<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--- SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-12993
ALEXANDRIA REAL ESTATE EQUITIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 95-4502084
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
251 South Lake Avenue, Suite 700, Pasadena, California 91101
(Address of principal executive offices)
(626) 578-0777
(Registrant's telephone number, including area code)
N/A
- - - - - - - - - - - - - - - - - - - -
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
--------- ----------
As of November 13, 1997, 11,404,631 shares of common stock, par value $.01 per
share, were outstanding.
<PAGE>
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS (UNAUDITED)
Condensed Consolidated Balance Sheets of Alexandria Real Estate
Equities, Inc. as of September 30, 1997 and December 31, 1996
Condensed Consolidated Statements of Operations of Alexandria
Real Estate Equities, Inc. for the three months ended September
30, 1997 and 1996 and the nine months ended September 30, 1997 and
1996
Condensed Consolidated Statement of Stockholders' Equity of
Alexandria Real Estate Equities, Inc. for the nine months ended
September 30, 1997
Condensed Consolidated Statements of Cash Flows of Alexandria
Real Estate Equities, Inc. for the nine months ended September
30, 1997 and 1996
Notes to Condensed Consolidated Financial Statements
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Item 3. DEFAULTS UPON SENIOR SECURITIES
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Item 5. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
1
<PAGE>
Alexandria Real Estate Equities, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------------------
ASSETS
Rental properties, net $214,922 $146,960
Cash and cash equivalents 6,789 1,696
Tenant security deposit funds and other
restricted cash 4,655 5,585
Tenant receivables and deferred rent 1,153 1,244
Loan fees and costs (net of accumulated
amortization of $184 and $131,
respectively) 1,602 2,502
Other assets 2,403 2,405
--------------------------
Total assets $231,524 $160,392
--------------------------
-------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Secured notes payable and line of credit $ 54,727 $113,182
Accounts payable, accrued expenses and tenant
security deposits 4,965 3,562
Dividends payable 4,562 1,550
Due to Health Science Properties Holding
Corporation -- 2,525
--------------------------
Total liabilities 64,254 120,819
Manditorily redeemable Series V cumulative
convertible preferred stock, $0.01 par
value per share -- 25,042
Stockholders' equity:
Preferred stock, $0.01 par value per share -- 111
Common stock, $0.01 par value per share,
100,000,000 shares authorized; 11,404,631
and 1,000 shares issued and outstanding at
September 30, 1997 and December 31, 1996,
respectively 114 --
Additional paid-in capital 178,297 16,195
Accumulated deficit (11,141) (1,775)
--------------------------
Total stockholders' equity 167,270 14,531
--------------------------
Total liabilities and stockholders' equity $231,524 $160,392
--------------------------
--------------------------
SEE ACCOMPANYING NOTES.
2
<PAGE>
Alexandria Real Estate Equities, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
---------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Rental $ 7,062 $ 3,752 $ 17,963 $ 8,303
Tenant recoveries and other income 2,615 1,659 6,619 2,881
---------------------------------------------------------
9,677 5,411 24,582 11,184
Expenses:
Rental operations 2,383 1,374 6,216 2,599
General and administrative 629 310 1,805 1,080
Interest 1,214 1,924 5,789 4,042
Stock compensation -- -- 4,239 --
Post retirement benefit -- 438 632 438
Special bonus -- -- 353 --
Acquisition LLC financing costs -- -- 6,973 --
Write-off of unamortized loan costs -- -- 2,147 --
Depreciation and amortization 1,325 674 3,434 1,567
---------------------------------------------------------
5,551 4,720 31,588 9,726
---------------------------------------------------------
Net (loss) income $ 4,126 $ 691 $ (7,006) $ 1,458
---------------------------------------------------------
---------------------------------------------------------
Net income allocated to preferred stockholders $ -- 255 $ 3,038 255
---------------------------------------------------------
---------------------------------------------------------
Net (loss) income allocated to common stockholders
$ 4,126 436 $ (10,044) 1,203
---------------------------------------------------------
---------------------------------------------------------
Net (loss) per pro forma share of common stock $ 0.36 $ (0.99)
------------- -------------
------------- -------------
Pro forma weighted average shares of common stock
outstanding 11,404,631 7,048,381
------------- -------------
------------- -------------
</TABLE>
SEE ACCOMPANYING NOTES.
3
<PAGE>
Alexandria Real Estate Equities, Inc.
Condensed Consolidated Statements of Stockholders' Equity
Nine months ended September 30, 1997
(Unaudited)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SERIES T SERIES T SERIES U SERIES U NUMBER OF
PREFERRED PREFERRED PREFERRED PREFERRED COMMON
SHARES STOCK SHARES STOCK SHARES
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 12 $ 1 220 $ 110 1,000
Accretion on Series V preferred stock -- -- -- -- --
Cash dividends on Series T, U and V preferred
stock -- -- -- -- --
Exercise of compensatory stock options and
issuance of stock grants (including
compensation expense of $4,161) -- -- -- -- 209,615
Stock split -- -- -- -- 1,764,923
Issuance of common stock in connection with
initial public offering, net of offering costs -- -- -- -- 7,762,500
Conversion of Series U preferred stock -- -- (220) (110) 7,354
Conversion of Series V preferred stock -- -- -- -- 1,659,239
Redemption of Series T preferred stock (12) (1) -- -- --
Cash dividends on common stock -- -- -- -- --
Dividends declared on common stock -- -- -- -- --
Net loss -- -- -- -- --
-------------------------------------------------------------
Balance at September 30, 1997 -- $-- -- $ -- 11,404,631
-------------------------------------------------------------
-------------------------------------------------------------
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
-----------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 $ -- $ 16,195 $ (1,775) $ 14,531
Accretion on Series V preferred stock -- (1,911) -- (1,911)
Cash dividends on Series T, U and V preferred
stock -- -- (1,127) (1,127)
Exercise of compensatory stock options and
issuance of stock grants (including
compensation expense of $4,161) 2 4,190 -- 4,192
Stock split 18 (18) -- --
Issuance of common stock in connection with
initial public offering, net of offering costs 78 138,812 -- 138,890
Conversion of Series U preferred stock -- 109 -- (1)
Conversion of Series V preferred stock 16 26,936 -- 26,952
Redemption of Series T preferred stock -- -- -- (1)
Cash dividends on common stock -- (1,454) (1,233) (2,687)
Dividends declared on common stock -- (4,562) -- (4,562)
Net loss -- -- (7,006) (7,006)
-----------------------------------------
Balance at September 30, 1997 $114 $178,297 $(11,141) $167,270
-----------------------------------------
-----------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES.
4
<PAGE>
Alexandria Real Estate Equities, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(IN THOUSANDS)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
---------------------
Net cash provided by (used in) operating activities $ 3,710 $ (2,573)
INVESTING ACTIVITIES
Purchase of rental properties (68,555) (55,941)
Improvements to rental properties (2,635) (878)
---------------------
Net cash used in investing activities (71,190) (56,819)
FINANCING ACTIVITIES
Proceeds from secured notes payable 15,360 68,060
Proceeds from unsecured line of credit 2,500 --
Proceeds from issuance of common stock 138,919 --
Redemption of Series T preferred stock (1) --
Issuance of Series U preferred stock -- 110
Issuance of Series V preferred stock -- 13,270
(Decrease) increase in due to Health Science Properties
Holding Corporation (2,525) 2,400
Principal reductions of secured notes payable (73,815) (16,424)
Principal reductions of unsecured line of credit (2,500) (4,000)
Common dividends paid (4,237) (939)
Preferred dividends paid (1,127) (98)
---------------------
Net cash provided by financing activities 72,573 62,379
Net increase in cash and cash equivalents 5,093 2,987
Cash and cash equivalents at beginning of period 1,696 919
---------------------
Cash and cash equivalents at end of period $ 6,789 $ 3,906
---------------------
---------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period year for interest $ 12,753 $ 3,898
---------------------
---------------------
SEE ACCOMPANYING NOTES.
5
<PAGE>
Alexandria Real Estate Equities, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. BACKGROUND, BASIS OF PRESENTATION AND THE INITIAL PUBLIC OFFERING
BACKGROUND
Alexandria Real Estate Equities, Inc. (formerly known as Health Science
Properties, Inc.), a Maryland corporation (the "Company"), is a Real Estate
Investment Trust ("REIT") formed in October 1994 to acquire, manage, and
selectively develop properties for lease principally to participants in
the life science industry ("Life Science Facilities"). As of September 30,
1997 and December 31, 1996, the Company owned 18 and 12 Life Science
Facilities, respectively.
The accompanying interim financial statements have been prepared by the
Company's management in accordance with generally accepted accounting
principles and in conformity with the rules and regulations of the Securities
and Exchange Commission. In the opinion of management, the interim financial
statements presented herein reflect all adjustments of a normal and recurring
nature that are necessary to fairly state the interim financial statements.
The results of operations for the interim period are not necessarily
indicative of the results that may be expected for the year ended December
31, 1997. These financial statements should be read in conjunction with the
financial statements included in the Company's prospectus dated May 27, 1997.
BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of Alexandria Real Estate Equities, Inc. and all of its
subsidiaries. All significant intercompany balances and transactions have
been eliminated.
THE INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS
On June 2, 1997, the Company completed an initial public offering (the
"Offering") of 6,750,000 shares of common stock, $.01 par value per share.
The Offering price was $20.00 per share, resulting in gross proceeds of
$135,000,000. On June 26, 1997, the underwriters exercised their
over-allotment option in connection with the Offering and the Company issued
an additional 1,012,500 shares of common stock, resulting in additional gross
proceeds of $20,250,000. The aggregate net proceeds of the Offering
(including exercise of the over-allotment option), net of underwriting
discounts and commissions, advisory fees and offering costs, were
approximately $ 138,890,000.
6
<PAGE>
Alexandria Real Estate Equities, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
1. BACKGROUND, BASIS OF PRESENTATION AND THE INITIAL PUBLIC OFFERING (CONTINUED)
THE INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS (CONTINUED)
The following transactions also occurred in June 1997 in connection with the
Offering:
- The Company paid off debt of approximately $77,698,000, including (i)
mortgage debt of $72,698,000, (ii) debt of $2,500,000 outstanding under
its prior unsecured line of credit, and (iii) debt of $2,500,000 to
Health Science Properties Holding Corporation ("Holdings"). Holdings
owned all of the Company's common stock prior to the Offering and 15.5%
of the common stock of the Company as of September 30, 1997.
- The Company obtained two new mortgage loans totaling $15,360,000.
- The Company acquired an entity that owns three Life Science Facilities
from affiliates of PaineWebber Incorporated, the lead managing
underwriter for the Offering, for an aggregate of $58,844,000
($51,871,000 of which has been recorded as the purchase price of the
properties and $6,973,000 of which has been recorded as a financing
cost (see Note 6)).
- Each previously outstanding share of the Company's common stock was split
into 1,765.923 shares of common stock.
- All of the previously outstanding Series T preferred stock was redeemed at
its stated value ($1,200 in the aggregate).
- All of the previously outstanding shares of the Company's Series U
preferred stock and Series V preferred stock were converted into shares
of common stock (7,354 shares in the aggregate for Series U and
1,659,239 shares in the aggregate for Series V).
- Officers, directors and certain employees of the Company were granted an
aggregate of 152,615 shares of the Company's common stock. In addition,
officers, directors and certain employees of the Company were granted
options to purchase 57,000 shares of the Company's common stock in
substitution for stock options previously issued by Holdings (see Note
5). These options were exercised in connection with the Offering.
7
<PAGE>
Alexandria Real Estate Equities, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
1. BACKGROUND, BASIS OF PRESENTATION AND THE INITIAL PUBLIC OFFERING (CONTINUED)
THE INITIAL PUBLIC OFFERING AND RELATED TRANSACTIONS (CONTINUED)
- Officers, directors and employees of the Company were granted options to
purchase an aggregate of 600,000 shares of the Company's common stock
of the Company at the Offering price under the Company's 1997 stock
option plan.
2. RENTAL PROPERTIES, NET
Rental properties, net consist of the following:
SEPTEMBER 30, DECEMBER 31,
1997 1996
----------------------------
(IN THOUSANDS)
Land $ 43,245 $ 28,383
Buildings and improvements 179,079 122,771
-----------------------
222,324 151,154
Less accumulated depreciation (7,402) (4,194)
-----------------------
$214,922 $146,960
-----------------------
-----------------------
During the three months ended September 30, 1997, the Company acquired three
Life Science Facilities and a parcel of land to be developed as a Life
Science Facility for an aggregate purchase price of $16,046,000.
3. UNSECURED LINE OF CREDIT
In connection with the Offering, the Company obtained an unsecured line of
credit providing for borrowings of up to $150,000,000, consisting of a
$100,000,000 activated portion and a $50,000,000 portion that may be
activated at the Company's discretion (upon the payment of an activation
fee), provided no default exists under the line of credit. Borrowings under
the line of credit bear interest at a floating rate which is based on the
Company's election of either a LIBOR based rate or the higher of the bank's
reference rate and the Federal Funds rate plus 0.5%. For each LIBOR based
advance, the Company must elect to fix the rate for a period of time of one,
two, three or six month period.
8
<PAGE>
Alexandria Real Estate Equities, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
3. UNSECURED LINE OF CREDIT (CONTINUED)
The line of credit contains financial covenants, including, among other
things, maintenance of minimum market net worth, a total liabilities to gross
asset value ratio, and a fixed charge coverage ratio. In addition, the terms
of the line of credit restrict, among other things, certain investments,
indebtedness, distributions and mergers. Borrowings under the line of credit
are limited to an amount based on a pool of unencumbered assets. As of
September 30, 1997, borrowings under the line of credit were limited to
approximately $84 million. No borrowings were outstanding under the line of
credit at September 30, 1997.
The line of credit expires on May 31, 2000 and provides for annual extensions
(provided there is no default) for one-year periods upon notice by the
Company and consent of the participating banks. In addition, at the
Company's election, the line of credit may be converted at any time to a term
loan with principal installments over two years from the date of such
conversion.
In connection with obtaining the line of credit, the Company incurred
$695,000 in fees and costs, which are being amortized over the initial term
of the line of credit. In addition, the Company is required to continue to
pay certain periodic fees for the line of credit, depending on the usage of
the facility.
In June 1997, the Company paid off its prior unsecured line of credit of
$2,500,000 with proceeds from the Offering (see Note 1).
4. SECURED NOTES PAYABLE
Secured notes payable as of September 30, 1997 are as follows:
Notes payable secured by first deeds of trust on four
rental properties bearing interest at annual rates
between 7.17% and 9.00%, payable in installments
through 2016 $48,056,000
Note payable to the City of Seattle secured by a second deed
of trust on 1102/1124 Columbia Street, bearing interest at
a variable annual rate (approximately 6% at September 30,
1997), payable in annual installments through 2016 6,671,000
-----------
$54,727,000
-----------
-----------
9
<PAGE>
Alexandria Real Estate Equities, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
4. SECURED NOTES PAYABLE (CONTINUED)
In September 1997, the City of Seattle notified the Company that, in
accordance with the terms of the loan, the Company's note in favor of the
City would be pooled with other notes (unrelated to the Company), and the
interest rate on the note would be fixed at approximately 7.1% in October
1997. Thereafter, the Company and the City of Seattle agreed that: (i) the
note will not be pooled, (ii) the Company will prepay the note, and (iii) the
interest rate will remain variable (approximately 6% at September 30, 1997)
until the prepayment is made. The Company intends to prepay the note during
the fourth quarter of 1997. In connection with the prepayment, $1,833,000 in
restricted cash held in trust as additional security on the loan will be
returned to the Company.
In June 1997, the Company paid off secured notes with a principal balance of
$72,698,000 with proceeds from the Offering and related transactions (see
Note 1). In connection with the retirement of these loans, the Company wrote
off $2,146,000 of unamortized loan costs, including the cost of certain
interest rate cap agreements.
5. NON-CASH TRANSACTIONS
Stock compensation expense represents non-cash compensation expense
associated with stock grants and stock options issued to officers, directors
and certain employees of the Company in connection with the Offering (see
Note 1). Stock compensation expense for the nine months ended September 30,
1997 includes (i) $394,000 recognized with respect to stock options issued
during the three months ended March 31, 1997, and (ii) $3,845,000 recognized
with respect to stock grants and the issuance and exercise of the substitute
options during the three months ended June 30, 1997 (including $77,000 not
previously recognized in the financial statements included in the Company's
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997).
In connection with the Offering, outstanding shares of the Company's Series U
preferred stock and Series V preferred stock were converted into shares of
common stock (see Note 1). The common stock issued was recorded at the book
value of the Series U preferred stock and the Series V preferred stock (an
aggregate of $27,061,000).
6. PURCHASE OF ACQUISITION LLC
In connection with the Offering, the Company acquired 100% of the membership
interests in ARE Acquisitions, LLC (formerly PW Acquisitions I, LLC) (the
"Acquisition LLC") from affiliates of PaineWebber Incorporated, the lead
managing underwriter of the
10
<PAGE>
Alexandria Real Estate Equities, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
Offering. Acquisition LLC owns three Life Science Facilities which it
acquired in January 1997 from unaffiliated sellers. The Company's purchase
price for the membership interests (approximately $58,844,000) exceeded the
cost incurred by the Acquisition LLC to acquire the properties (approximately
$51,871,000). The Company's acquisition of the membership interests in the
Acquisition LLC has been recorded as a financing transaction, with the excess
of the purchase price of such membership interests over the cost of the
Acquisition LLC over its cost to acquire the properties ($6,973,000) being
reflected as a financing cost in the accompanying condensed consolidated
statement of operations.
7. DIVIDEND
On September 26, 1997, the Company declared a cash dividend on its common
stock of $4,562,000 ($ 0.40 per share) for the calendar quarter ended
September 30, 1997. The dividend was paid on October 17, 1997.
8. NET LOSS PER SHARE
Historical per share data has not been presented because it is not meaningful
due to the various changes in the Company's capital structure in connection
with the Offering.
Pro forma shares of common stock outstanding on a historical basis include
all shares of common stock outstanding after giving effect to the 1,765.923
to 1 stock split, the issuance of the stock grants, the issuance and exercise
of the substitute stock options and the conversion of the Series U and Series
V preferred stock (see Note 1). In addition, shares issued to the public in
connection with the Offering have been weighted for the period of time they
were outstanding.
11
<PAGE>
Alexandria Real Estate Equities, Inc.
Notes to Condensed Consolidated Financial Statements (continued)
(Unaudited)
8. NET LOSS PER SHARE (CONTINUED)
The following table sets forth the computation of net loss per pro forma share
of common stock outstanding.
THREE MONTHS NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1997
-------------------------------
Net loss $(4,126,000) $(7,006,000)
-------------------------------
-------------------------------
Pro forma shares of common stock on a
historical basis 11,404,631 3,642,131
Shares issued in the Offering, weighted for
period outstanding -- 3,406,250
-------------------------------
11,404,631 7,048,381
-------------------------------
-------------------------------
Net loss per share $ (0.36) $ (0.99)
-------------------------------
-------------------------------
In February 1997, the Financing Accounting Standards Board (FASB), issued
Statement of Financial Accounting Standards No. 128 "Earnings Per Share"
which is required to be adopted on December 31, 1997. At that time the
Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect
of stock options will be excluded. The methodology required by this
pronouncement would not have a material impact on net loss per share
information presented by the Company for the three months or nine months
ended September 30, 1997.
9. PURCHASE AGREEMENTS
As of November 13, 1997, the Company has entered into agreements to purchase
three Life Science Facilities for an aggregate purchase price of $19,100,000
and approximately 18 acres of land suitable for the development of Life
Science Facilities for a purchase price of $5,375,000. Subject to the
Company's due diligence review and customary closing conditions, the Company
anticipates that these acquisitions will close during the fourth quarter of
1997. The Company anticipates using its line of credit to fund the cost of
these acquisitions.
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain information and statements included in this Quarterly Report on Form
10-Q, including, without limitation, statements containing the words
"believes," "anticipates," "expects" and words of similar import, constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995 and involve known and unknown risks and
uncertainties that could result in actual results of the Company differing
materially from expected results expressed or implied by such forward-looking
information and statements. In the context of forward-looking information and
statements provided in this Form 10-Q and in other reports, please refer to
the discussion of risk factors detailed in, as well as the other information
contained in, the Company's filings with the Securities and Exchange
Commission, including but not limited to, those risk factors set forth under
the caption "Risk Factors" in the Company's Registration Statement on Form
S-11 (File No. 333-23545) (the "Registration Statement").
The following discussion should be read in conjunction with the financial
statements and notes appearing elsewhere in this report and in the
Registration Statement.
OVERVIEW
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 the life science industry in its target markets.
The Company receives income from rental revenue (including tenant recoveries)
from its properties. Of the Company's 18 properties, four were acquired in
calendar year 1994, eight in 1996 (the "1996 Acquired Properties"), three in
1997 in connection with the Offering and three in 1997 subsequent to the
Offering (together, the "1997 Acquired Properties"). As a result of the
Company's acquisition strategy, the financial data shows significant
increases in total revenue and expenses for the 1997 periods compared to the
1996 periods, largely attributable to the acquisitions in 1996 and 1997 and
the recognition of a full period of revenues for the 1996 Acquired
Properties. For the foregoing reasons, and due to the effects of the Offering
and related transactions, the Company does not believe its period-to-period
historical financial data are comparable. Accordingly, the Company also has
included pro forma financial information, which gives effect to the Offering
and the acquisitions made in 1996 and in 1997 in connection with the Offering.
13
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1997 ("THIRD QUARTER 1997") TO
THREE MONTHS ENDED SEPTEMBER 30, 1996 ("THIRD QUARTER 1996")
Rental revenue increased by $3.3 million, or 87%, to $7.1 million for Third
Quarter 1997 compared to $3.8 million for Third Quarter 1996. The increase
resulted primarily from the 1996 Acquired Properties acquired after July 1,
1996 being owned for a full period and the 1997 Acquired Properties, which
together added $3.2 million of rental revenue in Third Quarter 1997. Rental
revenue from the Properties owned since July 1, 1996 (the "Third Quarter Same
Properties") increased by $96,000 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 and other income increased by $956,000, or 58%, to $2.6
million for Third Quarter 1997 compared to $1.7 million for Third Quarter
1996. The increase resulted primarily from the 1996 Acquired Properties
acquired after July 1, 1996 being owned for a full period and the 1997
Acquired Properties, which together added $644,000 million of tenant
recoveries. Tenant recoveries from the Third Quarter Same Properties
increased by $255,000, or 24%, due to an increase in operating expenses
(particularly utilities) being passed through to the tenants and due to the
improved measurement and recovery of certain tenant utility expenses. Other
income increased by $57,000 for Third Quarter 1997 compared to Third Quarter
1996, resulting from an increase in interest income due to the investment of
excess funds from the Offering and increased amounts in capital improvement
reserve accounts.
Rental operating expenses increased by $1.0 million, or 73%, to $2.4 million
for Third Quarter 1997 compared to $1.4 million for Third Quarter 1996. The
increases resulted primarily from the 1996 Acquired Properties acquired after
July 1, 1996 being owned for a full period and the 1997 Acquired Properties,
which together added $868,000 of rental operating expenses. Operating
expenses for the Third Quarter Same Properties increased by $263,000, or 25%,
primarily due to increased utility expenses (due to greater usage) that are
passed through to the tenants.
General and administrative expenses increased by $319,000, or 103%, to
$629,000 for Third Quarter 1997 compared to $310,000 for Third Quarter 1996,
due to the Company's larger scope of operations and increased costs incurred
as a result of being a public company.
Post retirement benefit for Third Quarter 1996 relates to the non-cash
accrual associated with a one-time post-retirement benefit for an officer of
the Company.
Interest expense decreased by $710,000, or 37%, to $1.2 million for Third
Quarter 1997 compared to $1.9 million for Third Quarter 1996. The decrease
resulted from lower interest expense in Third Quarter 1997 due to the
repayment of indebtedness paid off in June 1997 in connection with the
Offering.
14
<PAGE>
Depreciation and amortization increased by $651,000, or 97%, to $1.3 million
for Third Quarter 1997 compared to $674,000 for Third Quarter 1996. The
increase resulted primarily from depreciation associated with the 1996
Acquired Properties acquired after July 1, 1996 being owned for a full period
and the 1997 Acquired Properties.
As a result of the foregoing, net income was $4.1 million for Third Quarter
1997 compared to $691,000 for Third Quarter 1996.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 ("NINE MONTHS 1997") TO
NINE MONTHS ENDED SEPTEMBER 30, 1996 ("NINE MONTHS 1996")
Rental revenue increased by $9.7 million, or 117%, to $18.0 million for Nine
Months 1997 compared to $8.3 million for Nine Months 1996. The increase
resulted primarily from the 1996 Acquired Properties being owned for a full
period and the 1997 Acquired Properties, which together added $9.5 million of
rental revenue in Nine Months 1997. Rental revenue from the properties owned
since January 1, 1996 (the "Same Properties") increased by $174,000, 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 and other income increased by $3.7 million, or 128%, to
$6.6 million for Nine Months 1997 compared to $2.9 million for Nine Months
1996. The increase resulted primarily from the 1996 Acquired Properties being
owned for a full period and the 1997 Acquired Properties, which together added
$3.1 million of tenant recoveries. Tenant recoveries for the Same Properties
increased by $224,000, or 13%, due to an increase in operating expenses
(particularly utilities) being passed through to the tenants. Other income
increased by $246,000 for Nine Months 1997 compared to Nine Months 1996,
resulting from an increase in interest income due to the investment of excess
funds from the Offering and increased amounts in capital improvement reserve
accounts.
Rental operating expenses increased by $3.6 million, or 139%, to $6.2 million
for Nine Months 1997 compared to $2.6 million for Nine Months 1996. The
increase resulted almost entirely from the 1996 Acquired Properties being
owned for a full period and the 1997 Acquired Properties, which together
added $3.4 million in operating expenses. Operating expenses for the Same
Properties increased by $225,000, or 12%, primarily due to increased utility
expenses (due to greater usage) that are passed through to the tenants.
General and administrative expenses increased by $725,000, or 67%, to $1.8
million for Nine Months 1997 compared to $1.1 million for Nine Months 1996
due to the Company's larger scope of operations and increased costs incurred
as a result of being a public company.
Special bonus of $353,000 in Nine Months 1997 reflects a bonus awarded to an
officer of the Company in connection with the Offering. Post retirement
benefit expense of $632,000 and $438,000 in Nine Months 1997 and Nine Months
1996, respectively, reflects an adjustment for the non-cash accrual
associated with a one-time post retirement benefit for an officer of the
Company. Stock compensation expense of $4.2 million was
15
<PAGE>
recorded in Nine Months 1997 for the non-recurring, non-cash expense related
to the issuance of stock grants and options to officers, directors and
certain employees of the Company principally in connection with the Offering.
Interest expense increased by $1.8 million, or 43%, to $5.8 million for Nine
Months 1997 compared to $4.0 million for Nine Months 1996. The increase
resulted from indebtedness incurred to acquire the 1996 Acquired Properties,
offset by a reduction in ongoing interest expense due to the payoff of
$72,698,000 in secured notes payable in June 1997 in connection with the
Offering
Acquisition LLC financing costs of $6,973,000 in Nine Months 1997, represent
the portion of the purchase price of the membership interests in the
Acquisition LLC in excess of the cost incurred by Acquisition LLC to acquire
its three Life Science Facilities (see Note 6 to condensed financial
statements).
Write-off of unamortized loan costs in Nine Months 1997 represents the
write-off of loan costs associated with $72,698,000 of secured notes repaid
with proceeds of the Offering.
Depreciation and amortization increased by $1.8 million, or 119%, to $3.4
million for Nine Months 1997 compared to $1.6 million for Nine Months 1996.
The increase resulted primarily from depreciation associated with the 1996
Acquired Properties being owned for a full period and the 1997 Acquired
Properties.
As a result of the foregoing, net loss was $7.0 million for Nine Months 1997
compared to net income of $1.5 million for Nine Months 1996.
16
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Aggregate net proceeds of the Offering (including exercise of the
over-allotment option), net of underwriting discounts and commissions,
advisory fees, and offering costs, were approximately $138,890,000. The
Company used net proceeds from the Offering, as well as $15,360,000 in
proceeds from two new mortgage loans, to repay debt of approximately
$77,698,000. As a result, total secured debt was reduced during the nine
months ended September 30, 1997 to the following:
PRINCIPAL
BALANCE AT INTEREST MATURITY
COLLATERAL SEPTEMBER 30, RATE DATE
1997
- -------------------------------------------------------------------------------
3535/3565 General Atomics
Court, San Diego, CA $18,161,000 9.00% December 2014
1431 Harbor Bay Parkway
Alameda, CA 8,500,000 7.17% January 2014
1102/1124 Columbia Street
Seattle, WA (first deed of trust) 21,395,000 7.75% May 2016
1102/1124 Columbia Street
Seattle, WA (second deed of trust) 6,671,000 (1) July 2016
-----------
$54,727,000
-----------
-----------
(1) At September 30, 1997, the loan bore interest at a variable annual rate
(approximately 6%). The lender notified the Company in September 1997,
that, in accordance with the terms of the note, interest would become
fixed at approximately 7.1% in October 1997. Thereafter, the Company and
the lender agreed that the Company will prepay the loan, and the interest
rate will remain variable until the date of prepayment. The Company
expects to prepay the loan during the fourth quarter of 1997.
In connection with the prepayment of the second mortgage loan on 1102/1124
Columbia Street, $1,833,000 in restricted cash held in trust as additional
security on the loan will be returned to the Company.
As of September 30, 1997, approximately $3.5 million had been set aside in a
restricted cash account to complete the conversion of existing space into
higher rent generic laboratory space (as well as certain related improvements
to the property) at 1102/1124 Columbia Street pursuant to an agreement
between the Company and a tenant. The Company also holds approximately
$758,000 in security deposit reserve accounts based on the terms of certain
lease agreements.
Although cash from operations required to fund interest expense has decreased
substantially as a result of the Company's reduction in overall debt
following the Offering,
17
<PAGE>
such reduction has been offset by an increased requirement to use 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
debt described above. Initially, cash accumulated 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. After the Company begins utilizing its
line of credit facility to fund the cost of acquisitions, amounts accumulated
may also be utilized to reduce borrowings outstanding under the line of
credit.
The Company expects to meet its short-term liquidity requirements generally
through 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 net cash provided by operations 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, including borrowings under the line of credit, and
the issuance of additional equity securities.
In connection with the Offering, the Company obtained an unsecured line of
credit providing for borrowings of up to $150,000,000, consisting of a
$100,000,000 activated portion and a $50,000,000 portion that may be
activated at the Company's discretion (upon payment of an activation fee),
provided no default exists under the line of credit. The line of credit
provides for borrowings bearing interest at a floating rate which is based on
the Company's election of either a LIBOR based rate or the higher of the
bank's reference rate and the Federal Funds rate plus 0.5%. For each LIBOR
based advance the Company must elect to fix the rate for a one, two, three or
six month period.
The line of credit contains financial covenants, including, among other
things, maintenance of minimum market net worth, a total liabilities to gross
asset value ratio, and a fixed charge coverage ratio. In addition, the terms
of the line of credit restrict, among other things, certain investments,
indebtedness, distributions and mergers. Borrowings under the line of credit
are limited to an amount based on a pool of unencumbered assets. Accordingly,
as the Company acquires additional unencumbered properties, the borrowing
limitation under the line of credit will be increased. As of September 30,
1997, borrowings under the line of credit were limited to approximately $84
million. The line of credit will be used primarily to finance acquisitions
and capital improvements. As of September 30, 1997 and November 13, 1997, no
borrowings were outstanding under the line of credit.
The line of credit expires on May 31, 2000 and provides for annual extensions
(provided there is no default) for one-year periods upon notice by the
Company and consent of the
18
<PAGE>
participating banks. In addition, at the Company's election, the line of
credit may be converted at any time to a term loan with principal
installments over two years from the date of such conversion.
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.
HISTORICAL CASH FLOWS
Historically, the Company's principal sources of funding for operations and
capital expenditures have been the proceeds from the Offering, cash flows
from operating activities, private stock offerings and debt financings.
Net cash provided by operating activities for Nine Months 1997 increased by
$6.4 million to $3.7 million compared to net cash used by operating
activities of $2.6 million for Nine Months 1996. The increase resulted
primarily from operating cash flows from the 1996 Acquired Properties and the
1997 Acquired Properties.
Net cash used in investing activities increased by $14.4 million to $71.2
million for Nine Months 1997 compared to net cash used in investing
activities of $56.8 million for Nine Months 1996. The increase resulted
primarily from the costs associated with the acquisition of the 1997 Acquired
Properties.
Cash provided by financing activities increased by $10.2 million to $72.6
million for Nine Months 1997 compared to $62.4 million for Nine Months 1996.
The increase resulted primarily from $138.8 million in net proceeds from the
Offering and $15.4 million in proceeds from secured debt, offset by $78.8
million of principal reductions in debt, retired principally with proceeds
from the Offering. In addition, the Company paid dividends on common stock of
$4.2 million and dividends on preferred stock of $1.1 million during Nine
Months 1997.
INFLATION
Approximately 78% 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). An additional 17% of the Company's leases (on a square
footage basis) require the tenants to pay a majority of operating expenses.
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, including borrowings under the line of credit.
19
<PAGE>
COMPUTER SYSTEM IN THE YEAR 2000
The Company has evaluated the significance of the change from the year 1999
to the year 2000 on its existing computer system and has taken steps to
ensure that its computer system will not be adversely affected thereby. The
financial impact of steps taken to accommodate the change for the year 2000 is
not anticipated to be material.
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
Due to the impact of the Offering and related transactions and the
acquisitions by the Company in 1996 and 1997, the historical results of
operations are not indicative of the Company's future results of operations.
The following pro forma condensed consolidated financial information presents
the results of operations of the Company as if the Offering (including the
exercise of the over-allotment option) and related transactions occurred on
January 1, 1996. As described in the pro forma financial statements included
in the Company's prospectus dated May 27, 1997, pro forma results for the
nine months ended September 30, 1997 do not include the operations of two of
the Company's properties (14225 Newbrook Drive and 1330 Piccard Drive) for
the period prior to their acquisition by Acquisition LLC (on January 13, 1997
and January 15, 1997, respectively). These properties were owner-occupied
prior to purchase and, as a result, there were no historical operating
results as rental properties. The adjusted pro forma financial information
presented below assumes that the new leases entered into with the sellers of
such properties were in effect for the entire period presented. The pro forma
and adjusted pro forma financial information presented below is based upon
historical information and does not purport to present the actual results
that would have occurred had the offering and related transactions occurred
on January 1, 1996, nor to project the Company's results of operations for
any future period.
20
<PAGE>
CONDENSED CONSOLIDATED PRO FORMA
FINANCIAL INFORMATION
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30
ADJUSTED
PRO FORMA PRO FORMA
1997 1996 1997
----------- ----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)
Total revenues $ 27,839 18,774 $ 28,110
Expenses:
Rental operations 6,307 3,679 6,314
General and administrative 1,992 2,100 1,992
Interest 3,564 2,549 3,564
Special bonus 353 -- 353
Stock compensation 4,239 -- 4,239
Post retirement benefit 632 438 632
Depreciation and amortization 3,836 2,545 3,877
----------- ----------- -----------
20,923 11,311 20,971
----------- ----------- -----------
Net income $ 6,916 7,463 $ 7,139
----------- ----------- -----------
----------- ----------- -----------
Pro forma shares of common stock
outstanding 11,404,631 11,404,631 11,404,631
----------- ----------- -----------
----------- ----------- -----------
Net income per pro forma share of
common stock outstanding $ 0.61 $ 0.65 $ 0.63
----------- ----------- -----------
----------- ----------- -----------
FUNDS FROM OPERATIONS
Management believes that funds from operations (FFO) is helpful to investors
as a measure of the performance of an equity REIT because, along with cash
flows from operating activities, financing activities and investing
activities, it provides investors with an understanding of the ability of the
Company to incur and service debt and to make capital expenditures. The
Company computes FFO in accordance with standards established by the Board of
Governors of NAREIT in its March 1995 White Paper (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. The White Paper defines FFO as net
income (loss) (computed in accordance with generally accepted accounting
principles ("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 and
significant non-recurring events. 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.
The following tables present the Company's FFO for the three months ended
September 30, 1997 on an historical basis, and for the nine months ended
September 30, 1997 on an historical, pro forma and adjusted pro forma basis.
The adjusted pro forma information for the nine months ended September
21
<PAGE>
30, 1997 assumes that leases entered into with sellers of previously
owner-occupied properties were in effect for the entire period presented:
(UNAUDITED)
THREE MONTHS ENDED
SEPTEMBER 30, 1997
HISTORICAL
--------------
(IN THOUSANDS)
Net income $ 4,126
Add:
Depreciation and amortization 1,325
--------------
FFO $ 5,451
--------------
--------------
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1997
ADJUSTED
HISTORICAL PRO FORMA PRO FORMA
-----------------------------------
(IN THOUSANDS)
Net income (loss) $ (7,006) $ 6,916 $ 7,139
Add:
Special bonus 353 353 353
Stock compensation 4,239 4,239 4,239
Post-retirement benefit 632 632 632
Acquisition LLC financing costs 6,973 -- --
Write-off of unamortized loan costs 2,147 -- --
Depreciation and amortization 3,434 3,836 3,877
-----------------------------------
FFO $ 10,772 $ 15,976 $ 16,240
-----------------------------------
-----------------------------------
22
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the three months ended September 30, 1997, no legal proceedings were
initiated against the Company, the adverse determination of which would have
a material adverse effect upon the financial condition and results of
operations of the Company.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Use of Proceeds.
The Company consummated its initial public offering (the "Offering") of
Common Stock in June 1997. The Company's Registration Statement on Form S-11
(Registration No. 333-23545), as amended, with respect to the Offering was
declared effective by the Securities and Exchange Commission on May 27, 1997.
The Offering commenced on May 28, 1997, and has since terminated, resulting
in the sale by the Company of (i) 6,750,000 shares of Common Stock on June 2,
1997 and (ii) 1,012,500 shares of Common Stock on June 26, 1997 pursuant to
the exercise of the underwriters' over-allotment option, for an aggregate
offering price of $155,250,000. The shares of Common Stock sold constitute
all of the shares of Common Stock covered by the Registration Statement. The
managing underwriters of the Offering were PaineWebber Incorporated, Lehman
Brothers Inc., Smith Barney Inc. and EVEREN Securities, Inc.
During the period from May 27, 1997 through September 30, 1997, the Company
paid a total of $16,360,000 in expenses in connection with the Offering,
including $10,091,000 for underwriters' commissions and discounts, $1,553,000
for the underwriters' advisory fee, and $4,716,000 for other expenses. None
of these expenses were direct or indirect payments to directors or officers
of the Company or their associates, to persons owning ten percent or more of
any class of equity securities of the Company or to affiliates of the Company.
The net proceeds to the Company from the Offering were approximately
$138,890,000. During the period from May 27, 1997 through September 30,
1997, the Company used such net proceeds, as well as $15,360,000 in proceeds
from two mortgage loans obtained in connection with the Offering, as follows:
(i) $77,698,000 to repay mortgage and other indebtedness (including the
repayment of $2,500,000 of indebtedness advanced to the Company from Health
Science Properties Holding Corporation, the sole holder of the Common Stock
prior to the Offering); (ii) $58,844,000_to acquire the membership interests
in ARE Acquisitions, LLC, thereby acquiring three Life Science Facilities;
and (iii) an
23
<PAGE>
aggregate of $16,046,000 to acquire three additional Life Science Facilities
and one parcel of land suitable for the development of a Life Science
Facility. Except as set forth in clause (i) above, none of such uses were
direct or indirect payments to directors or officers of the Company or their
associates, to persons owning ten percent or more of any class of equity
securities of the Company or to affiliates of the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Articles of Amendment and Restatement of the Registrant (incorporated
by reference to Exhibit 3.1 of the Registrant's Quarterly Report on Form
10-Q for the Period Ended June 30, 1997)
3.2 Certification of Correction of the Registrant (incorporated by reference
to Exhibit 3.2 of the Registrant's Quarterly Report on Form 10-Q for
the Period Ended June 30, 1997)
3.3 Amended and Restated Bylaws of the Registrant (incorporated by reference
to Exhibit 3.3 of the Registrant's Quarterly Report on Form 10-Q for the
Period Ended June 30, 1997)
4.1 Specimen certificate representing shares of Common Stock (incorporated
by reference from Exhibit 4.1 of the Registrant's Registration Statement
on Form S-11 (File No. 333-23545))
10.41 Executive Employment Agreement by and between the Company and James H.
Richardson, dated July 30, 1997
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
24
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized on November 13, 1997.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
-------------------------------------------------
Joel S. Marcus
Chief Executive Officer
(Principal Executive Officer)
-------------------------------------------------
Peter J. Nelson
Chief Financial Officer, Treasurer and Secretary
(Principal Financial and Accounting Officer)
25
<PAGE>
- --------------------------------------------------------------------------------
EXECUTIVE EMPLOYMENT AGREEMENT
by and between
ALEXANDRIA REAL ESTATE EQUITIES, INC.,
a Maryland corporation,
and
JAMES H. RICHARDSON,
an individual
- --------------------------------------------------------------------------------
<PAGE>
1. POSITION AND DUTIES; LOCATION. . . . . . . . . . . . . . . . . . . 1
2. TERM OF EMPLOYMENT . . . . . . . . . . . . . . . . . . . . . . . . 2
3. COMPENSATION, BENEFITS AND REIMBURSEMENT . . . . . . . . . . . . . 2
3.1 BASE SALARY. . . . . . . . . . . . . . . . . . . . . . . 2
(a) MINIMUM BASE. . . . . . . . . . . . . . . . . . . . 2
(b) EARNED BASE SALARY. . . . . . . . . . . . . . . . . 2
3.2 INCREASES IN BASE SALARY . . . . . . . . . . . . . . . . 2
3.3 BONUS. . . . . . . . . . . . . . . . . . . . . . . . . . 3
(a) SIGNING BONUS. . . . . . . . . . . . . . . . . 3
(b) PERFORMANCE BONUS. . . . . . . . . . . . . . . 3
(c) OPTIONS. . . . . . . . . . . . . . . . . . . . 3
3.4 ADDITIONAL BENEFITS. . . . . . . . . . . . . . . . . . . 3
(a) OFFICER BENEFITS . . . . . . . . . . . . . . . 4
(b) VACATION . . . . . . . . . . . . . . . . . . . 4
(c) LIFE AND DISABILITY INSURANCE. . . . . . . . . 4
(d) REIMBURSEMENT FOR EXPENSES . . . . . . . . . . 4
(e) WITHHOLDING. . . . . . . . . . . . . . . . . . 5
4. TERMINATION OF THIS AGREEMENT. . . . . . . . . . . . . . . . . . . 5
4.1 TERMINATION BY CORPORATION DEFINED . . . . . . . . . . . 5
(a) TERMINATION WITHOUT CAUSE. . . . . . . . . . . 5
(b) TERMINATION FOR CAUSE. . . . . . . . . . . . . 5
(c) TERMINATION BY REASON OF DEATH OR DIS
ABILITY. . . . . . . . . . . . . . . . . . . 6
4.2 TERMINATION BY OFFICER DEFINED . . . . . . . . . . . . . 6
(a) TERMINATION OTHER THAN FOR GOOD REASON . . . . 6
(b) TERMINATION FOR GOOD REASON. . . . . . . . . . 6
(c) GOOD REASON FOLLOWING A CHANGE IN CON
TROL . . . . . . . . . . . . . . . . . . . . 6
4.3 EFFECT OF TERMINATION. . . . . . . . . . . . . . . . . . 8
(a) TERMINATION BY CORPORATION . . . . . . . . . . 8
(i) TERMINATION WITHOUT CAUSE . . . . . . . 8
(ii) TERMINATION FOR CAUSE,
DEATH OR DISABILITY . . . . . . . . . 9
(b) TERMINATION BY OFFICER . . . . . . . . . . . . 9
(i) TERMINATION OTHER THAN FOR GOOD
REASON. . . . . . . . . . . . . . . . . . . . . . . 9
i
<PAGE>
(ii) TERMINATION FOR GOOD REASON . . . . . 9
4.4 SEVERANCE PAYMENT. . . . . . . . . . . . . . . . . . . . 10
(a) DEFINITION OF "SEVERANCE PAYMENT." . . . . . . 10
(b) OTHER SEVERANCE BENEFITS . . . . . . . . . . . 10
(c) FULL SETTLEMENT OF ALL OBLIGATIONS . . . . . . 10
(d) CHANGE IN CONTROL. . . . . . . . . . . . . . . 10
4.5 GROSS-UP . . . . . . . . . . . . . . . . . . . . . . . . 12
4.6 OFFSET . . . . . . . . . . . . . . . . . . . . . . . . . 13
5. NONCOMPETITION/NONSOLICITATION . . . . . . . . . . . . . . . . . . 13
6. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.1 PAYMENT OBLIGATIONS. . . . . . . . . . . . . . . . . . . 13
6.2 CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . 14
6.3 WAIVER . . . . . . . . . . . . . . . . . . . . . . . . . 14
6.4 ENTIRE AGREEMENT; MODIFICATIONS. . . . . . . . . . . . . 14
6.5 NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . 14
6.6 HEADINGS . . . . . . . . . . . . . . . . . . . . . . . . 15
6.7 ARBITRATION. . . . . . . . . . . . . . . . . . . . . . . 15
6.8 SEVERABILITY . . . . . . . . . . . . . . . . . . . . . . 15
6.9 SURVIVAL OF CORPORATION'S OBLIGATIONS. . . . . . . . . . 15
6.11 COUNTERPARTS. . . . . . . . . . . . . . . . . . . . . . 16
6.12 INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . 16
ii
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT (this "Agreement") is entered
into as of the ________ day of July, 1997, by and between Alexandria Real
Estate Equities, Inc., a Maryland corporation (the "Corporation"), and James
H. Richardson, an individual (the "Officer"), to read as follows:
RECITAL
WHEREAS, Corporation desires to employ Officer as its Senior Vice
President - Acquisitions, 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:
1. POSITION AND DUTIES; LOCATION.
During the Term (as defined in Paragraph 2 below) of this Agreement
Officer agrees to be employed by and to serve Corporation as (i) for the
period commencing on September 3, 1997, or such earlier date as of which
Officer actually becomes employed by the Corporation (the "Effective Date"),
and ending on December 31, 1997, its Senior Vice President - Acquisitions and
(ii) for the period commencing on January 1, 1998 and ending on December 31,
1998, Executive Vice President - Acquisitions, or in such other capacity
consistent with the Officer's current position as 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 Chief Executive Officer and the President of the
Corporation or such other officer as the Board shall direct, and at all times
during the Term shall have powers and duties at least commensurate with his
position as a senior executive officer. Officer shall be based in the San
Francisco, California metropolitan area, except for required travel on
Corporation's business.
1
<PAGE>
2. TERM OF EMPLOYMENT.
The term (the "Term") of this Agreement shall be for a period
commencing on the Effective Date and ending on December 31, 1998 (the
"Termination Date"), unless terminated earlier pursuant to this Agreement
(the "Early Termination Date"). Commencing on December 31, 1998 and on each
subsequent anniversary thereof, the Term shall be automatically extended for
one (1) additional year unless, no later than six (6) months before such
date, either party shall have given written notice to the other that it does
not wish to extend the Term of this Agreement. References herein to the Term
shall refer to both the initial Term and any such extended Term.
3. COMPENSATION, BENEFITS AND REIMBURSEMENT.
3.1 BASE SALARY. During the Term, Officer shall be entitled to the
following base salary:
(a) MINIMUM BASE. During the Term and subject to the terms
and conditions set forth herein, Corporation agrees to pay to Officer an
annual "Base Salary" of One Hundred Seventy Five Thousand Dollars ($175,000),
or such other higher amount as may from time to time be determined by
Corporation. Unless otherwise agreed in writing by Officer and Corporation,
and subject to Subparagraph (b) below, the salary shall be payable in
substantially equal semimonthly installments in accordance with the standard
policies of Corporation in existence from time to time.
(b) EARNED BASE SALARY. For purposes of any early
termination of this Agreement as provided in Paragraph 4 below, the term
"Earned Base Salary" shall mean all semimonthly installments of the Base
Salary which have become due and payable to Officer pursuant to this
Paragraph 3.1, together with any partial monthly installment prorated on a
daily basis up to and including the applicable Termination Date.
3.2 INCREASES IN BASE SALARY. Officer's Base Salary shall be
reviewed no less frequently than on each anniversary of the Effective Date
during the Term by the Board (or such committee as may be appointed by the
Board for such purpose); PROVIDED, HOWEVER, that the first such review shall
take place as soon as practicable following the end of the Corporation's 1997
fiscal year. The Base Salary payable to Officer shall be increased on each
such date (and such other times as the
2
<PAGE>
Board or a committee of the Board may deem appropriate during the Term) to an
amount determined by the Board (or a committee of the Board). Each such new
Base Salary shall become the base for each successive year increase. Any
increase in Base Salary or other compensation shall in no way limit or reduce
any other obligations of Corporation hereunder and, once established at an
increased specified rate, Officer's Base Salary shall not be reduced unless
Officer otherwise agrees in writing.
3.3 BONUS. During the Term, the Officer is eligible for the
following bonus:
(a) SIGNING BONUS. Officer shall be entitled to receive a
signing bonus in an amount equal to $25,000, payable on the Effective Date of
this Agreement.
(b) PERFORMANCE BONUS. Officer shall be eligible to receive
a bonus for each fiscal year of Corporation (or portion thereof) during the
Term, with the actual amount of any such bonus to be determined in the sole
discretion of the Board (or a committee of the Board) based upon its
evaluation of Officer's performance during such year and such other factors
and conditions as the Board (or a committee of the Board) deems relevant.
Any such bonus shall be payable within seventy-five (75) days after the end
of Corporation's fiscal year to which such bonus relates. For the period
commencing on the Effective Date and ending on December 31, 1997, Officer
shall be entitled to a performance bonus in an amount equal to at least
$25,000.
(c) OPTIONS. The Officer shall be granted a non-qualified
stock option to purchase 80,000 shares of the Corporation's common stock, par
value $.01 per share (the "Common Stock"), pursuant to the Corporation's 1997
Stock Incentive Plan (the "1997 Stock Plan") with an exercise price equal to
the closing price of the Common Stock on the New York Stock Exchange on the
Effective Date. The option shall have a term of ten (10) years and shall
become vested and exercisable during such term with respect to one-third
(1/3) of the shares of Common Stock subject to such option on and after the
first anniversary of the Effective Date; two-thirds (2/3) of such shares on
and after the second anniversary of the Effective Date; and all of such
shares on and after the third anniversary of the Effective Date, except as
otherwise provided in the 1997 Stock Plan.
3
<PAGE>
3.4 ADDITIONAL BENEFITS. During the Term, Officer shall be entitled
to the following additional benefits:
(a) OFFICER BENEFITS. Officer shall be eligible to
participate in such of Corporation's benefit and deferred compensation plans
as are made available to executive officers of Corporation, including,
without limitation, Corporation's stock incentive plans, annual incentive
compensation plans, profit sharing/pension plans, deferred compensation
plans, annual physical examinations, dental, vision, sick pay, disability,
and medical plans, personal catastrophe and accidental death insurance plans,
financial planning and automobile arrangements, retirement plans and
supplementary executive retirement plans, if any. 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.
(b) VACATION. During the Term, Officer shall be entitled to
four (4) weeks of vacation during each year during the Term and any
extensions thereof, prorated for partial years. Any accrued vacation not
taken during any year may be carried forward to subsequent years; PROVIDED,
that Officer may not accrue more than eight (8) weeks of unused vacation at
any time.
(c) LIFE AND DISABILITY INSURANCE. During the Term,
Corporation shall, at its sole cost and expense, procure and keep in effect
term life insurance on the life of Officer, payable to such beneficiaries as
Officer may from time to time designate, in the aggregate amount of One
Million Dollars ($1,000,000). Such policy shall be owned by Officer or by a
member of his immediate family. Corporation shall have no incidents of
ownership therein.
During the Term, Corporation shall, at its sole cost and
expense, procure and keep in effect disability insurance, payable to Officer
in an annual amount not less than sixty percent (60%) of Officer's then
existing Base Salary ("Disability Policy"). For purposes of this Agreement,
"Permanent Disability" shall have the same meaning as is ascribed to such
terms in the Disability Policy (including the COBRA Disability Policy)
covering Officer at the time of occurrence of such Permanent Disability.
(d) REIMBURSEMENT FOR EXPENSES. During the Term, Corporation
shall reimburse Officer for all reasonable out-of-pocket business and/or
entertainment expenses incurred by Officer for the purpose of and in
connection with
4
<PAGE>
the performance of his services pursuant to this Agreement. Officer shall be
entitled to such reimbursement upon the presentation by Officer to
Corporation of vouchers or other statements itemizing such expenses in
reasonable detail consistent with Corporation's policies. In addition,
Officer shall be entitled to reimbursement for (i) dues and membership fees
in professional organizations and/or industry associations in which Officer
is currently a member or becomes a member, and (ii) appropriate industry
seminars and mandatory continuing education.
(e) WITHHOLDING. Compensation and benefits paid to Officer
under this Agreement shall be subject to applicable federal, state and local
wage deductions and other deductions required by law.
4. TERMINATION OF THIS AGREEMENT.
4.1 TERMINATION BY CORPORATION DEFINED.
(a) TERMINATION WITHOUT CAUSE. Subject to the provisions set
forth in Paragraph 4.3 below, "Termination Without Cause" shall constitute
any termination by Corporation other than termination for Cause (as defined
in Paragraph 4.1(b) below) or by reason of Officer's death or Disability (as
defined below).
(b) TERMINATION FOR CAUSE. Subject to the provisions set
forth in Paragraph 4.3 below, prior to the Termination Date, Corporation
shall have the right to terminate this Agreement for Cause immediately after
written notice has been delivered to Officer, which notice shall specify the
reason for and the effective date of such Termination (which date shall be
the applicable Early Termination Date). For purposes of this Agreement,
"Cause" shall mean the following:
(i) Officer's use of alcohol or narcotics which proximately results
in the willful Material Breach (as defined below) 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 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
5
<PAGE>
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.
(c) TERMINATION BY REASON OF DEATH OR DISABILITY. Subject to
the provisions set forth in Paragraph 4.3 below, prior to the Termination
Date, Corporation shall have the right to terminate this Agreement by reason
of Officer's death or if Officer is unable to work by reason of disability
for 180 days during any 365 day period, for disability ("Disability").
4.2 TERMINATION BY OFFICER DEFINED.
(a) TERMINATION OTHER THAN FOR GOOD REASON. Subject to the
provisions set forth in Paragraph 4.3 below, Officer shall have the right to
terminate this Agreement for any reason other than for Good Reason (as
defined in Paragraph 4.2(b) below), at any time prior to the Termination
Date, upon written notice delivered to Corporation thirty (30) days prior to
the effective date of termination specified in such notice (which date shall
be the applicable Early Termination Date).
(b) TERMINATION FOR GOOD REASON. Subject to the provisions
of Paragraph 4.3 below, Officer shall have the right to terminate this
Agreement prior to the Termination Date in the event of the material breach
of this Agreement by Corporation, if such breach is not cured by Corporation
within thirty (30) days after written notice thereof specifying the nature of
such breach has been delivered to Corporation, or, following a Change in
Control (as defined in Paragraph 4.4(d) below), under the circumstances set
forth in Paragraph 4.2(c) below. For purposes of this Agreement, termination
of this Agreement by Officer in the event of Corporation's material breach of
this Agreement in accordance with the provisions of this Paragraph 4.2(b)
shall be defined as termination by Officer for "Good Reason."
(c) GOOD REASON FOLLOWING A CHANGE IN CONTROL. Following a
Change in Control (as defined in Paragraph 4.4(d) below), "Good Reason" shall
mean, without Officer's express written consent, a material breach of this
Agreement by Corporation, including the occurrence of any of the following
circumstances, which breach is not fully corrected within thirty (30) days
after
6
<PAGE>
written notice thereof specifying the nature of such breach has been
delivered to Corporation:
(i) 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;
(ii) 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;
(iii) the relocation of Officer's offices to a location outside the San
Francisco 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;
(iv) 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;
(v) 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
7
<PAGE>
and the level of participation relative to other participants, as
existed at the time of the Change in Control;
(vi) 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 in accordance with
Corporation's normal vacation policy in effect at the time of the Change
in Control; or
(vii) 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.
4.3 EFFECT OF TERMINATION. In the event that this Agreement is
terminated by Corporation or Officer prior to the Termination Date in
accordance with the provisions of this Paragraph 4, the obligations and
covenants of the parties under this Agreement shall be of no further force
and effect, except for the obligations of the parties set forth below in this
Paragraph 4.3, and such other provisions of this Agreement which shall
survive termination of this Agreement as provided in Paragraph 6.10 below.
Except as otherwise specifically set forth, all amounts due upon termination
shall be payable on the date such amounts would otherwise have been paid had
the Agreement continued through its Term; PROVIDED, HOWEVER, that Deferred
Amounts (as defined in Paragraph 4.3(a)(i) below) shall be payable within
thirty (30) days following the Early Termination Date. In the event of any
such early termination in accordance with the provisions of this Paragraph
4.3, Officer shall be entitled to the following:
8
<PAGE>
(a) TERMINATION BY CORPORATION.
(i) TERMINATION WITHOUT CAUSE. In the event that Corporation
terminates this Agreement without Cause pursuant to Paragraph 4.1(a)
above, Officer shall be entitled to (i) Earned Base Salary; (ii) earned
benefits and reimbursable expenses; (iii) any earned bonus which Officer
has been awarded pursuant to the terms of this Agreement or any other
plan or arrangement as of the Early Termination Date, but which has not
been received by Officer as of such date; (iv) any compensation earned
but deferred ("Deferred Amounts"); and (v) the Severance Payment (as
defined in Paragraph 4.4 below).
(ii) TERMINATION FOR CAUSE, DEATH OR DISABILITY. In the event that
Corporation terminates this Agreement for Cause pursuant to Paragraph
4.1(b) above or by reason of Disability or death pursuant to Paragraph
4.1(c) above, Officer shall be entitled to (i) Earned Base Salary; (ii)
any earned bonus which Officer has been awarded pursuant to the terms of
this Agreement or any other plan or arrangement as of the Early
Termination Date, but which has not been received by Officer as of such
date; (iii) earned benefits and reimbursable expenses; and (iv) any
Deferred Amounts. Officer shall not be entitled to any future annual
bonus or Severance Payment.
(b) TERMINATION BY OFFICER.
(i) TERMINATION OTHER THAN FOR GOOD REASON. In the event that Officer
terminates this Agreement other than for Good Reason, Officer shall be
entitled to (i) Earned Base Salary; (ii) any earned bonus which Officer
has been awarded pursuant to the terms of this Agreement or any other
plan or arrangement as of the Early Termination Date, but which has not
been received by Officer as of such date; (iii) earned benefits and
reimbursable expenses; and (iv) any Deferred Amounts. Officer shall not
be entitled to any future annual bonus or Severance Payment.
(ii) TERMINATION FOR GOOD REASON. In the event that Officer terminates
this Agreement for Good Reason, Officer shall be entitled to (i) Earned
Base Salary; (ii) earned benefits and reimbursable expenses; (iii) any
earned bonus which Officer has been awarded
9
<PAGE>
pursuant to the terms of this Agreement or any other plan or arrangement
as of the Early Termination Date, but which has not been received by
Officer as of such date; (iv) any Deferred Amounts; and (v) the
Severance Payment (as defined in Paragraph 4.4 below).
(c) STOCK OPTIONS. In the event that the Officer's
employment is terminated (i) by the Corporation for any reason other
than for Cause or (ii) after December 31, 1998, by the Officer for any
reason, the Officer shall be entitled to retain the options granted
pursuant to Section 3.3(c) hereof, and such options shall continue to
become exercisable as set forth therein as if the Officer had remained
an employee of the Corporation throughout the term of such options.
4.4 SEVERANCE PAYMENT.
(a) DEFINITION OF "SEVERANCE PAYMENT." For purposes of this
Agreement, the term "Severance Payment" shall mean a lump sum amount (payable
within ten (10) days following such termination) equal to the sum of (i) the
Base Salary otherwise payable to Officer during the remainder of the Term had
such early termination of this Agreement not occurred ("Severance Period")
and (ii) Officer's target bonus as determined by the Board (or a Committee of
the Board) as of the date of termination (or if such target has not yet been
determined, the average of the annual bonuses earned by Officer in the two
(2) years immediately preceding the date of termination (or if there are less
than two (2) years immediately preceding such date, an amount equal to the
immediately preceding bonus earned)) (the "Average Bonus"); PROVIDED,
HOWEVER, that in the event that, following a Change in Control as defined in
Paragraph 4.4(d) below, Officer terminates this Agreement for Good Reason
pursuant to Paragraph 4.2(b) above, the term "Severance Payment" shall mean
three (3) times the sum of the Base Salary otherwise payable during the
Severance Period and the Average Bonus.
(b) OTHER SEVERANCE BENEFITS. In the event that Officer is
entitled to any Severance Payment pursuant to Paragraph 4.3 above, he shall
also be entitled to full and immediate vesting of any awards granted to
Officer under Corporation's stock option or incentive compensation plans.
(c) FULL SETTLEMENT OF ALL OBLIGATIONS. Officer hereby
acknowledges and agrees that any Severance Payment paid to Officer hereunder
shall be conditioned upon full and complete settlement of all obligations of
Corporation under this Agreement.
10
<PAGE>
(d) CHANGE IN CONTROL. For purposes of this Agreement,
"Termination Upon a Change in Control" shall mean a termination of Officer's
employment with Corporation following a "Change in Control" by Officer for
Good Reason or by Corporation Other Than for Cause. A "Change in Control"
shall be deemed to have occurred if:
(i) Any Person, as such term is used in section
3(a)(9) of the Securities Exchange Act of 1934, as amended from time to time
(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, 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 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
11
<PAGE>
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.
4.5 GROSS-UP. If any of the Total Payments (as hereinafter defined)
will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the
Internal Revenue Code of 1986, as amended (the "Code") (the "Excise Tax"),
Corporation shall pay to Officer, no later than the tenth (10th) day
following the Early Termination Date, an additional amount (the "Gross-Up
Payment") such that the net amount retained by him, after deduction of any
Excise Tax on the Total Payments and any federal, state and local income tax
and excise tax upon the payment provided for by this Paragraph, shall be
equal to the Total Payments. For purposes of determining whether any of the
Total Payments will be subject to the Excise Tax and the amount of such
Excise Tax, (i) all payments or benefits received or to be received by
Officer in connection with a Change in Control or the termination of
Officer's employment (whether payable pursuant to the terms of this Agreement
or of any other plan, arrangement or agreement with Corporation, its
successors, any person whose actions result in a Change in Control or any
person affiliated (or which, as a result of the completion of the
transactions causing a Change in Control, will become affiliated) with
Corporation or such person within the meaning of Section 1504 of
12
<PAGE>
the Code (the "Total Payments")) shall be treated as "parachute payments"
(within the meaning of Section 280G(b)(2) of the Code) unless, in the opinion
of tax counsel selected by Corporation's independent auditors and reasonably
acceptable to Officer, such payments or benefits (in whole or in part) do not
constitute parachute payments, including by reason of Section 280G(b)(4)(A)
of the Code, and all "excess parachute payments" (within the meaning of
Section 280G(b)(1) of the Code) shall be 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.
4.6 OFFSET. Although Officer shall not be required to
mitigate damages under this Agreement by seeking other comparable employment
or otherwise, the amount of any payment or benefit provided for in this
Agreement, including, without limitation, welfare benefits, shall be reduced
by any compensation earned by or provided to Officer as the result of
employment by an employer other than Corporation prior to the expiration of
the Term; PROVIDED, HOWEVER, that such offset under this Paragraph 4.6 shall
not apply in the event of a Termination Upon a Change in Control.
5. NONCOMPETITION/NONSOLICITATION.
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 (i) engage in any activity competitive with the business of
Corporation or (ii) solicit any employee of the Corporation (or its
affiliates) to work for any business, individual, partnership, firm,
corporation or other entity then in competition with the business of the
Corporation (or any of its affiliates).
6. MISCELLANEOUS.
13
<PAGE>
6.1 PAYMENT OBLIGATIONS. Corporation's obligation to pay Officer the
compensation and to make the arrangements provided herein shall be
unconditional, and Officer shall have no obligation whatsoever to mitigate
damages hereunder. If arbitration after a Change in Control shall be brought
to enforce or interpret any provision contained herein, Corporation shall, to
the extent permitted by applicable law and Corporation's Charter and By-Laws,
indemnify Officer for Officer's reasonable attorneys' fees and disbursements
incurred in such arbitration.
6.2 CONFIDENTIALITY. Officer agrees that all confidential and
proprietary information relating to the business of Corporation shall be kept
and treated as confidential both during and after the Term, except as may be
permitted in writing by the Board or as such information is within the public
domain or comes within the public domain without any breach of this Agreement.
6.3 WAIVER. The waiver of the breach of any provision of this
Agreement shall not operate or be construed as a waiver of any subsequent
breach of the same or other provision hereof.
6.4 ENTIRE AGREEMENT; MODIFICATIONS. Except as otherwise provided
herein, this Agreement (together with the agreements and plans referred to
herein) represents the entire understanding among the parties with respect to
the subject matter hereof, and this Agreement supersedes any and all prior
understandings, agreements, plans and negotiations, whether written or oral,
with respect to the subject matter hereof, including without limitation any
understandings, agreements or obligations respecting any past or future
compensation, bonuses, reimbursements or other payments to Officer from
Corporation. All modifications to the Agreement must be in writing and
signed by the party against whom enforcement of such modification is sought.
6.5 NOTICES. All notices and other communications under this
Agreement shall be in writing and shall be given by facsimile or first class
mail, certified or registered with return receipt requested, and shall be
deemed to have been duly given three (3) days after mailing or twenty-four
(24) hours after transmission of a facsimile to the respective persons named
below:
If to Corporation: Alexandria Real Estate Equities, Inc.
251 South Lake Avenue, Suite 700
Pasadena, California 91101
Phone: (818) 578-0777
14
<PAGE>
Facsimile: (818) 578-0770
If to Officer: James H. Richardson
1525 Escondido Way
Belmont, CA 94002
Any party may change such party's address for notices by notice duly given
pursuant hereto.
6.6 HEADINGS. The Paragraph headings herein are intended for
reference only and shall not by themselves determine the construction or
interpretation of this Agreement.
6.7 ARBITRATION. Any dispute arising out of or relating to this
Agreement that cannot be settled by good faith negotiation between the
parties shall be submitted to ENDISPUTE for final and binding arbitration
pursuant to ENDISPUTE's Arbitration Rules incorporated herein by reference,
which arbitration shall be the exclusive remedy of the parties hereto. The
resulting arbitration shall be deemed a final order of a court having
jurisdiction over the subject matter, shall not be appealable, and shall be
enforceable in any court of competent jurisdiction. Submission to
arbitration shall not preclude the right of any party hereto involved in a
dispute regarding this Agreement (each, a "Disputing Party" and collectively,
the "Disputing Parties") to institute proceedings at law or in equity for
injunctive or other relief pending the arbitration of a matter subject to
arbitration pursuant to this Agreement. Any documentation and information
submitted by any party in the arbitration proceeding shall be kept strictly
confidential by the parties and the arbitrator.
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; PROVIDED, HOWEVER, that any dispute following a Change in
Control shall be governed by the provisions of Paragraph 6.1 above. The
arbitrator shall make such determination and apportionment whether or not the
dispute proceeds to a final award.
15
<PAGE>
6.8 SEVERABILITY. Should a court or other body of competent
jurisdiction determine that any provision of this Agreement is excessive in
scope or otherwise invalid or unenforceable, such provision shall be adjusted
rather than voided, if possible, and all other provisions of this Agreement
shall be deemed valid and enforceable to the lawfully permitted.
6.9 SURVIVAL OF CORPORATION'S OBLIGATIONS. 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
corporation or person. This Agreement shall be binding upon and inure to the
benefit of the executors, administrators, heirs, successors and assigns of
the parties; PROVIDED, HOWEVER, that except as herein expressly provided,
this Agreement shall not be assignable either by Corporation (except to 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.
6.10 SURVIVAL OF CERTAIN RIGHTS AND OBLIGATIONS. The rights and
obligations of the parties hereto pursuant to Paragraphs 4.3, 4.4, 4.5, 4.6,
5 and 6.1, 6.2, 6.7, 6.10, 6.11 and 6.12 hereof shall survive the termination
of this Agreement.
6.11 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which taken together shall constitute one and the same
Agreement.
6.12 INDEMNIFICATION. In addition to any rights to indemnification
to which Officer is entitled under the Corporation's Charter and By-Laws,
Corporation shall indemnify Officer at all times during and after the Term of
this Agreement to the maximum extent permitted under Section 2-418 of the
General Corporation Law of the State of Maryland or any successor provision
thereof and any other applicable state law, and shall pay Officer's expenses
in defending any civil or criminal action, suit, or proceeding in advance of
the final disposition of such action, suit, or proceeding, to the maximum
extent permitted under such applicable state laws.
16
<PAGE>
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
OFFICER:
/s/ James H. Richardson
-----------------------------------------
James H. Richardson
Date: July 30, 1997
------------------------------------
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 6,789,000
<SECURITIES> 0
<RECEIVABLES> 1,153,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 222,324,000
<DEPRECIATION> 7,402,000
<TOTAL-ASSETS> 231,524,000
<CURRENT-LIABILITIES> 9,527,000
<BONDS> 54,727,000
0
0
<COMMON> 114,000
<OTHER-SE> 167,156,000
<TOTAL-LIABILITY-AND-EQUITY> 231,524,000
<SALES> 0
<TOTAL-REVENUES> 24,582,000
<CGS> 0
<TOTAL-COSTS> 8,021,000
<OTHER-EXPENSES> 10,805,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,762,000
<INCOME-PRETAX> (7,006,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,006,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,006,000)
<EPS-PRIMARY> (0.99)
<EPS-DILUTED> 0
</TABLE>
