
1991 $7.9
1992 $9.3
1993 $10.5
1994 $11.1
1995 $11.8
1996E $13.3
1997E $15.0
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SOURCE: PHRMA ANNUAL SURVEY, 1997.
According to PhRMA, research and development expenditures also have increased as a percentage of U.S. sales and exports of PhRMA member firms. In 1985, research and development expenditures totaled approximately 15.1% of U.S. sales and exports. Based on estimated 1997 expenditures (and as illustrated in the following chart), this percentage is expected to increase to 21.2% of U.S. sales and exports. By comparison, according to PhRMA, research and development expenditures across all U.S. industries averaged only 3.8% of sales in 1995. Although the PhRMA data is based on information compiled principally from the nation's largest pharmaceutical companies, the Company believes that this data is reflective of growth in research-based pharmaceutical companies generally.
RESEARCH AND DEVELOPMENT AS A PERCENTAGE OF U.S. SALES (INCLUDING U.S.
EXPORTS)
BY PHRMA MEMBER FIRMS
[CHART APPEARS HERE]
RESEARCH AND DEVELOPMENT AS A PERCENTAGE
OF U.S. SALES (INCLUDING U.S. EXPORTS)
----------------------------------------
(DOLLARS IN BILLONS)
1985 $15.1
1986 $15.1
1987 $16.1
1988 $16.7
1989 $16.8
1990 $16.2
1991 $16.6
1992 $17.9
1993 $19.9
1994 $20.4
1995 $19.4
1996E $19.9
1997E $21.2
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SOURCE: PHRMA ANNUAL SURVEY, 1997.
The Company believes that several factors should continue to drive increases in research and development expenditures, and thus increase the demand for Life Science Facilities. These factors include (i) the aging of the U.S. population resulting from the transition of baby boomers to senior citizens, which has increased demand for new drugs, (ii) increased competition resulting from generic drug penetration and the loss of patent protection on billions of dollars worth of drugs, both of which have increased the need for proprietary drug manufacturers to develop new products, (iii) the desire of companies to reduce research and development lead times to bring new products to market faster, (iv) modifications to the FDA approval process, which have reduced the effective cost of new drug development and (v) increased collaborative efforts among major pharmaceutical and biotechnology companies, which have increased capital availability to Life Science Industry participants.
TARGET MARKETS
The Company owns Life Science Facilities in four primary markets and has targeted these markets, and two additional markets, within which to focus its activities. The Company has selected its target markets as a result of the concentration of Life Science Industry participants. The concentration of Life Science Industry participants is largely a result of the need of such participants to be in close proximity to regulatory agencies and funding sources, such as the FDA and the NIH, trade and manufacturing groups and major scientific research universities and non-profit research centers. These groups provide funding, research and administrative assistance and product approvals to the Life Science Industry, as well as opportunities for the recruitment of scientific professionals. The Company believes that its target markets have been and will continue to be attractive markets for the Life Science Industry because of the established presence of the scientific community and the opportunities for the commercialization of Life Science Industry research and development in these areas. The Company believes that the concentration of Life Science Industry participants in its markets is a significant factor contributing to increased demand for available space and higher overall occupancy rates for Life Science Facilities and thus to reducing the risks associated with tenant turnover. See "Risk Factors--Geographic Concentration; Dependence on Certain Markets."
EXISTING MARKETS
San Diego. Life Science Industry participants have established a significant presence in the San Diego area primarily due to the presence of four internationally renowned research institutions: The University of California at San Diego; The Scripps Clinic and Research Foundation (a tenant of the Company); the Burnham Institute (formerly, the La Jolla Cancer Research Foundation); and The Salk Institute for Biological Studies. Additionally, the Company believes that Life Science Industry participants are attracted to San Diego due, in part, to a supportive local government and a favorable quality of life that attracts scientific research professionals. The University of California at San Diego, is one of the leading research universities in the nation and the 14th largest recipient of NIH awards in 1996, with over $133 million of total awards. The University's faculty includes Nobel laureates and members of the National Academy of the Sciences. The Scripps Clinic and Research Foundation includes the largest non-profit biotechnology research facility in the world, with over 700 scientists. Specializing in cancer research, the Burnham Institute is the fourth largest research institution in the San Diego area. The Salk Institute, with more than 500 employees, conducts a wide range of Life Science Industry research.
San Francisco Bay Area. The San Francisco Bay area is the birthplace of the biotechnology industry and continues to be one of the largest markets for biotechnology companies and related research and development activities in the United States. Local universities and non-profit and government scientific research institutions, including the University of California at San Francisco, the University of California at Berkeley, Stanford University and the Lawrence Livermore Laboratories, have also provided advanced technologies and scientific discoveries and have fostered the growth of the Life Science Industry in the region. The University of California at San Francisco and Stanford University ranked second and tenth, respectively, in NIH grants in 1996, with approximately $213 million and $151 million of total awards, respectively. Several of the largest and most successful biotechnology companies were founded in and remain based in the San Francisco Bay area, including Genentech, Inc. and Chiron Corporation (a tenant of the Company). As a result of the large concentration of major research universities, teaching hospitals, scientific research institutions and Life Science Industry companies, the Company believes that the San Francisco Bay area is also a strong market for the recruitment of scientific research professionals.
Seattle. The University of Washington and the Fred Hutchinson Cancer Research Center (a tenant of the Company), founded in 1861 and 1972, respectively, have influenced the growth of the Life Science Industry in the Seattle/Puget Sound region. For over 20 years, the University of Washington has consistently ranked among the top five federally funded research institutions. In fiscal 1996, the University received approximately $482 million in such funds, representing an increase of nearly five-fold from fiscal 1976. The University also serves as a major source of technology transfer and commercialization of products. In addition, the Fred Hutchinson Cancer Research Center, established by a Nobel prize winner in medicine, is a comprehensive
research center emphasizing basic cancer research and clinical testing. With approximately 2,200 employees and revenues of $158 million in fiscal 1996, the Fred Hutchinson Cancer Research Center continues to serve as a driver for Life Science Facility demand in the area.
Suburban Washington, D.C. Washington, D.C. and its suburbs (including Maryland and Virginia) have one of the highest concentrations of federal laboratories, scientists and engineers per capita in the United States. The NIH and the National Institute of Standards and Technology are significant drivers of demand for Life Science Facilities in this market. The area's colleges and universities, including major research universities and two renowned medical schools, Johns Hopkins University and the University of Maryland at Baltimore, also generate demand for Life Science Facilities. Scientific research institutes involved in Life Science Industry research, including the Institute for Genomic Research, are located nearby. Proximity to the nation's capital also provides access to major trade associations supporting the Life Science Industry, key federal agencies, such as the FDA (a tenant of the Company in California), the U.S. Patent and Trademark Office and the U.S. Department of Agriculture, as well as a cooperative network of governmental, industrial and academic leaders and organizations.
ADDITIONAL TARGET MARKETS
Boston/Cambridge. With the Massachusetts Institute of Technology and Harvard University as anchors, scientific research in the Boston/Cambridge area is one of the principal drivers of demand for Life Science Facilities in the area. The Company believes that these institutions, as well as other major research universities, teaching hospitals and scientific research institutions, produce a favorable environment for the recruitment of scientific professionals and the development of new technologies and products, all of which contribute to demand for Life Science Facilities. The Boston/Cambridge area has historically produced several of the largest and most successful biotechnology companies, including Genetics Institute, Inc., Biogen, Inc., and Genzyme Corp. The Company believes that the factors supporting the growth of these companies, including the cooperative network of academic and industrial organizations within the Boston/Cambridge area, continue to attract Life Science Industry participants to the area.
New York/New Jersey and Suburban Philadelphia Areas. The New York/New Jersey and suburban Philadelphia areas are centers of the Life Science Industry on the East Coast. New Jersey is home to the largest concentration of pharmaceutical companies in the United States, including Merck & Co. Inc., Johnson & Johnson (an affiliate of which is a tenant of the Company in California), Bristol-Myers Squibb Company, American Home Products Corp., Smithkline Beecham p.l.c., Rhone-Poulenc Rorer, Inc. and Wyeth Laboratories Inc., all based in the Philadelphia area, and Pfizer, Inc., based in New York, further enhance this region's importance in the research and development of pharmaceutical products. In addition to the presence of major pharmaceutical companies, the University of Pennsylvania, Princeton University, the Sloan- Kettering Cancer Research Center and numerous other major research universities, teaching hospitals and scientific research institutions play a significant role in the continuing development of the Life Science Industry in this region.
MARKET STUDIES
In connection with the Offering, the Company has obtained a market study from Rosen Consulting Group, dated May 1, 1997 (the "RCG Study"), regarding each of the Company's existing markets (San Diego, the San Francisco Bay Area, Seattle and Suburban Washington, D.C.). The study focused on scientific research facilities, defined as properties containing both office and a significant component of laboratory space leased principally to pharmaceutical and biotechnology companies, non-profit research institutions and related government agencies engaged in scientific research. As a result, the RCG Study did not include all Life Science Facilities, such as those facilities leased primarily to diagnostic and medical instrumentation companies, personal care products companies and other less intensive laboratory users.
The RCG Study indicated that scientific research facilities were substantially fully leased (98-100%) in each of the Company's existing markets, with only a small structural vacancy accounting for downtime between leases and during periods of renovation. In each market, occupancy for scientific research facilities exceeded occupancy
for suburban office space. The RCG Study further indicated that the limited availability of scientific research space in the Company's markets was putting upward pressure on rental rates. Set forth below are market annual triple net effective rental rates from the RCG Study for prototype scientific research facilities in each market.
SCIENTIFIC RESEARCH FACILITIES TRIPLE
MARKET NET EFFECTIVE RENTAL RATES(1)
------ -------------------------------------
San Diego
Torrey Pines Area................. $23.50 - $33.50
Other Areas....................... $20.00 - $27.50
San Francisco Bay Area
West Bay (2)...................... $20.00 - $34.50
East Bay (3)...................... $14.00 - $23.00
Seattle............................. $21.00 - $28.50
Suburban Washington, D.C. .......... $17.00 - $23.50
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(1) Rental rates reflect current market rates for a prototype scientific research facility with 50-70% laboratory space and generic laboratory infrastructure (of $75 to $100 per square foot) in place, located in a "favorable" location in each market.
(2) West Bay includes the area from South San Francisco to Palo Alto.
(3) East Bay includes the area from Berkeley to Fremont, including Alameda.
The RCG Study also indicated that tenant turnover in scientific research
facilities was low, due to the limited amount of available space and the
essential nature of the facilities to tenants. The RCG Study noted that
(i) tenants usually renew upon expiration of their leases (either through
signing of a new lease or, where applicable, exercise of an option to extend
an existing lease) unless they have outgrown their space; (ii) available space
is frequently released before it is put on the market and (iii) there is
minimal downtime between leases. The RCG Study estimated the probability of
renewal in each of the Company's markets at 80% or higher, with the exception
of San Diego where the renewal rate was estimated at 70% or higher. Further,
the RCG Study indicated that the probabilities for renewal were higher--and
thus tenant turnover was lower--for scientific research facilities as compared
to pure office properties in each of the markets studied.
DISTRIBUTIONS
Distributions by the Company will be determined by the Board of Directors and will be dependent upon a number of factors, including the federal income tax requirement that a REIT must distribute annually at least 95% of its taxable income. The Company intends to make regular quarterly distributions to the holders of the Common Stock and initially to distribute annually approximately 83.4% of estimated cash available for distribution. The Company expects to pay a pro rata distribution with respect to the period commencing upon consummation of the Offering and ending on June 30, 1997.
Based on its estimated cash available for distribution, the Company initially expects to make distributions of $1.60 per share on an annualized basis, or an annual distribution rate of 7.62%, based on an assumed initial public offering price of $21.00 per share. The Company currently intends to maintain its initial distribution rate for the 12-month period following consummation of the Offering, unless actual results of operations, economic conditions or other factors differ materially from the assumptions used in its estimate. The Company does not intend to reduce the expected distribution rate if the Underwriters' over-allotment option is exercised. See "Risk Factors-- Inability to Sustain Distributions." The following discussion and the information set forth in the table and footnotes below should be read in connection with the historical consolidated financial statements and the pro forma financial information of the Company and notes thereto contained herein and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
The Company's estimate of cash available for distribution after the Offering is based upon pro forma FFO for the 12 months ended March 31, 1997, with certain adjustments based on the items described below. To estimate cash available for distribution following the Offering, pro forma FFO for the 12 months ended March 31, 1997 was adjusted for certain known events and/or contractual commitments that either occurred subsequent to March 31, 1997 or during the 12 months ended March 31, 1997 but were not effective for the full 12 months, and for certain non-GAAP adjustments consisting of (i) revising historical rent estimates from a GAAP basis to amounts currently being paid or due from tenants and (ii) an estimate of amounts anticipated for recurring tenant improvements, leasing commissions and capital expenditures. Pro forma FFO was not adjusted for changes in working capital resulting from changes in current assets and current liabilities, for investing activities (other than a reserve for capital expenditures and tenant improvements for renewing or reletting space) or for financing activities. The estimate of cash available for distribution is being made solely for the purpose of setting the initial distribution and is not intended to be a projection or forecast of the Company's results of operations or its liquidity, nor is the methodology upon which such adjustments were made necessarily intended to be a basis for determining future distributions. There can be no assurance that any distributions will be made or that the estimated level of distributions will be maintained by the Company.
The Company anticipates that its distributions will exceed earnings and profits for federal income tax purposes due to non-cash expenses, primarily depreciation and amortization, and the difference between rents reported for tax purposes as compared to rents reported in accordance with GAAP. Therefore, approximately 19.3% (or $0.29 per share) of the distributions anticipated to be paid by the Company for the 12 months following the Offering are expected to represent a return of capital for federal income tax purposes and in such event will not be subject to federal income tax under current law to the extent such distributions do not exceed a stockholder's basis in the Common Stock. The nontaxable distributions will reduce the stockholder's tax basis in the Common Stock and, therefore, the gain (or loss) recognized on the sale of such Common Stock or upon liquidation of the Company will be increased (or decreased) accordingly. See "Federal Income Tax Considerations--Taxation of Taxable Domestic Stockholders." The percentage of a stockholder's distributions that represents a nontaxable return of capital may vary substantially from year to year.
Federal income tax law requires that a REIT distribute annually at least 95% of its REIT taxable income. See "Federal Income Tax Considerations--Taxation of the Company." The amount of distributions on an annual basis necessary to maintain the Company's REIT status based on pro forma taxable income of the Company for the 12 months ended March 31, 1997, as adjusted for certain items in the following table, would have been approximately $12.8 million or $1.23 per share. The estimated cash available for distribution is anticipated to be
in excess of the annual distribution requirements applicable to REITs. Under certain circumstances, the Company may be required to make distributions in excess of cash available for distribution in order to meet such distribution requirements. For a discussion of the tax treatment of distributions to holders of Common Stock, see "Federal Income Tax Considerations."
The Company believes that its estimate of cash available for distribution constitutes a reasonable basis for setting the initial distribution; however, no assurance can be given that the estimate will prove accurate or that actual distributions will not vary significantly from the expected distributions. Actual results of operations, economic conditions or other factors may differ materially from the assumptions used in the estimate. The Company's actual results of operations will be affected by a number of factors, including the revenue received from the Properties, the operating expenses of the Company, interest expense, the ability of tenants of the Properties to meet their obligations and unanticipated capital expenditures. Variations in the net proceeds from the Offering as a result of a change in the initial public offering price or the exercise of the Underwriters' overallotment option may affect the cash available for distribution and the payout ratio of cash available for distribution and available reserves.
The following table describes the calculation of pro forma FFO for the 12 months ended March 31, 1997, and the adjustments thereto used in estimating the initial cash available for distribution:
(DOLLARS IN
THOUSANDS,
EXCEPT
PER SHARE
AMOUNTS)
-----------
Pro forma net income for the year ended December 31, 1996....... $14,245
Pro forma net income for the three months ended March 31, 1996.. (3,477)
Pro forma net income for the three months ended March 31, 1997.. 3,191
-------
Pro forma net income for the 12 months ended March 31, 1997..... $13,959
Plus: Pro forma real estate depreciation for the 12 months ended
March 31, 1997................................................. 4,960
Pro forma real estate amortization for the 12 months ended
March 31, 1997............................................... 113
Elimination of an accrual of a post-retirement benefit(1)..... 1,070
-------
Pro forma FFO for the 12 months ended March 31, 1997 ........... 20,102
Adjustments:
Provision for assumed expiring leases, assuming no renewals
(2).......................................................... (83)
Incremental pro forma lease adjustment (3).................... 238
Net increase in tenant recoveries (4)......................... 317
Decrease in other income (5).................................. (12)
-------
Estimated pro forma FFO for the 12 months ended April 30, 1998.. 20,562
Net effect of straight-lining of rents (6).................... 510
Estimated recurring, non-revenue enhancing capital
expenditures (7)............................................. (1,132)
-------
Total estimated cash available for distribution................. $19,940
=======
Total estimated cash distributions.............................. $16,627
=======
Estimated initial cash distribution per share (8)............... $ 1.60
=======
Estimated cash available for distribution payout ratio (9)...... 83.4%
=======
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(1) This amount relates solely to the elimination of a non-cash accrual of a one-time post-retirement benefit for an officer of the Company.
(2) The provision for assumed expiring leases above assumes no lease renewals for the period from January 1, 1997 to April 30, 1998.
(3) Reflects increases and decreases resulting from the annualization of leasing transactions occurring in 1996 and 1997. The net amount of $238,000 includes the effect from (i) eliminating the rental revenue relating to leases expiring and not renewed during 1996 and (ii) adding rental revenue for leases signed through April 30, 1997.
(4) Consists of (i) $301,000 of recovery payments from existing tenants in accordance with their lease agreements and (ii) a $16,000 net increase in tenant recoveries resulting from the net increase in occupancy for the 12 months ended March 31, 1997.
(5) Reflects the decrease in other income-storage relating to space vacated by a tenant during 1996. This space was converted to additional office space and released. See note (3).
(6) Represents the effect of adjusting straight-line rental revenue included in pro forma net income for the 12 months ended April 30, 1998 from the straight-line accrual basis to amounts currently being paid or due from tenants. This adjustment is positive due to one significant lease (with the FDA at 1431 Harbor Bay Parkway in Alameda, California) that was in place at the time of the Company's purchase that contains rent step-down provisions beginning on January 1, 1999. As a result, cash rents currently received by the Company from this tenant ($2,950,000 annually) exceed rents calculated on a straight-line basis in accordance with GAAP ($1,496,000 annually). The lower, straight-lined rental income of $1,496,000 is reflected in FFO. If the Company did not include in estimated cash available for distribution the cash to be received pursuant to this lease in excess of the straight-lined amount, total estimated cash available for distribution would be $18,486,000 and the estimated cash available for distribution payout ratio would be 89.9%.
(7) Reflects projected non-incremental revenue-generating tenant improvements ("TI"), leasing commissions ("LC") and non-reimbursable building improvements for the 12 months ended April 30, 1998. Non-reimbursable building improvements are calculated at a rate of $0.35 per square foot for the Company's portfolio (or a total of $509,343) based on the Company's historical experience. TI and LC expenditures are based on the weighted average TI and LC expenditures for all space renewed and retenanted by the Company during 1994, 1995 and 1996, multiplied by the highest annual net rentable square feet of leased space expiring during 1997, 1998 and 1999.
WEIGHTED
1994 1995 1996 1997 AVERAGE
----- ----- ----- ------ ----------
Retenanted
TI per net rentable square foot....... $0.32 $7.30 $5.90 $13.83 $ 6.24
LC per net rentable square foot....... $4.56 $4.23 $0.87 -- $ 1.63
----------
Total weighted average TI and LC.... $ 7.87
Highest annual net rentable square
feet of leased space
expiring during 1997, 1998 and
1999............................... 195,837
----------
$1,541,237
Estimated rate of retenant.......... 30%
----------
Total cost of retenants............. $ 462,371
Renewals
TI per net rentable square foot....... -- -- -- -- $ 0.00
LC per net rentable square foot....... -- $3.00 -- -- $ 1.17
----------
Total weighted average TI and LC.... $ 1.17
Highest annual net rentable square
feet of leases expiring during
1997, 1998 and 1999................ 195,837
----------
$ 229,129
Estimated rate of renewal........... 70%
----------
Total cost of renewals............ $ 160,391
----------
Total estimated TI and LC Cost........ $ 622,762
----------
Non-reimbursable building improve-
ments (1,455,267 square feet times
$0.35 per square foot)............... $ 509,343
----------
Total TI, LC and building improvement
costs................................ $1,132,105
==========
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(8) Based on a total of 10,391,848 shares to be outstanding upon consummation of the Offering and the Formation Transactions.
(9) Calculated as the total estimated cash distributions divided by the total estimated cash available for distribution for the 12 months ended April 30, 1998. The payout ratio of estimated pro forma FFO equals 80.8%.
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deducting underwriting discounts and commissions and estimated expenses of the Offering, will equal approximately $127.8 million (approximately $147.4 million if the Underwriters' over-allotment option is exercised in full), assuming an initial public offering price of $21.00 per Share. The Company intends to apply the net proceeds of the Offering as follows: approximately $62.7 million to repay mortgage and other indebtedness (including the repayment of approximately $2.5 million of indebtedness advanced to the Company from Holdings); approximately $60.6 million to acquire the Acquisition LLC, as more fully described in "Formation and Structure;" and the remainder (approximately $4.5 million) for general corporate purposes (approximately $1.0 million of which will be placed in a restricted cash account pursuant to the terms of certain indebtedness and approximately $800,000 of which will be used to pay fees in connection with the Credit Facility and certain other loans). If the initial public offering price is less than $21.00 per Share, the Company may reduce the amount of the offering proceeds applied to general corporate purposes or draw on the Credit Facility, as necessary, to make the foregoing payments. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
If the Underwriters' over-allotment option to purchase additional Shares is exercised, the Company expects to use the additional net proceeds for general corporate purposes, including the acquisition of additional properties. Pending the uses described above, the Company intends to invest the net proceeds in interest-bearing accounts and other short-term, interest-bearing securities that are consistent with the Company's qualification for taxation as a REIT. Such investments may include, for example, government and government agency securities, certificates of deposit and interest-bearing bank deposits.
The following table sets forth certain information with respect to the indebtedness to be repaid with the net proceeds of the Offering and the net proceeds of approximately $15.4 million from new mortgage debt on two of the Properties to be incurred in connection with the Offering. The indebtedness to be repaid at such time had a weighted average interest rate of approximately 8.25% and a weighted average remaining term to maturity of approximately 1.5 years (excluding the balance due to Holdings, which is due on demand) as of May 1, 1997.
INDEBTEDNESS
TO BE REPAID
PROPERTY ($000)(1)
-------- ------------
3535/3565 General Atomics Court................................. $ 4,703
1413 Research Boulevard(2)...................................... 8,600
300/401 Professional Drive(2)................................... 10,800
25/35/45 West Watkins Mill Road(2).............................. 11,700
1311/1401/1431 Harbor Bay Parkway(2)............................ 13,300
10933/11099 North Torrey Pines Road............................. 18,158
1102/1124 Columbia Street....................................... 5,860
Working Capital Line of Credit.................................. 2,500
Advanced/Due to Holdings(3)..................................... 2,500
-------
Total......................................................... $78,121
=======
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(1) Amounts reflect principal amortization through May 1, 1997.
(2) Represents aggregate borrowings under the PaineWebber Facility of $44.4
million. Such indebtedness was incurred on various dates in 1996 and bears
interest at a rate equal to LIBOR plus 2.5% (8.19% at May 1, 1997). See
"Risk Factors--Benefits to Managing Underwriter."
(3) Holdings will use the proceeds to repay outstanding loans from certain of
its stockholders. See "Formation and Structure--Benefits to Related
Parties."
CAPITALIZATION
The following table sets forth the historical capitalization of the Company as of March 31, 1997, and the pro forma capitalization as adjusted to give effect to the Formation Transactions, the Offering and the use of the net proceeds from the Offering as described under "Use of Proceeds." The information set forth in the table should be read in conjunction with the historical consolidated financial statements and the pro forma financial information of the Company and notes thereto contained herein, "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources."
MARCH 31, 1997
--------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
Debt(1):
Secured notes payable................................ $112,815 $ 55,381
Unsecured line of credit............................. 2,500 --
Due to Holdings........................................ 2,300 --
Advances from Holdings................................. 286 --
Mandatorily redeemable Series V Preferred Stock,
$.01 par value per share, $1,000 stated value per
share; 50,000 shares authorized; 27,500 issued and
outstanding; no shares issued and outstanding pro
forma............................................... 25,929 --
Stockholders' equity:
Preferred Stock, $.01 par value per share; 65,000
shares authorized; 100,000,000 shares authorized pro
forma
Series T Preferred Stock, $100 stated value per
share; 125 shares authorized; 12 shares issued and
outstanding; no shares issued and outstanding pro
forma............................................. 1 --
Series U Preferred Stock, $500 stated value per
share; 250 shares authorized; 220 issued and
outstanding; no shares issued and outstanding pro
forma............................................. 110 --
Common Stock, $0.01 par value per share; 65,000
shares authorized; 1,000 issued and outstanding;
100,000,000 shares authorized; 10,391,848 shares
issued and outstanding pro forma(2)................. -- 104
Additional paid-in capital............................. 15,308 172,264
Accumulated deficit.................................... (2,973) (17,164)
-------- --------
Total stockholders' equity............................. 12,446 155,204
-------- --------
Total capitalization................................... $156,276 $210,585
======== ========
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(2) Excludes 900,000 shares reserved for issuance pursuant to the Company's 1997 Stock Option Plan of which options to acquire 600,000 shares of Common Stock will be outstanding upon consummation of the Offering and the Formation Transactions.
DILUTION
At March 31, 1997, the Company had a net tangible book value of approximately $36.3 million or $9.98 per share. After giving effect to (i) the sale of the Shares (at an assumed initial public offering price of $21.00 per Share) and the receipt by the Company of approximately $127.8 million in net proceeds from the Offering, after deducting underwriting discounts and commissions and estimated Offering expenses, and (ii) the repayment of approximately $72.8 million of debt, the pro forma net tangible book value at March 31, 1997 would have been $155.2 million, or $14.94 per share of Common Stock. This amount represents an immediate increase in net tangible book value of $4.96 per share to the existing stockholders and an immediate dilution in pro forma net tangible book value of $6.06 per share of Common Stock to new investors. The following table illustrates this dilution:
Assumed initial public offering price per share................ $21.00
Net tangible book value per share prior to the Offering (1).. 9.98
Increase in net tangible book value per share attributable to
the Offering (2)............................................ 4.96
----
Pro forma net tangible book value after the Offering (3)....... 14.94
------
Dilution in net tangible book value per share of Common Stock
(4)........................................................... $ 6.06
======
|
(1) Net tangible book value per share prior to the Offering is determined by
dividing net tangible book value of the Company (based on the March 31,
1997 net book value of the assets, less net book value of prepaid
financing costs to be expensed in connection with the mortgage
indebtedness repaid in connection with the Offering), by the number of
shares of Common Stock issuable to existing stockholders in connection
with the Formation Transactions.
(2) Based on the assumed initial public offering price of $21.00 per share of
Common Stock and after deducting underwriting discounts and commissions
and estimated Offering expenses.
(3) Based on total pro forma net tangible book value of $155.2 million divided
by the total number of shares of Common Stock to be outstanding upon
consummation of the Offering and the Formation Transactions.
(4) Dilution is determined by subtracting pro forma net tangible book value
per share of Common Stock after the Offering from the assumed initial
public offering price of $21.00 per share of Common Stock.
The following table summarizes, on a pro forma basis giving effect to the Offering and the Formation Transactions, the number of shares of Common Stock to be sold by the Company in the Offering and the number of shares of Common Stock to be issued in connection with the Formation Transactions, and the net tangible book value as of March 31, 1997.
SHARES ISSUED BY THE COMPANY
-----------------------------------------
BOOK VALUE
OF AVERAGE
CONTRIBUTION CONTRIBUTION
SHARES VALUE PERCENT PER SHARE
------ ------------ ------- ------------
(IN THOUSANDS, EXCEPT PERCENTAGES
AND PER SHARE AMOUNTS)
Shares sold to public investors..... 6,750 $141,750(1) 65.0% $21.00(1)
Shares issued in connection with the
Formation Transactions............. 3,642 36,329(2) 35.0% $ 9.98
------ -------- -----
Total............................. 10,392 $178,079 100.0%
====== ======== =====
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(2) Based on the March 31, 1997 net book value of the assets, less net book value of prepaid financing and leasing costs to be expensed in connection with the mortgage indebtedness repaid in connection with the Offering.
SELECTED FINANCIAL DATA
The following pro forma and historical information should be read in conjunction with, and is qualified in its entirety by, the historical consolidated financial statements and notes thereto of the Company included elsewhere in this Prospectus. The selected historical financial information of the Company at December 31, 1996 and 1995, and for the years ended December 31, 1996 and 1995, and for the period October 27, 1994 (inception) through December 31, 1994, has been derived from the historical consolidated financial statements of the Company audited by Ernst & Young LLP, independent auditors, whose report with respect thereto is included elsewhere in this Prospectus. The selected financial and operating information for the three months ended March 31, 1997 and March 31, 1996 has been derived from the unaudited financial statements of the Company included elsewhere in this Prospectus.
The unaudited pro forma information as of March 31, 1997 and for the year ended December 31, 1996 and the three months ended March 31, 1997 is presented as if the Offering, the application of the net proceeds thereof as set forth in "Use of Proceeds," the Formation Transactions and the acquisition of the Acquisition LLC all had occurred at March 31, 1997 for the pro forma balance sheet, and the Formation Transactions and the acquisition of the 1996 Acquired Properties and the Acquisition LLC all had occurred at January 1, 1996 for the pro forma statements of operations. The pro forma information is not necessarily indicative of what the actual financial position or results of the Company would have been as of and for the period indicated, nor does it purport to represent the Company's future financial position or results of operations.
HISTORICAL
FOR THE PERIOD
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, OCTOBER 27, 1994
-------------------------------- -------------------------------- (INCEPTION) THROUGH
PRO FORMA HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL DECEMBER 31,
1997 1997 1996 1996 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- -------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OPERATING DATA:
Revenue:
Rental................. $ 6,925 $ 5,175 $ 2,090 $ 27,121 $ 12,941 $ 8,020 $ 834
Tenant recoveries...... 1,897 1,897 486 6,669 4,169 1,699 87
Other.................. 129 89 34 658 563 204 90
---------- -------- ------- ---------- -------- ------- -------
Total revenue........... 8,951 7,161 2,610 34,448 17,673 9,923 1,011
Expenses:
Rental operations...... 1,893 1,830 554 7,195 4,356 2,228 252
General and
administrative........ 725 954 406 2,900 1,972 1,608 1,016
Post retirement
benefit............... 632 632 -- 438 438 -- --
Interest............... 1,180 2,509 918 4,717 6,327 3,553 328
Depreciation and
amortization.......... 1,330 1,003 413 4,953 2,405 1,668 63
---------- -------- ------- ---------- -------- ------- -------
Total expenses.......... 5,760 6,928 2,291 20,203 15,498 9,057 1,659
Income (loss) from
operations............. 3,191 233 319 14,245 2,175 866 (648)
Charge in lieu of
taxes.................. -- -- -- -- -- 105 --
---------- -------- ------- ---------- -------- ------- -------
Net income (loss)....... $ 3,191 $ 233 $ 319 $ 14,245 $ 2,175 $ 761 $ (648)
========== ======== ======= ========== ======== ======= =======
Net income allocated to
preferred
stockholders........... -- $ 1,378 -- -- $ 1,256 -- --
========== ======== ======= ========== ======== ======= =======
Net income (loss)
allocated to common
stockholders........... $ 3,191 $ (1,145) $ 319 $ 14,245 $ 919 $ 761 $ (648)
========== ======== ======= ========== ======== ======= =======
Pro forma net income per
share of Common
Stock(1)............... $ 0.31 $ 1.37
========== ==========
Pro forma shares of
Common Stock
outstanding............ 10,391,848 10,391,848
========== ==========
BALANCE SHEET DATA (AT
PERIOD END):
Rental properties--net
of accumulated
depreciation........... $198,984 $147,315 $146,960 $54,353 $54,366
Total assets............ 216,136 161,690 160,392 58,702 56,600
Mortgage loans payable
and unsecured lines of
credit................. 55,381 115,315 113,182 40,894 39,164
Total liabilities....... 60,932 123,315 120,819 42,369 40,119
Mandatorily redeemable
Series V Preferred
Stock.................. -- 25,929 25,042 -- --
Stockholders' equity.... $ 155,204 12,446 14,531 16,333 16,481
|
SELECTED FINANCIAL DATA (CONTINUED)
HISTORICAL
FOR THE PERIOD
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, OCTOBER 27, 1994
-------------------------------- -------------------------------- (INCEPTION) THROUGH
PRO FORMA HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL DECEMBER 31,
1997 1997 1996 1996 1996 1995 1994
--------- ---------- ---------- --------- ---------- ---------- -------------------
(DOLLARS IN THOUSANDS)
OTHER DATA:
Net income.............. $ 3,191 $ 233 $ 319 $ 14,245 $ 2,175 $ 761 $ (648)
Add:
Accrual of a post-
retirement
benefit(2)............ 632 632 -- 438 438 -- --
Depreciation and
amortization of
Properties,
improvements and
leasing costs......... 1,330 1,003 413 4,953 2,405 1,668 63
--------- --------- ------- --------- --------- ------- --------
Funds from
Operations(3)......... $ 5,153 $ 1,868 $ 732 $ 19,636 $ 5,018 $ 2,429 $ (585)
========= ========= ======= ========= ========= ======= ========
Cash flows from
operating activities... $ -- $ 3,160 $ 972 $ -- $ (1,646) $ 355 $ (1,024)
Cash flows from
investing activities... -- (1,319) (86) -- (94,900) (1,554) (29,924)
Cash flows from
financing activities... -- (787) (52) -- 97,323 927 32,139
Number of properties
owned at period end.... 15 12 4 15 12 4 4
Rentable square feet of
properties owned at
period end............. 1,455,267 1,031,070 313,042 1,455,267 1,031,070 313,042 313,042
Occupancy at period end
of properties owned at
period end............. -- 97% 96% -- 97% 96% 88%
|
(1) Pro forma net income per share includes pro forma net income from the Acquisition LLC Properties. If such net income (and the related shares of Common Stock to be sold in the Offering, the net proceeds of which will be used for the purchase of the Acquisition LLC) were excluded, pro forma net income would be $1,778,000 million and $7,464,000 million, respectively, for the three months ended March 31, 1997 and the year ended December 31, 1996, and pro forma net income per share would be $0.25 and $1.04, respectively, for the three months ended March 31, 1997 and the year ended December 31, 1996.
(2) This adjustment relates solely to the elimination of a non-cash accrual of a one-time post-retirement benefit for an officer of the Company.
(3) The White Paper defines FFO as net income (loss) (computed in accordance
with GAAP), excluding gains (or losses) from debt restructuring and sales
of property, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures.
Management considers FFO an appropriate measure of performance of an
equity REIT because it is predicated on cash flow analyses. The Company
computes FFO in accordance with standards established by the White Paper,
which may differ from the methodology for calculating FFO utilized by
other equity REITs, and, accordingly, may not be comparable to such other
REITs. Further, FFO does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
service obligations, or other commitments and uncertainties. See notes (6)
(7) and (8) to the table under the caption "Distributions" and the notes
to the Company's historical financial statements. FFO should not be
considered as an alternative to net income (determined in accordance with
GAAP) as an indication of the Company's financial performance or to cash
flows from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds
available to fund the Company's cash needs, including its ability to make
distributions.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the information contained in "Selected Financial Data" and the more detailed historical consolidated financial statements and notes thereto included elsewhere herein.
Since its formation in October 1994, the Company has devoted substantially all of its resources to the acquisition and management of high quality, strategically located Life Science Facilities leased principally to Life Science Industry tenants in its target markets. Upon consummation of the Offering and the Formation Transactions, the Company will have total assets with a book value of approximately $216 million, including real estate assets with a book value of approximately $199 million.
The Company receives income from rental revenue (including tenant recoveries) from its Properties. The Company acquired its current portfolio over the last three years, with four of the Properties acquired in calendar year 1994 (the "1994 Acquired Properties"), eight in 1996 and three to be acquired in connection with the Offering and the Formation Transactions. As a result of the Company's acquisition strategy, the financial data shows significant increases in total revenue from year to year, largely attributable to the acquisitions over the years and the benefit of a full period of effective rental and other revenue for Properties acquired in the preceding year. For the foregoing reasons, the Company does not believe its period-to- period financial data are comparable.
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1997 ("First Quarter 1997") to Three Months Ended March 31, 1996 ("First Quarter 1996")
Rental revenue increased by $3.1 million, or 148%, to $5.2 million for First Quarter 1997 compared to $2.1 million for First Quarter 1996. The increase resulted primarily from the 1996 Acquired Properties, which added $3.0 million of rental revenue in First Quarter 1997. Rental revenue from the Properties owned since January 1, 1995 ("Same Properties") increased by $64,000, or 3%. This increase resulted primarily from the conversion and lease of 19,310 square feet of storage space at 10933 North Torrey Pines Road to higher rent laboratory space in October 1996.
Tenant recoveries increased by $1.4 million, or 290%, to $1.9 million for First Quarter 1997 compared to $486,000 for First Quarter 1996. The increase resulted primarily from the 1996 Acquired Properties, which added $1.3 million of tenant recoveries. Tenant recoveries from the Same Properties increased by $101,000, or 21%, due to an increase in operating expenses and the improved measurement and recovery of tenant utility expenses.
Other income increased by $55,000, or 161%, to $89,000 for First Quarter 1997 compared to $34,000 for First Quarter 1996, resulting from an increase in interest income due to increased amounts in capital improvement reserve accounts.
Rental operating expenses increased by $1.3 million, or 230%, to $1.8 million for First Quarter 1997 compared to $554,000 for First Quarter 1996. The increase resulted primarily from the 1996 Acquired Properties, which added $1.2 million of rental expenses. Operating expenses for the Same Properties were relatively unchanged.
General and administrative expenses increased by $548,000, or 135%, to $954,000 for First Quarter 1997 compared to $406,000 for First Quarter 1996. Of this increase, approximately $543,000 resulted from the accrual of employee bonuses to be paid in connection with the Offering in consideration for past services and the amendment of certain employment agreements.
Post-retirement benefit expense for First Quarter 1997 reflects the non-cash accrual associated with a one-time post-retirement benefit for an officer of the Company.
Interest expense increased by $1.6 million, or 173%, to $2.5 million for First Quarter 1997 compared to $918,000 for First Quarter 1996. The increase resulted primarily from indebtedness incurred to acquire the 1996 Acquired Properties, which added $1.5 million of interest expense.
Depreciation and amortization increased by $590,000, or 143%, to $1.0 million for First Quarter 1997 compared to $413,000 for First Quarter 1996. The increase resulted primarily from depreciation associated with the 1996 Acquired Properties.
As a result of the foregoing, net income decreased by $86,000, or 27%, to $233,000 for First Quarter 1997 compared to $319,000 for First Quarter 1996.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Rental revenue increased by $4.9 million, or 61%, to $12.9 million for the year ended December 31, 1996 compared to $8.0 million for the year ended December 31, 1995. The increase resulted primarily from the 1996 Acquired Properties, which added $4.6 million of rental revenue in 1996. Rental revenue from the Same Properties increased by $370,000, or 5%. Of this increase, $320,000 resulted from a full year of rental income in 1996 resulting from the increase in occupancy at 11099 North Torrey Pines Road during 1995.
Tenant recoveries increased by $2.5 million, or 147%, to $4.2 million for 1996 compared to $1.7 million for 1995. The increase resulted primarily from the 1996 Acquired Properties, which added $2.1 million of tenant recoveries. Tenant recoveries from the Same Properties increased by $395,000, or 23%. Of this increase, $300,000 resulted from a new lease at 11099 North Torrey Pines Road. The remaining increase resulted primarily from a new energy management system at 10933 North Torrey Pines Road that allows the Company to more accurately measure and recover from its tenants certain costs of utility usage.
Other income increased by $359,000, or 176%, to $563,000 for 1996 compared to $204,000 for 1995. The increase resulted primarily from the 1996 Acquired Properties, which added $337,000 of other income.
Rental operating expenses increased by $2.2 million, or 100%, to $4.4 million for 1996 compared to $2.2 million for 1995. The increase resulted primarily from the 1996 Acquired Properties, which added $2.0 million of rental operating expenses. Rental operating expenses from the Same Properties increased by $162,000, or 7.3%, primarily as a result of an increase in expenses at 10933 North Torrey Pines Road.
General and administrative expenses increased by $364,000, or 23%, to $2.0 million for 1996 compared to $1.6 million for 1995. The increase resulted primarily from additional professional fees incurred during 1996.
Post-retirement benefit expense in 1996 represents the non-cash accrual associated with a one-time post-retirement benefit for an officer of the Company.
Interest expense increased by $2.8 million, or 80%, to $6.3 million for 1996 compared to $3.5 million for 1995. The increase resulted primarily from indebtedness incurred to acquire the 1996 Acquired Properties, which added $2.3 million of interest expense, and debt outstanding under the Company's unsecured line of credit, which was repaid in July 1996.
Depreciation and amortization increased by $737,000, or 44%, to $2.4 million for 1996 compared to $1.7 million for 1995. The increase resulted primarily from depreciation associated with the 1996 Acquired Properties.
As a result of the foregoing, net income increased by $1.4 million, or 184%, to $2.2 million for 1996 compared to $761,000 for 1995.
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
Rental revenue increased by $7.2 million, or 862%, to $8.0 million for the year ended December 31, 1995 compared to $834,000 for the year ended December 31, 1994. The increase resulted primarily from a full year of rental revenue from the 1994 Acquired Properties.
Tenant recoveries increased by $1.6 million, or 1,853%, to $1.7 million for 1995 compared to $87,000 for 1994. The increase resulted primarily from a full year of tenant recoveries from the 1994 Acquired Properties.
Other income increased by $114,000, or 127%, to $204,000 for 1995 compared to $90,000 for 1994. The increase resulted primarily from $56,500 of additional storage income from the 1994 Acquired Properties and interest income of $57,000 earned on the Company's cash balances for 1995 not earned during 1994.
Rental operating expenses increased by $2.0 million, or 784%, to $2.2 million for 1995 compared to $252,000 for 1994. The increase resulted primarily from a full year of rental operating expenses for the 1994 Acquired Properties.
General and administrative expenses increased by $592,000, or 58%, to $1.6 million for 1995 compared to $1,016,000 for 1994. The increase resulted primarily from a full year of general and administrative expenses in 1995 compared to 1994.
Interest expenses increased by $3.2 million, or 983%, to $3.6 million for 1995 compared to $328,000 for 1994. The increase resulted primarily from a full year of interest expense on outstanding debt in 1995 compared to 1994.
Depreciation and amortization increased by $1.6 million, or 2,548%, to $1.7 million for 1995 compared to $63,000 for 1994. The increase resulted primarily from a full year of depreciation and amortization from the 1994 Acquired Properties.
As a result of the foregoing, net income increased by $1.4 million to $761,000 for 1995 compared to a net loss of $648,000 for 1994.
PRO FORMA RESULTS OF OPERATIONS
Comparison of Pro Forma Three Months Ended March 31, 1997 to Historical Three Months Ended March 31, 1997
For the three months ended March 31, 1997, pro forma rental revenue, tenant recoveries, rental property operating expenses and depreciation and amortization reflect increases over the historical amounts due to adjustments for the previously owner-occupied periods for the Acquisition LLC Properties. Pro forma interest expense of $1.2 million is $1.3 million lower than the historical interest expense of $2.5 million due to the elimination of interest on certain mortgage loans to be repaid with a portion of the proceeds of the Offering, offset by interest expense on two new mortgage loans to be incurred in connection with the Offering. Pro forma general and administrative expenses have been reduced from the historical period as a result of the elimination of a $543,000 accrual for bonuses to two officers of the Company to be paid in connection with the Offering in consideration for past services and the amendment of such officers' employment agreements, offset by an increase in general and administrative expenses due to increased costs expected to be incurred as a result of being a public company.
Comparison of Pro Forma Year Ended December 31, 1996 to Historical Year Ended December 31, 1996
For the year ended December 31, 1996, pro forma rental revenue, tenant recoveries, rental operating expenses and depreciation and amortization were higher than the historical amounts as a result of the Company's ownership in the pro forma period of the 1996 Acquired Properties and the Acquisition LLC Properties, the pre-acquisition results of which are not included in the historical financial data. Additionally, pro forma interest expense was lower by $1,610,000, or 25%, primarily as a result of the elimination of interest on certain mortgage loans to be repaid with a portion of the proceeds of the Offering. The increase in general and administrative expenses of $928,000, or 47%, for the pro forma period, reflects increased costs expected to be incurred as a result of being a public company.
LIQUIDITY AND CAPITAL RESOURCES
Upon consummation of the Offering and the Formation Transactions, the Company will repay approximately $78.1 million of its existing mortgage debt with a portion of the net proceeds of the Offering, a new $8.5 million, 17- year, self-amortizing mortgage on 1431 Harbor Bay Parkway and a new $6.9 million
mortgage on 1102 and 1124 Columbia Street. As a result, total secured debt will be reduced by approximately $57.6 million to $55.2 million, and 11 of the 15 Properties will be unencumbered. In addition, the Company will have established working capital reserves of approximately $4.5 million (of which approximately $1.0 million will be placed in a restricted cash account pursuant to the terms of certain indebtedness and approximately $800,000 of which will be used to pay fees in connection with the Credit Facility and certain other loans) and capital expenditure cash reserves of approximately $4.3 million. Of the $4.3 million, approximately $3.6 million has been set aside and is held in a cash account to complete the conversion of existing space into higher rent generic laboratory space at 1102 and 1124 Columbia Street pursuant to an agreement between the Company and Corixa Corporation. See "The Company--Growth Strategies." The remaining $700,000 has been set aside for capital expenditures based on agreements with lenders. In addition, the Company holds approximately $500,000 in security deposit reserve accounts based on the terms of certain lease agreements.
Upon consummation of the Offering and the Formation Transactions, the Company will have outstanding mortgage indebtedness as follows:
APPROXIMATE
PROPERTY PLEDGED AS COLLATERAL PRINCIPAL BALANCE INTEREST RATE MATURITY DATE
------------------------------ ----------------- ------------- -------------
3535/3565 General Atomics
Court
San Diego, CA $18,305,869 9.00% December 2014
1431 Harbor Bay Parkway
Alameda, CA 8,500,000 (1) January 2014
1102/1124 Columbia Street
Seattle, WA 21,562,264 7.75% May 2016
1102/1124 Columbia Street
Seattle, WA 6,860,000 (2) July 2016
-----------
Total $55,228,133
===========
|
(1) The interest rate will be fixed at a rate equal to approximately 70 basis points over the interpolated 7-year Treasury rate, which would result in an interest rate of approximately 7.30% (as of May 1, 1997).
(2) The interest rate will initially be variable, based on an interest rate of 90 basis points over LIBOR. This rate is anticipated to be fixed (based on the terms of the loan) in August 1997 at a rate equal to approximately 90 basis points over the interpolated 20-year Treasury rate, which would result in a fixed interest rate of approximately 7.70% (as of May 1, 1997).
The expected principal payments due on outstanding indebtedness in 1997 (following the Offering) and 1998 are $705,000 and $1,190,000, respectively.
The Company believes that the substantial reduction in its overall debt, and the corresponding reduction in required debt service payments, should provide the Company with increased financial flexibility to take advantage of acquisition opportunities as well as to provide working capital for retenanting and releasing costs and for payment of leasing commissions associated with new leasing activity.
Although cash from operations required to fund interest expense will decrease substantially as a result of the Company's reduction in overall debt, such reduction will be offset by an increased use of cash from operations to meet annual REIT distribution requirements. The Company expects to make distributions and to pay amortization of principal and interest on its debt from cash available for distribution, which is expected to exceed cash historically available for distribution as a result of the reduction in overall debt described above. Amounts accumulated for distribution will be invested by the Company primarily in interest-bearing accounts and other short-term, interest-bearing securities that are consistent with the Company's qualification for taxation as a REIT.
The Company expects to meet its short-term liquidity requirements generally through its initial working capital and net cash provided by operations. The Company believes that its net cash provided by operations will be sufficient to allow the Company to make distributions necessary to enable the Company to continue to qualify
as a REIT. The Company also believes that the foregoing sources of liquidity will be sufficient to fund its recurring non-revenue enhancing capital expenditures, tenant improvements and leasing commissions.
The Company expects to meet certain long-term liquidity requirements, such as property acquisitions, scheduled debt maturities, renovations, expansions and other non-recurring capital improvements, through long-term secured and unsecured indebtedness and the issuance of additional equity securities. The Company anticipates that only a portion of the principal outstanding under its outstanding indebtedness will be amortized prior to maturity and that the Company will not have sufficient funds on hand to repay such indebtedness at maturity. As a result, it will be necessary for the Company to refinance such debt either through additional debt financing secured by individual properties or groups of properties, by unsecured private or public debt offerings or by additional equity offerings. See "Risk Factors--Real Estate Financing." The Company's debt will mature at various dates through 2016.
The Company has received a commitment for the Credit Facility from the Bank of America for up to $150,000,000, consisting of a $100,000,000 activated tranche and a $50,000,000 tranche which may be activated at the Company's discretion provided there is no event of default under the Credit Facility. The Company expects to enter into the Credit Facility upon consummation of the Offering and the Formation Transactions. The Credit Facility will provide for syndicated borrowings bearing interest based on the lower of (i) the LIBOR rate plus an applicable margin ranging from 1.10% to 1.50% and (ii) a bank reference rate plus an applicable margin ranging from 0.0% to 0.25%. The applicable margins will be determined initially by reference to the ratio of the Company's total liabilities to gross asset value at the time of borrowing. Upon completion of the Offering, the Company anticipates borrowing under the Credit Facility at a rate equal to LIBOR plus 1.40%. The Company may also solicit competitive bids for loans for up to one-third of the activated commitment amount. The Company has paid certain fees in connection with the acceptance of the commitment to lend and will be liable for additional fees upon the closing of the Credit Facility and thereafter. The Credit Facility will have customary conditions to closing and to borrowing, and will contain representations and warranties customary in REIT financings. The Credit Facility will contain financial covenants, including minimum market net worth; total liabilities to gross asset value ratios; earnings to interest and fixed charge coverage ratios; limitations on unsecured indebtedness and advances to joint ventures; and requirements to maintain a pool of unencumbered assets approved by the lenders under certain circumstances and meeting certain defined characteristics. The Credit Facility will contain restrictions on, among other things, indebtedness, investments, distributions and mergers. There can be no assurance that the Company will be able to enter into the Credit Facility on terms satisfactory to it. The Credit Facility will be used to finance acquisitions and capital improvements, and for general corporate purposes.
The Phase I environmental assessments of the Properties have not revealed any environmental liabilities that the Company believes would have a material adverse effect on the Company's financial condition or results of operations taken as a whole, nor is the Company aware of any such material environmental liabilities. See "Risk Factors--Possible Environmental Liabilities" and "The Properties--Environmental Matters."
HISTORICAL CASH FLOWS
The Company's principal sources of funding for operations and capital expenditures have been cash flows from operating activities, private stock offerings and secured debt financings. The Company had net income for the years ended December 31, 1996 and 1995, and had a net loss for the year ended December 31, 1994. The Company had net income for the three months ended March 31, 1997 and 1996.
Net cash provided by operating activities decreased by $2.0 million to a deficit of $1.6 million for 1996 compared to net cash of $355,000 for 1995. The decrease resulted primarily from loan fees associated with additional financing and additional restricted cash reserves required by a tenant of one of the 1996 Acquired Properties. Net cash provided by operating activities increased by $1.4 million to $355,000 for 1995 compared to a deficit of $1.0 million for 1994. The increase resulted from a full year of operations for the 1994 Acquired Properties. Net cash provided by operating activities increased by $2.2 million to $3.2 million for the three months ended March 31, 1997 compared to net cash of $972,000 for the three months ended March 31, 1996. The increase resulted from the operations of the 1996 Acquired Properties.
Net cash used in investing activities increased by $93.3 million to $94.9 million for 1996 compared to net cash used in investing activities of $1.6 million for 1995. The increase resulted primarily from the 1996 Acquired Properties. Net cash used in investing activities decreased by $28.3 million to $1.6 million for 1995 compared to $29.9 million for 1994. The decrease resulted from the fact that no properties were acquired in 1995. Net cash used in investing activities increased by $1.2 million to $1.3 million for the three months ended March 31, 1997 compared to the net cash used of $86,000 for the three months ended March 31, 1996. The majority of the increase resulted from improvements made to 1102 and 1124 Columbia Street.
Cash provided by financing activities increased by $96.4 million to $97.3 million for 1996 compared to $927,000 for 1995. The increase resulted primarily from net borrowings of $80 million during 1996 compared to $2.3 million in 1995. In addition, the Company received net proceeds of $24.1 million from the issuance of mandatorily redeemable preferred stock in 1996. Cash provided by financing activities decreased $31.2 million to $927,000 for 1995 compared to $32.1 million for 1994. This decrease resulted primarily from borrowings incurred in 1994 in connection with the 1994 Acquired Properties. Net cash used in financing activities increased by $735,000 to $787,000 for the three months ended March 31, 1997 compared to the net cash used of $52,000 for the three months ended March 31, 1996. The increase resulted from a $3.0 million cash distribution, offset by a $2.5 million draw on the Company's line of credit.
FUNDS FROM OPERATIONS
FFO increased by $2.6 million, or 107%, to $5.0 million for 1996 compared to $2.4 million for 1995. Pro forma FFO was $19.6 million for 1996. FFO increased by $1.1 million, or 155%, to $1.9 million for the three months ended March 31, 1997 compared to $732,000 for 1996. Pro forma FFO was $5.2 million for the three months ended March 31, 1997. The following reconciliation of net income to FFO illustrates the difference between the two measures of operating performance:
HISTORICAL
FOR THE YEAR ENDED
THREE MONTHS ENDED MARCH 31, PRO FORMA FOR DECEMBER 31,
------------------------------- THE YEAR ENDED -------------------
PRO FORMA HISTORICAL HISTORICAL DECEMBER 31, 1996
1997 1997 1996 (UNAUDITED) 1996 1995
--------- ---------- ---------- ----------------- --------- ---------
(IN THOUSANDS)
Net income.............. $3,191 $ 233 $319 $14,245 $ 2,175 $ 761
Add:
Accrual of a post-re-
tirement benefit(1).. 632 632 -- 438 438 --
Depreciation and amor-
tization of Proper-
ties, improvements
and leasing costs.... 1,330 1,003 413 4,953 2,405 1,668
------ ------ ---- ------- --------- ---------
FFO(2).................. $5,153 $1,868 $732 $19,636 $ 5,018 $ 2,429
====== ====== ==== ======= ========= =========
|
(1) This adjustment relates solely to the elimination of a non-cash accrual of a one-time post-retirement benefit for an officer of the Company.
(2) The White Paper defines FFO as net income (loss) (computed in accordance
with GAAP), excluding gains (or losses) from debt restructuring and sales
of property, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures.
Management considers FFO an appropriate measure of performance of an
equity REIT because it is predicated on cash flow analyses. The Company
computes FFO in accordance with standards established by the White Paper,
which may differ from the methodology for calculating FFO utilized by
other equity REITs, and, accordingly, may not be comparable to such other
REITs. Further, FFO does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
service obligations, or other commitments and uncertainties. See notes
(6), (7) and (8) under the caption "Distribution Policy" and the notes to
the Company's historical financial statements. FFO should not be
considered as an alternative to net income (determined in accordance with
GAAP) as an indication of the Company's financial performance or to cash
flows from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds
available to fund the Company's cash needs, including its ability to make
distributions.
INFLATION
Approximately 80% of the Company's leases (on a square footage basis) are triple net leases, requiring tenants to pay substantially all real estate taxes and insurance, common area and other operating expenses (including increases thereto). In addition, approximately 65% of the Company's leases (on a square footage basis) contain effective annual rent escalations that are either fixed (ranging from 2.5% to 4.0%) or indexed based on a CPI or other index. Accordingly, the Company does not believe that its earnings or cash flow are subject to any significant risk of inflation. An increase in inflation, however, could result in an increase in the Company's variable rate borrowing cost on future financing. See "Risk Factors--Real Estate Financing." The Credit Facility will bear interest at a variable rate.
THE PROPERTIES
GENERAL
The Properties range in size from approximately 30,000 to 250,000 square feet, are built to accommodate single or multiple tenants and are generally one or two story concrete tilt-up or block and steel frame structures. The exteriors typically resemble traditional suburban office properties, but interior infrastructures are designed to accommodate the needs of Life Science Industry tenants. Such improvements typically are generic to Life Science Industry tenants rather than specific to a particular tenant. As a result, management believes that the improvements have long-term value and utility and are readily usable by a wide range of Life Science Industry tenants. Generic infrastructure improvements for each Property include: reinforced concrete floors, upgraded roof loading capacity and increased floor to ceiling heights; heavy-duty HVAC systems and advanced environmental control technology; significantly upgraded electrical, gas and plumbing infrastructure; and laboratory benches.
Upon consummation of the Offering and the Formation Transactions, the Company will own 15 high quality, strategically located Life Science Facilities containing approximately 1.5 million rentable square feet of office and laboratory space in four markets: the San Diego area, the San Francisco Bay area, Seattle and suburban Washington, D.C. All of the Properties have been built or substantially renovated since 1984. As of April 30, 1997, the Properties were approximately 98% leased.
Leases in the Company's multi-tenant buildings typically have terms of three to seven years, while the single-tenant building leases typically have terms of 10 to 20 years. Approximately 80% of the Company's leases (on a square footage basis) are triple net leases, requiring tenants to pay substantially all real estate taxes and insurance, common area and other operating expenses (including increases thereto) in addition to base rent. The remaining leases are gross leases, pursuant to which tenants generally pay for substantially all real estate taxes and insurance, common area and other operating expenses above those for an established base year. Approximately 65% of the Company's leases (on a square footage basis) contain effective annual rent escalations that are either fixed (ranging from 2.5% to 4.0%) or indexed based on a CPI or other index. In addition, approximately 80% of the Company's leases (on a square footage basis) provide for the recapture of certain non-revenue enhancing capital expenditures (including roof replacements, parking lot resurfacing and HVAC systems maintenance expenditures), which the Company believes would typically be borne by the landlord in traditional office leases. The leases also typically give the Company the right to review and approve tenant alterations to the property. Generally, tenant-installed improvements remain the property of the Company after termination of the lease. However, the Company is permitted under the terms of most of its leases to require that the tenant remove such improvements and restore the premises to their original condition.
The Company manages 11 of the Properties, and the balance are managed by the tenant or by property management firms. All material decisions with respect to the Properties, however, are made by the Company.
The following table sets forth certain information with respect to the Properties:
ANNUALIZED
PERCENTAGE OF BASE
AGGREGATE RENT PER ANNUALIZED
APPROXIMATE PORTFOLIO LEASED NET EFFECTIVE
YEAR BUILT/ RENTABLE PERCENTAGE PERCENTAGE ANNUALIZED ANNUALIZED SQUARE RENT PER LEASED
PROPERTIES RENOVATED (1) SQUARE FEET LAB SPACE LEASED (2) BASE RENT(3) BASE RENT FOOT (3) SQUARE FOOT (4)
- ---------- ------------- ----------- ----------- ---------- ------------ ------------- ---------- ---------------
San Diego
10933 North 1971/1994 108,133 71% 100% $ 2,308,560 8.4% $21.35(5) $15.84
Torrey Pines
Road San Diego,
CA
11099 North Torrey 1986/1996 86,962 71 100 2,206,992 8.0 25.38(6) 23.66
Pines Road San
Diego, CA
3535 General 1991 76,084 77 100 2,509,704 9.1 32.99(7) 32.11
Atomics Court
San Diego, CA
3565 General 1991 43,600 80 100 1,526,952 5.6 35.02(10) 35.02
Atomics Court San
Diego, CA
San Francisco Bay
Area
1311 Harbor Bay 1984 30,000 17 30(11) 148,752 0.6 16.48 16.48
Parkway Alameda,
CA
1401 Harbor Bay 1986/1994 47,777 50 100 519,144 1.9 10.87 10.87
Parkway Alameda,
CA
1431 Harbor Bay 1985/1994 70,000 50 100 1,415,196 5.2 20.22 12.87
Parkway
Alameda, CA
Seattle, Washington
1102/1124 Columbia 1975/1997 213,397 64 100 4,959,792 18.1 23.24(12) 23.01
Street Seattle, WA
Suburban
Washington, D.C.
300 Professional 1989 48,440 23 100 669,840 2.4 13.83 13.83
Drive
Gaithersburg, MD
401 Professional 1987 62,739 75 100 1,038,564 3.8 16.55 16.55
Drive
Gaithersburg, MD
25/35/45 West 1989/1997 138,938 39 93 1,747,044 6.4 13.56(14) 13.56
Watkins Mill Road
Gaithersburg, MD
1413 Research 1967/1996 105,000 75 100 1,563,456 5.7 14.89 13.29
Boulevard
Rockville, MD
--------- --- --- ----------- ---- ------ ------
Subtotal/Weighted
Average (18): 1,031,070 61% 97% $20,613,996 75.1% $20.61 $19.07
PROPERTIES MAJOR TENANTS
- ---------- ------------------------
San Diego
10933 North
Torrey Pines
Road San Diego, The Scripps Research
CA Institute
Advanced Tissue
Sciences, Inc.
11099 North Torrey Agouron
Pines Road San Pharmaceuticals, Inc.
Diego, CA
Sequana Therapeutics,
Inc.
3535 General The Scripps Research
Atomics Court Institute
San Diego, CA
R.W. Johnson
Research Institute (8)
Syntro Corporation (9)
3565 General Agouron
Atomics Court San Pharmaceuticals, Inc.
Diego, CA
San Francisco Bay
Area
1311 Harbor Bay Chiron Corporation
Parkway Alameda,
CA
1401 Harbor Bay Chiron Diagnostics
Parkway Alameda,
CA
1431 Harbor Bay FDA
Parkway
Alameda, CA
Seattle, Washington
1102/1124 Columbia Fred Hutchinson Cancer
Street Seattle, WA Research Center
Corixa Corporation
Swedish Medical Center
Suburban
Washington, D.C.
300 Professional Mobile Telesystems, Inc.
Drive
Gaithersburg, MD
Antex Biologics Inc.
401 Professional Gillette Capital
Drive Corporation (13)
Gaithersburg, MD
25/35/45 West Genetic Therapy,
Watkins Mill Road Inc. (15)
Gaithersburg, MD MedImmune, Inc.
1413 Research U.S. Army Corps of
Boulevard Engineers
Rockville, MD
Subtotal/Weighted
Average (18):
|
ANNUALIZED
PERCENTAGE OF BASE
AGGREGATE RENT PER ANNUALIZED
APPROXIMATE PORTFOLIO LEASED NET EFFECTIVE
YEAR BUILT/ RENTABLE PERCENTAGE PERCENTAGE ANNUALIZED ANNUALIZED SQUARE RENT PER LEASED
PROPERTIES RENOVATED (1) SQUARE FEET LAB SPACE LEASED (2) BASE RENT(3) BASE RENT FOOT (3) SQUARE FOOT (4)
- ---------- ------------- ----------- ----------- ---------- ------------ ------------- ---------- ---------------
ACQUISITION LLC
PROPERTIES (16)
- ----------------
Suburban
Washington, D.C.
1550 East Gude 1981/1995 44,500 40 100 597,216 2.2 13.42 13.42
Drive
Rockville, MD
1330 Piccard Drive 1978/1995 131,511 75 100 1,903,656 6.9 14.48 14.48
Rockville, MD
14225 Newbrook 1992 248,186 60 100 4,340,256 15.8 17.49 17.49
Drive
Chantilly, VA
--------- --- --- ----------- ----- ------ ------
Subtotal/Weighted
Average (18): 424,197 63% 100% $ 6,841,128 24.9% $16.13 $16.13
--------- --- --- ----------- ----- ------ ------
Total/Weighted
Average (18): 1,455,267 61% 98% $27,455,124 100.0% $19.28 $18.20
========= === === =========== ===== ====== ======
PROPERTIES MAJOR TENANTS
- ---------- ----------------------
ACQUISITION LLC
PROPERTIES (16)
- ----------------
Suburban
Washington, D.C.
1550 East Gude Quest
Drive Diagnostics, Inc. (17)
Rockville, MD
1330 Piccard Drive PerImmune, Inc.
Rockville, MD
14225 Newbrook
Drive American Medical
Chantilly, VA Laboratories, Inc.
Subtotal/Weighted
Average (18):
Total/Weighted
Average (18):
|
(2) Based on all leases at the respective Property in effect as of April 30, 1997.
(3) Annualized Base Rent means the annualized fixed base rental amount (determined in accordance with GAAP) in effect as of April 30, 1997. In the case of triple net leases, Annualized Base Rent does not include real estate taxes and insurance, common area and other operating expenses, substantially all of which are borne by the tenants. This amount, divided by the rentable square feet leased at the Property as of April 30, 1997, is the Annualized Base Rent per Leased Square Foot.
(4) Annualized Net Effective Rent is the Annualized Base Rent in effect as of April 30, 1997, less (for gross leases) real estate taxes and insurance, common area and other operating expenses and (for all leases) amortized tenant improvements and leasing commissions. This amount, divided by the rentable square feet leased at the Property as of April 30, 1997, is the Annualized Net Effective Rent per Leased Square Foot.
(5) The average Annualized Base Rent per Leased Square Foot was $21.35, $18.85 and $18.71 for the years 1996, 1995 and 1994, respectively.
(6) The average Annualized Base Rent per Leased Square Foot was $25.66, $26.02 and $10.55 for the years 1996, 1995 and 1994, respectively.
(7) The average Annualized Base Rent per Leased Square Foot was $33.57, $33.64 and $33.65 for the years 1996, 1995 and 1994, respectively.
(8) The R.W. Johnson Research Institute is a wholly owned subsidiary of Johnson & Johnson.
(9) Syntro Corporation is a wholly owned subsidiary of Mallinckrodt, Inc.
(10) The average Annualized Base Rent per Leased Square Foot was $35.02 for each of the years 1996, 1995 and 1994.
(11) Vacancy represents 20,973 square feet of office space. The Company is in lease negotiations with respect to all of the vacant office space.
(12) The average Annualized Base Rent per Leased Square Foot for 1996 was $22.81.
(13) Gillette Capital Corporation is a wholly owned subsidiary of The Gillette Company.
(14) The average Annualized Base Rent per Leased Square Foot for 1996 was $12.57.
(15) Genetic Therapy, Inc. is a wholly owned subsidiary of Novartis AG.
(16) Represents Properties to be acquired through the acquisition of the Acquisition LLC in connection with the Offering and the Formation Transactions. See "Formation and Structure."
(17) Quest Diagnostics, Inc. subleases its space to Shire Laboratory, Inc., a wholly owned subsidiary of Shire Pharmaceuticals Group p.l.c.
(18) Weighted Average based on a percentage of aggregate leased square feet.
LOCATION AND TYPE OF SPACE
The following table sets forth, as of April 30, 1997, the space within the Properties by rentable square footage in each of the Company's existing markets.
LOCATION AND TYPE OF SPACE OF PROPERTIES
APPROXIMATE RENTAL SQUARE FOOTAGE
-------------------------------------- PERCENTAGE
GEOGRAPHIC AREA LABORATORY OFFICE TOTAL OF TOTAL
--------------- ---------- ---------- ------------ ----------
San Diego............... 232,948 81,831 314,779 21.6%
San Francisco Bay Area.. 63,958 83,819 147,777 10.2%
Seattle................. 136,588 76,809 213,397 14.7%
Suburban Washington,
D.C. (1)............... 457,130 322,184 779,314 53.5%
-------- -------- ---------- ------
Total................. 890,624 564,643 1,455,267 100.0%
======== ======== ========== ======
Percentage of Total
Rentable Square
Footage.............. 61.2% 38.8% 100.0%
======== ======== ==========
|
(1) Includes 265,345 laboratory rentable square footage and 158,852 office rentable square footage attributable to the Acquisition LLC Properties, representing 54.4% of the Company's Total Rentable Square Footage in the Suburban Washington, D.C. geographic area.
LEASE EXPIRATIONS
The following table sets forth scheduled lease expirations for leases in effect at the Properties as of April 30, 1997, through the year 2016. The table assumes that no tenants exercise renewal options or termination rights.
SCHEDULED LEASE EXPIRATIONS
APPROXIMATE
RENTABLE SQUARE PERCENTAGE OF TOTAL ANNUALIZED BASE PERCENTAGE OF
NUMBER FOOTAGE SUBJECT RENTABLE SQUARE FOOTAGE RENT UNDER TOTAL ANNUALIZED BASE
YEAR OF OF LEASES TO EXPIRING REPRESENTED EXPIRING RENT REPRESENTED
LEASE EXPIRATION EXPIRING LEASES(1) BY EXPIRING LEASES LEASES ($000)(2) BY EXPIRING LEASES(3)
- ---------------- --------- --------------- ----------------------- ---------------- ---------------------
1997(4)................. 1 2,200 0.2% $ 47 0.2%
1998.................... 4 105,700 7.3 2,085 7.6
1999.................... 7 195,800 13.5 3,667 13.4
2000.................... 5 174,200 12.0 3,848 14.0
2001.................... 4 193,000 13.3 4,158 15.1
2002.................... 0 -- -- -- --
2003.................... 2 35,300 2.4 410 1.5
2004(5)................. 2 70,100 4.8 1,447 5.3
2005.................... 1 64,000 4.4 1,949 7.1
2006.................... 2 134,000 9.2 2,185 8.0
2007.................... 1 131,500 9.0 1,904 6.9
2014(6)................. 1 70,000 4.8 1,415 5.1
2015.................... 0 -- -- -- --
2016.................... 1 248,200 17.0 4,340 15.8
--- --------- ---- ------- -----
Total................. 31 1,424,000(7) 97.9% $27,455 100.0%
=== ========= ==== ======= =====
|
(1) Excludes rentable square footage for expiring lease where the space has been re-leased to new tenants. Such space is included in the year of the new lease's expiration. Includes rentable square footage subject to expiring leases at the Acquisition LLC Properties.
(2) Annualized Base Rent means the annualized fixed base rental amount
(determined in accordance with GAAP) in effect as of April 30, 1997. In
the case of triple net leases, Annualized Base Rent does not include real
estate taxes and insurance, common area and other operating expenses,
substantially all of which are borne by the tenants.
(3) Calculated by dividing Annualized Base Rent for the respective year of
lease expiration by the total Annualized Base Rent.
(4) The Company's lease with E. Heller & Company is the only lease
contractually expiring in 1997. The Company is negotiating with E. Heller
& Company to extend its lease to 2002 and to expand its space from 2,200
square feet to approximately 8,000 square feet.
(5) The Company's leases with the Fred Hutchinson Cancer Research Center,
covering 70,089 square feet at 1102/1124 Columbia Street, were recently
extended to 2004. The Fred Hutchinson Cancer Research Center, however, may
terminate the leases at any time after November 30, 1999 upon 12 months
prior written notice.
(6) No leases are subject to expiration in the years 2008 to 2013, inclusive.
(7) Excludes 31,046 square feet of vacant office space, as of April 30, 1997.
LEASE EXPIRATIONS--PROPERTY BY PROPERTY
The following table sets forth detailed lease information for each of the Properties for leases in place as of April 30, 1997, assuming that no tenants exercise renewal options or termination rights at or prior to the scheduled expirations.
YEAR OF LEASE EXPIRATION
------------------------------------------------------------------------------------------
PROPERTY 1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 TOTAL
- -------- ------- -------- ---------- ---------- ---------- ---- ---- ---- ---- ---- ----------
10933 NORTH TORREY PINES
ROAD
Square Footage of
Expiring Leases......... 23,609 84,524 108,133
Percentage of Total
Rentable Sq. Ft. ....... 1.6% 5.8% 7.4%
Annualized Base Rent of
Expiring Leases(2)...... $ 587,700 $1,720,860 $2,308,560
Percentage of Total
Annualized Base Rent.... 2.1% 6.3% 8.4%
Annualized Base Rent Per
Square Foot of Expiring
Leases.................. $ 24.89 $ 20.36 $ 21.35
11099 NORTH TORREY PINES
ROAD
Square Footage of
Expiring Leases......... 4,508 26,906 55,548 86,962
Percentage of Total
Rentable Sq. Ft. ....... 0.3% 1.8% 3.8% 5.9%
Annualized Base Rent of
Expiring Leases(2)...... $160,536 $ 783,324 $1,263,132 $2,206,992
Percentage of Total
Annualized Base Rent.... 0.6% 2.9% 4.6% 8.1%
Annualized Base Rent Per
Square Foot of Expiring
Leases.................. $35.61 $ 29.11 $ 22.74 $ 25.38
3535 GENERAL ATOMICS
COURT
Square Footage of
Expiring Leases......... 57,775 18,309 76,084
Percentage of Total
Rentable Sq. Ft. ....... 4.0% 1.3% 5.3%
Annualized Base Rent of
Expiring Leases(2)...... $1,763,544 $ 746,160 $2,509,704
Percentage of Total
Annualized Base Rent.... 6.4% 2.7% 9.1%
Annualized Base Rent Per
Square Foot of Expiring
Leases.................. $ 30.52 $ 40.75 $ 32.99
3565 GENERAL ATOMICS
COURT
Square Footage of
Expiring Leases......... 43,600 43,600
Percentage of Total
Rentable Sq. Ft. ....... 3.0% 3.0%
Annualized Base Rent of
Expiring Leases(2)...... $1,526,952 $1,526,952
Percentage of Total
Annualized Base Rent.... 5.6% 5.6%
Annualized Base Rent Per
Square Foot of Expiring
Leases.................. $ 35.02 $ 35.02
1311 HARBOR BAY PARKWAY
Square Footage of
Expiring Leases......... 2,225 6,802 9,027
Percentage of Total
Rentable Sq. Ft. ....... 0.2% 0.5% 0.7%
Annualized Base Rent of
Expiring Leases(2)...... $46,716 $ 102,036 $ 148,752
Percentage of Total
Annualized Base Rent.... 0.2% 0.4% 0.6%
Annualized Base Rent Per
Square Foot of Expiring
Leases.................. $ 21.00 $ 15.00 $ 16.48
|
(1) Represents lease expiration data from April 30, 1997 to December 31, 1997.
(2) Annualized Base Rent means the annualized fixed base rental amount (determined in accordance with GAAP) in effect as of April 30, 1997. In the case of triple net leases, Annualized Base Rent does not include real estate taxes and insurance, common area and other operating expenses, substantially all of which are borne by the tenants.
(3) Portions of two leases at 1102/1124 Columbia Street and one lease at 1413 Research Boulevard expire in different years. Each portion of the lease is indicated in this table in the year that portion expires.
YEAR OF LEASE EXPIRATION
-----------------------------------------------------------
PROPERTY 1997(1) 1998 1999 2000 2001 2002
- -------- ------- ---------- ---------- ---------- ---------- -----
1401 HARBOR BAY
PARKWAY
Square Footage
of Expiring
Leases.......... 47,777
Percentage of
Total Rentable
Sq. Ft. ........ 3.3%
Annualized Base
Rent of Expiring
Leases(2)....... $519,144
Percentage of
Total Annualized
Base Rent....... 1.9%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 10.87
1431 HARBOR BAY
PARKWAY
Square Footage
of Expiring
Leases..........
Percentage of
Total Rentable
Sq. Ft. ........
Annualized Base
Rent of Expiring
Leases(2).......
Percentage of
Total Annualized
Base Rent.......
Annualized Base
Rent Per Square
Foot of Expiring
Leases..........
1102/1124
COLUMBIA STREET
Square Footage
of Expiring
Leases(3)....... 64,482 14,820
Percentage of
Total Rentable
Sq. Ft. ........ 4.5% 1.0%
Annualized Base
Rent of Expiring
Leases(2)....... $1,467,096 $ 96,564
Percentage of
Total Annualized
Base Rent....... 5.3% 0.4%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 22.75 $ 6.52
300 PROFESSIONAL
DRIVE
Square Footage
of Expiring
Leases.......... 33,386 15,054
Percentage of
Total Rentable
Sq. Ft. ........ 2.3% 1.0%
Annualized Base
Rent of Expiring
Leases(2)....... $ 410,376 $259,464
Percentage of
Total Annualized
Base Rent....... 1.5% 0.9%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 12.29 $ 17.24
401 PROFESSIONAL
DRIVE
Square Footage
of Expiring
Leases..........
Percentage of
Total Rentable
Sq. Ft. ........
Annualized Base
Rent of Expiring
Leases(2).......
Percentage of
Total Annualized
Base Rent.......
Annualized Base
Rent Per Square
Foot of Expiring
Leases..........
|
YEAR OF LEASE EXPIRATION
-------------------------------------------------------
PROPERTY 2003 2004 2005 2006 TOTAL
- -------- -------- ---------- ---------- ---------- ----------
1401 HARBOR BAY
PARKWAY
Square Footage
of Expiring
Leases.......... 47,777
Percentage of
Total Rentable
Sq. Ft. ........ 3.3%
Annualized Base
Rent of Expiring
Leases(2)....... $ 519,144
Percentage of
Total Annualized
Base Rent....... 1.9%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 10.87
1431 HARBOR BAY
PARKWAY
Square Footage
of Expiring
Leases.......... 0
Percentage of
Total Rentable
Sq. Ft. ........ 0.00%
Annualized Base
Rent of Expiring
Leases(2)....... $ 0
Percentage of
Total Annualized
Base Rent....... 0.00%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 0.00
1102/1124
COLUMBIA STREET
Square Footage
of Expiring
Leases(3)....... 70,089 64,006 213,397
Percentage of
Total Rentable
Sq. Ft. ........ 4.8% 4.4% 14.7%
Annualized Base
Rent of Expiring
Leases(2)....... $1,446,684 $1,949,448 $4,959,792
Percentage of
Total Annualized
Base Rent....... 5.3% 7.1% 18.1%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 20.64 $ 30.46 $ 23.24
300 PROFESSIONAL
DRIVE
Square Footage
of Expiring
Leases.......... 48,440
Percentage of
Total Rentable
Sq. Ft. ........ 3.3%
Annualized Base
Rent of Expiring
Leases(2)....... $ 669,840
Percentage of
Total Annualized
Base Rent....... 2.4%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 13.83
401 PROFESSIONAL
DRIVE
Square Footage
of Expiring
Leases.......... 62,739 62,739
Percentage of
Total Rentable
Sq. Ft. ........ 4.3% 4.3%
Annualized Base
Rent of Expiring
Leases(2)....... $1,038,564 $1,038,564
Percentage of
Total Annualized
Base Rent....... 3.8% 3.8%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 16.55 $ 16.55
|
(1) Represents lease expiration data from April 30, 1997 to December 31, 1997.
(2) Annualized Base Rent means the annualized fixed base rental amount (determined in accordance with GAAP) in effect as of April 30, 1997. In the case of triple net leases, Annualized Base Rent does not include real estate taxes and insurance, common area and other operating expenses, substantially all of which are borne by the tenants.
(3) Portions of two leases at 1102/1124 Columbia Street and one lease at 1413 Research Boulevard expire in different years. Each portion of the lease is indicated in this table in the year that portion expires.
YEAR OF LEASE EXPIRATION
----------------------------------------------------------------------
PROPERTY 1997(1) 1998 1999 2000 2001
- -------- ------- ---------- ---------- ---------- ----------
25/35/45 WEST
WATKINS MILL
ROAD
Square Footage
of Expiring
Leases.......... 3,370 18,924
Percentage of
Total Rentable
Sq. Ft. ........ 0.2% 1.3%
Annualized Base
Rent of Expiring
Leases(2)....... $ 46,920 $ 143,436
Percentage of
Total Annualized
Base Rent....... 0.2% 0.5%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 13.92 $ 7.58
1413 RESEARCH
BOULEVARD
Square Footage
of Expiring
Leases(3)....... 30,000 75,000
Percentage of
Total Rentable
Sq. Ft. ........ 2.1% 5.2%
Annualized Base
Rent of Expiring
Leases(2)....... $ 338,700 $1,224,756
Percentage of
Total Annualized
Base Rent....... 1.2% 4.5%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 11.29 $ 16.33
1550 EAST GUDE
DRIVE
Square Footage
of Expiring
Leases.......... 44,500
Percentage of
Total Rentable
Sq. Ft. ........ 3.1%
Annualized Base
Rent of Expiring
Leases(2)....... $ 597,216
Percentage of
Total Annualized
Base Rent....... 2.2%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 13.42
1330 PICCARD
DRIVE
Square Footage
of Expiring
Leases..........
Percentage of
Total Rentable
Sq. Ft. ........
Annualized Base
Rent of Expiring
Leases(2).......
Percentage of
Total Annualized
Base Rent.......
Annualized Base
Rent Per Square
Foot of Expiring
Leases..........
14225 NEWBROOK
DRIVE
Square Footage
of Expiring
Leases..........
Percentage of
Total Rentable
Sq. Ft. ........
Annualized Base
Rent of Expiring
Leases(2).......
Percentage of
Total Annualized
Base Rent.......
Annualized Base
Rent Per Square
Foot of Expiring
Leases..........
TOTAL PORTFOLIO
Square Footage
of Expiring
Leases.......... 2,225 105,746 195,837 174,239 193,072
Percentage of
Total Rentable
Sq. Ft. ........ 0.2% 7.3% 13.5% 12.0% 13.3%
Annualized Base
Rent of Expiring
Leases(2)....... $46,716 $2,084,928 $3,667,152 $3,847,560 $4,158,276
Percentage of
Total Annualized
Base Rent....... 0.2% 7.6% 13.4% 14.0% 15.1%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 21.00 $ 19.72 $ 18.73 $ 22.08 $ 21.54
|
YEAR OF LEASE EXPIRATION
----------------------------------------------------------------
PROPERTY 2002 2003 2004 2005 2006 TOTAL
- -------- ----- -------- ---------- ---------- ---------- -----------
25/35/45 WEST
WATKINS MILL
ROAD
Square Footage
of Expiring
Leases.......... 35,346 71,225 128,865
Percentage of
Total Rentable
Sq. Ft. ........ 2.4% 4.9% 8.8%
Annualized Base
Rent of Expiring
Leases(2)....... $410,160 $1,146,528 $ 1,747,044
Percentage of
Total Annualized
Base Rent....... 1.5% 4.2% 6.4%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 11.60 $ 16.10 $ 13.56
1413 RESEARCH
BOULEVARD
Square Footage
of Expiring
Leases(3)....... 105,000
Percentage of
Total Rentable
Sq. Ft. ........ 7.3%
Annualized Base
Rent of Expiring
Leases(2)....... $ 1,563,456
Percentage of
Total Annualized
Base Rent....... 5.7%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 14.89
1550 EAST GUDE
DRIVE
Square Footage
of Expiring
Leases.......... 44,500
Percentage of
Total Rentable
Sq. Ft. ........ 3.1%
Annualized Base
Rent of Expiring
Leases(2)....... $ 597,216
Percentage of
Total Annualized
Base Rent....... 2.2%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 13.42
1330 PICCARD
DRIVE
Square Footage
of Expiring
Leases.......... 0
Percentage of
Total Rentable
Sq. Ft. ........ 0.00%
Annualized Base
Rent of Expiring
Leases(2)....... $ 0
Percentage of
Total Annualized
Base Rent....... 0.00%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 0.00
14225 NEWBROOK
DRIVE
Square Footage
of Expiring
Leases.......... 0
Percentage of
Total Rentable
Sq. Ft. ........ 0.00%
Annualized Base
Rent of Expiring
Leases(2)....... $ 0
Percentage of
Total Annualized
Base Rent....... 0.00%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 0.00
TOTAL PORTFOLIO
Square Footage
of Expiring
Leases.......... 0 35,346 70,089 64,006 133,964 974,524
Percentage of
Total Rentable
Sq. Ft. ........ 0.00% 2.4% 4.8% 4.4% 9.2% 67.1%
Annualized Base
Rent of Expiring
Leases(2)....... $ 0 $410,160 $1,446,684 $1,949,448 $2,185,092 $19,796,016
Percentage of
Total Annualized
Base Rent....... 0.00% 1.5% 5.3% 7.1% 8.0% 72.2%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $0.00 $ 11.60 $ 20.64 $ 30.46 $ 16.31 $ 20.31
|
(1) Represents lease expiration data from April 30, 1997 to December 31, 1997.
(2) Annualized Base Rent means the annualized fixed base rental amount (determined in accordance with GAAP) in effect as of April 30, 1997. In the case of triple net leases, Annualized Base Rent does not include real estate taxes and insurance, common area and other operating expenses, substantially all of which are borne by the tenants.
(3) Portion of two leases at 1102/1124 Columbia Street and one lease at 1413 Research Boulevard expire in different years. Each portion of the lease is indicated in this table in the year that portion expires.
TENANTS
The Properties are leased to tenants engaged in a variety of activities in the Life Science Industry. The following table sets forth information regarding the Company's leases with its 20 largest tenants based upon Annualized Base Rent as of April 30, 1997.
20 LARGEST TENANTS
PERCENTAGE OF
REMAINING PERCENTAGE OF PERCENTAGE OF AGGREGATE
INITIAL APPROXIMATE AGGREGATE AGGREGATE PORTFOLIO
NUMBER LEASE TERM AGGREGATE LEASED ANNUALIZED PORTFOLIO ANNUALIZED NET ANNUALIZED
OF IN RENTABLE SQUARE BASE RENT ANNUALIZED EFFECTIVE RENT NET EFFECTIVE
TENANT(1) LEASES YEARS SQUARE FEET FEET (IN THOUSANDS)(2) BASE RENT (IN THOUSANDS)(3) RENT
--------- ------ ---------- ----------- ------------- ----------------- ------------- ----------------- -------------
American 1 19.7 248,200 17.4% $ 4,340 15.8% $ 4,340 16.7%
Medical.........
Laboratories,
Inc.
Fred Hutchinson 2 1.1 159,200 11.2 3,654 13.3 3,654 14.1
Cancer.......... 7.6
Research
Center(4)
Agouron 2 4.4 70,500 5.0 2,310 8.4 2,251 8.7
Pharmaceuticals, 3.4
Inc.............
PerImmune, Inc... 1 9.8 131,500 9.2 1,904 6.9 1,904 7.3
Advanced Tissue 2 3.4 84,500 5.9 1,721 6.3 1,353 5.2
Sciences,.......
Inc.
U.S. Army Corps.. 1 2.1 105,000 7.4 1,563 5.7 1,396 5.4
of Engineers(5) 4.4
FDA.............. 1 16.8 70,000 4.9 1,415 5.2 901 3.5
R.W. Johnson 1 1.8 45,000 3.2 1,334 4.9 1,267 4.9
Pharmaceutical..
Research
Institute
The Scripps 2 3.1 41,900 2.9 1,334 4.9 1,106 4.3
Research
Institute.......
2.4
Sequana 1 4.7 55,500 3.9 1,263 4.6 1,195 4.6
Therapeutics,
Inc.............
Corixa 2 7.7 37,600 2.6 1,198 4.4 1,150 4.5
Corporation..... 1.1
MedImmune, Inc... 1 9.6 71,200 5.0 1,147 4.2 1,147 4.4
Gillette Capital 1 8.9 62,700 4.4 1,039 3.8 1,039 4.0
Corporation.....
Quest 1 2.9 44,500 3.1 597 2.2 597 2.3
Diagnostics,
Inc.............
Chiron 1 2.7 47,800 3.4 519 1.9 519 2.0
Diagnostics.....
Syntro 1 2.7 12,800 0.9 430 1.6 430 1.7
Corporation.....
Mobile 1 1.7 33,400 2.3 410 1.5 410 1.6
Telesystems,
Inc.............
Antex Biologics, 1 1.8 15,100 1.1 259 0.9 259 1.0
Inc.............
Genetic Therapy, 1 6.3 20,600 1.4 229 0.8 229 0.9
Inc.............
Photo Science, 1 6.2 14,800 1.0 182 0.7 182 0.7
Inc.............
--- ---- --------- ---- ------- ---- ------- ----
Total/Weighted 25 8.4 1,371,800 96.2% $26,848 98.0% $25,329 97.8%
Average(6).....
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(1) American Medical Laboratories, Inc., PerImmune, Inc. and Quest Diagnostics, Inc. are tenants at the Acquisition LLC Properties.
(2) Annualized Base Rent means the annualized fixed base rental amount (determined in accordance with GAAP) in effect as of April 30, 1997 paid by tenants under the terms of their leases. In the case of triple net leases, Annualized Base Rent does not include real estate taxes and insurance, common area and other operating expenses, substantially all of which are borne by the tenants.
(3) Annualized Net Effective Rent is the Annualized Base Rent in effect as of April 30, 1997, less (for gross leases) real estate taxes and insurance, common area and other operating expenses and (for all leases) amortized tenant improvements and leasing commissions.
(4) Portions of the Company's leases with the Fred Hutchinson Cancer Research Center, covering 70,089 square feet at 1102/1124 Columbia Street, were recently extended to 2004. The Fred Hutchinson Cancer Research Center, however, has the right to terminate the leases at any time after November 30, 1999, upon 12 months prior written notice.
(5) Of the 105,000 rentable square feet at 1413 Research Boulevard, leases with respect to 30,000 square feet are subject to expiration in 1999 and leases with respect to 75,000 rentable square feet are subject to expiration in 2001.
(6) Weighted Average based on percentage of aggregate leased square feet.
PROPERTY DESCRIPTIONS
Following are narrative descriptions of each of the Properties. The book value of each of 3535 General Atomics Court, 1102 and 1124 Columbia Street, 25, 35 and 45 West Watkins Mill Road and 14225 Newbrook Drive was in excess of 10% of the Company's total assets as of December 31, 1996, and the gross revenues from each such Property for the year ended December 31, 1996 was in excess of 10% of the aggregate gross revenues of the Company for such period. In addition, the gross revenues from each of 3565 General Atomics Court, 10933 North Torrey Pines Road and 11099 North Torrey Pines Road for the year ended December 31, 1996 was in excess of 10% of the aggregate gross revenues of the Company for such period. Accordingly, certain additional information with respect to each such Property, including historical occupancy and property tax rates and amounts, is set forth below. The Company's ownership interest in each of the Properties (and the ownership interest the Company will acquire in each of the Acquisition LLC Properties) is subject to existing leases, easements and encumbrances that, in the opinion of the Company, are customary for such properties.
CALIFORNIA
San Diego
10933 North Torrey Pines Road is located in the Torrey Pines area of San Diego, California. The Property consists of approximately 108,000 rentable square feet of office and laboratory space, with extended frontage along North Torrey Pines Road. The Property, built in 1971 and substantially renovated in 1989 and 1994, is fully leased to two tenants: The Scripps Research Institute, one of the nation's largest non-profit biomedical research institutes, and Advanced Tissue Sciences, Inc., a publicly traded company focusing on the development and sale of artificial tissue products, each of which leases over 10% of the rentable space. The Property was 100% leased for the period ending December 31, 1996, 89% leased for the period ending December 31, 1995 and 85% leased for the period ending December 31, 1994. The Company acquired this Property in October 1994 and installed new HVAC and computerized energy management systems in May 1995. These upgrades have enabled the Company to measure more accurately and recover from each tenant certain costs of utility usage that previously were not recoverable. The Company owns fee simple title to the Property.
The Property is situated on approximately 16 acres of land. The Company has the right to develop and construct up to an additional 163,000 square feet of office and laboratory space on this parcel. The Company has applied for extension of conditional approvals from the City of San Diego and the California Coastal Commission for such development. The approvals are conditioned upon, among other things, the completion of certain off-site roadway and utility improvements and the submission of acceptable grading and building plans. The Company intends to maximize the site's value by developing build-to-suit facilities for specific tenants and to enter into long-term triple net leases with such tenants prior to construction. The Company believes that it has a competitive advantage in completing a build-to-suit project because of its low cost basis in the land and the superior North Torrey Pines Road location.
The Company's tax basis in the Property for federal income tax purposes as of December 31, 1996 was approximately $9.9 million. The Property is depreciated using the modified accelerated cost recovery system straight-line method, based on an estimated useful life ranging from 20 to 40 years, depending upon the date of certain capitalized improvements. For the year ended December 31, 1996, the estimated average depreciation rate for the Property under the modified accelerated cost recovery system was 2.8%. The 1996 realty taxes on the Property were assessed at an effective annual rate of approximately 1.118%. Such taxes on the Property for the 12 month period ending June 30, 1997 totaled approximately $116,900. The Company does not believe that any capital improvements made during the 12 month period immediately following the Offering should result in an increase in annual property taxes.
11099 North Torrey Pines Road is located in the Torrey Pines Science Park in San Diego, California. This two-story "L"-shaped Property, consisting of approximately 87,000 rentable square feet of office and laboratory space, has three levels of subterranean parking, garage storage, a 5,000 square foot central enclosed atrium and exterior patio terraces. The project was completed in 1986 and acquired by the Company in October 1994. The Property has benefitted from over $4.0 million of tenant-financed generic infrastructure improvements and is 100% leased to the following tenants: Agouron Pharmaceuticals, Inc., a publicly traded company focusing on
the development and sale of synthetic drugs for viral, cancer and immuno- inflammatory diseases; Sequana Therapeutics, Inc., a publicly traded company focusing on the development of diagnostic and therapeutic products utilizing gene discovery technology; and Cytel Corporation, a publicly traded company focusing on therapeutics to treat acute and inflammatory diseases. Each of Agouron Pharmaceuticals, Inc. and Sequana Therapeutics, Inc. leases over 10% of the rentable space. The Property was 100% leased for the periods ending December 31, 1996 and 1995, and was 75% leased for the period ending December 31, 1994. The Company owns fee simple title to the Property.
The Company's tax basis in the Property for federal income tax purposes as of December 31, 1996 was approximately $13.6 million. The Property is depreciated using the modified accelerated cost recovery system straight-line method, based on an estimated useful life ranging from 20 to 40 years, depending upon the date of certain capitalized improvements. For the year ended December 31, 1996, the estimated average depreciation rate for the Property under the modified accelerated cost recovery system was 2.7%. The 1996 property taxes on the Property were assessed at an effective annual rate of approximately 1.118%. Such taxes on the Property for the 12 month period ending June 30, 1997 totaled approximately $151,500. The Company does not believe that any capital improvements made during the 12 month period immediately following the Offering should result in an increase in annual property taxes.
3535 General Atomics Court is a two-story facility with approximately 76,000 rentable square feet of office and laboratory space. The Property was built in 1991 and is located in the Torrey Pines area of San Diego, California. The exterior consists of reflective glass and concrete and is situated over a single level of subterranean parking. The building has a direct fiber-optic linkup with the supercomputer center located at the University of California at San Diego. The Property has been fully leased since the date of acquisition and is currently leased to three tenants: The R.W. Johnson Pharmaceutical Research Institute (a wholly owned research subsidiary of Johnson & Johnson), The Scripps Research Institute and Syntro Corporation (a wholly owned subsidiary of Mallinckrodt, Inc.), each of which leases over 10% of the rentable space. Following the Offering, this Property, together with 3565 General Atomics Court, will secure approximately $18.3 million of outstanding mortgage indebtedness. The Company owns fee simple title to the Property. The Company acquired the Property in December 1994.
The Company's tax basis in the Property for federal income tax purposes as of December 31, 1996 was approximately $19.7 million. The Property is depreciated using the modified accelerated cost recovery system straight-line method, based on an estimated useful life ranging from 20 to 40 years, depending upon the date of certain capitalized improvements. For the year ended December 31, 1996, the estimated average depreciation rate for the Property under the modified accelerated cost recovery system was 2.8%. The 1996 property taxes on the Property were assessed at an effective annual rate of approximately 1.118%. Such taxes on the Property for the 12 month period ending June 30, 1997 totaled approximately $224,900. The Company does not believe that any capital improvements made during the 12 month period immediately following the Offering should result in an increase in annual property taxes.
3565 General Atomics Court contains approximately 44,000 rentable square feet of office and laboratory space and is located in the Torrey Pines area of San Diego, California. The two-story reflective glass and concrete building is situated over a single level of subterranean parking. The building has a direct fiber-optic linkup with the supercomputer center located at the University of California at San Diego. This single tenant Property built in 1991 is the principal research facility of Agouron Pharmaceuticals, Inc., which has leased 100% of the rentable space since the Company's acquisition of the Property in December 1994. Following the Offering, this Property, together with 3535 General Atomics Court, will secure approximately $18.3 million of outstanding mortgage indebtedness. The Company owns fee simple title to the Property.
The Company's tax basis in the Property for federal income tax purposes as of December 31, 1996 was approximately $10.2 million. The Property is depreciated using the modified accelerated cost recovery system straight-line method, based on an estimated useful life ranging from 20 to 40 years, depending upon the date of certain capitalized improvements. For the year ended December 31, 1996, the estimated average depreciation
rate for the Property under the modified accelerated cost recovery system was 2.8%. The 1996 property taxes on the Property were assessed at an effective annual rate of approximately 1.118%. Such taxes on the Property for the 12 month period ending June 30, 1997 totaled approximately $119,800. The Company does not believe that any capital improvements made during the 12 month period immediately following the Offering should result in an increase in annual property taxes.
San Francisco Bay Area
1311 Harbor Bay Parkway, located in Alameda, California, was developed in 1984 and contains approximately 30,000 rentable square feet of office and laboratory space. The building's exterior is finished with clay tile veneer over concrete tilt-up shear walls, with gray solar glass windows. The Company has a lease with Chiron Corporation covering approximately 6,800 square feet, and a lease with E. Heller & Company covering approximately 2,200 square feet. The Company is negotiating with E. Heller & Company to lease approximately 6,000 square feet of additional space and is negotiating with other potential tenants with respect to the remaining available office space. The Company owns a commercial condominium interest in the Property, together with an undivided interest in the common areas of the project in which the Property is a part. The Company acquired the Property in December 1996.
1401 Harbor Bay Parkway, located in Alameda, California, was developed in 1986, renovated in 1994 and acquired by the Company in December 1996. The Property consists of approximately 48,000 rentable square feet of office and laboratory space. The Property is constructed of concrete tilt-up shear walls with structural steel framework and is fully leased to Chiron Diagnostics, a wholly owned subsidiary of Chiron Corporation. The Company owns a commercial condominium interest in the Property, together with an undivided interest in the common areas of the project in which the Property is a part.
1431 Harbor Bay Parkway, located in Alameda, California, was developed in 1985 with significant renovations completed in 1989 and 1994. The building consists of approximately 70,000 rentable square feet of office and laboratory space. The Property is constructed of concrete tilt-up shear walls with structural steel framework and is fully leased to the FDA under a lease with the General Services Administration. The Company acquired the Property in December 1996. Following the Offering, this Property will secure a mortgage of approximately $8.5 million. The Company owns a commercial condominium interest in the Property, together with an undivided interest in the common areas of the project in which the Property is a part.
SEATTLE, WASHINGTON
1102 and 1124 Columbia Street, located in Seattle, Washington, consists of two inter-connecting buildings with an aggregate of approximately 213,000 rentable square feet. Built in 1975, the seven story Columbia Building (1124 Columbia Street) is a main research facility of the Fred Hutchinson Cancer Research Center, a leading non-profit cancer research institute. The Property also includes a three-level subterranean annex that serves as a research facility and the six-story Eklind Hall Building (1102 Columbia Street) that contains additional office and laboratory space. The Company has converted approximately 21,000 square feet of space in the Columbia Building, and in 1998 will convert an additional approximately 28,000 square feet of space in such building into higher rent generic laboratory space. In addition to the Fred Hutchinson Cancer Research Center, which leases nearly 75% of the rentable space, approximately 18% of the Property is leased to Corixa Corporation, a privately held company focusing on the development of cancer vaccines, and the remainder is leased to Swedish Medical Center. Following the Offering, the Property will secure approximately $28.4 million of outstanding mortgage indebtedness. The Company owns fee simple title to the Property. The Company acquired the Property in May 1996, and it has been fully leased since that time.
The Company's tax basis in the Property for federal income tax purposes as of December 31, 1996 was approximately $30.0 million. The Property is depreciated using the modified accelerated cost recovery system straight-line method, based on an estimated useful life ranging from 20 to 40 years, depending upon the date of
certain capitalized improvements. For the year ended December 31, 1996, the estimated average depreciation rate for the Property under the modified accelerated cost recovery system was 1.56%. The 1997 property taxes on the Property were assessed at an effective annual rate of approximately 1.318%. Such taxes on the Property for the 12 month period ending December 31, 1997 totaled approximately $21,578. Because a substantial portion of the Property is leased to non-profit tenants, only approximately 18.0% of the Property is subject to property tax. The Company does not believe that any capital improvements made during the 12 month period immediately following the Offering should result in an increase in annual property taxes. A decrease in the amount of space leased to non-profit tenants may result in an increase in annual property taxes, although the Company expects to recover any such increase from tenants.
SUBURBAN WASHINGTON, D.C.
300 Professional Drive contains approximately 48,000 rentable square feet of office and laboratory space in a master-planned business park in Gaithersburg, Maryland. This two-story brick veneer building with solar-reflective glass windows was built in 1989. The building's design allows for ground-level access to both floors and contains a split-level lobby. The Property is fully leased to Mobile Telesystems, Inc., a privately held portable satellite communications company, and Antex Biologics Inc., a publicly traded company focusing on research of vaccines for infectious diseases. The Company owns fee simple title to the Property. The Company acquired the Property in September 1996.
401 Professional Drive is a two-story building containing approximately 63,000 rentable square feet of office and laboratory space in Gaithersburg, Maryland. The Property is fully leased to The Gillette Capital Corporation, a wholly owned subsidiary of The Gillette Company, and houses Gillette's principal personal care products testing facility. The Company owns fee simple title to the Property. The Company acquired the Property in September 1996.
25, 35 and 45 West Watkins Mill Road is a three-building, single-story office and laboratory complex located in a master-planned business park known as the Bennington Corporate Center in Gaithersburg, Maryland. Consisting of approximately 139,000 rentable square feet, the brick veneer buildings with black reflective glass windows are constructed of structural steel framework with concrete slab flooring. The Property was completed in January 1989 and acquired by the Company in October 1996. Since that time, the Property has been approximately 93% leased. The Property currently is leased to five tenants, four of whom each lease over 10% of the rentable space. Genetic Therapy, Inc., a wholly owned subsidiary of Novartis AG, a multi-national Swiss pharmaceutical company, and MedImmune, Inc., a publicly traded company focusing on vaccines for infectious diseases, together with an electronics distribution company and a commercial photography company lease over 90% of the Property. The Company owns fee simple title to the Property.
The Company's tax basis in the Property for federal income tax purposes as of December 31, 1996 was approximately $17.6 million. The Property is depreciated using the modified accelerated cost recovery system straight-line method, based on an estimated useful life ranging from 20 to 40 years, depending upon the date of certain capitalized improvements. For the year ended December 31, 1996, the estimated average depreciation rate for the properties under the modified accelerated cost recovery system was 0.52%. The 1996 property taxes on the Property were assessed at an effective annual rate of approximately 1.444%. Such taxes on the Property for the 12 month period ending June 30, 1997 totaled approximately $275,000. The Company does not believe that any capital improvements made during the 12 month period immediately following the Offering should result in an increase in annual property taxes.
1413 Research Boulevard consists of 105,000 rentable square feet of office and laboratory office. This two-building complex was built in two phases in 1967 and 1973, and is located in Rockville, Maryland. The Company acquired this Property in July 1996. The Property is fully leased to the U.S. Army Corps of Engineers for the Walter Reed Army Institute of Research and the Armed Forces Institute of Pathology. The Company owns fee simple title to the Property. A $2.6 million renovation project recently was completed in 1996 with funds provided by the U.S. Army Corps of Engineers to renovate 45,000 square feet of the complex and convert office space to generic laboratory space.
ACQUISITION LLC PROPERTIES
1550 East Gude Drive, consisting of 44,500 rentable square feet, is located in Rockville Maryland. The two-story brick and masonry building was built in 1981 and underwent a complete interior renovation in 1995. The first floor contains primarily laboratory space designed within an open space configuration, and the entire second floor is devoted to office space. The Property is fully leased to Quest Diagnostics, Inc., a subsidiary of Corning, Inc., which has subleased the Property to Shire Laboratory, Inc., a wholly owned subsidiary of Shire Pharmaceuticals Group p.l.c. focusing on the development of advanced drug delivery systems. The Acquisition LLC acquired this property in January 1997. Upon consummation of the Offering and the Formation Transactions, the Company will own fee simple title to the Property.
1330 Piccard Drive, located in Rockville, Maryland, consists of approximately 131,000 rentable square feet of office and laboratory space. The Property was built in two phases in 1978 and 1984, was renovated in 1995 and was acquired by the Acquisition LLC in January 1997. PerImmune, Inc., a privately held company focusing on diagnostic and therapeutic applications for cancer and other diseases, leases the Property. Upon consummation of the Offering and the Formation Transactions, the Company will own fee simple title to the Property.
14225 Newbrook Drive, located in Chantilly, Virginia, was developed by American Medical Laboratories, Inc. ("AML"), a regional clinical laboratory, in 1992. The Acquisition LLC acquired the Property from AML through a sale- leaseback transaction in January 1997 pursuant to which AML will continue to occupy 100% of the Property under a 20-year lease. The approximately 248,000 rentable square foot complex consists of two buildings connected by a 10,000 square foot, two-story open atrium lobby. Building 1, consisting of approximately 162,000 rentable square feet of office and laboratory space, also contains a fully licensed day care center and a 24,288 square foot central plant housing the Property's utility distribution system. Building 2 currently consists of approximately 50,000 rentable square feet of office space and is designed to accommodate three additional floors or up to approximately 50,000 square feet of additional office and laboratory space. Upon consummation of the Offering and the Formation Transactions, the Company will own fee simple title to the Property.
COMPETITION
The Company competes for investment opportunities with various entities, including insurance companies, pension and investment funds, partnerships, developers, investment companies and other REITs. Many of these entities have substantially greater financial resources than the Company. These entities generally may be able to accept more risk than the Company can prudently manage, including risks with respect to the creditworthiness of a tenant or the geographic proximity of its investments. Competition generally may reduce the number of suitable investment opportunities offered to the Company or increase the bargaining power of property owners seeking to sell. Management believes, however, that the Company will be the first publicly traded entity focusing primarily on the acquisition, management, expansion and selective development of Life Science Facilities. See "Target Markets" for a more detailed description of market conditions affecting competition for tenants, including occupancy and rental rates, in each of the Company's primary markets.
INSURANCE
The Company carries comprehensive liability, fire, extended coverage and rental loss insurance with respect to the Properties, with policy specifications, insured limits and deductibles that the Company believes are consistent with those customarily carried for similar properties. The Company has also obtained environmental remediation insurance for the Properties. The insurance, subject to certain exclusions and deductibles, covers the cost to remediate environmental damage caused by unintentional future spills or the historic presence of previously undiscovered hazardous substances. The Company intends to carry similar insurance with respect to future acquisitions as appropriate. In addition, the Company requires its tenants to maintain comprehensive insurance, including liability and casualty insurance, that is customarily obtained for similar properties. There are, however, certain types of losses that are not generally insured because they are either uninsurable or not
economically insurable. In addition, certain disaster-type insurance (covering catastrophic events, such as earthquakes) may not be available or may only be available at rates that, in the opinion of management of the Company, are prohibitive. Many of the Properties are located in the vicinity of potentially active earthquake faults. The Company has obtained earthquake insurance for all of the Properties. Should an uninsured disaster or a loss in excess of insured limits occur, including a loss resulting from earthquake or other seismic activity, the Company could lose its capital invested in the affected properties, as well as the anticipated future revenues from such properties, and would continue to be obligated on any mortgage indebtedness or other obligations related to the properties. Any such loss could adversely affect the Company and its ability to make distributions to stockholders. See "Risk Factors--Uninsured Loss." Management believes that the Properties are currently adequately insured.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws and regulations, a current or previous owner or operator of real estate, as well as certain other parties, may be required to investigate and remediate the effects of hazardous or toxic substances or petroleum product releases on, under, in or from such property, and may be held liable to a governmental entity or to third parties for investigation and cleanup costs and certain damages resulting from such releases. Such laws and regulations typically impose responsibility and liability without regard to whether such person knew of or caused the releases, and the liability under such laws and regulations has been interpreted to be joint and several, unless the harm is divisible and there is a reasonable basis for allocation of responsibility. The cost of investigating and remediating such contamination may be substantial, and the presence of such contamination, or the failure to properly remediate it, may adversely affect the owner's ability to sell or rent such property or to borrow using such property as collateral. In addition, the owner of a site may be subject to governmental fines and common law claims by third parties seeking to recover damages and costs resulting from such contamination.
Certain other federal, state and local laws and regulations govern the management and disposal of ACMs. Such laws and regulations may impose liability for the release of ACMs and may provide for third parties to seek recovery from owners or operators of such property for personal injury associated with ACMs. In connection with the ownership and operation of its properties, the Company may be potentially liable for such costs. ACMs have been detected at certain of the Properties, but are not expected to result in material environmental costs or liabilities to the Company.
Federal, state and local laws and regulations also require the removal or upgrading of certain underground storage tanks and regulate the discharge of storm water, wastewater and any water pollutants, the emission of air pollutants, the generation, management and disposal of hazardous or toxic chemicals, substances or wastes, and workplace health and safety. Life Science Industry tenants, including certain of the Company's tenants, engage in various research and development activities involving the controlled use of hazardous materials, chemicals, biological and radioactive compounds. Although the Company believes that the tenants' activities involving such materials comply in all material respects with applicable laws and regulations, the risk of contamination or injury from these materials cannot be completely eliminated. In the event of such contamination or injury, the Company could be held liable for any damages that result, and any such liability could exceed the Company's resources and its environmental remediation coverage. See "Risk Factors--Lack of Industry Diversification; Reliance on Life Science Industry Tenants."
The Company's leases generally provide that (i) the tenant is responsible for all environmental liabilities relating to the tenant's operations, (ii) the Company is indemnified for such liabilities and (iii) the tenant must comply with all environmental laws and regulations. Such a contractual arrangement, however, does not eliminate the Company's statutory liability or preclude claims against the Company by governmental authorities or persons who are not parties to such an arrangement. Noncompliance with environmental or health and safety requirements may also result in the need to cease or alter operations at a property, which could affect the financial health of a tenant and its ability to make lease payments. In addition, if there is a violation of such a requirement in connection with a tenant's operations, it is possible that the Company, as the owner of the property, could be
held accountable by governmental authorities for such violation and could be required to correct the violation and pay related fines.
All of the Properties have been, and it is contemplated that all future acquisitions will be, subjected to a Phase I or similar environmental assessment (which generally includes a site inspection, interviews and a records review, but no subsurface sampling). These assessments and certain follow-up investigations (including, as appropriate, asbestos, radon and lead surveys, additional public records review, subsurface sampling and other testing) of the Properties have not revealed any environmental liability that the Company believes would have a material adverse effect on the Company's business or results of operations. Nevertheless, it is possible that the assessments on the Properties have not revealed, or that the assessments on future acquisitions will not reveal, all environmental liabilities and that there may be material environmental liabilities of which the Company is unaware.
The Company believes that the Properties are in compliance in all material respects with applicable environmental laws. No assurances can be given, however, that (i) the Company will not incur material liability under current or future environmental laws and regulations or (ii) the current environmental condition of the Properties will not be adversely affected by tenant operations or by environmental conditions in the vicinity of such Properties. See "Risk Factors--Possible Environmental Liabilities."
LEGAL PROCEEDINGS
To the Company's knowledge, no litigation is pending against the Company, other than routine actions and administrative proceedings, substantially all of which are expected to be covered by liability insurance or which, in the aggregate, are not expected to have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing and other
policies of the Company. These policies have been determined by the Board of
Directors and generally may be amended or revised from time to time by the
Board of Directors without a vote of the stockholders, except that (i) the
Company may not enter into certain extraordinary transactions without the
approval of a majority of the stockholders (see "Risk Factors--Influence of
Certain Stockholders" and "Description of Capital Stock--Common Stock") and
(ii) changes in certain policies with respect to conflicts of interest must be
consistent with legal requirements.
INVESTMENT POLICIES
Investment in Real Estate or Interests in Real Estate. The Company's investment objectives are to provide quarterly cash distributions and to achieve long-term capital appreciation through increases in cash flows and the value of the Properties and future acquisitions. See "The Company" and "The Properties" for a discussion of the Properties and the Company's acquisition and other strategic objectives.
The Company intends to pursue its investment objectives primarily through the ownership of the Properties and other Life Science Facilities. The Company also may expand and improve the Properties and future acquisitions or sell such properties, in whole or in part, when circumstances warrant. Under circumstances in which the investment returns to the Company justify the expense, the Company also may undertake selective development of Life Science Facilities. Although the Company intends to focus its activities on Life Science Facilities in its target markets, future activity is not limited to any geographic area or product type or to a specified percentage of the Company's assets. There is no limit on the amount or percentage of the Company's assets that may be invested in any one property or any one geographic area. The Company intends to engage in such activities in a manner consistent with the maintenance of its status as a REIT for federal income tax purposes.
The Company also may participate with third parties in property ownership through joint ventures or other types of co-ownership. Such investments may permit the Company to own interests in larger assets without unduly restricting diversification and, therefore, add flexibility in structuring its portfolio. Equity investments may be subject to existing mortgage financing and other indebtedness or such financing or indebtedness as may be incurred in connection with acquiring or refinancing these investments. Debt service with respect to such financing or indebtedness will have priority over any distributions with respect to capital stock. The Company intends to make investments in such a way that it will not be treated as an investment company under the Investment Company Act of 1940, as amended (the "1940 Act").
Investments in Real Estate Mortgages. Although the Company's current portfolio consists of, and the Company's business objectives emphasize, equity investments in Life Science Facilities, the Company may, in the discretion of the Board of Directors, invest in mortgages and other types of equity real estate interests consistent with the Company's qualification as a REIT. Investments in real estate mortgages run the risk that one or more borrowers may default under such mortgages and that the collateral securing such mortgages may not be sufficient to enable the Company to recoup its full investment. The Company may also retain a purchase money mortgage for a portion of the sale price in connection with the disposition of a property from time to time.
Investments in Securities or Interests in Persons Primarily Engaged in Real Estate Activities and Other Issuers. Although the Company has no present intention to do so, it also may invest in securities of other REITs, other entities engaged in real estate activities, or securities of other issuers (including for the purpose of exercising control over such entities), subject to the percentage of ownership limitations, limitations on ownership of certain types of assets, and the gross income tests necessary for REIT qualification. See "Federal Income Tax Considerations--Taxation of the Company."
DISPOSITION POLICY
Management will periodically review the assets comprising the Company's portfolio. The Company has no current intention to dispose of any of the Properties, although it reserves the right to do so. Disposition decisions
relating to the Company's assets will be made based upon several factors, including but not limited to: (i) the potential for continuing increases in cash flow and value, (ii) the sale price, (iii) the strategic fit of the properties with the Company's portfolio, (iv) the potential for, or the existence of, any environmental or regulatory issues, (v) alternative uses of capital, (vi) maintaining qualification as a REIT and (vii) other tax-related considerations. See "Federal Income Tax Considerations--Taxation of the Company."
FINANCING POLICIES
The Company intends to make additional investments in Life Science Facilities and may incur indebtedness to make such investments or to meet the distribution requirements imposed by the REIT provisions of the Code to the extent that cash flows from the Company's investments and working capital is insufficient. The Company has adopted a policy to limit its total consolidated indebtedness so that at the time any debt is incurred, the Company's debt to total market capitalization ratio does not exceed 50%. Upon consummation of the Offering and the Formation Transactions, the Company's debt to total market capitalization ratio will be approximately 20%. The Company's Charter and Bylaws, however, do not limit the amount or percentage of indebtedness that the Company may incur. The Company may, from time to time, modify its debt policy in light of current economic conditions, relative costs of debt and equity capital, market values of its properties, general conditions in the market for debt and equity securities, fluctuations in the market price of the Common Stock, growth and acquisition opportunities, the Company's continued REIT qualification requirements and other factors. Accordingly, the Company may increase or decrease its debt to total market capitalization ratio beyond the limits described above. If these policies were changed, the Company could become more highly leveraged, resulting in an increased risk of default on its obligations and a related increase in debt service requirements that could adversely affect the Company's financial condition and its ability to make distributions to stockholders. See "Risk Factors--Changes in Policies Without Stockholder Approval" and "--No Limitation on Debt."
The Company has established its debt policy relative to the total market capitalization of the Company computed at the time debt is incurred, rather than relative to the book value of its assets. The Company believes that the book value of its assets (which to a large extent is the depreciated value of real property, the Company's primary tangible asset) does not accurately reflect its ability to borrow and to meet debt service requirements and that a debt to total market capitalization ratio, therefore, provides a more appropriate indication of leverage. A debt to total market capitalization ratio, however, is based, in part, upon the aggregate market value of the outstanding shares of Common Stock and will fluctuate with changes in the price of the Common Stock (and the issuance of additional shares of Common Stock). Accordingly, because the measurement of the Company's total consolidated indebtedness to total market capitalization is made at the time debt is incurred, the debt to total market capitalization ratio could later exceed the 50% level.
To the extent that the Board of Directors desires to obtain additional capital, the Company may raise such capital through additional public and private equity offerings, debt financings, retention of cash flow (subject to satisfying the Company's distribution requirements under the REIT provisions of the Code) or a combination of these methods. The Company's debt may consist of a combination of property level debt and corporate level debt, and financing may consist of floating and/or fixed rate debt. Borrowings may be unsecured or secured by any or all of the assets of the Company and may have full or limited recourse to all or any portion of the assets of the Company. Indebtedness may be in the form of bank borrowings, purchase money obligations to sellers of properties, publicly or privately placed debt instruments or financing from institutional investors or other lenders. The proceeds from any borrowings by the Company may be used (subject to limitations which may be contained in the instruments governing such indebtedness) to pay distributions, to provide working capital, to pay existing indebtedness or to finance acquisitions, expansions or selective development of new properties. The Company has not established any limit on the number or amount of mortgages that may be placed on any single property or on its portfolio.
CONFLICT OF INTEREST POLICIES
The Company has entered into agreements with Messrs. Sudarsky, Marcus, Gold, Stone, Kreitzer and Nelson designed to eliminate or minimize potential conflicts of interest. The respective agreements prohibit each
of them from engaging in any activity competitive with the business of the Company during the term of each such officer's employment agreement with the Company and for any period during which such officer is entitled to severance benefits thereunder. See "Management--Employment Agreements." In addition, the Board of Directors is subject to certain provisions of Maryland law that are designed to eliminate or minimize certain potential conflicts of interest. There can be no assurance, however, that these policies will be successful in eliminating the effects of such conflicts, and if they are not successful, decisions could be made that might fail to reflect fully the interests of all stockholders.
Pursuant to Maryland law, each director will be subject to restrictions on misappropriation of corporate opportunities. In addition, a contract or other transaction between the Company and a director or between the Company and any other corporation or other entity in which a director of the Company is a director or has a material financial interest is not void or voidable solely on the grounds of such interest if (i) the fact of the common directorship is disclosed or known to the Board of Directors (or committee thereof) or the stockholders, as applicable, and the contract or transaction is authorized, approved or ratified by the affirmative vote of a majority of the disinterested directors or the stockholders, or (ii) the transaction is established to have been fair and reasonable to the Company. The Company's Charter provides, however, that directors of the Company who are affiliates of AEW have no obligation to present to the Company opportunities that may be pursued by AEW, unless such opportunities were presented to the director in his capacity as such.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company has authority to offer Common Stock, Preferred Stock or options
to purchase capital stock in exchange for property and to repurchase or
otherwise acquire its Common Stock or other securities in the open market or
otherwise and may engage in such activities in the future. The Board of
Directors, however, has no present intention of causing the Company to
repurchase any capital stock. The Company may issue Preferred Stock from time
to time, in one or more series, as authorized by the Board of Directors
without stockholder approval. See "Description of Capital Stock--Preferred
Stock." The Company has not engaged in trading, underwriting or agency
distribution or sale of securities of other issuers nor has the Company
invested in the securities of other issuers for the purposes of exercising
control (other than with respect to QRS), and does not intend to do so (other
than with respect to (i) the Acquisition LLC, GSA-QRS or other subsidiaries or
(ii) the acquisition of properties). The Company has not made any loans to
third parties, although the Company may in the future make loans to third
parties, including, without limitation, to joint ventures in which it
participates. The Company intends to make investments in such a manner as to
maintain its qualification as a REIT, unless because of circumstances or
changes in the Code (or the Treasury Regulations), the Board of Directors
determines that it is no longer in the best interest of the Company to qualify
as a REIT.
The Company will be required to file reports and other information with the Commission pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange Act"). In addition to applicable legal or NYSE requirements, if any, holders of shares of Common Stock will receive annual reports containing audited financial statements with a report thereon by the Company's independent certified public accountants.
FORMATION AND STRUCTURE
FORMATION AND RELATED TRANSACTIONS
Formation. Holdings filed its Articles of Incorporation in the State of Maryland on September 30, 1993 and was capitalized in January 1994 by its founders, Jerry Sudarsky, Joel Marcus, Alan Gold, Gary Kreitzer and Steven Stone. In connection with such capitalization, Holdings issued securities to Mr. Sudarsky in exchange for cash and to Mr. Marcus in exchange for a promissory note that was subsequently forgiven by Holdings in consideration for services rendered to Holdings. In addition, Holdings issued securities to Messrs. Gold, Kreitzer and Stone in exchange for the assets of Bernardo Capital, Inc., a real estate company, valued by the Board of Directors of Holdings pursuant to arm's length negotiations at $55,640. No independent appraisal of the assets was performed at the time of contribution. Bernardo Capital, Inc. acquired the contributed assets over the duration of its operations from September 1992 through January 1994 at a nominal cost. Messrs. Sudarsky,
Marcus and Gold, are officers and directors of both Holdings and Alexandria and are officers of QRS. Messrs. Sudarsky and Marcus are also directors of QRS.
On October 27, 1994, Alexandria filed its Articles of Incorporation in the State of Maryland. In connection with the formation of Alexandria, and as required by the Company's working capital lender, Holdings contributed substantially all of its assets and liabilities (other than certain outstanding unsecured notes) to Alexandria in exchange for all of the issued and outstanding shares of Common Stock. On September 6, 1996, as required in connection with the PaineWebber Facility, QRS filed its Articles of Incorporation in the State of Maryland. In connection with the formation of QRS, Alexandria contributed 1413 Research Boulevard in Rockville, Maryland to QRS in exchange for all of the issued and outstanding shares of common stock of QRS.
In connection with the refinancing of existing mortgage debt on 1431 Harbor Bay Parkway, prior to consummation of the Offering the Company will form GSA- QRS, a special-purpose entity, of which Alexandria will hold a 99% non- managing interest and QRS will hold a 1% managing interest. In connection with such formation, 1431 Harbor Bay Parkway in Alameda, California will be contributed to GSA-QRS.
Stock Split. Prior to consummation of the Offering, each then outstanding share of Common Stock will be split into 1,765.923 shares of Common Stock (the "Stock Split"). As a result, Holdings will directly own 1,765,923 shares of Common Stock, representing approximately 17.0% of the shares of Common Stock to be outstanding upon consummation of the Offering and the Formation Transactions.
Redemption of Outstanding Shares of Series T Preferred Stock. In December 1994, Alexandria issued four shares of Series T Preferred Stock to each of Messrs. Sudarsky, Marcus and Gold, each of whom are officers and directors of the Company, in connection with certain REIT requirements of the Code. Pursuant to the terms thereof, upon consummation of the Offering, each outstanding share of Series T Preferred Stock will be redeemed for cash in an amount equal to its stated value of $100.
Conversion of Series U Preferred Stock. In January 1996, Alexandria issued 220 shares of Series U Preferred Stock to 126 holders, including certain officers and directors of the Company, in connection with certain REIT requirements of the Code. Upon the effectiveness of the Registration Statement, the outstanding shares of Series U Preferred Stock will be converted into an aggregate of 7,071 shares of Common Stock, representing 0.1% of the shares of Common Stock to be outstanding upon consummation of the Offering and the Formation Transactions.
Conversion of Series V Preferred Stock. In 1996, Alexandria issued 27,500 shares of Series V Preferred Stock to AEW in a series of transactions to raise additional equity capital. Pursuant to the terms of the Series V Preferred Stock, the Company notified AEW that it intended to (i) convert one-half of the outstanding shares of Series V Preferred Stock into shares of Common Stock and (ii) redeem the remaining shares of Series V Preferred Stock for cash. Notwithstanding the option of the Company to effectuate the foregoing conversion and redemption, AEW has exercised its right to convert all of its shares of Series V Preferred Stock into shares of Common Stock. As a result of such conversion (and after giving effect to an approximately 2.4% adjustment to the conversion rate agreed to between AEW and the Company in connection with the Offering), AEW will own 1,659,239 shares of Common Stock, representing approximately 16.0% of the shares of Common Stock to be outstanding upon consummation of the Offering and the Formation Transactions.
Purchase of the Acquisition LLC. Pursuant to the terms of the Agreement for Sale and Purchase of Membership Interests (the "LLC Agreement") entered into between certain affiliates of PaineWebber and the Company on January 13, 1997, the Company assigned its rights to purchase the Acquisition LLC Properties to the Acquisition LLC, which is controlled by PaineWebber Real Estate Holdings Inc. and PW Realty Partners, LLC (the "PW Affiliates"). Thereafter, the Acquisition LLC acquired the Acquisition LLC Properties. In connection with the Offering, and as required by the LLC Agreement, the Company will acquire 100% of the membership interests in the Acquisition LLC from the PW Affiliates. Thereafter, the Company expects that
Alexandria will hold a 99% non-managing interest in the Acquisition LLC, and QRS will hold a 1% managing interest therein. As a result of the acquisition of the membership interests in the Acquisition LLC, the Company will acquire the Acquisition LLC Properties located at 1550 East Gude Drive, Rockville, Maryland, 1330 Piccard Drive, Rockville, Maryland and 14225 Newbrook Drive, Chantilly, Virginia.
Under the terms of the LLC Agreement, the Company is required to acquire the membership interests in the Acquisition LLC upon the earlier to occur of September 30, 1998, the Offering or certain events of default as specified therein. The purchase price for the Acquisition LLC will equal the original purchase price of the Acquisition LLC Properties (as adjusted for certain cash flow amortization from the Acquisition LLC Properties) and a percentage of the aggregate fair market value (as defined) of the Acquisition LLC Properties on the date of purchase of the Acquisition LLC by the Company in excess of the adjusted purchase price. The Company currently anticipates that the purchase price for the membership interests in the Acquisition LLC will be approximately $60.6 million. The terms of the LLC Agreement, including the purchase price, were determined through arm's-length negotiations, and none of the Continuing Investors has any direct or indirect interest in the Acquisition LLC or the Properties owned thereby. In connection with the Offering, PaineWebber agreed to amend the LLC Agreement to reduce the purchase price required to be paid by the Company for the membership interests in the Acquisition LLC by approximately $766,000.
NEW MORTGAGE DEBT
Upon consummation of the Offering and the Formation Transactions, the Company will repay approximately $78.1 million of its existing mortgage debt with a portion of the net proceeds of the Offering, as well as the net proceeds from: (i) a new $8.5 million mortgage loan on 1431 Harbor Bay Parkway and (ii) a new $6.9 million mortgage loan on 1102 and 1124 Columbia Street. The $8.5 million mortgage loan will bear interest at a fixed rate equal to approximately 70 basis points over the interpolated 7-year Treasury rate, which would result in an interest rate of approximately 7.30% (as of May 1, 1997), and will mature in January 2014. The $6.9 million mortgage loan will initially bear interest at a variable rate based on 90 basis points over LIBOR. This rate is anticipated to be fixed (based on the terms of the loan) in August 1997 at a rate equal to approximately 90 basis points over the interpolated 20-year Treasury rate, which would result in a fixed interest rate of approximately 7.70% (as of May 1, 1997). This loan will mature in July 2016.
BENEFITS TO RELATED PARTIES
Accretion in Value. As a result of the Offering and the Formation Transactions, Holdings and the officers and directors of the Company directly will realize an immediate accretion in the net tangible book value per share of Common Stock of $9.11 and $14.94 per share of Common Stock, respectively.
Stock Grants and Stock Options. In connection with the Offering, officers, directors and certain employees of the Company will be granted (i) an aggregate of 152,615 shares of Common Stock and (ii) options to purchase 57,000 shares of Common Stock under the 1996 Plan in substitution for previously granted Holdings Stock Options (such stock options will be exercised in connection with the Offering at a nominal exercise price, and thereafter no further stock options will be issued under the 1996 Plan). In addition to their respective ownership interests in Holdings, upon consummation of the Offering and the Formation Transactions, officers, directors and certain employees of the Company will directly own 209,615 shares of Common Stock, representing approximately 2.0% of the outstanding shares of Common Stock.
The following table lists the number of shares to be issued to officers and directors of the Company and the number of shares issuable upon exercise of stock options under the 1996 Plan.
SHARES OF COMMON
STOCK ISSUABLE
UPON EXERCISE OF
OPTIONS UNDER
SHARES OF COMMON THE 1996 PLAN
NAME STOCK TO BE ISSUED (1)
---- ------------------ ----------------
Jerry M. Sudarsky........................ 5,555 4,164
Joel S. Marcus........................... 54,160 29,140
Alan D. Gold............................. 33,329 7,619
Peter J. Nelson.......................... 3,097 --
Gary A. Kreitzer......................... 13,887 3,822
Steven A. Stone.......................... 13,887 4,212
Vincent R. Ciruzzi....................... 4,166 --
Joseph Elmaleh........................... 3,703 1,190
Viren Mehta.............................. 3,703 1,190
David M. Petrone......................... 3,703 1,190
Anthony M. Solomon....................... 3,703 1,190
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In connection with the Offering, the Company will also grant options to officers, directors and certain employees of the Company to purchase an aggregate of 600,000 shares of Common Stock at the initial public offering price pursuant to the Company's 1997 Stock Option Plan. See "Management-- Benefit Plans." Options granted to officers and directors of the Company under the 1997 Stock Option Plan will vest ratably over a three-year period. Options granted to non-employee directors under the 1997 Stock Option Plan will vest immediately upon the date of grant.
Registration Rights. In connection with the Offering, the Company will grant to Holdings customary transferable registration rights with respect to the shares of Common Stock held by it. See "Shares Eligible for Future Sale."
Related Party Loans and Reimbursements. During 1996, certain stockholders of Holdings, including Jacobs Engineering Group, Inc., Southern Shipping & Energy, Inc., Joseph Jacobs, Jerry Sudarsky, Joseph Flom and Joseph Elmaleh, loaned in the aggregate $2.5 million to Holdings. Such loans mature on June 30, 1997, bear interest at the rate of 10% per annum, and are payable in monthly installments. The proceeds from such loans were subsequently advanced to the Company for general working capital purposes. Holdings will receive $2.5 million from the proceeds of the Offering as repayment of the advance to the Company and will use the proceeds thereof to repay the loans from the stockholders of Holdings. See "Use of Proceeds."
Upon consummation of the Offering and the Formation Transactions, Bernardo Capital, Inc. (a corporation of which Messrs. Gold, Kreitzer and Stone are stockholders) will receive from Holdings approximately $517,000 as reimbursement for certain expenses, including accrued salaries and benefits paid to each of Messrs. Gold, Kreitzer and Stone, incurred in connection with the formation of Holdings in 1993. These funds will be paid by Holdings, and no proceeds of the Offering will be utilized for this purpose. Bernardo Capital, Inc. has had no active operations since January 1994.
Benefits to Lead Managing Underwriter. PaineWebber will receive certain material benefits from the Offering and the Formation Transactions in addition to underwriting discounts and commissions and a fee for structural and advisory services. Certain affiliates of PaineWebber are expected to receive approximately $60.6 million of the net proceeds as consideration for the sale of the Acquisition LLC to the Company and will receive $44.4 million of the net proceeds as repayment of amounts outstanding under the PaineWebber Facility. See "Use of Proceeds," "--Formation and Related Transactions" and "Underwriting."
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND SENIOR MANAGEMENT
The following table sets forth certain information with respect to the directors and executive officers of the Company, as well as certain of its senior management.
NAME AGE POSITION ---- --- -------- Jerry M. Sudarsky....... 78 Chairman of the Board Joel S. Marcus.......... 49 Chief Executive Officer and Director Alan D. Gold............ 36 President and Director Peter J. Nelson......... 39 Chief Financial Officer, Treasurer and Secretary Gary A. Kreitzer........ 42 Senior Vice President and In-House Counsel Steven A. Stone......... 35 Corporate Vice President Vincent R. Ciruzzi...... 34 Vice President Joseph Elmaleh.......... 58 Director Viren Mehta............. 47 Director David M. Petrone........ 52 Director Anthony M. Solomon...... 77 Director |
JERRY M. SUDARSKY has served as the Company's Chairman of the Board of Directors since its inception. Mr. Sudarsky also served as Chief Executive Officer of the Company from its inception until March 1997. Mr. Sudarsky served as Vice Chairman of Jacobs Engineering Group, Inc., an engineering and construction firm, from 1986 to 1994. Mr. Sudarsky has had extensive experience in the design, engineering, construction and operation of commercial properties, including Life Science Facilities. In 1967, Mr. Sudarsky founded and became Chairman of Israel Chemicals, where he served until 1972, and in 1946, he founded Bioferm Corp., a pioneer in the production of Vitamin B12 and the first commercial bio-insecticide products, where he served until 1965.
JOEL S. MARCUS has served as the Company's Chief Executive Officer since March 1997 and has served as a director since inception. Mr. Marcus previously served as the Company's Vice Chairman of the Board and Chief Operating Officer from its inception until his appointment as Chief Executive Officer in March 1997 and as Secretary from inception until Mr. Nelson's appointment as Secretary in April 1997. Mr. Marcus was a partner in the law firm of Brobeck, Phleger & Harrison, and a predecessor firm, from 1986 to 1994, specializing in corporate finance and acquisitions. From 1984 to 1994, he also served as General Counsel and Secretary of Kirin-Amgen, Inc., a joint venture that financed the development of two genetically engineered pharmaceuticals. Mr. Marcus has served on the Board of Directors of Ariad Pharmaceuticals, a publicly traded biotechnology company, since 1995. Mr. Marcus was formerly a practicing Certified Public Accountant specializing in the financing and taxation of real estate, including REITs. Mr. Marcus has a broad-based network of working relationships in the real estate and Life Science industries. He received his undergraduate and Juris Doctor Degrees from the University of California at Los Angeles and is a member of NAREIT.
ALAN D. GOLD has served as President and a director of the Company since its inception. Mr. Gold previously served as the Company's Treasurer from inception until Mr. Nelson's appointment as Treasurer in April 1997. Mr. Gold has served as managing partner of GoldStone Real Estate Finance and Investments, a partnership engaged in the real estate and mortgage business, since 1989. The partnership ceased active operations in January 1994. He also served as Assistant Vice President of Commercial Real Estate for Northland Financial Company, a full service commercial property mortgage banker, from 1989 to 1990 and as Real Estate Investment Officer-Commercial Real Estate for John Burnham Company, a regional full service real estate company, from 1985 to 1989. Mr. Gold received his Bachelor of Science Degree in Business Administration and his Master of Business Administration with an emphasis in real estate finance from San Diego State University.
PETER J. NELSON has served as the Chief Financial Officer, Treasurer and Secretary of the Company since April 1997. Prior to joining the Company, from 1995 to 1997, Mr. Nelson served as Chief Financial Officer of
Lennar Partners, a diversified real estate company, where he was responsible for the financial management of the firm's real estate portfolio. From 1990 to 1995, Mr. Nelson was Chief Financial Officer of Westrec Properties, Inc., a national owner and operator of boat marinas and resort properties. Mr. Nelson also served as Vice President, Corporate Financial Planning at Public Storage, Inc. from 1986 to 1990, and as an Audit Manager at Ernst & Young LLP from 1979 to 1986. Mr. Nelson is a Certified Public Accountant and a member of the American Institute of CPAs and the California Society of CPAs where he has served on the Real Estate Committee. Mr. Nelson received his Bachelor of Science Degree from California State University.
GARY A. KREITZER has served as Senior Vice President and In-House Counsel of the Company since its inception. From 1990 to 1994, Mr. Kreitzer was In-House Counsel and Vice President for Seawest Energy Corporation, an alternative energy facilities development company. Mr. Kreitzer also served as In-House Counsel, Secretary and Vice President for The Christiana Companies, Inc., a publicly traded investment and real estate development company from 1982 to 1989. Mr. Kreitzer received his Juris Doctor Degree, with honors, from the University of San Francisco and a Bachelor of Arts Degree in economics from the University of California, San Diego. Mr. Kreitzer is a member of the California State Bar, the American Bar Association and the American Corporate Counsel Association.
STEVEN A. STONE has served as Corporate Vice President of the Company since its inception. Since 1989, Mr. Stone has served as a partner in GoldStone Real Estate Finance and Investments, which ceased active operations in January 1994. Mr. Stone served as Asset Manager for Baldwin Industrial Properties, Ltd., a commercial real estate developer, from 1986 to 1989, Assistant to Vice President-Business and Real Estate Development at Grant General Contractors from 1986 to 1989, and Appraiser for the Bank of America from 1983 to 1984. Mr. Stone holds a Bachelor of Science Degree in Business Administration from San Diego State University.
VINCENT R. CIRUZZI has served as a Vice President of the Company since September 1996. In 1993, Mr. Ciruzzi founded a real estate consulting business, which provided consulting services to the Company from September 1995 until his appointment as Vice President. Mr. Ciruzzi served as Project Manager for Home Capital Development Corporation, a real estate development company, from 1986 to 1993, where he specialized in project management of master planned communities as well as real estate development. Mr. Ciruzzi received his Bachelor of Science Degree in Finance and Real Estate from the University of Southern California.
JOSEPH ELMALEH has served as a director of the Company since its inception. Dr. Elmaleh is a chemical engineer and international financier, with businesses in the United States, Europe and the Middle East. He served as Chairman and Chief Executive Officer of Passport Ltd., an oil and gas and real estate company, from 1989 to 1995 and of J.O.E.L. Ltd., an oil and gas and real estate company, from 1981 to 1995. Dr. Elmaleh also served as Chairman, Chief Executive Officer and a director of Isramco, Inc., a publicly traded oil and gas exploration company, from 1981 to 1996. Dr. Elmaleh has been a director of Panatech Research and Development Inc., a manufacturer of tips for spray guns, since 1980. Dr. Elmaleh received his Bachelor of Science Degree in chemical engineering from the Technion-Israel Institute of Technology and his Doctorate in Operations Research from the Imperial College of Science and Technology, London.
VIREN MEHTA has served as a director of the Company since January 1995. Since 1989, Mr. Mehta has been a partner of Mehta and Isaly, a pharmaceutical and biotechnology industry advisory and investment firm. Mr. Mehta served as a Vice President at S.G. Warburg & Co., Inc., a merchant bank, from 1987 to 1989. In 1986, he established the pharmaceutical investment research division in Wood MacKenzie & Company Inc., New York, of which he became a Vice President and served until 1987. Mr. Mehta also worked with the international division of Merck & Co., a pharmaceutical manufacturer, from 1983 to 1986. Mr. Mehta received his Doctor of Pharmacy Degree from the University of Southern California and his Master of Business Administration from the University of California at Los Angeles.
DAVID M. PETRONE has served as a director of the Company since its inception. Mr. Petrone has been Chairman of the Board of Housing Capital Corporation, a real estate finance company, since 1994. From 1986
until 1992, Mr. Petrone was Vice Chairman of the Board of Wells Fargo and Company. Mr. Petrone also served as Chief Executive Officer and President of Wells Fargo Realty Advisors from 1978 to 1981 and of Wells Fargo Mortgage and Equity Trust, a publicly held REIT, from 1981 to 1988. Mr. Petrone has served as a director of Jacobs Engineering Group, Inc. since 1986 and of Spieker Properties, a publicly held REIT, since 1993. He received his Bachelor of Science and Master of Business Administration Degrees from the University of Oregon.
ANTHONY M. SOLOMON has served as a director of the Company since October 1994. Mr. Solomon is an economist and banker and has served as Chairman of The Blackstone Alternate Asset Management Advisory Board since 1994. Mr. Solomon also has served as Chairman of The Europe Fund, a closed end fund investing in Europe since 1990 and of The United Kingdom Fund, a closed end fund investing in the United Kingdom since 1987. Mr. Solomon has served as an economic advisor to the Banca Comerciale Italiana since 1985. Mr. Solomon was a director of S.G. Warburg p.l.c. London from 1985 until 1991 and Chairman of S.G. Warburg USA from 1985 until 1989. Mr. Solomon also served as President and Chief Executive Officer of the Federal Reserve Bank of New York from 1980 to 1985 and was Under Secretary of the Treasury from 1977 to 1980. Mr. Solomon received his Bachelor of Arts Degree in Economics from the University of Chicago and his Masters Degree in Economics and Public Administration from Harvard University.
ELECTION OF DIRECTORS AND DIRECTOR COMPENSATION
All directors are elected to hold office until the next annual meeting of stockholders of the Company and until their successors are duly elected and qualify. Pursuant to an agreement with the Company, AEW has the right to include two nominees on the ballot for the election of directors of the Company, and one nominee on the ballot for the election of directors of QRS, so long as AEW owns Common Stock representing more than 15% of the voting securities of the Company, and the right to include one nominee on the ballot for the election of directors of the Company so long as AEW owns Common Stock representing more than 7% of such securities. Holdings has agreed to vote its shares of Common Stock for such nominees included on the ballot for the election of directors of the Company, and the Company has agreed to take all actions necessary to cause the election of the nominee at QRS. No directors currently serve on the board of directors of the Company or QRS pursuant to such arrangement, although AEW may, at its discretion, exercise its right to include nominees on the ballot in the future. If, at any time, AEW's ownership of Common Stock represents less than 15% of the voting securities of the Company, within 10 days of such decrease in ownership, AEW has agreed to cause one director elected or nominated by it to resign from the Board of Directors and all committees thereof, and from the board of directors of QRS and all committees thereof. Upon AEW's ownership of Common Stock decreasing to less than 7% of the outstanding voting securities of the Company, within 10 days of such decrease in ownership, AEW shall cause all directors nominated by it pursuant to this arrangement to resign from the Board of Directors and all committees thereof. Upon consummation of the Offering and the Formation Transactions, AEW will own approximately 16.0% of the outstanding Common Stock. See "Formation and Structure--Benefits to Related Parties."
Following the Offering, the Company intends to pay each of its non-employee directors annual compensation of $12,000 for their services. In addition, each non-employee director will receive a fee of $1,000 for each meeting of the Board of Directors attended in person and $500 for attendance at each telephonic meeting of the Board of Directors, and will be reimbursed for reasonable expenses incurred to attend director and committee meetings. Non- employee directors also will be eligible to receive options to purchase Common Stock as compensation for their service as directors under the 1997 Stock Option Plan. Officers of the Company who are also directors will not be paid any fees for services as directors. Prior to the Offering, non-employee directors received no annual compensation for their services but were entitled to stock options under the 1996 Stock Option Plan and to reimbursement for reasonable expenses incurred to attend director and committee meetings. Directors of the Company will also receive certain benefits in connection with the Offering and the Formation Transactions. See "Formation and Structure."
COMMITTEES OF THE BOARD OF DIRECTORS
The Board currently has two committees, the principal functions of which are described below. The Board of Directors may, from time to time, establish other committees, composed of one or more directors, and delegate to such committees various powers, to the extent permitted by Maryland law.
The Audit Committee, among other things, recommends the firm to be appointed as independent accountants to audit the Company's financial statements, discusses the scope and results of the audit with the independent accountants, reviews with management and the independent accountants the Company's interim and year-end operating results, considers the adequacy of the internal accounting controls and audit procedures of the Company and reviews the non- audit services to be performed by the independent accountants. The members of the Audit Committee currently are Messrs. Petrone and Elmaleh.
The Compensation Committee has authority to, among other things, renew and approve salary arrangements, including annual incentive awards, for directors, officers and other employees of the Company; adopt and amend employment agreements for officers and other employees of the Company; and administer the Company's option and other incentive plans. Members of the Compensation Committee currently include Messrs. Sudarsky, Elmaleh and Petrone. Mr. Sudarsky will resign from the Compensation Committee immediately prior to consummation of the Offering.
EXECUTIVE COMPENSATION
The following table sets forth, in summary form, the compensation paid by the Company to its Chief Executive Officer and the four other most highly compensated executive officers of the Company (the "Named Executive Officers") for services rendered to the Company in all capacities for the year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
ANNUAL LONG TERM COMPENSATION
COMPENSATION(1) AWARDS
------------------ ----------------------
SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS(2) YEAR SALARY($) BONUS($) OPTIONS (#) COMPENSATION($)
- ------------------------------- ---- --------- -------- ---------------------- ---------------
Jerry M. Sudarsky....... 1996 $244,339 -- -- --
Chairman of the Board
Joel S. Marcus.......... 1996 $213,797 $100,000 369(3) $6,343(4)
Chief Executive Officer
and Director
Alan D. Gold............ 1996 $179,076 $ 65,000 -- $1,510(5)
President and Director
Gary A. Kreitzer........ 1996 $127,260 $ 35,000 -- $2,300(6)
Senior Vice President
and In-House Counsel
Steven A. Stone......... 1996 $ 95,260 $ 35,000 -- $1,194(7)
Corporate Vice
President
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(1) While each of the five named individuals received perquisites or other
personal benefits in the years shown, in accordance with applicable
regulations, the value of these benefits is not indicated because they did
not exceed in the aggregate the lesser of $50,000 or 10% of the
individual's salary and bonus in 1996.
(2) During 1996, Mr. Sudarsky served as Chairman of the Board and Chief
Executive Officer; Mr. Marcus served as Vice Chairman of the Board, Chief
Operating Officer and Secretary; and Mr. Gold served as President,
Treasurer and Director.
(3) In 1996, Holdings granted to Mr. Marcus a non-qualified option under the
1994 Plan to purchase 369 shares of common stock of Holdings exercisable
at $2.55 per share. As of January 28, 1997, the value of the shares of
common stock of Holdings subject to the option was $6.91 per share. In
connection with the Offering, the Company will grant to Mr. Marcus an
option under the 1996 Plan to purchase 1,756 shares of Common Stock in
substitution for such option, which will be fully vested and exercisable
at a nominal exercise price. Such option will be exercised in connection
with the Offering. See "Formation and Structure--Benefits to Related
Parties."
(4) Consists of $1,540 paid by the Company for term life insurance premiums,
$2,767 for individual disability insurance premiums and $2,036 for long-
term disability insurance premiums.
(5) Consists of $948 paid by the Company for individual disability insurance
premiums and $562 for long-term disability insurance premiums.
(6) Consists of $1,060 paid by the Company for term life insurance premiums
and $1,240 for long-term disability insurance premiums.
(7) Consists of $820 paid by the Company for term life insurance premiums and
$374 for long-term disability insurance premiums.
BENEFIT PLANS
1997 Stock Option Plan. The Company will adopt a stock option and incentive plan (the "1997 Stock Option Plan") prior to consummation of the Offering. The 1997 Stock Option Plan will be administered by the Compensation Committee of the Board of Directors. The 1997 Stock Option Plan is expected to provide for the grant of incentive stock options intended to qualify as such under Section 422 of the Code, non-qualified stock options, stock appreciation rights and restricted stock to employees, officers, directors and independent contractors (including non-employee directors) of the Company with respect to 900,000 shares of Common Stock; provided, that incentive stock options may be granted only to employees of the Company. The 1997 Stock Option Plan will permit the Compensation Committee to select eligible employees, officers, directors and independent contractors (including non-employee directors) of the Company to receive awards, to determine the type and number of awards to be granted and to determine the terms, conditions, restrictions and performance criteria relating to any award. In connection with the Offering, the Company will grant options to officers, directors and certain employees of the Company under the 1997 Stock Option Plan with respect to an aggregate of 600,000 shares of Common Stock. See "Formation and Structure--Benefits to Related Parties."
1996 Stock Option Plan. Options may be granted under the Company's Amended and Restated 1996 Stock Option Plan ("1996 Plan") to employees and non- employee directors of the Company. Options issued under the 1996 Plan may be either incentive stock options intended to qualify as such under Section 422 of the Code or non-qualified stock options; provided, that incentive stock options may be granted only to employees of the Company. Recipients of stock options must enter into a written stock option agreement with the Company. As adjusted for the Stock Split, there are 423,134 shares of Common Stock reserved for issuance under the 1996 Plan, of which 382,985 shares are currently eligible for issuance thereunder. No options or stock appreciation rights were granted under the 1996 Plan for the year ended December 31, 1996, and no Named Executive Officer exercised options during such period. Moreover, as of December 31, 1996, no Named Executive Officer held unexercised options granted pursuant to the 1996 Plan. Following consummation of the Offering, no further grants of options will be made under the 1996 Plan.
Unless otherwise determined by the administrator of the 1996 Plan (the "Administrator"), options granted to non-employee members of the Board of Directors are exercisable immediately, and options granted to other eligible employees may be exercised as follows: 50% of the option shares, one year following the grant date, 75% of the option shares, two years following the grant date and 100% of the option shares, three years following the grant date. The Administrator may waive such installment exercise provisions at any time based on such factors as the Administrator may determine in its sole discretion. No stock option is exercisable more than ten years after the date such stock option is granted.
Any option that is outstanding and not yet fully exercisable under the 1996
Plan shall become fully and immediately exercisable upon (i) the termination
of the employment of the option holder by reason of death or disability or by
the Company without "cause" or by the option holder for "good reason," if and
to the extent that either term is defined in any employment or similar
agreement between the option holder and the Company, (ii) the consummation of
an underwritten initial public offering of Common Stock by the Company or
(iii) a change in control (as defined in the 1996 Plan).
The purchase price for shares issued to an optionee upon exercise of an option is the price determined by the Administrator at the time of grant and may not be less than the Fair Market Value (as defined in the 1996 Plan) of the Common Stock as of the grant date.
Holders of options granted under Holdings' 1994 Stock Option Plan, as amended, or Holdings' 1994 Stock Option Plan for Non-Employee Directors, as amended ("Holdings Stock Options"), may be eligible to be granted substitute stock options under the 1996 Plan in the event of certain changes in the capital or corporate structure of the Company or a subsidiary of the Company, including an initial public offering of the Common Stock. Substitute stock options will be granted under the 1996 Plan in substitution for then outstanding Holdings Stock Options to the extent that the Administrator determines, in its sole discretion, that the grant of substitute stock options is necessary to provide that holders of Holdings Stock Options not be deprived of benefits to which
they would otherwise have been entitled had such event or events not occurred. Any grant of a substitute stock option will be subject to the prior cancellation and surrender of the corresponding Holdings Stock Option. The terms and conditions of substitute stock options shall be substantially equivalent to those of the Holdings Stock Options in respect of which the substitute stock options are granted.
Each substitute stock option will entitle the holder to purchase that number of shares of Common Stock equal to the product of (i)(a) the fair market value of a share of Holdings common stock divided by (b) the fair market value of a share of Common Stock (the "Conversion Ratio") and (ii) the number of shares of Holdings' common stock subject to such option (rounded to the nearest whole share). The exercise price of the substitute stock option will be equal to the per share exercise price of the Holdings Stock Option divided by the Conversion Ratio (rounded to the nearest cent). The Company intends to grant substitute stock options under the 1996 Plan in connection with the Offering. See "Formation and Structure." All of such options will be exercised in connection with the Offering.
401(k) Plan. The Company adopted its 401(k) Plan (the "401(k) Plan")
effective January 1, 1997. Each employee of the Company may enroll in the
401(k) Plan on such employee's date of hire. An employee actively employed by
the Company is eligible to receive a matching contribution under the 401(k)
Plan. Plan participants are immediately vested in their contributions to the
401(k) Plan and the matching contributions by the Company. The 401(k) Plan
permits each participant to elect to defer up to 15% of base compensation,
subject to the annual statutory limitation prescribed by Section 402(g) of the
Code, on a pre-tax basis. The Company will make matching contributions equal
to 50% of each participant's contribution.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with each of Messrs. Sudarsky, Marcus, Gold, Kreitzer, Stone and Nelson. Mr. Sudarsky's employment agreement previously provided that commencing on January 1, 1997 and ending on December 31, 2000, he would serve as Chairman of the Board of Directors. In connection with the Offering, Mr. Sudarsky's employment agreement was amended to provide that, upon consummation of the Offering, Mr. Sudarsky will retire from employment with the Company and will continue to serve as non-executive Chairman of the Board with no annual salary (other than the payment of directors' fees) for a term that ends upon the next annual election of officers. The amendment also provides that Mr. Sudarsky will begin receiving an annual retirement benefit of $150,000 per year for the first three years following the consummation of the Offering, at which time his benefit will be reduced to $90,000 per year plus an annual cost of living increase of 2%. Through the closing of the Offering, Mr. Sudarsky will be paid a base salary of $240,000 per year.
Mr. Marcus' employment agreement provides that he will serve as the Company's Chief Executive Officer through December 31, 2000. Mr. Marcus' employment agreement provides for automatic one-year extensions until either Mr. Marcus or the Company notifies the other that such party does not wish to extend the agreement. Mr. Marcus will be paid a base salary of $235,000 per year.
The employment agreements with each of Messrs. Gold, Kreitzer and Stone provide for a term ending on December 31, 1998, and, with respect to Mr. Nelson, on April 3, 1998, in each case with provision for automatic one-year extensions until either the executive or the Company notifies the other that such party does not wish to extend the agreement. Messrs. Gold, Nelson, Kreitzer and Stone are paid base salaries of $190,000, $165,000, $140,000 and $105,000 per year, respectively.
Each of the employment agreements with Messrs. Marcus, Gold, Nelson, Kreitzer and Stone provides that such executive will be entitled to a discretionary annual bonus and that his base salary will be subject to annual increases, each as may be determined by the Board of Directors or a committee thereof. In connection with the Offering, the employment agreements with Messrs. Marcus and Gold were amended to eliminate the stated minimums with respect to such officers' annual bonus. In connection with the Offering, in March 1997 the Company agreed to pay bonuses to Messrs. Marcus and Gold in the amount of $352,500 and $190,000, respectively, in consideration for past services and the amendment of such employment agreements.
The employment agreements with each of Messrs. Marcus, Gold, Nelson, Kreitzer and Stone also provide for standard employee benefits, including, without limitation, participation in the Company's pension, welfare and stock incentive plans, to the extent the Company maintains any such plans. In addition, the employment agreements with each of Messrs. Marcus, Gold, Kreitzer and Stone provide that the Company will maintain term life insurance on the life of each executive in the aggregate amount of $1 million.
Each of the employment agreements with Messrs. Marcus, Gold, Kreitzer and Stone provides that if the Company terminates the executive's employment without "cause" or if the executive terminates his employment for "good reason" (each as defined in the employment agreements), then such executive shall be entitled to receive a severance payment ("Severance Payment"), payable in monthly installments (except that portion of the Severance Payment that represents the executive's bonus will be payable on the dates such amounts would have been paid had such executive continued in the Company's employment), equal to the sum of his base salary plus bonus otherwise payable during the remainder of the term of his agreement (the "Severance Period"); provided, however, that if any of Messrs. Marcus, Gold, Kreitzer or Stone terminates his employment for "good reason" following a "change in control" (as defined), then such executive shall be entitled to receive a lump sum Severance Payment equal to three times the sum of his base salary plus bonus otherwise payable during the remaining term of the agreement. Upon termination by reason of death or disability, Mr. Marcus will receive a Severance Payment equal to the sum of his base salary and bonus otherwise payable during the remaining term of his agreement. In the event that any such executive is entitled to any Severance Payment, he will also be entitled to full and immediate vesting of all awards granted under any of the Company's stock option or incentive compensation plans and continued participation throughout the Severance Period in all employee welfare and pension benefits plans. In addition, in the event that amounts payable to executive are subject to the excise tax imposed under Section 4999 of the Code, the Company will provide such executive with a tax "gross up" payment in an amount sufficient to offset the effects of such excise tax. Mr. Nelson's agreement provides that if he is terminated for any reason other than "cause" (as defined in the agreement), he will receive a Severance Payment, payable in monthly installments, equal to seven and one-half months of his base salary.
The employment agreements with each of Messrs. Sudarsky, Marcus, Gold, Nelson, Kreitzer and Stone also provide that during the term of employment, and any period, if any, which such executive is entitled to receive Severance Payments, such executive will not engage in any activity competitive with the business of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From January 1, 1996 through September 9, 1996, Messrs. Sudarsky, Marcus, Gold, Petrone, Mehta, Elmaleh and Solomon constituted the Board of Directors of each of Holdings and Alexandria, and Messrs. Sudarsky, Petrone and Elmaleh constituted the Compensation Committee of each such entity. From September 9, 1996 through March 14, 1997, Thomas Eastman and Thomas Nolan, each an AEW nominee, also served on the Board of Directors of Alexandria. In addition, on September 9, 1996, Mr. Elmaleh resigned from the Compensation Committee of Alexandria, and Mr. Eastman served thereon until December 5, 1996, at which time he was replaced by Mr. Nolan, who resigned from the Compensation Committee in March 1997. In March 1997, Mr. Elmaleh was reappointed to the Compensation Committee.
Messrs. Sudarsky, Petrone, Elmaleh, Eastman and Nolan each served on the Compensation Committee during 1996. Mr. Sudarsky also served as Chief Executive Officer of the Company during 1996. Messrs. Kreitzer and Stone, executive officers of the Company, serve on the Board of Directors of Bernardo Capital, Inc. Mr. Gold, an executive officer of Bernardo Capital, Inc., serves as a director of the Company. Bernardo Capital, Inc. has had no active operations since January 1994. See "Formation and Structure--Benefits to Related Parties."
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting
from (i) actual receipt of an improper benefit or profit in money, property or services or (ii) active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Charter of the Company contains a provision that eliminates such liability to the maximum extent permitted by the MGCL.
The Charter authorizes the Company, to the maximum extent permitted by Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (i) any present or former director or officer or (ii) any individual who, while a director or officer of the Company and at the request of the Company, serves or has served another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee from and against any claim or liability to which such person may become subject or to which such person may incur by reason of his or her serving as a present or former director or officer of the Company.
The Bylaws obligate the Company, to the maximum extent permitted by Maryland law, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (i) any present or former director or officer who is made a party to the proceeding by reason of his service in that capacity or (ii) any individual who, while a director or officer of the Company and at the request of the Company, serves or has served another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee and who is made a party to the proceeding by reason of his service in that capacity. The Charter and Bylaws also permit the Company, with the approval of the Board of Directors, to indemnify and advance expenses to any person who served a predecessor of the Company in any of the capacities described above and to any employee or agent of the Company or a predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service in those or other capacities unless it is established that (i) the act
or omission of the director or officer was material to the matter giving rise
to the proceeding and (a) was committed in bad faith or (b) was the result of
active and deliberate dishonesty, (ii) the director or officer actually
received an improper personal benefit in money, property or services or
(iii) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However,
under the MGCL, a Maryland corporation may not indemnify for an adverse
judgment in a suit by or in the right of the corporation. In addition, the
MGCL requires the Company, as a condition to advancing expenses, to obtain a
written affirmation by the director or officer of his good faith belief that
he has met the standard of conduct necessary for indemnification by the
Company as authorized by the Bylaws and a written statement by or on his
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
Each of the employment agreements with Messrs. Sudarsky, Marcus, Gold, Nelson, Kreitzer and Stone requires that the Company indemnify such officers to the maximum extent permitted by Maryland law, and to pay such persons' expenses in defending any civil or criminal proceeding in advance of final disposition of such proceeding.
CERTAIN TRANSACTIONS
Jacobs Engineering Group, Inc., a stockholder of Holdings, subleases space to the Company in Pasadena, California. The Company paid $3,762 per month plus expenses to Jacobs Engineering Group, Inc. in 1996 under such sublease. The terms of the sublease, which expires on October 30, 1997, were determined through arm's-length negotiations. Jacobs Engineering Group, Inc. also has, from time to time, provided non-exclusive consulting, engineering, design and related services to the Company. The Company has not paid any fees to Jacobs Engineering Group, Inc. for such services. Mr. Petrone, a director of the Company, is also a director of Jacobs Engineering Group, Inc.
Holdings, a stockholder of the Company, will receive $2.5 million from the proceeds of the Offering as repayment of an advance made to the Company for general working capital purposes. Such proceeds will be used by Holdings to repay certain loans from stockholders of Holdings. See "Use of Proceeds" and "Formation and Structure--Benefits to Related Parties."
A partner of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to the Company and Holdings, owns certain debt and equity securities of Holdings and will receive $197,500 from Holdings in connection with the Offering as repayment of certain loans made to Holdings that were advanced to the Company for general working corporate purposes. During 1996, the Company paid $1.4 million to Skadden, Arps, Slate, Meagher & Flom LLP for legal services provided to the Company. See "Formation and Structure."
Upon consummation of the Offering and the Formation Transactions, Bernardo Capital, Inc. (a corporation of which Messrs. Gold, Kreitzer and Stone are stockholders) will receive from Holdings approximately $517,000 as reimbursement for certain expenses, including accrued salaries and benefits paid to each of Messrs. Gold, Kreitzer and Stone, incurred in connection with the formation of Holdings in 1993. These funds will be paid by Holdings, and no proceeds of the Offering will be utilized for this purpose. See "Use of Proceeds" and "Formation and Structure--Benefits to Related Parties."
In December 1994, Alexandria issued four shares of Series T Preferred Stock to each of Messrs. Sudarsky, Marcus and Gold, each of whom are officers and directors of the Company, in connection with certain REIT requirements of the Code. Pursuant to the terms thereof, upon consummation of the Offering, each outstanding share of Series T Preferred Stock will be redeemed for cash in an amount equal to its stated value of $100. See "Formation and Structure."
In January 1996, Alexandria issued 220 shares of Series U Preferred Stock to 126 holders, including certain officers and directors of the Company (or members of their immediate families), in connection with certain REIT requirements of the Code. Upon the effectiveness of the Registration Statement, the outstanding shares of Series U Preferred Stock will be converted into an aggregate of approximately 7,071 shares of Common Stock, representing 0.1% of the shares of Common Stock to be outstanding upon consummation of the Offering and the Formation Transactions. See "Formation and Structure."
In 1996, Alexandria issued 27,500 shares of Series V Preferred Stock to AEW in a series of transactions to raise additional equity capital. In connection with the issuance of the Series V Preferred Stock, the Company granted to AEW certain registration rights with respect to the shares of Common Stock to be received in exchange for its shares of Series V Preferred Stock. See "Shares Eligible for Future Sale." The terms of the Series V Preferred Stock were determined through arm's-length negotiations. As a result of the conversion of the shares of Series V Preferred Stock, AEW will own 1,659,239 shares of Common Stock, representing approximately 16.0% of the shares of Common Stock to be outstanding upon consummation of the Offering and the Formation Transactions. See "Formation and Structure."
In connection with the Offering, as compensation for services rendered to the Company, officers, directors and certain employees of the Company will be granted an aggregate of 152,615 shares of Common Stock. In addition, in connection with the Offering, officers, directors and certain employees of the Company will be granted options to purchase 57,000 shares of Common Stock pursuant to the Company's existing stock option
plan in substitution for previously granted Holdings Stock Options (such stock options will be exercised in connection with the Offering at a nominal exercise price and thereafter no further stock options will be issued under this plan). In connection with the Offering, the Company will grant options to officers, directors and certain employees of the Company to purchase an aggregate of 600,000 shares of Common Stock at the initial public offering price under the 1997 Stock Option Plan. See "Formation and Structure--Benefits to Related Parties." Options granted to officers and directors of the Company under the 1997 Stock Option Plan will vest ratably over a three-year period. Options granted to non-employee directors under the 1997 Stock Option Plan will vest immediately upon the date of grant.
In connection with the Offering, the Company will grant to Holdings customary transferable registration rights with respect to the shares of Common Stock held by it. See "Shares Eligible for Future Sale."
In connection with the Offering, and as required by the LLC Agreement, the Company will acquire 100% of the membership interests in the Acquisition LLC from the PW Affiliates. The Company currently anticipates that the purchase price for the Acquisition LLC will be approximately $60.6 million. The purchase price was determined through arm's-length negotiations and will equal the original purchase price of the Acquisition LLC Properties (as adjusted for certain cash flow amortization from the Acquisition LLC Properties) and a percentage of the aggregate fair market value of the Acquisition LLC Properties on the date of purchase of the membership interests in the Acquisition LLC by the Company in excess of the adjusted purchase price. The aggregate fair market value on the date of purchase of the Acquisition LLC by the Company will be based on the "IPO Multiple" (as defined in the LLC Agreement) and "Funds From Operations generated by the Properties" (as defined in the LLC Agreement). In addition, PaineWebber, lead managing Underwriter of the Offering, and certain of its affiliates, will receive certain other benefits in connection with the Offering. In connection with the Offering, PaineWebber agreed to amend the LLC Agreement to reduce the purchase price required to be paid by the Company for the membership interests in the Acquisition LLC by approximately $766,000. See "Use of Proceeds," "Formation and Structure" and "Underwriting."
SHARE OWNERSHIP
PRINCIPAL STOCKHOLDERS OF ALEXANDRIA
The following table sets forth certain information as of April 30, 1997 regarding the beneficial ownership of the Common Stock with respect to (i) each director of the Company, (ii) each Named Executive Officer, (iii) each person known by the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock and (iv) all directors and executive officers as a group, assuming exercise of options to purchase 57,000 shares of Common Stock to be granted under the 1996 Plan and the issuance of 152,615 shares of Common Stock in connection with the Offering. The following table excludes options to purchase 600,000 shares of Common Stock to be granted to officers, directors and certain employees under the Company's 1997 Stock Option Plan. See "Formation and Structure--Benefits to Related Parties."
PERCENTAGE
BENEFICIALLY
NUMBER OF SHARES OWNED
BENEFICIALLY -----------------
OWNED PRIOR TO PRIOR TO AFTER
BENEFICIAL OWNER(1) OFFERING OFFERING OFFERING
- ------------------- ---------------- -------- --------
Jerry M. Sudarsky(2)....................... 1,775,642 89.9% 17.1%
Joel S. Marcus(3).......................... 1,846,223 93.5 17.8
Alan D. Gold(4)............................ 1,806,871 91.5 17.4
Gary A. Kreitzer........................... 17,709 * *
Steven A. Stone............................ 18,099 * *
Joseph Elmaleh(5).......................... 1,770,816 89.6 17.0
Viren Mehta................................ 4,893 * *
David M. Petrone........................... 4,893 * *
Anthony M. Solomon......................... 4,893 * *
Holdings(6)................................ 1,765,923 89.4 17.0
AEW Partners II, L.P.
225 Franklin Street
Boston, Massachusetts(7).................. -- * 16.0
Executive officers and directors as a group
(10 persons)(8)........................... 1,958,367 99.1 18.0
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(2) Includes 1,765,923 shares owned by Holdings, which may be deemed to be beneficially owned by Mr. Sudarsky. Mr. Sudarsky disclaims beneficial ownership of the shares of Common Stock owned by Holdings.
(3) Includes 1,765,923 shares owned by Holdings, which may be deemed to be beneficially owned by Mr. Marcus. Mr. Marcus disclaims beneficial ownership of the shares of Common Stock owned by Holdings.
(4) Includes 1,765,923 shares owned by Holdings, which may be deemed to be beneficially owned by Mr. Gold. Mr. Gold disclaims beneficial ownership of the shares of Common Stock owned by Holdings.
(5) Includes 1,765,923 shares owned by Holdings, which may be deemed to be
beneficially owned by Mr. Elmaleh. Mr. Elmaleh disclaims beneficial
ownership of the shares of Common Stock owned by Holdings.
(6) Each of Messrs. Sudarsky, Marcus, Gold and Elmaleh is a member of the
board of directors and a stockholder of Holdings. See "--Certain
Beneficial Ownership of Holdings." As a result, each such individual may
be deemed to be the beneficial owner of the shares of Common Stock owned
by Holdings. In addition, Jacobs Engineering Group, Inc. and an affiliate
own approximately 26.1% of the outstanding voting securities of Holdings
but disclaim beneficial ownership of the shares of Common Stock owned by
Holdings.
(7) AEW owns 27,500 shares of Series V Preferred Stock, including 6,666 shares held by AEW Health Science Properties Co-Investment, L.P., which may be deemed to be beneficially owned by AEW Partners II, L.P. Upon consummation of the Offering and the Formation Transactions, such shares of Series V Preferred Stock will be converted into 1,659,239 shares of Common Stock.
(8) See notes (2) through (6) above.
CERTAIN BENEFICIAL OWNERSHIP IN HOLDINGS
The following table sets forth certain information regarding the beneficial
ownership of the Holdings' common stock as of April 30, 1997, with respect to
(i) each director of Alexandria, (ii) each Named Executive Officer and (iii)
all directors and executive officers of Alexandria as a group.
NUMBER OF SHARES OF
HOLDINGS' COMMON STOCK PERCENTAGE
BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED(1)
- ---------------- ---------------------- ---------------------
Jerry M. Sudarsky(2)............. 11,340 10.4%
Joel S. Marcus(3)................ 6,626 6.1
Alan D. Gold(4).................. 10,729 9.8
Gary A. Kreitzer(5).............. 6,012 5.5
Steven A. Stone(6)............... 8,055 7.4
Joseph Elmaleh(7)................ 9,969 9.1
Viren Mehta(8)................... 500 *
David M. Petrone(9).............. 500 *
Anthony M. Solomon(10)........... 500 *
Executive officers and directors
as a group (9 persons)(11)...... 54,231 49.7
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(1) Excludes the effect of shares issuable upon conversion or exchange of certain convertible and exchangeable securities of Holdings currently outstanding. Such securities are not convertible or exchangeable until the occurrence of certain events.
(2) Excludes 875 shares issuable upon the exercise of options granted under the 1994 Plan for which substitute stock options will be granted under the 1996 Plan.
(3) Excludes 6,123 shares issuable upon the exercise of options granted under the 1994 Plan for which substitute stock options will be granted under the 1996 Plan.
(4) Excludes 1,601 shares issuable upon the exercise of options granted under the 1994 Plan for which substitute stock options will be granted under the 1996 Plan.
(5) Excludes 803 shares issuable upon the exercise of options granted under the 1994 Plan for which substitute stock options will be granted under the 1996 Plan.
(6) Excludes 885 shares issuable upon the exercise of options granted under the 1994 Plan for which substitute stock options will be granted under the 1996 Plan.
(7) Excludes 250 shares issuable upon the exercise of options granted under the 1994 Plan for which substitute stock options will be granted under the 1996 Plan. Includes shares beneficially owned by Southern Shipping and Energy, Inc., of which Mr. Elmaleh is the Chairman of the Board.
(8) Excludes 250 shares issuable upon the exercise of options granted under the 1994 Plan for which substitute stock options will be granted under the 1996 Plan. Includes 500 shares held by Mehta and Isaly, of which Mr. Mehta is a partner.
(9) Excludes 250 shares issuable upon the exercise of options granted under the 1994 Plan for which substitute stock options will be granted under the 1996 Plan.
(10) Excludes 250 shares issuable upon the exercise of options granted under the 1994 Plan for which substitute stock options will be granted under the 1996 Plan.
(11) See notes (2) through (10) above.
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the stock of the Company existing upon consummation of the Offering and the Formation Transactions does not purport to be complete and is subject to and qualified in its entirety by reference to the Company's Charter and Bylaws, copies of which are exhibits to the Registration Statement. See "Additional Information."
GENERAL
The Charter provides that the Company may issue up 100,000,000 shares of Common Stock, 100,000,000 shares of Preferred Stock and 200,000,000 shares of Excess Stock (as defined below). Upon consummation of the Offering and the Formation Transactions, 10,391,848 shares of Common Stock will be issued and outstanding and no shares of Preferred Stock will be issued and outstanding. See "Formation and Structure." Under Maryland law, stockholders generally are not liable for a corporation's debts or obligations.
COMMON STOCK
All shares of Common Stock offered hereby will be duly authorized, fully paid and nonassessable. Subject to the preferential rights of any other class or series of stock and to the provisions of the Charter regarding the restrictions on transfer of stock, holders of shares of Common Stock are entitled to receive distributions on such shares if, as and when authorized and declared by the Board of Directors out of assets legally available therefor and to share ratably in the assets of the Company legally available for distribution to its stockholders in the event of its liquidation, dissolution or winding up after payment of or adequate provision for all known debts and liabilities of the Company.
Subject to the provisions of the Charter regarding the restrictions on transfer of stock, each outstanding share of Common Stock entitles the holder thereof to one vote on all matters submitted to a vote of stockholders, including the election of directors, and, except as provided with respect to any other class or series of stock, the holders of such shares will possess the exclusive voting power. There is no cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of Common Stock can elect all of the directors then standing for election, and the holders of the remaining shares will not be able to elect any directors.
Holders of shares of Common Stock have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any securities of the Company. Subject to the provisions of the Charter regarding restriction on transfer of stock, shares of Common Stock will have equal distribution, liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business, unless approved by the affirmative vote of stockholders holding at least two thirds of the shares entitled to vote on the matter unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is set forth in the corporation's charter. The Company's Charter provides for approval of such matters by the affirmative vote of a majority of all of the votes entitled to be cast thereon.
The Charter authorizes the Board of Directors to reclassify any unissued shares of Common Stock into other classes or series of classes of stock and to establish the number of shares in each class or series and to set the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption for each such class or series.
PREFERRED STOCK
The Charter authorizes the Board of Directors, without the approval of the stockholders of the Company, to classify any unissued shares of Preferred Stock and to reclassify any previously classified but unissued shares of
any series, as authorized by the Board of Directors. Prior to issuance of shares of each series, the Board of Directors is required by the MGCL and the Charter of the Company to set, subject to the provisions of the Charter regarding restrictions on transfer of stock, the terms, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption for each such series. Thus, the Board of Directors could authorize the issuance of shares of Preferred Stock with terms and conditions which could have the effect of delaying, deferring or preventing a transaction or a change in control of the Company that might involve a premium price for holders of Common Stock or otherwise be in their best interest. Upon consummation of the Offering and the Formation Transactions, there will be no shares of Preferred Stock outstanding, and the Company has no present plans to issue any additional shares of Preferred Stock. See "Formation and Structure."
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
The Company believes that the power of the Board of Directors to issue additional authorized but unissued shares of Common Stock or Preferred Stock and to classify or reclassify unissued shares of Common Stock or Preferred Stock and thereafter to cause the Company to issue such classified or reclassified shares of stock will provide the Company with increased flexibility in structuring possible future financing and acquisitions and in meeting other needs which might arise. The additional classes or series, as well as the Common Stock, will be available for issuance without further action by the Company's stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which the Company's securities may be listed or traded. Although the Board of Directors has no present intention to do so, it could authorize the Company to issue a class or series that could, depending upon the terms of such class or series, delay, defer or prevent a transaction or a change in control of the Company that might involve a premium price for holders of Common Stock or otherwise be in their best interest. See "Risk Factors--Anti- takeover Effect of Ownership Limit and Power to Issue Additional Stock."
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, not more than 50% of the value of its outstanding stock may be owned, directly or constructively, by five or fewer individuals or entities (as set forth in the Code) during the last half of a taxable year (other than the first year for which an election to be a REIT has been made). Also, shares of its outstanding stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months (other than the first year for which an election to be a REIT has been made) or during a proportionate part of a shorter taxable year.
In order for the Company to maintain its qualification as a REIT, the Company's Charter provides for the Ownership Limit, which prohibits, with certain exceptions, direct or constructive ownership of shares of stock representing more than 9.8% of the combined total value of outstanding shares of the Company's stock by any person.
The Board of Directors, in its sole discretion, may waive the Ownership Limit for any person. However, the Board may not grant such waiver if, after giving effect to such waiver, five individuals could beneficially own, in the aggregate, more than 49.9% of the value of the Company's outstanding stock. As a condition to waiving the Ownership Limit, the Board of Directors may require a ruling from the IRS or an opinion of counsel in order to determine the Company's status as a REIT. The Charter excepts Holdings and AEW from the Ownership Limit. Therefore, Holdings and AEW will be permitted to own in the aggregate, actually or constructively, 17.0% and 16.0% of the Common Stock, respectively.
The Company's Charter further prohibits (a) any person from beneficially or constructively owning shares of stock of the Company that would result in the Company being "closely held" under Section 856(h) of the Code and (b) any person from transferring shares of stock of the Company if such transfer would result in shares of stock of the Company being owned by fewer than 100 persons. Any transfer in violation of any of such restrictions is void ab initio. Any person who acquires or attempts to acquire beneficial or constructive ownership
of shares of stock of the Company in violation of the foregoing restrictions on transferability and ownership is required to give notice immediately to the Company and provide the Company with such other information as the Company may request in order to determine the effect of such transfer on the Company's status as a REIT. The foregoing restrictions on transferability and ownership will not apply if the Board of Directors determines that it is no longer in the best interests of the Company to attempt to qualify, or to continue to qualify, as a REIT.
If any transfer of shares of stock of the Company or other event occurs that, if effective, would result in any person beneficially or constructively owning shares of stock of the Company in excess or in violation of the above transfer or ownership limitations (a "Prohibited Owner"), then that number of shares of stock of the Company the beneficial or constructive ownership of which otherwise would cause such person to violate such limitations (rounded to the nearest whole share) shall be automatically exchanged for an equal number of shares of excess stock (the "Excess Stock") and such shares of Excess Stock shall be automatically transferred to a trust (the "Trust") for the exclusive benefit of one or more charitable beneficiaries (the "Charitable Beneficiary"), and the Prohibited Owner shall generally not acquire any rights in such shares. Such automatic exchange shall be deemed to be effective as of the close of business on the business day prior to the date of such violative transfer. Shares of Excess Stock held in the Trust shall be issued and outstanding shares of stock of the Company. The Prohibited Owner shall not benefit economically from ownership of any shares of Excess Stock held in the Trust, shall have no rights to distributions and shall not possess any rights to vote or other rights attributable to the shares of Excess Stock held in the Trust. The trustee of the Trust (the "Trustee") shall have all voting rights and rights to dividends or other distributions with respect to shares of stock held in the Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend or other distribution paid prior to the discovery by the Company that shares of stock have been transferred to the Trustee shall be paid by the recipient of such dividend or distribution to the Company upon demand, or, at the Company's sole election, shall be offset against any future dividends or distributions payable to the purported transferee or holder, and any dividend or distribution authorized but unpaid shall be rescinded as void ab initio with respect to such shares of stock and promptly thereafter paid over to the Trustee with respect to such shares of Excess Stock, as trustee of the Trust for the exclusive benefit of the Charitable Beneficiary. The Prohibited Owner shall have no voting rights with respect to shares of Excess Stock held in the Trust and, subject to Maryland law, effective as of the date that such shares of stock have been transferred to the Trustee, the Trustee shall have the authority (at the Trustee's sole discretion) (i) to rescind as void any vote cast by a Prohibited Owner prior to the discovery by the Company that such shares have been transferred to the Trustee and (ii) to recast such vote in accordance with the desires of the Trustee acting for the benefit of the Charitable Beneficiary. However, if the Company has already taken irreversible corporate action, then the Trustee shall not have the authority to rescind and recast such vote.
Within 180 days after the date of the event that resulted in shares of Excess Stock of the Company being transferred to the Trust (or as soon as possible thereafter if the Trustee did not learn of such event within such period), the Trustee shall sell the shares of stock held in the Trust to a person, designated by the Trustee, whose ownership of the shares will not violate the ownership limitations set forth in the Charter. Upon such sale, the interest of the Charitable Beneficiary in the shares sold shall terminate and such shares of Excess Stock shall be automatically exchanged for an equal number of shares of the same class or series of stock that originally were exchanged for the Excess Stock. The Trustee shall distribute to the Prohibited Owner, as appropriate (i) the price paid by the Prohibited Owner for the shares, (ii) if the Prohibited Owner did not give value for the shares in connection with the event causing the shares to be held in the Trust (e.g., a gift, devise or other such transaction), the Market Price (as defined in the Charter) of such shares on the day of the event causing the shares to be held in the Trust, or (iii) if the exchange for Excess Stock did not arise as a result of a purported transfer, the Market Price of such Shares on the day of the other event causing the Shares to be held in the Trust. If such shares are sold by a Prohibited Owner, then to the extent that the Prohibited Owner received an amount for such shares that exceeds the amount that such Prohibited Owner was entitled to receive pursuant to the aforementioned requirement, such excess shall be paid to the Trustee.
All certificates representing shares of Common Stock and Preferred Stock will bear a legend referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as required by the Code or the regulations promulgated thereunder) of all classes or series of the Company's stock, including shares of Common Stock, within 30 days after the end of each taxable year, is required to give written notice to the Company stating the name and address of such owner, the number of shares of each class and series of stock of the Company which the owner beneficially owns and a description of the manner in which such shares are held. Each such owner shall provide to the Company such additional information as the Company may reasonably request in order to determine the effect, if any, of such beneficial ownership on the Company's status as a REIT. In addition, each stockholder shall upon demand be required to provide to the Company such information as the Company may reasonably request in order to determine the Company's status as a REIT, to comply with the requirements of any taxing authority or governmental authority or to determine such compliance, or to comply with the REIT provisions of the Code.
These ownership limits could delay, defer or prevent a transaction or a change in control of the Company that might involve a premium price for the Common Stock or otherwise be in the best interest of the stockholders. See "Risk Factors--Anti-takeover Effect of Ownership Limit and Power to Issue Additional Stock."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock Transfer & Trust Company.
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S CHARTER AND BYLAWS
The following summary of certain provisions of Maryland law and of the Charter and Bylaws of the Company does not purport to be complete and is subject to and qualified in its entirety by reference to Maryland law and the Charter and Bylaws of the Company, copies of which are exhibits to the Registration Statement. See "Additional Information."
BOARD OF DIRECTORS
The Company's Bylaws provide that the number of directors of the Company may be established by the Board of Directors, but may not be fewer than the minimum number required by the MGCL nor more than 15. Any vacancy will be filled, at any regular meeting or at any special meeting called for that purpose, by a majority of the remaining directors, except that a vacancy resulting from an increase in the number of directors must be filled by a majority of the entire Board of Directors. All directors are elected to hold office until the next annual meeting of stockholders of the Company and until their successors are duly elected and qualify. Pursuant to a contractual arrangement with the Company, AEW has the right to include two nominees on the ballot for the election of directors of the Company, and one nominee on the ballot for the election of directors of QRS, so long as AEW owns Common Stock representing more than 15% of the voting securities of the Company, and the right to include one nominee on the ballot for the election of directors of the Company so long as AEW owns Common Stock representing more than 7% of such securities. Holdings has agreed to vote its shares of Common Stock for such nominees included on the ballot for the election of directors of the Company, and the Company has agreed to take all actions necessary to cause the election of the nominees at QRS. No directors currently serve on the board of directors of the Company or QRS pursuant to such arrangement, although AEW may, at its discretion, exercise its right to include nominees on the ballot in the future. If, at any time, AEW's ownership of Common Stock represents less than 15% of the voting securities of the Company, within 10 days of such decrease in ownership, AEW will cause one director elected or nominated by it to resign from the Board of Directors and all committees thereof, and from the board of directors of QRS and all committees thereof. Upon AEW's ownership of Common Stock decreasing to less than 7% of the outstanding voting securities of the Company, within 10 days of such decrease in ownership, AEW shall cause all directors nominated by it pursuant to this arrangement to resign from the Board of Directors and all committees thereof. Upon consummation of the Offering and the Formation Transactions, AEW will own 16.0% of the outstanding voting securities of the Company. See "Management--Election of Directors and Director Compensation."
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any person who beneficially owns 10% or more of the voting power of the corporation's shares or an affiliate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of the corporation (an "Interested Stockholder") or an affiliate of such an Interested Stockholder are prohibited for five years after the most recent date on which the Interested Stockholder becomes an Interested Stockholder. Thereafter, any such business combination must be recommended by the board of directors of such corporation and approved by the affirmative vote of at least (i) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (ii) two thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the Interested Stockholder with whom (or with whose affiliate) the business combination is to be effected, unless, among other conditions, the corporation's common stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its shares. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by the board of directors of the corporation prior to the time that the Interested Stockholder becomes an Interested Stockholder. Pursuant to an act of the Board of Directors, any business combination between the Company and AEW is exempt from the above- described provisions of the MGCL. As a result, AEW may be able to enter into business combinations with the Company that may not be in the best interest of the stockholders, without compliance by the Company with the supermajority vote requirements and other provisions of the MGCL. Additionally, immediately prior to the consummation of the Offering, the Board of Directors will adopt a resolution providing that the "business combination" provisions of the MGCL shall not apply to the Company generally. This resolution will only be revoked if the Board of Directors determines that such revocation is in the best interests of the Company and its stockholders.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast on the matter, excluding shares of stock owned by the acquiror, by officers or by directors who are employees of the corporation. "Control Shares" are voting shares of stock which, if aggregated with all other such shares of stock previously acquired by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority or more of all voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of control shares, subject to certain exceptions.
Under Maryland law, a person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses), may compel the board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any meeting of the stockholders.
If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then, subject to certain conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting rights have previously been approved) for fair value determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of
such shares are considered and not approved. If voting rights for control shares are approved at a meeting of the stockholders and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (i) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (ii) to acquisitions approved or exempted by the charter or bylaws of the corporation.
The Bylaws contain a provision exempting from the control share acquisition statute any acquisition by any person of the Company's shares of stock. There can be no assurance that such provision will not be amended or eliminated in the future.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (i) with respect to an annual meeting
of stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(a) pursuant to the Company's notice of the meeting, (b) by the Board of
Directors or (c) by a stockholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws and
(ii) with respect to special meetings of stockholders, only the business
specified in the Company's notice of meeting may be brought before the meeting
of stockholders and nominations of persons for election to the Board of
Directors may be made only (a) pursuant to the Company's notice of the
meeting, (b) by the Board of Directors or (c) provided that the Board of
Directors has determined that directors shall be elected at such meeting, by a
stockholder who is entitled to vote at the meeting and has complied with the
advance notice provisions set forth in the Bylaws.
AMENDMENT TO THE CHARTER OR BYLAWS
As permitted by the MGCL, the Charter provides that it may be amended by the affirmative vote of the holders of a majority of votes entitled to be cast on the matter. The Board of Directors has the exclusive power to adopt, alter, repeal or amend the Bylaws.
DISSOLUTION OF THE COMPANY
As permitted by the MGCL, the Charter provides that dissolution of the Company must be approved by the affirmative vote of the holders of not less than a majority of all of the votes entitled to be cast on the matter. See "Description of Capital Stock--Common Stock."
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER AND BYLAWS
The business combination provisions and, if the applicable provision in the Bylaws is rescinded, the control share acquisition provisions of the MGCL and the advance notice provisions of the Bylaws could delay, defer or prevent a transaction or a change in control of the Company that might involve a premium price for holders of Common Stock or otherwise be in their best interest.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering and the Formation Transactions, there will be 10,391,848 shares of Common Stock issued and outstanding (11,404,348 if the Underwriters' over-allotment option is exercised in full). The shares outstanding will include 1,765,923 shares of Common Stock held by Holdings, 209,615 shares of Common Stock held directly by officers and directors of the Company, and 1,659,239 shares of Common Stock held by AEW (collectively, the "Restricted Shares"). In addition, the Company has reserved 900,000
shares of Common Stock for issuance to officers, directors and certain employees of the Company pursuant to the 1997 Stock Option Plan, of which options for 600,000 shares will be issued in connection with the Offering. All of the Shares issued in the Offering will be freely tradeable by persons other than Affiliates (as defined below) without registration or other restrictions under the Securities Act, subject to limitations set forth in the Charter and, in certain cases, to the additional contractual restrictions described below. The Restricted Shares and shares issued upon the exercise of options (unless issued pursuant to an effective registration statement) will be "restricted securities" under the meaning of Rule 144 promulgated under the Securities Act ("Rule 144"), and may be sold only pursuant to an effective registration statement under the Securities Act or an applicable exemption, including an exemption under Rule 144, under the Securities Act.
In general, under Rule 144 as in effect as of April 29, 1997, a person (or persons whose shares are aggregated), including an "affiliate" as that term is defined in Rule 144 (an "Affiliate"), who has beneficially owned his or her "restricted securities" for at least one year, is entitled to sell within any three-month period a number of shares of Common Stock that does not exceed the greater of 1% of the then outstanding shares of Common Stock (approximately 103,918 shares immediately after the Offering) or the average weekly trading volume of Common Stock during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are also subject to certain restrictions on the manner of sale, notice requirements and the availability of current public information about the Company. If two years have elapsed since the date of acquisition of "restricted securities" from the Company or from any Affiliate of the Company, and the acquiror or subsequent holder thereof is deemed not to have been an Affiliate of the Company at any time during the 90 days preceding a sale, such person would be entitled to sell such shares of Common Stock in the public market under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements.
The Company and the Continuing Investors have agreed with the Underwriters, subject to certain limited exceptions, not to offer, sell, contract to sell, pledge, grant any option to purchase or otherwise dispose of any shares of Common Stock (or any securities convertible into, or exercisable, exchangeable or redeemable for, shares of Common Stock) for a period of 360 days from the date of this Prospectus, without the prior written consent of PaineWebber. Management of the Company, including Messrs. Sudarsky, Marcus, Gold, Nelson, Kreitzer, Stone and Ciruzzi, have agreed with the Underwriters, subject to certain limited exceptions, not to offer, sell, contract to sell, pledge or otherwise dispose of any shares of Common Stock (or any securities convertible into, or exercisable, exchangeable or redeemable for, shares of Common Stock), including any shares of Common Stock that any such persons may have the right to receive by virtue of their ownership interest in Holdings, for a period of two years from the date of this Prospectus, without the prior written consent of PaineWebber. After such time, such shares of Common Stock may be sold in the public market, subject to applicable securities laws restrictions or exemptions from registration, if available. The Company has granted to AEW certain registration rights in connection with the Restricted Shares owned by them. AEW has the ability to "demand" that the Company under certain circumstances and subject to certain conditions, prepare and file a shelf registration statement within a specified time period after the Offering with respect to the resale of shares of Common Stock issued upon conversion of the Series V Preferred Stock. AEW also has certain rights following an initial public offering to have shares of Common Stock registered incidentally to any registration being conducted by the Company with respect to the Common Stock. The Company will also grant to Holdings customary transferable registration rights with respect to the shares of Common Stock held by it. See "Formation and Structure--Benefits to Related Parties."
The Company intends to issue options to purchase shares of Common Stock to directors, officers and certain key employees of the Company from time to time after the Offering. See "Management--Benefits Plans." The Company expects to file a registration statement on Form S-8 with the Commission with respect to the shares of Common Stock issuable under stock option plans of the Company following the Offering. Shares of Common Stock issued after the effective date of any such registration statement on Form S-8 upon the exercise of options granted under any such plan will be available for sale in the public market without restriction to the extent that such shares are held by persons who are not Affiliates of the Company.
Prior to the Offering, there has been no public market for the Common Stock. Trading of the Common Stock on the NYSE is expected to commence immediately following consummation of the Offering, upon official notice of issuance, under the symbol "ARE." No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price prevailing from time to time. Sales of substantial amounts of Common Stock, or the perception that such sales occur, could adversely affect prevailing market prices of the Common Stock.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations regarding an investment in Common Stock of the Company is based on current law, is for general information only and is not tax advice. This discussion does not purport to deal with all aspects of taxation that may be relevant to particular investors in light of their personal investment or tax circumstances, or, except to the extent discussed under the headings "Taxation of Tax-Exempt Stockholders" and "Taxation of Non-U.S. Stockholders," to certain types of investors (including insurance companies, tax-exempt organizations, financial institutions or broker-dealers, foreign corporations and persons who are not citizens or residents of the U.S.) that are subject to special treatment under the federal income tax laws. This discussion assumes that investors will hold the Common Stock as a "capital asset" (generally, property held for investment) under the Code.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT WITH ITS TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF THE COMMON STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General. The REIT provisions of the Code are highly technical and complex. The following sets forth the material aspects of the provisions of the Code that govern the federal income tax treatment of a REIT and its stockholders. This summary is qualified in its entirety by the applicable Code provisions, rules and regulations promulgated thereunder, and administrative and judicial interpretations thereof, all of which are subject to change which may apply retroactively.
The Board of Directors intends that the Company will operate in a manner that permits it to elect, and that it will elect, REIT status for the taxable year ended December 31, 1996, and the Company intends to continue to operate in such a manner. Skadden, Arps, Slate, Meagher & Flom LLP will deliver an opinion on or before the effectiveness of the Registration Statement that, commencing with the Company's taxable year ending December 31, 1996, the Company was organized in conformity with the requirements for qualification as a REIT, and its proposed method of operation, and its actual method of operation since January 1, 1996 through the date of this Prospectus, has and will enable it to meet the requirements for qualification and taxation as a REIT under the Code. It must be emphasized that this opinion will be based and conditioned upon certain assumptions and representations made by the Company as to factual matters (including representations of the Company concerning, among other things, its business and properties, the amount of rents attributable to personal property and other items regarding the Company's ability to meet the various requirements for qualification as a REIT). The opinion will be expressed as of its date, and Skadden, Arps, Slate, Meagher & Flom LLP will have no obligation to advise holders of Common Stock of any subsequent change in the matters stated, represented or assumed or any subsequent change in the applicable law. Moreover, such qualification and taxation as a REIT depends upon the Company having met and continuing to meet, through actual annual operating results, distribution levels and diversity of stock ownership, the various qualification tests imposed under the Code as discussed below, the results of which will not be reviewed by Skadden, Arps, Slate, Meagher & Flom LLP. Accordingly, no assurance can be given that the actual results of the Company's operation for
any particular taxable year have satisfied or will satisfy such requirements. See "--Failure to Qualify." An opinion of counsel is not binding on the IRS, and no assurance can be given that the IRS will not challenge the Company's eligibility for taxation as a REIT.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from investment in a corporation. However, the Company will be subject
to federal income tax as follows: First, the Company will be taxed at regular
corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business other than
foreclosure property), such income will be subject to a 100% tax. Fourth, if
the Company should fail to satisfy the 75% gross income test or the 95% gross
income test (as discussed below), but has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on an amount equal to (a) the gross income
attributable to the greater of the amount by which the Company fails the 75%
or 95% test multiplied by (b) a fraction intended to reflect the Company's
profitability. Fifth, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and
(iii) any undistributed taxable income from prior periods, the Company would
be subjected to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed during such year. Sixth, if during the
10-year period (the "Recognition Period") beginning on the first day on the
first taxable year for which the Company qualified as a REIT, the Company
recognizes gain on the disposition of any asset held by the Company as of the
beginning of such Recognition Period, then, to the extent of the excess of (a)
the fair market value of such asset as of the beginning of such Recognition
Period over (b) the Company's adjusted basis in such asset as of the beginning
of such Recognition Period (the "Built-in Gain"), such gain will be subject to
tax at the highest regular corporate tax rate pursuant to IRS regulations that
have not yet been promulgated. Seventh, if the Company acquires any asset from
a C corporation (i.e., generally a corporation subject to full corporate level
tax) in a transaction in which the basis of the asset in the Company's hands
is determined by reference to the basis of the asset (or any other property)
in the hands of the C corporation, and the Company recognizes gain on the
disposition of such asset during the Recognition Period beginning on the date
on which such asset was acquired by the Company, then, to the extent of the
Built-in Gain, such gain will be subject to tax at the highest regular
corporate rate pursuant to IRS regulations that have not yet been promulgated.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (3) that would be taxable
as a domestic corporation, but for the special Code provisions applicable to
REITs; (4) that is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (5) the beneficial ownership of
which is held by 100 or more persons; (6) in which, during the last half of
each taxable year, not more than 50% in value of the outstanding stock is
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities); and (7) that meets certain other tests
described below (including with respect to the nature of its income and
assets). The Code provides that conditions (1) through (4) must be met during
the entire taxable year, and that condition (5) must be met during at least
335 days of a taxable year of 12 months, or during a proportionate part of a
taxable year of less than 12 months.
The Company believes that it has already issued sufficient shares to allow it to satisfy conditions (5) and (6) above. In order to comply with the share ownership tests described in conditions (5) and (6) above, the Company's Charter provides certain restrictions on the transfer of its capital stock to prevent concentration of stock ownership. These restrictions may not ensure that, in all cases, the Company will be able to satisfy the share ownership tests set forth above. If the Company fails to satisfy such requirements, the Company's status as a REIT will terminate.
To monitor the Company's compliance with such share ownership requirements, the Company is required to maintain records regarding the actual ownership of its shares. To do so, the Company must demand written statements each year from the record holders of certain percentages of its stock in which the record holders are to disclose the actual owners of the shares (i.e., the persons required to include in gross income the REIT dividends). A list of those persons failing or refusing to comply with this demand must be maintained as part of the Company's records. A stockholder who fails or refuses to comply with the demand must submit a statement with its tax return disclosing the actual ownership of the shares and certain other information. See "Description of Capital Stock--Restrictions on Transfer."
In the case of a REIT that is a partner in a partnership, regulations provide that the REIT is deemed to own its proportionate share of the partnership's assets and to earn its proportionate share of the partnership's income. In addition, the assets and gross income of the partnership retain the same character in the hands of the REIT for purposes of the gross income and asset tests applicable to REITs as described below. Thus, the Company's proportionate share of the assets, liabilities and items of income of any partnership will be treated as assets, liabilities and items of income of the Company for purposes of applying the REIT requirements described below. There can be no assurance, however, that any partnerships will be organized or operated in a manner that will enable the Company to continue to satisfy the REIT requirements of the Code.
Income Tests. In order to maintain qualification as a REIT, the Company annually must satisfy three gross income requirements. First, at least 75% of the Company's gross income (excluding gross income from "prohibited transactions," i.e., certain sales of property held primarily for sale to customers in the ordinary course of business) for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property (including "rents from real property" and, in certain circumstances, interest) or from certain types of temporary investments. Second, at least 95% of the Company's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property investments, and from other dividends, interest and gain from the sale or disposition of stock or securities (or from any combination of the foregoing). Third, short-term gain from the sale or other disposition of stock or securities, gain from certain sales of property held primarily for sale, and gain on the sale or other disposition of real property held for less than four years (apart from involuntary conversions and sales of foreclosure property) must, in the aggregate, represent less than 30% of the Company's gross income for each taxable year.
Rents received by the Company will qualify as "rents from real property" in satisfying the gross income tests described above only if several conditions are met, including the following. First, if rent attributable to personal property, leased in connection with real property, is greater than 15% of the total rent received under any particular lease, then all of the rent attributable to such personal property will not qualify as rents from real property. The determination of whether an item of property constitutes real property or personal property under the REIT provisions of the Code is subject to both legal and factual considerations and, as such, is subject to differing interpretations. Counsel has advised the Company with respect to the legal considerations underlying such determination. After consulting with counsel and considering such advice, the Company has reviewed its properties and has determined that rents attributable to personal property do not exceed 15% of the total rent with respect to any particular lease. Due to the highly specialized nature of the Company's properties, however, there can be no assurance that the IRS will not assert that the rent attributable to personal property with respect to a particular lease is greater than 15% of the total rent with respect to such lease. If the IRS were successful, and the amount of such non-qualifying income, together with other non-qualifying income, exceeds 5% of the Company's taxable income, the Company may fail to qualify as a REIT. See "Risk Factors--Adverse Consequences of Failure to Qualify as a REIT."
In addition, rents received by the Company will not qualify as rents from real property of the Company if an owner of 10% or more of the Company directly or constructively owns 10% or more in such tenant (a "Related Tenant"). Moreover, an amount received or accrued will not qualify as rents from real property (or as interest income) if it is based in whole or part of the income or profits of any person. Rent or interest will not be disqualified, however, solely by reason of being based on a fixed percentage or percentages of receipts or
sales. Finally, for rents received to qualify as rents from real property, the REIT generally must not operate or manage the property or furnish or render services to the tenants of such property, other than through an "independent contractor" from which the REIT derives no revenue. However, the Company (or its affiliates) is permitted to, and does directly perform services that are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered rendered to the occupant of the property. The Company regularly attempts to monitor such requirements. There can be no assurance, however, that the Company will not realize income from a Related Tenant that does not qualify as "rents from real property."
The Company will provide certain services with respect to the Properties and any newly acquired Properties. The Company believes that the services provided by the Company with respect to the Properties are usually and customarily rendered in connection with the rental of space occupancy only, and therefore the provision of such services will not cause the rents received with respect to the Properties to fail to qualify as rents from real property for purposes of the 75% and the 95% gross income tests.
If the Company fails to satisfy one or both of the 75% or 95% gross income tests (though not the 30% gross income test) for any taxable year, it may nevertheless qualify as a REIT for such year if it is entitled to relief under certain provisions of the Code. These relief provisions will be generally available if the Company's failure" to meet such tests was due to reasonable cause and not due to willful neglect, the Company attaches a schedule of the sources of its income to its return, and any incorrect information on the schedule was not due to fraud with intent to evade tax. It is not possible, however, to state whether in all circumstances the Company would be entitled to the benefit of these relief provisions. If these relief provisions are inapplicable to a particular set of circumstances involving the Company, the Company will not qualify as a REIT. As discussed above in "--General," even where these relief provisions apply, a tax is imposed with respect to the excess net income.
Asset Tests. The Company, at the close of each quarter of its taxable year, must also satisfy three tests relating to the nature of its assets. First, at least 75% of the value of the Company's total assets must be represented by real estate assets, stock or debt instruments held for not more than one year purchased with the proceeds of a stock offering or long-term (at least five years) debt offering of the Company, cash, cash items and U.S. government securities. Second, not more than 25% of the Company's total assets may be represented by securities other than those in the 75% asset class. Third, of the investments included in the 25% asset class, the value of any one issuer's securities owned by the Company may not exceed 5% of the value of the Company's total assets, and the Company may not own more than 10% of any one issuer's outstanding voting securities.
The Company expects that substantially all of its assets will be real estate assets. In addition, the Company does not expect that the value of any security of any one entity would ever exceed 5% of the Company's total assets, and the Company does not expect to own more than 10% of any one issuer's voting securities.
The Company intends to monitor closely the purchase, holding and disposition
of its assets in order to comply with the REIT asset tests. In particular, the
Company intends to limit and diversify its ownership of any assets not
qualifying as real estate assets to less than 25% of the value of the
Company's assets and to less than (i) 5%, by value, of any single issuer and
(ii) 10% of the outstanding voting securities of any one issuer. If it is
anticipated that these limits would be exceeded, the Company intends to take
appropriate measures, including the disposition of non-qualifying assets, to
avoid exceeding such limits.
QRS is a wholly owned corporate subsidiary of the Company organized and operated as a "qualified REIT subsidiary" within the meaning of the Code. Qualified REIT subsidiaries are not treated as separate entities from their parent REIT for federal income tax purposes. Instead, all assets, liabilities and items of income, deduction and credit of a qualified REIT subsidiary are treated as assets, liabilities and items of the Company. A qualified REIT subsidiary therefore will not be subject to federal corporate income taxation, although it may be subject to state or local taxation. In addition, the Company's ownership of the voting stock of a qualified REIT subsidiary does not violate the general restriction against ownership of more than 10% of the voting securities of any issuer.
Annual Distribution Requirements. The Company, in order to qualify as a REIT, is required to distribute dividends (other than capital gain dividends) to its stockholders in an amount at least equal to (i) the sum of
(a) 95% of the Company's "REIT taxable income" (computed without regard to the dividends paid deduction and the Company's net capital gain) and (b) 95% of the net income (after tax), if any, from foreclosure property, minus (ii) the sum of certain items of noncash income. Such distributions must be paid in the taxable year to which they relate, or in the following taxable year if declared before the Company timely files its tax return for such year and if paid with or before the first regular dividend payment after such declaration. To the extent that the Company does not distribute all of its net capital gain or distributes at least 95%, but less than 100%, of its "REIT taxable income," as adjusted, it will be subject to tax thereon at the capital gains or ordinary corporate tax rates, as the case may be. Furthermore, if the Company should fail to distribute during each calendar year at least the sum of (1) 85% of its REIT ordinary income for such year, (2) 95% of its REIT capital gain income for such year, and (3) any undistributed taxable income from prior periods, the Company would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. The Company believes that it has made, and intends to make, timely distributions sufficient to satisfy this annual distribution requirement.
It is possible that the Company, from time to time, may not have sufficient cash or other liquid assets to meet the 95% distribution requirement due to timing differences between (i) the actual receipt of income and actual payment of deductible expenses and (ii) the inclusion of such income and deduction of such expenses in arriving at taxable income of the Company. In the event that such timing differences occur, in order to meet the 95% distribution requirement, the Company may find it necessary to arrange for short-term, or possibly long-term, borrowings or to pay dividends in the form of taxable distributions of property.
Under certain circumstances, the Company may be able to rectify a failure to meet the distribution requirement for a year by paying "deficiency dividends" to stockholders in a later year, which may be included in the Company's deduction for dividends paid for the earlier year. Thus, the Company may be able to avoid being taxed on amounts distributed as deficiency dividends; however, the Company will be required to pay interest based on the amount of any deduction taken for deficiency dividends.
Absence of Earnings and Profits. The Company, in order to qualify as a REIT, must not have accumulated earnings and profits attributable to any non-REIT years. A REIT has until the close of its first taxable year in which it has non-REIT earnings and profits to distribute any such accumulated earnings and profits. Unless the "deficiency dividend" procedures described above apply and the Company complies with those procedures, failure to distribute such accumulated earnings and profits would result in the disqualification of the Company as a REIT. The Company believes that the Company had no accumulated earnings and profits as of December 31, 1995. The determination of accumulated earnings and profits, however, depends upon a number of factual matters related to the activities and operations of the Company during its entire corporate existence and is subject to review and challenge by the IRS. There can be no assurance that the IRS will not examine the tax returns of the Company for prior years and propose adjustments to increase its taxable income. In this regard, the IRS can consider all taxable years of the Company as open for review for purposes of determining the amount of such earnings and profits.
Failure to Qualify. If the Company fails to qualify for taxation as a REIT in any taxable year, and certain relief provisions do not apply, the Company will be subject to tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Distributions to stockholders in any year in which the Company fails to qualify will not be deductible by the Company nor will they be required to be made under the Code. In such event, to the extent of current and accumulated earnings and profits, all distributions to stockholders will be taxable as ordinary income, and, subject to certain limitations of the Code, corporate distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, the Company will also be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether in all circumstances the Company would be entitled to such statutory relief. In addition, a recent federal budget proposal contains language which, if enacted in its present form, would result in the immediate taxation of all gain inherent in a C corporation's assets upon an election by the corporation to become a REIT, and thus could effectively preclude the Company from re-electing REIT status following a termination of its REIT qualification.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
General. As long as the Company qualifies as a REIT, distributions made to the Company's taxable domestic stockholders out of current or accumulated earnings and profits (and not designated as capital gain dividends) will be taken into account by them as ordinary income and will not be eligible for the dividends received deduction for corporations. Distributions that are designated as capital gain dividends will be taxed as long-term capital gains (to the extent that they do not exceed the Company's actual net capital gain for the taxable year) without regard to the period for which the stockholder has held its stock. However, corporate stockholders may be required to treat up to 18% of certain capital gain dividends as ordinary income.
Distributions in excess of current and accumulated earnings and profits will not be taxable to a stockholder to the extent that they do not exceed the adjusted basis of the stockholder's shares, but rather will reduce the adjusted basis of such shares. To the extent that such distributions exceed the adjusted basis of a stockholder's shares, they will be included in income as long-term capital gain (or short-term capital gain if the shares have been held for one year or less). In addition, any dividend declared by the Company in October, November or December of any year and payable to a stockholder of record on a specified date in any such month shall be treated as both paid by the Company and received by the stockholder on December 31 of such year, provided that the dividend is actually paid by the Company during January of the following calendar year. Stockholders may not include in their individual income tax returns any net operating losses or capital losses of the Company.
Upon a sale or other disposition of the Common Stock, a stockholder will generally recognize a capital gain or loss in an amount equal to the difference between the amount realized and the stockholder's adjusted basis in such shares, which gain or loss will be long-term if such shares have been held for more than one year. To the extent of any long-term capital gain dividends received by a stockholder, any loss on the sale or other disposition of Common Stock held by such stockholder for six months or less will generally be treated as a long-term capital loss.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Based upon a published ruling by the IRS, distributions by the Company to a stockholder that is a tax-exempt entity will not constitute "unrelated business taxable income" ("UBTI"), provided that the tax-exempt entity has not financed the acquisition of its shares with "acquisition indebtedness" within the meaning of the Code and the shares are not otherwise used in an unrelated trade or business of the tax-exempt entity.
Notwithstanding the preceding paragraph, however, a portion of the dividends paid by the Company may be treated as UBTI to certain domestic private pension trusts if the Company is treated as a "pension-held REIT." The Company believes that it is not, and does not expect to become, a "pension-held REIT." If the Company were to become a pension-held REIT, these rules generally would only apply to certain pension trusts that hold more than 10% of the Company's stock.
TAXATION OF NON-U.S. HOLDERS
The following is a discussion of certain anticipated U.S. federal income and estate tax consequences of the ownership and disposition of the Company's Common Stock applicable to Non-U.S. Holders of such stock. A "Non-U.S. Holder" is any person other than (i) a citizen or resident of the U.S., (ii) a corporation or partnership created or organized in the U.S. or under the laws of the U.S. or of any state thereof, (iii) an estate whose income is includable in gross income for U.S. federal income tax purposes regardless of its source, or (iv) a trust whose administration is subject to the primary supervision of a U.S. court and which has one or more U.S. fiduciaries who have the authority to control all substantial decisions of the trust. The discussion is based on current law and is for general information only. The discussion addresses only certain and not all aspects of U.S. federal income and estate taxation.
Ordinary Dividends. The portion of dividends received by Non-U.S. Holders payable out of the Company's earnings and profits which are not attributable to capital gains of the Company and which are not
effectively connected with a U.S. trade or business of the Non-U.S. Holder will be subject to U.S. withholding tax at the rate of 30% (unless reduced by treaty). In general, Non-U.S. Holders will not be considered engaged in a U.S. trade or business solely as a result of their ownership of stock of the Company. In cases where the dividend income from a Non-U.S. Holder's investment in stock of the Company is (or is treated as) effectively connected with the Non-U.S. Holder's conduct of a U.S. trade or business, the Non-U.S. Holder generally will be subject to U.S. tax at graduated rates, in the same manner as U.S. stockholders are taxed with respect to such dividends (and may also be subject to the 30% branch profits tax in the case of a Non-U.S. Holder that is a foreign corporation).
Non-Dividend Distributions. Unless the Company's stock constitutes a USRPI (as defined below), distributions by the Company which are not dividends out of the earnings and profits of the Company will not be subject to U.S. income or withholding tax. If it cannot be determined at the time a distribution is made whether or not such distribution will be in excess of current and accumulated earnings and profits, the distribution will be subject to withholding at the rate applicable to dividends. However, the Non-U.S. Holder may seek a refund of such amounts from the IRS if it is subsequently determined that such distribution was, in fact, in excess of current and accumulated earnings and profits of the Company. If the Company's stock constitutes a USRPI, such distribution shall be subject to 10% withholding tax and may be subject to taxation under FIRPTA (as defined below).
Capital Gain Dividends. Under the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"), a distribution made by the Company to a Non-U.S. Holder, to the extent attributable to gains from dispositions of U.S. Real Property Interests ("USRPIs") such as the properties beneficially owned by the Company ("'USRPI Capital Gains"), will be considered effectively connected with a U.S. trade or business of the Non-U.S. Holder and subject to U.S. income tax at the rate applicable to U.S. individuals or corporations, without regard to whether such distribution is designated as a capital gain dividend. In addition, the Company will be required to withhold tax equal to 35% of the amount of dividends to the extent such dividends constitute USRPI Capital Gains. Distributions subject to FIRPTA may also be subject to a 30% branch profits tax in the hands of a foreign corporate stockholder that is not entitled to treaty exemption.
Disposition of Stock of the Company. Unless the Company's stock constitutes a USRPI, a sale of such stock by a Non-U.S. Holder generally will not be subject to U.S. taxation under FIRPTA. The stock will not constitute a USRPI if the Company is a "domestically controlled REIT." A domestically controlled REIT is a REIT in which, at all times during a specified testing period, less than 50% in value of its shares is held directly or indirectly by Non-U.S. Holders. The Company believes that it is, and it expects to continue to be a domestically controlled REIT, and therefore that the sale of the Company's stock will not be subject to taxation under FIRPTA. Because the Company's stock will be publicly traded, however, no assurance can be given that the Company will continue to be a domestically controlled REIT.
If the Company does not constitute a domestically controlled REIT, a Non- U.S. Holder's sale of stock generally will still not be subject to tax under FIRPTA as a sale of a USRPI provided that (i) the stock is "regularly traded" (as defined by applicable Treasury regulations) on an established securities market (e.g., the NYSE, on which the Company's Common Stock will be listed) and (ii) the selling Non-U.S. Holder held 5% or less of the Company's outstanding stock at all times during a specified testing period.
If gain on the sale of stock of the Company were subject to taxation under FIRPTA, the Non-U.S. Holder would be subject to the same treatment as a U.S. stockholder with respect to such gain (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals) and the purchaser of the stock could be required to withhold 10% of the purchase price and remit such amount to the IRS.
Capital gains not subject to FIRPTA will nonetheless be taxable in the United States to a Non-U.S. Holder in two cases: (i) if the Non-U.S. Holder's investment in the stock of the Company is effectively connected with a U.S. trade or business conducted by such Non-U.S. Holder, the Non-U.S. Holder will be subject to the same
treatment as a U.S. stockholder with respect to such gain, or (ii) if the Non- U.S. Holder is a nonresident alien individual who was present in the U.S. for 183 days or more during the taxable year and has a "tax home" in the United States, the nonresident alien individual will be subject to a 30% tax on the individual's capital gain.
Estate Tax. Stock of the Company owned or treated as owned by an individual who is not a citizen or resident (as specially defined for U.S. federal estate tax purposes) of the United States at the time of death will be includable in the individual's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise. Such individual's estate may be subject to U.S. federal estate tax on the property includable in the estate for U.S. federal estate tax purposes.
Information Reporting and Backup Withholding. The Company must report annually to the IRS and to each Non-U.S. Holder the amount of dividends (including any capital gain dividends) paid to, and the tax withheld with respect to, each Non-U.S. Holder. These reporting requirements apply regardless of whether withholding was reduced or eliminated by an applicable tax treaty. Copies of these returns may also be made available under the provisions of a specific treaty or agreement with the tax authorities in the country in which the Non-U.S. Holder resides.
U.S. backup withholding (which generally is imposed at the rate of 31% on certain payments to persons that fail to furnish the information required under the U.S. information reporting requirements) and information reporting will generally not apply to dividends (including any capital gain dividends) paid on stock of the Company to a Non-U.S. Holder at an address outside the United States.
The payment of the proceeds from the disposition of stock of the Company to or through a U.S. office of a broker will be subject to information reporting and backup withholding unless the owner, under penalties of perjury, certifies, among other things, its status as a Non-U.S. Holder, or otherwise establishes an exemption. The payment of the proceeds from the disposition of stock to or through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding and information reporting.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules will be refunded or credited against the Non-U.S. Holder's U.S. federal income tax liability, provided that the required information is furnished to the IRS.
These information reporting and backup withholding rules are under review by the U.S. Treasury and their application to the Common Stock could be changed by future regulations. On April 15, 1996, the IRS issued proposed Treasury Regulations concerning the withholding of tax and reporting for certain amounts paid to non-resident individuals and foreign corporations. The proposed Treasury Regulations, if adopted in their present form, would be effective for payments made after December 31, 1997. Prospective purchasers should consult their tax advisors concerning the potential adoption of such proposed Treasury Regulations and the potential effect on their ownership of Common Stock.
OTHER TAX CONSEQUENCES
Possible Legislative or Other Actions Affecting Tax Consequences. Prospective investors should recognize that the present federal income tax treatment of an investment in the Company may be modified by legislative, judicial or administrative action at any time, and that any such action may affect investments and commitments previously made. The rules dealing with federal income taxation are constantly under review by persons involved in the legislative process and by the IRS and the U.S. Treasury Department, resulting in revisions of regulations and revised interpretations of established concepts as well as statutory changes. For example, a recent federal budget proposal contains language which, if enacted in its present form, would result in the immediate taxation of all gain inherent in a C corporation's assets upon an election by the corporation to become a REIT, and thus could effectively preclude the Company from re-electing REIT status following a termination of its REIT qualification. Revisions in federal tax laws and interpretations thereof could adversely affect the tax consequences of an investment in the Company.
State and Local Taxes. The Company and its stockholders may be subject to state or local taxation in various state or local jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment of the Company and its stockholders may not conform to the federal income tax consequences discussed above. Consequently, prospective stockholders should consult their tax advisors regarding the effect of state and local tax laws on an investment in the Company.
UNDERWRITING
Subject to the terms and conditions in the underwriting agreement (the "Underwriting Agreement"), the Company has agreed to sell to each of the Underwriters named below, and each of such Underwriters, for whom PaineWebber, Lehman Brothers Inc., Smith Barney Inc. and EVEREN Securities, Inc. are acting as representatives of the Underwriters (the "Representatives"), has severally agreed to purchase from the Company, the respective number of shares of Common Stock set forth opposite their names. Pursuant to the terms of the Underwriting Agreement, the Underwriters are obligated to purchase all such shares of Common Stock if any are purchased.
NUMBER OF
SHARES TO BE
UNDERWRITERS PURCHASED
------------ ------------
PaineWebber Incorporated.......................................
Lehman Brothers Inc............................................
Smith Barney Inc...............................................
EVEREN Securities, Inc.........................................
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Total........................................................
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The Representatives have advised the Company that the Underwriters propose to offer the Shares to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per Share. The Underwriters may allow, and such dealers may re-allow, a discount not in excess of $ per Share on sales to certain other brokers and dealers. After the Offering, the public offering price, concession and discount may be changed.
At the request of the Company, the Underwriters have reserved up to 250,000 shares of Common Stock for sale at the initial public offering price to directors, officers, employees, business associates and related persons of the Company. The number of shares of Common Stock available for sale to the general public will be reduced to the extent such persons purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the Underwriters to the general public on the same basis as the other shares offered hereby.
The Company has granted to the Underwriters an option, exercisable for 30 days after the date of this Prospectus, to purchase up to 1,012,500 additional shares of Common Stock to cover over-allotments, if any, at the initial public offering price, less the underwriting discounts and commissions set forth on the cover page of this Prospectus. If the Underwriters exercise this option, each of the Underwriters will have a firm commitment, subject to certain conditions, to purchase approximately the same percentage thereof that the number of shares of Common Stock to be purchased by it shown in the foregoing table bears to the number of Shares initially offered hereby.
In the Underwriting Agreement, the Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the federal securities laws, or to contribute to payments that the Underwriters may be required to make in respect thereof.
The Company and the Continuing Investors have agreed with the Underwriters, subject to certain limited exceptions, not to offer, sell, contract to sell, pledge, grant any option to purchase or otherwise dispose of any shares of Common Stock (or any securities convertible into, or exercisable, exchangeable or redeemable for, shares of Common Stock) for a period of 360 days from the date of this Prospectus, without the prior written consent of PaineWebber. Management of the Company, including Messrs. Sudarsky, Marcus, Gold, Nelson, Kreitzer, Stone and Ciruzzi, have agreed with the Underwriters, subject to certain limited exceptions, not to offer, sell, contract to sell, pledge or otherwise dispose of any shares of Common Stock (or any securities convertible into, or exercisable, exchangeable or redeemable for, shares of Common Stock), including any shares of
Common Stock that any such persons may have the right to receive by virtue of their ownership interest in Holdings, for a period of two years from the date of this Prospectus, without the prior written consent of PaineWebber. After such time, such shares of Common Stock may be sold in the public market, subject to applicable securities laws restrictions or exemptions from registration, if available. See "Shares Eligible for Future Sale."
The Underwriters do not intend to confirm sales of Shares to any account over which they exercise discretionary authority.
Prior to the Offering, there has been no public market for the shares of Common Stock of the Company. The initial public offering price will be determined through negotiations among the Company and the Representatives. Among the factors considered in such negotiations, in addition to prevailing market conditions, are dividend yields and financial characteristics of publicly traded REITs that the Company and the Representatives believe to be comparable to the Company, the expected results of operations of the Company and the Properties, estimates of the future business potential and earnings prospects of the Company as a whole, the current state of the real estate market in the Company's target markets and the economy as a whole.
The Common Stock has been approved for listing on the NYSE, subject to official notice of issuance, under the symbol "ARE." In order to meet one of the requirements for listing the shares of Common Stock on the NYSE, the Underwriters have undertaken to sell lots of 100 or more shares of Common Stock to a minimum of 2,000 beneficial holders.
Until the distribution of the Common Stock is completed, rules of the Commission may limit the ability of the Underwriters and certain selling group members to bid for and purchase the Common Stock. As an exception to these rules, the Representatives are permitted to engage in certain transactions that stabilize the price of the Common Stock. Such transactions consist of bids or purchases for the purpose of pegging, fixing or maintaining the price of the Common Stock.
If the Underwriters create a short position in the Common Stock in connection with the offering, i.e., if they sell more shares of Common Stock than are set forth on the cover page of this Prospectus, the Representatives may reduce that short position by purchasing shares of Common Stock in the open market. The Representatives may also elect to reduce any short position by exercising all or part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters and selling group members. This means that if the Representatives purchase shares of Common Stock in the open market to reduce the Underwriters' short position or to stabilize the price of the Common Stock, they may reclaim the amount of the selling concession from the Underwriters and selling group members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to reduce a short position could cause the price of the security to be higher than it might be in the absence of such purchases. The imposition of a penalty bid might also have an effect on the price of a security to the extent that it were to discourage resales of the security before the distribution is completed.
Neither the Company nor any of the Underwriters makes any representation or prediction as to the direction or magnitude of any effect that the transactions described above might have on the price of the Common Stock. In addition, neither the Company nor any of the Underwriters makes any representation that the Representatives will engage in such transactions or that such transactions, once commenced, will not be discontinued without notice.
The Company has agreed to pay PaineWebber an advisory fee equal to 1.0% of the gross proceeds of the Offering for structural and advisory services. In addition, affiliates of PaineWebber will receive $44.4 million of the net proceeds as repayment of amounts outstanding under the PaineWebber Facility and are expected to receive
approximately $60.6 million as consideration for the acquisition of the Acquisition LLC. See "Use of Proceeds" and "Formation and Structure" for a description of the payments to be received by affiliates of PaineWebber and the manner in which the purchase price for the Acquisition LLC membership interests will be calculated.
Certain of the Underwriters, including the Representatives, have in the past performed and may continue to perform investment banking, broker-dealer and financial advisory services for the Company and have received customary compensation therefor.
Although the Conduct Rules of the NASD exempt REITs from the conflict of interest provisions thereof, because affiliates of PaineWebber will receive more than 10% of the net proceeds of the Offering as described above, the Underwriters have determined to conduct the Offering in accordance with the applicable provisions of Rules 2710(c)(8) and 2720(c)(3) of the Conduct Rules. In accordance with these requirements, Lehman Brothers Inc. (the "Independent Underwriter") is assuming the responsibilities of acting as "qualified independent underwriter" and will recommend the maximum initial public offering price for the Shares in compliance with the requirements of the Conduct Rules. In connection with the Offering, the Independent Underwriter is performing due diligence investigations and is reviewing and participating in the preparation of this Prospectus and the Registration Statement. The initial public offering price of the Shares will be no higher than the price recommended by the Independent Underwriter.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California, and certain legal matters with respect to Maryland law, including the validity of the issuance of the Shares offered hereby, will be passed upon for the Company by Ballard Spahr Andrews & Ingersoll, Baltimore, Maryland. Certain legal matters will be passed upon for the Underwriters by Goodwin, Procter & Hoar llp, Boston, Massachusetts. Goodwin, Procter & Hoar llp will rely on the legal opinion of Ballard Spahr Andrews & Ingersoll with respect to certain matters relating to Maryland law. A partner at Skadden, Arps, Slate, Meagher & Flom LLP owns certain debt and equity securities of Holdings and will receive $197,500 from Holdings in connection with the Offering as repayment of certain loans. See "Certain Transactions."
EXPERTS
The consolidated financial statements of Alexandria Real Estate Equities, Inc. at December 31, 1996 and 1995, and for each of the two years in the period ended December 31, 1996, and for the period October 27, 1994 (inception) through December 31, 1994, and the statements of revenue and certain expenses for the year ending December 31, 1995, of 1413 Research Boulevard; 300 and 401 Professional Drive; 25, 35, and 45 W. Watkins Mill Road; 1311, 1401 and 1431 Harbor Bay Parkway; the statement of revenue and certain expenses of 1550 East Gude Drive for the year ending December 31, 1996; and the financial statements of PW Acquisitions I, LLC at March 31, 1997, and for the quarter ended March 31, 1997, all appearing in this Prospectus and Registration Statement, have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing.
Certain market information included in this Prospectus and Registration Statement has been prepared by Rosen Consulting Group and is set forth in a report dated May 1, 1997 (the "RCG Study"). Certain information from the RCG Study is included herein in reliance upon the authority of such firm as an expert in, among other things, urban economics and real estate market analysis.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form S-11 under the Securities Act and the rules and regulations promulgated thereunder, with respect to the Shares offered pursuant to this Prospectus. This Prospectus, which is part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits and financial statement schedules thereto. For further information with respect to the Company and the Shares, reference is made to the Registration Statement and such exhibits and financial statement schedules, copies of which may be examined without charge at or obtained upon payment of prescribed fees from, the Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and will also be available for inspection and copying at the regional offices of the Commission located at 13th Floor, 7 World Trade Center, New York, New York 10048, and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661- 2511. The Commission maintains a Website at http:/www.sec.gov, and reports, proxy and information statements and other information regarding registrants that file electronically with the Commission (including the Company) can be obtained from that site.
Statements contained in this Prospectus as to the contents of any contract or other document that is filed as an exhibit to the Registration Statement are not necessarily complete, and each such statement is qualified in its entirety by reference to the full text of such contract or document.
The Company will be required to file reports and other information with the Commission pursuant to the Exchange Act. In addition to applicable legal or NYSE requirements, if any, holders of shares of Common Stock will receive annual reports containing audited financial statements with a report thereon by the Company's independent certified public accountants.
GLOSSARY
As used in this Prospectus, the capitalized and other terms listed below have the meanings indicated.
"401(k) Plan" means the Company's 401(k) Plan.
"1940 Act" means the Investment Company Act of 1940, as amended.
"1994 Plan" means the Holdings' Amended and Restated 1994 Stock Option Plan.
"1994 Acquired Properties" means the four Properties acquired by the Company in 1994.
"1996 Acquired Properties" means the eight Properties acquired by the Company in 1996.
"1996 Plan" means the Company's Amended & Restated 1996 Stock Option Plan.
"1997 Stock Option Plan" means the Company's stock option and incentive plan to be adopted prior to the Offering.
"ACMs" means asbestos-containing materials.
"Acquisition LLC" means PW Acquisitions I, LLC.
"Acquisition LLC Properties" means 1550 East Gude Drive, Rockville, Maryland, 1330 Piccard Drive, Rockville, Maryland and 14225 Newbrook Drive, Chantilly, Virginia.
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"AEW" means AEW Partners II, L.P. and certain of its affiliates.
"Affiliate" of a person means a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with such person.
"Alexandria" means Alexandria Real Estate Equities, Inc., a Maryland corporation.
"Annualized Base Rent" means the annualized fixed base rental amount (determined in accordance with GAAP) in effect as of April 30, 1997 paid by tenants under the terms of their leases. In the case of triple net leases, Annualized Base Rent does not include real estate taxes and insurance, common area and other operating expenses, substantially all of which are borne by the tenants.
"Annualized Net Effective Rent" means the Annualized Base Rent in effect as of April 30, 1997, less (for gross leases) real estate taxes and insurance, common area and other operating expenses and (for all leases) amortized tenant improvements and leasing commissions.
"Bank of America" means the Bank of America National Trust and Savings Association.
"Bankruptcy Code" means Title 11 of the United States Code.
"Built-in Gain" means the excess of the fair market value of an asset as of the beginning of the Recognition Period over the Company's adjusted basis in such asset as of the beginning of the Recognition Period.
"Bylaws" means the Amended and Restated Bylaws of Alexandria.
"Capitalization Rate" means, for each acquired property, the initial annual projected property EBITDA for the 12 months following acquisition, divided by the consideration paid by the Company for such property, including closing costs and budgeted capital improvements.
"Charter" means the Articles of Amendment and Restatement of Alexandria to be filed prior to the consummation of the Offering.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, par value $.01 per share, of Alexandria.
"Company" means Alexandria, QRS, GSA-QRS and the Acquisition LLC, unless the context otherwise requires.
"Continuing Investors" means, collectively, Holdings, the Company's officers, directors and employees and AEW.
"Control Share Acquisition" means the acquisition of Control Shares, subject to certain exceptions.
"Control Shares" means voting shares of stock which, if aggregated with all other such shares of stock previously acquired by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority or more of all voting power, but does not include shares the acquiring person is then entitled to vote as a result of having previously obtained shareholder approval.
"CPI" means a consumer price index.
"Credit Facility" means the revolving credit facility for up to $150 million, for which the Company has received a commitment from the Bank of America.
"EBITDA" means earnings before interest, taxes, depreciation and amortization.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FDA" means the U.S. Food and Drug Administration.
"FFO" means Funds from Operations as defined in the White Paper as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"Formation Transactions" means the transactions described in "Formation and Structure."
"GAAP" means generally accepted accounting principles as from time to time in effect.
"GSA-QRS" means a special purpose entity to be formed prior to consummation of the Offering of which Alexandria will hold a 99% non-managing interest and QRS will hold a 1% managing interest.
"Holdings" means Health Science Properties Holding Corporation, a Maryland corporation.
"Holdings Stock Options" means options granted under Holdings 1994 Stock Option Plan, as amended, or Holdings 1994 Stock Option Plan for Non-Employee Directors, as amended.
"HVAC" means heating, ventilation and air conditioning.
"Independent Underwriter" means Lehman Brothers Inc., who will act as "qualified independent underwriter" and will recommend the maximum initial public offering price for the Shares.
"Interested Stockholder" means any person who beneficially owns 10% or more of the voting power of a corporation's shares or an affiliate of a corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then- outstanding voting stock of the corporation.
"IRS" means the Internal Revenue Service.
"Life Science Facilities" means office buildings containing scientific research and development laboratories and other improvements that are generic to tenants operating in the Life Science Industry.
"Life Science Industry" means the industry comprised of pharmaceutical, biotechnology, diagnostic and personal care products companies, major scientific research institutions and related government agencies.
"LLC Agreement" means the Agreement for Sale and Purchase of Membership Interests entered into between certain affiliates of PaineWebber and the Company on January 13, 1997, as amended.
"MGCL" means the Maryland General Corporation Law, as amended.
"Named Executive Officers" means the Company's Chief Executive Officer and the four other most highly compensated executive officers of the Company.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"NIH" means the National Institutes of Health.
"Non-U.S. Holder" means any person other than (i) a citizen or resident of the United States, (ii) a corporation or partnership created or organized in the United States or under the laws of the United States or of any state thereof, (iii) an estate whose income is includable in gross income for U.S. federal income tax purposes regardless of its source, or (iv) a trust whose administration is subject to the primary supervision of a U.S. court and which has one or more U.S. fiduciaries who have the authority to control all substantial decisions of the trust.
"NYSE" means the New York Stock Exchange.
"Offering" means the offering of Shares hereby.
"Ownership Limit" means the direct or constructive ownership of shares of capital stock representing more than 9.8% of the combined total value of outstanding shares of the Company's capital stock by any person.
"PaineWebber" means PaineWebber Incorporated, the lead managing Underwriter of the Offering.
"PaineWebber Facility" means the Company's acquisition facility with certain affiliates of PaineWebber entered into on September 9, 1996, as amended.
"PhRMA" means Pharmaceutical Research and Manufacturers of America.
"Preferred Stock" means preferred stock, par value $.01 per share, of the Company.
"Prohibited Owner" means a person who beneficially or constructively owns shares of stock of the Company in excess or in violation of the transfer or ownership limitations.
"Properties" means the 15 Properties the Company will own upon consummation of the Offering and the Formation Transactions.
"PW Affiliates" means PaineWebber Real Estate Holdings Inc. and PW Realty Partners, LLC.
"QRS" means ARE-QRS Corp., a Maryland corporation, a wholly owned subsidiary of Alexandria.
"RCG Study" means the market study prepared by the Rosen Consulting Group dated May 1, 1997.
"Recognition Period" means the 10-year period beginning on the first day of the first taxable year for which the Company qualified as a REIT.
"REIT" means a real estate investment trust.
"Registration Statement" means the Registration Statement of which this Prospectus forms a part.
"Related Tenant" means an owner of 10% or more of the Company who directly or constructively owns 10% or more in a tenant.
"Representatives" means PaineWebber, Lehman Brothers Inc., Smith Barney Inc. and EVEREN Securities, Inc.
"Restricted Securities" means the Restricted Shares and shares of Common Stock that will be restricted securities under Rule 144.
"Restricted Shares" means shares of Common Stock held by the Continuing Investors upon consummation of the Offering and the Formation Transactions.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Series T Preferred Stock" means the Series T Preferred Stock, par value $.01 per share, of Alexandria.
"Series U Preferred Stock" means the Series U Preferred Stock, par value $.01 per share, of Alexandria.
"Series V Preferred Stock" means the Series V Preferred Stock, par value $.01 per share, of Alexandria.
"Shares" means the shares of Common Stock to be offered and sold in the Offering.
"Stock Split" means the split of each share of outstanding Common Stock into 1,765.923 shares of Common Stock in connection with the Offering.
"UBTI" means unrelated business taxable income.
"Underwriters" means the Underwriters named in this Prospectus for whom PaineWebber, Lehman Brothers Inc., Smith Barney Inc. and EVEREN Securities, Inc. are acting as Representatives.
"Underwriting Agreement" means the Underwriting Agreement to be entered into between the Company and the Underwriters.
"USRPIs" means U.S. Real Property Interests.
"USRPI Capital Gains" means gains from dispositions of USRPIs, such as the properties beneficially owned by the Company.
"White Paper" means the White Paper on FFO approved by the Board of Governors of NAREIT in March 1995.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
ALEXANDRIA REAL ESTATE EQUITIES, INC.
Unaudited Pro Forma Condensed Consolidated Financial Statements.......... F-2
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31,
1997................................................................... F-3
Unaudited Pro Forma Condensed Consolidated Income Statement for the
Three Months Ended March 31, 1997...................................... F-4
Unaudited Pro Forma Condensed Consolidated Income Statement for the Year
Ended December 31, 1996................................................ F-5
Adjustments to the Unaudited Pro Forma Condensed Consolidated Financial
Statements............................................................. F-6
Historical Consolidated Financial Statements
Report of Independent Auditors.......................................... F-9
Consolidated Balance Sheets as of March 31, 1997 (Unaudited) and
December 31, 1996 and 1995............................................. F-10
Consolidated Statements of Operations for the Three Months Ended March
31, 1997 and 1996 (Unaudited) and for the Years Ended December 31, 1996
and 1995 and the period October 27, 1994 (inception) through December
31, 1994............................................................... F-11
Consolidated Statements of Stockholders' Equity for the Three Months
Ended March 31, 1997 (Unaudited) and for the Years Ended December 31,
1996 and 1995 and the period October 27, 1994 (inception) through
December 31, 1994...................................................... F-12
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 1997 and 1996 (Unaudited) and for the Years Ended December 31, 1996
and 1995 and the period October 27, 1994 (inception) through December
31, 1994............................................................... F-13
Notes to Consolidated Financial Statements.............................. F-14
Schedule III--Rental Properties and Accumulated Depreciation............ F-24
1413 RESEARCH BLVD.
Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................... F-25
Statement of Revenue and Certain Expenses for the Period January 1, 1996
to July 2, 1996 (Unaudited) and for the Year Ended December 31, 1995... F-26
Notes to Statement of Revenue and Certain Expenses...................... F-27
300 AND 401 PROFESSIONAL DRIVE
Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................... F-28
Statement of Revenue and Certain Expenses for the Period January 1, 1996
to September 10, 1996 (Unaudited) and for the Year Ended December 31,
1995................................................................... F-29
Notes to Statement of Revenue and Certain Expenses...................... F-30
25, 35 AND 45 W. WATKINS MILL ROAD
Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................... F-31
Statement of Revenue and Certain Expenses for the Period January 1, 1996
to October 18, 1996 (Unaudited) and for the Year Ended December 31,
1995................................................................... F-32
Notes to Statement of Revenue and Certain Expenses...................... F-33
1311, 1401 AND 1431 HARBOR BAY PARKWAY
Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................... F-34
Statement of Revenue and Certain Expenses for the Period January 1, 1996
to December 12, 1996 (Unaudited) and for the Year Ended December 31,
1995................................................................... F-35
Notes to Statement of Revenue and Certain Expenses...................... F-36
1550 EAST GUDE DRIVE
Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................... F-37
Statement of Revenue and Certain Expenses for the Year Ended December
31, 1996............................................................... F-38
Notes to Statement of Revenue and Certain Expenses...................... F-39
PW ACQUISITIONS I, LLC
Report of Independent Auditors.......................................... F-40
Balance Sheet as of March 31, 1997...................................... F-41
Income Statement and Changes in Members' Capital for the Quarter Ended
March 31, 1997......................................................... F-42
Statement of Cash Flows for the Quarter Ended March 31, 1997............ F-43
Notes to Financial Statements........................................... F-44
Schedule III--Rental Properties and Accumulated Depreciation............ F-47
|
ALEXANDRIA REAL ESTATE EQUITIES, INC.
(FORMERLY KNOWN AS HEALTH SCIENCE PROPERTIES, INC.)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated balance sheet as of March 31, 1997 is presented as if the Offering, the application of the net proceeds thereof and the transactions described in "Formation and Structure" all had occurred on March 31, 1997.
The unaudited pro forma condensed consolidated income statements for the three months ended March 31, 1997, and for the year ended December 31, 1996 are presented as if the Offering, the application of the net proceeds thereof, the transactions described in "Formation and Structure" (including the acquisition of PW Acquisitions I, LLC) and the acquisition of the eight Properties acquired during 1996 (the "1996 Acquired Properties") all had occurred on January 1, 1996.
The pro forma condensed consolidated financial statements are not necessarily indicative of what the Company's financial position or results of operations would have been assuming consummation of the transactions described in "Formation and Structure" and the Offering on such date or at the beginning of the period indicated, nor do they purport to project the Company's financial position or results of operations at any future date or for any future period.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(DOLLARS IN THOUSANDS)
HISTORICAL
ALEXANDRIA PW PROCEEDS
REAL ESTATE ACQUISITIONS I, FROM THE PRO FORMA COMPANY
EQUITIES, INC. LLC (A) OFFERING (B) ADJUSTMENTS PRO FORMA
-------------- --------------- ------------ ----------- ---------
ASSETS
Rental properties--net.. $147,315 $ 51,669 $198,984
Cash and cash
equivalents............ 2,750 (60,515) $128,114 $ 14,520 (C) 6,606
(78,262)(D)
(1)(G)
Tenant security deposit
funds and other
restricted cash........ 4,735 302 5,037
Tenant receivables and
deferred rents......... 1,552 123 1,675
Loan fees and costs--
net.................... 2,468 840 (C) 1,262
(2,046)(E)
Leasing commissions--
net.................... 337 337
Other assets............ 2,533 (298) 2,235
-------- -------- -------- -------- --------
Total assets........ $161,690 $ (8,421) $127,816 $(64,949) $216,136
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Secured notes payable... $112,815 $(72,794)(D) $ 55,381
15,360 (C)
Accounts payable and
accrued expenses....... 4,924 $ 66 (382)(D) 4,608
Prepaid rents........... -- 151 151
Tenant security
deposits............... 490 302 792
Unsecured line of
credit................. 2,500 (2,500)(D) --
Due to Holdings......... 2,300 (2,300)(D) --
Advances from Holdings.. 286 (286)(D) --
-------- -------- -------- -------- --------
Total liabilities... 123,315 519 (62,902) 60,932
Mandatorily redeemable
Series V Preferred
Stock.................. 25,929 (25,929)(F) --
Stockholders' equity
Preferred stock
Undesignated Preferred
Stock................ -- --
Series T 8.5%
Preferred Stock...... 1 (1)(G) --
Series U 8.5%
Preferred Stock...... 110 (110)(G) --
Common Stock............ -- $ 68 16 (F) 104
20 (G)
Additional paid-in
capital................ 15,308 127,748 25,913 (F) 172,264
110 (G)
(20)(G)
3,205 (G)
Accumulated deficit..... (2,973) (8,940) (2,046)(E) (17,164)
(3,205)(G)
-------- -------- -------- -------- --------
Total stockholders'
equity............. 12,446 (8,940) 127,816 23,882 155,204
-------- -------- -------- -------- --------
Total liabilities
and equity......... $161,690 $ (8,421) $127,816 $(64,949) $216,136
======== ======== ======== ======== ========
|
See accompanying notes.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL
ALEXANDRIA PW PRO COMPANY
REAL ESTATE ACQUISITIONS I, FORMA PRO
EQUITIES, INC. LLC ADJUSTMENTS FORMA
-------------- --------------- ----------- ----------
Revenues:
Rental revenue........ $5,175 $1,450 $ 257 (H) $ 6,925
43 (I)
Tenant recoveries..... 1,897 14 (14)(H) 1,897
Other................. 89 3 1 (H) 129
36 (K)
------ ------ ------- ----------
Total revenues...... 7,161 1,467 323 8,951
------ ------ ------- ----------
Expenses:
Rental properties..... 1,830 54 (36)(H) 1,893
45 (J)
General and
administrative ...... 954 (229)(L) 725
Post retirement
benefit.............. 632 632
Stock grant
compensation......... -- (M) --
Interest ............. 2,509 (1,329)(N) 1,180
PW Acquisitions I, LLC
financing costs...... -- (O) --
Depreciation and
amortization......... 1,003 327 (P) 1,330
------ ------ ------- ----------
Total expenses...... 6,928 54 (1,222) 5,760
------ ------ ------- ----------
Net income.............. $ 233 $1,413 $ 1,545 $ 3,191
====== ====== ======= ==========
Pro forma Common Stock
outstanding............ 10,391,848
==========
Pro forma net income per
share.................. $ 0.31(Q)
==========
|
See accompanying notes.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRE-
ACQUISITION
PERIOD FOR
1996
ACQUIRED PRE-
PROPERTIES ACQUISITION
HISTORICAL EXCLUDING PERIOD FOR
ALEXANDRIA 1102 AND 1124 1102 AND 1124 PW PRO COMPANY
REAL ESTATE COLUMBIA COLUMBIA ACQUISITIONS I, FORMA PRO
EQUITIES, INC. STREET STREET(H) LLC (H) ADJUSTMENTS FORMA
-------------- ------------- ------------- --------------- ----------- ----------
Revenues:
Rental revenue........ $12,941 $5,248 $1,976 $6,781 $ 175 (I) $ 27,121
Tenant recoveries..... 4,169 1,323 763 62 352 (J) 6,669
Other................. 563 3 201 (109)(K) 658
------- ------ ------ ------ ------- ----------
Total revenues...... 17,673 6,574 2,940 6,843 418 34,448
------- ------ ------ ------ ------- ----------
Expenses:
Rental properties..... 4,356 1,853 745 62 179 (J) 7,195
General and
administrative 1,972 928 (L) 2,900
Post retirement
benefit.............. 438 438
Stock grant
compensation......... -- (M) --
Interest ............. 6,327 (1,610)(N) 4,717
PW Acquisitions I, LLC
financing costs...... -- (O) --
Depreciation and
amortization......... 2,405 2,548 (P) 4,953
------- ------ ------ ------ ------- ----------
Total expenses...... 15,498 1,853 745 62 2,045 20,203
------- ------ ------ ------ ------- ----------
Net income.............. $ 2,175 $4,721 $2,195 $6,781 $(1,627) $ 14,245
======= ====== ====== ====== ======= ==========
Pro forma common stock
outstanding............ 10,391,848
==========
Pro forma net income per
share.................. $ 1.37(Q)
==========
|
See accompanying notes.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The adjustments to the Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1997 are as follows:
(A) Acquisition of PW Acquisitions I, LLC. Rental Properties (net) consists of the following:
PROPERTY
--------
1150 East Gude Drive.............................................. $ 4,898
1330 Piccard Drive................................................ 14,333
14225 Newbrook Drive.............................................. 32,438
-------
51,669
|
The acquisition price reflected differs from the total amount paid by the Company ($60,609). The difference ($8,940) is treated as a financing cost that will be recognized when the transaction is completed. Other assets and liabilities of PW Acquisitions I, LLC have been reflected at their book value.
(B) Sale of 6,750,000 shares Common Stock in the Offering:
Proceeds from the Offering based on initial price of $21.00 per
share......................................................... $141,750
Costs associated with the Offering............................. (13,636)
--------
128,114
Offering costs paid by Alexandria prior to Offering............ (298)
--------
$127,816
========
Par Value of Common Stock issued, excluding conversion of
Series V preferred stock...................................... 68
Additional paid in capital from proceeds of sale of Common
Stock......................................................... 127,748
--------
$127,816
========
(C) Net proceeds from mortgage financing and line of credit
commitment fees
Gross proceeds from new debt.................................. $ 15,360
Costs associated with new debt origination.................... (290)
Costs associated with new line of credit...................... (550)
--------
$ 14,520
========
(D) Repayment of certain secured notes payable and Due to Holdings
Payment of certain secured notes payable...................... $(72,794)
Payment of unsecured line of credit........................... (2,500)
Payment Due to Holdings....................................... (2,300)
Payment of advances from Holdings............................. (286)
Payment of accrued interest................................... (382)
--------
$(78,262)
========
(E) Write off of unamortized loan fees
|
ALEXANDRIA REAL ESTATE EQUITIES, INC.
ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(F) Conversion of mandatorily redeemable Series V Preferred Stock
exchanged for 1,659,239 shares of Common Stock
Par Value of Common Stock....................................... $ 16
Additional paid-in-capital...................................... 25,913
-------
$25,929
=======
(G) Redemption of Series T 8.5% Preferred Stock for cash............ $ (1)
Conversion of Series U 8.5% Preferred Stock exchanged for 7,071
shares of the Common Stock...................................... (110)
Stock split on Holdings stock and grant of the Company's Common
Stock and substitute options.................................... 20
Non-cash compensation expense associated with the issuance of
152,615 shares of fully vested common stock..................... 3,205
|
2. ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
The pro forma adjustments reflected in the Unaudited Pro Forma Condensed Consolidated Income Statement for the three months ended March 31, 1997 and for the year ended December 31, 1996 are as follows:
(H) Increase in revenue and expenses to adjust for the previously owner-occupied period for certain acquired properties and PW Acquisitions I, LLC:
THREE MONTHS ENDED MARCH 31, 1997 YEAR ENDED DECEMBER 31, 1996
--------------------------------- -------------------------------
PW PW
1102/1104 ACQUISITIONS I, 1102/1104 ACQUISITIONS I,
COLUMBIA STREET LLC COLUMBIA STREET LLC
----------------- ---------------- --------------- ---------------
Rental revenue.......... $ -- $ 257 $ 1,976 $ 6,781
Tenant recoveries....... -- (14) 763 62
Other................... -- 1 201 --
Rental properties
expense................ -- (36) 745 62
|
(I) Increase in rental revenue to adjust the 1996 Acquired Properties and PW Acquisitions I, LLC to straight-line rental revenue for the pro forma period.
(J) Increase in rental properties expenses (primarily due to insurance) and tenant recoveries which are directly related to the increase in pro forma expenses to be recovered in excess of historical amounts.
(K) Increase (decrease) in other income to eliminate non-recurring construction management fees which would not have been realized by the Company as a public REIT.
(L) Increase (decrease) in general and administrative expense related to expected level of operations as a public REIT.
(M) In connection with the Offering, certain officers, directors and employees of the Company will be granted an aggregate of 152,615 shares of the Company's Common Stock. The Company will recognize $3,205 of compensation expense relating to such stock grants.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE THREE MONTHS FOR THE YEAR ENDED
ENDED MARCH 31, 1997 DECEMBER 31, 1996
-------------------- ------------------
(N) Decrease in interest expense
Decrease in interest expense
due to repayment of certain
mortgage loans................ $(1,658) $(2,924)
Increase in interest expense
related to mortgage debt to be
incurred in connection with
the Offering.................. 294 1,177
Increase in amortization of fi-
nance costs related to the
Company's new credit facili-
ty............................ 35 137
------- -------
Net decrease in interest ex-
pense....................... $(1,329) $(1,610)
======= =======
(O) In connection with the Offering, the Company will acquire the
membership interests in PW Acquisitions I, LLC for $60,609. This
exceeds the price paid by PW Acquisitions I, LLC for the
PW Acquisitions I, LLC Properties by $8,940. This difference will be
accounted for as a financing cost that will be recognized when the
transaction is completed.
(P) Increase in depreciation
expense to reflect a full
period of depreciation for the
1996 Acquired Properties and
the PW Acquisitions I, LLC
Properties utilizing a 40-year
useful life for buildings and a
10-year useful life for
improvements................... $ 327 $ 2,548
======= =======
Historical depreciation of the
Company......................... $ 1,003 $ 2,405
Additional depreciation of the
1996 Acquired Properties and the
PW Acquisitions I, LLC
Properties:
Pro forma depreciation as if
the 1996 Acquired Properties
were purchased on January 1,
1996.......................... -- 1,884
Historical depreciation re-
corded by the Company......... -- 645
------- -------
Net increase in depreciation
expense..................... -- 2,529
Depreciation on the PW Acquisi-
tions I, LLC Properties......... 327 1,308
------- -------
Total pro forma depreciation..... $ 1,330 $ 6,242
======= =======
|
(Q) Pro forma net income per share includes pro forma net income from the properties owned by PW Acquisitions I, LLC. If such net income (and the related shares of Common Stock to be sold in the Offering, the net proceeds of which will be used for the purchase of the membership interests in PW Acquisitions I, LLC) were excluded, pro forma net income would be $1,778,000 and $7,464,000, for the three months ended March 31, 1997 and the year ended December 31, 1996, respectively, and pro forma net income per share would be $0.25 and $1.04, for the three months ended March 31, 1997 and the year ended December 31, 1996, respectively.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of Alexandria Real Estate Equities, Inc.
We have audited the accompanying consolidated balance sheets of Alexandria Real Estate Equities, Inc. (formerly known as Health Science Properties, Inc.) (the "Company") as of December 31, 1996 and 1995, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the two years ended December 31, 1996 and 1995 and the period October 27, 1994 (inception) through December 31, 1994. Our audits also included the financial statement schedule III, rental properties and accumulated depreciation. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. 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 the Company as of December 31, 1996 and 1995, and the consolidated results of its operations and its cash flows for each of the two years ended December 31, 1996 and 1995 and the period October 27, 1994 (inception) through December 31, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Los Angeles, California
February 13, 1997,
except for Note 11,
as to which the date is
May 1, 1997
ALEXANDRIA REAL ESTATE EQUITIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
DECEMBER 31,
-----------------------------
MARCH 31,
1997 1996 1995
----------- -------- -------
(UNAUDITED)
ASSETS
Rental properties, net......................... $147,315 $146,960 $54,353
Cash and cash equivalents...................... 2,750 1,696 919
Tenant security deposit funds and other
restricted cash............................... 4,735 5,585 1,214
Tenant receivables and deferred rent........... 1,552 1,244 830
Loan fees and costs (net of accumulated
amortization of $186, $131 and $25,
respectively)................................. 2,468 2,502 206
Leasing commissions (net of accumulated
amortization of $118, $92 and $26,
respectively)................................. 337 353 258
Other assets (net of accumulated amortization
of $117, $103 and $69, respectively).......... 2,533 2,052 922
-------- -------- -------
Total assets............................... $161,690 $160,392 $58,702
======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Secured notes payable.......................... $112,815 $113,182 $36,894
Accounts payable and accrued expenses.......... 4,924 3,026 834
Dividends payable.............................. -- 1,550 --
Tenant security deposits....................... 490 536 536
Unsecured line of credit....................... 2,500 -- 4,000
Due to Health Science Properties Holding
Corporation................................... 2,300 2,300 --
Advances from Health Science Properties Holding
Corporation................................... 286 225 105
-------- -------- -------
Total liabilities.......................... 123,315 120,819 42,369
Commitments and contingencies.................. -- -- --
Manditorily redeemable Series V cumulative
convertible preferred stock, $0.01 par value,
$1,000 stated value per share, 50,000 shares
authorized; 27,500 issued and outstanding..... 25,929 25,042 --
Stockholders' equity:
Preferred stock:
Undesignated preferred stock, $0.01 par value
per share, 14,625 shares authorized; no
shares were issued and outstanding.......... -- -- --
Series T 8.5% preferred stock, $0.01 par
value and $100 stated value per share, 125
shares authorized; 12 shares issued and
outstanding................................. 1 1 1
Series U 8.5% cumulative convertible
preferred stock, $0.01 par value and $500
stated value per share, 250 shares
authorized; 220 shares issued and
outstanding................................. 110 110 --
Common stock, $0.01 par value per share, 65,000
shares authorized; 1,000 issued and
outstanding................................... -- -- --
Additional paid-in capital..................... 15,308 16,195 17,128
Accumulated deficit............................ (2,973) (1,775) (796)
-------- -------- -------
Total stockholders' equity................. 12,446 14,531 16,333
-------- -------- -------
Total liabilities and stockholders'
equity.................................... $161,690 $160,392 $58,702
======== ======== =======
|
See accompanying notes.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
THE PERIOD
OCTOBER 27, 1994
THREE MONTHS YEAR ENDED (INCEPTION)
ENDED MARCH 31, DECEMBER 31, THROUGH
----------------- -------------- DECEMBER 31,
1997 1996 1996 1995 1994
-------- ------- ------- ------ ----------------
(UNAUDITED)
Revenues:
Rental.................... $5,175 $2,090 $12,941 $8,020 $ 834
Tenant recoveries......... 1,897 486 4,169 1,699 87
Other..................... 89 34 563 204 90
-------- ------- ------- ------ ------
7,161 2,610 17,673 9,923 1,011
Expenses:
Rental operations......... 1,830 554 4,356 2,228 252
General and
administrative........... 954 406 1,972 1,608 1,016
Post retirement benefit... 632 -- 438 -- --
Interest.................. 2,509 918 6,327 3,553 328
Depreciation and
amortization............. 1,003 413 2,405 1,668 63
-------- ------- ------- ------ ------
6,928 2,291 15,498 9,057 1,659
-------- ------- ------- ------ ------
Income (loss) from
operations................. 233 319 2,175 866 (648)
Charge in lieu of income
taxes...................... -- -- -- 105 --
-------- ------- ------- ------ ------
Net income (loss)........... $ 233 $ 319 $ 2,175 $ 761 $ (648)
======== ======= ======= ====== ======
Net income allocated to
preferred stockholders..... $ 1,378 $ -- $ 1,256 $ -- $ --
======== ======= ======= ====== ======
Net income (loss) allocated
to common stockholders..... $ (1,145) $ 319 $ 919 $ 761 $ (648)
======== ======= ======= ====== ======
|
See accompanying notes.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
NUMBER OF NUMBER OF
SERIES T SERIES T SERIES U SERIES U NUMBER OF ADDITIONAL
PREFERRED PREFERRED PREFERRED PREFERRED COMMON COMMON PAID-IN ACCUMULATED
SHARES STOCK SHARES STOCK SHARES STOCK CAPITAL DEFICIT TOTAL
--------- --------- --------- --------- --------- ------ ---------- ----------- -------
Balance at October 27,
1994................... $ $ $ $ $ $
Issuance of common
stock................. -- -- -- -- 1,000 -- 17,128 -- 17,128
Net loss............... -- -- -- -- -- -- -- (648) (648)
--- ---- --- ---- ----- ---- ------- ------- -------
Balance at December 31,
1994................... -- -- -- -- 1,000 -- 17,128 (648) 16,480
Issuance of Series T
preferred stock....... 12 1 -- -- -- -- -- -- 1
Cash dividends on
common stock.......... -- -- -- -- -- -- -- (909) (909)
Net income............. -- -- -- -- -- -- -- 761 761
--- ---- --- ---- ----- ---- ------- ------- -------
Balance at December 31,
1995................... 12 1 -- -- 1,000 -- 17,128 (796) 16,333
Issuance of Series U
preferred stock....... -- -- 220 110 -- -- -- -- 110
Accretion on Series V
preferred stock....... -- -- -- -- -- -- (933) -- (933)
Cash dividends on
Series T & U preferred
stock................. -- -- -- -- -- -- -- (9) (9)
Cash dividends on
Series V preferred
stock................. -- -- -- -- -- -- -- (656) (656)
Cash dividends on
common stock.......... -- -- -- -- -- -- -- (939) (939)
Dividends declared on
common stock.......... -- -- -- -- -- -- -- (1,550) (1,550)
Net income............. -- -- -- -- -- -- -- 2,175 2,175
--- ---- --- ---- ----- ---- ------- ------- -------
Balance at December 31,
1996................... 12 1 220 110 1,000 -- 16,195 (1,775) 14,531
Accretion on Series V
preferred stock....... -- -- -- -- -- -- (887) -- (887)
Cash dividends on
Series T & U preferred
stock................. -- -- -- -- -- -- -- (2) (2)
Cash dividends on
Series V preferred
stock................. -- -- -- -- -- -- -- (688) (688)
Cash dividends on
common stock.......... -- -- -- -- -- -- -- (741) (741)
Net income............. -- -- -- -- -- -- -- 233 233
--- ---- --- ---- ----- ---- ------- ------- -------
Balance at March 31,
1997 (unaudited)....... 12 $ 1 220 $110 1,000 $-- $15,308 $(2,973) $12,446
=== ==== === ==== ===== ==== ======= ======= =======
|
See accompanying notes.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
THREE MONTHS THE PERIOD
ENDED YEAR ENDED OCTOBER 27, 1994
MARCH 31, DECEMBER 31, (INCEPTION) THROUGH
--------------- ----------------- DECEMBER 31,
1997 1996 1996 1995 1994
------- ------ -------- ------- -------------------
(UNAUDITED)
OPERATING ACTIVITIES
Net income (loss)....... $ 233 $ 319 $ 2,175 $ 761 $ (648)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization......... 1,058 419 2,405 1,668 63
Changes in operating
assets and
liabilities:
Tenant security
deposit funds and
other restricted
cash............... 850 456 (4,371) (779) (130)
Loan fees and
costs.............. (21) -- (2,402) (15) --
Leasing
commissions........ (10) (2) (67) (258) --
Other assets........ (802) (749) (1,578) (1,433) 86
Accounts payable and
accrued expenses... 1,898 530 2,192 267 (384)
Tenant security
deposits........... (46) (1) -- 144 (11)
------- ------ -------- ------- --------
Net cash provided by
(used in) operating
activities............. 3,160 972 (1,646) 355 (1,024)
INVESTING ACTIVITIES
Additions to rental
properties............. (1,319) (86) (1,578) (1,554) --
Purchase of rental
properties............. -- -- (93,322) -- (29,924)
------- ------ -------- ------- --------
Net cash used in
investing activities... (1,319) (86) (94,900) (1,554) (29,924)
FINANCING ACTIVITIES
Proceeds from secured
notes payable.......... -- -- 77,260 1,250 19,711
Cash portion of
contributed net
assets................. -- -- -- -- 9,427
Proceeds from issuance
of Series T preferred
stock.................. -- -- -- -- 1
Proceeds from issuance
of Series U preferred
stock.................. -- 105 110 -- --
Proceeds from issuance
of Series V preferred
stock (net of issuance
costs of $3,391)....... -- -- 24,109 -- --
Proceeds from unsecured
line of credit......... 2,500 -- -- 1,000 3,000
Increase in due to
Health Science
Properties Holding
Corporation............ -- (17) 2,300 -- --
Increase in advances
from Health Science
Properties Holding
Corporation............ 61 -- 120 105 --
Principal reductions of
unsecured line of
credit................. -- -- (4,000) -- --
Principal reductions of
secured notes payable.. (367) (139) (972) (519) --
Common dividends paid... (2,291) -- (939) (909) --
Preferred dividends
paid................... (690) (1) (665) -- --
------- ------ -------- ------- --------
Net cash provided by
(used in) financing
activities............. (787) (52) 97,323 927 32,139
Net increase (decrease)
in cash and cash
equivalents............ 1,054 834 777 (272) 1,191
Cash and cash
equivalents at
beginning of year...... 1,696 919 919 1,191 --
------- ------ -------- ------- --------
Cash and cash
equivalents at end of
year................... $ 2,750 $1,735 $ 1,696 $ 919 $ 1,191
======= ====== ======== ======= ========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION
Cash paid during the
year for interest...... $ 2,192 $ 851 $ 5,953 $ 3,409 $ 293
======= ====== ======== ======= ========
Cash paid during the
year for income taxes.. $ -- $ -- $ -- $ -- $ --
======= ====== ======== ======= ========
|
See accompanying notes.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE
PERIOD OCTOBER 27, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Alexandria Real Estate Equities, Inc. (formerly known as Health Science Properties, Inc.--see Note 11), a Maryland corporation (the "Company"), was formed on October 27, 1994. The common stock of the Company is wholly owned by Health Science Properties Holding Corporation ("Holdings").
The Company and its wholly owned subsidiary, ARE-QRS Corp. ("ARE-QRS"), were formed to acquire, manage and develop properties for lease to the life science industry. As of December 31, 1996, the Company had acquired the following properties:
NUMBER NUMBER
OF OF RENTABLE
PROPERTY NAME LOCATION BUILDINGS TENANTS SQUARE FEET
------------- -------- --------- ------- -----------
10933 N. Torrey Pines
Road.................... San Diego, California 1 3 108,133
11099 N. Torrey Pines
Road.................... San Diego, California 1 4 86,962
3535 General Atomics
Court................... San Diego, California 1 3 76,084
3565 General Atomics
Court................... San Diego, California 1 1 43,600
1102 and 1124 Columbia
Street.................. Seattle, Washington 1 2 213,397
1413 Research Blvd....... Rockville, Maryland 1 1 105,000
300 and 401 Professional
Drive................... Gaithersburg, Maryland 2 3 111,179
25, 35 and 45 W. Watkins
Mill Road............... Gaithersburg, Maryland 1 6 138,938
1311, 1401 and 1431
Harbor Bay Parkway...... Alameda, California 3 4 147,777
---------
1,031,070
=========
|
Principles of Consolidation
All significant intercompany accounts and transactions have been eliminated in consolidation.
Proposed Transactions
The Company expects to elect real estate investment trust ("REIT") status effective 1996 for federal income tax purposes. The Company currently intends to consummate an Initial Public Offering ("Offering") of the Company's common stock to enable it, ARE-QRS and a special-purpose entity to be formed by the Company prior to the Offering ("GSA-QRS") to (i) acquire a limited liability company formed and owned by certain affiliates of PaineWebber Incorporated (see Note 11), (ii) repay certain existing debt, (iii) provide a vehicle for future acquisitions, and (iv) comply with certain requirements under the federal income tax laws and regulations relating to REITs.
In connection with the Offering, the Company will redeem all of the outstanding shares of its Series T preferred stock and convert into shares of Common Stock all of the outstanding shares of its Series U preferred stock. In addition, the Company has notified AEW Partners II, L.P. and certain of its affiliates (collectively, "AEW"), the sole holders of the Series V preferred stock, of its intention to (i) convert one-half of the outstanding shares of its Series V preferred stock into shares of Common Stock and (ii) redeem the remaining shares of Series V preferred stock for cash (see Note 11). Notwithstanding the option of the Company to effectuate the foregoing conversion and redemption, AEW has elected to convert all of the outstanding shares of Series V preferred stock into shares of Common Stock. As a result, the officers, directors and employees of the Company, together with Holdings and AEW (the "Continuing Investors"), will hold 3,634,777 shares of Common Stock after the Offering. Simultaneous with consummation of the Offering, the Company also will
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
acquire 100% of the ownership interests in the Acquisition LLC (see Note 11), thereby acquiring three additional properties. None of the current shareholders has any direct or indirect interest in the Acquisition LLC or the additional properties owned thereby.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
Rental Properties
Rental properties are recorded at cost. Costs associated with acquiring and renovating properties are capitalized as incurred. At such times that events or circumstances indicate that the carrying amount of a property may be impaired, the Company makes an assessment of its recoverability by estimating the future undiscounted cash flows, excluding interest charges, of the property. If the carrying amount exceeds the aggregate future cash flows, the Company would recognize an impairment loss to the extent the carrying amount exceeds the fair value of the property. Based upon such periodic assessments, no impairment has been determined and no rental properties carrying amounts have been adjusted.
Maintenance and repairs are expensed as incurred. Major replacements and betterments are capitalized and depreciated over their estimated useful lives.
Depreciation is computed on the straight-line method using estimated lives of 30 to 40 years for building and improvements, and the term of the respective lease for tenant improvements.
Restricted Cash
Restricted cash consists of security deposit funds and a $4,715,000 tenant improvement reserve established by the Company pursuant to a lease with a tenant at one of the Company's properties.
Rental Income
Rental income from leases with scheduled rent increases, free rent and other rent concessions are recognized on a straight-line basis over the lease term. Amounts currently recognized as income, and expected to be received in later years, are included in tenant receivables and deferred rent. Amounts received currently, but recognized as income in future years, are included in unearned rent.
Loan Fees and Costs
Fees and costs incurred in obtaining long-term financing are amortized over the terms of the related loan agreements and included in interest expense.
Leasing Commissions
Leasing commissions are amortized on a straight-line basis over the term of the related lease.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Offering Costs and Yield Adjustment
Offering costs associated with the issuance of preferred shares are deducted from the proceeds of the preferred stock. The Company accretes the difference between the minimum yield requirement on the preferred stock and the minimum dividend payment as a charge to additional paid-in capital.
Fair Value of Financial Instruments
The Company believes the carrying amounts of its financial instruments, except certain secured notes payable, approximate their fair values (see Note 4).
Earnings Per Share
Per share data is not meaningful because the Company is a wholly owned subsidiary of Holdings and the Company's capital structure will be materially affected by the Proposed Transactions.
Income Taxes
For the taxable year ended December 31, 1996, the Company intends to make an election to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code. As a REIT, the Company generally will not be subject to federal income tax if it meets a number of organizational and operational requirements and distributes at least 95% of its taxable income for each tax year to its stockholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to state and local income taxes and to federal income tax and excise tax on its undistributed income. None of the Company's distributions made for the year ended December 31, 1996, represented a return of capital.
For the year ended December 31, 1995, deferred income taxes are recognized for tax consequences of temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods and tax net operating loss ("NOL") carryforwards.
Unaudited Interim Statements
The consolidated financial statements as of March 31, 1997 and for the three months ended March 31, 1997 and 1996, are unaudited. In the opinion of management, such financial statements reflect all adjustments necessary for a fair presentation of the results of the respective interim periods. All such adjustments are of a recurring nature.
2. RENTAL PROPERTIES
Rental properties are as follows:
DECEMBER 31,
-----------------
1996 1995
-------- -------
(IN THOUSANDS)
Land.................................................... $ 28,383 $10,444
Building and improvements............................... 121,236 45,397
Tenant and other improvements........................... 1,535 413
-------- -------
151,154 56,254
Less accumulated depreciation........................... (4,194) (1,901)
-------- -------
$146,960 $54,353
======== =======
|
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
All of the Company's rental properties are encumbered by deeds of trust and assignments of the rents and leases associated with the properties. The Company leases space, under noncancelable leases with remaining terms of 1 to 20 years. Certain tenants are also obligated to reimburse the Company for specific operating expenses.
Minimum lease payments to be received under the terms of the operating lease agreements, excluding expense reimbursements, as of December 31, 1996 are as follows:
(IN THOUSANDS)
1997........................................................ $21,663
1998........................................................ 20,371
1999........................................................ 16,107
2000........................................................ 12,459
2001........................................................ 9,004
Thereafter.................................................. 28,299
|
3. UNSECURED LINE OF CREDIT
The unsecured line of credit to the Company from a bank had a maximum commitment of $3,000,000 (which was subject to increase, with certain limitations, to $4,000,000) bore interest at LIBOR plus 2.5% (or prime plus 1.5%) and matured on October 31, 1995.
In September 1995, certain terms of the line of credit were amended. The limitation to increase the maximum commitment to $4,000,000 was removed and the maximum commitment was increased to $4,000,000. The interest rate was increased to LIBOR plus 3.00% (or prime plus 1.75%) and the due date was extended to January 31, 1996. The loan was further extended to June 30, 1996. This loan was repaid in full during the year ended December 31, 1996.
4. SECURED NOTES PAYABLE
Secured notes payable are as follows:
1996 1995
-------- -------
(IN THOUSANDS)
Line of credit, with PaineWebber Incorporated, secured by
four of the Company's properties, with a maximum
commitment of $44,400,000, bearing interest at LIBOR plus
2.5%, and due in 1999, convertible to a 10 year term
loan..................................................... $ 44,400 $ --
Notes payable to banks, an insurance company, and a
tenant/prior owner secured by first and second deeds of
trust on the rental properties, bearing interest at fixed
rates ranging from 8.25% to 9.00% and due at various
dates through 2014....................................... 67,152 35,204
Note payable to a bank, secured by certain building
improvements, bearing interest at prime plus 1.5% and due
in 1997.................................................. 380 440
Line of credit with a maximum commitment of $1,250,000,
secured by deeds of trust on rental properties, bearing
interest at LIBOR plus 2.5% and due in 1997.............. 1,250 1,250
-------- -------
$113,182 $36,894
======== =======
|
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future principal payments due on secured notes payable, as of December 31, 1996, are as follows:
(IN THOUSANDS)
1997........................................................ $ 25,016
1998........................................................ 1,430
1999........................................................ 49,523
2000........................................................ 1,192
2001........................................................ 1,295
Thereafter.................................................. 34,726
--------
$113,182
========
|
The prime and LIBOR rates of interest at December 31, 1996 were 8.25% and 5.78%, respectively.
Based on the borrowing rates currently available to the Company for bank loans with similar maturities, the fair value of secured notes payable as of December 31, 1996 and 1995 are approximately $113,215,000 and $37,650,000, respectively.
Effective October 1, 1996, the Company entered into two interest rate floor and cap transactions with notional amounts of $44,500,000 to convert its floating rate line of credit with PaineWebber Incorporated to a fixed rate liability. The agreements limit the risk of rising interest rates associated with the Company's line of credit by fixing the variable portion of the interest rate on variable rate debt at 8.0% through October 1, 1999. The Company does not hold or issue the interest rate agreements for trading purposes and is exposed to possible credit risk if the counterparties fail to perform on the contracts. The cost of the derivative is included as a loan cost and amortized over the term of the line of credit as an adjustment to the interest rate yield.
5. INCOME TAXES
As of December 31, 1996, the Company had net deferred tax assets totaling
$1,246,000 arising primarily from differences between financial accounting and
income tax reporting for the effects of (i) straight line rents;
(ii) depreciation and amortization; (iii) unearned rents; (iv) the present
value of a post-retirement benefit and (v) an NOL carryforward totaling
$213,000. Since the Company intends to qualify as a REIT it has fully reserved
the amount of income tax benefit relating to its deferred tax assets to the
extent they exceed deferred tax liabilities, and has not recognized any
deferred tax expense.
6. MANDATORILY REDEEMABLE PREFERRED STOCK
Series V cumulative convertible preferred stock
Series V preferred stockholders are entitled to dividends at an annual rate of 10% of the stated value per share during the first twelve dividend periods or such larger amount as would be payable on an as converted basis were the Series V preferred stock converted to common stock. Beginning with the thirteenth dividend period, the annual dividend rate increases to 15%. The stated value of each share is $1,000. Dividends are cumulative and are payable in quarterly equal installments on March 31, June 30, September 30, and December 31 of each year. In the event of any liquidation events, the Series V preferred stockholders are entitled to a liquidation preference that will provide an internal rate of return of 15% on the stated value per share.
Upon the closing of an Offering during the four years following the issue date of the shares of Series V preferred stock, the Company has the right to redeem no less than one-half of the Series V preferred stock for cash and to convert the balance into fully paid and nonassessable shares of common stock. The redemption price per share of Series V preferred stock is the stated value plus an amount calculated to provide an internal rate of
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
return of 20%. Notwithstanding the Company's option to redeem and convert the Series V preferred stock as set forth above, the Series V preferred stockholders have elected to convert all of the Series V preferred stock at the conversion share price (as defined). In addition, each share of Series V preferred stock may convert at the conversion share price into common stock at the option of the holder (i) prior to the closing of a merger or consolidation of the Company, (ii) at any time after the fourth anniversary of the issue date or (iii) upon consummation of the Offering.
Other than in connection with a partial cash redemption (as defined), the Company may not redeem the Series V preferred stock prior to the third anniversary of the issue date. Thereafter, such shares may be redeemed in whole but not in part, at an amount which provides the holders an internal rate of return equal to 25%, for the first three years and 20% thereafter.
The Series V preferred stock is subject to certain procedural and operating covenants including payment of regular dividends and maintaining minimum cash available for distribution (as defined). Following the first anniversary of the issue date, the holder of the Series V preferred stock shall have the option upon a breach of such covenants to cause the Company to redeem such shares for an amount in cash necessary to provide an internal rate of return ranging from 15% to 20% depending on the covenant breach which triggered such redemptions.
The Series V preferred stock ranks senior to the common stock and all other classes of preferred stock issued by the Company with respect to dividends, liquidations, and for all other purposes. The difference between the amount of dividends and the internal rate of return to be earned upon the closing of the Offering is accreted to the recorded value of the stock.
7. PREFERRED STOCK
Series T 8.5% preferred stock
Holders of the Series T preferred stock are entitled to dividends at an annual rate of 8.5% of the stated value per share. Dividends are fully cumulative and are payable, in arrears, on July 1 and January 1 of each year.
The Series T preferred stock may be redeemed from time to time, in whole or in part, at the option of the Company, at a redemption price equal to 100% of the stated value per share, plus all accrued and unpaid dividends, whether or not authorized and declared. The stated value per share of the Series T preferred stock is $100.
In addition to separate class voting rights on certain matters directly effecting the specific status and rights of the Series T preferred stockholders, the Series T preferred stockholders are entitled to vote upon all matters upon which holders of common stock have the right to vote.
Series T preferred stock ranks on parity with Series U 8.5% preferred stock and is junior to Series V preferred stock with respect to dividends, liquidations, and all other purposes.
Series U 8.5% cumulative convertible preferred stock
Holders of the Series U 8.5% preferred stock are entitled to dividends at an annual rate of 8.5% of the stated value per share. Dividends are fully cumulative and are payable in arrears on January 1 of each year.
Commencing on the fifth anniversary of the issue date, the Series U preferred stock may be redeemed, at a redemption price equal to 135% of the stated value per share, plus all accrued and unpaid dividends. The stated value per share of the Series U preferred stock is $500.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Series U preferred stock is mandatorily convertible into common stock if
(i) shares of common stock are registered under the Securities Act of 1933, as
amended, pursuant to an effective registration statement, and (ii) the Company
has entered into an underwriting agreement to sell shares of common stock
(which underwriting agreement sets forth the price at which such shares will
be offered for sale). Upon such conversion, each share of Series U preferred
stock will convert into a number of shares of common stock having a value
equal to 135% of the Series U stated value plus all accrued and unpaid
dividends.
The Series U holders have no voting rights other than on certain matters directly affecting the specific status and rights of the Series U.
The Series U preferred stock ranks on parity with Series T preferred stock and is junior to Series V preferred stock with respect to dividends, liquidations, and all other purposes.
8. COMMITMENTS AND CONTINGENCIES
Litigation
To the Company's knowledge, no litigation is pending against the Company, other than routine actions and administrative proceedings, substantially all of which are expected to be covered by liability insurance or which, in the aggregate, are not expected to have a material adverse effect on the financial condition, results of operations or cash flows of the Company.
Employment Agreements
Two of the Company's executives have signed employment agreements that run through December 31, 2000. For the year ended December 31, 1997, these executives will earn a combined salary of $475,000. For the remaining three years they will earn a combined salary of $415,000. One of the executives will earn an annual retirement benefit of $150,000 per year for the first three years following the consummation of the Offering, at which time his benefit will be reduced to $90,000 per year, plus an annual cost of living increase of 2% per year for the remainder of his life and his then living spouse's life. For the year ended December 31, 1996, the Company recorded a post-retirement benefit for past services provided by this executive equal to $438,000.
Three employees are subject to employment agreements that provide for a combined annual salary of $435,000 per year and are for a term ending on December 31, 1998, with a provision for automatic one year extensions until either the executive or the Company notifies the other that such party does not wish to extend the agreement.
Each of the employment agreements of the executives and employees provides for bonuses and base salary adjustments. With respect to two of these individuals, the bonus is tied to the annual increase in funds from operations (as defined).
Concentration of Credit Risk
The Company maintains its cash and cash equivalents at insured financial institutions. The combined account balances at each institution periodically exceeds FDIC insurance coverage, and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. Management believes that the risk is not significant.
The Company is dependent on rental payments from a limited number of tenants and the inability of any single tenant to make its lease payments could adversely affect the Company and its ability to make distributions to stockholders. The Company currently has approximately 31 leases with a total of approximately 26 tenants,
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and eight of the Company's 15 properties (including the properties to be acquired in connection with the Company's acquisition of the Acquisition LLC-- see Note 11) are single-tenant properties. At February 1, 1997, three of the Company's tenants, accounted for approximately 37% of the Company's aggregate annualized base rent.
The Company does not generally require collateral or other security from its tenants other than security deposits. The Company has available two irrevocable letters of credit totaling $858,000 which are used as security deposits for two leases.
9. STOCK OPTION PLANS
1996 Stock Option Plan
The Company has a ten-year incentive and nonqualified stock option plan (the "Plan") for certain employees and non-employee directors of the Company. Under the Plan, options to purchase shares of common stock of the Company are granted to eligible participants at an exercise price to be determined by the Administrator of the Plan (the "Administrator") at the time of grant, which may not be less than the Fair Market Value (as defined in the Plan) of the common stock as of the grant date. The Plan resulted from the consolidation of the Company's 1996 Stock Option Plan, 1996 Stock Option Plan for Non-Employee Directors, 1995 Substitute Stock Option Plan and 1995 Substitute Stock Option Plan for Non-employee Directors. Non-employee directors of the Company are only eligible to receive non-qualified stock options under the Plan. Unless otherwise determined by the Administrator, the option shares may be exercised as follows:
. 50% one year following the grant date.
. 75% two years following the grant date.
. 100% three years following the grant date.
The Administrator may waive such installment exercise provisions at any time
based on such factors as the Administrator may determine in its sole
discretion. In addition, any option that is outstanding and not yet fully
exercisable under the Plan shall become fully and immediately exercisable upon
(i) certain events of termination of employment as set forth in the Plan, (ii)
the underwritten initial public offering of common stock by the Company or
(iii) a Change in Control (as defined in the Plan). A maximum of 239.60 shares
of common stock are authorized for issuance under the Plan and none are
outstanding.
Under the Plan, holders of options granted under the Holdings 1994 Stock Option Plan, as amended, or the Holdings 1994 Stock Option Plan for Non- Employee Directors, as amended, ("Holdings Stock Options") may be eligible to be granted substitute stock options in the event of certain changes in the capital or corporate structure of the Company or a subsidiary of the Company (including upon the consummation of the Offering). Substitute stock options may be granted under the Plan in substitution for then outstanding Holdings Stock Options to the extent that the Administrator determines, in its sole discretion, that the grant of substitute stock options is necessary to provide that holders of Holdings Stock Options not be deprived of benefits to which they would otherwise have been entitled had such event or events not occurred. Any grant of a substitute stock option will be subject to the prior cancellation and surrender of the corresponding Holdings Stock Option. The terms and conditions of substitute stock options shall be substantially equivalent to those of the Holdings Stock Options in respect of which the substitute stock options are granted. In connection with the proposed Offering substitute stock options will be granted under the 1996 Plan in substitution for outstanding Holdings Stock Options. As of December 31, 1996, 7,932 Holdings Stock Options had been issued and are outstanding. In January 1997, an additional 4,045 options were issued by Holdings. No substitute stock options were outstanding at December 31, 1996.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee and director stock options.
Post-IPO Stock Option Plan
The Company will adopt a stock option and incentive plan (the "1997 Stock Option Plan") prior to consummation of the Offering. The 1997 Stock Option Plan will be administered by the Compensation Committee of the Board of Directors. The 1997 Stock Option Plan is expected to provide for the grant of incentive stock options intended to qualify as such under Section 422 of the Internal Revenue Code, non-qualified stock options, stock appreciation rights and restricted stock to employees, officers, directors and independent contractors (including non-employee directors) of the Company with respect to 900,000 shares of Common Stock; provided, that incentive stock options may be granted only to employees of the Company. The 1997 Stock Option Plan will permit the Compensation Committee to select eligible employees, officers, directors and independent contractors (including non-employee directors) of the Company to receive awards, to determine the type and number of awards to be granted and to determine the terms, conditions, restrictions and performance criteria relating to any award. In connection with the Offering, the Company will grant options to officers, directors and certain employees of the Company under the 1997 Stock Option Plan with respect to an aggregate of 600,000 shares of Common Stock.
10. RELATED PARTY TRANSACTIONS
During 1996 and 1995, the Company incurred $1,708,000 and $369,000, respectively, for legal services provided by a law firm of which a shareholder of Holdings is a member.
General and administrative expenses for 1996 and 1995 include $49,000 and $35,000, respectively, for payroll accounting and office space provided by a shareholder of Holdings.
Holdings advanced to the Company $2,483,000 at a rate of 10% which is due on demand. For the year ended December 31, 1996, $162,000 of interest was accrued and $42,000 was paid on this advance.
11. SUBSEQUENT EVENTS
Subsequent to December 31, 1996, the following events occurred:
The Company assigned its rights to purchase three properties to PW
Acquisitions I, LLC, a limited liability company ("Acquisition LLC")
controlled by PaineWebber Real Estate Holdings, Inc. and PW Realty Partners
LLC (together "PaineWebber"). In January 1997, the Acquisition LLC acquired
the three properties for approximately $52 million. The Company, upon
occurrence of certain events (but no later than September 30, 1998), is
required to purchase the outstanding membership interests in the Acquisition
LLC. The purchase price for the membership interests in the Acquisition LLC
will equal the original purchase price of the properties (adjusted for certain
cash flow amortization from the Acquisition LLC Properties), plus 50% of the
difference between the aggregate fair value, as defined, over PaineWebber's
adjusted purchase price. PaineWebber has agreed to amend the purchase
agreement to reduce the purchase price (as thus calculated) by approximately
$766,000. Based upon the above formula, the Company will be required to
purchase the membership interests in the Acquisition LLC for approximately
$60.6 million with a portion of the net proceeds of the Offering.
On January 24, 1997, the Company entered into an unsecured line of credit of $2,500,000 which bears interest at either the "Reference Rate" or the LIBOR rate, plus a margin based upon the ratio of liabilities to gross asset value, and matures on December 31, 1997. The Company has drawn $2,500,000 subsequent to
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 31, 1996. The line of credit contains certain financial covenants, and repayment is guaranteed by Holdings.
Subsequent to year-end, the Company adopted a 401(k) plan which became effective January 1, 1997. Each employee of the Company may enroll in the plan on such employee's date of hire. An actively employed employee is eligible to receive a matching contribution under the plan equal to 50% of each participant's contribution. Plan participants are immediately vested in their contributions to the plan and the matching contributions by the Company.
Subsequent to year-end, the Company changed its name from Health Science Properties, Inc. to Alexandria Real Estate Equities, Inc. and changed the name of its consolidated subsidiary from HSP-QRS Corp. to ARE-QRS Corp.
Subsequent to year-end, AEW notified the Company of its election to convert all of its Series V preferred stock into shares of Common Stock in connection with the Offering.
12. NON-CASH TRANSACTION
In connection with the formation of the Company, the following net assets were contributed from Holdings, on November 4, 1994:
(IN THOUSANDS)
Rental properties, net...................................... $ 24,544
Cash and cash equivalents................................... 9,427
Tenant security deposit funds............................... 306
Other assets, net........................................... 655
Secured notes payable and unsecured line of credit.......... (16,453)
Tenants security deposits................................... (403)
Accounts payable and accrued expenses....................... (948)
--------
Net assets................................................ $ 17,128
========
|
SCHEDULE III
ALEXANDRIA REAL ESTATE EQUITIES, INC.
RENTAL PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
COSTS
CAPITALIZED
SUBSEQUENT TO
INITIAL COSTS ACQUISITION TOTAL COSTS
--------------------- ------------- ------------------------------
SQUARE BUILDINGS AND BUILDINGS AND ACCUMULATED
PROPERTY FOOTAGE LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION ENCUMBRANCES
- -------- --------- ------- ------------- ------------- ------- ------------- -------- ------------ ------------
10933 N. Torrey
Pines Road..... 108,133 $ 3,903 $ 5,960 $1,048 $ 3,903 $ 7,008 $ 10,911 $ 586 $ 7,741
11099 N. Torrey
Pines Road..... 86,962 2,663 10,649 1,545 2,663 12,194 14,857 1,069 10,106
3535 General
Atomics Court.. 76,084 2,651 18,046 153 2,651 18,199 20,850 1,244 12,180
3565 General
Atomics Court.. 43,600 1,227 9,554 -- 1,227 9,554 10,781 650 6,303
1102 and 1124
Columbia
Street......... 213,397 6,566 23,528 73 6,566 23,601 30,167 339 32,452
1413 Research
Boulevard...... 105,000 2,317 9,611 238 2,317 9,849 12,166 121 8,600
300 and 401
Professional
Drive.......... 111,179 2,000 12,302 22 2,000 12,324 14,324 95 10,800
25, 35 and 45 W.
Watkins Mill
Road........... 138,938 3,281 14,416 32 3,281 14,448 17,729 69 11,700
1311, 1401 and
1431 Harbor Bay
Parkway........ 147,777 3,775 15,526 68 3,775 15,594 19,369 21 13,300
--------- ------- -------- ------ ------- -------- -------- ------ --------
1,031,070 $28,383 $119,592 $3,179 $28,383 $122,771 $151,154 $4,194 $113,182
========= ======= ======== ====== ======= ======== ======== ====== ========
PROPERTY YEAR BUILT
- -------- ----------
10933 N. Torrey
Pines Road..... 1971
11099 N. Torrey
Pines Road..... 1986
3535 General
Atomics Court.. 1991
3565 General
Atomics Court.. 1991
1102 and 1124
Columbia
Street......... 1975
1413 Research
Boulevard...... 1967
300 and 401
Professional
Drive.......... 1989/1987
25, 35 and 45 W.
Watkins Mill
Road........... 1989
1311, 1401 and
1431 Harbor Bay
Parkway........ 1984/1985/
1986
|
A summary of activity of rental office properties and accumulated depreciation is as follows:
RENTAL PROPERTIES
DECEMBER 31,
------------------------
1996 1995 1994
-------- ------- -------
Balance at beginning of period................... $ 56,254 $54,700 $ --
Improvements..................................... 1,578 1,554 47
Acquisition of land, building and improvements... 93,322 -- 54,653
-------- ------- -------
Balance at end of period......................... $151,154 $56,254 $54,700
======== ======= =======
|
ACCUMULATED DEPRECIATION
DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
Balance at beginning of period................... $ 1,901 $ 333 $ 270
Depreciation expense............................. 2,293 1,568 63
-------- -------- ------
Balance at end of period......................... $ 4,194 $ 1,901 $ 333
======== ======== ======
|
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors Alexandria Real Estate Equities, Inc.
We have audited the accompanying statement of revenue and certain expenses of 1413 Research Blvd. (the "Property") for the year ended December 31, 1995. This statement of revenue and certain expenses is the responsibility of the management of the Property. Our responsibility is to express an opinion on the statement of revenue and certain expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of revenue and certain expenses is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Alexandria Real Estate Equities, Inc. Certain expenses (described in Note
1) that would not be comparable to those resulting from the proposed future
operations of the Property are excluded and the statement is not intended to
be a complete presentation of the revenue and expenses of the Property.
In our opinion, the statement of revenue and certain expenses presents fairly, in all material respects, the revenue and certain expenses, as defined above, of the Property for the year ended December 31, 1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
February 20, 1997
1413 RESEARCH BLVD.
STATEMENT OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
PRE ACQUISITION
PERIOD FOR THE YEAR
JANUARY 1, ENDED
1996 TO DECEMBER 31,
JULY 2, 1996 1995
--------------- ------------
(UNAUDITED)
Revenue:
Rental........................................... $ 711 $407
Tenant recoveries................................ 595 243
------ ----
Total revenue.................................. 1,306 650
Certain Expenses:
Utilities........................................ 194 128
Repairs and maintenance.......................... 389 134
Insurance........................................ 10 --
Taxes and license................................ 87 174
------ ----
Total certain expenses......................... 680 436
------ ----
Excess of revenue over certain expenses........ $ 626 $214
====== ====
|
See accompanying notes to statement of revenue and certain expenses.
1413 RESEARCH BLVD.
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The accompanying statement of revenue and certain expenses includes the operations of 1413 Research Blvd. located in Rockville, Maryland (the "Property") which was acquired by Alexandria Real Estate Equities, Inc., a Maryland corporation (the "Company") from a nonaffiliated third party. The Property is 100% leased to the United States Government.
Basis of Presentation
The accompanying statement has been prepared to comply with the rules and regulations of the Securities and Exchange Commission for inclusion in the registration statement on Form S-11 of the Company.
The accompanying statement is not representative of the actual operations for the period presented as certain expenses that may not be comparable to the expenses expected to be incurred by the Company in the future operations of the Property have been excluded. Excluded expenses consist of interest, depreciation and amortization and property general and administrative costs not directly comparable to the future operations of the Property.
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the terms of the related leases.
Risks and Uncertainties
The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Unaudited Interim Statement
The statement of revenue and certain expenses for the period January 1, 1996, to July 2, 1996 (date of acquisition) is unaudited. In the opinion of management, this financial statement reflects all adjustments necessary for a fair presentation of the results of the respective interim period. All such adjustments are of a normal, recurring nature.
2. RENTAL OFFICE PROPERTY
The future minimum lease payments to be received under noncancelable operating leases as of December 31, 1996, are as follows:
1997........................................................... $ 1,563,000 1998........................................................... 1,563,000 1999........................................................... 1,366,000 2000........................................................... 1,225,000 2001........................................................... 919,000 Thereafter..................................................... -- |
The above future minimum lease payments do not include specified payments for tenant recoveries of operating expenses.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors Alexandria Real Estate Equities, Inc.
We have audited the accompanying statement of revenue and certain expenses of 300 and 401 Professional Drive (the "Property") for the year ended December 31, 1995. This statement of revenue and certain expenses is the responsibility of the management of the Property. Our responsibility is to express an opinion on the statement of revenue and certain expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of revenue and certain expenses is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Alexandria Real Estate Equities, Inc. Certain expenses (described in Note
1) that would not be comparable to those resulting from the proposed future
operations of the Property are excluded and the statement is not intended to
be a complete presentation of the revenue and expenses of the Property.
In our opinion, the statement of revenue and certain expenses presents fairly, in all material respects, the revenue and certain expenses, as defined above, of the Property for the year ended December 31, 1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
February 20, 1997
300 AND 401 PROFESSIONAL DRIVE
STATEMENT OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
PRE ACQUISITION
PERIOD FOR THE YEAR
JANUARY 1, 1996 ENDED
TO SEPTEMBER 10, DECEMBER 31,
1996 1995
---------------- ------------
(UNAUDITED)
Revenue:
Rental.......................................... $1,096 $1,582
Tenant recoveries............................... 350 525
------ ------
Total revenue................................. 1,446 2,107
Certain Expenses:
Utilities....................................... 75 76
Repairs and maintenance......................... 85 260
Insurance....................................... 13 8
Taxes and license............................... 177 181
------ ------
Total certain expenses........................ 350 525
------ ------
Excess of revenue over certain expenses....... $1,096 $1,582
====== ======
|
See accompanying notes to statement of revenue and certain expenses.
300 AND 401 PROFESSIONAL DRIVE
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The accompanying statement of revenue and certain expenses includes the operations of 300 and 401 Professional Drive located in Gaithersburg, Maryland (the "Property") which was acquired by Alexandria Real Estate Equities, Inc., a Maryland corporation (the "Company") from a nonaffiliated third party. The Property consists of two buildings that are 100% occupied and leased to three tenants under triple net leases which require the tenants to pay substantially all expenses associated with the Property including operating and maintenance, utilities, taxes and insurance.
Basis of Presentation
The accompanying statement has been prepared to comply with the rules and regulations of the Securities and Exchange Commission for inclusion in the registration statement on Form S-11 of the Company.
The accompanying statement is not representative of the actual operations for the period presented as certain expenses that may not be comparable to the expenses expected to be incurred by the Company in the future operations of the Property have been excluded. Excluded expenses consist of interest, depreciation and amortization and property general and administrative costs not directly comparable to the future operations of the Property.
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the terms of the related leases.
Risks and Uncertainties
The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Unaudited Interim Statement
The statement of revenue and certain expenses for the period January 1, 1996, to September 10, 1996 (date of acquisition) is unaudited. In the opinion of management, this financial statement reflects all adjustments necessary for a fair presentation of the results of the respective interim period. All such adjustments are of a normal, recurring nature.
2. RENTAL OFFICE PROPERTY
The future minimum lease payments to be received under noncancelable operating leases as of December 31, 1996, are as follows:
1997.............................................................. $1,640,000 1998.............................................................. 1,674,000 1999.............................................................. 1,030,000 2000.............................................................. 1,023,000 2001.............................................................. 1,039,000 Thereafter........................................................ 4,592,000 |
The above future minimum lease payments do not include specified payments for tenant recoveries of operating expenses.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors Alexandria Real Estate Equities, Inc.
We have audited the accompanying statement of revenue and certain expenses of 25, 35 and 45 W. Watkins Mill Road (the "Property") for the year ended December 31, 1995. This statement of revenue and certain expenses is the responsibility of the management of the Property. Our responsibility is to express an opinion on the statement of revenue and certain expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of revenue and certain expenses is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Alexandria Real Estate Equities, Inc. Certain expenses (described in Note
1) that would not be comparable to those resulting from the proposed future
operations of the Property are excluded and the statement is not intended to
be a complete presentation of the revenue and expenses of the Property.
In our opinion, the statement of revenue and certain expenses presents fairly, in all material respects, the revenue and certain expenses, as defined above, of the Property for the year ended December 31, 1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
February 20, 1997
25, 35 AND 45 W. WATKINS MILL ROAD
STATEMENT OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
PRE ACQUISITION
PERIOD
JANUARY 1, FOR THE
1996 TO YEAR ENDED
OCTOBER 18, DECEMBER 31,
1996 1995
--------------- ------------
(UNAUDITED)
Revenue:
Rental........................................... $1,296 $1,739
Tenant recoveries................................ 300 287
------ ------
Total revenue.................................. 1,596 2,026
Certain Expenses:
Utilities........................................ 31 46
Repairs and maintenance.......................... 74 52
Insurance........................................ 11 12
Taxes and license................................ 216 198
------ ------
Total certain expenses......................... 332 308
------ ------
Excess of revenue over certain expenses........ $1,264 $1,718
====== ======
|
See accompanying notes to statement of revenue and certain expenses.
25, 35 AND 45 W. WATKINS MILL ROAD
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The accompanying statement of revenue and certain expenses includes the operations of 25, 35 and 45 W. Watkins Mill Road located in Gaithersburg, Maryland (the "Property") which was acquired by Alexandria Real Estate Equities, Inc., a Maryland corporation (the "Company") from a nonaffiliated third party. The Property consists of three buildings that are 100% occupied and leased to five tenants under triple net leases which require the tenants to pay substantially all expenses associated with the property including operating and maintenance, utilities, taxes and insurance.
Basis of Presentation
The accompanying statement has been prepared to comply with the rules and regulations of the Securities and Exchange Commission for inclusion in the registration statement on Form S-11 of the Company.
The accompanying statement is not representative of the actual operations for the period presented as certain expenses that may not be comparable to the expenses expected to be incurred by the Company in the future operations of the Property have been excluded. Excluded expenses consist of interest, depreciation and amortization and property general and administrative costs not directly comparable to the future operations of the Property.
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the terms of the related leases.
Risks and Uncertainties
The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Unaudited Interim Statement
The statement of revenue and certain expenses for the period January 1, 1996, to October 18, 1996 (date of acquisition) is unaudited. In the opinion of management, this financial statement reflects all adjustments necessary for a fair presentation of the results of the respective interim period. All such adjustments are of a normal, recurring nature.
2. RENTAL OFFICE PROPERTY
The future minimum lease payments to be received under noncancelable operating leases as of December 31, 1996 are as follows:
1997............................................................ $1,572,000 1998............................................................ 1,591,000 1999............................................................ 1,618,000 2000............................................................ 1,667,000 2001............................................................ 1,074,000 Thereafter...................................................... 7,358,000 |
The above future minimum lease payments do not include specified payments for tenant recoveries of operating expenses.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors Alexandria Real Estate Equities, Inc.
We have audited the accompanying statement of revenue and certain expenses of 1311, 1401 and 1431 Harbor Bay Parkway (the "Property") for the year ended December 31, 1995. This statement of revenue and certain expenses is the responsibility of the management of the Property. Our responsibility is to express an opinion on the statement of revenue and certain expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of revenue and certain expenses is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Alexandria Real Estate Equities, Inc. Certain expenses (described in Note
1) that would not be comparable to those resulting from the proposed future
operations of the Property are excluded and the statement is not intended to
be a complete presentation of the revenue and expenses of the Property.
In our opinion, the statement of revenue and certain expenses presents fairly, in all material respects, the revenue and certain expenses, as defined above, of the Property for the year ended December 31, 1995, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
February 20, 1997
1311, 1401 AND 1431 HARBOR BAY PARKWAY
STATEMENT OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
PRE ACQUISITION
PERIOD
JANUARY 1, FOR THE
1996 TO YEAR ENDED
DECEMBER 12, DECEMBER 31,
1996 1995
--------------- ------------
(UNAUDITED)
Revenue:
Rental........................................... $2,144 $2,188
Tenant recoveries................................ 142 207
Other income..................................... 4 --
------ ------
Total revenue.................................. 2,290 2,395
Certain Expenses:
Utilities........................................ 62 126
Repairs and maintenance.......................... 271 269
Insurance........................................ 22 21
Taxes and license................................ 200 200
------ ------
Total certain expenses......................... 555 616
------ ------
Excess of revenue over certain expenses........ $1,735 $1,779
====== ======
|
See accompanying notes to statement of revenue and certain expenses.
1311, 1401 AND 1431 HARBOR BAY PARKWAY
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The accompanying statement of revenue and certain expenses includes the operations of 1311, 1401 and 1431 Harbor Bay Parkway located in Alameda, California (the "Property") which was acquired by Alexandria Real Estate Equities, Inc., a Maryland corporation (the "Company") from a nonaffiliated third party. The Property consists of three buildings that are 86% occupied and leased to four tenants under triple net leases which require the tenants to pay substantially all expenses associated with the property including operating and maintenance, utilities, taxes and insurance.
Basis of Presentation
The accompanying statement has been prepared to comply with the rules and regulations of the Securities and Exchange Commission for inclusion in the registration statement on Form S-11 of the Company.
The accompanying statement is not representative of the actual operations for the period presented as certain expenses that may not be comparable to the expenses expected to be incurred by the Company in the future operations of the Property have been excluded. Excluded expenses consist of interest, depreciation and amortization and property general and administrative costs not directly comparable to the future operations of the Property.
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the terms of the related leases.
Risks and Uncertainties
The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Unaudited Interim Statement
The statement of revenue and certain expenses for the period January 1, 1996, to December 12, 1996 (date of acquisition) is unaudited. In the opinion of management, this financial statement reflects all adjustments necessary for a fair presentation of the results of the respective interim period. All such adjustments are of a normal, recurring nature.
2. RENTAL OFFICE PROPERTY
The future minimum lease payments to be received under noncancelable operating leases as of December 31, 1996, are as follows:
1997........................................................... $ 3,555,000 1998........................................................... 3,595,000 1999........................................................... 2,763,000 2000........................................................... 2,116,000 2001........................................................... 2,116,000 Thereafter..................................................... 11,732,000 |
The above future minimum lease payments do not include specified payments for tenant recoveries of operating expenses.
1431 Harbor Bay Parkway is 100% leased to the US Food and Drug Administration. This lease has a monthly base rent of $246,000 with step downs in monthly base rent to $176,000 and $63,000 on January 1, 1999 and January 1, 2004, respectively.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors Alexandria Real Estate Equities, Inc.
We have audited the accompanying statement of revenue and certain expenses of 1550 East Gude Drive (the "Property") for the year ended December 31, 1996. This statement of revenue and certain expenses is the responsibility of the management of the Property. Our responsibility is to express an opinion on the statement of revenue and certain expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of revenue and certain expenses is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Alexandria Real Estate Equities, Inc. Certain expenses (described in Note
1) that would not be comparable to those resulting from the proposed future
operations of the Property are excluded and the statement is not intended to
be a complete presentation of the revenue and expenses of the Property.
In our opinion, the statement of revenue and certain expenses presents fairly, in all material respects, the revenue and certain expenses, as defined above, of the Property for the year ended December 31, 1996, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
February 20, 1997
1550 EAST GUDE DRIVE
STATEMENT OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
FOR THE
YEAR ENDED
DECEMBER 31,
1996
------------
Revenue:
Rental........................................................... $539
Tenant recoveries................................................ 62
----
Total revenue.................................................. 601
Certain Expenses:
Taxes and license................................................ 62
----
Excess of revenue over certain expenses........................ $539
====
|
See accompanying notes to statement of revenue and certain expenses.
1550 EAST GUDE DRIVE
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The accompanying statement of revenue and certain expenses includes the operations of 1550 East Gude Drive located in Rockville, Maryland (the "Property") which was acquired by PW Acquisitions I, LLC (the "Acquisition LLC"). Concurrently with the consummation of a proposed initial public offering of the Common Stock of Alexandria Real Estate Equities, Inc., a Maryland corporation, (the "Company"), the Acquisition LLC will be acquired by the Company. The Property is 100% leased to a single tenant under a triple net lease which requires the tenant to pay for substantially all costs associated with the building including a reimbursement to the owner for real estate taxes.
Basis of Presentation
The accompanying statement has been prepared to comply with the rules and regulations of the Securities and Exchange Commission for inclusion in the registration statement on Form S-11 of the Company.
The accompanying statement is not representative of the actual operations for the period presented as certain expenses that may not be comparable to the expenses expected to be incurred by the Company in the future operations of the Property have been excluded. Excluded expenses consist of interest, depreciation and amortization and property general and administrative costs not directly comparable to the future operations of the Property.
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the term of the related lease.
Risks and Uncertainties
The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
2. RENTAL OFFICE PROPERTY
The future minimum lease payments to be received under the noncancelable operating lease as of December 31, 1996, are as follows:
1997.............................................................. $527,000 1998.............................................................. 590,000 1999.............................................................. 609,000 2000.............................................................. 627,000 2001.............................................................. 646,000 Thereafter........................................................ 54,000 |
The above future minimum lease payments do not include specified payments for tenant recoveries of operating expenses.
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Alexandria Real Estate Equities, Inc.
We have audited the accompanying balance sheet of PW Acquisitions I, LLC (the "Company") as of March 31, 1997, and the related statements of income and changes in member's capital, and cash flows for the quarter ended March 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 1997, and the results of its operations and its cash flows for the quarter ended March 31, 1997, in conformity with generally accepted accounting principles.
Los Angeles, California
April 24, 1997
PW ACQUISITIONS I, LLC
BALANCE SHEET
(IN THOUSANDS)
MARCH 31, 1997
ASSETS
Rental properties, net................................................. $51,435
Cash................................................................... 187
Tenant security deposit funds and other restricted cash................ 302
Tenant receivables and deferred rent................................... 123
-------
Total assets......................................................... $52,047
=======
LIABILITIES AND MEMBERS' CAPITAL
Accounts payable and accrued expenses.................................. $ 66
Tenant security deposits............................................... 302
Prepaid rents.......................................................... 151
-------
Total liabilities.................................................... 519
Commitments and contingencies --
Member's capital....................................................... 51,528
-------
Total liabilities and member's capital............................... $52,047
=======
|
See accompanying notes.
PW ACQUISITIONS I, LLC
INCOME STATEMENT AND CHANGES IN MEMBERS' CAPITAL
(IN THOUSANDS)
FOR THE QUARTER ENDED MARCH 31, 1997
Revenue:
Rental............................................................ $ 1,450
Tenant recoveries................................................. 14
Other............................................................. 3
-------
1,467
Expenses:
Rental operations................................................. 54
General and administrative........................................ 32
Depreciation and amortization..................................... 234
-------
320
-------
Net income.......................................................... 1,147
-------
Contributions....................................................... 51,709
Distributions....................................................... (1,328)
Beginning Member's capital.......................................... --
-------
Ending Member's capital............................................. $51,528
=======
|
See accompanying notes.
PW ACQUISITIONS I, LLC
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
FOR THE QUARTER ENDED MARCH 31, 1997
OPERATING ACTIVITIES
Net income.......................................................... $ 1,147
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 234
Changes in operating assets and liabilities:
Tenant security deposit funds and other restricted cash......... (302)
Tenant receivables and deferred rent............................ (123)
Accounts payable and accrued expenses........................... 66
Tenant security deposits........................................ 302
Unearned rental income.......................................... 151
--------
Net cash provided by operating activities........................... 1,475
INVESTING ACTIVITIES
Purchase of rental properties....................................... (51,669)
--------
Net cash used in investing activities............................... (51,669)
FINANCING ACTIVITIES
Contributions from members.......................................... 51,709
Distributions to members............................................ (1,328)
--------
Net cash provided by financing activities........................... 50,381
Net increase in cash................................................ 187
Cash at beginning of period......................................... --
--------
Cash at end of period............................................... $ 187
========
|
See accompanying notes.
PW ACQUISITIONS I, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PW Acquisitions I, LLC, a Delaware limited liability company (the "Company"), was formed on December 23, 1996, by PW Realty Partners LLC and PaineWebber Real Estate Holdings, Inc. (collectively the "Owner") who own 99% and 1% of the membership interests, respectively. The Company commenced operations on January 13, 1997, and shall continue until December 31, 2040 unless terminated at a earlier date pursuant to the terms of the operating agreement. The Company was formed to acquire, own and lease the following Properties:
ACQUISITION RENTABLE
PROPERTY NAME LOCATION PRICE ACQUISITION DATE SQUARE FEET
- ------------- -------- ----------- ---------------- -----------
14225 Newbrook Drive..... Chantilly, VA $32,439,000 January 13, 1997 248,186
1330 Piccard Drive....... Rockville, MD 14,333,000 January 15, 1997 131,511
1550 East Guide.......... Rockville, MD 4,897,000 January 24, 1997 44,500
----------- -------
$51,669,000 424,197
=========== =======
|
Income of the Company is allocated in accordance with each member's respective percentage interests. To the extent any allocation of losses causes a deficit capital balance for any member, such allocation shall be reallocated among the other members in accordance with their respective percentage interest.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
RENTAL PROPERTIES
Rental properties are recorded at cost. Costs associated with acquiring and renovating properties are capitalized as incurred. At such times that events or circumstances indicate that the carrying amount of a property may be impaired, the Company makes an assessment of its recoverability by estimating the future undiscounted cash flows, excluding interest charges, of the property. If the carrying amount exceeds the aggregate future cash flows, the Company would recognize an impairment loss to the extent the carrying amount exceeds the fair value of the property. Based upon such periodic assessments, no impairment has been determined and no rental properties carrying amounts have been adjusted.
Maintenance and repairs are expensed as incurred. Major replacements and betterments are capitalized and depreciated over their estimated useful lives.
Depreciation is computed on the straight-line method using an estimated life of 40 years for building and improvements, and the term of the respective lease for tenant improvements.
RESTRICTED CASH
Restricted cash consists of security deposit funds held on behalf of a tenant at one of the properties.
PW ACQUISITIONS I, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
RENTAL INCOME
Rental income from leases with scheduled rent increases are recognized on a straight-line basis over the lease term. Amounts currently recognized as income, and expected to be received in later years, are included in tenant receivables and deferred rent. Amounts received currently, but recognized as income in future years, are included in unearned rent.
SALE AGREEMENT
The Company has an agreement with Alexandria Real Estate Equities, Inc. ("ARE") to sell all rights, title and interest in the Company to ARE at a sales price based on an agreed-upon calculation upon consummation of the initial public offering of ARE, but in no event later than September 30, 1998.
INCOME TAXES
The financial statements contain no provision for federal income taxes since the taxable income from the Company is reported on the separate tax returns of the members based on their allocable membership shares. The members are responsible for including their share of taxable results of operations in their respective federal income tax returns.
2. RENTAL PROPERTIES
Rental properties are as follows as of March 31, 1997:
(IN THOUSANDS)
Land....................................................... $ 8,375
Building and improvements.................................. 43,294
-------
51,669
Less accumulated depreciation.............................. (234)
-------
$51,435
=======
|
The Company leases space, under noncancelable leases with remaining terms ranging from 3 to 20 years. Certain tenants are also obligated to reimburse the Company for specific operating expenses. Minimum lease payments to be received under the terms of the operating lease agreements, excluding expense reimbursements, as of December 31, 1996 are as follows:
(IN THOUSANDS)
1997....................................................... $ 5,997
1998....................................................... 6,264
1999....................................................... 6,281
2000....................................................... 6,343
2001....................................................... 5,820
Thereafter................................................. 77,489
--------
$108,194
========
|
PW ACQUISITIONS I, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
3. COMMITMENTS AND CONTINGENCIES
CONCENTRATION OF CREDIT RISK
The Company maintains its cash at insured and uninsured financial institutions. The combined insured account balances at each institution periodically exceed FDIC insurance coverage, and, as a result, there is a concentration of credit risk related to amounts on deposit in excess of FDIC insurance coverage. Management believes that the risk is not significant.
The Company is dependent on rental payments from a limited number of tenants and the inability of any single tenant to make its lease payments could adversely affect the Company and its ability to make distributions to members. The Company's three properties are all 100% leased to three unrelated tenants.
The Company does not generally require collateral or other security from its tenants, other than security deposits.
Pursuant to the terms of a management agreement, the Company's properties are managed by ARE. For the period ended March 31, 1997, $65,000 in management fees were paid to ARE by the Company.
SCHEDULE III
PW ACQUISITIONS I, LLC
RENTAL PROPERTIES AND ACCUMULATED DEPRECIATION
MARCH 31, 1997
(IN THOUSANDS, EXCEPT SQUARE FOOT DATA)
INITIAL COSTS TOTAL COSTS
-------------------- ----------------------------
SQUARE BUILDINGS AND BUILDINGS AND ACCUMULATED
PROPERTY NAME FOOTAGE LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION ENCUMBRANCES YEAR BUILT
- ------------- ------- ------ ------------- ------ ------------- ------- ------------ ------------ ----------
14225 Newbrook Drive.... 248,186 $4,800 $27,638 $4,800 $27,638 $32,438 $151 -- 1992
1330 Piccard Drive...... 131,511 2,800 11,533 2,800 11,533 14,333 63 -- 1978
1550 East Gude Drive.... 44,500 775 4,123 775 4,123 4,898 20 -- 1981
------- ------ ------- ------ ------- ------- ---- ----
424,197 $8,375 $43,294 $8,375 $43,294 $51,669 $234 $--
======= ====== ======= ====== ======= ======= ==== ====
|
A summary of activity of rental properties and accumulated depreciation is as follows:
RENTAL PROPERTIES
MARCH 31, 1997
-----------------
Balance at beginning of period........................... $ --
Acquisition of land, building and improvements........... 51,669
-------
Balance at end of period................................. $51,669
=======
ACCUMULATED
DEPRECIATION
-----------------
Balance at beginning of period........................... $ --
Depreciation expense..................................... 234
-------
Balance at end of period................................. $ 234
=======
|
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE- SENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDER- WRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMA- TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLIC- ITATION IS UNLAWFUL.
TABLE OF CONTENTS
PAGE
----
Prospectus Summary....................................................... 1
Risk Factors............................................................. 16
The Company.............................................................. 29
Target Markets........................................................... 35
Distributions............................................................ 38
Use of Proceeds.......................................................... 41
Capitalization........................................................... 42
Dilution................................................................. 43
Selected Financial Data.................................................. 44
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 46
The Properties........................................................... 53
Policies with Respect to Certain Activities.............................. 68
Formation and Structure.................................................. 70
Management............................................................... 74
Certain Transactions..................................................... 82
Share Ownership.......................................................... 84
Description of Capital Stock............................................. 86
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws.................................................................. 89
Shares Eligible for Future Sale.......................................... 91
Federal Income Tax Considerations........................................ 93
Underwriting............................................................. 102
Legal Matters............................................................ 104
Experts.................................................................. 104
Additional Information................................................... 105
Glossary................................................................. 106
Index to Financial Statements............................................ F-1
|
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECU- RITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE- LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
6,750,000 SHARES
[LOGO OF ALEXANDRIA REAL ESTATE EQUITIES, INC.]
ALEXANDRIA REAL
ESTATE EQUITIES, INC.
COMMON STOCK
PROSPECTUS
PAINEWEBBER INCORPORATED
LEHMAN BROTHERS
SMITH BARNEY INC.
EVEREN SECURITIES, INC.
COVER
Inside front cover: Title Caption - ALEXANDRIA.
Map of the United States highlighting in green the states in which the Properties are located, including California, Washington, Maryland, Washington, D.C. and Virginia, with the major cities in or near which the Properties are located, including San Diego, San Francisco, Seattle and Washington, D.C., marked with a star. Enlargements of each area with a red dot depicting the location of each Property are included across the center of the map. A list of Properties by city appears under the map.
GATEFOLD
Title Caption: ALEXANDRIA REAL ESTATE EQUITIES, INC.
Photograph depicting 3565 General Atomics Court, San Diego, California; photograph depicting the Atrium at 11099 North Torrey Pines Road, San Diego, California; photograph depicting improved laboratory space at 3535 General Atomics Court, San Diego, California; photograph depicting 1401 Harbor Bay Parkway, Alameda, California; photograph depicting 14225 Newbrook Drive, Chantilly, Virginia; photograph depicting 25,35 and 45 West Watkins Mill Road, Gaithersburg, Maryland; photograph depicting 10933 North Torrey Pines Road, San Diego, California. Text at bottom of pictures reads: "The Company believes that the pictorial representation herein, which includes 12 of the Company's 15 Properties, is representative of the Company's Properties and tenants. See "The Properties" for square footage, Annualized Base Rent and Annualized Net Effective Rent with respect to the Properties and tenants pictured."
Inside Back Cover: Title Caption: ALEXANDRIA.
Photograph depicting 401 Professional Drive, Gaithersburg, Maryland; photograph depicting 1311 Harbor Bay Parkway, Alameda, California; photograph depicting 1330 Piccard Drive, Rockville, Maryland; photograph depicting 3535 General Atomics Court, San Diego, California; photograph depicting improved laboratory space of 1431 Harbor Bay Parkway, Alameda, California; photograph depicting 1102 and 1124 Columbia Street, Seattle, Washington.
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred by the Registrant in connection with the sale and distribution of the securities being registered hereby, other than underwriting discounts and commissions. All amounts are estimated except the Securities and Exchange Commission registration fee and the NASD filing fee.
Registration Fee--Securities and Exchange Commission................... $52,364
NASD Fee............................................................... $17,985
New York Stock Exchange Listing Fee.................................... $ *
Transfer Agent and Registrar's Fees.................................... $ *
Printing and Engraving Expenses........................................ $ *
Legal Fees and Expenses................................................ $ *
Accounting Fees and Expenses........................................... $ *
Miscellaneous Expenses................................................. $ *
-------
Total.............................................................. $ *
=======
|
ITEM 32. SALES TO SPECIAL PARTIES.
See Item 33.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
On November 3, 1994, Alexandria issued 1,000 shares of Common Stock to Holdings, an accredited investor, in exchange for the contribution by Holdings of substantially all of its assets and liabilities to Alexandria. The issuance of such shares was effected in reliance upon an exemption from registration under Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.
On December 31, 1994, Alexandria issued four shares of Series T Preferred Stock to each of Messrs. Sudarsky, Marcus and Gold, accredited investors, for an aggregate purchase price of $1,200. The issuance of such shares was effected in reliance upon an exemption from registration under Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering. Such shares will be redeemed in connection with the Offering.
On January 29, 1996, Alexandria issued 220 shares of Series U Preferred Stock to 126 holders for an aggregate purchase price of $110,000, in connection with certain REIT requirements of the Code. The purchasers of the shares were accredited investors. The issuance of such shares was effected in reliance upon an exemption from registration under Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering. Prior to consummation of the Offering, shares of Common Stock will be issued in exchange for the shares of Series U Preferred Stock in reliance upon an exemption from registration under Section 3(a)(9) of the Securities Act.
On September 9, 1996, Alexandria issued 16,000 shares of Series V Preferred Stock to AEW, an accredited investor. Subsequently, on October 16, 1996, and on December 10, 1996, Alexandria issued an additional 6,000 and 5,500 shares, respectively, of Series V Preferred Stock to AEW, for a total of 27,500 shares for an aggregate purchase price of $27,500,000. The issuance of such shares was effected in reliance upon an exemption from registration under Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering. In connection with the Offering, shares of Common Stock will be issued in exchange for the shares of Series V Preferred Stock in reliance upon an exemption from registration under Section 3(a)(9) of the Securities Act.
II-1
The Board of Directors has approved the issuance of an aggregate of 152,615 shares of Common Stock in connection with the Offering to officers, directors and certain employees of the Company. The issuance of such shares upon consummation of the Offering and the Formation Transactions will be effected in reliance upon an exemption from registration under Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.
In connection with the Offering, officers, directors and certain employees of the Company will be granted options to purchase in the aggregate approximately 57,000 shares of Common Stock under the 1996 Plan in substitution for previously granted Holdings Stock Options. The issuance of such options will be effected in reliance upon an exemption from registration under Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.
In connection with the Offering, an aggregate of approximately 57,000 shares of Common Stock will be issued to officers and directors of the Company upon the exercise of options held by such officers and directors at an exercise price of approximately $0.54 per share. The issuance of such shares upon consummation of the Offering and the Formation Transactions will be effected in reliance upon an exemption from registration under Section 4(2) of the Securities Act as a transaction by an issuer not involving a public offering.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The MGCL permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (i) actual receipt of an improper benefit or profit in money, property or services or (ii) active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Charter of the Company contains such a provision which eliminates such liability to the maximum extent permitted by Maryland law.
The Charter of the Company authorizes it, to the maximum extent permitted by Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (i) any present or former director or officer or (ii) any individual who, while a director or officer of the Company and at the request of the Company, serves or has served another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee from and against any claim or liability to which such person may become subject or which such person may incur by reason of his or her serving as a present or former director or office of the Company.
The Bylaws obligate the Company, to the maximum extent permitted by Maryland law, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (i) any present or former director or officer who is made a party to the proceeding by reason of his or her service in that capacity or (ii) any individual who, while a director or officer of the Company and at the request of the Company, serves or has served another corporation, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee and who is made a party to the proceeding by reason of his or her service in that capacity. The Charter and Bylaws also permit the Company to indemnify and advance expenses to any person who served a predecessor of the Company in any of the capacities described above and to any employee or agent of the Company or a predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise, which the Company's Charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he or she is made a party by reason of his other service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that (i) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (a) was committed in bad faith or (b) was the result of active and deliberate dishonesty, (ii) the director or officer actually received an improper personal benefit in money, property or services or (iii) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission
II-2
was unlawful. However, under the MGCL, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation. In addition, the MGCL requires the Company, as a condition to advancing expenses, to obtain a written affirmation by the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification by the Company as authorized by the Bylaws and a written statement by or on his behalf to repay the amount paid or reimbursed by the Company if it shall ultimately be determined that the standard of conduct was not met.
Each of the employment agreements with Messrs. Sudarsky, Marcus, Gold, Nelson, Kreitzer and Stone requires that the Company indemnify such officers to the maximum extent permitted by Maryland law, and to pay such persons expenses in defending any civil or criminal proceeding in advance of final disposition of such proceeding.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements. See page F-1 of the Prospectus for a list of the financial statements included as part of the Prospectus.
(b) Schedules Included in Part II: None
All schedules have been omitted because they are either not applicable or the information required has been disclosed in the financial statements and related notes included in this Prospectus.
(c) Exhibits.
EXHIBIT
NUMBER EXHIBIT
------- -------
1.1* Form of Underwriting Agreement between the Registrant and the
Representatives
3.1+ Articles of Amendment and Restatement of the Registrant
3.2 Form of Articles of Amendment and Restatement of the Registrant
3.3+ Amended and Restated Bylaws of the Registrant
3.4 Form of Amended and Restated Bylaws of the Registrant
4.1* Specimen Certificate representing shares of Common Stock
5.1* Opinion of Ballard Spahr Andrews & Ingersoll regarding the validity of
the Common Stock being registered
8.1 Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding
certain federal income tax matters
10.1+ Health Science Properties, Inc. Amended and Restated 1996 Stock Option
Plan
10.2 Form of Non-Employee Director Substitute Stock Option Agreement for
use in connection with options issued pursuant to the 1996 Plan
10.3 Form of Nonqualified Substitute Stock Option Agreement for use in
connection with options issued pursuant to the 1996 Plan
10.4 Employment Agreement between the Registrant and Peter Nelson
10.5+ Form of Director Indemnification Agreement
10.6+ Employment Agreement between the Registrant and Jerry M. Sudarsky
10.7+ Amendment to Employment Agreement between the Registrant and Jerry M.
Sudarsky
10.8+ Employment Agreement between the Registrant and Joel S. Marcus
10.9+ Amendment to Employment Agreement between the Registrant and Joel S.
Marcus
10.10+ Employment Agreement between the Registrant and Alan Gold
10.11+ Amendment to Employment Agreement between the Registrant and Alan Gold
10.12+ Employment Agreement between the Registrant and Gary Kreitzer
|
II-3
EXHIBIT
NUMBER EXHIBIT
------- -------
10.13+ Amendment to Employment Agreement between the Registrant and Gary
Kreitzer
10.14+ Employment Agreement between the Registrant and Steven Stone
10.15+ Amendment to Employment Agreement between the Registrant and Steven
Stone
10.16+ Standard Lease Form to be executed by tenant and the Registrant as
Landlord
10.17+ Second Amended and Restated Loan Agreement by and between PaineWebber
Incorporated and HSP-QRS Corp., dated September 9, 1996
10.18+ First Amendment to Second Amended and Restated Loan Agreement by and
among PaineWebber Incorporated, PaineWebber Real Estate Securities
Inc. and HSP-QRS Corp., dated January 13, 1997
10.19+ Amended and Restated Promissory Note executed by Registrant in favor
of PaineWebber Incorporated, dated September 9, 1996
10.20+ Unsecured Line of Credit Loan Agreement by and between Bank of America
NT&SA and the Registrant, dated January 24, 1997
10.21+ Promissory Note executed by Registrant in favor of Bank of America
National Trust and Savings Association, dated January 24, 1997
10.22+ Loan Agreement by and between the Registrant and Bank Audi
(California), dated November 23, 1994
10.23+ Promissory Note executed by Registrant in favor of Bank Audi
(California), dated November 23, 1994
10.24+ Form of Management Agreement
10.25+ Agreement for Sale and Purchase of Membership Interest by and among
PaineWebber Real Estate Holdings, Inc., PW Realty Partners LLC,
Registrant and HSP-QRS, dated January 13, 1997
10.26+ Stockholders Agreement by and among the Registrant, Health Science
Properties Holding Corporation and AEW Partners II, L.P., dated
September 9, 1996
10.27+ Series V Convertible Preferred Stock Purchase Agreement, by and among
Health Science Properties Holding Corporation, Registrant and AEW
Partners II, L.P., dated September 9, 1996
10.28 Form of 1997 Stock Award and Incentive Plan of the Registrant
10.29 Form of Non-Employee Director Stock Option Agreement for use in
connection with options issued pursuant to the 1997 Stock Option Plan
10.30 Form of Incentive Stock Option Agreement for use in connection with
Options issued pursuant to the 1997 Stock Option Plan
10.31 Form of Substitute Incentive Stock Option Agreement
10.32 Form of Nonqualified Stock Option Agreement
10.33* Form of Amendment to Agreement for Sale and Purchase of Membership
Interest by and among PaineWebber Real Estate Holdings, Inc., PW
Realty Partners LLC, Registrant and HSP-QRS, dated January 13, 1997
10.34* Amended and Restated Executive Employment Agreement by and between the
Registrant and Joel S. Marcus
10.35* Amended and Restated Executive Employment Agreement by and between the
Registrant and Alan D. Gold
10.36 Form of Amended and Restated Executive Employment Agreement by and
between the Registrant and Gary Kreitzer
10.37 Form of Amended and Restated Executive Employment Agreement by and
between the Registrant and Steven Stone
10.38* Second Amendment to the Executive Employment Agreement and General and
Special Release by and between the Registrant and Jerry Sudarsky
10.39* Form of Registration Rights Agreement to be entered into by and
between the Registrant and Health Science Properties Holding
Corporation
21.1+ List of Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Rosen Consulting Group
24.1+ Powers of Attorney (included on signature page)
27.1 Financial Data Schedule
|
+ Previously filed
II-4
ITEM 37. UNDERTAKINGS.
The undersigned Company hereby undertakes to provide to the Underwriters at the closing specified in the Underwriting Agreement, certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Company pursuant to the provisions described under Item 33 above, or otherwise, the Company has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Company of expenses incurred or paid by a director, officer or controlling person of the Company in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Company will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned Company hereby undertakes that:
(1) For the purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of the Registration Statement in reliance upon Rule 430A and contained in the form of Prospectus filed by the Company pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of the Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-5
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS ANGELES, STATE OF CALIFORNIA ON THE 5TH DAY OF MAY, 1997.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
/s/ Joel S. Marcus
By: __________________________________
JOEL S. MARCUS
CHIEF EXECUTIVE OFFICER
|
Pursuant to the requirements of the Securities Act, this Amendment to Registration Statement has been signed below by the following persons in the capacities on May 5, 1997.
SIGNATURE TITLE
--------- -----
* Chairman of the Board
____________________________________ of Directors
JERRY M. SUDARSKY
/s/ Joel S. Marcus Chief Executive Officer
____________________________________ (Principal Executive
JOEL S. MARCUS Officer)
* President and Director
____________________________________
ALAN D. GOLD
/s/ Peter J. Nelson Chief Financial Officer,
____________________________________ Treasurer and Secretary
PETER J. NELSON (Principal Financial
Officer)
* Director
____________________________________
JOSEPH ELMALEH
* Director
____________________________________
VIREN MEHTA
Director
____________________________________
DAVID M. PETRONE
* Director
____________________________________
ANTHONY M. SOLOMON
By: /s/ Joel S. Marcus Attorney-in-fact for
__________________________________ the persons marked
JOEL S. MARCUS above with an *
|
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
1.1* Form of Underwriting Agreement between the Registrant
and the Representatives
3.1+ Articles of Amendment and Restatement of the Registrant
3.2 Form of Articles of Amendment and Restatement of the
Registrant
3.3+ Amended and Restated Bylaws of the Registrant
3.4 Form of Amended and Restated Bylaws of the Registrant
4.1* Specimen Certificate representing shares of Common
Stock
5.1* Opinion of Ballard Spahr Andrews & Ingersoll regarding
the validity of the Common Stock being registered
8.1 Form of Opinion of Skadden, Arps, Slate, Meagher & Flom
LLP regarding certain federal income tax matters
10.1+ Health Science Properties, Inc. Amended and Restated
1996 Stock Option Plan
10.2 Form of Non-Employee Director Substitute Stock Option
Agreement for use in connection with options issued
pursuant to the 1996 Plan
10.3 Form of Nonqualified Substitute Stock Option Agreement
for use in connection with options issued pursuant to
the 1996 Plan
10.4 Employment Agreement between the Registrant and Peter
Nelson
10.5+ Form of Director Indemnification Agreement
10.6+ Employment Agreement between the Registrant and Jerry
M. Sudarsky
10.7+ Amendment to Employment Agreement between the
Registrant and Jerry M. Sudarsky
10.8+ Employment Agreement between the Registrant and Joel S.
Marcus
10.9+ Amendment to Employment Agreement between the
Registrant and Joel S. Marcus
10.10+ Employment Agreement between the Registrant and Alan
Gold
10.11+ Amendment to Employment Agreement between the
Registrant and Alan Gold
10.12+ Employment Agreement between the Registrant and Gary
Kreitzer
10.13+ Amendment to Employment Agreement between the
Registrant and Gary Kreitzer
10.14+ Employment Agreement between the Registrant and Steven
Stone
10.15+ Amendment to Employment Agreement between the
Registrant and Steven Stone
10.16+ Standard Lease Form to be executed by tenant and the
Registrant as Landlord
10.17+ Second Amended and Restated Loan Agreement by and
between PaineWebber Incorporated and HSP-QRS Corp.,
dated September 9, 1996
10.18+ First Amendment to Second Amended and Restated Loan
Agreement by and among PaineWebber Incorporated,
PaineWebber Real Estate Securities Inc. and HSP-QRS
Corp., dated January 13, 1997
10.19+ Amended and Restated Promissory Note executed by
Registrant in favor of PaineWebber Incorporated, dated
September 9, 1996
10.20+ Unsecured Line of Credit Loan Agreement by and between
Bank of America NT&SA and the Registrant, dated
January 24, 1997
10.21+ Promissory Note executed by Registrant in favor of Bank
of America National Trust and Savings Association,
dated January 24, 1997
10.22+ Loan Agreement by and between the Registrant and Bank
Audi (California), dated November 23, 1994
10.23+ Promissory Note executed by Registrant in favor of Bank
Audi (California), dated November 23, 1994
10.24+ Form of Management Agreement
10.25+ Agreement for Sale and Purchase of Membership Interest
by and among PaineWebber Real Estate Holdings, Inc.,
PW Realty Partners LLC, Registrant and HSP-QRS, dated
January 13, 1997
|
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
10.26+ Stockholders Agreement by and among the Registrant,
Health Science Properties Holding Corporation and AEW
Partners II, L.P., dated September 9, 1996
10.27+ Series V Convertible Preferred Stock Purchase
Agreement, by and among Health Science Properties
Holding Corporation, Registrant and AEW Partners II,
L.P., dated September 9, 1996
10.28 Form of 1997 Stock Award and Incentive Plan of the
Registrant
10.29 Form of Non-Employee Director Stock Option Agreement
for use in connection with options issued pursuant to
the 1997 Stock Option Plan
10.30 Form of Incentive Stock Option Agreement for use in
connection with Options issued pursuant to the 1997
Stock Option Plan
10.31 Form of Substitute Incentive Stock Option Agreement
10.32 Form of Nonqualified Stock Option Agreement
10.33* Form of Amendment to Agreement for Sale and Purchase of
Membership Interest by and among PaineWebber Real
Estate Holdings, Inc., PW Realty Partners LLC,
Registrant and HSP-QRS, dated January 13, 1997
10.34* Amended and Restated Executive Employment Agreement by
and between the Registrant and Joel S. Marcus
10.35* Amended and Restated Executive Employment Agreement by
and between the Registrant and Alan D. Gold
10.36 Form of Amended and Restated Executive Employment
Agreement by and between the Registrant and Gary
Kreitzer
10.37 Form of Amended and Restated Executive Employment
Agreement by and between the Registrant and Steven
Stone
10.38* Second Amendment to the Executive Employment Agreement
and General and Special Release by and between the
Registrant and Jerry Sudarsky
10.39* Form of Registration Rights Agreement to be entered
into by and between the Registrant and Health Science
Properties Holding Corporation
21.1+ List of Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Rosen Consulting Group
24.1+ Powers of Attorney (included on signature page)
27.1 Financial Data Schedule
|
* To be filed by Amendment
+ Previously filed
EXHIBIT 3.2
FORM OF
ARTICLES OF AMENDMENT AND RESTATEMENT
ARTICLE I
NAME
The name of the corporation (the "Corporation") is:
Alexandria Real Estate Equities, Inc.
ARTICLE II
PURPOSES
The purposes for which the Corporation is formed are to engage in any lawful act or activity (including, without limitation or obligation, engaging in business as a real estate investment trust under the Internal Revenue Code of 1986, as amended, or any successor statute (the "Code")) for which corporations may be organized under the general laws of the State of Maryland as now or hereafter in force. For purposes of these Articles, "REIT" means a real estate investment trust under Sections 856 through 860 of the Code.
ARTICLE III
PRINCIPAL OFFICE IN STATE
The address of the principal office of the Corporation in the State of Maryland is c/o The Prentice-Hall Corporation System, Maryland, 11 East Chase Street, Suite 7C, Baltimore, Maryland 21202.
ARTICLE IV
RESIDENT AGENT
The name of the resident agent of the Corporation in the State of Maryland is c/o The Prentice-Hall Corporation System, Maryland, 11 East Chase Street, Suite 7C, Baltimore, Maryland 21202. The resident agent is a Maryland corporation.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS
Jerry M. Sudarsky Joel S. Marcus Alan D. Gold Joe Elmaleh Viren Mehta David Petrone Anthony Solomon
The directors may increase the number of directors and may fill any vacancy, whether resulting from an increase in the number of directors or otherwise, on the Board of Directors in the manner provided in the Bylaws. Each director shall be elected to hold office for a term ending on the date of the next annual meeting of stockholders and until a successor is duly elected and qualifies.
ARTICLE VI
STOCK
1. Fractional Shares; Stated Value. The Series T Preferred Stock is issuable solely in whole shares that shall entitle the holder thereof to exercise the voting rights, to participate in the distributions and to have the benefit of all other rights of holders of the Series T Preferred Stock as set forth in the charter of the Corporation. The Stated Value of each such share of Series T Preferred Stock shall be $100.
2. Dividends.
(a) Subject to any preference rights with respect to the payment of
dividends attaching to any other stock of the Corporation ranking prior to the
Series T Preferred Stock, holders of each share of Series T Preferred Stock
shall be entitled to receive out of the assets of the Corporation, at the time
legally available therefor, dividends at an annual rate equal to 8.5% of the
Stated Value thereof, and no more, which shall be fully cumulative, shall accrue
from January 1, 1995, and shall be payable, in cash, semi-annually in arrears on
July 1 and January 1 of each year (as used in this Section 6.3(b), each such
date a "Dividend Payment Date"), commencing July 1, 1995, as set forth below
(except that, if any such date is a Saturday, Sunday or legal holiday, then such
dividend shall be payable on the next day that is not a Saturday, Sunday or
legal holiday), to holders of record as they appear upon the stock transfer
books of the Corporation at the close of business ten business days preceding
the related Dividend Payment Dates, or on such other date fixed by the Board (as
used in this Section 6.3(b), each such date a "Record Date"). Subject to
Section 6.3(b)(2)(d) hereof, dividends on account of arrearages for any past
Dividend Payment Date may be authorized, declared and paid at any time, without
reference to any regular Dividend Payment Date. Holders at the close of
business on a Record Date of shares of Series T Preferred Stock that are called
for redemption on a redemption date during the period between such Record Date
and the corresponding Dividend Payment Date shall not, in their capacity as
such, be entitled to receive the dividend payment on such Dividend Payment Date.
(b) The dividend payable on each share of Series T Preferred Stock shall be computed on the basis of a 360-day year consisting of twelve 30-day months. The aggregate dividend paid to a holder of shares of Series T Preferred Stock shall be based on the aggregate number of shares of Series T Preferred Stock held by such holder at the close of business on the applicable Record Date and rounded to the nearest whole cent (with one-half cent rounded upward). Unless otherwise provided herein, dividends on each share of Series T Preferred Stock shall accrue from and including January 1, 1995 to and excluding the earliest to occur of (i) the date of redemption of such share and (ii) the date of final distribution of assets upon Liquidation (as defined below). All dividend payments made on shares of Series T Preferred Stock shall first be credited against the earliest accumulated but unpaid dividends with respect to such shares.
(c) If, on any Dividend Payment Date, the holders of the Series T Preferred Stock shall not have received the full dividends provided for herein, then such dividends shall cumulate, whether or not earned, authorized or declared, with additional dividends thereon for each succeeding full dividend period during which such dividend shall remain unpaid.
(d) No dividends or other distributions (other than a dividend or
distribution in Common Stock or any other stock of the Corporation ranking
junior to the Series T Preferred Stock as to dividends and upon a liquidation,
dissolution or winding up of the Corporation or other distribution of the
Corporation's assets among stockholders for the purpose of winding up the
Corporation's affairs, whether voluntary or involuntary (any such event, a
"Liquidation")) shall be authorized, declared, made or paid, or set apart for
payment or distribution, upon the Common Stock or upon any other stock of the
Corporation ranking junior to or on a parity with the Series T Preferred Stock
as to dividends, nor may any Common Stock or any other stock of the Corporation
ranking junior to or on a parity with the Series T Preferred Stock as to
dividends or upon Liquidation be redeemed, purchased or otherwise acquired for
any consideration (or any moneys be paid to or made available for a sinking fund
for the redemption of any shares of such stock) by the Corporation (except by
conversion into or in exchange for Common Stock or any other stock of the
Corporation ranking junior to the Series T Preferred Stock as to dividends and
upon Liquidation), unless full accrued dividends on all outstanding shares of
the Series T Preferred Stock have been, or contemporaneously are, authorized,
declared and paid, or authorized, declared and a sum sufficient for the
payment thereof is set apart for the payment thereof, to the date of such
authorization, declaration, payment, distribution, setting apart, making monies
available, redemption, purchase or acquisition. Notwithstanding the foregoing,
(i) nothing herein shall prevent the Corporation from making contributions to,
or purchasing stock in connection with, any employee benefit or dividend
reinvestment plans or (ii) if at any time full accrued or accumulated dividends
have not been authorized, declared and paid on the Series T Preferred Stock and
on any of the Corporation's Preferred Stock ranking on a parity as to dividends
with the Series T Preferred Stock, partial dividends may be authorized, declared
and paid on the Series T Preferred Stock and such other Preferred Stock so long
as such dividends are authorized, declared and paid pro rata so that the amounts
of dividends authorized, declared and paid per share on the Series T Preferred
Stock and such other Preferred Stock will in all cases bear to each other the
same ratio that accrued or accumulated and unpaid dividends per share on the
Series T Preferred Stock and such other Preferred Stock bear to each other.
(e) Any reference to "distribution" contained in this Section 6.3(b)(2) shall not include any distribution made in connection with any Liquidation.
3. Liquidation Preference. In the event of any Liquidation, and subject to the rights, privileges, conditions and restrictions attaching to any other stock of the Corporation ranking prior to the Series T Preferred Stock upon Liquidation, each holder of a share of Series T Preferred Stock shall be entitled to receive, and be paid out of the assets of the Corporation available for distribution to its stockholders, an amount in cash per share equal to 100% of the Stated Value thereof, plus all accrued and unpaid dividends on such share to the date of final distribution to the holders of shares of Series T Preferred Stock, whether or not authorized and declared, and no more, before any payment shall be made or any assets distributed to the holders of
Common Stock or any other class or series of the Corporation's stock ranking junior to the Series T Preferred Stock upon such Liquidation. If, upon any Liquidation the amounts payable with respect to the liquidation preference of the Series T Preferred Stock and any other shares of the Corporation's stock ranking on a parity with the Series T Preferred Stock upon such Liquidation are not paid in full, holders of the Series T Preferred Stock and of such other shares will share pro rata in the amounts payable and other property distributable with respect to such Liquidation so that the per share amounts to which holders of the Series T Preferred Stock and such other shares are entitled will in all cases bear to each other the same ratio that the liquidation preferences of the Series T Preferred Stock and such other stock bear to each other. After payment in full of the preferences in respect of shares of the Series T Preferred Stock upon Liquidation, the holders of such shares in their capacity as such shall not be entitled to any further right or claim to any remaining assets of the Corporation. For purposes hereof, a consolidation or merger of the Corporation with or into another corporation, or a merger of any other corporation with or into the Corporation, or the sale of all or substantially all of the Corporation's property or business (other than in connection with a winding up of its business) will not be considered a Liquidation.
4. Redemption at Option of the Corporation.
(a) Shares of the Series T Preferred Stock may be redeemed by the
Corporation, at its option, on any date set by the Board, in whole or from time
to time in part, out of assets legally available therefor, at a redemption price
per share of 100% of the Stated Value thereof plus, in each case, an amount
equal to all accrued and unpaid dividends thereon, whether or not authorized and
declared, to but excluding the date fixed for redemption (as used in this
Section 6.3(b), the "Redemption Price"). The aggregate Redemption Price paid to
a holder of shares of the Series T Preferred Stock shall be the product of the
aggregate number of shares of Series T Preferred Stock redeemed from such holder
and the per share Redemption Price, with such product being rounded to the
nearest whole cent (with one-half cent rounded upward), and shall be payable in
cash. In case of the redemption of less than all of the then outstanding shares
of Series T Preferred Stock, the Corporation shall designate the shares to be
redeemed pro rata so that the number of shares redeemed from each holder will in
all cases bear to each other the same ratio that the aggregate number of shares
held by each holder bear to each other. The Corporation shall not redeem less
than all of the shares of Series T Preferred Stock at any time outstanding
unless all dividends accumulated and in arrears upon all shares of Series T
Preferred Stock shall have been paid for all dividend periods ending on or prior
to the redemption date.
(b) Not more than sixty nor less than thirty days prior to the
redemption date fixed by the Board, notice by first class mail, postage prepaid,
shall be given to the holders of record of shares of the Series T Preferred
Stock to be redeemed, addressed to such holders at their last addresses as shown
upon the stock transfer books of the Corporation. Each such notice of redemption
shall specify (i) the date fixed for redemption, (ii) the number of shares of
Series T Preferred Stock to be redeemed, and if less than all shares held by
such holder are to be redeemed, the number of such shares to be redeemed from
such holder, (iii) the Redemption Price, (iv) the place or places of payment,
(v) that payment will be made upon presentation and surrender of the
certificates representing shares of the Series T Preferred Stock at the place
designated in such
notice and (vi) that on and after the date fixed for redemption dividends will cease to accrue on such shares (unless the Corporation defaults in the payment of the Redemption Price).
(c) Any notice that is mailed as provided herein shall be conclusively presumed to have been duly given, whether or not the holder of shares of the Series T Preferred Stock receives such notice; and failure to give such notice by mail, or any defect in such notice to the holders of any shares designated for redemption, shall not affect the validity of the proceedings for the redemption of any other shares of the Series T Preferred Stock. On or after the date fixed for redemption as stated in such notice, each holder of shares of the Series T Preferred Stock called for redemption shall surrender the certificate representing such shares to the Corporation at the place designated in such notice and shall thereupon be entitled to receive payment of the Redemption Price for each such share. If less than all shares of the Series T Preferred Stock represented by any surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares of Series T Preferred Stock, such unredeemed shares shall remain outstanding and the rights of holders of such shares of Series T Preferred Stock thereafter shall continue to be only those of a holder of shares of the Series T Preferred Stock. Notice having been given as aforesaid, if, on the date fixed for redemption, assets necessary for the redemption shall be legally available therefor and shall have been irrevocably deposited or set aside, then, notwithstanding that the certificates representing any shares of the Series T Preferred Stock so called for redemption shall not have been surrendered, (i) dividends with respect to the shares so called for redemption shall cease to accrue on the date fixed for redemption, (ii) such shares shall no longer be deemed outstanding, (iii) the holders thereof shall cease to be stockholders of the Corporation to the extent of their interest in such shares and (iv) all rights whatsoever with respect to the shares so called for redemption (except the right of the holders to receive the Redemption Price for each such share, without interest or any sum of money in lieu of interest thereon, upon surrender of their certificates therefor at a place designated in such notice) shall terminate. If assets legally available for such purpose are not sufficient for redemption of all of the shares of Series T Preferred Stock that were to be redeemed, then such assets shall be applied pro rata to the redemption of all of the shares of Series T Preferred Stock to be redeemed.
(d) Shares of the Series T Preferred Stock shall not be subject to the operation of any mandatory redemption, purchase, retirement or sinking fund and holders of shares of the Series T Preferred Stock shall have no right to require redemption of the Series T Preferred Stock.
5. Voting Rights.
(a) General. In addition to the voting rights provided in Section 6.3(b)(5)(b) hereof, the holders of each share of Series T Preferred Stock shall be entitled to one vote upon all matters upon which holders of the Common Stock have the right to vote, such vote to be counted together with all other shares of stock having general voting powers and not separately as a class. In all cases where the holders of shares of Series T Preferred Stock have the right to vote separately as a class, such holders shall be entitled to one vote for each such share held by them respectively. Any shares of Series T Preferred Stock held by the Corporation, or any subsidiary of the Corporation in which the Corporation owns shares entitled to cast a majority of all votes
entitled to be cast, shall not have voting rights, and shall not be counted in determining the presence of a quorum or in calculating any percentage of shares, under this Section 6.3(b)(5).
(b) Class Voting Rights. So long as shares of the Series T Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote or consent of the holders of at least a majority of all outstanding shares of Series T Preferred Stock, voting separately as a class, amend any provision of the charter of the Corporation so as to change the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption of the Series T Preferred Stock. A class vote on the part of the Series T Preferred Stock shall not be required (except as otherwise required by resolution of the Board) in connection with any other matter.
6. Ranking. Any class or series of stock of the Corporation shall be deemed to rank:
(a) prior to the Series T Preferred Stock, as to dividends or upon Liquidation, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable upon Liquidation, as the case may be, in preference or priority to the holders of Series T Preferred Stock;
(b) on a parity with the Series T Preferred Stock, as to dividends or upon Liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation preferences per share thereof are different from those of the Series T Preferred Stock, if the holders of such class or series of stock and the Series T Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon Liquidation, as the case may be, in proportion to their respective amounts of accumulated or accrued and unpaid dividends per share or liquidation preferences, as the case may be, without preferences or priority one over the other; and
(c) junior to the Series T Preferred Stock, as to dividends or upon Liquidation, if such stock shall be Common Stock or any other class or series of stock of the Corporation if the holders of Series T Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon Liquidation, as the case may be, in preference or priority to the holders of shares of such stock.
7. Outstanding Shares. For purposes hereof, all shares of the Series T Preferred Stock issued by the Corporation shall be deemed outstanding except (i) as provided in Section 6.3(b)(4) hereof and (ii) from the date of surrender of a certificate representing shares of Series T Preferred Stock, all shares of Series T Preferred Stock represented by such certificate.
8. Status of Acquired Shares. Shares of the Series T Preferred Stock redeemed or otherwise acquired by the Corporation constitute authorized but unissued shares of Common Stock, and may thereafter be issued, but not as shares of Series T Preferred Stock.
1. Fractional Shares; and Stated Value. The Series U Preferred Stock is issuable solely in whole shares that shall entitle the holder thereof to exercise the voting rights, to participate in the distributions and to have the benefit of all other rights of holders of the Series U Preferred Stock as set forth in the charter of the Corporation. The Stated Value of each such share of Series U Preferred Stock shall be $500.
2. Dividends.
(a) Subject to any preference rights with respect to the payment of dividends attaching to any other stock of the Corporation ranking prior to the Series U Preferred Stock as to the payment of dividends, holders of each share of Series U Preferred Stock shall be entitled to receive out of the assets of the Corporation, at the time legally available therefor, dividends at an annual rate equal to 8.5% of the Stated Value thereof, and no more, which shall be fully cumulative, shall accrue from the date shares of the Series U Preferred Stock are first issued by the Corporation (as used in this Section 6.3(c), the "Issue Date"), and shall be payable, in cash, annually in arrears on January 1 of each year (as used in this Section 6.3(c), each such date a "Dividend Payment Date"), commencing January 1, 1997, as set forth below (except that, if any such date is a Saturday, Sunday or legal holiday, then such dividend shall be payable on the next day that is not a Saturday, Sunday or legal holiday), to holders of record as they appear upon the stock transfer books of the Corporation at the close of business on such record dates, not more than sixty days nor less than ten days preceding the related Dividend Payment Dates, as are fixed by the Board (as used in this Section 6.3(c), each such date a "Record Date"). Subject to subsection 2(d) of this Section 6.3(c), dividends on account of arrearages for any past Dividend Payment Date may be authorized, declared and paid at any time, without reference to any regular Dividend Payment Date. Holders at the close of business on a Record Date of shares of Series U Preferred Stock that are called for redemption on a redemption date during the period (as used herein, the "Ex-Dividend Period") between such Record Date and the corresponding Dividend Payment Date shall not, in their capacity as such, be entitled to receive the dividend payment on such Dividend Payment Date.
(b) The dividend payable on each share of Series U Preferred Stock shall be computed on the basis of a 360-day year consisting of twelve 30-day months. The aggregate dividend paid to a holder of shares of Series U Preferred Stock shall be based on the aggregate number of shares of Series U Preferred Stock held by such holder at the close of business on the applicable Record Date and rounded to the nearest whole cent (with one-half cent rounded upward). Unless otherwise provided herein, dividends on each share of Series U Preferred Stock shall accrue from and including the Issue Date to and excluding the earliest to occur of (i) the date of redemption of such share, (ii) the date of conversion of such share and (iii) the date of final distribution of assets upon any Liquidation. All dividend payments made on shares of Series U Preferred Stock shall first be credited against the earliest accumulated but unpaid dividends with respect to such shares.
(c) If, on any Dividend Payment Date, the holders of the Series U Preferred Stock shall not have received the full dividends provided for herein, then such dividends shall cumulate, whether or not earned, authorized or declared, with additional dividends thereon for each succeeding full dividend period during which such dividend shall remain unpaid.
(d) No dividends or other distributions (other than a dividend or
distribution in Common Stock or any other stock of the Corporation ranking
junior to the Series U Preferred Stock as to dividends and upon Liquidation)
shall be authorized, declared, made or paid, or set apart for payment or
distribution, upon the Common Stock, or upon any other stock of the Corporation
ranking junior to or on a parity with the Series U Preferred Stock as to
dividends, nor may any Common Stock or any other stock of the Corporation
ranking junior to or on a parity with the Series U Preferred Stock as to
dividends or upon Liquidation be redeemed, purchased or otherwise acquired for
any consideration (or any moneys be paid to or made available for a sinking fund
for the redemption of any shares of such stock) by the Corporation (except by
conversion into or in exchange for Common Stock or any other stock of the
Corporation ranking junior to the Series U Preferred Stock as to dividends and
upon Liquidation), unless full accrued dividends on all outstanding shares of
the Series U Preferred Stock have been, or contemporaneously are, authorized,
declared and paid, or authorized, declared and a sum sufficient for the payment
thereof is set apart for the payment thereof, to the date of such authorization,
declaration, payment, distribution, setting apart, making monies available,
redemption, purchase or acquisition. Notwithstanding the foregoing, (i) nothing
herein shall prevent the Corporation from making contributions to, or purchasing
stock in connection with, any employee benefit or dividend reinvestment plans or
(ii) if at any time full accrued or accumulated dividends have not been
authorized, declared and paid on the Series U Preferred Stock and on any of the
Corporation's Preferred Stock ranking on a parity as to dividends with the
Series U Preferred Stock, partial dividends may be authorized, declared and paid
on the Series U Preferred Stock and such other Preferred Stock so long as such
dividends are authorized, declared and paid pro rata so that the amounts of
dividends authorized, declared and paid per share on the Series U Preferred
Stock and such other Preferred Stock will in all cases bear to each other the
same ratio that accrued or accumulated and unpaid dividends per share on the
Series U Preferred Stock and such other Preferred Stock bear to each other.
(e) Any reference to "distribution" contained in this subsection 2 of this Section 6.3(c) shall not include any distribution made in connection with any Liquidation.
3. Liquidation Preference. In the event of any Liquidation, and subject to the rights, privileges, conditions and restrictions attaching to any other stock of the Corporation ranking prior to the Series U Preferred Stock upon Liquidation, each holder of a share of Series U Preferred Stock shall be entitled to receive, and be paid out of the assets of the Corporation available for distribution to its stockholders, an amount in cash per share equal to 100% of the Stated Value thereof, plus all accrued and unpaid dividends on such share to the date of final distribution to the holders of shares of Series U Preferred Stock, whether or not authorized and declared, and no more, before any payment shall be made or any assets distributed to the holders of Common Stock or any other class or series of the Corporation's stock ranking junior to the Series U Preferred Stock upon such Liquidation. If, upon any Liquidation the amounts payable with respect to the liquidation preference of the Series U Preferred Stock and any other shares of the Corporation's stock ranking on a parity with the Series U Preferred Stock upon such Liquidation are not paid in full, holders of the Series U Preferred Stock and of such other shares will share pro rata in the amounts payable and other property distributable with respect to such Liquidation so that the per share amounts to which holders of the Series U Preferred Stock and such other shares are entitled
will in all cases bear to each other the same ratio that the liquidation preferences of the Series U Preferred Stock and such other stock bear to each other. After payment in full of the preferences in respect of shares of the Series U Preferred Stock upon Liquidation, the holders of such shares in their capacity as such shall not be entitled to any further right or claim to any remaining assets of the Corporation. For purposes of this Section, a consolidation or merger of the Corporation with or into another corporation, or a merger of any other corporation with or into the Corporation, or the sale of all or substantially all of the Corporation's property or business (other than in connection with a winding up of its business) will not be considered a Liquidation.
4. Redemption at Option of the Corporation.
(a) Commencing on the fifth anniversary of the Issue Date, shares of the Series U Preferred Stock may be redeemed by the Corporation, at its option, on any date set by the Board, in whole or from time to time in part, out of assets legally available therefor, at a redemption price per share of 135% of the Stated Value thereof plus, in each case, an amount equal to all accrued and unpaid dividends thereon, whether or not authorized and declared, to but excluding the date fixed for redemption (as used in this Section 6.3(c), the "Redemption Price"). The aggregate Redemption Price paid to a holder of shares of the Series U Preferred Stock shall be the product of the aggregate number of shares of Series U Preferred Stock redeemed from such holder and the per share Redemption Price, with such product being rounded to the nearest whole cent (with one-half cent rounded upward), and shall be payable in cash. In case of the redemption of less than all of the then outstanding shares of Series U Preferred Stock, the Corporation shall designate the shares to be redeemed pro rata so that the number of shares redeemed from each holder will in all cases bear to each other the same ratio that the aggregate number of shares held by each holder bear to each other. The Corporation shall not redeem less than all of the shares of Series U Preferred Stock at any time outstanding unless all dividends accumulated and in arrears upon all shares of Series U Preferred Stock shall have been paid for all dividend periods ending on or prior to the redemption date.
(b) Not more than sixty nor less than thirty days prior to the
redemption date fixed by the Board, notice by first class mail, postage prepaid,
shall be given to the holders of record of shares of the Series U Preferred
Stock to be redeemed, addressed to such holders at their last addresses as shown
upon the stock transfer books of the Corporation. Each such notice of redemption
shall specify (i) the date fixed for redemption, (ii) the number of shares of
Series U Preferred Stock to be redeemed, and if less than all shares held by
such holder are to be redeemed, the number of such shares to be redeemed from
such holder, (iii) the Redemption Price, (iv) the place or places of payment,
(v) that payment will be made upon presentation and surrender of the
certificates representing shares of the Series U Preferred Stock at the place
designated in such notice and (vi) that on and after the date fixed for
redemption dividends will cease to accrue on such shares (unless the Corporation
defaults in the payment of the Redemption Price).
(c) Any notice that is mailed as provided herein shall be conclusively presumed to have been duly given, whether or not the holder of shares of the Series U Preferred Stock receives such notice; and failure to give such notice by mail, or any defect in such notice to the holders of any shares designated for redemption, shall not affect the validity of the
proceedings for the redemption of any other shares of the Series U Preferred Stock. On or after the date fixed for redemption as stated in such notice, each holder of shares of the Series U Preferred Stock called for redemption shall surrender the certificate representing such shares to the Corporation at the place designated in such notice and shall thereupon be entitled to receive payment of the Redemption Price for each such share. If less than all shares of the Series U Preferred Stock represented by any surrendered certificate are redeemed, a new certificate shall be issued representing the unredeemed shares of Series U Preferred Stock, such unredeemed shares shall remain outstanding and the rights of holders of such shares of Series U Preferred Stock thereafter shall continue to be those of a holder of shares of the Series U Preferred Stock. Notice having been given as aforesaid, if, on the date fixed for redemption, assets necessary for the redemption shall be legally available therefor and shall have been irrevocably deposited or set aside, then, notwithstanding that the certificates representing any shares of the Series U Preferred Stock so called for redemption shall not have been surrendered, (i) dividends with respect to the shares so called for redemption shall cease to accrue on the date fixed for redemption, (ii) such shares shall no longer be deemed outstanding, (iii) the holders thereof shall cease to be stockholders of the Corporation to the extent of their interest in such shares and (iv) all rights whatsoever with respect to the shares so called for redemption (except the right of the holders to receive the Redemption Price for each such share, without interest or any sum of money in lieu of interest thereon, upon surrender of their certificates therefor at a place designated in such notice) shall terminate. If assets legally available for such purpose are not sufficient for redemption of all of the shares of Series U Preferred Stock that were to be redeemed, then such assets shall be applied pro rata to the redemption of all of the shares of Series U Preferred Stock to be redeemed.
(d) Shares of the Series U Preferred Stock shall not be subject to the operation of any mandatory redemption, purchase, retirement or sinking fund and holders of shares of the Series U Preferred Stock shall have no right to require redemption of the Series U Preferred Stock.
5. Mandatory Conversion.
(a) On the first date on which (i) shares of Common Stock are
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to an effective registration statement, and (ii) the Corporation has
entered into an underwriting agreement to sell shares of Common Stock (which
underwriting agreement sets forth the price at which such shares will be offered
for sale (as used in this Section 6.3(c), the "Offering Price")), the shares of
Series U Preferred Stock held by each holder not otherwise redeemed in
accordance herewith shall automatically convert as of the date immediately prior
thereto (as used in this Section 6.3(c), the "Conversion Date") without further
action on the part of the Corporation or any such holder, into that number of
fully paid and nonassessable shares of Common Stock (calculated to the nearest
1/100th of a share, with .5/100 rounded upwards) determined by dividing (i) the
product of (x) 135%, (y) the Stated Value thereof (plus all accrued and unpaid
dividends thereon to but excluding the Conversion Date, unless the Corporation
shall elect to pay such amount in cash on such date) and (z) the aggregate
number of shares of Series U Preferred Stock held at such time by such holder by
(ii) the Offering Price.
(b) Each holder of shares of Series U Preferred Stock shall, as soon as practicable after the Conversion Date, surrender all shares of Series U Preferred Stock held by such holder and the Corporation shall, as soon as practicable after such surrender, deliver at the offices of the Corporation to such holder, or to the nominee or nominees of such holder, certificates representing the number of full shares of Common Stock to which such holder shall be entitled, together with a cash payment in respect of any accrued and unpaid dividends and any fraction of a share of Common Stock, in each case as provided below. Conversion of shares of Series U Preferred Stock shall be deemed to have been effected on the Conversion Date, without regard to the time of surrender of such shares of Series U Preferred Stock and (i) dividends with respect to such shares of Series U Preferred Stock shall cease to accrue and accumulate on the Conversion Date, (ii) such shares of Series U Preferred Stock shall no longer be deemed outstanding, (iii) the holders thereof shall cease to be stockholders of the Corporation to the extent of their interest in such shares, (iv) all rights whatsoever with respect to shares of Series U Preferred Stock shall terminate (except the right of a holder to receive certificates representing the number of full shares of Common Stock to which such holder shall be entitled, together with a cash payment in respect of any fraction of a share of Common Stock as provided herein) and (v) the holders entitled to receive the shares of Common Stock deliverable upon conversion of such shares of Series U Preferred Stock shall be treated for all purposes as the record holder or holders of such shares of Common Stock on the Conversion Date, unless the stock transfer books of the Corporation shall be closed on such date, in which event such person or persons shall be deemed to become such holder or holders of record at the close of business on the next succeeding day on which such stock transfer books are open, but such conversion shall be at the Conversion Price in effect on the Conversion Date.
6. No Fractional Shares. No fractional shares or scrip representing fractional shares of Common Stock shall be issued upon conversion of shares of Series U Preferred Stock. If a certificate or certificates representing more than one share of Series U Preferred Stock shall be surrendered for conversion at one time by the same record holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the aggregate number of shares of Series U Preferred Stock so surrendered by such record holder. In lieu of any fractional share of Common Stock that would otherwise be issuable upon conversion of any shares of Series U Preferred Stock, the Corporation shall pay a cash adjustment in respect of such fractional share in an amount equal to the same fraction as the Offering Price, calculated to the nearest whole cent, with one-half cent rounded upward.
7. Reservation of Shares; Transfer Taxes. The Corporation shall at all times reserve and keep available, out of its authorized and unissued stock, solely for the purpose of effecting the conversion of shares of Series U Preferred Stock, such number of shares of Common Stock free of preemptive rights as shall be sufficient to effect the conversion of all shares of Series U Preferred Stock outstanding. The Corporation shall, in accordance with the laws of the State of Maryland, use its reasonable best efforts to increase the authorized number of shares of Common Stock if at such time the number of shares of authorized and unissued Common Stock shall not be sufficient to permit the conversion of all the then outstanding shares of Series U Preferred Stock. The Corporation shall not be required to deliver shares of Common Stock upon conversion
if, in the opinion of its counsel, such delivery would violate the laws of the State of Maryland or any other United States jurisdiction or any jurisdiction outside the United States.
The Corporation shall pay any and all issue or other taxes that may be payable in respect of any issue or delivery of shares of Common Stock upon conversion of the Series U Preferred Stock. The Corporation shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of Common Stock in a name other than that in which the shares of Series U Preferred Stock so converted were registered, and no such issue or delivery shall be made unless and until the person requesting such issue has paid to the Corporation the amount of such tax or has established to the satisfaction of the Corporation that such tax has been paid.
8. Voting Rights.
(a) General. Holders of shares of the Series U Preferred Stock shall
not have any voting rights except as set forth below. In connection with any
such right to vote, each holder of shares of the Series U Preferred Stock will
have one vote for each such share held. Any shares of Series U Preferred Stock
held by the Corporation, or any subsidiary of the Corporation in which the
Corporation owns shares entitled to cast a majority of all votes entitled to be
cast, shall not have voting rights, and shall not be counted in determining the
presence of a quorum or in calculating any percentage of shares, under this
Section 6.3(c).8.
(b) Class Voting Rights. So long as shares of the Series U Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote or consent of the holders of at least a majority (or such higher percentage, if any, as may then be required by applicable law) of all outstanding shares of Series U Preferred Stock, voting separately as a class, (i) amend any provision of the charter of the Corporation so as to change the preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications and terms or conditions of redemption of the Series U Preferred Stock or (ii) create, authorize or issue, or reclassify any authorized stock of the Corporation into, or increase the authorized amount of, any class or series of stock of the Corporation ranking senior to the Series U Preferred Stock as to dividends or upon Liquidation (other than up to $50.0 million aggregate liquidation preference of Preferred Stock, to accredited investors who are not current holders of any class or series of stock of the Corporation (or of any other securities of the Corporation convertible into, or exchangeable or exercisable for, such stock of the Corporation) in an offering exempt from the registration requirements of the Securities Act, such stock to have the designation, preferences, conversion or other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications, terms or conditions of redemption, and Stated Value thereof, as determined by the Board). A class vote on the part of the Series U Preferred Stock shall not be required (except as otherwise required by law or resolution of the Board) in connection with any other matter, including, without limitation, the authorization, issuance or increase in the authorized amount of any shares of any class or series of stock of the Corporation that either (A) ranks junior to, or on a parity with, the Series U Preferred Stock as to dividends and upon Liquidation or (B) is, at the time of such increase, undesignated as to ranking with respect to dividends and upon Liquidation.
9. Ranking. Any class or series of stock of the Corporation shall be deemed to rank:
(a) prior to the Series U Preferred Stock, as to dividends or upon Liquidation, if the holders of such class or series shall be entitled to the receipt of dividends or of amounts distributable upon Liquidation, as the case may be, in preference or priority to the holders of Series U Preferred Stock;
(b) on a parity with the Series U Preferred Stock, as to dividends or upon Liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share thereof are different from those of the Series U Preferred Stock, if the holders of such class or series of stock and the Series U Preferred Stock shall be entitled to the receipt of dividends or of amounts distributable upon Liquidation, as the case may be, in proportion to their respective amounts of accumulated or accrued and unpaid dividends per share or liquidation prices, as the case may be, without preferences or priority one over the other; and
(c) junior to the Series U Preferred Stock, as to dividends or upon Liquidation, if such stock shall be Common Stock or any other class or series of stock of the Corporation if the holders of Series U Preferred Stock shall be entitled to receipt of dividends or of amounts distributable upon Liquidation, as the case may be, in preference or priority to the holders of shares of such stock.
For purposes hereof, the Series T Preferred Stock shall rank on parity with the Series U Preferred Stock as to dividends and upon Liquidation.
10. Outstanding Shares. For purposes hereof, all shares of the Series U Preferred Stock issued by the Corporation shall be deemed outstanding except (i) as provided in subsections 4 and 5 of this Section 6.3(c) and (ii) from the date of surrender of a certificate representing shares of Series U Preferred Stock, all shares of Series U Preferred Stock represented by such certificate.
11. Status of Acquired Shares. Shares of the Series U Preferred Stock redeemed or otherwise acquired by the Corporation constitute authorized but unissued shares of undesignated Preferred Stock, and may thereafter be issued, but not as shares of Series U Preferred Stock.
1. Designation, Notice, Fractional Shares, Taxes.
2. Cumulative Dividends.
or series of Parity Shares (as defined below) for any period unless full cumulative dividends have been or contemporaneously are authorized and paid or authorized and a sum sufficient for the payment thereof set apart for such payment on the Series V Preferred Stock for all Dividend Periods terminating on or prior to the dividend payment date on such class or series of Parity Shares.
3. Liquidation Preference.
underwriter in a public offering or private placement of the Common Stock or (F) any affiliates or members of the immediate families (their spouse, issues, brothers, sisters and their respective issue and trusts for the benefit of such persons) of the foregoing.
4. Conversion at the Option of the Holder.
(1) "OPTIONS" shall mean rights, options or warrants to subscribe for, purchase or otherwise acquire either Common Stock or Convertible Securities (other than options as approved by the Board of Directors or Compensation Committee to acquire Common Stock and granted (or with respect to the Corporation's
(A) no further adjustment in the Conversion Share Price shall be made upon the subsequent issue of Options or Convertible Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities for which adjustment has been made as a result of a deemed issuance pursuant to this subsection 4(c)(iii);
(B) if such Options or Convertible Securities by their terms provide, with the passage of time or otherwise, for any increase or decrease in the consideration payable to the Corporation, or in the number of shares of Common Stock issuable, upon the exercise, conversion or exchange thereof, the Conversion Share Price computed upon the original issue thereof, and any subsequent adjustments based thereon, shall, upon any such increase or decrease becoming effective, be recomputed to reflect such increase or decrease insofar as it affects such Options or rights of conversion or exchange under such Convertible Securities;
(C) upon the expiration of any such Options or any rights of conversion or exchange under such Convertible Securities which shall not have been exercised, the Conversion Price computed upon the original issue thereof, and any subsequent adjustments based thereon, shall, upon such expiration, be recomputed as if:
(I) in the case of Convertible Securities or Options for Common Stock, the only Additional Stock issued was Common Stock, if any, actually issued upon the exercise of such Options or the conversion or exchange of such Convertible Securities and the consideration received therefor was the consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration actually received by the Corporation upon such exercise, or for the issue of all such Convertible Securities whether or not actually converted or exchanged plus the additional consideration, if any, actually received by the Corporation upon such conversion or exchange, and
(II) in the case of Options for Convertible Securities, only the Additional Stock, if any, actually issued upon the exercise thereof were issued at the time of issue of such Options, and the consideration received by the Corporation for the shares of Additional Stock deemed to have been then issued was consideration actually received by the Corporation for the issue of all such Options, whether or not exercised, plus the consideration deemed to have been received by the Corporation upon the issue of the Convertible Securities with respect to which such Options were actually exercised;
(D) no readjustment pursuant to Clause (B) or (C) above shall have the effect of increasing the Conversion Share Price to an amount which exceeds the lower of (i) the Conversion Share Price on the date immediately prior to the original adjustment date, or (ii) the Conversion Price that would have
resulted from any issuance of Additional Stock between such date and such readjustment date; and
(E) in the case of any Options or Convertible Securities which expire by their terms not more than ninety (90) days after the date of issue thereof, no adjustment of the Conversion Share Price shall be made until the expiration, conversion or exercise of all such Options or Convertible Securities.
value thereof at the time of such issue, as determined in good faith by the Board of Directors; and (C) in the event Additional Stock is issued together with other shares of securities or other assets of the Corporation for consideration which covers both, be the proportion of such consideration so received which relates to Additional Stock, computed as provided in Clause (A) and (B) above, as determined in good faith by the Board of Directors.
period, subject to all other adjustments called for during such period under this subsection 4 with respect to the rights of the holders of this Series V Preferred Stock.
5. Conversion and Redemption at the Option of the Corporation.
Notwithstanding the Corporation's right to require a Partial Cash Exchange, not later than 15 days after receipt of a written Notice of Exchange (as defined below) of such Partial Cash Exchange, a holder of Series V Preferred Stock may elect, in its sole discretion, to convert up to 100% of such holder's shares of Series V Preferred Stock into that number of shares of Common Stock determined by multiplying the number of shares of Series V Preferred Stock by the Conversion Share Ratio if such holder provides written notice (in accordance with subsection 1(b) of this Section 6.3(d)) of such election to the Corporation. Such election may be conditioned upon consummation of the IPO. If requested by the underwriter in an IPO, any shares of Common Stock issuable upon a Partial Cash Exchange (including shares issuable if the holder elects to convert 100% of such holder's shares of Series V Preferred Stock) shall be subject to a lock-up of not greater than three hundred and sixty (360) days provided that all officers, directors and substantially all 1% shareholders of the Corporation are bound by the same lock-up terms.
trading on the NYSE, on the principal national securities exchange on which such securities are listed or admitted, or if not listed or admitted for trading on any national securities exchange, on The NASDAQ Stock Market, or if such securities are not quoted on The NASDAQ Stock Market, in the applicable securities market in which the securities are traded.
7. Redemption. The shares of Series V Preferred Stock shall be subject to the redemption as follows:
Date and an Internal Rate of Return of 20% during the period from and after the third anniversary date of the Issue Date until the date of redemption. Such redemption shall be subject to the limitations, if any, imposed by the MGCL, and shall be paid in immediately available funds. The Series V Preferred Stock shall not be subject to the operation of any mandatory purchase, retirement or sinking fund. Any notice that is mailed as provided in this subsection 7(a) shall be conclusively presumed to have been duly given, whether or not the holder of shares of the Series V Preferred Stock receives such notice; and failure to give such notice by mail, or any defect in such notice to the holders of any shares designated for redemption, shall not affect the validity of the redemption of any other shares of the Series V Preferred Stock.
On or after the date fixed for redemption as stated in such notice, each holder of shares of the Series V Preferred Stock called for redemption shall surrender the certificate representing such shares to the Corporation at the place designated in such notice and shall thereupon be entitled to receive payment of the redemption price for each such share. Notice having been given as aforesaid, if, on the date fixed for redemption, the cash funds necessary for the redemption shall be legally available therefor and shall have been irrevocably deposited or set aside in trust with a bank or trust company, then, notwithstanding that any certificates representing any shares of the Series V Preferred Stock so called for redemption shall not have been surrendered, (i) dividends with respect to the shares so called for redemption shall cease to accrue on the date fixed for redemption, (ii) such shares shall no longer be deemed outstanding, (iii) the holders thereof shall cease to be stockholders of the Corporation to the extent of their interest in such shares and (iv) all rights whatsoever with respect to the shares so called for redemption (except the right of the holders to receive the redemption price for each such share, without interest or any sum of money in lieu of interest thereon, upon surrender of their certificates therefor at a place designated in such notice) shall terminate.
on square footage that was not leased at the time of acquisition, (iv) development of new properties or material new elements of existing properties, and (v) improvements to bring a property into compliance with government regulations.
The redemption price for each share of the Series V Preferred Stock to be redeemed pursuant to this subsection (b) shall be the cash amount equal to the Stated Value plus an Internal Rate of Return of 20%, except that an Internal Rate of Return of 15% shall be paid in connection with a redemption on account of the failure of the Corporation to consummate an IPO of the Corporation's Common Stock by the fourth anniversary of the Issue Date as specified in subsection (vii) above. Notwithstanding subsections (iv), (v) and (vi) above, the Corporation shall not be deemed to have failed the FAD tests set forth in such sections if and to the extent that any such failure is based directly on lost revenues or expenses incurred arising out of a casualty, civil unrest, natural disaster or similar act of God as to which the Corporation was not insured (and prudent institutional owners in the market or markets where the affected assets are located would not have been insured) or the Corporation has experienced a delay in the receipt of insurance proceeds for reasons beyond the reasonable control of the Corporation, provided that no single casualty event shall operate to excuse failure to satisfy a FAD test as to more than one calendar year.
8. Protective Provisions. In addition to any other approval that
may be required by law and the charter of the Corporation, (A) the Corporation
shall not take any of the following actions (other than the actions specified in
clause (vii) below) and the Corporation shall not permit any subsidiary of the
Corporation (the "Subsidiary") to take any of the actions specified in clauses
(i), (ii), (iii), (iv), (v), (vi) or (viii) below without first obtaining prior
written approval of (x) the holders of a majority of the outstanding shares of
Series V Preferred Stock or (y) if AEW does not own a majority of the
outstanding shares of Series V Preferred Stock, the directors elected by the
holders of Series V Preferred Stock and (B) the Corporation shall not take any
of the actions specified in clause (vii) below without first obtaining prior
unanimous approval of the board of directors:
(i) the issuance of or modification in a manner materially adverse to the Corporation or Subsidiary of any debt if the principal amount of such debt exceeds $10 million or the conversion to a term loan of any amounts owed to PaineWebber Incorporated, provided that such approval will not be required upon such issuance or modification necessary in connection with the redemption in full of the Series V Preferred Stock in accordance with Section 7 hereof or an IPO in
which the shares of Series V Preferred Stock are converted and redeemed in accordance with Section 5(a) hereof.
(ii) new investments, including a purchase of a real estate operating company or REIT, with a purchase price equal to or greater than $10 million, or any series of investments within any 90-day period with an aggregate purchase price exceeding $25 million;
(iii) issuance of any equity securities by the Corporation or Subsidiary in an IPO of Common Stock other than an IPO in which the shares of Series V Preferred Stock are converted and redeemed in accordance with Section 5(a) hereof or redeemed in accordance with Section 7(a) hereof.
(iv) issuance of any equity security by the Subsidiary (other than to
the Corporation) or issuance of any equity security by the Corporation (other
than (i) securities issuable upon conversion, exercise or exchange of any Share
of Series V Preferred Stock, Convertible Security (provided the issuance of such
Convertible Security was made in accordance with the provisions of this Section
8), Option or Permitted Option, (ii) securities issuable in consideration of the
acquisition of assets or shares of another entity as long as the acquisition is
approved in accordance with this Section 8, (iii) securities issuable in
connection with any stock split or stock dividend payable in Common Stock or
(iv) Substitute Securities (as defined in the Series V Convertible Stock
Purchase Agreement, dated as of September 9, 1996, between the Corporation,
Health Science Properties Holding Corporation and AEW Partners II, L.P.)) unless
the following conditions are satisfied, (A) such securities do not rank senior
in liquidation preferences, dividend payment or redemption to the Series V
Preferred Stock, (B) the rights of such securities do not impair the voting or
approval rights of the holders of the Series V Preferred Stock or prevent the
holders of shares of Series V Preferred Stock from electing a majority of the
members of the Board of Directors under circumstances set forth in Section 11 of
this Section 6.3(d), (C) the holders of the Series V Preferred Stock are offered
transferable preemptive rights to purchase their Pro Rata Portion (as defined
below) of such securities on terms no less favorable to the Corporation, and (D)
if such securities are Common Stock or securities convertible into Common Stock,
and if the Common Stock purchase price or Common Stock conversion share price is
less than the then Conversion Share Price then the Conversion Share Price will
be adjusted as set forth in Section 4 (and the Conversion Share Ratio adjusted
accordingly), provided however that prior approval will not be required upon
issuance of any equity securities fully to redeem the Series V Preferred Stock
or as part of an IPO in which the shares of Series V Preferred Stock are
converted and redeemed in accordance with Section 5(a) hereof.
(v) payment of dividends on any equity securities when the Corporation's FAD fails to equal the required dividends payable on the outstanding Series V Preferred Stock and the assumed dividends on the outstanding Common Stock as set forth in any of Sections 7(b)(iv), 7(b)(v) or 7(b)(vi) hereof;
connection with a complete redemption of the Series V Preferred Stock in accordance with Section 7(a) hereof or as part of an IPO in which the shares of Series V Preferred Stock are converted and redeemed in accordance with subsection 5(a) hereof;
(vii) institution of any bankruptcy action (as defined below) provided, however, that such approval will not be required in connection with such bankruptcy action if obtaining such approval is determined by a court of competent jurisdiction to be unenforceable under applicable state or federal law;
(viii) sale, consolidation or merger of the Corporation or Subsidiary;
(ix) the voluntary termination of the Corporation's status as a REIT for tax purposes;
(x) any substantial change in the Corporation's current business strategies substantially as described in the Corporation's Confidential Offering Memorandum dated September 11, 1995;
(xi) Jerry Sudarsky ceasing to serve as the full-time Chairman of the Corporation (other than by reason of his death or disability) during the period ending on the earlier of January 1, 1998 or consummation of a public offering of the securities of the Corporation or Joel Marcus ceasing to serve as the full- time Chief Executive Officer or Chief Operating Officer of the Corporation (other than by reason of his death or disability);
(xii) the sale or disposition by Mr. Sudarsky or Mr. Marcus of 20% or more of his stock ownership interest in the Parent as of the Issue Date. For the purposes of this paragraph, shares held in (a) a trust for estate planning purposes for the benefit of Mr. Sudarsky or Mr. Marcus or members of their immediate families (spouse, issues and siblings), or (b) held by members of their immediate families or (c) an entity wholly-owned by any of the foregoing, shall be deemed to be held by Mr. Sudarsky or Mr. Marcus as the case may be;
The term "Pro Rata Share" shall mean a fraction of the entire issuance of equity securities the numerator of which shall be the sum of the number of the shares of Common Stock then owned (or issuable upon conversion of Shares then owned) by the holder of Series V Preferred Stock and the denominator of which shall be the total number of the shares of Common Stock outstanding immediately prior to the issuance of such equity securities assuming full conversion or exercise of all outstanding Common Stock and Shares, Convertible Securities, Options and Permitted Options.
Any offer of equity securities made to the holders of Series V Preferred Stock shall be made by notice in writing at least 20 days prior to the date on which the Corporation intends to
issue and sell such securities. Such notice shall set forth (i) the number and type of securities proposed to be issued and sold and the terms of such securities, (ii) the approximate price at which such securities are proposed to be sold and the terms of payment, (iii) the number of securities offered to the holders of Series V Preferred Stock in compliance with the provisions of this Section, and (iv) the proposed date of issuance and sale of such securities. Not later than 10 Business Days after receipt of such notice, each holder of Series V Preferred Stock shall notify the Corporation in writing whether it elects to purchase all or any portion of its Pro Rata Portion of the securities offered pursuant to such notice. If any holder of Series V Preferred Stock does not so notify the Corporation, such holder shall be deemed to have waived rights to purchase any of the securities. If a holder of Series V Preferred Stock shall elect to purchase any such securities, the securities which it shall have elected to purchase shall be issued and sold to such holder by the Corporation at the same time and on the same terms and conditions as the securities are issued and sold to third parties. If, for any reason, the sale of securities to third parties is not consummated, such holder's election shall terminate, subject to such holder's ongoing subscription right with respect to issuances of securities at later dates or times.
The term "bankruptcy action" shall mean:
(a) Commencing any case, proceeding or other action seeking protection for the Corporation as a debtor under any existing or future law of any jurisdiction relating to bankruptcy, insolvency, reorganization or relief of debtors;
(b) Consenting to the entry of an order of relief in any involuntary bankruptcy case against the Corporation;
(c) Filing an answer in any involuntary case described in clause (b) above admitting the material allegations of the petition therein;
(d) Seeking or consenting to the appointment of a receiver, liquidator, assignee, trustee, sequestrator, custodian or any similar official for the Corporation or for a substantial portion of its properties;
(e) Making any assignment for the benefit of the creditors of the Corporation; and
(f) Admitting in writing the inability of the Corporation to generally pay its debts as they mature or that the Corporation is generally not paying its debts as they become due.
If any director of the Corporation votes against the initiation of any bankruptcy action, such director shall not be liable for monetary damages to the Corporation or its stockholders for voting against such bankruptcy action. This exculpation shall be in addition to, and shall not in any way limit or modify any other exculpation contained in the charter of the Corporation.
With respect to each of the above transactions, if their approval is required, the holders of Series V Preferred Stock shall be provided with the information regarding the proposed transaction at least 10 Business Days prior to the scheduled approval date. If the holders of the
Series V Preferred Stock shall not deliver written notice objecting to the particular transaction before the end of such 10 Business Day period, such holders shall be deemed to have consented to such transaction.
9. Shares to Be Retired. All shares of Series V Preferred Stock which shall have been issued and reacquired in any manner by the Corporation shall be restored to the status of authorized but unissued shares of Preferred Stock of the Corporation, without designation as to class or series.
10. Ranking. Any class or series of stock of the Corporation shall be deemed to rank:
(b) on a parity with the Series V Preferred Stock as to the payment of dividends and as to the distribution of assets upon liquidation, dissolution or winding up if such stock or series shall be Parity Shares;
(c) junior to the Series V Preferred Stock, as to the payment of dividends or as to the distribution of assets upon liquidation, dissolution or winding up, if such stock or series shall be Junior Shares; and
(d) junior to the Series V Preferred Stock, as to the payment of dividends and as to the distribution of assets upon liquidation, dissolution or winding up, if such stock or series shall be Fully Junior Shares.
11. Voting Rights. Except as expressly provided below or otherwise in this charter or required by law, the holders of Series V Preferred Stock shall have no voting rights.
(i) the Corporation has failed in two consecutive quarters to pay in full the quarterly dividends on Series V Preferred Stock as required by subsection 2 of this Section 6.3(d) (including all dividends accumulated but unpaid for all prior quarters);
(ii) the Corporation violates Section 8(xi) and (xii) hereof;
(iii) the Corporation has failed to close an IPO of its Common Stock by the fourth anniversary of the Issue Date; or
(iv) the Corporation fails to pay the full redemption price on the Series V Preferred Stock subject to redemption pursuant to subsection 7(b) on any redemption date (provided, that such redemption was made at the request of the holders of the majority of the then-outstanding shares of Series V Preferred Stock), then the holders of Series V Preferred Stock shall immediately (and regardless of any subsequent cure) and thereafter be entitled to elect the smallest number of directors constituting a majority of the Board of Directors, and the holders of Common Stock, as a class, shall retain the right to elect the remaining directors. In order to facilitate the effective control of the Board of Directors by the holders of Series V Preferred Stock upon the occurrence of any event identified in (i), (ii), (iii) or (iv) above, the size of the Board shall automatically be increased to 15, and the holders of Series V Preferred Stock, voting together as a single class, shall have the exclusive right to elect six persons to fill such newly created vacancies on the Board of Directors. All Directors elected by a vote of the holders of Series V Preferred Stock shall be referred to as "Series V Directors." The initial two Series V Directors serving as directors of the Corporation shall be a Class B Director and a Class C Director. If more than the two Series V Directors are serving then they shall be assigned to classes to make the number of directors in each class as nearly equal as possible. Holders of Series V Preferred Stock may elect the Series V Directors by unanimous written consent, by a special meeting of the holders of the Series V Preferred Stock, or at an annual meeting of stockholders of the Corporation. Any special meeting of the holders of the Series V Preferred Stock may be called by holders who hold at least 10% of the outstanding shares of Series V Preferred Stock or by a Series V Director and shall be held at a time and place specified by the holder or Series V Director calling a meeting. The presence in person or by proxy at a meeting of persons entitled to cast a majority of all the votes entitled to be cast by the holders of a majority of the outstanding shares of Series V Preferred Stock shall constitute a quorum for the purposes of any such special meeting. In the case of any vacancy occurring among the Series V Directors, a majority of the remaining Series V Directors, if any, may elect a successor to hold office until the earlier of the expiration of the remaining term of such Series V Director or the next meeting of the stockholders of that class or series, which shall not be later than the next annual meeting of holders of the Common Stock. If all Series V Directors shall cease to serve as directors before their terms expire, the holders of Series V Preferred Stock then outstanding may, by unanimous written consent or at an annual or special meeting of the holders of Series V Preferred Stock, elect successors to hold office for the unexpired terms of the Series V Directors.
12. Record Holders. The Corporation and the Transfer Agent may deem and treat the record holder of any Series V Preferred Stock as the true and lawful owner thereof for all purposes, and neither the Corporation nor the Transfer Agent shall be affected by any notice to the contrary.
ARTICLE VII
EXCESS SHARE PROVISIONS
"AEW" shall mean AEW Partners II, L.P., a Delaware limited partnership.
"Beneficial Ownership" shall mean ownership of Capital Stock either directly or constructively through application of section 544 of the Code, as modified by section 856(h) of the Code. The terms "Beneficial Owner," "Beneficially Owns" and "Beneficially Owned" shall have correlative meanings.
"Beneficial Transferee" shall mean the transferee that acquires for consideration Capital Stock from the Trustee pursuant to Section 7.3.5 of this Article VII.
"Capital Stock" shall mean all classes and series of stock of the Corporation, including, without limitation, Common Stock, Excess Stock, and Preferred Stock.
"Charitable Beneficiary" shall mean the beneficiary or beneficiaries
of the Trust which shall be the United Jewish Appeal and, if necessary either
(i) to prevent the Corporation from becoming Closely Held, as defined below, or
(ii) to prevent beneficial ownership of Capital Stock by fewer than 100 Persons
(determined without reference to any rules of attribution), one or more
additional persons exempt from tax under section 501(c)(3) of the Code to be
selected by the Trustee.
"Closely Held" shall have the meaning set forth in Section 7.2.1(d) of this Article VII.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Excepted Holder" shall mean (i) AEW, (ii) an assignee of AEW who is an Excepted Holder pursuant to Section 7.2.10(b), and (iii) any stockholder of the Corporation for whom an exemption to the Ownership Limit is created by the Board of Directors pursuant to Section 7.2.10(a). Notwithstanding anything to the contrary in this Article VII, unless otherwise agreed in writing by the Board of Directors, an Excepted Holder shall cease to be an Excepted Holder if, as a result of a sale or other disposition of Capital Stock by such Excepted Holder, the Excepted Holder Beneficially Owns Capital Stock less than the Ownership Limit.
"Excepted Holder Limit" shall mean (i) with respect to AEW (or any assignee of AEW who is an Excepted Holder pursuant to Section 7.2.10(b)), ___% of the Capital Stock of the Corporation, reduced in each case by the percentage of Capital Stock of the Corporation disposed of by AEW or any such assignee after __________, 1997, and (ii) with respect to any other Excepted
Holder, such percentage of the Capital Stock of the Corporation as determined by the Board of Directors pursuant to Section 7.2.10.
"Excess Stock" shall mean stock that is exchanged for Capital Stock pursuant to Section 7.2.2 of this Article VII.
"Individual" shall mean any Person that is treated as an individual for purposes of section 542(a)(2) of the Code as the application of such section may be modified by section 856(h) of the Code and by applying the "look through" rule of section 856(h)(3) of the Code to any trust described in section 401(a) of the Code and exempt from tax under section 501(a) of the Code.
"Market Price" on any date shall mean the fair market value as determined by a nationally recognized investment banking firm selected by the Board of Directors.
"Ownership Limit" shall mean 9.8% of the value of the outstanding shares of Capital Stock of the Corporation, subject to adjustment as set forth in Section 7.2.8.
"Person" shall mean an individual, corporation, partnership, estate, trust (including a trust qualified under section 401(a) or 501(c)(17) of the Code), a portion of a trust permanently set aside for or to be used exclusively for the purposes described in section 642(c) of the Code, association, private foundation within the meaning of section 509(a) of the Code, joint stock compa ny or other entity or any government or agency or political subdivision thereof and also includes a "group" as that term is used for purposes of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
"Purported Holder" shall mean, with respect to any event, other than a purported Transfer, that results in Excess Stock, the record holder of the Capital Stock but for this Article VII.
"Purported Transferee" shall mean, with respect to any purported Transfer of Capital Stock, including (without limitation) a purported Transfer that results in Excess Stock, the person who would be the record holder of the Capital Stock but for this Article VII.
"Restriction Termination Date" shall mean the first day on which the Board of Directors determines that it is no longer in the best interests of the Corporation to attempt to, or continue to, qualify as a REIT.
"REIT" shall mean a real estate investment trust under the Code.
"Transfer" shall mean any sale, issuance, transfer, gift, hypothecation, pledge, assign ment, devise or other disposition (including (i) the granting of any option or entering into any agreement for the sale, transfer or other disposition of Capital Stock, or (ii) the sale, transfer, assign ment or other disposition of any securities or rights convertible into or exchangeable for Capital Stock), whether voluntary or involuntary, whether of record, constructively or beneficially and whether by operation of law or otherwise. The terms "Transfers" and "Transferred" shall have the correlative meanings.
"Trust" shall mean the trust created pursuant to Section 7.3.1 of this Article VII.
"Trustee" shall mean such person, as trustee of the Trust, as shall be selected from time to time by the Board of Directors.
Section 7.2.1 Restriction on Transfers. Prior to the Restriction Termination Date:
(a) No Person, other than an Excepted Holder, shall Beneficially Own Capital Stock in excess of the Ownership Limit. In addition, no Excepted Holder shall Beneficially Own Capital Stock in excess of the Excepted Holder Limit with respect to such Excepted Holder.
Section 7.2.2 Exchange for Excess Stock.
(a) If, notwithstanding the other provisions contained in this Article VII, at any time prior to the Restriction Termination Date, there is a purported Transfer or any other event such that any Person, other than an Excepted Holder, would Beneficially Own Capital Stock in excess of the Ownership Limit, then such shares of Capital Stock in excess of such Ownership Limit (such shares to be rounded up to the nearest whole share) shall be automatically exchanged for an equal
number of shares of Excess Stock and shall be subject to the terms of Section 7.3 hereof. Such exchange shall be effective as of the close of business on the business day prior to the date of the Transfer or other event.
(b) If, notwithstanding the other provisions contained in this Article
VII, at any time prior to the Restriction Termination Date, there is a purported
Transfer or any other event such that any Excepted Holder would Beneficially Own
Capital Stock in excess of the applicable Excepted Holder Limit, then such
shares of Capital Stock in excess of such Excepted Holder Limit (such shares to
be rounded up to the nearest whole share) shall be automatically exchanged for
an equal number of shares of Excess Stock and shall be subject to the terms of
Section 7.3 hereof. Such exchange shall be effective as of the close of
business on the business day prior to the date of the Transfer or other event.
(c) If, notwithstanding the other provisions contained in this Article VII, at any time prior to the Restriction Termination Date, there is a purported Transfer or any other event that would result in the Corporation being Closely Held, then such shares of Capital Stock that would otherwise cause the Corporation to become Closely Held (such shares to be rounded up to the nearest whole share) shall be automatically exchanged for an equal number of shares of Excess Stock and shall be subject to the terms of Section 7.3 hereof. Such exchange shall be effective as of the close of business on the business day prior to the date of the Transfer or other event.
(d) If, notwithstanding the other provisions contained in this Article VII, at any time prior to the Restriction Termination Date, there is a purported Transfer or any other event that would result in beneficial ownership of Capital Stock by fewer than 100 Persons (determined without reference to any rules of attribution), then such shares of Capital Stock that would otherwise cause such beneficial ownership to be held by fewer than 100 Persons shall be automatically exchanged for an equal number of shares of Excess Stock and shall be subject to the terms of Section 7.3 hereof. Such exchange shall be effective as of the close of business on the business day prior to the date of the Transfer or other event.
Section 7.2.4 Notice of Ownership or Attempted Ownership in Violation of Section 7.2.1. Any Person who acquires or attempts to acquire Beneficial Ownership of shares of Capital Stock in violation of Section 7.2.1 of this Article VII, shall immediately give written notice to the Corporation of such event and shall provide to the Corporation such other information as the
Corporation may request in order to determine the effect, if any, of such acquisition or attempted acquisition on the Corporation's qualification as a REIT.
Section 7.2.5 Owners Required to Provide Information. Prior to the Restriction Termination Date:
(a) The Corporation shall demand written notice, within 30 days after the close of each taxable year, from every stockholder of record of more than 5% (during any periods in which the number of such owners exceeds 2000) or 1% (during any periods in which the number of such owners is greater than 200 but no more than 2000), or such lower percentages as required pursuant to regulations under the Code, of the outstanding shares of Capital Stock of the Corporation stating the name and address of such Beneficial Owner, the number of shares of Capital Stock Beneficially Owned, and a description of how such shares are held. Each such Beneficial Owner shall provide to the Corporation such additional information as the Corporation may reasonably request in order to determine the effect, if any, of such Beneficial Ownership on the Corporation's status as a REIT.
(b) Each Person who is a Beneficial Owner of Capital Stock and each Person (in cluding the stockholder of record) who is holding Capital Stock for a Beneficial Owner shall provide to the Corporation such information as the Corporation may reasonably request in order to determine the Corporation's status as a REIT, to comply with the requirements of any taxing authority or governmental agency or to determine such compliance, or to comply with regulations promulgated under the REIT provisions of the Code including, without limitation, Treasury Regulation Section 1.857-8 or any successor regulation.
(c) Every stockholder of record who holds shares of Capital Stock as nominee for another Person shall give written notice to the Corporation of the name and address of such other Person and the number of shares of Capital Stock which the stockholder of record holds as nominee for such Person.
Section 7.2.6 Ambiguity. In the case of an ambiguity in the application of any of the provisions of this Article VII, including any definition contained in Section 7.1 and any ambiguity with respect to whether Capital Stock is to be exchanged for Excess Stock in a given situation, the Board of Directors shall have the power to determine the application of the provisions of this Article VII with respect to any situation based on the facts known to it and any such determination by the Board of Directors shall be final and conclusive for all purposes.
Section 7.2.7 Modifications of Ownership Limit. Subject to the limitations provided in Section 7.2.8, the Board of Directors may from time to time increase or decrease the Ownership Limit.
Section 7.2.8 Limitations on Modifications.
(a) The Ownership Limit may not be increased if, after giving effect to such increase, five Individuals could Beneficially Own, in the aggregate, more than 49.9% of the value of the outstanding Capital Stock.
(b) Prior to the modification of any Ownership Limit pursuant to
Section 7.2.7, the Board of Directors may require such opinions of counsel,
affidavits, undertakings or agreements as it may deem necessary or advisable in
order to determine or ensure the Corporation's status as a REIT.
Section 7.2.9 Exceptions to Ownership Limit.
(a) Subject to Section 7.2.1(d), the Board of Directors may exempt a Person from the Ownership Limit if, prior to such exemption, the Board of Directors receives such opinions of counsel, rulings, affidavits, undertakings or agreements as it may deem necessary or advisable in order to determine or ensure the Corporation's status as a REIT. Notwithstanding the receipt of any such opinion, ruling, affidavit, undertaking, or agreement, the Board of Directors may impose such conditions or restrictions as it deems appropriate in connection with granting such exception.
(b) AEW may Transfer or assign all or a portion of its interest held in Common Stock of the Corporation on ________, 1997 to another Person or Persons, provided that, as a result of such Transfer, no Individual would Beneficially Own shares of Capital Stock in excess of the Ownership Limit. Any such transferee shall be an Excepted Holder until such time as it disposes of such Common Stock.
Section 7.2.10 Legend. Each certificate for Capital Stock shall bear substantially the following legend:
The shares represented by this Certificate are subject to restrictions on transfer for the purpose of establishing or maintaining the Corporation's status as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the "Code"). No Person may Beneficially Own shares in excess of the Ownership Limit, which may increase or decrease from time to time, unless such Person is an Excepted Holder. Any Person who attempts to beneficially own shares in violation of the above limitation must immediately notify the Corporation. All capitalized terms in this legend have the meanings defined in the Corporation's charter. If the restrictions on ownership or transfer are violated, the shares represented hereby will be automatically exchanged for shares of Excess Stock, which will then be held in trust for a Charitable Beneficiary. The foregoing is qualified in its entirety by reference to the Corporation's charter, a copy of which, including the restrictions on transfer, will be sent without charge to each stockholder who so requests.
Section 7.3.1 Ownership in Trust. Upon any purported Transfer or other event that results in the exchange of shares of Capital Stock for Excess Stock pursuant to Section 7.2.2 of this Article VII, such shares of Excess Stock shall be deemed to have been Transferred to the Trustee, as trustee of a Trust for the exclusive benefit of the Charitable Beneficiary. Shares of Excess Stock so held in the Trust shall continue to be issued and outstanding shares of stock of the Corporation of such class. The Purported Transferee or Purported Holder shall have no rights in such shares of Excess Stock except for the rights provided in Sections 7.3.3 and 7.3.5.
Section 7.3.3 Rights Upon Liquidation. At such time as (i) the Corporation has received the necessary stockholder approval with respect to a voluntary liquidation or dissolution of the Corporation, or (ii) the Corporation has become the subject of an order of a court of competent jurisdiction compelling an involuntary liquidation or dissolution of the Corporation, the Trustee, as trustee of the Trust for the exclusive benefit of the Charitable Beneficiary, shall be entitled to receive that amount of distributable assets of the Corporation to which such Excess Stock would be entitled if such Excess Stock were entitled to share ratably in the distributable assets of the Corporation as shares of Capital Stock (the "Distributed Amount"). The Trustee shall distribute to the Purported Transferee or Purported Holder an amount equal to the lesser of (a) the Distributed Amount, or (b) as appropriate, either (1) the price per share paid by such Purported Transferee for the shares of Capital Stock that were exchanged for Excess Stock, (2) if the Purported Transferee did not give value for such shares of Capital Stock (having received such through a gift, devise or otherwise), a price per share equal to the Market Price on the date of the purported Transfer that resulted in the Excess Stock, or (3) if the exchange for Excess Stock did not arise as a result of a purported Transfer, a price per share equal to the Market Price on the date of the other event that resulted in the exchange for Excess Stock. Payment to the Purported Transferee or Purported Holder shall be without interest. Subject to applicable law, if the Corporation causes such liquidation or dissolution to be revoked or otherwise rescinded, any Excess Stock previously automatically cancelled pursuant to this Section 7.3.3 of this Article VII shall be automatically reissued.
Article VII, until the Corporation has received notification that shares of Excess Stock have been transferred to the Trustee, the Corporation shall be entitled to rely on its stock transfer and other stockholder records for purposes of preparing lists of stockholders entitled to vote at meetings, determining the validity and authority of proxies and otherwise conducting votes of stockholders.
Section 7.3.5 Restrictions on Transfer.
(a) Any shares of Excess Stock that were issued in exchange for Capital Stock pursuant to Section 7.2.2 of this Article VII and are held by the Trustee pursuant to Section 7.3.1 of this Article VII shall be Transferred by the Trustee only as provided for in this subparagraph 7.3.5(a). The Trustee shall, within 180 days after the date of the purported Transfer or other event that resulted in the Excess Stock being issued in exchange for Capital Stock (or as soon as possible thereafter if the Trustee does not learn of such purported Transfer or other event within such period), Transfer for consideration the Excess Stock held in Trust to a Beneficial Transferee, to be designated by the Corporation, provided that (i) such shares would not be Excess Stock in the hands of such Beneficial Transferee and (ii) simultaneously with such Transfer such shares shall be automatically exchanged for an equal number of shares of the same class or series of Capital Stock which originally was exchanged for the Excess Stock. The Trustee shall distribute to the Purported Transferee or Purported Holder from and to the extent of the consideration received by the Trustee from the Beneficial Transferee an amount equal to, as appropriate (i) the price per share paid by the Purported Transferee for the shares of the same class or series of Capital Stock that were exchanged for Excess Stock, as the case may be, or (ii) if the Purported Transferee did not give value for such shares of Capital Stock (having received such through a gift, devise or otherwise), a price per share equal to the Market Price on the date of the purported Transfer that resulted in Excess Stock or (iii) if the exchange for Excess Stock did not arise as a result of a purported Transfer, a price per share equal to the Market Price on the date of the other event that resulted in the exchange for Excess Stock.
(b) Notwithstanding the foregoing, if a Purported Transferee receives a price for its interest in the shares of Capital Stock that were exchanged for Excess Stock that exceeds the amounts such Purported Transferee would receive under Section 7.3.5(a) of this Article VII, such Purported Transferee shall pay, or cause to be paid, such excess to the Trustee, as trustee of the Trust for the exclusive benefit of the Charitable Beneficiary.
(c) If any of the foregoing restrictions are determined to be void, invalid or unenforceable by any court of competent jurisdiction, then the Purported Transferee may be deemed, at the option of the Corporation, to have acted as an agent of the Corporation, acting in turn as agent on behalf of a third-party purchaser, in acquiring such Excess Stock and to hold such Excess Stock on behalf of the Corporation (acting, in turn, as agent as aforesaid).
ARTICLE VIII
AMENDMENTS
The Corporation reserves the right from time to time to make any amendment to its charter, now or hereafter authorized by law, including any amendment altering the terms or contract rights, as expressly set forth in this charter, of any shares of outstanding stock. All rights and powers conferred by the charter on stockholders, directors and officers are granted subject to this reservation.
ARTICLE IX
LIMITATION OF LIABILITY
To the maximum extent that Maryland law in effect from time to time permits limitation of the liability of directors and officers of a corporation, no director or officer of the Corporation shall be liable to the Corporation or its stockholders for money damages. Neither the amendment nor repeal of this Article IX, nor the adoption or amendment of any other provision of the charter or Bylaws inconsistent with this Article IX, shall apply to or affect in any respect the applicability of the preceding sentence with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.
ARTICLE X
CONTROL SHARE RIGHTS
Notwithstanding any other provision of the charter or the Bylaws of the Corporation, Title 3, Subtitle 7 of the Corporations and Associations Article of the Annotated Code of Maryland (or any successor statute) shall not apply to any acquisition by any person of shares of stock of the
Corporation. This Article X may be repealed, in whole or in part, at any time, whether before or after an acquisition of control shares and, upon such repeal, may to the extent provided by any amendment to this Article X, apply to any prior or subsequent control share acquisition; provided, however, in addition to any other requirement set forth by law or in the charter of the Corporation, that, while shares of Series V Preferred this Article X may not be modified or repealed with the prior approval of the holders of a majority of the shares of Series V Preferred Stock, voting separately as a class.
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment and Restatement to be signed in its name and on its behalf by its Chairman of the Board and attested to by its Secretary on this _____ day of ____________,
1997. ATTEST: ALEXANDRIA REAL ESTATE EQUITIES, INC. _____________________________ By:_________________________________(SEAL) Secretary Chairman of the Board |
EXHIBIT 3.4
FORM OF
AMENDED AND RESTATED BYLAWS
(Adopted _______________, 1997, Effective _____________, 1997)
ARTICLE I
OFFICES
ARTICLE II
MEETINGS OF STOCKHOLDERS
stockholder not entitled to vote who is entitled to notice of the meeting written or printed notice stating the time and place of the meeting and, in the case of a special meeting or as otherwise may be required by any statute, the purpose for which the meeting is called, either by mail or by presenting it to such stockholder personally or by leaving it at his residence or usual place of business. If mailed, such notice shall be deemed to be given when deposited in the United States mail addressed to the stockholder at his post office address as it appears on the records of the Corporation, with postage thereon prepaid.
Shares of stock of the Corporation directly or indirectly owned by it shall not be voted at any meeting and shall not be counted in determining the total number of outstanding shares entitled to be voted at any given time, unless they are held by it in a fiduciary capacity, in which case they may be voted and shall be counted in determining the total number of outstanding shares at any given time.
The Board of Directors may adopt by resolution a procedure by which a stockholder may certify in writing to the Corporation that any shares of stock registered in the name of the stockholder are held for the account of a specified person other than the stockholder. The resolution shall set forth the class of stockholders who may make the certification, the purpose for which the certification may be made, the form of certification and the information to be contained in it; if the certification is with respect to a record date or closing of the stock transfer books, the time after the record date or closing of the stock transfer books within which the certification must be received by the Corporation; and any other provisions with respect to the procedure which the Board of Directors considers necessary or desirable. On receipt of such certification, the person specified in the certification shall be regarded as, for the purposes set forth in the certification, the stockholder of record of the specified stock in place of the stockholder who makes the certification.
Notwithstanding any other provision of the charter of the Corporation or these Bylaws, Title 3, Subtitle 7 of the Corporations and Associations Article of the Annotated Code of Maryland (or any successor statute) shall not apply to any acquisition by any person of shares of stock of the Corporation. This section may be repealed, in whole or in part, at any time, whether before or after an acquisition of control shares and, upon such repeal, may, to the extent provided by any successor bylaw, apply to any prior or subsequent control share acquisition.
ascertain and report the number of shares represented at the meeting based upon their determination of the validity and effect of proxies, count all votes, report the results and perform such other acts as are proper to conduct the election and voting with impartiality and fairness to all the stockholders.
(2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of this Section 12, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation and such other business must otherwise be a proper matter for action by stockholders. To be timely, a stockholder's notice shall be delivered to the secretary at the principal executive offices of the Corporation not later than the close of business on the 60th day nor earlier than the close of business on the 90th day prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days or delayed by more than 60 days from such anniversary date or if the Corporation has not previously held an annual meeting, notice by the stockholder to be timely must be so delivered not earlier than the close of business on the 90th day prior to such annual meeting and not later than the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall the public announcement of a postponement or adjournment of an annual meeting to a later date or time commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); (ii) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any
material interest in such business of such stockholder and of the beneficial owner, if any, on whose behalf the proposal is made; and (iii) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made, (x) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (y) the number of shares of each class of stock of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(a)(2) of this Section 12 to the contrary, in the event that the number of
directors to be elected to the Board of Directors is increased and there is no
public announcement by the Corporation naming all of the nominees for director
or specifying the size of the increased Board of Directors at least 70 days
prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Section 12(a) shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the secretary at the principal executive
offices of the Corporation not later than the close of business on the tenth day
following the day on which such public announcement is first made by the
Corporation.
the meeting was made or proposed, as the case may be, in accordance with the procedures set forth in this Section 12 and, if any proposed nomination or business is not in compliance with this Section 12, to declare that such nomination or proposal shall be disregarded.
(2) For purposes of this Section 12, "public announcement" shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 12, a stockholder shall also comply with all applicable requirements of state law and of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 12. Nothing in this Section 12 shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
ARTICLE III
DIRECTORS
without the State of Maryland, as the place for holding any special meeting of the Board of Directors called by them.
The directors present at a meeting which has been duly called and convened may continue to transact business until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum.
ARTICLE IV
COMMITTEES
designate alternate members to replace any absent or disqualified member or to dissolve any such committee.
ARTICLE V
OFFICERS
deposited all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as from time to time may be designated by the Board of Directors. The treasurer shall cause to be disbursed the funds of the Corporation in such manner as may be ordered by the Board of Directors from time to time and shall render to the chairman or vice chairman of the board, the president and the Board, at regular meetings of the Board or whenever any of them may so require, an account of all transactions and of the financial condition of the Corporation.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
ARTICLE VII
STOCK
shall, from time to time, issue several classes of stock, each class may have its own number series. A certificate is valid and may be issued whether or not an officer who signed it is still an officer when it is issued. Each certificate representing shares which are restricted as to their transferability or voting powers, which are preferred or limited as to their dividends or as to their allocable portion of the assets upon liquidation or which are redeemable at the option of the Corporation, shall have a statement of such restriction, limitation, preference or redemption provision, or a summary thereof, plainly stated on the certificate. If the Corporation has authority to issue stock of more than one class, the certificate shall contain on the face or back a full statement or summary of the designations and any preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends and other distributions, qualifications and terms and conditions of redemption of each class of stock and, if the Corporation is authorized to issue any preferred or special class in series, the differences in the relative rights and preferences between the shares of each series to the extent they have been set and the authority of the Board of Directors to set the relative rights and preferences of subsequent series. In lieu of such statement or summary, the certificate may state that the Corporation will furnish a full statement of such information to any stockholder upon request and without charge. If any class of stock is restricted by the Corporation as to transferability, the certificate shall contain a full statement of the restriction or state that the Corporation will furnish information about the restrictions to the stockholder on request and without charge.
The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of the State of Maryland.
Notwithstanding the foregoing, transfers of shares of any class of stock will be subject in all respects to the charter of the Corporation and all of the terms and conditions contained therein.
In lieu of fixing a record date, the Board of Directors may provide that the stock transfer books shall be closed for a stated period but not longer than 20 days. If the stock transfer books are closed for the purpose of determining stockholders entitled to notice of or to vote at a meeting of stockholders, such books shall be closed for at least ten days before the date of such meeting.
If no record date is fixed and the stock transfer books are not closed for the determination of stockholders, (a) the record date for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day on which the notice of meeting is mailed or the 30th day before the meeting, whichever is the closer date to the meeting; and (b) the record date for the determination of stockholders entitled to receive payment of a dividend or an allotment of any other rights shall be the close of business on the day on which the resolution of the directors, declaring the dividend or allotment of rights, is adopted.
When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof, except when (i) the determination has been made through the closing of the transfer books and the stated period of closing has expired or (ii) the meeting is adjourned to a date more than 120 days after the record date fixed for the original meeting, in either of which case a new record date shall be determined as set forth herein.
ARTICLE VIII
ACCOUNTING YEAR
The Board of Directors shall have the power, from time to time, to fix the fiscal year of the Corporation by a duly adopted resolution.
ARTICLE IX
DISTRIBUTIONS
ARTICLE X
INVESTMENT POLICY
Subject to the provisions of the charter of the Corporation, the Board of Directors may from time to time adopt, amend, revise or terminate any policy or policies with respect to investments by the Corporation as it shall deem appropriate in its sole discretion.
ARTICLE XI
SEAL
relating to a seal to place the word "(SEAL)" adjacent to the signature of the person authorized to execute the document on behalf of the Corporation.
ARTICLE XII
INDEMNIFICATION AND ADVANCE OF EXPENSES; INSURANCE
To the maximum extent permitted by Maryland law in effect from time to
time, the Corporation shall indemnify and, without requiring a preliminary
determination of the ultimate entitlement to indemnification, shall pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any individual who is a present or former director or officer of the
Corporation and who is made a party to the proceeding by reason of his service
in that capacity or (b) any individual who, while a director of the Corporation
and at the request of the Corporation, serves or has served another corporation,
partnership, joint venture, trust, employee benefit plan or any other enterprise
as a director, officer, partner or trustee of such corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise and who is made
a party to the proceeding by reason of his service in that capacity. The
Corporation may, with the approval of its Board of Directors, provide such
indemnification and advance for expenses to a person who served a predecessor of
the Corporation in any of the capacities described in (a) or (b) above and to
any employee or agent of the Corporation or a predecessor of the Corporation.
Neither the amendment nor repeal of this Article, nor the adoption or amendment of any other provision of the Bylaws or charter of the Corporation inconsistent with this Article, shall apply to or affect in any respect the applicability of the preceding paragraph with respect to any act or failure to act which occurred prior to such amendment, repeal or adoption.
The Corporation shall have the power to purchase and maintain insurance on behalf of any person entitled to indemnification or whom the Corporation may indemnify under the charter of the Corporation or under Maryland law against any liability, whether or not the Corporation would have the power to indemnify him or her against such liability. The rights to indemnification set forth in the charter or in these Bylaws are in addition to all rights which any such indemnitee may be entitled as a matter of law and shall inure to the benefit of the heirs and personal representatives of each such indemnitee.
ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the charter of the Corporation or these Bylaws or pursuant to applicable law, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Neither the business to be transacted at nor the purpose of any meeting need be set forth in the waiver of notice, unless specifically required by statute. The attendance of any person at any meeting shall constitute a waiver of notice of such meeting, except where such person attends a meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.
ARTICLE XIV
AMENDMENT OF BYLAWS
The Board of Directors shall have the exclusive power to adopt, alter or repeal any provision of these Bylaws and to make new Bylaws.
EXHIBIT 8.1
DRAFT
FORM OF OPINION
May [ ], 1997
Alexandria Real Estate Equities, Inc.
251 South Lake Avenue
Suite 535
Pasadena, CA 91101
Ladies and Gentlemen:
You have requested our opinion concerning certain Federal income tax considerations in connection with the offering for sale by Alexandria Real Estate Equities, Inc., a Maryland corporation ("ARE"), of shares of its Common Stock, par value $.01 per share, pursuant to the Registration Statement on Form S-11 (No. 333-23545) filed with the Securities and Exchange Commission, dated as of the date hereof (the "Registration Statement")./1/
You have provided to us and we have reviewed certain documents
(collectively, the "Documents") that we have deemed necessary or appropriate as
a basis for our opinion, including, without limitation (i) organizational
documents of ARE and ARE-QRS Corp., a Maryland corporation (the "Subsidiary"),
(ii) copies of certain leases, management contracts and other agreements, (iii)
a certificate executed by duly appointed officers of ARE (the "Officer's Certifi
cate") setting forth certain factual representations, and (iv) certain
schedules, memoranda, financial information and other records.
DRAFT
In our examination, we have assumed the legal capacity of all natural persons, the genuineness of all signatures, the authenticity of all documents submitted to us as originals, the conformity to original documents of all documents submitted to us as certified, conformed or photostatic copies, and the authenticity of the originals of such copies.
Our opinion is based on the correctness of the following specific
assumptions: (i) ARE and the Subsidiary have been and will continue to be
operated in accordance with the laws of the State of Maryland in the manner
described in their respective organizational documents; (ii) there will be no
changes in the applicable laws of the State of Maryland; and (iii) each of the
representations contained in the Officer's Certificate is true, correct and
complete. For purposes of our opinion, we have not made an independent
investigation of the facts set forth in the Officer's Certificate and other
Documents, including, without limitation, any investigation as to the accuracy
of (i) whether the shares of ARE are beneficially owned by 100 or more persons,
(ii) whether ARE is "closely held" within the meaning of section 856(h) of the
Internal Revenue Code of 1986, as amended (the "Code"), (iii) the proper
allocation of lease payments between real property and personal property, or
(iv) whether ARE owns, directly or indirectly, 10% or more of any tenant of ARE
or the Subsidiary, applying the principles of sections 856(d)(2)(B) and (d)(5)
of the Code. No facts have come to our attention, however, that would cause us
to question the accuracy and completeness of such facts or documents in a
material way. We have, consequently, relied on your representations that the
facts and information presented in the Officer's Certificate and other Documents
or otherwise furnished to us are true, correct, and complete.
In rendering our opinion, we have also considered and relied upon the Code, the regulations promulgated thereunder by the Treasury Department (the "Regulations"), administrative rulings and the other interpretations of the Code and the Regulations by the courts and the Internal Revenue Service, all as they exist at the date of this letter. With respect to the latter assumption, it should be noted that statutes, regulations, judicial decisions, and administrative interpretations are subject to change at any time and, in some circumstances, with retroactive effect. A material change that is made after the date hereof in any of the foregoing bases for our opinion could affect our conclusions.
We express no opinion as to the laws of any jurisdiction other than the Federal laws of the United States of America to the extent specifically referred to herein.
DRAFT
Based on the foregoing, we are of the opinion that,
1. Commencing with ARE's taxable year beginning January 1, 1996 and ending on December 31, 1996, ARE has been organized and operated in conformity with the requirements for qualification as a real estate investment trust ("REIT") under the Code for the taxable year ended December 31, 1996. It is also our opinion that ARE's organization and actual method of operation through the date of this letter and its planned method of operation as represented in the Officer's Certificate will continue to enable it to meet the requirements for qualification and taxation as a REIT for the taxable year ended December 31, 1997 and thereafter.
2. The discussion in the Registration Statement under the heading "FEDERAL INCOME TAX CONSIDERATIONS" is, in all material respects, a fair and accurate summary of the Federal income tax consequences of the purchase, ownership, and disposition of the Common Stock, subject to the qualifications set forth therein -
Qualification and taxation as a REIT will depend upon ARE's continuing ability to meet, through actual annual operating results, certain requirements, including requirements relating to distribution levels and diversity of stock ownership, and the various qualification tests imposed under the Code, the results of which will not be reviewed by us. Accordingly, no assurance can be given that the actual results of ARE's operation for any one taxable year, if inconsistent with ARE's projected results, will be able to satisfy or will actually satisfy such requirements. We do not undertake to monitor whether the Company will, in fact, through actual operating results, satisfy the various qualification tests, and we express no opinion whether the Company will actually satisfy these various qualification tests in the future.
Other than as expressly stated above, we express no opinion on any issue relating to ARE, the Subsidiary, or to any investment therein.
This opinion is intended for the exclusive use of ARE and its shareholders and except as set forth herein, it may not be used, circulated, quoted or relied upon for any other purpose without our prior written consent. This opinion is expressed as of the date hereof, and we disclaim any undertaking to advise you of any subsequent changes of the matters stated, represented, or assumed herein or any subsequent changes in applicable law.
Very truly yours,
EXHIBIT 10.2
This SUBSTITUTE STOCK OPTION AGREEMENT (the "Agreement"), is entered into effective as of the __ day of _____, 199_, by and between ALEXANDRIA REAL ESTATE EQUITIES, INC., a Maryland corporation (the "Corporation"), and __________, a Non-Employee Director of the Corporation (the "Optionee"). Any capitalized terms not defined herein shall have the meaning set forth in the Subsidiary Plan (defined below).
WHEREAS, on the ___ day of ____, 199_, Health Science Properties
Holding Corporation, Inc., a Maryland corporation (the "Parent" ), granted
Optionee a nonqualified option to purchase [____] shares of the Parent's common
stock, par value $.01 per share ("Parent Common Stock") at an exercise price of
[$____] per share pursuant to the terms and conditions of its Amended and
Restated 1994 Stock Option Plan (the "Parent Plan"), which option is currently
outstanding and exercisable (the "Parent Option"); and
WHEREAS, pursuant to the Corporation's Amended and Restated 1996 Stock Option Plan (the "Subsidiary Plan"), in the event of any merger, reorganization, consolidation, recapitalization, stock dividend or other change in the capital or corporate structure of the Corporation and/or the Parent including without limitation an initial public offering ("IPO"), the Administrator of such plan may, in its sole discretion, grant substitute stock options to purchase the Corporation's Common Stock ("Substitute Stock Options") in order to preserve the benefits otherwise inherent in the Parent Options, subject to the surrender and cancellation of the corresponding Parent Option; and
WHEREAS, in accordance with the provisions of the Subsidiary Plan, as set forth above, the Administrator of the Subsidiary Plan has determined that, as a result of the filing by the Corporation of a Registration Statement on Form S-11 with the Securities and Exchange Commission, the grant of Substitute Stock Options is necessary and appropriate in order to preserve the benefits to which holders of Parent Options would otherwise have been entitled had such filing not occurred.
NOW, THEREFORE, effective as of the date first set forth above, the Administrator of the Subsidiary Plan hereby grants to the Optionee Substitute Stock Options subject to the following terms and conditions.
/2/ The exercise price per share of the Substitute Stock Option is an amount equal to the quotient of the aggregate exercise price of the Parent Option divided by the number of shares subject to the Substitute Stock Option.
IN WITNESS WHEREOF, the parties have executed this Agreement on this _____ day of ____ 199_.
ALEXANDRIA REAL ESTATE
EQUITIES, INC.
By: ________________________________
Joel S. Marcus
Chief Executive Officer
The undersigned hereby accepts and
agrees to all the terms and
provisions of the foregoing
Agreement and to all the terms and
provisions of the Plan herein
incorporated by reference.
EXHIBIT 10.3
This SUBSTITUTE STOCK OPTION AGREEMENT (the "Agreement"), is entered into effective as of the __ day of _____, 199_, by and between ALEXANDRIA REAL ESTATE EQUITIES, INC., a Maryland corporation (the "Corporation"), and __________, an employee of the Corporation (the "Optionee"). Any capitalized terms not defined herein shall have the meaning set forth in the Subsidiary Plan (defined below).
WHEREAS, on the ___ day of ____, 199_, Health Science Properties
Holding Corporation, Inc., a Maryland corporation (the "Parent" ), granted
Optionee a nonqualified option to purchase [____] shares of the Parent's common
stock, par value $.01 per share ("Parent Common Stock") at an exercise price of
[$____] per share pursuant to the terms and conditions of its Amended and
Restated 1994 Stock Option Plan (the "Parent Plan"), which option is currently
outstanding and exercisable (the "Parent Option"); and
WHEREAS, pursuant to the Corporation's Amended and Restated 1996 Stock Option Plan (the "Subsidiary Plan"), in the event of any merger, reorganization, consolidation, recapitalization, stock dividend or other change in the capital or corporate structure of the Corporation and/or the Parent including without limitation an initial public offering ("IPO"), the Administrator of such plan may, in its sole discretion, grant substitute stock options to purchase the Corporation's Common Stock ("Substitute Stock Options") in order to preserve the benefits otherwise inherent in the Parent Options, subject to the surrender and cancellation of the corresponding Parent Option; and
WHEREAS, in accordance with the provisions of the Subsidiary Plan, as set forth above, the Administrator of the Subsidiary Plan has determined that, as a result of the filing by the Corporation of a Registration Statement on Form S-11 with the Securities and Exchange Commission, the grant of Substitute Stock Options is necessary and appropriate in order to preserve the benefits to which holders of Parent Options would otherwise have been entitled had such filing not occurred.
NOW, THEREFORE, effective as of the date first set forth above, the Administrator of the Subsidiary Plan hereby grants to the Optionee Substitute Stock Options subject to the following terms and conditions.
/2/ The exercise price per share of the Substitute Stock Option is an amount equal to the quotient of the aggregate exercise price of the Parent Option divided by the number of shares subject to the Substitute Stock Option.
relations order ("QDRO"); and the Substitute Stock Option may be exercised, during the lifetime of the Optionee, only by the Optionee or by his or her legal representative or as otherwise provided by a QDRO.
Optionee to furnish to the Company an agreement (in such form as the Administrator may specify) in which the Optionee shall represent that the shares of common stock to be acquired upon exercise of the Substitute Stock Option are to be acquired for the Optionee's own account and not with a view to the sale or distribution thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on this _____ day of ____ 199_.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
By: ________________________________
Joel S. Marcus
Chief Executive Officer
The undersigned hereby accepts and agrees
to all the terms and provisions of the
foregoing Agreement and to all the terms
and provisions of the Plan herein
incorporated by reference.
EXHIBIT 10.4
THIS EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of this 22nd day of April, 1997, and the employment hereunder shall commence as of the 3rd day of April, 1997 (the latter date shall be referred to as the "Effective Date"), by and between ALEX ANDRIA REAL ESTATE EQUITIES, INC., a Maryland corporation ("Corporation"), and PETER J. NELSON, an individual ("Officer").
Corporation desires to employ Officer as its Chief Financial Officer, Treasurer and Secretary, and officer is willing to accept such employment by Corporation, on the terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows:
During the term of this Agreement, Officer agrees to be employed by and to serve Corporation as its Chief Financial Officer, Treasurer and Secretary. Corporation agrees to employ and retain Officer in such capacities. Officer shall devote such of his business time, energy, and skill to the affairs of Corporation as shall be necessary to perform the duties of such positions. Officer shall report to Joel S. Marcus. Officer shall be based at the principal executive offices of Corporation in the Los Angeles, California metropolitan area, except for required travel on Corporation's business.
The term of this Agreement shall commence on the Effective Date and shall continue until the first anniversary of the Effective Date (the "Term"); provided, however, that on April 1, 1998, and on each anniversary thereof, the Term of this Agreement shall automatically be extended for one additional year unless, not later than 90 days prior to April 1, 1998 or such anniversary thereof, either party shall have given written notice to the other that it does not wish to extend the Term of the Agreement. If Officer's employment hereunder shall
terminate by reason of the expiration of the Term (including any extensions thereof), the date of such termination shall be referred to as the "Termination Date."
and such stock incentive plans available to senior management and established upon the contemplated initial public offering of Corporation. For purposes of establishing the length of service under any benefit plans or programs of Corporation, Officer's employment with the Corporation will be deemed to have commenced on the Effective Date of this Agreement. Corporation shall pay one hundred percent (100%) of Officer's medical premiums under Corporation's medical plan.
(i) Officer's use of alcohol or narcotics which proximately results in the willful material breach or habitual willful neglect of Officer's duties under this Agreement;
(ii) Officer's criminal conviction of fraud, embezzlement, misappropriation of assets, malicious mischief, or any felony; or
(iii) Officer's willful Material Breach (as defined below) of this Agreement, if such willful Material Breach is not cured by Officer within thirty (30) days after Corporation's written notice thereof specifying the nature of such willful Material Breach. For purposes of this Paragraph 4.2, the term willful "Material Breach" shall mean the substantial and continual willful nonperformance of Officer's duties under this Agreement which the Board of Directors determines has resulted in material injury to Corporation.
During the Term of this Agreement, including the period, if any, with respect to which Officer shall be entitled to Severance Payments, Officer shall not engage in any activity competitive with the business of Corporation.
information is within the public domain or comes within the public domain without any breach of this Agreement.
If to Corporation: Alexandria Real Estate Equities, Inc.
251 South Lake Avenue, Suite 700
Pasadena, CA 91101
Phone: (818) 578-0777
|
Facsimile: (818) 578-0770 Attn: Joel S. Marcus
If to Officer: Peter J. Nelson
11978 Shoshone Ave.
Granada Hills, California 91344
Phone: (818) 368-2465
|
In addition to any other relief or award granted by the arbitrator to either Disputing Party, the arbitrator shall determine the extent to which each Disputing Party has prevailed as to the material issues raised in the arbitration, and, based upon such determination, shall apportion to each Disputing Party its ratable share of (i) the Disputing Parties' reasonable attorneys' fees and other costs reasonably incurred in the arbitration, (ii) the expense of the arbitrator, and (iii) all other expenses of the arbitration. The arbitrator shall make such determination and apportionment whether or not the dispute proceeds to a final award.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
CORPORATION:
ALEXANDRIA REAL ESTATE
EQUITIES, INC.
a Maryland corporation
By: /s/ Joel S. Marcus
---------------------------------
Joel S. Marcus
Chief Executive Officer
Date: April 28, 1997
-------------------------------
|
OFFICER:
/s/ Peter J. Nelson
------------------------------------
Peter J. Nelson
Date: April 28, 1997
-------------------------------
|
EXHIBIT 10.28
FORM OF
ALEXANDRIA REAL ESTATE EQUITIES, INC.
1997 STOCK AWARD AND INCENTIVE PLAN
FORM OF ALEXANDRIA REAL ESTATE EQUITIES, INC.
1997 STOCK AWARD AND INCENTIVE PLAN
Section Page ------- ---- 1. Purpose; Types of Awards; Construction...................... 1 2. Definitions................................................. 1 3. Administration.............................................. 6 4. Eligibility................................................. 7 5. Stock Subject to the Plan................................... 8 6. Specific Terms of Awards.................................... 9 7. Change of Control Provisions................................ 13 8. Loan Provisions............................................. 13 9. General Provisions.......................................... 14 |
FORM OF
ALEXANDRIA REAL ESTATE EQUITIES, INC.
1997 STOCK AWARD AND INCENTIVE PLAN
The purpose of the Alexandria Real Estate Equities, Inc. 1997 Stock Award and Incentive Plan (the "Plan") is to afford an incentive to selected officers, employees and independent contractors (including non-employee directors) of Alexandria Real Estate Equities, Inc. (the "Company"), or any Subsidiary or Affiliate that now exists or hereafter is organized or acquired, to acquire a proprietary interest in the Company, to continue as employees or independent contractors (including non-employee directors), as the case may be, to increase their efforts on behalf of the Company and to promote the success of the Company's business. Pursuant to Section 6 of the Plan, there may be granted Options (including "incentive stock options" and "nonqualified stock options"), Stock Appreciation Rights, Restricted Stock, and Other Stock-Based Awards or Other Cash-Based Awards. The Plan also provides the authority to make loans to purchase shares of Stock. From and after the consummation of the Initial Public Offering, the Plan is designed to comply with the requirements of Regulation G (12 C.F.R. (S) 207) regarding the purchase of shares on margin, the requirements for "performance-based compensation" under Section 162(m) of the Code and the conditions for exemption from short-swing profit recovery rules under Rule 16b-3 of the Exchange Act, and shall be interpreted in a manner consistent with the requirements thereof.
2.1 For purposes of the Plan, the following terms shall be defined as set forth below:
(a) "Affiliate" means any entity if, at the time of granting of an Award or a Loan, (i) the Company, directly or indirectly, owns at least 20% of the combined voting power of all classes of stock of such entity or at least 20% of the ownership interests in such entity or (ii) such entity, directly or indirectly, owns at least 20% of the combined voting power of all classes of stock of the Company.
(b) "Award" means any Option, SAR, Restricted Stock, or Other Stock-Based Award or Other Cash-Based Award granted under the Plan.
(c) "Award Agreement" means any written agreement, contract, or other instrument or document evidencing an Award.
(d) "Beneficiary" means the person, persons, trust or trusts that have been designated by a Grantee in his or her most recent written beneficiary designation filed with the Company to receive the benefits specified under the Plan upon his or her death, or, if there is no designated Beneficiary or surviving designated Beneficiary, then the person, persons, trust or trusts entitled by will or the laws of descent and distribution to receive such benefits.
(e) "Board" means the Board of Directors of the Company.
(f) "Change of Control" shall mean the occurrence of any of the following events:
(i) Any Person (as such term is used in section 3(a)(9) of the Exchange Act, as modified and used in sections 13(d) and 14(d) thereof, except that such term shall not include (A) the Company or any of its subsidiaries, (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its affiliates, (C) an underwriter temporarily holding securities pursuant to an offering of such securities, (D) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company, or (E) a person or group as used in Rule 13d-1(b) under the Exchange Act) that is or becomes the Beneficial Owner, as such term is defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; or
(ii) The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director
(other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Company) whose appointment or election by the Board or nomination for election by the Company's stockholders was approved or recommended by a vote of at least two- thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or
(iii) There is consummated a merger or consolidation of the Company with any other corporation, other than (A) a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Company or any subsidiary of the Company, at least seventy-five percent (75%) of the combined voting power of the securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its affiliates other than in connection with the acquisition by the Company or its affiliates of a business) representing twenty-five percent (25%) or more of the combined voting power of the Company's then outstanding securities; or
(iv) The stockholders of the Company approve a plan of complete liquidation or dissolution of the Company or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least seventy-five (75%) of the combined voting power of the voting securities of which are owned by stockholders of the Company in substantially the same proportions as their ownership of the Company immediately prior to such sale.
(g) "Code" means the Internal Revenue Code of 1986, as amended from time to time.
(h) "Committee" means the Board or the committee designated or established by the Board to administer the Plan from and after the consummation of the Initial Public Offering, the composition of which shall at all times satisfy the provisions of Rule 16b-3. With respect to the period prior to consummation of the Initial Public Offering, references to the "Committee" shall be deemed to refer to the Board.
(i) "Company" means Alexandria Real Estate Equities, Inc., a corporation organized under the laws of the State of Maryland, or any successor corporation or to the Compensation Committee of the Board.
(j) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, and as now or hereafter construed, interpreted and applied by regulations, rulings and cases.
(k) "Fair Market Value" means, with respect to Stock or other property, the fair market value of such Stock or other property determined by such methods or procedures as shall be established from time to time by the Committee. Unless otherwise determined by the Committee in good faith, the per share Fair Market Value of Stock as of a particular date shall mean (i) the closing sales price per share of Stock on the national securities exchange on which the Stock is principally traded for the last preceding date on which there was a sale of such Stock on such exchange, or (ii) if the shares of Stock are then traded in an over-the-counter market, the average of the closing bid and ask prices for the shares of Stock in such over-the-counter market for the last preceding date on which there was a sale of such Stock in such market, or (iii) if the shares of Stock are not then listed on a national securities exchange or traded in an over-the-counter market, such value as the Committee, in its sole discretion, shall determine.
(l) "Grantee" means a person who, as an employee or independent contractor of the Company, a Subsidiary or an Affiliate, has been granted an Award or Loan under the Plan.
(m) "Initial Public Offering" shall mean the initial public offering of shares of Stock of the Company, as more fully described in the Registration Statement on Form S-11 filed with the Securities and Exchange Commission on March 18, 1997, as such Registration Statement may be amended from time to time.
(n) "Incentive Stock Option" or "ISO" means any Option
intended to be and designated as an incentive stock option within the meaning of
Section 422 of the Code.
(o) "Loan" means the proceeds from the Company borrowed by a Plan participant under Section 8 of the Plan.
(p) "Non-Employee Director" means any director who is not an employee of the Company or any of its subsidiaries or affiliates. For purposes of this Plan, such non-employee director shall be treated as an independent contractor.
(q) "Nonqualified Stock Option" or "NQSO" means any Option that is designated as a nonqualified stock option.
(r) "Option" means a right, granted to a Grantee under
Section 6.2, to purchase shares of Stock. An Option may be either an ISO or an
NQSO; provided that ISOs may be granted only to employees of the Company or of a
Subsidiary.
(s) "Other Cash-Based Award" means cash awarded to a Grantee under Section 6.6, including cash awarded as a bonus or upon the attainment of specified performance objectives or otherwise as permitted under the Plan.
(t) "Other Stock-Based Award" means a right or other interest granted to a Grantee under Section 6.6 that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Stock, including, but not limited to (1) unrestricted Stock awarded as a bonus or upon the attainment of specified performance objectives or otherwise as permitted under the Plan and (2) a right granted to a Grantee to acquire Stock from the Company for cash and/or a promissory note containing terms and conditions prescribed by the Committee.
(u) "Plan" means this Alexandria Real Estate Equities, Inc. 1997 Stock Award and Incentive Plan, as amended from time to time.
(v) "Restricted Stock" means an Award of shares of Stock to a Grantee under Section 6.4 that may be subject to certain restrictions and to a risk of forfeiture.
(w) "Rule 16b-3" means Rule 16b-3, as from time to time in effect promulgated by the Securities and Exchange Commission under Section 16 of the Exchange Act, including any successor to such Rule.
(x) "Securities Act" means the Securities Act of 1933, as amended from time to time, and as now or hereafter construed, interpreted and applied by the regulations, rulings and cases.
(y) "Stock" means shares of the common stock, par value $.01 per share, of the Company.
(z) "Stock Appreciation Right" or "SAR" means the right, granted to a Grantee under Section 6.3, to be paid an amount measured by the appreciation in the Fair Market Value of Stock from the date of grant to the date of exercise of the right, with payment to be made in cash, Stock, or property as specified in the Award or determined by the Committee.
(aa) "Subsidiary" means any corporation (other than the Company) in an unbroken chain of corporations beginning with the Company if, at the time of granting of an Award, each of the corporations (other than the last corporation in the unbroken chain) owns stock possessing 50% or more of the total combined voting power of all classes of stock in one of the other corporations in the chain.
The Plan shall be administered by the Committee. The Committee shall have the authority in its discretion, subject to and not inconsistent with the express provisions of the Plan, to administer the Plan and to exercise all the powers and authorities either specifically granted to it under the Plan or necessary or advisable in the administration of the Plan including, without limitation, the authority to grant Awards and make Loans; to determine the persons to whom and the time or times at which Awards shall be granted and Loans shall be made; to determine the type and number of Awards to be granted and the amount of any Loan, the number of shares of Stock to which an Award may relate and the terms, conditions, restrictions and performance criteria relating to any Award or
Loan; and to determine whether, to what extent, and under what circumstances an Award may be settled, cancelled, forfeited, exchanged, or surrendered; to make adjustments in the terms and conditions of, and the criteria and performance objectives (if any) included in, Awards and Loans in recognition of unusual or non-recurring events affecting the Company or any Subsidiary or Affiliate or the financial statements of the Company or any Subsidiary or Affiliate, or in response to changes in applicable laws, regulations, or accounting principles; to designate Affiliates; to construe and interpret the Plan and any Award or Loan; to prescribe, amend and rescind rules and regulations relating to the Plan; to determine the terms and provisions of the Award Agreements and any promissory note or agreement related to any Loan (which need not be identical for each Grantee); and to make all other determinations deemed necessary or advisable for the administration of the Plan.
The Committee may appoint a chairperson and a secretary and may make such rules and regulations for the conduct of its business as it shall deem advisable, and shall keep minutes of its meetings. All determinations of the Committee shall be made by a majority of its members either present in person or participating by conference telephone at a meeting or by written consent. The Committee may delegate to one or more of its members or to one or more agents such administrative duties as it may deem advisable, and the Committee or any person to whom it has delegated duties as aforesaid may employ one or more persons to render advice with respect to any responsibility the Committee or such person may have under the Plan. All decisions, determinations and interpretations of the Committee shall be final and binding on all persons, including the Company, and any Subsidiary, Affiliate or Grantee (or any person claiming any rights under the Plan from or through any Grantee) and any stockholder.
No member of the Board or Committee shall be liable for any action taken or determination made in good faith with respect to the Plan or any Award granted or Loan made hereunder.
Subject to the provisions set forth below, Awards and Loans may be granted to selected employees, officers and independent contractors (including Non-Employee Directors) of the Company and its present or future Subsidiaries and Affiliates, in the discretion of the Committee; provided that ISOs may be granted only to employees of the Company or of a Subsidiary. In determining the persons to whom Awards and Loans shall be granted and the type (including
the number of shares to be covered) of any Award or the amount of any Loan, the Committee shall take into account such factors as the Committee shall deem relevant in connection with accomplishing the purposes of the Plan.
The maximum number of shares of Stock reserved for the grant of Awards under the Plan shall be [1,030,000], subject to adjustment as provided herein. No more than 100% of the total shares available for grant may be awarded to a single individual in a single year. Such shares may, in whole or in part, be authorized but unissued shares or shares that shall have been or may be reacquired by the Company in the open market, in private transactions or otherwise. If any shares subject to an Award are forfeited, cancelled, exchanged or surrendered, or if an Award otherwise terminates or expires without a distribution of shares to the Grantee, the shares of stock with respect to such Award shall, to the extent of any such forfeiture, cancellation, exchange, surrender, termination or expiration, again be available for Awards under the Plan; provided that, in the case of forfeiture, cancellation, exchange or surrender of shares of Restricted Stock with respect to which dividends have been paid or accrued, the number of shares with respect to such Awards shall not be available for Awards hereunder unless, in the case of shares with respect to which dividends were accrued but unpaid, such dividends are also forfeited, cancelled, exchanged or surrendered. Upon the exercise of any Award granted in tandem with any other Awards or awards, such related Awards or awards shall be cancelled to the extent of the number of shares of Stock as to which the Award is exercised and, notwithstanding the foregoing, such number of shares shall no longer be available for Awards under the Plan.
In the event that the Committee shall determine that any dividend or other distribution (whether in the form of cash, Stock, or other property), recapitalization, stock split, reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, or share exchange, or other similar corporate transaction or event, affects the Stock such that an adjustment is appropriate in order to prevent dilution or enlargement of the rights of Grantees under the Plan, then the Committee shall make such equitable changes or adjustments as it deems necessary or appropriate to any or all of (a) the number and kind of shares of Stock which may thereafter be issued in connection with Awards, (b) the number and kind of shares of Stock issued or issuable in respect of outstanding Awards, and (c) the exercise price, grant price, or purchase price relating to any Award;
provided that, with respect to ISOs, such adjustment shall be made in accordance with Section 424(h) of the Code.
related ISO. An SAR granted in tandem with an Option shall be exercisable only to the extent the underlying Option is exercisable.
mine. If certificates representing Restricted Stock are registered in the name of the Grantee, such certificates shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, and the Company shall retain physical possession of the certificate.
The Committee shall determine the terms and conditions of such Awards at the date of grant or thereafter; provided, that performance objectives for each year shall be established by the Committee not later than the latest date permissible under Section 162(m) of the Code. Such performance objectives may be expressed in terms of one or more financial or other objective goals. Financial goals may be expressed, for example, in terms of earnings per share, stock price, return on equity, net earnings growth, net earnings, related return ratios, cash flow, earnings before interest, taxes, depreciation and amortization (EBITDA), return on assets or total stockholder return. Other objective goals may include the attainment of various productivity and long-term growth objectives. Any criteria may be measured in absolute terms or as compared to another corporation or corporations. To the extent applicable, any such performance
objective shall be determined (a) in accordance with the Company's audited financial statements and generally accepted accounting principles and reported upon by the Company's independent accountants or (b) so that a third party having knowledge of the relevant facts could determine whether such performance objective is met. Performance objectives shall include a threshold level of performance below which no Award payment shall be made, levels of performance above which specified percentages of target Awards shall be paid, and a maximum level of performance above which no additional Award shall be paid. Performance objectives established by the Committee may be (but need not be) different from year-to-year and different performance objectives may be applicable to different Grantees.
7.1 any Award carrying a right to exercise that was not previously exercisable and vested shall become fully exercisable and vested;
7.2 the restrictions, deferral limitations, payment conditions, and forfeiture conditions applicable to any other Award granted under the Plan shall lapse and such Awards shall be deemed fully vested, and any performance conditions imposed with respect to Awards shall be deemed to be fully achieved; and
7.3 any indebtedness incurred pursuant to Section 8 of this Plan shall be forgiven and the collateral pledged in connection with any such Loan shall be released.
or other property and to make cash payments in respect thereof in satisfaction of a Grantee's tax obligations.
(a) The obligation of the Company to sell or deliver Stock with respect to any Award granted under the Plan shall be subject to all applicable laws, rules and regulations, including all applicable federal and state securities laws, and the obtaining of all such approvals by governmental agencies as may be deemed necessary or appropriate by the Committee.
(b) Each Award is subject to the requirement that, if at any time the Committee determines, in its absolute discretion, that the listing, registration or qualification of Stock issuable pursuant to the Plan is required by any securities exchange or under any state or federal law, or the consent or approval of any governmental regulatory body is necessary or desirable as a condition of, or in connection with, the grant of an Award or the issuance of Stock, no such Award shall be granted or payment made or Stock issued, in whole or in part, unless listing, registration, qualification, consent or approval has been effected or obtained free of any conditions not acceptable to the Committee.
(c) In the event that the disposition of Stock acquired pursuant to the Plan is not covered by a then current registration statement under the Securities Act and is not otherwise exempt from such registration, such Stock shall be restricted against transfer to the extent required by the Securities Act or regulations thereunder, and the Committee may require a Grantee receiving Stock pursuant to the Plan, as a condition precedent to receipt of such Stock, to represent to the Company in writing that the Stock acquired by such Grantee is acquired for investment only and not with a view to distribution.
EXHIBIT 10.29
This OPTION AGREEMENT (the "Agreement"), is entered into this __ day of _____, 1997, by and between ALEXANDRIA REAL ESTATE EQUITIES, INC., a Maryland corporation (the "Corporation"), and __________, a non-employee director of the Corporation (the "Optionee"). Any capitalized terms not defined herein shall have the meaning set forth in the Plan (defined below).
Pursuant to the Alexandria Real Estate Equities, Inc. 1997 Stock Award and Incentive Plan (the "Plan"), the Committee has determined that the Optionee is to be granted, on the terms and conditions set forth herein (and subject to the terms and provisions of the Plan), a nonqualified stock option (an "Option") to purchase shares of the Corporation's common stock and hereby grants such Option. It is intended that the Option constitute a "nonqualified stock option" that is not an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). Any capitalized terms not defined herein shall have the meaning set forth in the Plan.
IN WITNESS WHEREOF, the parties have executed this Agreement on this _____ day of ____ 199_.
ALEXANDRIA REAL ESTATE
EQUITIES, INC.
By: ________________________________
Joel S. Marcus
Chief Executive Officer
The undersigned hereby accepts and
agrees to all the terms and
provisions of the foregoing
Agreement and to all the terms and
provisions of the Plan herein
incorporated by reference.
EXHIBIT 10.30
This OPTION AGREEMENT (the "Agreement"), is entered into this __ day of _____, 1997, by and between ALEXANDRIA REAL ESTATE EQUITIES, INC., a Maryland corporation (the "Corporation"), and _______, an employee of the Corporation (the "Optionee"). Any capitalized terms not defined herein shall have the meaning set forth in the Plan (defined below).
Pursuant to the Alexandria Real Estate Equities, Inc. 1997 Stock Award and Incentive Plan (the "Plan"), the Committee has determined that the Optionee is to be granted, on the terms and conditions set forth herein (and subject to the terms and provisions of the Plan), an option (the "Option") to purchase shares of the Corporation's common stock and hereby grants such Option. It is intended that the Option constitute an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). Any capitalized terms not defined herein shall have the meaning set forth in the Plan.
[TO FOLLOW]
Disability, the Option may be exercised until the earlier to occur of (A) three
(3) months from the date of such termination or (B) the expiration of the term
of the Option.
18. IN WITNESS WHEREOF, the parties have executed this Agreement on this _____ day of ____ 199_.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
By: ________________________________
Joel S. Marcus
Chief Executive Officer
The undersigned hereby accepts and agrees
to all the terms and provisions of the
foregoing Agreement and to all the terms
and provisions of the Plan herein
incorporated by reference.
EXHIBIT 10.31
This SUBSTITUTE STOCK OPTION AGREEMENT (the "Agreement"), is entered into effective as of the __ day of _____, 199_, by and between ALEXANDRIA REAL ESTATE EQUITIES, INC., a Maryland corporation (the "Corporation"), and __________, an employee of the Corporation (the "Optionee"). Any capitalized terms not defined herein shall have the meaning set forth in the Subsidiary Plan (defined below).
WHEREAS, on the ___ day of ____, 199_, Health Science Properties
Holding Corporation, Inc., a Maryland corporation (the "Parent" ), granted
Optionee a nonqualified option to purchase [____] shares of the Parent's common
stock, par value $.01 per share ("Parent Common Stock") at an exercise price of
[$____] per share pursuant to the terms and conditions of its Amended and
Restated 1994 Stock Option Plan (the "Parent Plan"), which option is currently
outstanding and exercisable (the "Parent Option"); and
WHEREAS, pursuant to the Corporation's Amended and Restated 1996 Stock Option Plan (the "Subsidiary Plan"), in the event of any merger, reorganization, consolidation, recapitalization, stock dividend or other change in the capital or corporate structure of the Corporation and/or the Parent including without limitation an initial public offering ("IPO"), the Administrator of such plan may, in its sole discretion, grant substitute stock options to purchase the Corporation's Common Stock ("Substitute Stock Options") in order to preserve the benefits otherwise inherent in the Parent Options, subject to the surrender and cancellation of the corresponding Parent Option; and
WHEREAS, in accordance with the provisions of the Subsidiary Plan, as set forth above, the Administrator of the Subsidiary Plan has determined that, as a result of the filing by the Corporation of a Registration Statement on Form S-11 with the Securities and Exchange Commission, the grant of Substitute Stock Options is necessary and appropriate in order to preserve the benefits to which holders of Parent Options would otherwise have been entitled had such filing not occurred.
NOW, THEREFORE, effective as of the date first set forth above, the Administrator of the Subsidiary Plan hereby grants to the Optionee Substitute Stock Options subject to the following terms and conditions.
/2/ The exercise price per share of the Substitute Stock Option is an amount equal to the quotient of the aggregate exercise price of the Parent Option divided by the number of shares subject to the Substitute Stock Option subject to such adjustments as may be necessary to preserve the status of the Substitute Option as an incentive stock option for purposes of Section 422 of the Code.
Optionee either at his address hereinbelow set forth or such other address as he
or she may designate in writing to the Corporation, or to the Corporation:
Attention: Joel S. Marcus (or his designee), at the Corporation's address or
such other address as the Corporation may designate in writing to the Optionee.
be acquired for the Optionee's own account and not with a view to the sale or distribution thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on this _____ day of ____ 199_.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
By: ____________________________________
Joel S. Marcus
Chief Executive Officer
The undersigned hereby accepts and agrees
to all the terms and provisions of the
foregoing Agreement and to all the terms
and provisions of the Plan herein
incorporated by reference.
EXHIBIT 10.32
This OPTION AGREEMENT (the "Agreement"), is entered into this __ day of _____, 1997, by and between ALEXANDRIA REAL ESTATE EQUITIES, INC., a Maryland corporation (the "Corporation"), and _________, an employee of the Corporation (the "Optionee"). Any capitalized terms not defined herein shall have the meaning set forth in the Plan (defined below).
Pursuant to the Alexandria Real Estate Equities, Inc. 1997 Stock Award and Incentive Plan (the "Plan"), the Committee has determined that the Optionee is to be awarded, on the terms and conditions set forth herewith (and subject to the terms and provision of the Plan), a nonqualified stock option (an "Option") to purchase shares of the Corporation's common stock and hereby grants such Option. It is intended that the Option constitute a "nonqualified stock option" that is not an "incentive stock option" within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"). Any capitalized terms not defined herein shall have the meaning set forth in the Plan.
[TO FOLLOW]
and the Option may be exercised, during the lifetime of the Optionee, only by the Optionee or by his or her legal representative or as otherwise provided by a QDRO.
the Optionee shall represent that the Option Shares are to be acquired for the Optionee's own account and not with a view to the sale or distribution thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on this _____ day of ____ 199_.
ALEXANDRIA REAL ESTATE
EQUITIES, INC.
By: ________________________________
Joel S. Marcus
Chief Executive Officer
The undersigned hereby accepts and
agrees to all the terms and
provisions of the foregoing
Agreement and to all the terms and
provisions of the Plan herein
incorporated by reference.
EXHIBIT 10.36
by and between
ALEXANDRIA REAL ESTATE EQUITIES, INC.,
a Maryland corporation,
and
GARY A. KREITZER,
an individual
THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") originally made and entered into as of the fifth (5th) day of January, 1994, (the "Original Effective Date"), by and between Health Science Properties Holding Corp., a Maryland corporation (the "Parent") and Gary A. Kreitzer, an individual (the "Officer") is hereby amended and restated in its entirety effective as of March 28, 1997 (the "Effective Date") to read as follows:
WHEREAS, on November 3, 1994, Parent transferred to its then wholly- owned subsidiary Alexandria Real Estate Equities, Inc., a Maryland corporation (formerly, Health Science Properties, Inc.) (the "Corporation") substantially all of its property, assets and certain liabilities, including Parent's rights and obligations under this Agreement;
WHEREAS, on July 30, 1996, this Agreement was amended pursuant to an agreement between the Corporation and Officer;
WHEREAS, Corporation desires to continue to employ Officer as its Senior Vice President and In-House Counsel, and Officer is willing to continue to accept such employment by Corporation, on the terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained herein and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree to amend and restate this Agreement as follows:
During the term of this Agreement, Officer agrees to be employed by and to serve Corporation as its Senior Vice President and In-House Counsel or in such other capacity consistent with the Officer's current position as a senior executive officer, as may be determined by the Board of Directors of the Corporation (the "Board"). Corporation agrees to employ and retain Officer in such capacities. Officer shall devote such of his business time, energy, and skill to the affairs of Corporation as shall be necessary to perform the
duties of such positions. Officer shall report to the President or such other officer as the Board shall direct, and at all times during the term of this Agreement shall have powers and duties at least commensurate with his position as a senior executive officer. Officer shall be based at the offices of Corporation in the San Diego, California metropolitan area, except for required travel on Corporation's business.
not covered by COBRA, to maintain reasonable health and medical benefits coverage for Officer and his family.
(i) Officer's use of alcohol or narcotics which proximately results in the willful material breach or habitual willful neglect of Officer's duties under this Agreement;
(ii) Officer's criminal conviction of fraud, embezzlement, misappropriation of assets, malicious mischief, or any felony;
(iii) Officer's willful Material Breach (as defined below) of this Agreement, if such willful Material Breach is not cured by Officer within thirty (30) days after Corporation's written notice thereof specifying the nature of such willful Material Breach. For purposes of this Paragraph 4.1(b), the term willful "Material Breach" shall mean the substantial and continual willful nonperformance of Officer's duties under this Agreement which the Board determines has resulted in material injury to Corporation.
prior to the effective date of termination specified in such notice (which date shall be the applicable Early Termination Date).
(a) the assignment to Officer of any duties inconsistent with the position in Corporation that Officer held immediately prior to the Change in Control, or an adverse alteration in the nature or status of Officer's responsibilities from those in effect immediately prior to such change;
(b) a reduction by Corporation in Officer's annual base salary as in effect on the date hereof or as the same may be increased from time to time;
(c) the relocation of Officer's offices to a location outside the San Diego metropolitan area (or, if different, the metropolitan area in which such offices are located immediately prior to the Change in Control) or Corporation's requiring Officer to travel on Corporation's business to an extent not substantially consistent with Officer's business travel obligations immediately prior to the Change in Control;
(d) the failure by Corporation to pay Officer any portion of his current compensation except pursuant to an across-the-board compensation deferral similarly affecting all officers of Corporation and all officers of any person whose actions resulted in a Change in Control or any person affiliated with Corporation or such person, or to pay Officer any portion of an installment of deferred compensation under any deferred compensation program of Corporation, within seven (7) days of the date such compensation is due;
(e) the failure by Corporation to continue in effect any compensation plan in which Officer participates immediately prior to the Change in Control which is material to Officer's total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by Corporation to continue Officer's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of participation relative to other participants, as existed at the time of the Change in Control;
(f) the failure by Corporation to continue to provide Officer with benefits substantially similar to those under any of Corporation's life insurance, medical, health and accident, or disability plans in which Officer was participating at the time of the Change in Control, the taking of any action by Corporation which would directly or indirectly materially reduce any of such benefits or deprive Officer of any material fringe benefit enjoyed by him at the time of the Change in Control, or the failure by Corporation to provide Officer with the number of paid vacation days to which he is entitled on the basis of years of service with Corporation in accordance with Corporation's normal vacation policy, in effect at the time of the Change in Control; or
(g) the failure of Corporation to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement.
Officer's right to terminate Officer's employment for Good Reason shall not be affected by Officer's incapacity due to physical or mental illness. Officer's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder.
(i) Any Person, as such term is used in section 3(a)(9) of the Exchange Act, as modified and used in sections 13(d) and 14(d) thereof, except that such term shall not include (A) the Corporation or any of its subsidiaries, (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any of its affiliates, (C) an underwriter temporarily holding securities pursuant to an offering of such securities, (D) a corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation, or (E) a person or group as used in Rule 13d-1(b) under the Exchange Act, which is or becomes the Beneficial Owner, as such term is defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of the Corporation (not including in the securities beneficially owned by such Person any securities acquired directly from the Corporation or its affiliates other than in connection with the acquisition by the Corporation or its affiliates of a business) representing twenty-five percent (25%) or more of the combined voting power of the Corporation's then outstanding securities; or
(ii) The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Corporation) whose appointment or election by the Board or nomination for election by the Corporation's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or
(iii) There is consummated a merger or consolidation of the Corporation with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any subsidiary of the Corporation, at least seventy-five percent (75%) of the combined voting power of the securities of the Corporation or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the
Corporation (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation (not including in the securities beneficially owned by such Person any securities acquired directly from the Corporation or its affiliates other than in connection with the acquisition by the Corporation or its affiliates of a business) representing twenty-five percent (25%) or more of the combined voting power of the Corporation's then outstanding securities; or
(iv) The stockholders of the Corporation approve a plan of complete liquidation or dissolution of the Corporation or there is consummated an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets, other than a sale or disposition by the Corporation of all or substantially all of the Corporation's assets to an entity, at least seventy-five (75%) of the combined voting power of the voting securities of which are owned by stockholders of the Corporation in substantially the same proportions as their ownership of the Corporation immediately prior to such sale.
determined by the Corporation's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Officer shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the residence of Officer on the Early Termination Date, net of the maximum reduction in federal income taxes that could be obtained from deduction of such state and local taxes.
During the term of this Agreement, including the period, if any, with respect to which Officer shall be entitled to Severance Payments, Officer shall not engage in any activity competitive with the business of Corporation.
If to Corporation: Alexandria Real Estate Equities, Inc.
251 South Lake Avenue
Pasadena, California 91101
Phone: (818) 578-6812
Facsimile: (818) 578-6966
If to Officer: Gary A. Kreitzer
17511 Caminito Canasto
San Diego, California 92127
Phone: (619) 485-9425
|
Any Party may change such Party's address for notices by notice duly given pursuant hereto.
an affiliate of the Corporation, in which event Corporation shall remain liable if the affiliate fails to meet any obligations to make payments or provide benefits or otherwise) or by Officer.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
CORPORATION:
ALEXANDRIA REAL ESTATE EQUITIES, INC.,
a Maryland corporation
By:_______________________________________
Joel S. Marcus
Chief Executive Officer
Date:_____________________________________
OFFICER:
Date:_____________________________________
EXHIBIT 10.37
by and between
ALEXANDRIA REAL ESTATE EQUITIES, INC.
a Maryland corporation,
and
STEVEN A. STONE,
an individual
THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") originally made and entered into as of the fifth (5th) day of January, 1994, (the "Original Effective Date"), by and between Health Science Properties Holding Corp., a Maryland corporation (the "Parent") and Steven A. Stone, an individual (the "Officer") is hereby amended and restated in its entirety effective as of March 28, 1997 (the "Effective Date") to read as follows:
WHEREAS, on November 3, 1994, Parent transferred to its then wholly- owned subsidiary Alexandria Real Estate Equities, Inc., a Maryland corporation (formerly, Health Science Properties, Inc.) (the "Corporation") substantially all of its property, assets and certain liabilities, including Parent's rights and obligations under this Agreement;
WHEREAS, on July 30, 1996, this Agreement was amended pursuant to an agreement between the Corporation and Officer;
WHEREAS, Corporation desires to continue to employ Officer as its Vice President, and Officer is willing to continue to accept such employment by Corporation, on the terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree to amend and restate this Agreement as follows:
During the term of this Agreement, Officer agrees to be employed by and to serve Corporation as its Vice President or in such other capacity consistent with the Officer's current position as a senior executive officer as may be determined by the Board of Directors of the Corporation (the "Board"). Corporation agrees to employ and retain Officer in such capacities. Officer shall devote such of his business time, energy, and skill to the affairs of Corporation as shall be necessary to perform the duties of such positions. Officer shall report to the President or such other officer as the Board shall direct, and at all times during the term of this Agreement shall have powers and duties at least commensurate with his
position as a senior executive officer. Officer shall be based at the offices of Corporation in the San Diego, California metropolitan area, except for required travel on Corporation's business.
(i) Officer's use of alcohol or narcotics which proximately results in the willful material breach or habitual willful neglect of Officer's duties under this Agreement;
(ii) Officer's criminal conviction of fraud, embezzlement, misappropriation of assets, malicious mischief, or any felony;
(iii) Officer's willful Material Breach (as defined below) of this Agreement, if such willful Material Breach is not cured by Officer within thirty (30) days after Corporation's written notice thereof specifying the nature of such willful Material Breach. For purposes of this Paragraph 4.1(b), the term willful "Material Breach" shall mean the substantial and continual willful nonperformance of Officer's duties under this Agreement which the Board determines has resulted in material injury to Corporation.
prior to the effective date of termination specified in such notice (which date shall be the applicable Early Termination Date).
(a) the assignment to Officer of any duties inconsistent with the position in Corporation that Officer held immediately prior to the Change in Control, or an adverse alteration in the nature or status of Officer's responsibilities from those in effect immediately prior to such change;
(b) a reduction by Corporation in Officer's annual base salary as in effect on the date hereof or as the same may be increased from time-to-time;
(c) the relocation of Officer's offices to a location outside the San Diego metropolitan area (or, if different, the metropolitan area in which such offices are located immediately prior to the Change in Control) or Corporation's requiring Officer to travel on Corporation's business to an extent not substantially consistent with Officer's business travel obligations immediately prior to the Change in Control;
(d) the failure by Corporation to pay Officer any portion of his current compensation except pursuant to an across-the-board compensation deferral similarly affecting all officers of Corporation and all officers of any person whose actions resulted in a Change in Control or any person affiliated with Corporation or such person, or to pay Officer any portion of an installment of deferred compensation under any deferred compensation program of Corporation, within seven (7) days of the date such compensation is due;
(e) the failure by Corporation to continue in effect any compensation plan in which Officer participates immediately prior to the Change in Control which is material to Officer's total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by Corporation to continue Officer's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of participation relative to other participants, as existed at the time of the Change in Control;
(f) the failure by Corporation to continue to provide Officer with benefits substantially similar to those under any of Corporation's life insurance, medical, health and accident, or disability plans in which Officer was participating at the time of the Change in Control, the taking of any action by Corporation which would directly or indirectly materially reduce any of such benefits or deprive Officer of any material fringe benefit enjoyed by him at the time of the Change in Control, or the failure by Corporation to provide Officer with the number of paid vacation days to which he is entitled on the basis of years of service with Corporation in accordance with Corporation's normal vacation policy in effect at the time of the Change in Control; or
(g) the failure of Corporation to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement.
Officer's right to terminate Officer's employment for Good Reason shall not be affected by Officer's incapacity due to physical or mental illness. Officer's continued employment shall not constitute consent to, or a waiver of rights with respect to, any circumstance constituting Good Reason hereunder.
(i) Any Person, as such term is used in section 3(a)(9) of the Exchange Act, as modified and used in sections 13(d) and 14(d) thereof, except that such term shall not include (A) the Corporation or any of its subsidiaries, (B) a trustee or other fiduciary holding securities under an employee benefit plan of the Corporation or any of its affiliates, (C) an underwriter temporarily holding securities pursuant to an offering of such securities, (D) a corporation owned, directly or indirectly, by the stockholders of the Corporation in substantially the same proportions as their ownership of stock of the Corporation, or (E) a person or group as used in Rule 13d-1(b) under the Exchange Act, which is or becomes the Beneficial Owner, as such term is defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of the Corporation (not including in the securities beneficially owned by such Person any securities acquired directly from the Corporation or its affiliates other than in connection with the acquisition by the Corporation or its affiliates of a business) representing twenty-five percent (25%) or more of the combined voting power of the Corporation's then outstanding securities; or
(ii) The following individuals cease for any reason to constitute a majority of the number of directors then serving: individuals who, on the date hereof, constitute the Board and any new director (other than a director whose initial assumption of office is in connection with an actual or threatened election contest, including but not limited to a consent solicitation, relating to the election of directors of the Corporation) whose appointment or election by the Board or nomination for election by the Corporation's stockholders was approved or recommended by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors on the date hereof or whose appointment, election or nomination for election was previously so approved or recommended; or
(iii) There is consummated a merger or consolidation of the Corporation with any other corporation, other than (A) a merger or consolidation which would result in the voting securities of the Corporation outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof), in combination with the ownership of any trustee or other fiduciary holding securities under an employee
benefit plan of the Corporation or any subsidiary of the Corporation, at least seventy-five percent (75%) of the combined voting power of the securities of the Corporation or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Corporation (or similar transaction) in which no Person is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation (not including in the securities beneficially owned by such Person any securities acquired directly from the Corporation or its affiliates other than in connection with the acquisition by the Corporation or its affiliates of a business) representing twenty-five percent (25%) or more of the combined voting power of the Corporation's then outstanding securities; or
(iv) The stockholders of the Corporation approve a plan of complete liquidation or dissolution of the Corporation or there is consummated an agreement for the sale or disposition by the Corporation of all or substantially all of the Corporation's assets, other than a sale or disposition by the Corporation of all or substantially all of the Corporation's assets to an entity, at least seventy-five (75%) of the combined voting power of the voting securities of which are owned by stockholders of the Corporation in substantially the same proportions as their ownership of the Corporation immediately prior to such sale.
treated as subject to the Excise Tax, unless in the opinion of such tax counsel such excess parachute payments represent reasonable compensation for services actually rendered within the meaning of Section 280G(b)(4)(B) of the Code, or are not otherwise subject to the Excise Tax, and (ii) the value of any noncash benefits or any deferred payment or benefit shall be determined by the Corporation's independent auditors in accordance with the principles of Sections 280G(d)(3) and (4) of the Code. For purposes of determining the amount of the Gross-Up Payment, Officer shall be deemed to pay federal income taxes at the highest marginal rate of federal income taxation in the calendar year in which the Gross-Up Payment is to be made and state and local income taxes at the highest marginal rate of taxation in the state and locality of the residence of Officer on the Early Termination Date, net of the maximum reduction in federal income taxes that could be obtained from deduction of such state and local taxes.
During the term of this Agreement, including the period, if any, with respect to which Officer shall be entitled to Severance Payments, Officer shall not engage in any activity competitive with the business of Corporation.
the Board or as such information is within the public domain or comes within the public domain without any breach of this Agreement.
If to Corporation: Alexandria Real Estate Equities, Inc.
251 South Lake Avenue
Pasadena, California 91101
Phone: (818) 578-6812
Facsimile: (818) 578-6966
If to Officer: Steven A. Stone
3536 Santa Flora Court
Escondido, California 92029
Phone: (619) 432-0270
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Any party may change such party's address for notices by notice duly given pursuant hereto.
Corporation's obligations hereunder shall not be terminated by reason of any liquidation, dissolution, bankruptcy, cessation of business, or similar event relating to Corporation. This Agreement shall not be terminated by any merger or consolidation or other reorganization of Corporation. In the event any such merger, consolidation or reorganization shall be accomplished by transfer of stock or by transfer of assets or otherwise, the provisions of this Agreement shall be binding upon and inure to the benefit of the surviving or resulting
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
CORPORATION:
ALEXANDRIA REAL ESTATE EQUITIES,
INC.,
a Maryland corporation
By:_____________________________
Joel S. Marcus
Chief Executive Officer
Date:___________________________
OFFICER:
Date:___________________________
EXHIBIT 23.1
CONSENT
We consent to the reference to our firm under the caption "Experts" and to the use of our reports on Alexandria Real Estate Equities, Inc. dated February 13, 1997 (except Note 11, as to which the date is May 1, 1997), 1413 Research Blvd. dated February 20, 1997, 300 and 401 Professional Drive dated February 20, 1997, 25, 35 and 45 W. Watkins Mill Road dated February 20, 1997, 1311, 1401 and 1431 Harbor Bay Parkway dated February 20, 1997, 1550 East Gude Drive dated February 20, 1997, and PW Acquisitions I, LLC dated April 24, 1997, in Amendment No. 1 to the Registration Statement (Form S-11 No. 333-23545), and related Prospectus of Alexandria Real Estate Equities, Inc. for the registration of 6,750,000 shares of its common stock.
Ernst & Young LLP
Los Angeles, California
May 1, 1997
EXHIBIT 23.2
Rosen Consulting Group consents to all references to our firm in the
registration statement of Alexandria Real Estate Equities, Inc. on Form S-11
(File No. 333-23545) (the "Registration Statement"), including under the
caption "Experts," and to the incorporation by reference therein of our report
dated May 1, 1997, entitled Scientific Research Facilities Market Analysis:
San Diego, San Francisco Bay Area, Seattle, and Suburban Washington, D.C. (the
"Report"). Rosen Consulting Group agrees that each of PaineWebber
Incorporated, Lehman Brothers Inc., Smith Barney Inc. and EVEREN Securities,
Inc. (as representatives of the several underwriters) may rely upon the Report
as if it were prepared for them in the first instance.
May 5, 1997 Rosen Consulting Group
By: /s/ Kenneth T. Rosen
----------------------------------
Kenneth T. Rosen
|
| ARTICLE 5 |
| MULTIPLIER: 1,000 |
| PERIOD TYPE | 3 MOS | YEAR |
| FISCAL YEAR END | DEC 31 1997 | DEC 31 1996 |
| PERIOD START | JAN 01 1997 | JAN 01 1996 |
| PERIOD END | MAR 31 1997 | DEC 31 1996 |
| CASH | 2,750 | 1,696 |
| SECURITIES | 0 | 0 |
| RECEIVABLES | 1,552 | 1,244 |
| ALLOWANCES | 0 | 0 |
| INVENTORY | 0 | 0 |
| CURRENT ASSETS | 4,302 | 2,940 |
| PP&E | 152,473 | 151,154 |
| DEPRECIATION | 5,158 | 4,194 |
| TOTAL ASSETS | 161,690 | 160,392 |
| CURRENT LIABILITIES | 4,924 | 4,576 |
| BONDS | 0 | 0 |
| PREFERRED MANDATORY | 25,929 | 25,042 |
| PREFERRED | 111 | 111 |
| COMMON | 0 | 0 |
| OTHER SE | 12,335 | 14,420 |
| TOTAL LIABILITY AND EQUITY | 161,690 | 160,392 |
| SALES | 0 | 0 |
| TOTAL REVENUES | 7,161 | 17,673 |
| CGS | 0 | 0 |
| TOTAL COSTS | 3,416 | 6,766 |
| OTHER EXPENSES | 1,003 | 2,405 |
| LOSS PROVISION | 0 | 0 |
| INTEREST EXPENSE | 2,509 | 6,327 |
| INCOME PRETAX | 233 | 2,175 |
| INCOME TAX | 0 | 0 |
| INCOME CONTINUING | 233 | 2,175 |
| DISCONTINUED | 0 | 0 |
| EXTRAORDINARY | 0 | 0 |
| CHANGES | 0 | 0 |
| NET INCOME | 233 | 2,175 |
| EPS PRIMARY | 0 | 0 |
| EPS DILUTED | 0 | 0 |