<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 1997
REGISTRATION NO. 333-23545
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 1 TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ALEXANDRIA REAL ESTATE EQUITIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
251 SOUTH LAKE AVENUE, SUITE 700
PASADENA, CALIFORNIA 91101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
JOEL S. MARCUS
CHIEF EXECUTIVE OFFICER
ALEXANDRIA REAL ESTATE EQUITIES, INC.
251 SOUTH LAKE AVENUE, SUITE 700
PASADENA, CALIFORNIA 91101
TELEPHONE: 818-578-0777
FACSIMILE: 818-578-0770
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPIES TO:
MICHAEL A. WORONOFF, ESQ. DAVID W. WATSON, ESQ.
SKADDEN, ARPS, SLATE, MEAGHER & FLOM GOODWIN, PROCTER & HOAR LLP
LLP EXCHANGE PLACE
300 SOUTH GRAND AVENUE BOSTON, MASSACHUSETTS 02109
LOS ANGELES, CALIFORNIA 90071 TELEPHONE: (617) 570-1000
TELEPHONE: (213) 687-5000 FACSIMILE: (617) 523-1231
FACSIMILE: (213) 687-5600
----------------
APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 5, 1997
[LOGO OF ALEXANDRIA 6,750,000 SHARES
REAL ESTATE
EQUITIES, INC.] ALEXANDRIA REAL ESTATE EQUITIES, INC.
COMMON STOCK
----------
Alexandria Real Estate Equities, Inc. (the "Company") is a real estate
investment trust ("REIT") formed in October 1994 to acquire, manage, expand and
selectively develop high quality, strategically located properties containing
office and laboratory space designed and improved for lease principally to
pharmaceutical, biotechnology, diagnostic and personal care products companies,
major scientific research institutions and related government agencies
(collectively, the "Life Science Industry"). Upon consummation of the Offering
and the transactions described in "Formation and Structure" (the "Formation
Transactions"), the Company will own 15 properties (the "Properties"),
including three properties to be acquired in connection with the Offering,
containing approximately 1.5 million rentable square feet of office and
laboratory space. The Properties are located in California (in the San Diego
and San Francisco Bay areas), Seattle, Washington and suburban Washington, D.C.
(including Maryland and Virginia), each of which is a leading market for the
Life Science Industry. The Company believes that it will be the first publicly
traded entity focusing primarily on this property type.
All of the shares (the "Shares") of Common Stock, par value $.01 per share
(the "Common Stock"), of the Company offered hereby (the "Offering") are being
sold by the Company. It is currently anticipated that the initial public
offering price will be between $20.00 and $22.00 per Share. See "Underwriting"
for a discussion of factors relating to the determination of the initial public
offering price. The Shares will represent approximately 65.0% of all
outstanding shares of Common Stock. Prior to this Offering, there has been no
public market for the Common Stock.
To ensure that the Company maintains its qualification as a REIT, the
Company's charter (the "Charter") provides, with exceptions for certain of the
Company's continuing investors (the "Continuing Investors"), that no person may
own more than 9.8% of the outstanding shares of any class or series of capital
stock of the Company. See "Description of Capital Stock--Restrictions on
Transfer." The Company currently intends to make regular quarterly
distributions and initially to distribute annually approximately 83.4% of
estimated cash available for distribution. See "Distributions." The Common
Stock has been approved for listing on the New York Stock Exchange ("NYSE"),
subject to official notice of issuance, under the symbol "ARE."
SEE "RISK FACTORS" STARTING ON PAGE 16 FOR CERTAIN FACTORS RELEVANT TO AN
INVESTMENT IN THE SHARES, INCLUDING:
. The lack of industry diversification and the Company's reliance on the Life
Science Industry;
. Reliance on a limited number of major tenants and on the ability of such
tenants to make rental payments, and related property management risks,
including nonrenewal of space or inability to relet space;
. The concentration of the Properties in a limited number of markets;
. Conflicts of interest in connection with the Offering and the Formation
Transactions, including material benefits to the Continuing Investors;
. Benefits to PaineWebber Incorporated ("PaineWebber"), the lead managing
underwriter of the Offering, and certain of its affiliates, including, in
addition to underwriting discounts and commissions and a fee for structural
and advisory services, approximately $60.6 million in connection with the
sale to the Company of the Acquisition LLC (defined herein), and $44.4
million as repayment of debt under the PaineWebber Facility (defined herein);
. The rapid growth of the Company, its limited operating history and the
limited experience of current management in REIT operations;
. Real estate financing risks, including that the Company's cash flows may be
insufficient to meet required payments of principal and interest on
outstanding indebtedness and that interest rates could increase on variable
rate indebtedness;
. Economic and other conditions affecting the value of the Company's
properties, the relative illiquidity of real estate, increases in taxes and
potential liabilities for unknown or future environmental problems; and
. Taxation of the Company as a corporation if the Company fails to qualify as a
REIT and the resulting decrease in amounts available for distribution to
stockholders.
----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
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Price to Underwriting Discounts Proceeds to
Public and Commissions(1) Company(2)
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<S> <C> <C> <C>
Per Share.................................. $ $ $
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Total...................................... $ $ $
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Total Assuming Full Exercise of Over-
Allotment Option(3)....................... $ $ $
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</TABLE>
(1) See "Underwriting."
(2) Before deducting expenses estimated at $2,600,000, which are payable by the
Company.
(3) Assuming exercise in full of the 30-day option granted by the Company to
the Underwriters to purchase up to 1,012,500 additional shares of Common
Stock on the same terms and conditions, solely to cover over-allotments.
See "Underwriting."
----------
The Shares are offered by the Underwriters, subject to prior sale, when, as
and if delivered to and accepted by the Underwriters, and subject to their
right to reject orders in whole or in part. It is expected that delivery of the
Shares will be made in New York City on or about , 1997.
----------
PAINEWEBBER INCORPORATED
LEHMAN BROTHERS
SMITH BARNEY INC.
EVEREN SECURITIES, INC.
----------
THE DATE OF THIS PROSPECTUS IS , 1997
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF THE COMMON STOCK TO STABILIZE
ITS MARKET PRICE, THE PURCHASE OF THE COMMON STOCK TO COVER SYNDICATE SHORT
POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
PROSPECTUS SUMMARY........................................................ 1
The Company.............................................................. 1
Risk Factors............................................................. 2
Growth Strategies........................................................ 4
The Properties........................................................... 7
Market Studies........................................................... 9
Structure of the Company................................................. 10
The Offering............................................................. 12
Distributions............................................................ 12
Tax Status of the Company................................................ 13
Summary Financial Information............................................ 13
RISK FACTORS.............................................................. 16
Lack of Industry Diversification; Reliance on Life Science Industry
Tenants................................................................. 16
Environmental Matters................................................... 16
Uncertainty of Government Regulatory Requirements and Funding........... 16
Dependence on Reimbursement............................................. 16
Dependence on Tenants.................................................... 17
Geographic Concentration; Dependence on Certain Markets.................. 17
Conflicts of Interest.................................................... 18
Benefits to Managing Underwriter......................................... 18
Rapid Growth............................................................. 19
Limited Operating History................................................ 19
Experience of Management................................................. 19
Real Estate Financing.................................................... 19
Debt Financing and Existing Debt Maturities............................. 19
Requirement of Additional Financing..................................... 20
Rising Interest Rates................................................... 20
Acquisition and Renovation............................................... 20
Real Estate Investment................................................... 21
General................................................................. 21
Operations.............................................................. 21
Bankruptcy.............................................................. 21
Development............................................................. 21
Market Illiquidity...................................................... 22
Competition............................................................. 22
Adverse Consequences of Failure to Qualify as a REIT..................... 22
Influence of Certain Stockholders........................................ 23
Anti-takeover Effect of Ownership Limit and Power to Issue Additional
Stock................................................................... 23
Uninsured Loss........................................................... 24
Possible Environmental Liabilities....................................... 24
Costs of Compliance with Americans with Disabilities Act................. 25
Changes in Laws.......................................................... 26
Reliance on Key Personnel................................................ 26
Change in Policies Without Stockholder Approval.......................... 26
No Limitation on Debt.................................................... 26
Inability to Sustain Distributions....................................... 27
Absence of Prior Market for Shares....................................... 27
Effect of Market Interest Rates on Price of Shares....................... 27
Effect of Future Offerings on Price of Shares............................ 27
Immediate and Substantial Dilution....................................... 28
Shares Eligible for Future Sale.......................................... 28
THE COMPANY............................................................... 29
Growth Strategies........................................................ 30
Tenant Demand............................................................ 33
TARGET MARKETS............................................................ 35
Existing Markets......................................................... 35
Additional Target Markets................................................ 36
Market Studies........................................................... 36
DISTRIBUTIONS............................................................. 38
USE OF PROCEEDS........................................................... 41
CAPITALIZATION............................................................ 42
DILUTION.................................................................. 43
SELECTED FINANCIAL DATA................................................... 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS............................................................ 46
Overview................................................................. 46
Results of Operations.................................................... 46
Pro Forma Results of Operations.......................................... 48
Liquidity and Capital Resources.......................................... 48
Historical Cash Flows.................................................... 50
Funds from Operations.................................................... 51
Inflation................................................................ 52
THE PROPERTIES............................................................ 53
General.................................................................. 53
Location and Type of Space............................................... 56
Lease Expirations........................................................ 56
Lease Expirations--Property by Property.................................. 57
Tenants.................................................................. 60
Property Descriptions.................................................... 61
California............................................................... 61
Seattle, Washington...................................................... 63
Suburban Washington, D.C. ............................................... 64
Acquisition LLC Properties............................................... 65
Competition.............................................................. 65
Insurance................................................................ 65
Environmental Matters.................................................... 66
Legal Proceedings........................................................ 67
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES................................ 68
Investment Policies....................................................... 68
Disposition Policy........................................................ 68
Financing Policies........................................................ 69
Conflict of Interest Policies............................................. 69
Policies with Respect to Other Activities................................. 70
FORMATION AND STRUCTURE.................................................... 70
Formation and Related Transactions........................................ 70
New Mortgage Debt......................................................... 72
Benefits to Related Parties............................................... 72
MANAGEMENT................................................................. 74
Directors, Executive Officers and Senior Management....................... 74
Election of Directors and Director Compensation........................... 76
Committees of the Board of Directors...................................... 77
Executive Compensation.................................................... 77
Benefit Plans............................................................. 78
Employment Agreements..................................................... 79
Compensation Committee Interlocks and Insider Participation............... 80
Limitation of Liability and Indemnification............................... 80
CERTAIN TRANSACTIONS....................................................... 82
SHARE OWNERSHIP............................................................ 84
Principal Stockholders of Alexandria...................................... 84
Certain Beneficial Ownership in Holdings.................................. 85
DESCRIPTION OF CAPITAL STOCK............................................... 86
General................................................................... 86
Common Stock.............................................................. 86
Preferred Stock........................................................... 86
Power to Issue Additional Shares of Common Stock and Preferred Stock...... 87
Restrictions on Transfer.................................................. 87
Transfer Agent and Registrar.............................................. 89
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND
BYLAWS.................................................................... 89
Board of Directors........................................................ 89
Business Combinations..................................................... 90
Control Share Acquisitions................................................ 90
Advance Notice of Director Nominations and New Business .................. 91
Amendment to the Charter or Bylaws........................................ 91
Dissolution of the Company................................................ 91
Anti-takeover Effect of Certain Provisions of Maryland Law and of the
Charter and Bylaws....................................................... 91
SHARES ELIGIBLE FOR FUTURE SALE............................................ 91
FEDERAL INCOME TAX CONSIDERATIONS.......................................... 93
Taxation of the Company................................................... 93
Taxation of Taxable Domestic Stockholders................................. 98
Taxation of Tax-Exempt Stockholders....................................... 98
Taxation of Non-U.S. Holders.............................................. 98
Other Tax Consequences.................................................... 100
UNDERWRITING............................................................... 102
LEGAL MATTERS.............................................................. 104
EXPERTS.................................................................... 104
ADDITIONAL INFORMATION..................................................... 105
GLOSSARY................................................................... 106
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
</TABLE>
ii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus. Capitalized and certain
other terms used herein shall have the meanings assigned to them in the
Glossary. Unless the context otherwise requires, references in this Prospectus
to the "Company" mean, collectively, (i) Alexandria Real Estate Equities, Inc.
("Alexandria"), (ii) ARE-QRS Corp. ("QRS"), a wholly owned subsidiary of
Alexandria, (iii) a special purpose entity to be formed by the Company prior to
consummation of the Offering ("GSA-QRS"), and (iv) PW Acquisitions I, LLC (the
"Acquisition LLC"). See "Formation and Structure." Unless otherwise indicated,
the information in this Prospectus assumes that: (i) the Underwriters' over-
allotment option is not exercised; (ii) the Formation Transactions have
occurred; and (iii) the initial public offering price is $21.00 per Share (the
midpoint of the price range set forth on the cover page of this Prospectus).
THE COMPANY
Alexandria was formed in October 1994 to acquire, manage, expand and
selectively develop high quality, strategically located properties containing
office and laboratory space designed and improved for lease principally to
pharmaceutical, biotechnology, diagnostic and personal care products companies,
major scientific research institutions and related government agencies
(collectively, the "Life Science Industry"). The Company's tenant base is broad
and diverse within the Life Science Industry and reflects the Company's focus
on regional, national and international tenants with substantial financial and
operational resources. Significant tenants include affiliates of major
pharmaceutical companies (e.g., Johnson & Johnson and Novartis AG, the company
resulting from the merger of Ciba-Geigy AG and Sandoz AG); biotechnology
companies and their affiliates (e.g., Chiron Corporation, Agouron
Pharmaceuticals, Inc. and Advanced Tissue Sciences, Inc.); affiliates of
personal care products companies (The Gillette Company); major scientific
research institutions (e.g., the Fred Hutchinson Cancer Research Center and The
Scripps Research Institute); clinical laboratories (American Medical
Laboratories, Inc.); and government agencies (e.g., the U.S. Food and Drug
Administration and the U.S. Army Corps of Engineers). See "The Properties--
Tenants" for the percentage of the aggregate portfolio Annualized Net Effective
Rent contributed by each of the foregoing tenants.
Upon consummation of the Offering and the Formation Transactions, the Company
will own 15 Properties, including three Properties to be acquired in connection
with the Offering, containing approximately 1.5 million rentable square feet of
office and laboratory space located in California (in the San Diego and San
Francisco Bay areas), Seattle, Washington and suburban Washington, D.C.
(including Maryland and Virginia), each of which is a leading market in the
United States for the Life Science Industry. To facilitate research and
development, technology transfer and recruitment of scientific professionals,
Life Science Industry companies generally cluster near major scientific
research institutions, universities and government agencies, all of which drive
demand for properties combining office and laboratory space suitable for such
tenants. As a result, the Company focuses its operations and acquisition
activities principally in a limited number of target markets, including all of
the Company's existing markets and certain other markets where Life Science
Industry tenants are concentrated, including Boston/Cambridge and the New
York/New Jersey and suburban Philadelphia areas. As of April 30, 1997, the
Properties were approximately 98% leased, at an average Annualized Net
Effective Rent per leased square foot of $18.20.
The multibillion dollar Life Science Industry comprises some of the fastest
growing segments of the U.S. economy and includes thousands of public and
private companies and scientific research institutions engaged principally in
the research, development, testing, manufacture, sale and regulation of
pharmaceuticals, diagnostics, personal care products, medical devices,
laboratory instrumentation and other related applications. Properties leased to
tenants in the Life Science Industry typically consist of suburban office
buildings containing scientific research and development laboratories and other
improvements that are generic to tenants operating in
1
<PAGE>
the Life Science Industry (such properties, "Life Science Facilities"). Unlike
traditional office space, the location of and improvements to Life Science
Facilities are generally considered essential to a tenant's business. The
Company believes that, as a result of these factors, occupancy levels in Life
Science Facilities within its markets have been higher and tenant turnover has
been lower than in traditional office properties.
Despite increasing competition for the acquisition of traditional office
properties, the Company believes that, based on market conditions and
prospective acquisitions currently under review, it can continue to purchase
high quality Life Science Facilities at initial Capitalization Rates generally
ranging from 10.0% to 12.5% and at prices significantly below replacement cost.
The initial Capitalization Rate is the initial annual projected property
earnings, before interest, taxes, depreciation and amortization ("EBITDA"), for
the 12 months following acquisition, divided by the consideration paid by the
Company for the property, including closing costs and budgeted capital
improvements. In 1996, the Company completed the acquisition of eight Life
Science Facilities (the "1996 Acquired Properties") for an aggregate purchase
price (including closing costs and budgeted capital improvements) of
approximately $95.2 million and an average initial Capitalization Rate of over
12%. In addition, the Company believes that opportunities exist for internal
growth through contractual rental rate escalations (included in approximately
65% of the Company's leases on a square footage basis), the retenanting and
releasing of space at higher rental rates upon the expiration of existing
leases, the expansion of existing Properties and the conversion of existing
office space to higher rent generic laboratory space.
The Company is led by a senior management team with extensive experience in
both the real estate and Life Science industries and is supported by a highly
experienced board of directors. Management believes that it has achieved
favorable returns on its Properties as a result of: (i) the strong and growing
demand by tenants for Life Science Facilities; (ii) the constrained supply and
lack of speculative development of Life Science Facilities due to the expertise
generally required to develop and manage this property type; (iii) the highly
fragmented and inefficient market for ownership of Life Science Facilities;
(iv) the Company's adherence to strict evaluation criteria and due diligence
review when assessing prospective properties and tenants; and (v) the Company's
knowledge and understanding of Life Science Industry tenants and their real
estate needs. Additionally, the personal and business relationships that
management has developed over time within the real estate and Life Science
industries have contributed significantly to the Company's ability to identify
and consummate favorable acquisitions and to lease space to high quality Life
Science Industry tenants. Management believes that the Company will be the
first publicly traded entity focusing primarily on the acquisition, management,
expansion and selective development of Life Science Facilities.
Upon consummation of the Offering and the Formation Transactions, Health
Science Properties Holding Corporation ("Holdings"), which is owned principally
by founding stockholders (including officers and directors) of the Company,
will own approximately 17.0% of the outstanding shares of Common Stock. The
Company's Continuing Investors, consisting of Holdings, AEW Partners II, L.P.
and certain of its affiliates (collectively, "AEW"), and officers, directors
and certain employees of the Company, will own an aggregate of approximately
35.0% of the outstanding shares of Common Stock. See "Formation and Structure"
for a detailed discussion of the Formation Transactions. See also "Share
Ownership."
RISK FACTORS
An investment in the Shares involves various risks, and prospective investors
should carefully consider the matters discussed under "Risk Factors" prior to
an investment in the Company. Such risks include, among others:
. The lack of industry diversification and the Company's reliance on the
Life Science Industry, including the extensive government regulation of
Life Science Industry tenants and certain related environmental
concerns, and the potential inability of the Company to identify
suitable Life Science Industry tenants. See "Risk Factors--Lack of
Industry Diversification; Reliance on Life Science Industry Tenants."
2
<PAGE>
. Reliance on a limited number of major tenants, of which the three
largest (American Medical Laboratories, Inc., the Fred Hutchinson Cancer
Research Center and Agouron Pharmaceuticals, Inc.) account for
approximately 37.5% of the Company's Annualized Base Rent from the
Properties, and on the ability of such tenants to make rental payments,
and related property management risks, including nonrenewal of space or
inability to relet space. Leases representing 21.2% of Annualized Base
Rent will expire by the end of 1999. See "Risk Factors--Dependence on
Tenants."
. The concentration of the Properties in a limited number of markets and
the resulting dependence of the Company on economic conditions in such
markets. See "Risk Factors--Geographic Concentration; Dependence on
Certain Markets."
. Conflicts of interest in connection with the Offering and the Formation
Transactions, including material benefits to certain officers, directors
and affiliates of the Company (including the increase in the net
tangible book value of the shares of Common Stock held by them). See
"Risk Factors--Conflicts of Interest."
. Benefits to PaineWebber, the lead managing underwriter of the Offering,
and certain of its affiliates, including, in addition to underwriting
discounts and commissions and a fee for structural and advisory
services, approximately $60.6 million in connection with the sale to the
Company of the Acquisition LLC and $44.4 million as repayment of amounts
outstanding under the PaineWebber Facility. See "Risk Factors--Benefits
to Managing Underwriter," "Use of Proceeds" and "Underwriting."
. The rapid growth of the Company and its limited operating history,
including the risk that the Company may not be able to effectively
integrate new acquisitions into its operations and that the Properties
may have characteristics or deficiencies unknown to the Company that
could adversely affect such Properties, and the limited experience of
current management in REIT operations. See "Risk Factors--Rapid Growth";
"--Limited Operating History" and "--Experience of Management."
. Real estate financing risks, including that the Company's cash flows may
be insufficient to meet required payments of principal and interest on
outstanding indebtedness and that interest rates could increase on
variable rate indebtedness. See "Risk Factors--Real Estate Financing."
. Acquisition risks, including that acquired properties will fail to
perform in accordance with expectations, that the Company has overpaid
for such properties, that the Company may have underestimated costs of
improvements, or that the Company may not be able to acquire desired
properties. See "Risk Factors--Acquisition and Renovation."
. Economic and other conditions affecting the value of the Company's
properties, competition, the relative illiquidity of real estate,
increases in taxes and other operating expenses and potential
liabilities for unknown or future environmental problems. See "Risk
Factors--Real Estate Investment Risks."
. Taxation of the Company as a corporation if the Company fails to qualify
as a REIT and the resulting decrease in the amounts available for
distribution to stockholders. See "Risk Factors--Adverse Consequences of
Failure to Qualify as a REIT."
. Significant stock ownership by Holdings and AEW (approximately 17.0% and
16.0%, respectively) after the Offering and limitations on ownership of
the capital stock by other stockholders of the Company, which may delay,
defer or prevent third parties from seeking to control or acquire the
Company in transactions that may otherwise be beneficial to the
stockholders. See "Risk Factors--Influence of Certain Stockholders" and
"--Anti-takeover Effect of Ownership Limit and Power to Issue Additional
Stock."
. Certain types of losses, such as from earthquakes, could exceed the
Company's insurance coverage. See "Risk Factors--Uninsured Loss."
3
<PAGE>
GROWTH STRATEGIES
The Company seeks to maximize growth in funds from operations ("FFO") and
cash available for distribution to stockholders through effective management,
operation, acquisition, expansion and selective development of Life Science
Facilities. The Company believes that opportunities exist to increase FFO and
cash available for distribution per share by (i) acquiring high quality Life
Science Facilities at attractive returns in its target markets, (ii) realizing
contractual rental rate escalations (which are included in 65% of the Company's
leases on a square footage basis), (iii) retenanting and releasing space within
its portfolio at higher rental rates and with minimal tenant improvement costs,
(iv) expanding existing Properties or converting existing office space to
generic laboratory space that can be leased at higher rental rates, (v)
selectively developing properties on a retrofit or build-to-suit basis, where
the Company can secure leases prior to construction and where such development
is expected to result in returns on investment that the Company believes will
exceed returns on comparable acquisitions, and (vi) continuing to implement
effective cost control measures, including expense pass-through provisions in
tenant leases. In pursuing its growth strategy, the Company intends to maintain
significant financial flexibility, enabling it to take advantage of growth
opportunities as they arise.
Tenant demand for Life Science Facilities in the Company's target markets is
driven largely by the size and growth of the Life Science Industry and its
various segments, and particularly by the Life Science Industry's expenditures
on research and development. Growth in the Life Science Industry creates demand
for Life Science Facilities because traditional office space is generally
inadequate to meet the needs of Life Science Industry tenants. The Life Science
Industry has experienced significant growth over the past 25 years and the
Company believes such growth should continue. For example, according to
Pharmaceutical Research and Manufacturers of America ("PhRMA"), the principal
industry trade group for major pharmaceutical research companies, U.S.
pharmaceutical industry sales and exports by PhRMA member firms have grown at a
compound annual rate of 10.5% since 1985, and are estimated to have totaled
over $66.7 billion in 1996. Further, domestic research and development
expenditures by PhRMA member firms have increased at a compound annual rate of
over 13% since 1985, and are estimated to have totaled approximately $13.3
billion in 1996 and to total approximately $15.0 billion in 1997. According to
PhRMA, research and development expenditures as a percentage of U.S. sales and
exports for PhRMA member firms were approximately 19.4% in 1995, versus
approximately 3.8% for U.S. industries generally. Although the PhRMA data is
based on information compiled principally from the nation's largest
pharmaceutical companies, the Company believes this data reflects growth in
research-based pharmaceutical companies generally. In addition, private sector
spending in the Life Science Industry augments extensive public sector funding
for scientific research. For example, the estimated fiscal 1997 budget for the
National Institutes of Health ("NIH") is approximately $12.7 billion.
The Company believes that several factors should continue to drive increases
in research and development expenditures, and thus increase the demand for Life
Science Facilities. These factors include (i) the aging of the U.S. population
resulting from the transition of baby boomers to senior citizens, which has
increased demand for new drugs, (ii) increased competition resulting from
generic drug penetration and the loss of patent protection on billions of
dollars worth of drugs, both of which have increased the need for proprietary
drug manufacturers to develop new products, (iii) the desire of companies to
reduce research and development lead times to bring new products to market
faster, (iv) modifications to the U.S. Food and Drug Administration (the "FDA")
approval process, which have reduced the effective cost of new drug development
and (v) increased collaborative efforts among major pharmaceutical and
biotechnology companies, which have increased capital availability to Life
Science Industry participants.
Acquisitions. The Company seeks to identify and acquire high quality Life
Science Facilities in its target markets. Management believes that it has been
able to maximize returns on acquisitions as a result of its expertise in
understanding the real estate needs of Life Science Industry tenants, its
ability to identify and acquire those properties with generic laboratory
infrastructure that appeal to a wide range of Life Science Industry tenants and
its expertise in identifying and evaluating Life Science Industry tenants. The
Company also seeks to utilize the
4
<PAGE>
extensive personal and business relationships that management has developed
over time with owners of Life Science Facilities and with major Life Science
Industry participants to identify prospective acquisition opportunities and to
consummate favorable acquisitions prior to the active marketing of the subject
properties.
The Company believes that the ownership of Life Science Facilities is highly
fragmented and that such fragmentation often creates pricing inefficiencies in
the sale of such properties. Life Science Facilities are generally owned by
numerous local developers and institutions, many of whom own or operate a
single facility. Additionally, management believes that many Life Science
Facilities are occupied by owners who desire to focus their investments on and
attention to their respective core businesses, and not on ownership of real
estate.
Critical evaluation of prospective property acquisitions is an essential
component of the Company's acquisition strategy. When evaluating acquisition
opportunities, the Company assesses a full range of matters relating to the
properties, including the quality of the tenants, the condition and capacity of
building infrastructure, the quality and generic characteristics of laboratory
facilities and the physical condition of the shell structure and common area
improvements. Management also considers opportunities available for leasing
vacant space and retenanting occupied space. In addition, the Company is
developing a proprietary database that will contain information on Life Science
Facilities and Life Science Industry tenants located in each of the Company's
target markets. The database is designed to enhance the Company's ability to
identify and evaluate prospective acquisitions in such markets.
In connection with the Offering, the Company will purchase the Acquisition
LLC, thereby acquiring three Properties (the "Acquisition LLC Properties"),
aggregating approximately 424,000 square feet of office and laboratory space,
for a purchase price of approximately $60.6 million. The Acquisition LLC
Properties are 14225 Newbrook Drive in Chantilly, Virginia, 1330 Piccard Drive
in Rockville, Maryland and 1550 East Gude Drive in Rockville, Maryland. See
"The Properties."
Internal Growth. The Company's strategy is to achieve internal growth from
several sources. Approximately 65% of the Company's leases (on a square footage
basis) contain effective annual rent escalations that are either fixed (ranging
from 2.5% to 4.0%) or indexed based on a CPI or other index. The Company will
seek to include similar escalation provisions in its future leases. Although
most of the Company's recent acquisitions have been fully leased, the Company
also seeks to acquire undervalued or underperforming properties where it can
improve investment returns through releasing of vacant space and replacement of
existing tenants with new tenants at higher rental rates. Further, the Company
believes that a significant percentage of its existing leases contain below-
market rental rates and that opportunities should exist to achieve higher
rental rates as these leases expire. The Company believes that retenanting and
releasing costs for existing improved space at its Properties should be
relatively low, as a result of the favorable demand and supply characteristics
for Life Science Facilities in the Company's target markets and the generic
infrastructure improvements that are already in place at the Properties. Since
1994, the Company has retenanted approximately 241,000 square feet of space at
a weighted average cost for non-revenue enhancing tenant improvements and
leasing commissions of $7.87 per square foot. The Company's ability to
negotiate contractual rent escalations in future leases and to achieve
increases in rental rates will depend upon market conditions and demand for
Life Science Facilities at the time such leases are negotiated and such
increases are proposed.
The Company also intends to pursue internal growth through the expansion of
existing facilities that are fully leased and the conversion of existing office
space to higher rent generic laboratory space. The Company is currently
evaluating expansion opportunities at several of its Properties, including 1413
Research Boulevard in Rockville, Maryland, which is designed to accommodate an
additional 60,000 square feet of office and laboratory space, and 14225
Newbrook Drive in Chantilly, Virginia, which can accommodate three additional
floors or up to approximately 50,000 square feet of additional office and
laboratory space. The Company is also currently considering the conversion of
office space into higher rent generic laboratory space at 300 Professional
Drive in Gaithersburg, Maryland, 25, 35 and 45 West Watkins Mill Road in
Gaithersburg, Maryland, and 1311 Harbor Bay Parkway in Alameda, California. In
the first quarter of 1997, the Company completed the conversion of
5
<PAGE>
approximately 21,000 square feet into higher rent generic laboratory space at
1102 and 1124 Columbia Street in Seattle, Washington, and in 1998 the Company
will convert an additional approximately 28,000 square feet of space into
higher rent generic laboratory space at this Property. The Company has invested
approximately $1.2 million and will invest an additional $3.6 million in these
conversion projects, which funds have been set aside in a separate cash account
pursuant to the terms of the Company's lease with Corixa Corporation, which
will occupy all of the converted space. Based on this lease and the planned
expenditures, the Company estimates a return on investment of approximately 14%
on these conversion projects. The Company intends to pursue expansion and
conversion projects only where the Company can secure signed leases for a
significant portion of such space prior to construction and where it expects to
achieve investment returns that equal or exceed its returns on acquisitions.
Development. Given the current favorable acquisition environment for Life
Science Facilities, the Company intends to emphasize acquisitions over
development in pursuing its growth objectives. However, the Company intends to
pursue selective build-to-suit and retrofit development projects where it
expects to achieve investment returns that will equal or exceed its returns on
acquisitions. Build-to-suit projects involve the construction of new Life
Science Facilities for specified tenants. Retrofit projects involve the
conversion of existing office space for use by Life Science Industry tenants,
generally through the addition of laboratory space and other generic
infrastructure improvements. The Company intends to undertake build-to-suit and
retrofit projects only if it can secure long-term leases (generally 10 years or
more) with high quality Life Science Industry tenants prior to construction and
the Company's investment in infrastructure will be generic in nature and not
tenant specific.
The Company's 10933 North Torrey Pines Road Property in San Diego,
California, is situated on approximately 16 acres of land. The Company has
rights to construct up to an additional 163,000 square feet of office and
laboratory space on this parcel. The Company also has entered into a purchase
agreement to acquire two parcels of land, aggregating approximately 4.2 acres,
adjacent to the Company's 3535 and 3565 General Atomics Court Properties, also
in the Torrey Pines area of San Diego, California. The purchase price for the
land is approximately $2.7 million, of which the Company has paid a deposit of
$200,000. The Company will have the ability (subject to receipt of necessary
governmental approvals and licenses) to develop and construct two buildings on
the land, containing an aggregate of approximately 90,000 square feet of office
and laboratory space. There can be no assurance, however, that the Company will
acquire the land or will be able to enter into desirable build-to-suit
arrangements.
Financing. Upon consummation of the Offering and the Formation Transactions,
the Company will have a debt to total market capitalization ratio (i.e., total
consolidated debt of the Company as a percentage of the market value of
outstanding shares of capital stock of the Company and total consolidated debt)
of approximately 20%. The Company has a commitment from the Bank of America
National Trust and Savings Association (the "Bank of America") to provide, upon
consummation of the Offering, an unsecured revolving credit facility (the
"Credit Facility") for up to $150 million, which will be used primarily for the
acquisition of additional properties. The Company has adopted a policy of
incurring debt in the future only if, upon such incurrence, its debt to total
market capitalization ratio will not exceed 50%. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" for a description of certain conditions to borrowing and
other provisions applicable to the Credit Facility and "Policies With Respect
to Certain Activities" for a discussion of the Company's policy of incurring
debt.
The Company expects to finance future acquisitions initially through the
Credit Facility and then to refinance such indebtedness with debt or equity
capital. The Company may also issue Common Stock or interests in subsidiaries
as consideration for acquisitions. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." The Company believes that its access to capital should provide it
with a competitive advantage in acquisitions over other bidders that qualify
their bids with financing or other contingencies.
6
<PAGE>
THE PROPERTIES
Upon consummation of the Offering and the Formation Transactions, the Company
will own 15 Properties, including the Acquisition LLC Properties, containing
approximately 1.5 million rentable square feet of office and laboratory space.
The buildings are generally one or two stories and are built primarily of
concrete tilt-up or block and steel frame construction. Building exteriors
typically resemble traditional suburban office properties, but interior
infrastructures are enhanced with generic improvements designed to meet the
needs of Life Science Industry tenants. These improvements include, for each
Property, reinforced concrete floors, upgraded roof loading capacity and
increased floor to ceiling heights; heavy-duty heating, ventilation and air
conditioning ("HVAC") systems and advanced environmental control technology;
significantly upgraded electrical, gas and plumbing infrastructure; and
laboratory benches.
The following table summarizes the Properties by geographic region:
<TABLE>
<CAPTION>
ANNUALIZED
YEAR APPROXIMATE ANNUALIZED BASE NET EFFECTIVE
BUILT/ RENTABLE PERCENTAGE PERCENTAGE RENT PER LEASED RENT PER LEASED
PROPERTIES RENOVATED(1) SQUARE FEET LAB SPACE LEASED(2) SQUARE FOOT(3) SQUARE FOOT(4) MAJOR TENANTS
- ---------- ------------ ----------- ----------- ---------- --------------- --------------- -----------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
San Diego
- ---------
10933 North 1971/1994 108,133 71% 100% $21.35 $15.84 The Scripps Research
Torrey Pines Institute
Road Advanced Tissue
San Diego, CA Sciences, Inc.
11099 North 1986/1996 86,962 71 100 25.38 23.66 Agouron Pharmaceuticals, Inc.
Torrey Pines Sequana Therapeutics, Inc.
Road
San Diego, CA
3535 General 1991 76,084 77 100 32.99 32.11 The Scripps Research
Atomics Court Institute
San Diego, CA The R.W. Johnson
Research Institute(5)
Syntro Corporation(6)
3565 General 1991 43,600 80 100 35.02 35.02 Agouron Pharmaceuticals, Inc.
Atomics Court
San Diego, CA
San Francisco
Bay Area
- -------------
1311 Harbor Bay 1984 30,000 17 30(7) 16.48 16.48 Chiron Corporation
Parkway
Alameda, CA
1401 Harbor Bay 1986/1994 47,777 50 100 10.87 10.87 Chiron Diagnostics
Parkway
Alameda, CA
1431 Harbor Bay 1985/1994 70,000 50 100 20.22 12.87 FDA
Parkway
Alameda, CA
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
ANNUALIZED
YEAR APPROXIMATE ANNUALIZED BASE NET EFFECTIVE
BUILT/ RENTABLE PERCENTAGE PERCENTAGE RENT PER LEASED RENT PER LEASED
PROPERTIES RENOVATED(1) SQUARE FEET LAB SPACE LEASED(2) SQUARE FOOT(3) SQUARE FOOT(4) MAJOR TENANTS
- ---------- ------------ ----------- ----------- ---------- --------------- --------------- ----------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Seattle,
Washington
- -----------
1102/1124 Columbia 1975/1997 213,397 64 100 23.24 23.01 Fred Hutchinson Cancer
Street Research Center
Seattle, WA Corixa Corporation
Swedish Medical
Center
Suburban Washington, D.C.
- -------------------------
300 Professional 1989 48,440 23 100 13.83 13.83 Mobile Telesystems,
Drive Inc.
Gaithersburg, MD Antex Biologics Inc.
401 Professional 1987 62,739 75 100 16.55 16.55 Gillette Capital
Drive Corporation(8)
Gaithersburg, MD
25/35/45 West 1989/1997 138,938 39 93 13.56 13.56 Genetic Therapy,
Watkins Mill Road Inc.(9)
Gaithersburg, MD MedImmune, Inc.
1413 Research 1967/1996 105,000 75 100 14.89 13.29 U.S. Army Corps of
Boulevard Engineers
Rockville, MD
--------- --- --- ------ ------
Subtotal/Weighted
Average(12): 1,031,070 61% 97% $20.61 $19.07
ACQUISITION LLC
PROPERTIES(10)
- ---------------
Suburban Washington, D.C.
- -------------------------
1550 East Gude 1981/1995 44,500 40 100 13.42 13.42 Quest Diagnostics,
Drive Inc.(11)
Rockville, MD
1330 Piccard Drive 1978/1995 131,511 75 100 14.48 14.48 PerImmune, Inc.
Rockville, MD
14225 Newbrook 1992 248,186 60 100 17.49 17.49 American Medical
Drive Laboratories, Inc.
Chantilly, VA
--------- --- --- ------ ------
Subtotal/Weighted
Average(12): 424,197 63% 100% $16.13 $16.13
--------- --- --- ------ ------
Total/Weighted
Average(12): 1,455,267 61% 98% $19.28 $18.20
========= === === ====== ======
</TABLE>
- -------
(1) Includes year in which construction was completed and, where applicable,
year of most recent major renovation.
(2) Based on all leases at the respective Property in effect as of April 30,
1997.
(3) Annualized Base Rent means the annualized fixed base rental amount
(determined in accordance with generally accepted accounting principles
("GAAP")) in effect as of April 30, 1997. In the case of triple net leases,
Annualized Base Rent does not include real estate taxes and insurance,
common area and other operating expenses, substantially all of which are
borne by the tenants. This amount, divided by the rentable square feet
leased at the Property as of April 30, 1997, is the Annualized Base Rent
per Leased Square Foot.
(4) Annualized Net Effective Rent is the Annualized Base Rent in effect as of
April 30, 1997, less (for gross leases) real estate taxes and insurance,
common area and other operating expenses and (for all leases) amortized
tenant improvements and leasing commissions. This amount, divided by the
rentable square feet leased at the Property as of April 30, 1997, is the
Annualized Net Effective Rent per Leased Square Foot.
(5) The R.W. Johnson Research Institute is a wholly owned subsidiary of Johnson
& Johnson.
(6) Syntro Corporation is a wholly owned subsidiary of Mallinckrodt, Inc.
(7) Vacancy represents 20,973 square feet of office space. The Company is in
lease negotiations with respect to all of the vacant office space.
(8) Gillette Capital Corporation is a wholly owned subsidiary of The Gillette
Company.
(9) Genetic Therapy, Inc. is a wholly owned subsidiary of Novartis AG.
(10) Represents Properties to be acquired through the acquisition of the
Acquisition LLC in connection with the Offering and the Formation
Transactions. See "Formation and Structure."
(11) Quest Diagnostics, Inc. subleases its space to Shire Laboratory, Inc., a
wholly owned subsidiary of Shire Pharmaceuticals Group p.l.c.
(12) Weighted Average based on a percentage of aggregate leased square feet.
8
<PAGE>
MARKET STUDIES
In connection with the Offering, the Company has obtained a market study from
Rosen Consulting Group, dated May 1, 1997 (the "RCG Study"), regarding each of
the Company's existing markets (San Diego, the San Francisco Bay Area, Seattle
and Suburban Washington, D.C.). The study focused on scientific research
facilities, defined as properties containing both office and a significant
component of laboratory space leased principally to pharmaceutical and
biotechnology companies, non-profit research institutions and related
government agencies engaged in scientific research. As a result, the RCG Study
did not include all Life Science Facilities, such as those facilities leased
primarily to diagnostic and medical instrumentation companies, personal care
products companies and other less intensive laboratory users.
The RCG Study indicated that scientific research facilities were
substantially fully leased (98-100%) in each of the Company's existing markets.
The RCG Study further indicated that the limited availability of scientific
research space in the Company's markets was putting upward pressure on rental
rates. Set forth below are market annual triple net effective rental rates from
the RCG Study for prototype scientific research facilities in each market.
<TABLE>
<CAPTION>
SCIENTIFIC RESEARCH FACILITIES TRIPLE
NET EFFECTIVE RENTAL RATES
MARKET PER SQUARE FOOT(1)
------ -------------------------------------
<S> <C>
San Diego
Torrey Pines Area................. $23.50 - $33.50
Other Areas....................... $20.00 - $27.50
San Francisco Bay Area
West Bay (2)...................... $20.00 - $34.50
East Bay (3)...................... $14.00 - $23.00
Seattle............................. $21.00 - $28.50
Suburban Washington, D.C. .......... $17.00 - $23.50
</TABLE>
- --------
(1) Rental rates reflect current market rates for a prototype scientific
research facility with 50-70% laboratory space and generic laboratory
infrastructure (of $75 to $100 per square foot) in place, located in a
"favorable" location in each market.
(2) West Bay includes the area from South San Francisco to Palo Alto.
(3) East Bay includes the area from Berkeley to Fremont, including Alameda.
The RCG Study also indicated that tenant turnover in scientific research
facilities was low, due to the limited amount of available space and the
essential nature of the facilities to tenants. The RCG Study noted that
(i) tenants usually renew upon expiration of their leases (either through
signing of a new lease or, where applicable, exercise of an option to extend an
existing lease) unless they have outgrown their space, (ii) available space is
frequently released before it is put on the market and (iii) there is minimal
downtime between leases.
9
<PAGE>
STRUCTURE OF THE COMPANY
FORMATION AND STRUCTURE
Prior to consummation of the Offering, each outstanding share of Common Stock
will be split into 1,765.923 shares of Common Stock. In addition, in connection
with the Offering, the Company will redeem all of the outstanding shares of its
Series T Preferred Stock, and will convert into shares of Common Stock all of
the outstanding shares of its Series U Preferred Stock and its Series V
Preferred Stock, as more fully described in "Formation and Structure." As a
result, upon consummation of the Offering and the Formation Transactions,
Holdings, which is owned principally by founding stockholders (including
officers and directors) of the Company, will hold 1,765,923 shares of Common
Stock, the officers, directors and certain employees of the Company will
directly own 209,615 shares of Common Stock, and AEW will hold 1,659,239 shares
of Common Stock, representing approximately 17.0%, 2.0% and 16.0% of the
outstanding shares of Common Stock, respectively. Upon consummation of the
Offering, the Company also will acquire 100% of the membership interests in the
Acquisition LLC, thereby acquiring the Acquisition LLC Properties. The purchase
price of the Acquisition LLC was determined through arm's-length negotiations.
None of the Continuing Investors has any direct or indirect interest in the
Acquisition LLC or the Acquisition LLC Properties. See "Formation and
Structure" for a detailed discussion of the Formation Transactions.
The following diagram illustrates the resulting structure of the Company and
the approximate ownership of Alexandria upon consummation of the Offering and
the Formation Transactions.
[CHART APPEARS HERE]
Chart depicting structure of the Company and the beneficial ownership of
Alexandria upon consummation of the Offering and the Formation Transactions.
Alexandria is shown as base of chart with 10,391,848 shares of Common Stock
outstanding(3). Each of Public Stockholders, AEW, Holdings and Officers and
Directors of Alexandria is shown in separate box above Alexandria, with share
ownership and percentage ownership noted as follows: Public Stockholders
6,750,000 shares, 65%; AEW 1,659,239 shares(1), 16%; Holdings, 1,765,923 shares,
17%; Officers and Directors, 209,615 shares(2), 2%.
- --------
(1) Represents shares of Common Stock to be issued upon conversion of 27,500
shares of Series V Preferred Stock.
(2) Does not include shares beneficially owned by officers and directors by
virtue of their ownership interests in Holdings or shares issuable upon the
exercise of options to be granted to officers, directors and certain
employees under the Company's 1997 Stock Option Plan (as defined in
"Management--Benefit Plans").
(3) Includes 7,071 shares of Common Stock to be issued upon conversion of 220
shares of Series U Preferred Stock. Excludes 900,000 shares reserved for
issuance pursuant to the Company's 1997 Stock Option Plan, of which options
to purchase 600,000 shares will be granted in connection with the Offering.
10
<PAGE>
BENEFITS TO RELATED PARTIES
As a result of the Offering and the Formation Transactions, Holdings and the
officers and directors of the Company directly will realize an immediate
accretion in the net tangible book value per share of Common Stock of their
investment in Alexandria of $9.11 and $14.94 per share of Common Stock,
respectively.
In connection with the Offering, officers, directors and certain employees of
the Company will be granted (i) an aggregate of 152,615 shares of Common Stock
and (ii) options to purchase 57,000 shares of Common Stock pursuant to the
Company's existing stock option plan in substitution for previously granted
Holdings Stock Options (such stock options will be exercised in connection with
the Offering at a nominal exercise price, and thereafter no further stock
options will be issued under this plan). In addition, officers, directors and
certain employees of the Company will be granted options to purchase 600,000
shares of Common Stock at the initial public offering price pursuant to the
Company's 1997 Stock Option Plan, to be adopted in connection with the
Offering. See "Formation and Structure--Benefits to Related Parties." Options
granted to officers and directors of the Company under the 1997 Stock Option
Plan will vest ratably over a three-year period. Options granted to non-
employee directors under the 1997 Stock Option Plan will vest immediately upon
the date of grant.
In connection with the Offering, the Company will grant to Holdings customary
transferable registration rights with respect to the shares of Common Stock
held by it. See "Shares Eligible for Future Sale."
Holdings will receive $2.5 million from the proceeds of the Offering as
repayment of an advance made to the Company for general working capital
purposes. Such proceeds will be used by Holdings to repay certain loans from
stockholders of Holdings. See "Use of Proceeds" and "Formation and Structure--
Benefits to Related Parties."
Upon consummation of the Offering and the Formation Transactions, Bernardo
Capital, Inc. (a corporation of which Messrs. Gold, Kreitzer and Stone are
stockholders) will receive from Holdings approximately $517,000 as
reimbursement for certain expenses, including accrued salaries and benefits
paid to each of Messrs. Gold, Kreitzer and Stone, incurred in connection with
the formation of Holdings in 1993. These funds will be paid by Holdings, and no
proceeds of the Offering will be used for this purpose. See "Formation and
Structure--Benefits to Related Parties."
PaineWebber, the lead managing Underwriter of the Offering, and certain of
its affiliates, will receive material benefits from the Offering and the
Formation Transactions in addition to underwriting discounts and commissions
and a fee for structural and advisory services. Certain affiliates of
PaineWebber are expected to receive approximately $60.6 million of the net
proceeds as consideration for the sale of the Acquisition LLC to the Company,
and will receive $44.4 million of the net proceeds as repayment of amounts
outstanding under the Company's acquisition facility (the "PaineWebber
Facility"). See "Use of Proceeds," "Formation and Structure" and
"Underwriting."
11
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the
Company.......................... 6,750,000 shares
Common Stock to be Outstanding
after the Offering(1)............ 10,391,848 shares
Use of Proceeds................... The net proceeds of the Offering will be
used as follows: (i) approximately $62.7
million to repay mortgage and other
indebtedness (including approximately $2.5
million of indebtedness to Holdings); (ii)
approximately $60.6 million to acquire the
Acquisition LLC, as more fully described in
"Formation and Structure"; and (iii) the
remainder for general corporate purposes.
See "Use of Proceeds."
New York Stock Exchange Symbol.... "ARE"
</TABLE>
- --------
(1) Excludes 900,000 shares reserved for issuance pursuant to the Company's
1997 Stock Option Plan, of which options to purchase 600,000 shares will be
granted in connection with the Offering.
DISTRIBUTIONS
Distributions by the Company will be determined by the Board of Directors and
will be dependent upon a number of factors, including the federal income tax
requirement that a REIT must distribute annually at least 95% of its taxable
income. The Company intends to make regular quarterly distributions to the
holders of the Common Stock and initially to distribute annually approximately
83.4% of estimated cash available for distribution. The Company expects to pay
a pro rata distribution with respect to the period commencing upon consummation
of the Offering and ending on June 30, 1997.
Based on its estimated cash available for distribution, the Company initially
expects to make distributions of $1.60 per share on an annualized basis, or an
annual distribution rate of approximately 7.62%, based on an assumed initial
public offering price of $21.00 per share. The Company currently intends to
maintain its initial distribution rate for the 12-month period following
consummation of the Offering, unless actual results of operations, economic
conditions or other factors differ materially from the assumptions used in its
estimate. The Company does not intend to reduce the expected distribution rate
if the Underwriters' over-allotment option is exercised. See "Risk Factors--
Inability to Sustain Distributions." Approximately 19.3% of the distributions
anticipated to be paid by the Company for the 12 months following the Offering
are expected to represent a return of capital for federal income tax purposes.
The Company's estimate of cash available for distribution after the Offering
is based upon pro forma FFO for the 12 months ended March 31, 1997. See
"Distributions" for information as to how this estimate was derived. FFO does
not represent cash generated from operating activities in accordance with GAAP
and should not be considered as an alternative to net income as an indication
of the Company's financial performance or to cash flows from operating
activities (determined in accordance with GAAP) as a measure of the Company's
liquidity, nor is it indicative of funds available to fund the Company's cash
needs, including its ability to make distributions. The Company computes FFO in
accordance with standards established by the White Paper on FFO approved by the
Board of Governors of the National Association of Real Estate Investment Trusts
("NAREIT") in March 1995 (the "White Paper"), which may differ from the
methodology for calculating FFO utilized by other equity REITs, and,
accordingly, may not be comparable to such other REITs. The Company believes
that its estimate of cash available for distribution constitutes a reasonable
basis for setting the initial distribution; however, no assurance can be given
that the estimate will prove accurate or that actual distributions will not
vary significantly from the expected distributions. See "Distributions."
12
<PAGE>
TAX STATUS OF THE COMPANY
The Company intends to make an election to be taxed as a REIT under sections
856 through 860 of the Internal Revenue Code of 1986, as amended (the "Code"),
commencing with its taxable year ended December 31, 1996. Skadden, Arps, Slate,
Meagher & Flom LLP will issue an opinion as to the Company's qualification as a
REIT. For each taxable year that the Company qualifies as a REIT, it will
generally not be subject to federal income tax to the extent it distributes in
such year 95% of its net taxable income to its stockholders. Notwithstanding
the Company's qualification as a REIT, the Company may be subject to certain
federal, state and local taxes on its income and property. See "Risk Factors--
Adverse Consequences of Failure to Qualify as a REIT" and "Federal Income Tax
Considerations."
SUMMARY FINANCIAL INFORMATION
The following pro forma and historical information should be read in
conjunction with, and is qualified in its entirety by, the historical
consolidated financial statements and notes thereto of the Company included
elsewhere in this Prospectus. The selected historical financial information of
the Company at December 31, 1996 and 1995, for the years ended December 31,
1996 and 1995, and for the period October 27, 1994 (inception) through December
31, 1994, has been derived from the historical consolidated financial
statements of the Company audited by Ernst & Young LLP, independent auditors,
whose report with respect thereto is included elsewhere in this Prospectus. The
summary financial and operating information for the three months ended March
31, 1997 and March 31, 1996 has been derived from the unaudited financial
statements of the Company included elsewhere in this Prospectus.
The unaudited pro forma information as of March 31, 1997 and for the year
ended December 31, 1996 and the three months ended March 31, 1997 is presented
as if the Offering, the application of the net proceeds thereof as set forth in
"Use of Proceeds," the Formation Transactions and the acquisition of the
membership interests in the Acquisition LLC all had occurred at March 31, 1997
for the pro forma balance sheet, and the Formation Transactions and the
acquisition of the 1996 Acquired Properties and the Acquisition LLC all had
occurred at January 1, 1996 for the pro forma statement of operations. The pro
forma information is not necessarily indicative of what the actual financial
position or results of the Company would have been as of and for the period
indicated, nor does it purport to represent the Company's future financial
position or results of operations.
13
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
HISTORICAL
FOR THE PERIOD
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, OCTOBER 27, 1994
-------------------------------- -------------------------------- (INCEPTION) THROUGH
PRO FORMA HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL DECEMBER 31,
1997 1997 1996 1996 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- -------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental................. $ 6,925 $ 5,175 $ 2,090 $ 27,121 $ 12,941 $ 8,020 $ 834
Tenant recoveries...... 1,897 1,897 486 6,669 4,169 1,699 87
Other.................. 129 89 34 658 563 204 90
---------- -------- ------- ---------- -------- ------- -------
Total revenue........... 8,951 7,161 2,610 34,448 17,673 9,923 1,011
Expenses:
Rental operations...... 1,893 1,830 554 7,195 4,356 2,228 252
General and
administrative........ 725 954 406 2,900 1,972 1,608 1,016
Post retirement
benefit............... 632 632 -- 438 438 -- --
Interest............... 1,180 2,509 918 4,717 6,327 3,553 328
Depreciation and
amortization.......... 1,330 1,003 413 4,953 2,405 1,668 63
---------- -------- ------- ---------- -------- ------- -------
Total expenses.......... 5,760 6,928 2,291 20,203 15,498 9,057 1,659
Income (loss) from
operations............. 3,191 233 319 14,245 2,175 866 (648)
Charge in lieu of
taxes.................. -- -- -- -- -- 105 --
---------- -------- ------- ---------- -------- ------- -------
Net income (loss)....... $ 3,191 $ 233 $ 319 $ 14,245 $ 2,175 $ 761 $ (648)
========== ======== ======= ========== ======== ======= =======
Net income allocated to
preferred
stockholders........... -- $ 1,378 -- -- $ 1,256 -- --
========== ======== ======= ========== ======== ======= =======
Net income (loss)
allocated to common
stockholders........... $ 3,191 $ (1,145) $ 319 $ 14,245 $ 919 $ 761 $ (648)
========== ======== ======= ========== ======== ======= =======
Pro forma net income per
share of Common
Stock(1)............... $ 0.31 $ 1.37
========== ==========
Pro forma shares of
Common Stock
outstanding............ 10,391,848 10,391,848
========== ==========
BALANCE SHEET DATA (AT
PERIOD END):
Rental properties--net
of accumulated
depreciation........... $198,984 $147,315 $146,960 $54,353 $54,366
Total assets............ 216,136 161,690 160,392 58,702 56,600
Mortgage loans payable
and unsecured lines of
credit................. 55,381 115,315 113,182 40,894 39,164
Total liabilities....... 60,932 123,315 120,819 42,369 40,119
Mandatorily redeemable
Series V Preferred
Stock.................. -- 25,929 25,042 -- --
Stockholders' equity.... 155,204 12,446 14,531 16,333 16,481
</TABLE>
14
<PAGE>
SUMMARY FINANCIAL INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
HISTORICAL
FOR THE PERIOD
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, OCTOBER 27, 1994
-------------------------------- -------------------------------- (INCEPTION) THROUGH
PRO FORMA HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL DECEMBER 31,
1997 1997 1996 1996 1996 1995 1994
--------- ---------- ---------- --------- ---------- ---------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Net income.............. $ 3,191 $ 233 $ 319 $ 14,245 $ 2,175 $ 761 $ (648)
Add:
Accrual of a post-
retirement
benefit(2)............ 632 632 -- 438 438 -- --
Depreciation and
amortization of
Properties,
improvements and
leasing costs......... 1,330 1,003 413 4,953 2,405 1,668 63
--------- --------- ------- --------- --------- ------- -------
Funds from
Operations(3)......... $ 5,153 $ 1,868 $ 732 $ 19,636 $ 5,018 $ 2,429 $ (585)
========= ========= ======= ========= ========= ======= =======
Cash flows from
operating activities... -- 3,160 972 -- (1,646) 355 (1,024)
Cash flows from
investing activities... -- (1,319) (86) -- (94,900) (1,554) (29,924)
Cash flows from
financing activities... -- (787) (52) -- 97,323 927 32,139
Number of properties
owned at period end.... 15 12 4 15 12 4 4
Rentable square feet of
properties owned at
period end............. 1,455,267 1,031,070 313,042 1,455,267 1,031,070 313,042 313,042
Occupancy at period end
of properties owned at
period end............. -- 97% 96% -- 97% 96% 88%
</TABLE>
- --------
(1) Pro forma net income per share includes pro forma net income from the
Acquisition LLC Properties. If such net income (and the related shares of
Common Stock to be sold in the Offering, the net proceeds of which will be
used for the purchase of the Acquisition LLC) were excluded, pro forma net
income would be $1,778,000 and $7,464,000, respectively, for the three
months ended March 31, 1997 and the year ended December 31, 1996, and pro
forma net income per share would be $0.25 and $1.04, respectively, for the
three months ended March 31, 1997 and the year ended December 31, 1996.
(2) This adjustment relates solely to the elimination of a non-cash accrual of
a one-time post-retirement benefit for an officer of the Company.
(3) The White Paper defines FFO as net income (loss) (computed in accordance
with GAAP), excluding gains (or losses) from debt restructuring and sales
of property, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures.
Management considers FFO an appropriate measure of performance of an equity
REIT because it is predicated on cash flow analyses. The Company computes
FFO in accordance with standards established by the White Paper, which may
differ from the methodology for calculating FFO utilized by other equity
REITs, and, accordingly, may not be comparable to such other REITs.
Further, FFO does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
service obligations, or other commitments and uncertainties. See notes (6)
(7) and (8) to the table under the caption "Distributions" and the notes to
the Company's historical financial statements. FFO should not be considered
as an alternative to net income (determined in accordance with GAAP) as an
indication of the Company's financial performance or to cash flows from
operating activities (determined in accordance with GAAP) as a measure of
the Company's liquidity, nor is it indicative of funds available to fund
the Company's cash needs, including its ability to make distributions.
15
<PAGE>
RISK FACTORS
An investment in the Shares involves various risks. Prospective investors
should carefully consider the following information in conjunction with the
other information contained in this Prospectus before making a decision to
purchase the Shares.
LACK OF INDUSTRY DIVERSIFICATION; RELIANCE ON LIFE SCIENCE INDUSTRY TENANTS
The Company's strategy is to invest in Life Science Facilities.
Consequently, the Company is subject to the risks associated with an
investment in real estate in the Life Science Industry, and is subject to the
risks generally associated with investment in a single industry. Accordingly,
the effects on cash available for distribution to the Company's stockholders
may be more pronounced than if the Company had diversified investments.
Although laboratory facilities typically are generic in nature, certain
facilities may be better suited for particular Life Science Industry tenants
and could require modification prior to or at the commencement of a lease term
if the property has to be released to another Life Science Industry tenant.
Further, such facilities may not be suitable for lease to traditional office
tenants.
ENVIRONMENTAL MATTERS. Life Science Industry tenants, including certain of
the Company's tenants, engage in various research and development activities
involving the controlled use of hazardous materials, chemicals, biological and
radioactive compounds. The Company and such tenants are subject to federal,
state and local laws and regulations governing the use, manufacture, storage,
handling and disposal of such materials and certain waste products. Although
the Company believes that the tenants' activities involving such materials
comply in all material respects with applicable laws and regulations, the risk
of contamination or injury from these materials cannot be completely
eliminated. In the event of such contamination or injury, the Company could be
held liable for any damages that result, and any such liability could exceed
the Company's resources and its environmental remediation coverage. See "--
Possible Environmental Liabilities" and "The Properties--Environmental
Matters."
UNCERTAINTY OF GOVERNMENT REGULATORY REQUIREMENTS AND FUNDING. The products
of certain Life Science Industry tenants, including certain of the Company's
tenants, typically require regulatory approval by domestic or foreign
governmental agencies before they can be marketed and sold. The process of
obtaining such approvals is costly and time-consuming and is subject to
unanticipated delays. There can be no assurance that required approvals for
any of such products will be granted. Any failure to obtain or any delay in
obtaining such approvals could adversely affect the ability of a tenant to
market and sell its products successfully, thereby adversely affecting its
ability to generate revenues and to make lease payments to the Company.
Furthermore, approval of a pharmaceutical product is subject to the
requirement that the manufacturer's quality control and manufacturing
procedures conform to current Good Manufacturing Practices ("GMP"), which must
be followed at all times. The FDA strictly enforces GMP requirements through
periodic unannounced inspections, and there can be no assurance that the FDA
will determine that the facilities and manufacturing procedures of any of the
Company's tenants who manufacture pharmaceutical products will conform to GMP
requirements. Additionally, a manufacturer of pharmaceutical products must
pass a preapproval inspection of its manufacturing facilities by the FDA
before obtaining marketing approval. Failure to comply with applicable
regulatory requirements may result in penalties such as restrictions on a
product's marketing or withdrawal of a product from the market. In addition,
many approved products are subject to continuing regulation. Regulation could
result in limitations or restrictions on a tenant's ability to utilize its
technology, thereby adversely affecting such tenant's ability to generate
revenues and to make lease payments to the Company. Certain of the Company's
tenants are also subject to regulation under the Occupational Safety and
Health Act, federal restrictions on technology transfer, import, export and
customs regulations, and other federal, state and local regulations. In
addition, certain of the Company's tenants receive significant funding from
federal, state and local governments. If any of such funding were decreased or
discontinued, the affected tenant may experience difficulty meeting its
obligations under its lease. See "--Dependence on Tenants."
DEPENDENCE ON REIMBURSEMENT. The healthcare industry in the United States is
undergoing significant changes, resulting from political, economic and
regulatory influences. Successful commercial sales of the
16
<PAGE>
products of certain of the Company's tenants may depend in part on the
availability of reimbursement to consumers from third-party payors, such as
government and private insurance plans, that may be affected by changes in the
healthcare industry. There can be no assurance that adequate third-party
reimbursement will be available for the products of the Company's tenants. If
adequate reimbursement is not provided by government and third-party payors
for the products or services of the Company's tenants, such tenants' business
and ability to generate revenues and make lease payments to the Company could
be adversely affected. Consequently, the Company's ability to make
distributions to its stockholders could similarly be adversely affected.
DEPENDENCE ON TENANTS
The Company's revenues are derived primarily from rental payments under its
leases. Therefore, if a significant tenant failed to make rental payments
under its lease, the Company's financial condition and its ability to make
distributions to stockholders could be adversely affected. While the Company
evaluates the creditworthiness of its tenants based upon a due diligence
review of available financial and other pertinent information, there can be no
assurances that any such tenant will not default in the payment of rent under
its lease. In addition, U.S. government tenants are subject to annual
appropriations, and defaults under leases with such tenants are governed by
federal statute and not state eviction or rent deficiency laws. At April 30,
1997, the leases with U.S. government tenants at the Properties accounted for
approximately 10.9% of the Company's aggregate Annualized Base Rent. The
Company's leases with U.S. government tenants at each of 1431 Harbor Bay
Parkway in Alameda, California and 1413 Research Boulevard in Rockville,
Maryland provide that the government tenant may terminate the lease in the
event of a default by the Company or the landlord thereunder that continues
for a stated period.
To the extent the Company is dependent on rental payments from a limited
number of tenants, the inability of any single tenant to make its lease
payments could adversely affect the Company and its ability to make
distributions to stockholders. The Company currently has approximately 31
leases with a total of approximately 26 tenants. Eight of the Properties are
currently single-tenant Properties, although the Company believes that all
such Properties are capable of being converted to use by multiple tenants. At
April 30, 1997, three of the Company's tenants, American Medical Laboratories,
Inc., the Fred Hutchinson Cancer Research Center and Agouron Pharmaceuticals,
Inc., accounted for approximately 37.5% of the Company's aggregate Annualized
Base Rent, or approximately 15.8%, 13.3% and 8.4%, respectively.
No assurance can be given that a lessee will exercise any option to renew
its lease upon the expiration of the initial term or that upon expiration or
termination of a lease the Company will be able to locate a qualified
replacement tenant. Consequently, the Company could lose the cash flow from
such property and, in order to prevent a foreclosure, the Company might be
required to divert cash flow generated by other properties to meet mortgage
payments, if any, and pay other expenses associated with owning the property
with respect to which the expiration or termination occurred. Leases at the
Properties representing approximately 0.2%, 7.6% and 13.4% of Annualized Base
Rent will expire in the years 1997, 1998 and 1999, respectively. See "The
Properties--Lease Expirations." In addition, the Company may enter into or
acquire leases for properties that are specially suited to the needs of a
particular tenant. Such properties may require renovations, tenant
improvements or other concessions in order to lease it to another tenant if
the initial lease is terminated or not renewed. See "--Lack of Industry
Diversification; Reliance on Life Science Industry Tenants."
GEOGRAPHIC CONCENTRATION; DEPENDENCE ON CERTAIN MARKETS
The Properties are located in California (in the San Diego and San Francisco
Bay areas), Seattle, Washington and suburban Washington D.C. The Company also
has identified Boston/Cambridge and the New York/New Jersey and suburban
Philadelphia areas as target markets, consistent with its growth strategy. As
a result of this geographic concentration, the Company's performance, its
ability to make distributions to stockholders and the value of its properties
are dependent upon the performance of the Life Science Industry and on
economic conditions in these markets, including local real estate conditions
and competition. There can be no assurance that these markets will continue to
grow or will remain favorable to the Life Science Industry. The
17
<PAGE>
performance of the Life Science Industry and the economy in general in each
geographic market in which the Company owns or acquires properties may affect
occupancy, market rental rates and expenses and, consequently, may affect the
Company's performance and the value of its properties.
CONFLICTS OF INTEREST
In connection with the Formation Transactions, Holdings and AEW, as well as
officers (Messrs. Sudarsky, Marcus, Gold, Nelson, Kreitzer, Stone and Ciruzzi)
and directors (Messrs. Sudarsky, Marcus, Gold, Elmaleh, Mehta, Petrone and
Solomon) of the Company, will realize certain benefits that will not be
received by other persons. See "Formation and Structure--Benefits to Related
Parties." In addition, Messrs. Sudarsky, Marcus and Gold are officers of
Holdings and Messrs. Sudarsky, Marcus, Gold and Elmaleh are directors of
Holdings. In connection with the Offering, officers, directors and certain
employees of the Company will be granted (i) an aggregate of 152,615 shares of
Common Stock and (ii) options to purchase 57,000 shares of Common Stock under
the 1996 Plan in substitution for previously granted Holdings Stock Options
(such stock options will be exercised in connection with the Offering at a
nominal exercise price, and thereafter no further stock options will be issued
under the 1996 Plan). In addition, officers, directors and certain employees
of the Company will be granted options to purchase 600,000 shares of Common
Stock at the initial public offering price pursuant to the 1997 Stock Option
Plan, to be adopted in connection with the Offering.
In connection with the conversion of Series U Preferred Stock into shares of
Common Stock, certain officers, directors and affiliates of the Company (and
members of their immediate families) will receive an aggregate of 7,071 shares
of Common Stock. In connection with the conversion of the Series V Preferred
Stock AEW will receive an aggregate of 1,659,239 shares of Common Stock.
Because certain officers, directors and affiliates of the Company were
involved in structuring the terms of these transactions, they had the ability
to influence the type and level of benefits they will receive. See "Formation
and Structure." As a result, the type and level of benefits these persons will
receive may have been different if they had not participated in structuring
the terms. These persons may have interests that conflict with the interests
of persons acquiring Shares in the Offering. The net tangible book value of
officers' and directors' and Holdings' initial investment in the Company upon
consummation of the Offering and the Formation Transactions will increase by
approximately $3.1 million and $16.1 million, respectively, based on the
difference between the net tangible book value prior to the Offering and the
net tangible book value subsequent to the Offering.
BENEFITS TO MANAGING UNDERWRITER
PaineWebber and certain of its affiliates will receive material benefits
from the Offering and certain of the Formation Transactions, in addition to
underwriting discounts and commissions and a fee for structural and advisory
services. Certain affiliates of PaineWebber are expected to receive
approximately $60.6 million of the net proceeds as consideration for the sale
of the Acquisition LLC to the Company and will receive $44.4 million of the
net proceeds as repayment of amounts outstanding under the PaineWebber
Facility. See "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Formation and Structure" and "Underwriting." In accordance with
Rules 2710(c)(8) and 2720(c)(3) of the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "Conduct Rules"), Lehman Brothers
Inc. is assuming the responsibilities of acting as "qualified independent
underwriter" and will recommend the maximum initial public offering price of
the Shares in compliance with the requirements of the Conduct Rules. Lehman
Brothers Inc. is performing due diligence investigations and is reviewing and
participating in the preparation of this Prospectus and the Registration
Statement of which this Prospectus forms a part (the "Registration
Statement"). The initial public offering price of the Shares will be no higher
than the price recommended by the "qualified independent underwriter." See
"Underwriting."
18
<PAGE>
RAPID GROWTH
The Company is currently experiencing a period of rapid growth. As the
Company acquires additional properties, it will be subject to risks associated
with managing new properties, including lease-up and tenant retention. In
addition, the Company's ability to manage its growth effectively will require
it to successfully integrate new acquisitions into its existing management
structure. No assurances can be given that the Company will be able to succeed
with such integration or effectively manage additional properties or that
newly acquired properties will perform as expected. Additionally, there can be
no assurance that the Company will be able to maintain its current rate of
growth in the future.
LIMITED OPERATING HISTORY
Upon consummation of the Offering and the Formation Transactions, the
Company will own 15 Properties, including the Acquisition LLC Properties,
consisting of approximately 1.5 million rentable square feet of office and
laboratory space. All of the Properties have been under the Company's
management for less than three years, and a substantial majority of the
Properties have been owned for less than one year. The Properties may have
characteristics or deficiencies unknown to the Company that could affect such
Properties' valuation or revenue potential. There can be no assurance that the
operating performance of the Properties will not decline under the Company's
management.
EXPERIENCE OF MANAGEMENT
Although certain of the Company's officers and directors have extensive
experience in the acquisition, leasing, operation, financing and development
of real properties, prior to commencement of the Company's operations, no
officer had significant experience in operating a business in accordance with
the requirements for maintaining qualification as a REIT under the Code. See
"--Adverse Consequences of Failure to Qualify as a REIT."
REAL ESTATE FINANCING
DEBT FINANCING AND EXISTING DEBT MATURITIES. The Company is subject to the
risks normally associated with debt financing, including the risk that the
Company's cash flow from operations will be insufficient to meet required
payments of principal and interest, that existing indebtedness will not be
able to be refinanced or extended, and that the terms of any such refinancing
will not be as favorable as the terms of existing indebtedness. Upon
consummation of the Offering and the Formation Transactions, the Company will
have outstanding mortgage indebtedness of approximately $55.2 million, of
which approximately $18.3 million will be secured by 3535 General Atomics
Court and 3565 General Atomics Court; $8.5 million will be secured by 1431
Harbor Bay Parkway; and two mortgages of approximately $21.5 million and $6.9
million will be secured by 1102 and 1124 Columbia Street. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." In the event of a default by the Company,
the lender may be able to foreclose on or otherwise transfer such Properties
to the mortgagee, resulting in a loss of income and asset value to the
Company. As a result, the Company's financial condition and its ability to
make distributions to stockholders may be adversely affected.
The Credit Facility will contain conditions to borrowing and cross-default
provisions. The conditions to borrowing will include compliance with customary
financial covenants and restrictions on certain activities, such as incurring
indebtedness, making investments and distributions to stockholders, as well as
a requirement to maintain a pool of unencumbered assets approved by the
lenders. Under the cross default provisions, a default under the terms of any
Company indebtedness in excess of $5 million, with the exception of non-
recourse debt, could result in a default under the Credit Facility and could
lead to acceleration of the outstanding indebtedness under the Credit
Facility. Similarly, under the terms of the $6.9 million mortgage secured by
1102 and 1124 Columbia Street, a default under the terms of the $21.5 million
mortgage secured by the same Property could result in a default under the $6.9
million mortgage.
19
<PAGE>
The Company has financed the acquisition of the Properties in part, and may
finance future investments, with debt obligations that provide for the
repayment of principal in a lump-sum or "balloon" payment at maturity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." In addition, certain of the
Company's lenders may insist on the right to demand repayment prior to the
maturity date of a loan if certain events of default occur. The ability to
repay indebtedness at maturity or otherwise may depend upon the ability of the
Company either to refinance or extend such indebtedness, to repay such
indebtedness with proceeds of other capital transactions, such as the issuance
of equity capital, or to sell properties. There can be no assurance that such
refinancing or extension will be available on reasonable terms or at all, that
additional capital will be issued, or that a sale of property will occur. The
inability to repay such indebtedness could adversely affect the financial
condition of the Company and its ability to make distributions to
stockholders.
REQUIREMENT OF ADDITIONAL FINANCING. The Company's ability to acquire or
develop properties is subject to the Company's ability to obtain debt or
equity financing. The Company could be delayed or prevented from acquiring,
structuring and closing desirable investments by an inability to obtain
financing on acceptable terms. In addition, the issuance of additional shares
of capital stock to obtain financing for the acquisition of additional
properties could result in a dilution of ownership for the then existing
stockholders.
RISING INTEREST RATES. Upon consummation of the Offering and the Formation
Transactions, the Company will have approximately $6.9 million of variable
rate indebtedness outstanding which the Company anticipates converting into a
fixed rate loan in August 1997. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." In addition, borrowings under the Credit Facility will bear
interest at a variable rate, as may other indebtedness incurred by the Company
in the future. Accordingly, increases in market interest rates could increase
the Company's debt service requirements, which could adversely affect the
financial position of the Company and its ability to make distributions to
stockholders. In addition, the Company may enter into swap agreements or other
hedging transactions to further limit its exposure to rising interest rates as
appropriate and cost effective, although there can be no assurance that it
will be able to do so on terms acceptable to the Company. Swap agreements or
other hedging transactions also may expose the Company to the risk that the
counterparty may not perform, which could cause the Company to lose the
benefits of the hedging transactions.
ACQUISITION AND RENOVATION
The success of the Company is dependent in part upon its ability to acquire
additional properties on satisfactory terms. Moreover, the acquisition of Life
Science Facilities generally involves higher per square foot acquisition
prices than traditional suburban office properties. If debt or equity
financing were not available on acceptable terms, further acquisitions or
development activities may be curtailed, and the Company's ability to make
distributions to its stockholders may be adversely affected. There is also a
risk that the Company will not be able to acquire properties that meet the
Company's acquisition criteria.
In addition, the acquisition of real estate entails risks that investments
may fail to perform in accordance with expectations (including projected
occupancy and rental rates), that the Company may overpay for its properties,
or that the Company may underestimate the cost of improvements required to
bring an acquired property up to standards established for the market position
intended for that property. To the extent that the Company might otherwise
benefit from the conversion of a single tenant facility into a multi-tenant
facility, the cost of such conversion may be substantial and the Company may
deem such conversion to be impracticable. Moreover, although the costs
associated with tenant-specific improvements are generally borne by the
tenant, such improvements to Life Science Facilities typically involve higher
costs per square foot than similar improvements to office space, and there can
be no assurance that all such costs will be borne by tenants in the future. In
addition, there are general investment risks associated with any new real
estate investment. See "--Real Estate Investment."
20
<PAGE>
REAL ESTATE INVESTMENT
GENERAL. The Company's investments in real property are subject to varying
degrees of risk. The yields the Company receives from equity investments in
real estate depend in large part on the amount of income generated and
expenses incurred. Approximately 80% of the Company's leases (on a square
footage basis) are triple net leases. To the extent that the Company's lease
for a property is not a triple net lease, the Company will have greater
expenses associated with that property and will bear some or all of the risk
of any increase in such expenses, unless the lease provides for a rent
adjustment based on escalations in operating expenses. If the Company's
properties do not generate revenues sufficient to meet operating expenses,
including debt service and other capital expenditures, the Company may have to
borrow additional amounts to cover fixed costs and cash flow needs, and the
Company's ability to make distributions to its stockholders could be adversely
affected.
The revenues from and the value of the Company's properties may be adversely
affected by a number of factors, including the national and local economic
climate; real estate conditions in the Company's markets; the Company's
ability to provide adequate management, maintenance and insurance; and
increased operating costs (including real estate taxes and utilities). Certain
significant expenditures associated with the Company's investments (such as
mortgage payments, if any, real estate taxes, insurance and maintenance costs)
are generally not reduced when circumstances cause a reduction in income from
the investment. If a property is mortgaged to secure payment of indebtedness,
and if the Company is unable to meet its mortgage payments, a loss could be
sustained as a result of foreclosure on the property or the exercise of other
remedies by the mortgagee. In addition, real estate revenues and values are
also affected by the cost of compliance with government regulation, including
zoning and tax laws, interest rate levels and the availability of financing.
OPERATIONS. The Company's properties will be subject to operating risks
common to commercial properties in general, any or all of which may adversely
affect occupancy or rental rates. In addition, the Company's properties
contain generic infrastructure improvements (such as reinforced concrete
floors, upgraded roof loading capacity, heavy-duty HVAC systems and laboratory
benches) that are more capital intensive than other property types. To the
extent that leases are not triple net leases, increases in operating costs due
to inflation and other factors may not necessarily be offset by increased
rental rates.
BANKRUPTCY. The financial failure of one of the Company's tenants could
cause the tenant to become subject to a case under Title 11 of the U.S. Code
(the "Bankruptcy Code"). Under the Bankruptcy Code, a tenant has the option of
assuming (continuing) or rejecting (terminating) an unexpired lease. If the
tenant assumes its lease with the Company, the tenant must cure all defaults
under the lease and provide the Company with adequate assurance of its future
performance under the lease. If the tenant rejects the lease, the Company may
experience a reduction in cash flow, and the Company's claim for breach of the
lease would (absent collateral securing the claim) be treated as a general
unsecured claim. The amount of the claim would be capped at the amount owed
for unpaid pre-petition lease payments unrelated to the rejection, plus the
greater of one year's lease payments or 15% of the remaining lease payments
payable under the lease (but not to exceed the amount of three years' lease
payments). Although the Company has not experienced material losses from
tenant bankruptcies, no assurance can be given that tenants will not file for
bankruptcy protection in the future or, if any tenants file, that they will
assume their leases and continue to make rental payments in a timely manner.
If tenant leases are not assumed following bankruptcy, the Company's financial
condition and its ability to make distributions to its stockholders may be
adversely affected.
DEVELOPMENT. The Company may engage in expansion of existing Properties and
development activities through build-to-suit and retrofit projects. Such
activities subject the Company to risks related to development and
redevelopment projects, possible delays in construction, the cost of
materials, financing availability, volatility in interest rates, labor
availability, the timing of the commencement of rental payments and other
property development uncertainties. In addition, such activities, regardless
of whether they are ultimately successful, typically require a substantial
portion of management's time and attention and are subject to risks relating
to the inability to obtain, or delays in obtaining, all necessary zoning,
land-use, building, occupancy and other required governmental permits and
authorizations.
21
<PAGE>
MARKET ILLIQUIDITY. The illiquidity of the Company's investments will limit
the ability of the Company to vary its portfolio promptly in response to
changes in economic or other conditions. There can be no assurance that the
Company will be able to dispose of an investment when it finds disposition
advantageous or necessary or that the sale price of any disposition will
recoup or exceed the amount of the Company's investment. In addition, the Code
limits the Company's ability to sell properties held for fewer than four
years, which may affect the Company's ability to sell properties without
adversely affecting distributions to stockholders.
COMPETITION. The Company competes for investment opportunities with various
entities, including insurance companies, pension and investment funds,
partnerships, developers, investment companies and other REITs. Many of these
entities have substantially greater financial resources than the Company.
These entities generally may be able to accept more risk than the Company can
prudently manage, including risks with respect to the creditworthiness of a
tenant or the geographic proximity of its investments. Competition generally
may reduce the number of suitable investment opportunities offered to the
Company or increase the bargaining power of property owners seeking to sell.
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Qualification as a REIT involves the application of highly technical and
complex provisions of the Code, for which there are only limited judicial or
administrative interpretations, and the determination of various factual
matters and circumstances not entirely within the Company's control. Although
the Company believes that it has operated since January 1, 1996 in a manner so
as to qualify as a REIT, no assurance can be given that the Company is or will
remain so qualified. For example, under the REIT provisions of the Code, if
rent attributable to personal property, leased in connection with real
property, is greater than 15% of the total rent received under any particular
lease, then all of the rent attributable to such personal property will
constitute non-qualifying income for purposes of the 75% and 95% gross income
tests. The determination of whether an item of property constitutes real
property or personal property under the REIT provisions of the Code is subject
to both legal and factual considerations and, as such, is subject to differing
interpretations. Counsel has advised the Company with respect to the legal
considerations underlying such determination. After consulting with counsel
and considering such advice, the Company has reviewed its properties and has
determined that rents attributable to personal property do not exceed 15% of
the total rent with respect to any particular lease. Due to the specialized
nature of the Company's properties, there can be no assurance that the
Internal Revenue Service (the "IRS") will not assert that the rent
attributable to personal property with respect to a particular lease is
greater than 15% of the total rent with respect to such lease. If the amount
of any such non-qualifying income, together with other non-qualifying income,
exceeds 5% of the Company's taxable income, the Company may fail to qualify as
a REIT. See "Federal Income Tax Considerations--Taxation of the Company--
Income Tests." In addition, although the Company is not aware of any pending
tax legislation that would adversely affect the Company's ability to operate
as a REIT, no assurance can be given that new legislation, regulations,
administrative interpretations or court decisions will not change the tax laws
or interpretations thereof with respect to qualification as a REIT or the
federal income tax consequences of such qualification.
On or before the effectiveness of the Registration Statement, the Company
will receive an opinion of Skadden, Arps, Slate, Meagher and Flom LLP, tax
counsel to the Company, concerning the qualification of the Company as a REIT.
In rendering this opinion, Skadden, Arps, Slate, Meagher & Flom LLP will rely
on certain assumptions and representations by the Company as to factual
matters (including representations of the Company concerning, among other
things, its business and properties, the amounts of rents attributable to
personal property and other items regarding the Company's ability to meet the
various requirements for qualification as a REIT) and on opinions of local
counsel with respect to matters of local law. The opinion will be expressed
based upon facts, representations and assumptions as of its date and Skadden,
Arps, Slate, Meagher & Flom LLP will have no obligation to advise holders of
Common Stock of any subsequent change in the matters stated, represented or
assumed or any subsequent change in applicable law. No assurance can be given
that the Company has met or will continue to meet these requirements in the
future, and a legal opinion is not binding on the IRS.
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If in any taxable year the Company fails to qualify as a REIT, the Company
would not be allowed a deduction for distributions to stockholders in computing
taxable income and would be subject to federal income tax on its taxable income
at regular corporate rates. Unless entitled to relief under certain statutory
provisions, the Company would also be disqualified from treatment as a REIT for
the four taxable years following the year during which qualification is lost. As
a result of the additional tax liability, the Company might need to borrow funds
or liquidate certain investments in order to pay the applicable tax and the
funds available for investment or distribution to the Company's stockholders
would be reduced for each of the years involved. In addition, the Company would
no longer be required by the Code to make any distributions. Although the
Company currently intends to operate in a manner designed to qualify as a REIT,
it is possible that future economic, market, legal, tax or other considerations
may cause the Company to fail to qualify as a REIT or may cause the Board of
Directors to revoke the REIT election. See "Federal Income Tax
Considerations."
INFLUENCE OF CERTAIN STOCKHOLDERS
Upon consummation of the Offering and the Formation Transactions, Holdings and
AEW will own approximately 17.0% and 16.0%, respectively, of the outstanding
shares of Common Stock of the Company. These stockholders will have significant
influence over the election of directors of the Company and other matters to be
voted on by the stockholders of the Company. Pursuant to an agreement with the
Company, AEW has the right to include two nominees on the ballot for the
election of directors of the Company, and one nominee on the ballot for the
election of directors of QRS, so long as AEW owns Common Stock representing more
than 15% of the voting securities of the Company, and the right to include one
nominee on the ballot for the election of directors of the Company so long as
AEW owns Common Stock representing more than 7% of such securities. Holdings has
agreed to vote its shares of Common Stock for the AEW nominees included on the
ballot for the election of directors of the Company. No directors currently
serve on the board of directors of the Company or QRS pursuant to such
arrangement, although AEW may, at its discretion, exercise its right to include
nominees on the ballot in the future. See "Management--Election of Directors and
Director Compensation." Additionally, the concentration of ownership by Holdings
and AEW may have the effect of delaying, deferring or preventing a change in
control of the Company and may result in significant influence and control over
the Board of Directors and various corporate actions. See "Management" and
"Share Ownership--Principal Stockholders of Alexandria."
ANTI-TAKEOVER EFFECT OF OWNERSHIP LIMIT AND POWER TO ISSUE ADDITIONAL STOCK
In order for the Company to maintain its qualification as a REIT, not more
than 50% of the value of its outstanding capital stock may be owned, directly
or constructively, by five or fewer individuals or entities (as defined in the
Code). The Company's Charter prohibits, with exceptions for certain Continuing
Investors, direct or constructive ownership of shares of stock representing
more than 9.8% of the combined total value of outstanding shares of the
Company's stock by any person (the "Ownership Limit"). The constructive
ownership rules are complex and may cause shares of the Common Stock owned
directly or constructively by a group of related individuals or entities to be
constructively owned by one individual or entity. A transfer of shares to a
person who, as a result of the transfer, violates the Ownership Limit may be
void or may be transferred to a trust, for the benefit of one or more
qualified charitable organizations designated by the Company, with the
intended transferee having only a right to share (to the extent of the
transferee's original purchase price for such shares) in proceeds from the
trust's sale of such shares. See "Description of Capital Stock--Restrictions
on Transfer."
The Ownership Limit may have the effect of delaying, deferring or preventing
a transaction or a change in control of the Company that might involve a
premium price for the Common Stock or otherwise be in the best interest of the
stockholders. See "Description of Capital Stock--Restrictions on Transfer."
The Company's Charter authorizes the Board of Directors to cause the Company
to issue additional authorized but unissued shares of Common Stock or
preferred stock, par value $.01 per share (the "Preferred Stock"), and to
classify or reclassify any unissued shares of Common Stock or Preferred Stock
and to set the
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preferences, rights and other terms of such classified or reclassified shares.
See "Description of Capital Stock--Common Stock" and "--Preferred Stock."
Preferred Stock will be available for possible future financing of, or
acquisitions by, the Company and for general corporate purposes without any
legal requirement that further stockholder authorization for issuance be
obtained. The issuance of Preferred Stock could make more difficult any
attempt to gain control of the Company by means of a merger, tender offer,
proxy contest or otherwise. Although the Board of Directors has no present
intention to do so, it could establish a series of Preferred Stock that could,
depending on the terms of such series, delay, defer or prevent a transaction
or a change in control of the Company that might involve a premium price for
the Common Stock or otherwise be in the best interest of the stockholders.
Preferred Stock could also be issued with a preference on dividend payments,
which could affect the ability of the Company to pay dividends or make other
distributions to the holders of Common Stock. The Charter and the Amended and
Restated Bylaws of the Company (the "Bylaws") also contain other provisions
that may delay, defer or prevent a transaction or a change in control of the
Company that involves a premium price for the Common Stock or may otherwise be
in the best interest of the stockholders. See "Certain Provisions of Maryland
Law and of the Company's Charter and Bylaws," "--Control Share Acquisitions"
and "--Advance Notice of Director Nominations and New Business."
UNINSURED LOSS
The Company carries comprehensive liability, fire, extended coverage and
rental loss insurance with respect to the Properties, with policy
specifications, insured limits and deductibles that the Company believes are
consistent with those customarily carried for similar properties. The Company
also has obtained environmental remediation insurance for the Properties. The
insurance, subject to certain exclusions and deductibles, covers the cost to
remediate environmental damage caused by unintentional future spills or the
historic presence of previously undiscovered hazardous substances. The Company
intends to carry similar insurance with respect to future acquisitions, as
appropriate. In addition, the Company requires its tenants to maintain
comprehensive insurance, including liability and casualty insurance, that is
customarily obtained for similar properties. There are, however, certain types
of losses that are not generally insured because they are either uninsurable
or not economically insurable. In addition, certain disaster-type insurance
(covering catastrophic events, such as earthquakes) may not be available or
may only be available at rates that, in the opinion of management of the
Company, are prohibitive. Many of the Properties are located in the vicinity
of potentially active earthquake faults. The Company has obtained earthquake
insurance for all of the Properties. Should an uninsured disaster or a loss in
excess of insured limits occur, including losses resulting from earthquake or
other seismic activity, the Company could lose its capital invested in the
affected properties, as well as the anticipated future revenues from such
properties, and would continue to be obligated on any mortgage indebtedness or
other obligations related to the properties. Any such loss could adversely
affect the Company and its ability to make distributions to stockholders.
The Company will obtain updates of or endorsements to its existing title
insurance policies bringing such policies current through the closing of the
Offering. However, because such policies were originally obtained at the time
the applicable Property was acquired in an amount equal to the initial
purchase price of the Property, any such policy may be in an amount less than
the current value of the Property at the closing of the Offering. In the event
of an underinsured loss with respect to a Property relating to a title defect,
the Company could lose a portion of its capital invested in, and anticipated
profits from, such Property, which could adversely affect the Company and its
ability to make distributions to stockholders.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws and regulations, a
current or previous owner or operator of real estate, as well as certain other
parties, may be required to investigate and remediate the effects of hazardous
or toxic substances or petroleum product releases on, under, in or from such
property, and may be held liable to a governmental entity or to third parties
for investigation and cleanup costs and certain damages resulting from such
releases. Such laws and regulations typically impose responsibility and
liability without
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regard to whether such person knew of or caused the releases, and the
liability under such laws and regulations has been interpreted to be joint and
several unless the harm is divisible and there is a reasonable basis for
allocation of responsibility. The cost of investigating and remediating such
contamination may be substantial, and the presence of such contamination, or
the failure to properly remediate it, may adversely affect the owner's ability
to sell or rent such property or to borrow using such property as collateral.
In addition, the owner of a site may be subject to governmental fines and
common law claims by third parties seeking to recover damages and costs
resulting from such contamination.
Certain other federal, state and local laws and regulations govern the
management and disposal of asbestos-containing materials ("ACMs"). Such laws
and regulations may impose liability for the release of ACMs and may provide
for third parties to seek recovery from owners or operators of such property
for personal injury associated with ACMs. In connection with the ownership and
operation of its properties, the Company may be potentially liable for such
costs. ACMs have been detected at certain of the Properties, but are not
expected to result in material environmental costs or liabilities to the
Company. Federal, state and local laws and regulations also require the
removal or upgrading of certain underground storage tanks and regulate the
discharge of storm water, wastewater and any water pollutants, the emission of
air pollutants, the generation, management and disposal of hazardous or toxic
chemicals, substances or wastes, and workplace health and safety.
The Company's leases generally provide that (i) the tenant is responsible
for all environmental liabilities relating to the tenant's operations, (ii)
the Company is indemnified for such liabilities and (iii) the tenant must
comply with all environmental laws and regulations. Such a contractual
arrangement, however, does not eliminate the Company's statutory liability or
preclude claims against the Company by governmental authorities or persons who
are not parties to such an arrangement. Noncompliance with environmental or
health and safety requirements may also result in the need to cease or alter
operations at a property, which could affect the financial health of a tenant
and its ability to make lease payments. In addition, if there is a violation
of such a requirement in connection with a tenant's operations, it is possible
that the Company, as the owner of the property, could be held accountable by
governmental authorities for such violation and could be required to correct
the violation and pay related fines.
All of the Properties have been, and it is contemplated that all future
acquisitions will be, subjected to a Phase I or similar environmental
assessment (which generally includes a site inspection, interviews and a
records review, but no subsurface sampling). These assessments and certain
follow-up investigations (including, as appropriate, asbestos, radon and lead
surveys, additional public records review, subsurface sampling and other
testing) of the Properties have not revealed any environmental liability that
the Company believes would have a material adverse effect on the Company's
business or results of operations. Nevertheless, it is possible that the
assessments on the Properties have not revealed, or that the assessments on
future acquisitions will not reveal, all environmental liabilities and that
there may be material environmental liabilities of which the Company is
unaware. No assurances can be given that (i) the Company will not incur
material liability under current or future laws and regulations or (ii) the
current environmental condition of the Properties will not be adversely
affected by tenant operations or by environmental conditions in the vicinity
of such Properties. See "The Properties--Environmental Matters."
COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
Under the Americans with Disabilities Act of 1990 (the "ADA"), places of
public accommodation and/or commercial facilities are required to meet certain
federal requirements related to access and use by disabled persons. Although
management of the Company believes that the Properties are substantially in
compliance with the present requirements of the ADA, the Company may incur
additional costs in connection with such compliance in the future. In
addition, a number of additional federal, state and local laws and regulations
exist that may require modifications to the Company's properties, or affect
certain future renovations thereof, with respect to access by disabled
persons. Non-compliance with the ADA could result in the imposition of fines
or an award of damages to private litigants, and also could result in an order
to correct any non-complying feature. Under certain of the Company's leases,
the tenant is responsible for ensuring that the property complies with all
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laws and regulations, including the ADA. Notwithstanding the foregoing, the
Company may be required to make substantial capital expenditures to comply
with this law. In addition, provisions of the ADA may impose limitations or
restrictions on the completion of certain renovations and thus may limit the
overall returns on the Company's investments.
CHANGES IN LAWS
Because increases in taxes (including income, service and transfer taxes)
are generally not passed through to tenants under leases, such increases may
adversely affect the Company and its ability to make distributions to
stockholders. The Properties are also subject to various federal, state and
local regulatory requirements and to state and local fire and life-safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that the Properties are currently in
compliance with all such regulatory requirements. However, there can be no
assurance that these requirements will not be changed or that new requirements
will not be imposed which would require significant unanticipated expenditures
by the Company and could have an adverse effect on the Company and its
distributions to stockholders.
RELIANCE ON KEY PERSONNEL
The Company will depend upon the services of its executive officers,
particularly Messrs. Marcus, Gold and Nelson. The loss of the services of any
one of these officers could have an adverse effect on the Company's business
and financial condition. The Company has entered into employment agreements
with each of Messrs. Marcus, Gold and Nelson. See "Management--Employment
Agreements."
CHANGE IN POLICIES WITHOUT STOCKHOLDER APPROVAL
The Company's policies with respect to all activities, including
qualification as a REIT, its investment, growth, debt, financing,
capitalization, distribution and operating policies, will be determined by the
Board of Directors upon the recommendations of management. See "Policies with
Respect to Certain Activities." These policies may be amended or revised at
any time and from time to time without a vote of the stockholders of the
Company. A change in these policies could adversely affect the Company and its
ability to make distributions to stockholders. In addition, the Company
expects to acquire additional real estate assets in the future. The
stockholders of the Company will not be entitled to consider historical
financial statements regarding, or to vote upon, these acquisitions and,
instead, will be required to rely entirely on the decisions of management.
NO LIMITATION ON DEBT
Upon consummation of the Offering and the Formation Transactions, the
Company's debt to total market capitalization ratio will be approximately 20%.
Although the Company has adopted a policy to incur debt only if upon such
incurrence the debt to total market capitalization ratio would not exceed 50%,
the Charter does not contain any limitation on the amount of indebtedness the
Company may incur. Accordingly, the Board of Directors could alter or
eliminate this policy. If this policy were changed, the Company could become
more highly leveraged, resulting in an increase in debt service obligations
that could adversely affect the Company's cash flow and, consequently, the
amount available for distribution to stockholders, and could increase the risk
of default on the Company's indebtedness. See "The Company--Growth
Strategies."
The Company has established its debt policy relative to the total market
capitalization of the Company rather than relative to the book value of its
assets because it believes that the book value of its assets (which to a large
extent is the depreciated original cost of real property, the Company's
primary tangible assets) does not accurately reflect its ability to borrow and
to meet debt service requirements. The market capitalization of the Company,
however, is more variable than book value, and does not necessarily reflect
the fair market value of the underlying assets of the Company at all times.
The Company also will consider factors other than market capitalization in
making decisions regarding the incurrence of indebtedness, such as the
purchase price of
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properties to be acquired with debt financing, the estimated market value of
its properties upon refinancing and the ability of particular properties and
the Company as a whole to generate cash flow to cover expected debt service.
INABILITY TO SUSTAIN DISTRIBUTIONS
Distributions will be determined by the Board of Directors and will be
dependent on a number of factors, including the amount of the Company's cash
available for distribution, the Company's financial condition, any decision by
the Board of Directors to reinvest funds rather than to distribute such funds,
the Company's capital expenditures, the annual distribution requirements under
the REIT provisions of the Code and such other factors as the Board of
Directors deems relevant. See "Distributions."
The Company's initial distribution level is based on a number of
assumptions, including assumptions relating to the future operations of the
Company. These assumptions concern, among other matters, occupancy levels,
capital expenditures and other costs relating to the Properties, the level of
rental activity and decisions by the Company to reinvest rather than
distribute cash available for distribution. The Company expects to maintain
its distribution level for at least the 12-month period following consummation
of the Offering. However, certain of the assumptions described above are
beyond the control of the Company, and a significant change in any such
assumption could cause a reduction in cash available for distributions, which
could affect the Company's ability to sustain the initial distribution level.
See "Distributions." Moreover, the Company has not attempted to estimate the
sustainability of its distribution level past the first anniversary of the
Offering. As a result, no assurance can be given that the Company will be able
to maintain its initial distribution level. Any such failure to do so could
result in a decrease in the market price of the Common Stock.
ABSENCE OF PRIOR MARKET FOR SHARES
Prior to the Offering, there has been no public market for shares of the
Common Stock. The shares of Common Stock have been approved for listing on the
NYSE, subject to official notice of issuance. There can be no assurance that,
upon listing, the Company will continue to meet the criteria for continued
listing of the Common Stock on the NYSE. See "Underwriting." The initial
public offering price may not be indicative of the market price for the Common
Stock after the Offering, and there can be no assurance that an active public
market for the Common Stock will develop or continue after the Offering. The
market value of the Common Stock could be substantially affected by general
market conditions, including changes in interest rates. Moreover, numerous
other factors, such as governmental regulatory action and changes in tax laws,
could have significant effects on the future market price of the Common Stock.
See "Underwriting" for a discussion of factors considered in establishing the
initial public offering price.
EFFECT OF MARKET INTEREST RATES ON PRICE OF SHARES
One of the factors that may influence the market price of the Common Stock
in public trading markets will be the annual yield on the Common Stock
compared to yields on other financial instruments. Thus, an increase in market
interest rates will result in higher yields on other financial instruments,
which may lead prospective purchasers of the Common Stock to demand a higher
annual distribution rate from the Company. The requirement for a higher
distribution rate may have an adverse effect on the market price of the Common
Stock.
EFFECT OF FUTURE OFFERINGS ON PRICE OF SHARES
The Company in the future may increase its capital resources by making
additional private or public offerings of its Common Stock, securities
convertible into its Common Stock, Preferred Stock or debt securities. See
"Description of Capital Stock--Power to Issue Additional Shares of Common
Stock and Preferred Stock." The actual or perceived effect of such offerings,
the timing of which cannot be predicted, may be the dilution of the book value
or earnings per share of the Common Stock outstanding, which may result in a
reduction of the market price of the Common Stock.
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IMMEDIATE AND SUBSTANTIAL DILUTION
As set forth more fully under "Dilution," the pro forma net tangible book
value per share after the Offering will be substantially less than the
expected initial public offering price per Share in the Offering. Accordingly,
stockholders acquiring Shares in the Offering will experience immediate and
substantial dilution of $4.96 per Share in the net tangible book value of the
Shares. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, of future sales of
shares of Common Stock, or the availability of shares of Common Stock for
future sale, on the market price of the Common Stock prevailing from time to
time. Sales of substantial amounts of capital stock (including Common Stock
issued upon the exercise of stock options), or the perception that such sales
could occur, could adversely affect prevailing market prices for the Common
Stock. Upon consummation of the Offering and the Formation Transactions,
3,634,777 shares of Common Stock will be owned by the Continuing Investors.
The Company and the Continuing Investors have agreed with the Underwriters,
subject to certain limited exceptions, not to offer, sell, contract to sell,
pledge, grant any option to purchase or otherwise dispose of any shares of
Common Stock (or any securities convertible into, or exercisable, exchangeable
or redeemable for, shares of Common Stock) for a period of 360 days from the
date of this Prospectus, without the prior written consent of PaineWebber.
Management of the Company, including Messrs. Sudarsky, Marcus, Gold, Nelson,
Kreitzer, Stone and Ciruzzi, have agreed with the Underwriters, subject to
certain limited exceptions, not to offer, sell, contract to sell, pledge, or
otherwise dispose of any shares of Common Stock (or any securities convertible
into, or exercisable, exchangeable or redeemable for, shares of Common Stock),
including any shares of Common Stock that any such persons may have the right
to receive by virtue of their ownership interest in Holdings, for a period of
two years from the date of this Prospectus, without the prior written consent
of PaineWebber. After such time, such shares of Common Stock may be sold in
the public market, subject to applicable securities law restrictions or
exemptions from registration, if available. The Company has agreed to prepare
and file a shelf registration statement or such other registration statement
as may then be available within a specified time period after the Offering,
and the expiration of the applicable lock-up period, with respect to the
resale from time to time of shares of Common Stock issued to AEW in connection
with the Offering and the Formation Transactions. Accordingly, AEW will have
the ability to sell its shares of Common Stock at such time pursuant to such
registration statement or any applicable exemption then available under the
Securities Act of 1933, as amended (the "Securities Act"), including Rule 144
promulgated thereunder. The Company also will grant to Holdings customary
transferable registration rights with respect to the shares of Common Stock
held by it. See "Shares Available for Future Sale" and "Underwriting." In
addition, the Company has reserved 900,000 shares of Common Stock for issuance
to officers, directors and certain employees of the Company pursuant to the
Company's 1997 Stock Option Plan, of which options for 600,000 shares will be
issued in connection with the Offering. These shares of Common Stock will be
available for sale in the public markets from time to time pursuant to
exemptions from registration requirements or upon registration. See
"Management--Executive Compensation."
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THE COMPANY
Alexandria was formed in October 1994 to acquire, manage, expand and
selectively develop high quality, strategically located properties containing
office and laboratory space designed and improved for lease principally to
pharmaceutical, biotechnology, diagnostic and personal care products
companies, major scientific research institutions and related government
agencies. The Company's tenant base is broad and diverse within the Life
Science Industry and reflects the Company's focus on regional, national and
international tenants with substantial financial and operational resources.
Significant tenants include affiliates of major pharmaceutical companies
(e.g., Johnson & Johnson and Novartis AG, the company resulting from the
merger of Ciba-Geigy AG and Sandoz AG); biotechnology companies and their
affiliates (e.g., Chiron Corporation, Agouron Pharmaceuticals, Inc. and
Advanced Tissue Sciences, Inc.); affiliates of personal care products
companies (The Gillette Company); major scientific research institutions
(e.g., the Fred Hutchinson Cancer Research Center and The Scripps Research
Institute); clinical laboratories (American Medical Laboratories, Inc.); and
government agencies (e.g. the FDA and the U.S. Army Corps of Engineers). See
"The Properties--Tenants" for the percentage of the aggregate portfolio
Annualized Net Effective Rent contributed by each of the foregoing tenants.
Upon consummation of the Offering and the Formation Transactions, the
Company will own 15 Properties containing approximately 1.5 million rentable
square feet of office and laboratory space located in California (in the San
Diego and San Francisco Bay areas), Seattle, Washington and suburban
Washington, D.C. (including Maryland and Virginia), each of which is a leading
market in the United States for the Life Science Industry. To facilitate
research and development, technology transfer and recruitment of scientific
professionals, Life Science Industry companies generally cluster near major
scientific research institutions, universities and government agencies, all of
which drive demand for properties combining office and laboratory space
suitable for such tenants. As a result, the Company focuses its operations and
acquisition activities principally in a limited number of target markets,
including all of the Company's existing markets and certain other markets
where Life Science Industry tenants are concentrated, including
Boston/Cambridge and the New York/New Jersey and suburban Philadelphia areas.
As of April 30, 1997, the Properties were approximately 98% leased, at an
average Annualized Net Effective Rent per leased square foot of $18.20.
The multibillion dollar Life Science Industry comprises some of the fastest
growing segments of the U.S. economy and includes thousands of public and
private companies and scientific research institutions engaged principally in
the research, development, testing, manufacture, sale and regulation of
pharmaceuticals, diagnostics, personal care products, medical devices,
laboratory instrumentation and other related applications. Properties leased
to tenants in the Life Science Industry typically consist of suburban office
buildings containing scientific research and development laboratories and
other improvements that are generic to tenants operating in the Life Science
Industry. Unlike traditional office space, the location of and improvements to
Life Science Facilities are generally considered essential to a tenant's
business. The Company believes that, as a result of these factors, occupancy
levels in Life Science Facilities within its markets have been higher and
tenant turnover has been lower than in traditional office properties.
Despite increasing competition for the acquisition of traditional office
properties, the Company believes that, based on market conditions and
prospective acquisitions currently under review, it can continue to purchase
high quality Life Science Facilities at initial Capitalization Rates generally
ranging from 10.0% to 12.5% and at prices significantly below replacement
cost. In 1996, the Company completed the acquisition of the 1996 Acquired
Properties for an aggregate purchase price (including closing costs and
budgeted capital improvements) of approximately $95.2 million and an average
initial Capitalization Rate of over 12%. In addition, the Company believes
that opportunities exist for internal growth through contractual rental rate
escalations (included in approximately 65% of the Company's leases on a square
footage basis), the retenanting and releasing of space at higher rental rates
upon the expiration of existing leases, the expansion of existing Properties
and the conversion of existing office space to higher rent generic laboratory
space.
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The Company is led by a senior management team with extensive experience in
both the real estate and Life Science industries and is supported by a highly
experienced board of directors. Management believes that it has achieved
favorable returns on its Properties as a result of: (i) the strong and growing
demand by tenants for Life Science Facilities; (ii) the constrained supply and
lack of speculative development of Life Science Facilities due to the
expertise generally required to develop and manage this property type; (iii)
the highly fragmented and inefficient market for ownership of Life Science
Facilities; (iv) the Company's adherence to strict evaluation criteria and due
diligence review when assessing prospective properties and tenants; and (v)
the Company's knowledge and understanding of Life Science Industry tenants and
their real estate needs. Additionally, the personal and business relationships
that management has developed over time within the real estate and Life
Science industries have contributed significantly to the Company's ability to
identify and consummate favorable acquisitions and to lease space to high
quality Life Science Industry tenants. Management believes that the Company
will be the first publicly traded entity focusing primarily on the
acquisition, management, expansion and selective development of Life Science
Facilities.
The Company's principal executive office is located at 251 South Lake
Avenue, Suite 700, Pasadena, California 91101, and its telephone number is
(818) 578-0777.
GROWTH STRATEGIES
The Company seeks to maximize growth in FFO and cash available for
distribution to stockholders through effective management, operation,
acquisition, expansion and selective development of Life Science Facilities.
The Company believes that opportunities exist to increase FFO and cash
available for distribution per share by (i) acquiring high quality Life
Science Facilities at attractive returns in its target markets, (ii) realizing
contractual rental rate escalations (which are included in 65% of the
Company's leases on a square footage basis), (iii) retenanting and releasing
space within its portfolio at higher rental rates, and with minimal tenant
improvement costs, (iv) expanding existing Properties or converting existing
office space to generic laboratory space that can be leased at higher rental
rates, (v) selectively developing properties on a retrofit or build-to-suit
basis, where the Company can secure leases prior to construction and where
such development is expected to result in returns on investment that the
Company believes will exceed returns on comparable acquisitions, and (vi)
continuing to implement effective cost control measures, including expense
pass-through provisions in tenant leases. In pursuing its growth strategy, the
Company intends to maintain significant financial flexibility, enabling it to
take advantage of growth opportunities as they arise.
The Company believes that its focus on Life Science Facilities presents an
attractive investment opportunity, given the strong and growing demand for
Life Science Facilities coupled with constraints on new supply. The Company
believes that these factors, combined with management's expertise and
knowledge of Life Science Industry tenants and their facility needs, present
opportunities for the Company to achieve returns on its property investments
that are often higher than returns available on other types of commercial real
estate. There can be no assurance, however, that the Company will be able to
achieve such higher returns.
Acquisitions. The Company seeks to identify and acquire high quality Life
Science Facilities in its target markets. Management believes that it has been
able to maximize returns on acquisitions as a result of its expertise in
understanding the real estate needs of Life Science Industry tenants, its
ability to identify and acquire those properties with generic laboratory
infrastructure that appeal to a wide range of Life Science Industry tenants
and its expertise in identifying and evaluating Life Science Industry tenants.
The Company also seeks to utilize the extensive personal and business
relationships that management has developed over time with owners of Life
Science Facilities and with major Life Science Industry participants to
identify prospective acquisition opportunities and to consummate favorable
acquisitions prior to the active marketing of the subject properties.
The Company believes that the ownership of Life Science Facilities is highly
fragmented and that such fragmentation often creates pricing inefficiencies in
the sale of such properties. Life Science Facilities are generally owned by
numerous local developers and institutions, many of whom own or operate a
single facility. Additionally, management believes that many Life Science
Facilities are occupied by owners who desire to focus their investments on and
attention to their respective core businesses, and not on ownership of real
estate.
30
<PAGE>
Critical evaluation of prospective property acquisitions is an essential
component of the Company's acquisition strategy. When evaluating acquisition
opportunities, the Company assesses a full range of matters relating to the
properties, including the quality of the tenants, the condition and capacity
of building infrastructure, the quality and generic characteristics of
laboratory facilities and the physical condition of the shell structure and
common area improvements. Management also considers opportunities available
for leasing vacant space and retenanting occupied space. In addition, the
Company is developing a proprietary database that will contain information on
Life Science Facilities and Life Science Industry tenants located in each of
the Company's target markets. The database is designed to enhance the
Company's ability to identify and evaluate prospective acquisitions in such
markets.
The Company acquired the 1996 Acquired Properties for an aggregate purchase
price (including closing costs and budgeted capital improvements) of
approximately $95.2 million and a weighted average initial Capitalization Rate
of over 12.0%. The 1996 Acquired Properties are:
<TABLE>
<CAPTION>
PROPERTY (1) DATE OF ACQUISITION TOTAL ACQUISITION COSTS
------------ ------------------- -----------------------
<S> <C> <C>
1102/1124 Columbia Street May 1996 $31,755,000
Seattle, Washington
1413 Research Boulevard July 1996 11,966,000
Rockville, Maryland
300/401 Professional Drive September 1996 14,342,000
Gaithersburg, Maryland
25/35/45 West Watkins Mill Road October 1996 17,746,000
Gaithersburg, Maryland
1311/1401/1431 Harbor Bay Parkway December 1996 19,353,000
Alameda, California
-----------
Total $95,162,000
===========
</TABLE>
- --------
(1) Based on their respective configurations, the Company considers 1102/1124
Columbia Street to be one Property, 25/35/45 West Watkins Mill Road to be
one Property, 300 Professional Drive and 401 Professional Drive each to be
a Property and 1311 Harbor Bay Parkway, 1401 Harbor Bay Parkway and 1431
Harbor Bay Parkway each to be a Property.
In connection with the Offering, the Company will purchase the Acquisition
LLC, thereby acquiring the Acquisition LLC Properties, aggregating
approximately 424,000 square feet of office and laboratory space, for a
purchase price of approximately $60.6 million.
Internal Growth. The Company's strategy is to achieve internal growth from
several sources. Approximately 65% of the Company's leases (on a square
footage basis) contain effective annual rent escalations that are either fixed
(ranging from 2.5% to 4.0%) or indexed based on a CPI or other index. The
Company will seek to include similar escalation provisions in its future
leases. Although most of the Company's recent acquisitions have been fully
leased, the Company also seeks to acquire undervalued or underperforming
properties where it can improve investment returns through releasing of vacant
space and replacement of existing tenants with new tenants at higher rental
rates. Further, the Company believes that a significant percentage of its
existing leases contain below-market rental rates and that opportunities
should exist to achieve higher rental rates as these leases expire. The
Company believes that retenanting and releasing costs for existing improved
space at its Properties should be relatively low, as a result of the favorable
demand and supply characteristics for Life Science Facilities in the Company's
target markets and the generic infrastructure improvements that are already in
place at the Properties. Since 1994, the Company has retenanted approximately
241,000 square feet of space at a weighted average cost for non-revenue
enhancing tenant improvements and leasing commissions of $7.87 per square
foot. The Company's ability to negotiate contractual rent escalations in
future leases and to achieve increases in rental rates will depend upon market
conditions and demand for Life Science Facilities at the time such leases are
negotiated and such increases are proposed.
31
<PAGE>
The Company also intends to pursue internal growth through the expansion of
existing facilities that are fully leased and the conversion of existing
office space to higher rent generic laboratory space. The Company is currently
evaluating expansion opportunities at several of its Properties, including
1413 Research Boulevard in Rockville, Maryland, which is designed to
accommodate an additional 60,000 square feet of office and laboratory space,
and 14225 Newbrook Drive in Chantilly, Virginia, which can accommodate three
additional floors or up to approximately 50,000 square feet of additional
office and laboratory space. The Company is also currently considering the
conversion of office space into higher rent generic laboratory space at 300
Professional Drive in Gaithersburg, Maryland, 25, 35 and 45 West Watkins Mill
Road in Gaithersburg, Maryland, and 1311 Harbor Bay Parkway in Alameda,
California. In the first quarter of 1997 the Company completed the conversion
of approximately 21,000 square feet into higher rent generic laboratory space
at 1102 and 1124 Columbia Street in Seattle, Washington, and in 1998 the
Company will convert an additional approximately 28,000 square feet of space
into higher rent generic laboratory space at this Property. The Company has
invested approximately $1.2 million and will invest an additional $3.6 million
in these conversion projects, which funds have been set aside in a separate
cash account pursuant to the terms of the Company's lease with Corixa
Corporation, which will occupy all of the converted space. Based on this lease
and the planned expenditures, the Company estimates a return on investment of
approximately 14% on these conversion projects. The Company intends to pursue
expansion and conversion projects only where the Company can secure signed
leases for a significant portion of such space prior to construction and where
it expects to achieve investment returns that equal or exceed its returns on
acquisitions.
The Company believes that its internal growth strategy will be enhanced by
effective cost control measures, including expense pass-through provisions
that are included in a significant percentage of the Company's leases.
Approximately 80% of the Company's leases (on a square footage basis) are
triple net leases, requiring tenants to pay substantially all real estate
taxes and insurance, common area and other operating expenses (including
increases thereto). Further, approximately 80% of the Company's leases (on a
square footage basis) provide for the recapture of certain non-revenue
enhancing capital expenditures (including roof replacements, parking lot
resurfacing and HVAC maintenance expenditures), which the Company believes
would typically be borne by the landlord in traditional office leases.
Development. Given the current favorable acquisition environment for Life
Science Facilities, the Company intends to emphasize acquisitions over
development in pursuing its growth objectives. However, the Company intends to
pursue selective build-to-suit and retrofit development projects where it
expects to achieve investment returns that will equal or exceed its returns on
acquisitions. Build-to-suit projects involve the construction of new Life
Science Facilities for specified tenants. Retrofit projects involve the
conversion of existing office space for use by Life Science Industry tenants,
generally through the addition of laboratory space and other generic
infrastructure improvements. The Company intends to undertake build-to-suit
and retrofit projects only if it can secure long-term leases (generally 10
years or more) with high quality Life Science Industry tenants prior to
construction and the Company's investment in infrastructure will be generic in
nature and not tenant specific.
The Company's 10933 North Torrey Pines Road Property in San Diego,
California, is situated on approximately 16 acres of land. The Company has
rights to construct up to an additional 163,000 square feet of office and
laboratory space on this parcel. The Company also has entered into a purchase
agreement to acquire two parcels of land, aggregating approximately 4.2 acres,
adjacent to the Company's 3535 and 3565 General Atomics Court Properties, also
in the Torrey Pines area of San Diego, California. The purchase price for the
land is approximately $2.7 million, of which the Company has paid a deposit of
$200,000. The Company will have the ability (subject to receipt of necessary
governmental approvals and licenses) to develop and construct two buildings on
the land, containing an aggregate of approximately 90,000 square feet of
office and laboratory space. There can be no assurance, however, that the
Company will acquire the land or will be able to enter into desirable build-
to-suit arrangements.
Financing. Upon consummation of the Offering and the Formation Transactions,
the Company will have a debt to total market capitalization ratio of
approximately 20%. The Company has a commitment from the Bank
32
<PAGE>
of America to provide, upon consummation of the Offering, the Credit Facility
for up to $150 million, which will be used primarily for the acquisition of
additional properties. The Company has adopted a policy of incurring debt in
the future only if, upon such incurrence, its debt to total market
capitalization ratio will not exceed 50%. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources" for a description of certain conditions to borrowing and
other provisions applicable to the Credit Facility and "Policies With Respect
to Certain Activities" for a discussion of the Company's policy of incurring
debt.
The Company expects to finance future acquisitions initially through the
Credit Facility and then to refinance such indebtedness with debt or equity
capital. The Company may also issue Common Stock or interests in subsidiaries
as consideration for acquisitions. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources." The Company believes that its access to capital should provide it
with a competitive advantage in acquisitions over other bidders that qualify
their bids with financing or other contingencies.
TENANT DEMAND
Life Science Industry participants are engaged principally in the research,
development, testing, manufacture, sale and regulation of pharmaceuticals,
diagnostics, personal care products, medical devices, laboratory
instrumentation and other related applications. Tenant demand for Life Science
Facilities in the Company's target markets is driven largely by the size and
growth of the Life Science Industry and its various segments and particularly
by the Life Science Industry's expenditures on research and development.
Growth in the Life Science Industry creates demand for Life Science Facilities
because traditional office space is generally inadequate to meet the needs of
Life Science Industry tenants.
Research and development expenditures within the pharmaceutical industry,
the largest segment of the Life Science Industry, have grown dramatically
since 1985, and the Company believes that this growth should continue.
According to PhRMA, the principal industry trade group for major
pharmaceutical research companies, domestic research and development
expenditures by PhRMA member firms have increased at a compound annual rate of
over 13% since 1985. The following graph indicates the growth of domestic
research and development expenditures by PhRMA member firms from 1985 through
1995 and includes estimates of such research and development expenditures for
1996 and 1997.
DOMESTIC RESEARCH AND DEVELOPMENT EXPENDITURES
BY PHRMA MEMBER FIRMS
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
DOMESTIC RESEARCH AND
DEVELOPMENT EXPENDITURES
------------------------
(DOLLARS IN BILLIONS)
<S> <C>
1985 $3.4
1986 $3.9
1987 $4.5
1988 $5.2
1989 $6.0
1990 $6.8
1991 $7.9
1992 $9.3
1993 $10.5
1994 $11.1
1995 $11.8
1996E $13.3
1997E $15.0
</TABLE>
--------
SOURCE: PHRMA ANNUAL SURVEY, 1997.
33
<PAGE>
According to PhRMA, research and development expenditures also have
increased as a percentage of U.S. sales and exports of PhRMA member firms. In
1985, research and development expenditures totaled approximately 15.1% of
U.S. sales and exports. Based on estimated 1997 expenditures (and as
illustrated in the following chart), this percentage is expected to increase
to 21.2% of U.S. sales and exports. By comparison, according to PhRMA,
research and development expenditures across all U.S. industries averaged only
3.8% of sales in 1995. Although the PhRMA data is based on information
compiled principally from the nation's largest pharmaceutical companies, the
Company believes that this data is reflective of growth in research-based
pharmaceutical companies generally.
RESEARCH AND DEVELOPMENT AS A PERCENTAGE OF U.S. SALES (INCLUDING U.S.
EXPORTS)
BY PHRMA MEMBER FIRMS
[CHART APPEARS HERE]
<TABLE>
<CAPTION>
RESEARCH AND DEVELOPMENT AS A PERCENTAGE
OF U.S. SALES (INCLUDING U.S. EXPORTS)
----------------------------------------
(DOLLARS IN BILLONS)
<S> <C>
1985 $15.1
1986 $15.1
1987 $16.1
1988 $16.7
1989 $16.8
1990 $16.2
1991 $16.6
1992 $17.9
1993 $19.9
1994 $20.4
1995 $19.4
1996E $19.9
1997E $21.2
</TABLE>
--------
SOURCE: PHRMA ANNUAL SURVEY, 1997.
The Company believes that several factors should continue to drive increases
in research and development expenditures, and thus increase the demand for
Life Science Facilities. These factors include (i) the aging of the U.S.
population resulting from the transition of baby boomers to senior citizens,
which has increased demand for new drugs, (ii) increased competition resulting
from generic drug penetration and the loss of patent protection on billions of
dollars worth of drugs, both of which have increased the need for proprietary
drug manufacturers to develop new products, (iii) the desire of companies to
reduce research and development lead times to bring new products to market
faster, (iv) modifications to the FDA approval process, which have reduced the
effective cost of new drug development and (v) increased collaborative efforts
among major pharmaceutical and biotechnology companies, which have increased
capital availability to Life Science Industry participants.
34
<PAGE>
TARGET MARKETS
The Company owns Life Science Facilities in four primary markets and has
targeted these markets, and two additional markets, within which to focus its
activities. The Company has selected its target markets as a result of the
concentration of Life Science Industry participants. The concentration of Life
Science Industry participants is largely a result of the need of such
participants to be in close proximity to regulatory agencies and funding
sources, such as the FDA and the NIH, trade and manufacturing groups and major
scientific research universities and non-profit research centers. These groups
provide funding, research and administrative assistance and product approvals
to the Life Science Industry, as well as opportunities for the recruitment of
scientific professionals. The Company believes that its target markets have
been and will continue to be attractive markets for the Life Science Industry
because of the established presence of the scientific community and the
opportunities for the commercialization of Life Science Industry research and
development in these areas. The Company believes that the concentration of
Life Science Industry participants in its markets is a significant factor
contributing to increased demand for available space and higher overall
occupancy rates for Life Science Facilities and thus to reducing the risks
associated with tenant turnover. See "Risk Factors--Geographic Concentration;
Dependence on Certain Markets."
EXISTING MARKETS
San Diego. Life Science Industry participants have established a significant
presence in the San Diego area primarily due to the presence of four
internationally renowned research institutions: The University of California
at San Diego; The Scripps Clinic and Research Foundation (a tenant of the
Company); the Burnham Institute (formerly, the La Jolla Cancer Research
Foundation); and The Salk Institute for Biological Studies. Additionally, the
Company believes that Life Science Industry participants are attracted to San
Diego due, in part, to a supportive local government and a favorable quality
of life that attracts scientific research professionals. The University of
California at San Diego, is one of the leading research universities in the
nation and the 14th largest recipient of NIH awards in 1996, with over $133
million of total awards. The University's faculty includes Nobel laureates and
members of the National Academy of the Sciences. The Scripps Clinic and
Research Foundation includes the largest non-profit biotechnology research
facility in the world, with over 700 scientists. Specializing in cancer
research, the Burnham Institute is the fourth largest research institution in
the San Diego area. The Salk Institute, with more than 500 employees, conducts
a wide range of Life Science Industry research.
San Francisco Bay Area. The San Francisco Bay area is the birthplace of the
biotechnology industry and continues to be one of the largest markets for
biotechnology companies and related research and development activities in the
United States. Local universities and non-profit and government scientific
research institutions, including the University of California at San
Francisco, the University of California at Berkeley, Stanford University and
the Lawrence Livermore Laboratories, have also provided advanced technologies
and scientific discoveries and have fostered the growth of the Life Science
Industry in the region. The University of California at San Francisco and
Stanford University ranked second and tenth, respectively, in NIH grants in
1996, with approximately $213 million and $151 million of total awards,
respectively. Several of the largest and most successful biotechnology
companies were founded in and remain based in the San Francisco Bay area,
including Genentech, Inc. and Chiron Corporation (a tenant of the Company). As
a result of the large concentration of major research universities, teaching
hospitals, scientific research institutions and Life Science Industry
companies, the Company believes that the San Francisco Bay area is also a
strong market for the recruitment of scientific research professionals.
Seattle. The University of Washington and the Fred Hutchinson Cancer
Research Center (a tenant of the Company), founded in 1861 and 1972,
respectively, have influenced the growth of the Life Science Industry in the
Seattle/Puget Sound region. For over 20 years, the University of Washington
has consistently ranked among the top five federally funded research
institutions. In fiscal 1996, the University received approximately
$482 million in such funds, representing an increase of nearly five-fold from
fiscal 1976. The University also serves as a major source of technology
transfer and commercialization of products. In addition, the Fred Hutchinson
Cancer Research Center, established by a Nobel prize winner in medicine, is a
comprehensive
35
<PAGE>
research center emphasizing basic cancer research and clinical testing. With
approximately 2,200 employees and revenues of $158 million in fiscal 1996, the
Fred Hutchinson Cancer Research Center continues to serve as a driver for Life
Science Facility demand in the area.
Suburban Washington, D.C. Washington, D.C. and its suburbs (including
Maryland and Virginia) have one of the highest concentrations of federal
laboratories, scientists and engineers per capita in the United States. The
NIH and the National Institute of Standards and Technology are significant
drivers of demand for Life Science Facilities in this market. The area's
colleges and universities, including major research universities and two
renowned medical schools, Johns Hopkins University and the University of
Maryland at Baltimore, also generate demand for Life Science Facilities.
Scientific research institutes involved in Life Science Industry research,
including the Institute for Genomic Research, are located nearby. Proximity to
the nation's capital also provides access to major trade associations
supporting the Life Science Industry, key federal agencies, such as the FDA (a
tenant of the Company in California), the U.S. Patent and Trademark Office and
the U.S. Department of Agriculture, as well as a cooperative network of
governmental, industrial and academic leaders and organizations.
ADDITIONAL TARGET MARKETS
Boston/Cambridge. With the Massachusetts Institute of Technology and Harvard
University as anchors, scientific research in the Boston/Cambridge area is one
of the principal drivers of demand for Life Science Facilities in the area.
The Company believes that these institutions, as well as other major research
universities, teaching hospitals and scientific research institutions, produce
a favorable environment for the recruitment of scientific professionals and
the development of new technologies and products, all of which contribute to
demand for Life Science Facilities. The Boston/Cambridge area has historically
produced several of the largest and most successful biotechnology companies,
including Genetics Institute, Inc., Biogen, Inc., and Genzyme Corp. The
Company believes that the factors supporting the growth of these companies,
including the cooperative network of academic and industrial organizations
within the Boston/Cambridge area, continue to attract Life Science Industry
participants to the area.
New York/New Jersey and Suburban Philadelphia Areas. The New York/New Jersey
and suburban Philadelphia areas are centers of the Life Science Industry on
the East Coast. New Jersey is home to the largest concentration of
pharmaceutical companies in the United States, including Merck & Co. Inc.,
Johnson & Johnson (an affiliate of which is a tenant of the Company in
California), Bristol-Myers Squibb Company, American Home Products Corp.,
Smithkline Beecham p.l.c., Rhone-Poulenc Rorer, Inc. and Wyeth Laboratories
Inc., all based in the Philadelphia area, and Pfizer, Inc., based in New York,
further enhance this region's importance in the research and development of
pharmaceutical products. In addition to the presence of major pharmaceutical
companies, the University of Pennsylvania, Princeton University, the Sloan-
Kettering Cancer Research Center and numerous other major research
universities, teaching hospitals and scientific research institutions play a
significant role in the continuing development of the Life Science Industry in
this region.
MARKET STUDIES
In connection with the Offering, the Company has obtained a market study
from Rosen Consulting Group, dated May 1, 1997 (the "RCG Study"), regarding
each of the Company's existing markets (San Diego, the San Francisco Bay Area,
Seattle and Suburban Washington, D.C.). The study focused on scientific
research facilities, defined as properties containing both office and a
significant component of laboratory space leased principally to pharmaceutical
and biotechnology companies, non-profit research institutions and related
government agencies engaged in scientific research. As a result, the RCG Study
did not include all Life Science Facilities, such as those facilities leased
primarily to diagnostic and medical instrumentation companies, personal care
products companies and other less intensive laboratory users.
The RCG Study indicated that scientific research facilities were
substantially fully leased (98-100%) in each of the Company's existing
markets, with only a small structural vacancy accounting for downtime between
leases and during periods of renovation. In each market, occupancy for
scientific research facilities exceeded occupancy
36
<PAGE>
for suburban office space. The RCG Study further indicated that the limited
availability of scientific research space in the Company's markets was putting
upward pressure on rental rates. Set forth below are market annual triple net
effective rental rates from the RCG Study for prototype scientific research
facilities in each market.
<TABLE>
<CAPTION>
SCIENTIFIC RESEARCH FACILITIES TRIPLE
MARKET NET EFFECTIVE RENTAL RATES(1)
------ -------------------------------------
<S> <C>
San Diego
Torrey Pines Area................. $23.50 - $33.50
Other Areas....................... $20.00 - $27.50
San Francisco Bay Area
West Bay (2)...................... $20.00 - $34.50
East Bay (3)...................... $14.00 - $23.00
Seattle............................. $21.00 - $28.50
Suburban Washington, D.C. .......... $17.00 - $23.50
</TABLE>
- --------
(1) Rental rates reflect current market rates for a prototype scientific
research facility with 50-70% laboratory space and generic laboratory
infrastructure (of $75 to $100 per square foot) in place, located in a
"favorable" location in each market.
(2) West Bay includes the area from South San Francisco to Palo Alto.
(3) East Bay includes the area from Berkeley to Fremont, including Alameda.
The RCG Study also indicated that tenant turnover in scientific research
facilities was low, due to the limited amount of available space and the
essential nature of the facilities to tenants. The RCG Study noted that
(i) tenants usually renew upon expiration of their leases (either through
signing of a new lease or, where applicable, exercise of an option to extend
an existing lease) unless they have outgrown their space; (ii) available space
is frequently released before it is put on the market and (iii) there is
minimal downtime between leases. The RCG Study estimated the probability of
renewal in each of the Company's markets at 80% or higher, with the exception
of San Diego where the renewal rate was estimated at 70% or higher. Further,
the RCG Study indicated that the probabilities for renewal were higher--and
thus tenant turnover was lower--for scientific research facilities as compared
to pure office properties in each of the markets studied.
37
<PAGE>
DISTRIBUTIONS
Distributions by the Company will be determined by the Board of Directors
and will be dependent upon a number of factors, including the federal income
tax requirement that a REIT must distribute annually at least 95% of its
taxable income. The Company intends to make regular quarterly distributions to
the holders of the Common Stock and initially to distribute annually
approximately 83.4% of estimated cash available for distribution. The Company
expects to pay a pro rata distribution with respect to the period commencing
upon consummation of the Offering and ending on June 30, 1997.
Based on its estimated cash available for distribution, the Company
initially expects to make distributions of $1.60 per share on an annualized
basis, or an annual distribution rate of 7.62%, based on an assumed initial
public offering price of $21.00 per share. The Company currently intends to
maintain its initial distribution rate for the 12-month period following
consummation of the Offering, unless actual results of operations, economic
conditions or other factors differ materially from the assumptions used in its
estimate. The Company does not intend to reduce the expected distribution rate
if the Underwriters' over-allotment option is exercised. See "Risk Factors--
Inability to Sustain Distributions." The following discussion and the
information set forth in the table and footnotes below should be read in
connection with the historical consolidated financial statements and the pro
forma financial information of the Company and notes thereto contained herein
and "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
The Company's estimate of cash available for distribution after the Offering
is based upon pro forma FFO for the 12 months ended March 31, 1997, with
certain adjustments based on the items described below. To estimate cash
available for distribution following the Offering, pro forma FFO for the 12
months ended March 31, 1997 was adjusted for certain known events and/or
contractual commitments that either occurred subsequent to March 31, 1997 or
during the 12 months ended March 31, 1997 but were not effective for the full
12 months, and for certain non-GAAP adjustments consisting of (i) revising
historical rent estimates from a GAAP basis to amounts currently being paid or
due from tenants and (ii) an estimate of amounts anticipated for recurring
tenant improvements, leasing commissions and capital expenditures. Pro forma
FFO was not adjusted for changes in working capital resulting from changes in
current assets and current liabilities, for investing activities (other than a
reserve for capital expenditures and tenant improvements for renewing or
reletting space) or for financing activities. The estimate of cash available
for distribution is being made solely for the purpose of setting the initial
distribution and is not intended to be a projection or forecast of the
Company's results of operations or its liquidity, nor is the methodology upon
which such adjustments were made necessarily intended to be a basis for
determining future distributions. There can be no assurance that any
distributions will be made or that the estimated level of distributions will
be maintained by the Company.
The Company anticipates that its distributions will exceed earnings and
profits for federal income tax purposes due to non-cash expenses, primarily
depreciation and amortization, and the difference between rents reported for
tax purposes as compared to rents reported in accordance with GAAP. Therefore,
approximately 19.3% (or $0.29 per share) of the distributions anticipated to
be paid by the Company for the 12 months following the Offering are expected
to represent a return of capital for federal income tax purposes and in such
event will not be subject to federal income tax under current law to the
extent such distributions do not exceed a stockholder's basis in the Common
Stock. The nontaxable distributions will reduce the stockholder's tax basis in
the Common Stock and, therefore, the gain (or loss) recognized on the sale of
such Common Stock or upon liquidation of the Company will be increased (or
decreased) accordingly. See "Federal Income Tax Considerations--Taxation of
Taxable Domestic Stockholders." The percentage of a stockholder's
distributions that represents a nontaxable return of capital may vary
substantially from year to year.
Federal income tax law requires that a REIT distribute annually at least 95%
of its REIT taxable income. See "Federal Income Tax Considerations--Taxation
of the Company." The amount of distributions on an annual basis necessary to
maintain the Company's REIT status based on pro forma taxable income of the
Company for the 12 months ended March 31, 1997, as adjusted for certain items
in the following table, would have been approximately $12.8 million or $1.23
per share. The estimated cash available for distribution is anticipated to be
38
<PAGE>
in excess of the annual distribution requirements applicable to REITs. Under
certain circumstances, the Company may be required to make distributions in
excess of cash available for distribution in order to meet such distribution
requirements. For a discussion of the tax treatment of distributions to
holders of Common Stock, see "Federal Income Tax Considerations."
The Company believes that its estimate of cash available for distribution
constitutes a reasonable basis for setting the initial distribution; however,
no assurance can be given that the estimate will prove accurate or that actual
distributions will not vary significantly from the expected distributions.
Actual results of operations, economic conditions or other factors may differ
materially from the assumptions used in the estimate. The Company's actual
results of operations will be affected by a number of factors, including the
revenue received from the Properties, the operating expenses of the Company,
interest expense, the ability of tenants of the Properties to meet their
obligations and unanticipated capital expenditures. Variations in the net
proceeds from the Offering as a result of a change in the initial public
offering price or the exercise of the Underwriters' overallotment option may
affect the cash available for distribution and the payout ratio of cash
available for distribution and available reserves.
The following table describes the calculation of pro forma FFO for the 12
months ended March 31, 1997, and the adjustments thereto used in estimating
the initial cash available for distribution:
<TABLE>
<CAPTION>
(DOLLARS IN
THOUSANDS,
EXCEPT
PER SHARE
AMOUNTS)
-----------
<S> <C>
Pro forma net income for the year ended December 31, 1996....... $14,245
Pro forma net income for the three months ended March 31, 1996.. (3,477)
Pro forma net income for the three months ended March 31, 1997.. 3,191
-------
Pro forma net income for the 12 months ended March 31, 1997..... $13,959
Plus: Pro forma real estate depreciation for the 12 months ended
March 31, 1997................................................. 4,960
Pro forma real estate amortization for the 12 months ended
March 31, 1997............................................... 113
Elimination of an accrual of a post-retirement benefit(1)..... 1,070
-------
Pro forma FFO for the 12 months ended March 31, 1997 ........... 20,102
Adjustments:
Provision for assumed expiring leases, assuming no renewals
(2).......................................................... (83)
Incremental pro forma lease adjustment (3).................... 238
Net increase in tenant recoveries (4)......................... 317
Decrease in other income (5).................................. (12)
-------
Estimated pro forma FFO for the 12 months ended April 30, 1998.. 20,562
Net effect of straight-lining of rents (6).................... 510
Estimated recurring, non-revenue enhancing capital
expenditures (7)............................................. (1,132)
-------
Total estimated cash available for distribution................. $19,940
=======
Total estimated cash distributions.............................. $16,627
=======
Estimated initial cash distribution per share (8)............... $ 1.60
=======
Estimated cash available for distribution payout ratio (9)...... 83.4%
=======
</TABLE>
- --------
(1) This amount relates solely to the elimination of a non-cash accrual of a
one-time post-retirement benefit for an officer of the Company.
(2) The provision for assumed expiring leases above assumes no lease renewals
for the period from January 1, 1997 to April 30, 1998.
(3) Reflects increases and decreases resulting from the annualization of
leasing transactions occurring in 1996 and 1997. The net amount of
$238,000 includes the effect from (i) eliminating the rental revenue
relating to leases expiring and not renewed during 1996 and (ii) adding
rental revenue for leases signed through April 30, 1997.
(4) Consists of (i) $301,000 of recovery payments from existing tenants in
accordance with their lease agreements and (ii) a $16,000 net increase in
tenant recoveries resulting from the net increase in occupancy for the 12
months ended March 31, 1997.
(5) Reflects the decrease in other income-storage relating to space vacated by
a tenant during 1996. This space was converted to additional office space
and released. See note (3).
39
<PAGE>
(6) Represents the effect of adjusting straight-line rental revenue included
in pro forma net income for the 12 months ended April 30, 1998 from the
straight-line accrual basis to amounts currently being paid or due from
tenants. This adjustment is positive due to one significant lease (with
the FDA at 1431 Harbor Bay Parkway in Alameda, California) that was in
place at the time of the Company's purchase that contains rent step-down
provisions beginning on January 1, 1999. As a result, cash rents currently
received by the Company from this tenant ($2,950,000 annually) exceed
rents calculated on a straight-line basis in accordance with GAAP
($1,496,000 annually). The lower, straight-lined rental income of
$1,496,000 is reflected in FFO. If the Company did not include in
estimated cash available for distribution the cash to be received pursuant
to this lease in excess of the straight-lined amount, total estimated cash
available for distribution would be $18,486,000 and the estimated cash
available for distribution payout ratio would be 89.9%.
(7) Reflects projected non-incremental revenue-generating tenant improvements
("TI"), leasing commissions ("LC") and non-reimbursable building
improvements for the 12 months ended April 30, 1998. Non-reimbursable
building improvements are calculated at a rate of $0.35 per square foot
for the Company's portfolio (or a total of $509,343) based on the
Company's historical experience. TI and LC expenditures are based on the
weighted average TI and LC expenditures for all space renewed and
retenanted by the Company during 1994, 1995 and 1996, multiplied by the
highest annual net rentable square feet of leased space expiring during
1997, 1998 and 1999.
<TABLE>
<CAPTION>
WEIGHTED
1994 1995 1996 1997 AVERAGE
----- ----- ----- ------ ----------
<S> <C> <C> <C> <C> <C>
Retenanted
TI per net rentable square foot....... $0.32 $7.30 $5.90 $13.83 $ 6.24
LC per net rentable square foot....... $4.56 $4.23 $0.87 -- $ 1.63
----------
Total weighted average TI and LC.... $ 7.87
Highest annual net rentable square
feet of leased space
expiring during 1997, 1998 and
1999............................... 195,837
----------
$1,541,237
Estimated rate of retenant.......... 30%
----------
Total cost of retenants............. $ 462,371
Renewals
TI per net rentable square foot....... -- -- -- -- $ 0.00
LC per net rentable square foot....... -- $3.00 -- -- $ 1.17
----------
Total weighted average TI and LC.... $ 1.17
Highest annual net rentable square
feet of leases expiring during
1997, 1998 and 1999................ 195,837
----------
$ 229,129
Estimated rate of renewal........... 70%
----------
Total cost of renewals............ $ 160,391
----------
Total estimated TI and LC Cost........ $ 622,762
----------
Non-reimbursable building improve-
ments (1,455,267 square feet times
$0.35 per square foot)............... $ 509,343
----------
Total TI, LC and building improvement
costs................................ $1,132,105
==========
</TABLE>
(8) Based on a total of 10,391,848 shares to be outstanding upon consummation
of the Offering and the Formation Transactions.
(9) Calculated as the total estimated cash distributions divided by the total
estimated cash available for distribution for the 12 months ended April
30, 1998. The payout ratio of estimated pro forma FFO equals 80.8%.
40
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deducting
underwriting discounts and commissions and estimated expenses of the Offering,
will equal approximately $127.8 million (approximately $147.4 million if the
Underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $21.00 per Share. The Company intends to apply the
net proceeds of the Offering as follows: approximately $62.7 million to repay
mortgage and other indebtedness (including the repayment of approximately
$2.5 million of indebtedness advanced to the Company from Holdings);
approximately $60.6 million to acquire the Acquisition LLC, as more fully
described in "Formation and Structure;" and the remainder (approximately $4.5
million) for general corporate purposes (approximately $1.0 million of which
will be placed in a restricted cash account pursuant to the terms of certain
indebtedness and approximately $800,000 of which will be used to pay fees in
connection with the Credit Facility and certain other loans). If the initial
public offering price is less than $21.00 per Share, the Company may reduce
the amount of the offering proceeds applied to general corporate purposes or
draw on the Credit Facility, as necessary, to make the foregoing payments. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
If the Underwriters' over-allotment option to purchase additional Shares is
exercised, the Company expects to use the additional net proceeds for general
corporate purposes, including the acquisition of additional properties.
Pending the uses described above, the Company intends to invest the net
proceeds in interest-bearing accounts and other short-term, interest-bearing
securities that are consistent with the Company's qualification for taxation
as a REIT. Such investments may include, for example, government and
government agency securities, certificates of deposit and interest-bearing
bank deposits.
The following table sets forth certain information with respect to the
indebtedness to be repaid with the net proceeds of the Offering and the net
proceeds of approximately $15.4 million from new mortgage debt on two of the
Properties to be incurred in connection with the Offering. The indebtedness to
be repaid at such time had a weighted average interest rate of approximately
8.25% and a weighted average remaining term to maturity of approximately 1.5
years (excluding the balance due to Holdings, which is due on demand) as of
May 1, 1997.
<TABLE>
<CAPTION>
INDEBTEDNESS
TO BE REPAID
PROPERTY ($000)(1)
-------- ------------
<S> <C>
3535/3565 General Atomics Court................................. $ 4,703
1413 Research Boulevard(2)...................................... 8,600
300/401 Professional Drive(2)................................... 10,800
25/35/45 West Watkins Mill Road(2).............................. 11,700
1311/1401/1431 Harbor Bay Parkway(2)............................ 13,300
10933/11099 North Torrey Pines Road............................. 18,158
1102/1124 Columbia Street....................................... 5,860
Working Capital Line of Credit.................................. 2,500
Advanced/Due to Holdings(3)..................................... 2,500
-------
Total......................................................... $78,121
=======
</TABLE>
- --------
(1) Amounts reflect principal amortization through May 1, 1997.
(2) Represents aggregate borrowings under the PaineWebber Facility of $44.4
million. Such indebtedness was incurred on various dates in 1996 and bears
interest at a rate equal to LIBOR plus 2.5% (8.19% at May 1, 1997). See
"Risk Factors--Benefits to Managing Underwriter."
(3) Holdings will use the proceeds to repay outstanding loans from certain of
its stockholders. See "Formation and Structure--Benefits to Related
Parties."
41
<PAGE>
CAPITALIZATION
The following table sets forth the historical capitalization of the Company
as of March 31, 1997, and the pro forma capitalization as adjusted to give
effect to the Formation Transactions, the Offering and the use of the net
proceeds from the Offering as described under "Use of Proceeds." The
information set forth in the table should be read in conjunction with the
historical consolidated financial statements and the pro forma financial
information of the Company and notes thereto contained herein, "Use of
Proceeds" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------
HISTORICAL PRO FORMA
---------- ---------
(IN THOUSANDS)
<S> <C> <C>
Debt(1):
Secured notes payable................................ $112,815 $ 55,381
Unsecured line of credit............................. 2,500 --
Due to Holdings........................................ 2,300 --
Advances from Holdings................................. 286 --
Mandatorily redeemable Series V Preferred Stock,
$.01 par value per share, $1,000 stated value per
share; 50,000 shares authorized; 27,500 issued and
outstanding; no shares issued and outstanding pro
forma............................................... 25,929 --
Stockholders' equity:
Preferred Stock, $.01 par value per share; 65,000
shares authorized; 100,000,000 shares authorized pro
forma
Series T Preferred Stock, $100 stated value per
share; 125 shares authorized; 12 shares issued and
outstanding; no shares issued and outstanding pro
forma............................................. 1 --
Series U Preferred Stock, $500 stated value per
share; 250 shares authorized; 220 issued and
outstanding; no shares issued and outstanding pro
forma............................................. 110 --
Common Stock, $0.01 par value per share; 65,000
shares authorized; 1,000 issued and outstanding;
100,000,000 shares authorized; 10,391,848 shares
issued and outstanding pro forma(2)................. -- 104
Additional paid-in capital............................. 15,308 172,264
Accumulated deficit.................................... (2,973) (17,164)
-------- --------
Total stockholders' equity............................. 12,446 155,204
-------- --------
Total capitalization................................... $156,276 $210,585
======== ========
</TABLE>
- --------
(1) See note 4 of the notes to the historical consolidated financial
statements of the Company for information relating to the indebtedness.
(2) Excludes 900,000 shares reserved for issuance pursuant to the Company's
1997 Stock Option Plan of which options to acquire 600,000 shares of
Common Stock will be outstanding upon consummation of the Offering and the
Formation Transactions.
42
<PAGE>
DILUTION
At March 31, 1997, the Company had a net tangible book value of
approximately $36.3 million or $9.98 per share. After giving effect to (i) the
sale of the Shares (at an assumed initial public offering price of $21.00 per
Share) and the receipt by the Company of approximately $127.8 million in net
proceeds from the Offering, after deducting underwriting discounts and
commissions and estimated Offering expenses, and (ii) the repayment of
approximately $72.8 million of debt, the pro forma net tangible book value at
March 31, 1997 would have been $155.2 million, or $14.94 per share of Common
Stock. This amount represents an immediate increase in net tangible book value
of $4.96 per share to the existing stockholders and an immediate dilution in
pro forma net tangible book value of $6.06 per share of Common Stock to new
investors. The following table illustrates this dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $21.00
Net tangible book value per share prior to the Offering (1).. 9.98
Increase in net tangible book value per share attributable to
the Offering (2)............................................ 4.96
----
Pro forma net tangible book value after the Offering (3)....... 14.94
------
Dilution in net tangible book value per share of Common Stock
(4)........................................................... $ 6.06
======
</TABLE>
- --------
(1) Net tangible book value per share prior to the Offering is determined by
dividing net tangible book value of the Company (based on the March 31,
1997 net book value of the assets, less net book value of prepaid
financing costs to be expensed in connection with the mortgage
indebtedness repaid in connection with the Offering), by the number of
shares of Common Stock issuable to existing stockholders in connection
with the Formation Transactions.
(2) Based on the assumed initial public offering price of $21.00 per share of
Common Stock and after deducting underwriting discounts and commissions
and estimated Offering expenses.
(3) Based on total pro forma net tangible book value of $155.2 million divided
by the total number of shares of Common Stock to be outstanding upon
consummation of the Offering and the Formation Transactions.
(4) Dilution is determined by subtracting pro forma net tangible book value
per share of Common Stock after the Offering from the assumed initial
public offering price of $21.00 per share of Common Stock.
The following table summarizes, on a pro forma basis giving effect to the
Offering and the Formation Transactions, the number of shares of Common Stock
to be sold by the Company in the Offering and the number of shares of Common
Stock to be issued in connection with the Formation Transactions, and the net
tangible book value as of March 31, 1997.
<TABLE>
<CAPTION>
SHARES ISSUED BY THE COMPANY
-----------------------------------------
BOOK VALUE
OF AVERAGE
CONTRIBUTION CONTRIBUTION
SHARES VALUE PERCENT PER SHARE
------ ------------ ------- ------------
(IN THOUSANDS, EXCEPT PERCENTAGES
AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Shares sold to public investors..... 6,750 $141,750(1) 65.0% $21.00(1)
Shares issued in connection with the
Formation Transactions............. 3,642 36,329(2) 35.0% $ 9.98
------ -------- -----
Total............................. 10,392 $178,079 100.0%
====== ======== =====
</TABLE>
- --------
(1) Before deducting underwriting discounts and commissions and estimated
expenses of the Offering.
(2) Based on the March 31, 1997 net book value of the assets, less net book
value of prepaid financing and leasing costs to be expensed in connection
with the mortgage indebtedness repaid in connection with the Offering.
43
<PAGE>
SELECTED FINANCIAL DATA
The following pro forma and historical information should be read in
conjunction with, and is qualified in its entirety by, the historical
consolidated financial statements and notes thereto of the Company included
elsewhere in this Prospectus. The selected historical financial information of
the Company at December 31, 1996 and 1995, and for the years ended December
31, 1996 and 1995, and for the period October 27, 1994 (inception) through
December 31, 1994, has been derived from the historical consolidated financial
statements of the Company audited by Ernst & Young LLP, independent auditors,
whose report with respect thereto is included elsewhere in this Prospectus.
The selected financial and operating information for the three months ended
March 31, 1997 and March 31, 1996 has been derived from the unaudited
financial statements of the Company included elsewhere in this Prospectus.
The unaudited pro forma information as of March 31, 1997 and for the year
ended December 31, 1996 and the three months ended March 31, 1997 is presented
as if the Offering, the application of the net proceeds thereof as set forth
in "Use of Proceeds," the Formation Transactions and the acquisition of the
Acquisition LLC all had occurred at March 31, 1997 for the pro forma balance
sheet, and the Formation Transactions and the acquisition of the 1996 Acquired
Properties and the Acquisition LLC all had occurred at January 1, 1996 for the
pro forma statements of operations. The pro forma information is not
necessarily indicative of what the actual financial position or results of the
Company would have been as of and for the period indicated, nor does it
purport to represent the Company's future financial position or results of
operations.
<TABLE>
<CAPTION>
HISTORICAL
FOR THE PERIOD
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, OCTOBER 27, 1994
-------------------------------- -------------------------------- (INCEPTION) THROUGH
PRO FORMA HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL DECEMBER 31,
1997 1997 1996 1996 1996 1995 1994
---------- ---------- ---------- ---------- ---------- ---------- -------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental................. $ 6,925 $ 5,175 $ 2,090 $ 27,121 $ 12,941 $ 8,020 $ 834
Tenant recoveries...... 1,897 1,897 486 6,669 4,169 1,699 87
Other.................. 129 89 34 658 563 204 90
---------- -------- ------- ---------- -------- ------- -------
Total revenue........... 8,951 7,161 2,610 34,448 17,673 9,923 1,011
Expenses:
Rental operations...... 1,893 1,830 554 7,195 4,356 2,228 252
General and
administrative........ 725 954 406 2,900 1,972 1,608 1,016
Post retirement
benefit............... 632 632 -- 438 438 -- --
Interest............... 1,180 2,509 918 4,717 6,327 3,553 328
Depreciation and
amortization.......... 1,330 1,003 413 4,953 2,405 1,668 63
---------- -------- ------- ---------- -------- ------- -------
Total expenses.......... 5,760 6,928 2,291 20,203 15,498 9,057 1,659
Income (loss) from
operations............. 3,191 233 319 14,245 2,175 866 (648)
Charge in lieu of
taxes.................. -- -- -- -- -- 105 --
---------- -------- ------- ---------- -------- ------- -------
Net income (loss)....... $ 3,191 $ 233 $ 319 $ 14,245 $ 2,175 $ 761 $ (648)
========== ======== ======= ========== ======== ======= =======
Net income allocated to
preferred
stockholders........... -- $ 1,378 -- -- $ 1,256 -- --
========== ======== ======= ========== ======== ======= =======
Net income (loss)
allocated to common
stockholders........... $ 3,191 $ (1,145) $ 319 $ 14,245 $ 919 $ 761 $ (648)
========== ======== ======= ========== ======== ======= =======
Pro forma net income per
share of Common
Stock(1)............... $ 0.31 $ 1.37
========== ==========
Pro forma shares of
Common Stock
outstanding............ 10,391,848 10,391,848
========== ==========
BALANCE SHEET DATA (AT
PERIOD END):
Rental properties--net
of accumulated
depreciation........... $198,984 $147,315 $146,960 $54,353 $54,366
Total assets............ 216,136 161,690 160,392 58,702 56,600
Mortgage loans payable
and unsecured lines of
credit................. 55,381 115,315 113,182 40,894 39,164
Total liabilities....... 60,932 123,315 120,819 42,369 40,119
Mandatorily redeemable
Series V Preferred
Stock.................. -- 25,929 25,042 -- --
Stockholders' equity.... $ 155,204 12,446 14,531 16,333 16,481
</TABLE>
44
<PAGE>
SELECTED FINANCIAL DATA (CONTINUED)
<TABLE>
<CAPTION>
HISTORICAL
FOR THE PERIOD
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31, OCTOBER 27, 1994
-------------------------------- -------------------------------- (INCEPTION) THROUGH
PRO FORMA HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL DECEMBER 31,
1997 1997 1996 1996 1996 1995 1994
--------- ---------- ---------- --------- ---------- ---------- -------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Net income.............. $ 3,191 $ 233 $ 319 $ 14,245 $ 2,175 $ 761 $ (648)
Add:
Accrual of a post-
retirement
benefit(2)............ 632 632 -- 438 438 -- --
Depreciation and
amortization of
Properties,
improvements and
leasing costs......... 1,330 1,003 413 4,953 2,405 1,668 63
--------- --------- ------- --------- --------- ------- --------
Funds from
Operations(3)......... $ 5,153 $ 1,868 $ 732 $ 19,636 $ 5,018 $ 2,429 $ (585)
========= ========= ======= ========= ========= ======= ========
Cash flows from
operating activities... $ -- $ 3,160 $ 972 $ -- $ (1,646) $ 355 $ (1,024)
Cash flows from
investing activities... -- (1,319) (86) -- (94,900) (1,554) (29,924)
Cash flows from
financing activities... -- (787) (52) -- 97,323 927 32,139
Number of properties
owned at period end.... 15 12 4 15 12 4 4
Rentable square feet of
properties owned at
period end............. 1,455,267 1,031,070 313,042 1,455,267 1,031,070 313,042 313,042
Occupancy at period end
of properties owned at
period end............. -- 97% 96% -- 97% 96% 88%
</TABLE>
- --------
(1) Pro forma net income per share includes pro forma net income from the
Acquisition LLC Properties. If such net income (and the related shares of
Common Stock to be sold in the Offering, the net proceeds of which will be
used for the purchase of the Acquisition LLC) were excluded, pro forma net
income would be $1,778,000 million and $7,464,000 million, respectively,
for the three months ended March 31, 1997 and the year ended December 31,
1996, and pro forma net income per share would be $0.25 and $1.04,
respectively, for the three months ended March 31, 1997 and the year ended
December 31, 1996.
(2) This adjustment relates solely to the elimination of a non-cash accrual of
a one-time post-retirement benefit for an officer of the Company.
(3) The White Paper defines FFO as net income (loss) (computed in accordance
with GAAP), excluding gains (or losses) from debt restructuring and sales
of property, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures.
Management considers FFO an appropriate measure of performance of an
equity REIT because it is predicated on cash flow analyses. The Company
computes FFO in accordance with standards established by the White Paper,
which may differ from the methodology for calculating FFO utilized by
other equity REITs, and, accordingly, may not be comparable to such other
REITs. Further, FFO does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
service obligations, or other commitments and uncertainties. See notes (6)
(7) and (8) to the table under the caption "Distributions" and the notes
to the Company's historical financial statements. FFO should not be
considered as an alternative to net income (determined in accordance with
GAAP) as an indication of the Company's financial performance or to cash
flows from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds
available to fund the Company's cash needs, including its ability to make
distributions.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion should be read in conjunction with the information
contained in "Selected Financial Data" and the more detailed historical
consolidated financial statements and notes thereto included elsewhere herein.
Since its formation in October 1994, the Company has devoted substantially
all of its resources to the acquisition and management of high quality,
strategically located Life Science Facilities leased principally to Life
Science Industry tenants in its target markets. Upon consummation of the
Offering and the Formation Transactions, the Company will have total assets
with a book value of approximately $216 million, including real estate assets
with a book value of approximately $199 million.
The Company receives income from rental revenue (including tenant
recoveries) from its Properties. The Company acquired its current portfolio
over the last three years, with four of the Properties acquired in calendar
year 1994 (the "1994 Acquired Properties"), eight in 1996 and three to be
acquired in connection with the Offering and the Formation Transactions. As a
result of the Company's acquisition strategy, the financial data shows
significant increases in total revenue from year to year, largely attributable
to the acquisitions over the years and the benefit of a full period of
effective rental and other revenue for Properties acquired in the preceding
year. For the foregoing reasons, the Company does not believe its period-to-
period financial data are comparable.
RESULTS OF OPERATIONS
Comparison of Three Months Ended March 31, 1997 ("First Quarter 1997") to
Three Months Ended March 31, 1996 ("First Quarter 1996")
Rental revenue increased by $3.1 million, or 148%, to $5.2 million for First
Quarter 1997 compared to $2.1 million for First Quarter 1996. The increase
resulted primarily from the 1996 Acquired Properties, which added $3.0 million
of rental revenue in First Quarter 1997. Rental revenue from the Properties
owned since January 1, 1995 ("Same Properties") increased by $64,000, or 3%.
This increase resulted primarily from the conversion and lease of 19,310
square feet of storage space at 10933 North Torrey Pines Road to higher rent
laboratory space in October 1996.
Tenant recoveries increased by $1.4 million, or 290%, to $1.9 million for
First Quarter 1997 compared to $486,000 for First Quarter 1996. The increase
resulted primarily from the 1996 Acquired Properties, which added $1.3 million
of tenant recoveries. Tenant recoveries from the Same Properties increased by
$101,000, or 21%, due to an increase in operating expenses and the improved
measurement and recovery of tenant utility expenses.
Other income increased by $55,000, or 161%, to $89,000 for First Quarter
1997 compared to $34,000 for First Quarter 1996, resulting from an increase in
interest income due to increased amounts in capital improvement reserve
accounts.
Rental operating expenses increased by $1.3 million, or 230%, to $1.8
million for First Quarter 1997 compared to $554,000 for First Quarter 1996.
The increase resulted primarily from the 1996 Acquired Properties, which added
$1.2 million of rental expenses. Operating expenses for the Same Properties
were relatively unchanged.
General and administrative expenses increased by $548,000, or 135%, to
$954,000 for First Quarter 1997 compared to $406,000 for First Quarter 1996.
Of this increase, approximately $543,000 resulted from the accrual of employee
bonuses to be paid in connection with the Offering in consideration for past
services and the amendment of certain employment agreements.
Post-retirement benefit expense for First Quarter 1997 reflects the non-cash
accrual associated with a one-time post-retirement benefit for an officer of
the Company.
46
<PAGE>
Interest expense increased by $1.6 million, or 173%, to $2.5 million for
First Quarter 1997 compared to $918,000 for First Quarter 1996. The increase
resulted primarily from indebtedness incurred to acquire the 1996 Acquired
Properties, which added $1.5 million of interest expense.
Depreciation and amortization increased by $590,000, or 143%, to $1.0
million for First Quarter 1997 compared to $413,000 for First Quarter 1996.
The increase resulted primarily from depreciation associated with the 1996
Acquired Properties.
As a result of the foregoing, net income decreased by $86,000, or 27%, to
$233,000 for First Quarter 1997 compared to $319,000 for First Quarter 1996.
Comparison of Year Ended December 31, 1996 to Year Ended December 31, 1995
Rental revenue increased by $4.9 million, or 61%, to $12.9 million for the
year ended December 31, 1996 compared to $8.0 million for the year ended
December 31, 1995. The increase resulted primarily from the 1996 Acquired
Properties, which added $4.6 million of rental revenue in 1996. Rental revenue
from the Same Properties increased by $370,000, or 5%. Of this increase,
$320,000 resulted from a full year of rental income in 1996 resulting from the
increase in occupancy at 11099 North Torrey Pines Road during 1995.
Tenant recoveries increased by $2.5 million, or 147%, to $4.2 million for
1996 compared to $1.7 million for 1995. The increase resulted primarily from
the 1996 Acquired Properties, which added $2.1 million of tenant recoveries.
Tenant recoveries from the Same Properties increased by $395,000, or 23%. Of
this increase, $300,000 resulted from a new lease at 11099 North Torrey Pines
Road. The remaining increase resulted primarily from a new energy management
system at 10933 North Torrey Pines Road that allows the Company to more
accurately measure and recover from its tenants certain costs of utility
usage.
Other income increased by $359,000, or 176%, to $563,000 for 1996 compared
to $204,000 for 1995. The increase resulted primarily from the 1996 Acquired
Properties, which added $337,000 of other income.
Rental operating expenses increased by $2.2 million, or 100%, to $4.4
million for 1996 compared to $2.2 million for 1995. The increase resulted
primarily from the 1996 Acquired Properties, which added $2.0 million of
rental operating expenses. Rental operating expenses from the Same Properties
increased by $162,000, or 7.3%, primarily as a result of an increase in
expenses at 10933 North Torrey Pines Road.
General and administrative expenses increased by $364,000, or 23%, to $2.0
million for 1996 compared to $1.6 million for 1995. The increase resulted
primarily from additional professional fees incurred during 1996.
Post-retirement benefit expense in 1996 represents the non-cash accrual
associated with a one-time post-retirement benefit for an officer of the
Company.
Interest expense increased by $2.8 million, or 80%, to $6.3 million for 1996
compared to $3.5 million for 1995. The increase resulted primarily from
indebtedness incurred to acquire the 1996 Acquired Properties, which added
$2.3 million of interest expense, and debt outstanding under the Company's
unsecured line of credit, which was repaid in July 1996.
Depreciation and amortization increased by $737,000, or 44%, to $2.4 million
for 1996 compared to $1.7 million for 1995. The increase resulted primarily
from depreciation associated with the 1996 Acquired Properties.
As a result of the foregoing, net income increased by $1.4 million, or 184%,
to $2.2 million for 1996 compared to $761,000 for 1995.
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
Rental revenue increased by $7.2 million, or 862%, to $8.0 million for the
year ended December 31, 1995 compared to $834,000 for the year ended December
31, 1994. The increase resulted primarily from a full year of rental revenue
from the 1994 Acquired Properties.
47
<PAGE>
Tenant recoveries increased by $1.6 million, or 1,853%, to $1.7 million for
1995 compared to $87,000 for 1994. The increase resulted primarily from a full
year of tenant recoveries from the 1994 Acquired Properties.
Other income increased by $114,000, or 127%, to $204,000 for 1995 compared
to $90,000 for 1994. The increase resulted primarily from $56,500 of
additional storage income from the 1994 Acquired Properties and interest
income of $57,000 earned on the Company's cash balances for 1995 not earned
during 1994.
Rental operating expenses increased by $2.0 million, or 784%, to $2.2
million for 1995 compared to $252,000 for 1994. The increase resulted
primarily from a full year of rental operating expenses for the 1994 Acquired
Properties.
General and administrative expenses increased by $592,000, or 58%, to $1.6
million for 1995 compared to $1,016,000 for 1994. The increase resulted
primarily from a full year of general and administrative expenses in 1995
compared to 1994.
Interest expenses increased by $3.2 million, or 983%, to $3.6 million for
1995 compared to $328,000 for 1994. The increase resulted primarily from a
full year of interest expense on outstanding debt in 1995 compared to 1994.
Depreciation and amortization increased by $1.6 million, or 2,548%, to $1.7
million for 1995 compared to $63,000 for 1994. The increase resulted primarily
from a full year of depreciation and amortization from the 1994 Acquired
Properties.
As a result of the foregoing, net income increased by $1.4 million to
$761,000 for 1995 compared to a net loss of $648,000 for 1994.
PRO FORMA RESULTS OF OPERATIONS
Comparison of Pro Forma Three Months Ended March 31, 1997 to Historical Three
Months Ended March 31, 1997
For the three months ended March 31, 1997, pro forma rental revenue, tenant
recoveries, rental property operating expenses and depreciation and
amortization reflect increases over the historical amounts due to adjustments
for the previously owner-occupied periods for the Acquisition LLC Properties.
Pro forma interest expense of $1.2 million is $1.3 million lower than the
historical interest expense of $2.5 million due to the elimination of interest
on certain mortgage loans to be repaid with a portion of the proceeds of the
Offering, offset by interest expense on two new mortgage loans to be incurred
in connection with the Offering. Pro forma general and administrative expenses
have been reduced from the historical period as a result of the elimination of
a $543,000 accrual for bonuses to two officers of the Company to be paid in
connection with the Offering in consideration for past services and the
amendment of such officers' employment agreements, offset by an increase in
general and administrative expenses due to increased costs expected to be
incurred as a result of being a public company.
Comparison of Pro Forma Year Ended December 31, 1996 to Historical Year Ended
December 31, 1996
For the year ended December 31, 1996, pro forma rental revenue, tenant
recoveries, rental operating expenses and depreciation and amortization were
higher than the historical amounts as a result of the Company's ownership in
the pro forma period of the 1996 Acquired Properties and the Acquisition LLC
Properties, the pre-acquisition results of which are not included in the
historical financial data. Additionally, pro forma interest expense was lower
by $1,610,000, or 25%, primarily as a result of the elimination of interest on
certain mortgage loans to be repaid with a portion of the proceeds of the
Offering. The increase in general and administrative expenses of $928,000, or
47%, for the pro forma period, reflects increased costs expected to be
incurred as a result of being a public company.
LIQUIDITY AND CAPITAL RESOURCES
Upon consummation of the Offering and the Formation Transactions, the
Company will repay approximately $78.1 million of its existing mortgage debt
with a portion of the net proceeds of the Offering, a new $8.5 million, 17-
year, self-amortizing mortgage on 1431 Harbor Bay Parkway and a new
$6.9 million
48
<PAGE>
mortgage on 1102 and 1124 Columbia Street. As a result, total secured debt
will be reduced by approximately $57.6 million to $55.2 million, and 11 of the
15 Properties will be unencumbered. In addition, the Company will have
established working capital reserves of approximately $4.5 million (of which
approximately $1.0 million will be placed in a restricted cash account
pursuant to the terms of certain indebtedness and approximately $800,000 of
which will be used to pay fees in connection with the Credit Facility and
certain other loans) and capital expenditure cash reserves of approximately
$4.3 million. Of the $4.3 million, approximately $3.6 million has been set
aside and is held in a cash account to complete the conversion of existing
space into higher rent generic laboratory space at 1102 and 1124 Columbia
Street pursuant to an agreement between the Company and Corixa Corporation.
See "The Company--Growth Strategies." The remaining $700,000 has been set
aside for capital expenditures based on agreements with lenders. In addition,
the Company holds approximately $500,000 in security deposit reserve accounts
based on the terms of certain lease agreements.
Upon consummation of the Offering and the Formation Transactions, the
Company will have outstanding mortgage indebtedness as follows:
<TABLE>
<CAPTION>
APPROXIMATE
PROPERTY PLEDGED AS COLLATERAL PRINCIPAL BALANCE INTEREST RATE MATURITY DATE
------------------------------ ----------------- ------------- -------------
<S> <C> <C> <C>
3535/3565 General Atomics
Court
San Diego, CA $18,305,869 9.00% December 2014
1431 Harbor Bay Parkway
Alameda, CA 8,500,000 (1) January 2014
1102/1124 Columbia Street
Seattle, WA 21,562,264 7.75% May 2016
1102/1124 Columbia Street
Seattle, WA 6,860,000 (2) July 2016
-----------
Total $55,228,133
===========
</TABLE>
- --------
(1) The interest rate will be fixed at a rate equal to approximately 70 basis
points over the interpolated 7-year Treasury rate, which would result in
an interest rate of approximately 7.30% (as of May 1, 1997).
(2) The interest rate will initially be variable, based on an interest rate of
90 basis points over LIBOR. This rate is anticipated to be fixed (based on
the terms of the loan) in August 1997 at a rate equal to approximately 90
basis points over the interpolated 20-year Treasury rate, which would
result in a fixed interest rate of approximately 7.70% (as of May 1,
1997).
The expected principal payments due on outstanding indebtedness in 1997
(following the Offering) and 1998 are $705,000 and $1,190,000, respectively.
The Company believes that the substantial reduction in its overall debt, and
the corresponding reduction in required debt service payments, should provide
the Company with increased financial flexibility to take advantage of
acquisition opportunities as well as to provide working capital for
retenanting and releasing costs and for payment of leasing commissions
associated with new leasing activity.
Although cash from operations required to fund interest expense will
decrease substantially as a result of the Company's reduction in overall debt,
such reduction will be offset by an increased use of cash from operations to
meet annual REIT distribution requirements. The Company expects to make
distributions and to pay amortization of principal and interest on its debt
from cash available for distribution, which is expected to exceed cash
historically available for distribution as a result of the reduction in
overall debt described above. Amounts accumulated for distribution will be
invested by the Company primarily in interest-bearing accounts and other
short-term, interest-bearing securities that are consistent with the Company's
qualification for taxation as a REIT.
The Company expects to meet its short-term liquidity requirements generally
through its initial working capital and net cash provided by operations. The
Company believes that its net cash provided by operations will be sufficient
to allow the Company to make distributions necessary to enable the Company to
continue to qualify
49
<PAGE>
as a REIT. The Company also believes that the foregoing sources of liquidity
will be sufficient to fund its recurring non-revenue enhancing capital
expenditures, tenant improvements and leasing commissions.
The Company expects to meet certain long-term liquidity requirements, such
as property acquisitions, scheduled debt maturities, renovations, expansions
and other non-recurring capital improvements, through long-term secured and
unsecured indebtedness and the issuance of additional equity securities. The
Company anticipates that only a portion of the principal outstanding under its
outstanding indebtedness will be amortized prior to maturity and that the
Company will not have sufficient funds on hand to repay such indebtedness at
maturity. As a result, it will be necessary for the Company to refinance such
debt either through additional debt financing secured by individual properties
or groups of properties, by unsecured private or public debt offerings or by
additional equity offerings. See "Risk Factors--Real Estate Financing." The
Company's debt will mature at various dates through 2016.
The Company has received a commitment for the Credit Facility from the Bank
of America for up to $150,000,000, consisting of a $100,000,000 activated
tranche and a $50,000,000 tranche which may be activated at the Company's
discretion provided there is no event of default under the Credit Facility.
The Company expects to enter into the Credit Facility upon consummation of the
Offering and the Formation Transactions. The Credit Facility will provide for
syndicated borrowings bearing interest based on the lower of (i) the LIBOR
rate plus an applicable margin ranging from 1.10% to 1.50% and (ii) a bank
reference rate plus an applicable margin ranging from 0.0% to 0.25%. The
applicable margins will be determined initially by reference to the ratio of
the Company's total liabilities to gross asset value at the time of borrowing.
Upon completion of the Offering, the Company anticipates borrowing under the
Credit Facility at a rate equal to LIBOR plus 1.40%. The Company may also
solicit competitive bids for loans for up to one-third of the activated
commitment amount. The Company has paid certain fees in connection with the
acceptance of the commitment to lend and will be liable for additional fees
upon the closing of the Credit Facility and thereafter. The Credit Facility
will have customary conditions to closing and to borrowing, and will contain
representations and warranties customary in REIT financings. The Credit
Facility will contain financial covenants, including minimum market net worth;
total liabilities to gross asset value ratios; earnings to interest and fixed
charge coverage ratios; limitations on unsecured indebtedness and advances to
joint ventures; and requirements to maintain a pool of unencumbered assets
approved by the lenders under certain circumstances and meeting certain
defined characteristics. The Credit Facility will contain restrictions on,
among other things, indebtedness, investments, distributions and mergers.
There can be no assurance that the Company will be able to enter into the
Credit Facility on terms satisfactory to it. The Credit Facility will be used
to finance acquisitions and capital improvements, and for general corporate
purposes.
The Phase I environmental assessments of the Properties have not revealed
any environmental liabilities that the Company believes would have a material
adverse effect on the Company's financial condition or results of operations
taken as a whole, nor is the Company aware of any such material environmental
liabilities. See "Risk Factors--Possible Environmental Liabilities" and "The
Properties--Environmental Matters."
HISTORICAL CASH FLOWS
The Company's principal sources of funding for operations and capital
expenditures have been cash flows from operating activities, private stock
offerings and secured debt financings. The Company had net income for the
years ended December 31, 1996 and 1995, and had a net loss for the year ended
December 31, 1994. The Company had net income for the three months ended March
31, 1997 and 1996.
Net cash provided by operating activities decreased by $2.0 million to a
deficit of $1.6 million for 1996 compared to net cash of $355,000 for 1995.
The decrease resulted primarily from loan fees associated with additional
financing and additional restricted cash reserves required by a tenant of one
of the 1996 Acquired Properties. Net cash provided by operating activities
increased by $1.4 million to $355,000 for 1995 compared to a deficit of $1.0
million for 1994. The increase resulted from a full year of operations for the
1994 Acquired Properties. Net cash provided by operating activities increased
by $2.2 million to $3.2 million for the three months ended March 31, 1997
compared to net cash of $972,000 for the three months ended March 31, 1996.
The increase resulted from the operations of the 1996 Acquired Properties.
50
<PAGE>
Net cash used in investing activities increased by $93.3 million to $94.9
million for 1996 compared to net cash used in investing activities of $1.6
million for 1995. The increase resulted primarily from the 1996 Acquired
Properties. Net cash used in investing activities decreased by $28.3 million
to $1.6 million for 1995 compared to $29.9 million for 1994. The decrease
resulted from the fact that no properties were acquired in 1995. Net cash used
in investing activities increased by $1.2 million to $1.3 million for the
three months ended March 31, 1997 compared to the net cash used of $86,000 for
the three months ended March 31, 1996. The majority of the increase resulted
from improvements made to 1102 and 1124 Columbia Street.
Cash provided by financing activities increased by $96.4 million to $97.3
million for 1996 compared to $927,000 for 1995. The increase resulted
primarily from net borrowings of $80 million during 1996 compared to $2.3
million in 1995. In addition, the Company received net proceeds of $24.1
million from the issuance of mandatorily redeemable preferred stock in 1996.
Cash provided by financing activities decreased $31.2 million to $927,000 for
1995 compared to $32.1 million for 1994. This decrease resulted primarily from
borrowings incurred in 1994 in connection with the 1994 Acquired Properties.
Net cash used in financing activities increased by $735,000 to $787,000 for
the three months ended March 31, 1997 compared to the net cash used of $52,000
for the three months ended March 31, 1996. The increase resulted from a $3.0
million cash distribution, offset by a $2.5 million draw on the Company's line
of credit.
FUNDS FROM OPERATIONS
FFO increased by $2.6 million, or 107%, to $5.0 million for 1996 compared to
$2.4 million for 1995. Pro forma FFO was $19.6 million for 1996. FFO increased
by $1.1 million, or 155%, to $1.9 million for the three months ended March 31,
1997 compared to $732,000 for 1996. Pro forma FFO was $5.2 million for the
three months ended March 31, 1997. The following reconciliation of net income
to FFO illustrates the difference between the two measures of operating
performance:
<TABLE>
<CAPTION>
HISTORICAL
FOR THE YEAR ENDED
THREE MONTHS ENDED MARCH 31, PRO FORMA FOR DECEMBER 31,
------------------------------- THE YEAR ENDED -------------------
PRO FORMA HISTORICAL HISTORICAL DECEMBER 31, 1996
1997 1997 1996 (UNAUDITED) 1996 1995
--------- ---------- ---------- ----------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net income.............. $3,191 $ 233 $319 $14,245 $ 2,175 $ 761
Add:
Accrual of a post-re-
tirement benefit(1).. 632 632 -- 438 438 --
Depreciation and amor-
tization of Proper-
ties, improvements
and leasing costs.... 1,330 1,003 413 4,953 2,405 1,668
------ ------ ---- ------- --------- ---------
FFO(2).................. $5,153 $1,868 $732 $19,636 $ 5,018 $ 2,429
====== ====== ==== ======= ========= =========
</TABLE>
- --------
(1) This adjustment relates solely to the elimination of a non-cash accrual of
a one-time post-retirement benefit for an officer of the Company.
(2) The White Paper defines FFO as net income (loss) (computed in accordance
with GAAP), excluding gains (or losses) from debt restructuring and sales
of property, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures.
Management considers FFO an appropriate measure of performance of an
equity REIT because it is predicated on cash flow analyses. The Company
computes FFO in accordance with standards established by the White Paper,
which may differ from the methodology for calculating FFO utilized by
other equity REITs, and, accordingly, may not be comparable to such other
REITs. Further, FFO does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
service obligations, or other commitments and uncertainties. See notes
(6), (7) and (8) under the caption "Distribution Policy" and the notes to
the Company's historical financial statements. FFO should not be
considered as an alternative to net income (determined in accordance with
GAAP) as an indication of the Company's financial performance or to cash
flows from operating activities (determined in accordance with GAAP) as a
measure of the Company's liquidity, nor is it indicative of funds
available to fund the Company's cash needs, including its ability to make
distributions.
51
<PAGE>
INFLATION
Approximately 80% of the Company's leases (on a square footage basis) are
triple net leases, requiring tenants to pay substantially all real estate
taxes and insurance, common area and other operating expenses (including
increases thereto). In addition, approximately 65% of the Company's leases (on
a square footage basis) contain effective annual rent escalations that are
either fixed (ranging from 2.5% to 4.0%) or indexed based on a CPI or other
index. Accordingly, the Company does not believe that its earnings or cash
flow are subject to any significant risk of inflation. An increase in
inflation, however, could result in an increase in the Company's variable rate
borrowing cost on future financing. See "Risk Factors--Real Estate Financing."
The Credit Facility will bear interest at a variable rate.
52
<PAGE>
THE PROPERTIES
GENERAL
The Properties range in size from approximately 30,000 to 250,000 square
feet, are built to accommodate single or multiple tenants and are generally
one or two story concrete tilt-up or block and steel frame structures. The
exteriors typically resemble traditional suburban office properties, but
interior infrastructures are designed to accommodate the needs of Life Science
Industry tenants. Such improvements typically are generic to Life Science
Industry tenants rather than specific to a particular tenant. As a result,
management believes that the improvements have long-term value and utility and
are readily usable by a wide range of Life Science Industry tenants. Generic
infrastructure improvements for each Property include: reinforced concrete
floors, upgraded roof loading capacity and increased floor to ceiling heights;
heavy-duty HVAC systems and advanced environmental control technology;
significantly upgraded electrical, gas and plumbing infrastructure; and
laboratory benches.
Upon consummation of the Offering and the Formation Transactions, the
Company will own 15 high quality, strategically located Life Science
Facilities containing approximately 1.5 million rentable square feet of office
and laboratory space in four markets: the San Diego area, the San Francisco
Bay area, Seattle and suburban Washington, D.C. All of the Properties have
been built or substantially renovated since 1984. As of April 30, 1997, the
Properties were approximately 98% leased.
Leases in the Company's multi-tenant buildings typically have terms of three
to seven years, while the single-tenant building leases typically have terms
of 10 to 20 years. Approximately 80% of the Company's leases (on a square
footage basis) are triple net leases, requiring tenants to pay substantially
all real estate taxes and insurance, common area and other operating expenses
(including increases thereto) in addition to base rent. The remaining leases
are gross leases, pursuant to which tenants generally pay for substantially
all real estate taxes and insurance, common area and other operating expenses
above those for an established base year. Approximately 65% of the Company's
leases (on a square footage basis) contain effective annual rent escalations
that are either fixed (ranging from 2.5% to 4.0%) or indexed based on a CPI or
other index. In addition, approximately 80% of the Company's leases (on a
square footage basis) provide for the recapture of certain non-revenue
enhancing capital expenditures (including roof replacements, parking lot
resurfacing and HVAC systems maintenance expenditures), which the Company
believes would typically be borne by the landlord in traditional office
leases. The leases also typically give the Company the right to review and
approve tenant alterations to the property. Generally, tenant-installed
improvements remain the property of the Company after termination of the
lease. However, the Company is permitted under the terms of most of its leases
to require that the tenant remove such improvements and restore the premises
to their original condition.
The Company manages 11 of the Properties, and the balance are managed by the
tenant or by property management firms. All material decisions with respect to
the Properties, however, are made by the Company.
53
<PAGE>
The following table sets forth certain information with respect to the
Properties:
<TABLE>
<CAPTION>
ANNUALIZED
PERCENTAGE OF BASE
AGGREGATE RENT PER ANNUALIZED
APPROXIMATE PORTFOLIO LEASED NET EFFECTIVE
YEAR BUILT/ RENTABLE PERCENTAGE PERCENTAGE ANNUALIZED ANNUALIZED SQUARE RENT PER LEASED
PROPERTIES RENOVATED (1) SQUARE FEET LAB SPACE LEASED (2) BASE RENT(3) BASE RENT FOOT (3) SQUARE FOOT (4)
- ---------- ------------- ----------- ----------- ---------- ------------ ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
San Diego
10933 North 1971/1994 108,133 71% 100% $ 2,308,560 8.4% $21.35(5) $15.84
Torrey Pines
Road San Diego,
CA
11099 North Torrey 1986/1996 86,962 71 100 2,206,992 8.0 25.38(6) 23.66
Pines Road San
Diego, CA
3535 General 1991 76,084 77 100 2,509,704 9.1 32.99(7) 32.11
Atomics Court
San Diego, CA
3565 General 1991 43,600 80 100 1,526,952 5.6 35.02(10) 35.02
Atomics Court San
Diego, CA
San Francisco Bay
Area
1311 Harbor Bay 1984 30,000 17 30(11) 148,752 0.6 16.48 16.48
Parkway Alameda,
CA
1401 Harbor Bay 1986/1994 47,777 50 100 519,144 1.9 10.87 10.87
Parkway Alameda,
CA
1431 Harbor Bay 1985/1994 70,000 50 100 1,415,196 5.2 20.22 12.87
Parkway
Alameda, CA
Seattle, Washington
1102/1124 Columbia 1975/1997 213,397 64 100 4,959,792 18.1 23.24(12) 23.01
Street Seattle, WA
Suburban
Washington, D.C.
300 Professional 1989 48,440 23 100 669,840 2.4 13.83 13.83
Drive
Gaithersburg, MD
401 Professional 1987 62,739 75 100 1,038,564 3.8 16.55 16.55
Drive
Gaithersburg, MD
25/35/45 West 1989/1997 138,938 39 93 1,747,044 6.4 13.56(14) 13.56
Watkins Mill Road
Gaithersburg, MD
1413 Research 1967/1996 105,000 75 100 1,563,456 5.7 14.89 13.29
Boulevard
Rockville, MD
--------- --- --- ----------- ---- ------ ------
Subtotal/Weighted
Average (18): 1,031,070 61% 97% $20,613,996 75.1% $20.61 $19.07
<CAPTION>
PROPERTIES MAJOR TENANTS
- ---------- ------------------------
<S> <C>
San Diego
10933 North
Torrey Pines
Road San Diego, The Scripps Research
CA Institute
Advanced Tissue
Sciences, Inc.
11099 North Torrey Agouron
Pines Road San Pharmaceuticals, Inc.
Diego, CA
Sequana Therapeutics,
Inc.
3535 General The Scripps Research
Atomics Court Institute
San Diego, CA
R.W. Johnson
Research Institute (8)
Syntro Corporation (9)
3565 General Agouron
Atomics Court San Pharmaceuticals, Inc.
Diego, CA
San Francisco Bay
Area
1311 Harbor Bay Chiron Corporation
Parkway Alameda,
CA
1401 Harbor Bay Chiron Diagnostics
Parkway Alameda,
CA
1431 Harbor Bay FDA
Parkway
Alameda, CA
Seattle, Washington
1102/1124 Columbia Fred Hutchinson Cancer
Street Seattle, WA Research Center
Corixa Corporation
Swedish Medical Center
Suburban
Washington, D.C.
300 Professional Mobile Telesystems, Inc.
Drive
Gaithersburg, MD
Antex Biologics Inc.
401 Professional Gillette Capital
Drive Corporation (13)
Gaithersburg, MD
25/35/45 West Genetic Therapy,
Watkins Mill Road Inc. (15)
Gaithersburg, MD MedImmune, Inc.
1413 Research U.S. Army Corps of
Boulevard Engineers
Rockville, MD
Subtotal/Weighted
Average (18):
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
ANNUALIZED
PERCENTAGE OF BASE
AGGREGATE RENT PER ANNUALIZED
APPROXIMATE PORTFOLIO LEASED NET EFFECTIVE
YEAR BUILT/ RENTABLE PERCENTAGE PERCENTAGE ANNUALIZED ANNUALIZED SQUARE RENT PER LEASED
PROPERTIES RENOVATED (1) SQUARE FEET LAB SPACE LEASED (2) BASE RENT(3) BASE RENT FOOT (3) SQUARE FOOT (4)
- ---------- ------------- ----------- ----------- ---------- ------------ ------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ACQUISITION LLC
PROPERTIES (16)
- ----------------
Suburban
Washington, D.C.
1550 East Gude 1981/1995 44,500 40 100 597,216 2.2 13.42 13.42
Drive
Rockville, MD
1330 Piccard Drive 1978/1995 131,511 75 100 1,903,656 6.9 14.48 14.48
Rockville, MD
14225 Newbrook 1992 248,186 60 100 4,340,256 15.8 17.49 17.49
Drive
Chantilly, VA
--------- --- --- ----------- ----- ------ ------
Subtotal/Weighted
Average (18): 424,197 63% 100% $ 6,841,128 24.9% $16.13 $16.13
--------- --- --- ----------- ----- ------ ------
Total/Weighted
Average (18): 1,455,267 61% 98% $27,455,124 100.0% $19.28 $18.20
========= === === =========== ===== ====== ======
<CAPTION>
PROPERTIES MAJOR TENANTS
- ---------- ----------------------
<S> <C>
ACQUISITION LLC
PROPERTIES (16)
- ----------------
Suburban
Washington, D.C.
1550 East Gude Quest
Drive Diagnostics, Inc. (17)
Rockville, MD
1330 Piccard Drive PerImmune, Inc.
Rockville, MD
14225 Newbrook
Drive American Medical
Chantilly, VA Laboratories, Inc.
Subtotal/Weighted
Average (18):
Total/Weighted
Average (18):
</TABLE>
- -------
(1) Includes year in which construction was completed and, where applicable,
year of most recent major renovation.
(2) Based on all leases at the respective Property in effect as of April 30,
1997.
(3) Annualized Base Rent means the annualized fixed base rental amount
(determined in accordance with GAAP) in effect as of April 30, 1997. In
the case of triple net leases, Annualized Base Rent does not include real
estate taxes and insurance, common area and other operating expenses,
substantially all of which are borne by the tenants. This amount, divided
by the rentable square feet leased at the Property as of April 30, 1997,
is the Annualized Base Rent per Leased Square Foot.
(4) Annualized Net Effective Rent is the Annualized Base Rent in effect as of
April 30, 1997, less (for gross leases) real estate taxes and insurance,
common area and other operating expenses and (for all leases) amortized
tenant improvements and leasing commissions. This amount, divided by the
rentable square feet leased at the Property as of April 30, 1997, is the
Annualized Net Effective Rent per Leased Square Foot.
(5) The average Annualized Base Rent per Leased Square Foot was $21.35,
$18.85 and $18.71 for the years 1996, 1995 and 1994, respectively.
(6) The average Annualized Base Rent per Leased Square Foot was $25.66,
$26.02 and $10.55 for the years 1996, 1995 and 1994, respectively.
(7) The average Annualized Base Rent per Leased Square Foot was $33.57,
$33.64 and $33.65 for the years 1996, 1995 and 1994, respectively.
(8) The R.W. Johnson Research Institute is a wholly owned subsidiary of
Johnson & Johnson.
(9) Syntro Corporation is a wholly owned subsidiary of Mallinckrodt, Inc.
(10) The average Annualized Base Rent per Leased Square Foot was $35.02 for
each of the years 1996, 1995 and 1994.
(11) Vacancy represents 20,973 square feet of office space. The Company is in
lease negotiations with respect to all of the vacant office space.
(12) The average Annualized Base Rent per Leased Square Foot for 1996 was
$22.81.
(13) Gillette Capital Corporation is a wholly owned subsidiary of The Gillette
Company.
(14) The average Annualized Base Rent per Leased Square Foot for 1996 was
$12.57.
(15) Genetic Therapy, Inc. is a wholly owned subsidiary of Novartis AG.
(16) Represents Properties to be acquired through the acquisition of the
Acquisition LLC in connection with the Offering and the Formation
Transactions. See "Formation and Structure."
(17) Quest Diagnostics, Inc. subleases its space to Shire Laboratory, Inc., a
wholly owned subsidiary of Shire Pharmaceuticals Group p.l.c.
(18) Weighted Average based on a percentage of aggregate leased square feet.
55
<PAGE>
LOCATION AND TYPE OF SPACE
The following table sets forth, as of April 30, 1997, the space within the
Properties by rentable square footage in each of the Company's existing
markets.
LOCATION AND TYPE OF SPACE OF PROPERTIES
<TABLE>
<CAPTION>
APPROXIMATE RENTAL SQUARE FOOTAGE
-------------------------------------- PERCENTAGE
GEOGRAPHIC AREA LABORATORY OFFICE TOTAL OF TOTAL
--------------- ---------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
San Diego............... 232,948 81,831 314,779 21.6%
San Francisco Bay Area.. 63,958 83,819 147,777 10.2%
Seattle................. 136,588 76,809 213,397 14.7%
Suburban Washington,
D.C. (1)............... 457,130 322,184 779,314 53.5%
-------- -------- ---------- ------
Total................. 890,624 564,643 1,455,267 100.0%
======== ======== ========== ======
Percentage of Total
Rentable Square
Footage.............. 61.2% 38.8% 100.0%
======== ======== ==========
</TABLE>
- --------
(1) Includes 265,345 laboratory rentable square footage and 158,852 office
rentable square footage attributable to the Acquisition LLC Properties,
representing 54.4% of the Company's Total Rentable Square Footage in the
Suburban Washington, D.C. geographic area.
LEASE EXPIRATIONS
The following table sets forth scheduled lease expirations for leases in
effect at the Properties as of April 30, 1997, through the year 2016. The
table assumes that no tenants exercise renewal options or termination rights.
SCHEDULED LEASE EXPIRATIONS
<TABLE>
<CAPTION>
APPROXIMATE
RENTABLE SQUARE PERCENTAGE OF TOTAL ANNUALIZED BASE PERCENTAGE OF
NUMBER FOOTAGE SUBJECT RENTABLE SQUARE FOOTAGE RENT UNDER TOTAL ANNUALIZED BASE
YEAR OF OF LEASES TO EXPIRING REPRESENTED EXPIRING RENT REPRESENTED
LEASE EXPIRATION EXPIRING LEASES(1) BY EXPIRING LEASES LEASES ($000)(2) BY EXPIRING LEASES(3)
- ---------------- --------- --------------- ----------------------- ---------------- ---------------------
<S> <C> <C> <C> <C> <C>
1997(4)................. 1 2,200 0.2% $ 47 0.2%
1998.................... 4 105,700 7.3 2,085 7.6
1999.................... 7 195,800 13.5 3,667 13.4
2000.................... 5 174,200 12.0 3,848 14.0
2001.................... 4 193,000 13.3 4,158 15.1
2002.................... 0 -- -- -- --
2003.................... 2 35,300 2.4 410 1.5
2004(5)................. 2 70,100 4.8 1,447 5.3
2005.................... 1 64,000 4.4 1,949 7.1
2006.................... 2 134,000 9.2 2,185 8.0
2007.................... 1 131,500 9.0 1,904 6.9
2014(6)................. 1 70,000 4.8 1,415 5.1
2015.................... 0 -- -- -- --
2016.................... 1 248,200 17.0 4,340 15.8
--- --------- ---- ------- -----
Total................. 31 1,424,000(7) 97.9% $27,455 100.0%
=== ========= ==== ======= =====
</TABLE>
- --------
(1) Excludes rentable square footage for expiring lease where the space has
been re-leased to new tenants. Such space is included in the year of the
new lease's expiration. Includes rentable square footage subject to
expiring leases at the Acquisition LLC Properties.
(2) Annualized Base Rent means the annualized fixed base rental amount
(determined in accordance with GAAP) in effect as of April 30, 1997. In
the case of triple net leases, Annualized Base Rent does not include real
estate taxes and insurance, common area and other operating expenses,
substantially all of which are borne by the tenants.
(3) Calculated by dividing Annualized Base Rent for the respective year of
lease expiration by the total Annualized Base Rent.
(4) The Company's lease with E. Heller & Company is the only lease
contractually expiring in 1997. The Company is negotiating with E. Heller
& Company to extend its lease to 2002 and to expand its space from 2,200
square feet to approximately 8,000 square feet.
(5) The Company's leases with the Fred Hutchinson Cancer Research Center,
covering 70,089 square feet at 1102/1124 Columbia Street, were recently
extended to 2004. The Fred Hutchinson Cancer Research Center, however, may
terminate the leases at any time after November 30, 1999 upon 12 months
prior written notice.
(6) No leases are subject to expiration in the years 2008 to 2013, inclusive.
(7) Excludes 31,046 square feet of vacant office space, as of April 30, 1997.
56
<PAGE>
LEASE EXPIRATIONS--PROPERTY BY PROPERTY
The following table sets forth detailed lease information for each of the
Properties for leases in place as of April 30, 1997, assuming that no tenants
exercise renewal options or termination rights at or prior to the scheduled
expirations.
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------------------------------------------------------------------------
PROPERTY 1997(1) 1998 1999 2000 2001 2002 2003 2004 2005 2006 TOTAL
- -------- ------- -------- ---------- ---------- ---------- ---- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10933 NORTH TORREY PINES
ROAD
Square Footage of
Expiring Leases......... 23,609 84,524 108,133
Percentage of Total
Rentable Sq. Ft. ....... 1.6% 5.8% 7.4%
Annualized Base Rent of
Expiring Leases(2)...... $ 587,700 $1,720,860 $2,308,560
Percentage of Total
Annualized Base Rent.... 2.1% 6.3% 8.4%
Annualized Base Rent Per
Square Foot of Expiring
Leases.................. $ 24.89 $ 20.36 $ 21.35
11099 NORTH TORREY PINES
ROAD
Square Footage of
Expiring Leases......... 4,508 26,906 55,548 86,962
Percentage of Total
Rentable Sq. Ft. ....... 0.3% 1.8% 3.8% 5.9%
Annualized Base Rent of
Expiring Leases(2)...... $160,536 $ 783,324 $1,263,132 $2,206,992
Percentage of Total
Annualized Base Rent.... 0.6% 2.9% 4.6% 8.1%
Annualized Base Rent Per
Square Foot of Expiring
Leases.................. $35.61 $ 29.11 $ 22.74 $ 25.38
3535 GENERAL ATOMICS
COURT
Square Footage of
Expiring Leases......... 57,775 18,309 76,084
Percentage of Total
Rentable Sq. Ft. ....... 4.0% 1.3% 5.3%
Annualized Base Rent of
Expiring Leases(2)...... $1,763,544 $ 746,160 $2,509,704
Percentage of Total
Annualized Base Rent.... 6.4% 2.7% 9.1%
Annualized Base Rent Per
Square Foot of Expiring
Leases.................. $ 30.52 $ 40.75 $ 32.99
3565 GENERAL ATOMICS
COURT
Square Footage of
Expiring Leases......... 43,600 43,600
Percentage of Total
Rentable Sq. Ft. ....... 3.0% 3.0%
Annualized Base Rent of
Expiring Leases(2)...... $1,526,952 $1,526,952
Percentage of Total
Annualized Base Rent.... 5.6% 5.6%
Annualized Base Rent Per
Square Foot of Expiring
Leases.................. $ 35.02 $ 35.02
1311 HARBOR BAY PARKWAY
Square Footage of
Expiring Leases......... 2,225 6,802 9,027
Percentage of Total
Rentable Sq. Ft. ....... 0.2% 0.5% 0.7%
Annualized Base Rent of
Expiring Leases(2)...... $46,716 $ 102,036 $ 148,752
Percentage of Total
Annualized Base Rent.... 0.2% 0.4% 0.6%
Annualized Base Rent Per
Square Foot of Expiring
Leases.................. $ 21.00 $ 15.00 $ 16.48
</TABLE>
- ----
(1) Represents lease expiration data from April 30, 1997 to December 31, 1997.
(2) Annualized Base Rent means the annualized fixed base rental amount
(determined in accordance with GAAP) in effect as of April 30, 1997. In
the case of triple net leases, Annualized Base Rent does not include real
estate taxes and insurance, common area and other operating expenses,
substantially all of which are borne by the tenants.
(3) Portions of two leases at 1102/1124 Columbia Street and one lease at 1413
Research Boulevard expire in different years. Each portion of the lease is
indicated in this table in the year that portion expires.
57
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
-----------------------------------------------------------
PROPERTY 1997(1) 1998 1999 2000 2001 2002
- -------- ------- ---------- ---------- ---------- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
1401 HARBOR BAY
PARKWAY
Square Footage
of Expiring
Leases.......... 47,777
Percentage of
Total Rentable
Sq. Ft. ........ 3.3%
Annualized Base
Rent of Expiring
Leases(2)....... $519,144
Percentage of
Total Annualized
Base Rent....... 1.9%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 10.87
1431 HARBOR BAY
PARKWAY
Square Footage
of Expiring
Leases..........
Percentage of
Total Rentable
Sq. Ft. ........
Annualized Base
Rent of Expiring
Leases(2).......
Percentage of
Total Annualized
Base Rent.......
Annualized Base
Rent Per Square
Foot of Expiring
Leases..........
1102/1124
COLUMBIA STREET
Square Footage
of Expiring
Leases(3)....... 64,482 14,820
Percentage of
Total Rentable
Sq. Ft. ........ 4.5% 1.0%
Annualized Base
Rent of Expiring
Leases(2)....... $1,467,096 $ 96,564
Percentage of
Total Annualized
Base Rent....... 5.3% 0.4%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 22.75 $ 6.52
300 PROFESSIONAL
DRIVE
Square Footage
of Expiring
Leases.......... 33,386 15,054
Percentage of
Total Rentable
Sq. Ft. ........ 2.3% 1.0%
Annualized Base
Rent of Expiring
Leases(2)....... $ 410,376 $259,464
Percentage of
Total Annualized
Base Rent....... 1.5% 0.9%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 12.29 $ 17.24
401 PROFESSIONAL
DRIVE
Square Footage
of Expiring
Leases..........
Percentage of
Total Rentable
Sq. Ft. ........
Annualized Base
Rent of Expiring
Leases(2).......
Percentage of
Total Annualized
Base Rent.......
Annualized Base
Rent Per Square
Foot of Expiring
Leases..........
</TABLE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
-------------------------------------------------------
PROPERTY 2003 2004 2005 2006 TOTAL
- -------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1401 HARBOR BAY
PARKWAY
Square Footage
of Expiring
Leases.......... 47,777
Percentage of
Total Rentable
Sq. Ft. ........ 3.3%
Annualized Base
Rent of Expiring
Leases(2)....... $ 519,144
Percentage of
Total Annualized
Base Rent....... 1.9%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 10.87
1431 HARBOR BAY
PARKWAY
Square Footage
of Expiring
Leases.......... 0
Percentage of
Total Rentable
Sq. Ft. ........ 0.00%
Annualized Base
Rent of Expiring
Leases(2)....... $ 0
Percentage of
Total Annualized
Base Rent....... 0.00%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 0.00
1102/1124
COLUMBIA STREET
Square Footage
of Expiring
Leases(3)....... 70,089 64,006 213,397
Percentage of
Total Rentable
Sq. Ft. ........ 4.8% 4.4% 14.7%
Annualized Base
Rent of Expiring
Leases(2)....... $1,446,684 $1,949,448 $4,959,792
Percentage of
Total Annualized
Base Rent....... 5.3% 7.1% 18.1%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 20.64 $ 30.46 $ 23.24
300 PROFESSIONAL
DRIVE
Square Footage
of Expiring
Leases.......... 48,440
Percentage of
Total Rentable
Sq. Ft. ........ 3.3%
Annualized Base
Rent of Expiring
Leases(2)....... $ 669,840
Percentage of
Total Annualized
Base Rent....... 2.4%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 13.83
401 PROFESSIONAL
DRIVE
Square Footage
of Expiring
Leases.......... 62,739 62,739
Percentage of
Total Rentable
Sq. Ft. ........ 4.3% 4.3%
Annualized Base
Rent of Expiring
Leases(2)....... $1,038,564 $1,038,564
Percentage of
Total Annualized
Base Rent....... 3.8% 3.8%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 16.55 $ 16.55
</TABLE>
- ----
(1) Represents lease expiration data from April 30, 1997 to December 31, 1997.
(2) Annualized Base Rent means the annualized fixed base rental amount
(determined in accordance with GAAP) in effect as of April 30, 1997. In
the case of triple net leases, Annualized Base Rent does not include real
estate taxes and insurance, common area and other operating expenses,
substantially all of which are borne by the tenants.
(3) Portions of two leases at 1102/1124 Columbia Street and one lease at 1413
Research Boulevard expire in different years. Each portion of the lease is
indicated in this table in the year that portion expires.
58
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
----------------------------------------------------------------------
PROPERTY 1997(1) 1998 1999 2000 2001
- -------- ------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
25/35/45 WEST
WATKINS MILL
ROAD
Square Footage
of Expiring
Leases.......... 3,370 18,924
Percentage of
Total Rentable
Sq. Ft. ........ 0.2% 1.3%
Annualized Base
Rent of Expiring
Leases(2)....... $ 46,920 $ 143,436
Percentage of
Total Annualized
Base Rent....... 0.2% 0.5%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 13.92 $ 7.58
1413 RESEARCH
BOULEVARD
Square Footage
of Expiring
Leases(3)....... 30,000 75,000
Percentage of
Total Rentable
Sq. Ft. ........ 2.1% 5.2%
Annualized Base
Rent of Expiring
Leases(2)....... $ 338,700 $1,224,756
Percentage of
Total Annualized
Base Rent....... 1.2% 4.5%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 11.29 $ 16.33
1550 EAST GUDE
DRIVE
Square Footage
of Expiring
Leases.......... 44,500
Percentage of
Total Rentable
Sq. Ft. ........ 3.1%
Annualized Base
Rent of Expiring
Leases(2)....... $ 597,216
Percentage of
Total Annualized
Base Rent....... 2.2%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 13.42
1330 PICCARD
DRIVE
Square Footage
of Expiring
Leases..........
Percentage of
Total Rentable
Sq. Ft. ........
Annualized Base
Rent of Expiring
Leases(2).......
Percentage of
Total Annualized
Base Rent.......
Annualized Base
Rent Per Square
Foot of Expiring
Leases..........
14225 NEWBROOK
DRIVE
Square Footage
of Expiring
Leases..........
Percentage of
Total Rentable
Sq. Ft. ........
Annualized Base
Rent of Expiring
Leases(2).......
Percentage of
Total Annualized
Base Rent.......
Annualized Base
Rent Per Square
Foot of Expiring
Leases..........
TOTAL PORTFOLIO
Square Footage
of Expiring
Leases.......... 2,225 105,746 195,837 174,239 193,072
Percentage of
Total Rentable
Sq. Ft. ........ 0.2% 7.3% 13.5% 12.0% 13.3%
Annualized Base
Rent of Expiring
Leases(2)....... $46,716 $2,084,928 $3,667,152 $3,847,560 $4,158,276
Percentage of
Total Annualized
Base Rent....... 0.2% 7.6% 13.4% 14.0% 15.1%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 21.00 $ 19.72 $ 18.73 $ 22.08 $ 21.54
</TABLE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
----------------------------------------------------------------
PROPERTY 2002 2003 2004 2005 2006 TOTAL
- -------- ----- -------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
25/35/45 WEST
WATKINS MILL
ROAD
Square Footage
of Expiring
Leases.......... 35,346 71,225 128,865
Percentage of
Total Rentable
Sq. Ft. ........ 2.4% 4.9% 8.8%
Annualized Base
Rent of Expiring
Leases(2)....... $410,160 $1,146,528 $ 1,747,044
Percentage of
Total Annualized
Base Rent....... 1.5% 4.2% 6.4%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 11.60 $ 16.10 $ 13.56
1413 RESEARCH
BOULEVARD
Square Footage
of Expiring
Leases(3)....... 105,000
Percentage of
Total Rentable
Sq. Ft. ........ 7.3%
Annualized Base
Rent of Expiring
Leases(2)....... $ 1,563,456
Percentage of
Total Annualized
Base Rent....... 5.7%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 14.89
1550 EAST GUDE
DRIVE
Square Footage
of Expiring
Leases.......... 44,500
Percentage of
Total Rentable
Sq. Ft. ........ 3.1%
Annualized Base
Rent of Expiring
Leases(2)....... $ 597,216
Percentage of
Total Annualized
Base Rent....... 2.2%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 13.42
1330 PICCARD
DRIVE
Square Footage
of Expiring
Leases.......... 0
Percentage of
Total Rentable
Sq. Ft. ........ 0.00%
Annualized Base
Rent of Expiring
Leases(2)....... $ 0
Percentage of
Total Annualized
Base Rent....... 0.00%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 0.00
14225 NEWBROOK
DRIVE
Square Footage
of Expiring
Leases.......... 0
Percentage of
Total Rentable
Sq. Ft. ........ 0.00%
Annualized Base
Rent of Expiring
Leases(2)....... $ 0
Percentage of
Total Annualized
Base Rent....... 0.00%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 0.00
TOTAL PORTFOLIO
Square Footage
of Expiring
Leases.......... 0 35,346 70,089 64,006 133,964 974,524
Percentage of
Total Rentable
Sq. Ft. ........ 0.00% 2.4% 4.8% 4.4% 9.2% 67.1%
Annualized Base
Rent of Expiring
Leases(2)....... $ 0 $410,160 $1,446,684 $1,949,448 $2,185,092 $19,796,016
Percentage of
Total Annualized
Base Rent....... 0.00% 1.5% 5.3% 7.1% 8.0% 72.2%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $0.00 $ 11.60 $ 20.64 $ 30.46 $ 16.31 $ 20.31
</TABLE>
- ----
(1) Represents lease expiration data from April 30, 1997 to December 31, 1997.
(2) Annualized Base Rent means the annualized fixed base rental amount
(determined in accordance with GAAP) in effect as of April 30, 1997. In
the case of triple net leases, Annualized Base Rent does not include real
estate taxes and insurance, common area and other operating expenses,
substantially all of which are borne by the tenants.
(3) Portion of two leases at 1102/1124 Columbia Street and one lease at 1413
Research Boulevard expire in different years. Each portion of the lease is
indicated in this table in the year that portion expires.
59
<PAGE>
TENANTS
The Properties are leased to tenants engaged in a variety of activities in
the Life Science Industry. The following table sets forth information
regarding the Company's leases with its 20 largest tenants based upon
Annualized Base Rent as of April 30, 1997.
20 LARGEST TENANTS
<TABLE>
<CAPTION>
PERCENTAGE OF
REMAINING PERCENTAGE OF PERCENTAGE OF AGGREGATE
INITIAL APPROXIMATE AGGREGATE AGGREGATE PORTFOLIO
NUMBER LEASE TERM AGGREGATE LEASED ANNUALIZED PORTFOLIO ANNUALIZED NET ANNUALIZED
OF IN RENTABLE SQUARE BASE RENT ANNUALIZED EFFECTIVE RENT NET EFFECTIVE
TENANT(1) LEASES YEARS SQUARE FEET FEET (IN THOUSANDS)(2) BASE RENT (IN THOUSANDS)(3) RENT
--------- ------ ---------- ----------- ------------- ----------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
American 1 19.7 248,200 17.4% $ 4,340 15.8% $ 4,340 16.7%
Medical.........
Laboratories,
Inc.
Fred Hutchinson 2 1.1 159,200 11.2 3,654 13.3 3,654 14.1
Cancer.......... 7.6
Research
Center(4)
Agouron 2 4.4 70,500 5.0 2,310 8.4 2,251 8.7
Pharmaceuticals, 3.4
Inc.............
PerImmune, Inc... 1 9.8 131,500 9.2 1,904 6.9 1,904 7.3
Advanced Tissue 2 3.4 84,500 5.9 1,721 6.3 1,353 5.2
Sciences,.......
Inc.
U.S. Army Corps.. 1 2.1 105,000 7.4 1,563 5.7 1,396 5.4
of Engineers(5) 4.4
FDA.............. 1 16.8 70,000 4.9 1,415 5.2 901 3.5
R.W. Johnson 1 1.8 45,000 3.2 1,334 4.9 1,267 4.9
Pharmaceutical..
Research
Institute
The Scripps 2 3.1 41,900 2.9 1,334 4.9 1,106 4.3
Research
Institute.......
2.4
Sequana 1 4.7 55,500 3.9 1,263 4.6 1,195 4.6
Therapeutics,
Inc.............
Corixa 2 7.7 37,600 2.6 1,198 4.4 1,150 4.5
Corporation..... 1.1
MedImmune, Inc... 1 9.6 71,200 5.0 1,147 4.2 1,147 4.4
Gillette Capital 1 8.9 62,700 4.4 1,039 3.8 1,039 4.0
Corporation.....
Quest 1 2.9 44,500 3.1 597 2.2 597 2.3
Diagnostics,
Inc.............
Chiron 1 2.7 47,800 3.4 519 1.9 519 2.0
Diagnostics.....
Syntro 1 2.7 12,800 0.9 430 1.6 430 1.7
Corporation.....
Mobile 1 1.7 33,400 2.3 410 1.5 410 1.6
Telesystems,
Inc.............
Antex Biologics, 1 1.8 15,100 1.1 259 0.9 259 1.0
Inc.............
Genetic Therapy, 1 6.3 20,600 1.4 229 0.8 229 0.9
Inc.............
Photo Science, 1 6.2 14,800 1.0 182 0.7 182 0.7
Inc.............
--- ---- --------- ---- ------- ---- ------- ----
Total/Weighted 25 8.4 1,371,800 96.2% $26,848 98.0% $25,329 97.8%
Average(6).....
=== ==== ========= ==== ======= ==== ======= ====
</TABLE>
- -------
(1) American Medical Laboratories, Inc., PerImmune, Inc. and Quest
Diagnostics, Inc. are tenants at the Acquisition LLC Properties.
(2) Annualized Base Rent means the annualized fixed base rental amount
(determined in accordance with GAAP) in effect as of April 30, 1997 paid
by tenants under the terms of their leases. In the case of triple net
leases, Annualized Base Rent does not include real estate taxes and
insurance, common area and other operating expenses, substantially all of
which are borne by the tenants.
(3) Annualized Net Effective Rent is the Annualized Base Rent in effect as of
April 30, 1997, less (for gross leases) real estate taxes and insurance,
common area and other operating expenses and (for all leases) amortized
tenant improvements and leasing commissions.
(4) Portions of the Company's leases with the Fred Hutchinson Cancer Research
Center, covering 70,089 square feet at 1102/1124 Columbia Street, were
recently extended to 2004. The Fred Hutchinson Cancer Research Center,
however, has the right to terminate the leases at any time after
November 30, 1999, upon 12 months prior written notice.
(5) Of the 105,000 rentable square feet at 1413 Research Boulevard, leases
with respect to 30,000 square feet are subject to expiration in 1999 and
leases with respect to 75,000 rentable square feet are subject to
expiration in 2001.
(6) Weighted Average based on percentage of aggregate leased square feet.
60
<PAGE>
PROPERTY DESCRIPTIONS
Following are narrative descriptions of each of the Properties. The book
value of each of 3535 General Atomics Court, 1102 and 1124 Columbia Street,
25, 35 and 45 West Watkins Mill Road and 14225 Newbrook Drive was in excess of
10% of the Company's total assets as of December 31, 1996, and the gross
revenues from each such Property for the year ended December 31, 1996 was in
excess of 10% of the aggregate gross revenues of the Company for such period.
In addition, the gross revenues from each of 3565 General Atomics Court,
10933 North Torrey Pines Road and 11099 North Torrey Pines Road for the year
ended December 31, 1996 was in excess of 10% of the aggregate gross revenues
of the Company for such period. Accordingly, certain additional information
with respect to each such Property, including historical occupancy and
property tax rates and amounts, is set forth below. The Company's ownership
interest in each of the Properties (and the ownership interest the Company
will acquire in each of the Acquisition LLC Properties) is subject to existing
leases, easements and encumbrances that, in the opinion of the Company, are
customary for such properties.
CALIFORNIA
San Diego
10933 North Torrey Pines Road is located in the Torrey Pines area of San
Diego, California. The Property consists of approximately 108,000 rentable
square feet of office and laboratory space, with extended frontage along North
Torrey Pines Road. The Property, built in 1971 and substantially renovated in
1989 and 1994, is fully leased to two tenants: The Scripps Research Institute,
one of the nation's largest non-profit biomedical research institutes, and
Advanced Tissue Sciences, Inc., a publicly traded company focusing on the
development and sale of artificial tissue products, each of which leases over
10% of the rentable space. The Property was 100% leased for the period ending
December 31, 1996, 89% leased for the period ending December 31, 1995 and 85%
leased for the period ending December 31, 1994. The Company acquired this
Property in October 1994 and installed new HVAC and computerized energy
management systems in May 1995. These upgrades have enabled the Company to
measure more accurately and recover from each tenant certain costs of utility
usage that previously were not recoverable. The Company owns fee simple title
to the Property.
The Property is situated on approximately 16 acres of land. The Company has
the right to develop and construct up to an additional 163,000 square feet of
office and laboratory space on this parcel. The Company has applied for
extension of conditional approvals from the City of San Diego and the
California Coastal Commission for such development. The approvals are
conditioned upon, among other things, the completion of certain off-site
roadway and utility improvements and the submission of acceptable grading and
building plans. The Company intends to maximize the site's value by developing
build-to-suit facilities for specific tenants and to enter into long-term
triple net leases with such tenants prior to construction. The Company
believes that it has a competitive advantage in completing a build-to-suit
project because of its low cost basis in the land and the superior North
Torrey Pines Road location.
The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1996 was approximately $9.9 million. The Property is
depreciated using the modified accelerated cost recovery system straight-line
method, based on an estimated useful life ranging from 20 to 40 years,
depending upon the date of certain capitalized improvements. For the year
ended December 31, 1996, the estimated average depreciation rate for the
Property under the modified accelerated cost recovery system was 2.8%. The
1996 realty taxes on the Property were assessed at an effective annual rate of
approximately 1.118%. Such taxes on the Property for the 12 month period
ending June 30, 1997 totaled approximately $116,900. The Company does not
believe that any capital improvements made during the 12 month period
immediately following the Offering should result in an increase in annual
property taxes.
11099 North Torrey Pines Road is located in the Torrey Pines Science Park in
San Diego, California. This two-story "L"-shaped Property, consisting of
approximately 87,000 rentable square feet of office and laboratory space, has
three levels of subterranean parking, garage storage, a 5,000 square foot
central enclosed atrium and exterior patio terraces. The project was completed
in 1986 and acquired by the Company in October 1994. The Property has
benefitted from over $4.0 million of tenant-financed generic infrastructure
improvements and is 100% leased to the following tenants: Agouron
Pharmaceuticals, Inc., a publicly traded company focusing on
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the development and sale of synthetic drugs for viral, cancer and immuno-
inflammatory diseases; Sequana Therapeutics, Inc., a publicly traded company
focusing on the development of diagnostic and therapeutic products utilizing
gene discovery technology; and Cytel Corporation, a publicly traded company
focusing on therapeutics to treat acute and inflammatory diseases. Each of
Agouron Pharmaceuticals, Inc. and Sequana Therapeutics, Inc. leases over 10%
of the rentable space. The Property was 100% leased for the periods ending
December 31, 1996 and 1995, and was 75% leased for the period ending December
31, 1994. The Company owns fee simple title to the Property.
The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1996 was approximately $13.6 million. The Property is
depreciated using the modified accelerated cost recovery system straight-line
method, based on an estimated useful life ranging from 20 to 40 years,
depending upon the date of certain capitalized improvements. For the year
ended December 31, 1996, the estimated average depreciation rate for the
Property under the modified accelerated cost recovery system was 2.7%. The
1996 property taxes on the Property were assessed at an effective annual rate
of approximately 1.118%. Such taxes on the Property for the 12 month period
ending June 30, 1997 totaled approximately $151,500. The Company does not
believe that any capital improvements made during the 12 month period
immediately following the Offering should result in an increase in annual
property taxes.
3535 General Atomics Court is a two-story facility with approximately 76,000
rentable square feet of office and laboratory space. The Property was built in
1991 and is located in the Torrey Pines area of San Diego, California. The
exterior consists of reflective glass and concrete and is situated over a
single level of subterranean parking. The building has a direct fiber-optic
linkup with the supercomputer center located at the University of California
at San Diego. The Property has been fully leased since the date of acquisition
and is currently leased to three tenants: The R.W. Johnson Pharmaceutical
Research Institute (a wholly owned research subsidiary of Johnson & Johnson),
The Scripps Research Institute and Syntro Corporation (a wholly owned
subsidiary of Mallinckrodt, Inc.), each of which leases over 10% of the
rentable space. Following the Offering, this Property, together with 3565
General Atomics Court, will secure approximately $18.3 million of outstanding
mortgage indebtedness. The Company owns fee simple title to the Property. The
Company acquired the Property in December 1994.
The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1996 was approximately $19.7 million. The Property is
depreciated using the modified accelerated cost recovery system straight-line
method, based on an estimated useful life ranging from 20 to 40 years,
depending upon the date of certain capitalized improvements. For the year
ended December 31, 1996, the estimated average depreciation rate for the
Property under the modified accelerated cost recovery system was 2.8%. The
1996 property taxes on the Property were assessed at an effective annual rate
of approximately 1.118%. Such taxes on the Property for the 12 month period
ending June 30, 1997 totaled approximately $224,900. The Company does not
believe that any capital improvements made during the 12 month period
immediately following the Offering should result in an increase in annual
property taxes.
3565 General Atomics Court contains approximately 44,000 rentable square
feet of office and laboratory space and is located in the Torrey Pines area of
San Diego, California. The two-story reflective glass and concrete building is
situated over a single level of subterranean parking. The building has a
direct fiber-optic linkup with the supercomputer center located at the
University of California at San Diego. This single tenant Property built in
1991 is the principal research facility of Agouron Pharmaceuticals, Inc.,
which has leased 100% of the rentable space since the Company's acquisition of
the Property in December 1994. Following the Offering, this Property, together
with 3535 General Atomics Court, will secure approximately $18.3 million of
outstanding mortgage indebtedness. The Company owns fee simple title to the
Property.
The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1996 was approximately $10.2 million. The Property is
depreciated using the modified accelerated cost recovery system straight-line
method, based on an estimated useful life ranging from 20 to 40 years,
depending upon the date of certain capitalized improvements. For the year
ended December 31, 1996, the estimated average depreciation
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rate for the Property under the modified accelerated cost recovery system was
2.8%. The 1996 property taxes on the Property were assessed at an effective
annual rate of approximately 1.118%. Such taxes on the Property for the 12
month period ending June 30, 1997 totaled approximately $119,800. The Company
does not believe that any capital improvements made during the 12 month period
immediately following the Offering should result in an increase in annual
property taxes.
San Francisco Bay Area
1311 Harbor Bay Parkway, located in Alameda, California, was developed in
1984 and contains approximately 30,000 rentable square feet of office and
laboratory space. The building's exterior is finished with clay tile veneer
over concrete tilt-up shear walls, with gray solar glass windows. The Company
has a lease with Chiron Corporation covering approximately 6,800 square feet,
and a lease with E. Heller & Company covering approximately 2,200 square feet.
The Company is negotiating with E. Heller & Company to lease approximately
6,000 square feet of additional space and is negotiating with other potential
tenants with respect to the remaining available office space. The Company owns
a commercial condominium interest in the Property, together with an undivided
interest in the common areas of the project in which the Property is a part.
The Company acquired the Property in December 1996.
1401 Harbor Bay Parkway, located in Alameda, California, was developed in
1986, renovated in 1994 and acquired by the Company in December 1996. The
Property consists of approximately 48,000 rentable square feet of office and
laboratory space. The Property is constructed of concrete tilt-up shear walls
with structural steel framework and is fully leased to Chiron Diagnostics, a
wholly owned subsidiary of Chiron Corporation. The Company owns a commercial
condominium interest in the Property, together with an undivided interest in
the common areas of the project in which the Property is a part.
1431 Harbor Bay Parkway, located in Alameda, California, was developed in
1985 with significant renovations completed in 1989 and 1994. The building
consists of approximately 70,000 rentable square feet of office and laboratory
space. The Property is constructed of concrete tilt-up shear walls with
structural steel framework and is fully leased to the FDA under a lease with
the General Services Administration. The Company acquired the Property in
December 1996. Following the Offering, this Property will secure a mortgage of
approximately $8.5 million. The Company owns a commercial condominium interest
in the Property, together with an undivided interest in the common areas of
the project in which the Property is a part.
SEATTLE, WASHINGTON
1102 and 1124 Columbia Street, located in Seattle, Washington, consists of
two inter-connecting buildings with an aggregate of approximately 213,000
rentable square feet. Built in 1975, the seven story Columbia Building (1124
Columbia Street) is a main research facility of the Fred Hutchinson Cancer
Research Center, a leading non-profit cancer research institute. The Property
also includes a three-level subterranean annex that serves as a research
facility and the six-story Eklind Hall Building (1102 Columbia Street) that
contains additional office and laboratory space. The Company has converted
approximately 21,000 square feet of space in the Columbia Building, and in
1998 will convert an additional approximately 28,000 square feet of space in
such building into higher rent generic laboratory space. In addition to the
Fred Hutchinson Cancer Research Center, which leases nearly 75% of the
rentable space, approximately 18% of the Property is leased to Corixa
Corporation, a privately held company focusing on the development of cancer
vaccines, and the remainder is leased to Swedish Medical Center. Following the
Offering, the Property will secure approximately $28.4 million of outstanding
mortgage indebtedness. The Company owns fee simple title to the Property. The
Company acquired the Property in May 1996, and it has been fully leased since
that time.
The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1996 was approximately $30.0 million. The Property is
depreciated using the modified accelerated cost recovery system straight-line
method, based on an estimated useful life ranging from 20 to 40 years,
depending upon the date of
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certain capitalized improvements. For the year ended December 31, 1996, the
estimated average depreciation rate for the Property under the modified
accelerated cost recovery system was 1.56%. The 1997 property taxes on the
Property were assessed at an effective annual rate of approximately 1.318%.
Such taxes on the Property for the 12 month period ending December 31, 1997
totaled approximately $21,578. Because a substantial portion of the Property
is leased to non-profit tenants, only approximately 18.0% of the Property is
subject to property tax. The Company does not believe that any capital
improvements made during the 12 month period immediately following the
Offering should result in an increase in annual property taxes. A decrease in
the amount of space leased to non-profit tenants may result in an increase in
annual property taxes, although the Company expects to recover any such
increase from tenants.
SUBURBAN WASHINGTON, D.C.
300 Professional Drive contains approximately 48,000 rentable square feet of
office and laboratory space in a master-planned business park in Gaithersburg,
Maryland. This two-story brick veneer building with solar-reflective glass
windows was built in 1989. The building's design allows for ground-level
access to both floors and contains a split-level lobby. The Property is fully
leased to Mobile Telesystems, Inc., a privately held portable satellite
communications company, and Antex Biologics Inc., a publicly traded company
focusing on research of vaccines for infectious diseases. The Company owns fee
simple title to the Property. The Company acquired the Property in September
1996.
401 Professional Drive is a two-story building containing approximately
63,000 rentable square feet of office and laboratory space in Gaithersburg,
Maryland. The Property is fully leased to The Gillette Capital Corporation, a
wholly owned subsidiary of The Gillette Company, and houses Gillette's
principal personal care products testing facility. The Company owns fee simple
title to the Property. The Company acquired the Property in September 1996.
25, 35 and 45 West Watkins Mill Road is a three-building, single-story
office and laboratory complex located in a master-planned business park known
as the Bennington Corporate Center in Gaithersburg, Maryland. Consisting of
approximately 139,000 rentable square feet, the brick veneer buildings with
black reflective glass windows are constructed of structural steel framework
with concrete slab flooring. The Property was completed in January 1989 and
acquired by the Company in October 1996. Since that time, the Property has
been approximately 93% leased. The Property currently is leased to five
tenants, four of whom each lease over 10% of the rentable space. Genetic
Therapy, Inc., a wholly owned subsidiary of Novartis AG, a multi-national
Swiss pharmaceutical company, and MedImmune, Inc., a publicly traded company
focusing on vaccines for infectious diseases, together with an electronics
distribution company and a commercial photography company lease over 90% of
the Property. The Company owns fee simple title to the Property.
The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1996 was approximately $17.6 million. The Property is
depreciated using the modified accelerated cost recovery system straight-line
method, based on an estimated useful life ranging from 20 to 40 years,
depending upon the date of certain capitalized improvements. For the year
ended December 31, 1996, the estimated average depreciation rate for the
properties under the modified accelerated cost recovery system was 0.52%. The
1996 property taxes on the Property were assessed at an effective annual rate
of approximately 1.444%. Such taxes on the Property for the 12 month period
ending June 30, 1997 totaled approximately $275,000. The Company does not
believe that any capital improvements made during the 12 month period
immediately following the Offering should result in an increase in annual
property taxes.
1413 Research Boulevard consists of 105,000 rentable square feet of office
and laboratory office. This two-building complex was built in two phases in
1967 and 1973, and is located in Rockville, Maryland. The Company acquired
this Property in July 1996. The Property is fully leased to the U.S. Army
Corps of Engineers for the Walter Reed Army Institute of Research and the
Armed Forces Institute of Pathology. The Company owns fee simple title to the
Property. A $2.6 million renovation project recently was completed in 1996
with funds provided by the U.S. Army Corps of Engineers to renovate 45,000
square feet of the complex and convert office space to generic laboratory
space.
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ACQUISITION LLC PROPERTIES
1550 East Gude Drive, consisting of 44,500 rentable square feet, is located
in Rockville Maryland. The two-story brick and masonry building was built in
1981 and underwent a complete interior renovation in 1995. The first floor
contains primarily laboratory space designed within an open space
configuration, and the entire second floor is devoted to office space. The
Property is fully leased to Quest Diagnostics, Inc., a subsidiary of Corning,
Inc., which has subleased the Property to Shire Laboratory, Inc., a wholly
owned subsidiary of Shire Pharmaceuticals Group p.l.c. focusing on the
development of advanced drug delivery systems. The Acquisition LLC acquired
this property in January 1997. Upon consummation of the Offering and the
Formation Transactions, the Company will own fee simple title to the Property.
1330 Piccard Drive, located in Rockville, Maryland, consists of
approximately 131,000 rentable square feet of office and laboratory space. The
Property was built in two phases in 1978 and 1984, was renovated in 1995 and
was acquired by the Acquisition LLC in January 1997. PerImmune, Inc., a
privately held company focusing on diagnostic and therapeutic applications for
cancer and other diseases, leases the Property. Upon consummation of the
Offering and the Formation Transactions, the Company will own fee simple title
to the Property.
14225 Newbrook Drive, located in Chantilly, Virginia, was developed by
American Medical Laboratories, Inc. ("AML"), a regional clinical laboratory,
in 1992. The Acquisition LLC acquired the Property from AML through a sale-
leaseback transaction in January 1997 pursuant to which AML will continue to
occupy 100% of the Property under a 20-year lease. The approximately 248,000
rentable square foot complex consists of two buildings connected by a 10,000
square foot, two-story open atrium lobby. Building 1, consisting of
approximately 162,000 rentable square feet of office and laboratory space,
also contains a fully licensed day care center and a 24,288 square foot
central plant housing the Property's utility distribution system. Building 2
currently consists of approximately 50,000 rentable square feet of office
space and is designed to accommodate three additional floors or up to
approximately 50,000 square feet of additional office and laboratory space.
Upon consummation of the Offering and the Formation Transactions, the Company
will own fee simple title to the Property.
COMPETITION
The Company competes for investment opportunities with various entities,
including insurance companies, pension and investment funds, partnerships,
developers, investment companies and other REITs. Many of these entities have
substantially greater financial resources than the Company. These entities
generally may be able to accept more risk than the Company can prudently
manage, including risks with respect to the creditworthiness of a tenant or
the geographic proximity of its investments. Competition generally may reduce
the number of suitable investment opportunities offered to the Company or
increase the bargaining power of property owners seeking to sell. Management
believes, however, that the Company will be the first publicly traded entity
focusing primarily on the acquisition, management, expansion and selective
development of Life Science Facilities. See "Target Markets" for a more
detailed description of market conditions affecting competition for tenants,
including occupancy and rental rates, in each of the Company's primary
markets.
INSURANCE
The Company carries comprehensive liability, fire, extended coverage and
rental loss insurance with respect to the Properties, with policy
specifications, insured limits and deductibles that the Company believes are
consistent with those customarily carried for similar properties. The Company
has also obtained environmental remediation insurance for the Properties. The
insurance, subject to certain exclusions and deductibles, covers the cost to
remediate environmental damage caused by unintentional future spills or the
historic presence of previously undiscovered hazardous substances. The Company
intends to carry similar insurance with respect to future acquisitions as
appropriate. In addition, the Company requires its tenants to maintain
comprehensive insurance, including liability and casualty insurance, that is
customarily obtained for similar properties. There are, however, certain types
of losses that are not generally insured because they are either uninsurable
or not
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economically insurable. In addition, certain disaster-type insurance (covering
catastrophic events, such as earthquakes) may not be available or may only be
available at rates that, in the opinion of management of the Company, are
prohibitive. Many of the Properties are located in the vicinity of potentially
active earthquake faults. The Company has obtained earthquake insurance for
all of the Properties. Should an uninsured disaster or a loss in excess of
insured limits occur, including a loss resulting from earthquake or other
seismic activity, the Company could lose its capital invested in the affected
properties, as well as the anticipated future revenues from such properties,
and would continue to be obligated on any mortgage indebtedness or other
obligations related to the properties. Any such loss could adversely affect
the Company and its ability to make distributions to stockholders. See "Risk
Factors--Uninsured Loss." Management believes that the Properties are
currently adequately insured.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws and regulations, a
current or previous owner or operator of real estate, as well as certain other
parties, may be required to investigate and remediate the effects of hazardous
or toxic substances or petroleum product releases on, under, in or from such
property, and may be held liable to a governmental entity or to third parties
for investigation and cleanup costs and certain damages resulting from such
releases. Such laws and regulations typically impose responsibility and
liability without regard to whether such person knew of or caused the
releases, and the liability under such laws and regulations has been
interpreted to be joint and several, unless the harm is divisible and there is
a reasonable basis for allocation of responsibility. The cost of investigating
and remediating such contamination may be substantial, and the presence of
such contamination, or the failure to properly remediate it, may adversely
affect the owner's ability to sell or rent such property or to borrow using
such property as collateral. In addition, the owner of a site may be subject
to governmental fines and common law claims by third parties seeking to
recover damages and costs resulting from such contamination.
Certain other federal, state and local laws and regulations govern the
management and disposal of ACMs. Such laws and regulations may impose
liability for the release of ACMs and may provide for third parties to seek
recovery from owners or operators of such property for personal injury
associated with ACMs. In connection with the ownership and operation of its
properties, the Company may be potentially liable for such costs. ACMs have
been detected at certain of the Properties, but are not expected to result in
material environmental costs or liabilities to the Company.
Federal, state and local laws and regulations also require the removal or
upgrading of certain underground storage tanks and regulate the discharge of
storm water, wastewater and any water pollutants, the emission of air
pollutants, the generation, management and disposal of hazardous or toxic
chemicals, substances or wastes, and workplace health and safety. Life Science
Industry tenants, including certain of the Company's tenants, engage in
various research and development activities involving the controlled use of
hazardous materials, chemicals, biological and radioactive compounds. Although
the Company believes that the tenants' activities involving such materials
comply in all material respects with applicable laws and regulations, the risk
of contamination or injury from these materials cannot be completely
eliminated. In the event of such contamination or injury, the Company could be
held liable for any damages that result, and any such liability could exceed
the Company's resources and its environmental remediation coverage. See "Risk
Factors--Lack of Industry Diversification; Reliance on Life Science Industry
Tenants."
The Company's leases generally provide that (i) the tenant is responsible
for all environmental liabilities relating to the tenant's operations, (ii)
the Company is indemnified for such liabilities and (iii) the tenant must
comply with all environmental laws and regulations. Such a contractual
arrangement, however, does not eliminate the Company's statutory liability or
preclude claims against the Company by governmental authorities or persons who
are not parties to such an arrangement. Noncompliance with environmental or
health and safety requirements may also result in the need to cease or alter
operations at a property, which could affect the financial health of a tenant
and its ability to make lease payments. In addition, if there is a violation
of such a requirement in connection with a tenant's operations, it is possible
that the Company, as the owner of the property, could be
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held accountable by governmental authorities for such violation and could be
required to correct the violation and pay related fines.
All of the Properties have been, and it is contemplated that all future
acquisitions will be, subjected to a Phase I or similar environmental
assessment (which generally includes a site inspection, interviews and a
records review, but no subsurface sampling). These assessments and certain
follow-up investigations (including, as appropriate, asbestos, radon and lead
surveys, additional public records review, subsurface sampling and other
testing) of the Properties have not revealed any environmental liability that
the Company believes would have a material adverse effect on the Company's
business or results of operations. Nevertheless, it is possible that the
assessments on the Properties have not revealed, or that the assessments on
future acquisitions will not reveal, all environmental liabilities and that
there may be material environmental liabilities of which the Company is
unaware.
The Company believes that the Properties are in compliance in all material
respects with applicable environmental laws. No assurances can be given,
however, that (i) the Company will not incur material liability under current
or future environmental laws and regulations or (ii) the current environmental
condition of the Properties will not be adversely affected by tenant
operations or by environmental conditions in the vicinity of such Properties.
See "Risk Factors--Possible Environmental Liabilities."
LEGAL PROCEEDINGS
To the Company's knowledge, no litigation is pending against the Company,
other than routine actions and administrative proceedings, substantially all
of which are expected to be covered by liability insurance or which, in the
aggregate, are not expected to have a material adverse effect on the financial
condition, results of operations or cash flows of the Company.
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of certain investment, financing and other
policies of the Company. These policies have been determined by the Board of
Directors and generally may be amended or revised from time to time by the
Board of Directors without a vote of the stockholders, except that (i) the
Company may not enter into certain extraordinary transactions without the
approval of a majority of the stockholders (see "Risk Factors--Influence of
Certain Stockholders" and "Description of Capital Stock--Common Stock") and
(ii) changes in certain policies with respect to conflicts of interest must be
consistent with legal requirements.
INVESTMENT POLICIES
Investment in Real Estate or Interests in Real Estate. The Company's
investment objectives are to provide quarterly cash distributions and to
achieve long-term capital appreciation through increases in cash flows and the
value of the Properties and future acquisitions. See "The Company" and "The
Properties" for a discussion of the Properties and the Company's acquisition
and other strategic objectives.
The Company intends to pursue its investment objectives primarily through
the ownership of the Properties and other Life Science Facilities. The Company
also may expand and improve the Properties and future acquisitions or sell
such properties, in whole or in part, when circumstances warrant. Under
circumstances in which the investment returns to the Company justify the
expense, the Company also may undertake selective development of Life Science
Facilities. Although the Company intends to focus its activities on Life
Science Facilities in its target markets, future activity is not limited to
any geographic area or product type or to a specified percentage of the
Company's assets. There is no limit on the amount or percentage of the
Company's assets that may be invested in any one property or any one
geographic area. The Company intends to engage in such activities in a manner
consistent with the maintenance of its status as a REIT for federal income tax
purposes.
The Company also may participate with third parties in property ownership
through joint ventures or other types of co-ownership. Such investments may
permit the Company to own interests in larger assets without unduly
restricting diversification and, therefore, add flexibility in structuring its
portfolio. Equity investments may be subject to existing mortgage financing
and other indebtedness or such financing or indebtedness as may be incurred in
connection with acquiring or refinancing these investments. Debt service with
respect to such financing or indebtedness will have priority over any
distributions with respect to capital stock. The Company intends to make
investments in such a way that it will not be treated as an investment company
under the Investment Company Act of 1940, as amended (the "1940 Act").
Investments in Real Estate Mortgages. Although the Company's current
portfolio consists of, and the Company's business objectives emphasize, equity
investments in Life Science Facilities, the Company may, in the discretion of
the Board of Directors, invest in mortgages and other types of equity real
estate interests consistent with the Company's qualification as a REIT.
Investments in real estate mortgages run the risk that one or more borrowers
may default under such mortgages and that the collateral securing such
mortgages may not be sufficient to enable the Company to recoup its full
investment. The Company may also retain a purchase money mortgage for a
portion of the sale price in connection with the disposition of a property
from time to time.
Investments in Securities or Interests in Persons Primarily Engaged in Real
Estate Activities and Other Issuers. Although the Company has no present
intention to do so, it also may invest in securities of other REITs, other
entities engaged in real estate activities, or securities of other issuers
(including for the purpose of exercising control over such entities), subject
to the percentage of ownership limitations, limitations on ownership of
certain types of assets, and the gross income tests necessary for REIT
qualification. See "Federal Income Tax Considerations--Taxation of the
Company."
DISPOSITION POLICY
Management will periodically review the assets comprising the Company's
portfolio. The Company has no current intention to dispose of any of the
Properties, although it reserves the right to do so. Disposition decisions
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relating to the Company's assets will be made based upon several factors,
including but not limited to: (i) the potential for continuing increases in
cash flow and value, (ii) the sale price, (iii) the strategic fit of the
properties with the Company's portfolio, (iv) the potential for, or the
existence of, any environmental or regulatory issues, (v) alternative uses of
capital, (vi) maintaining qualification as a REIT and (vii) other tax-related
considerations. See "Federal Income Tax Considerations--Taxation of the
Company."
FINANCING POLICIES
The Company intends to make additional investments in Life Science
Facilities and may incur indebtedness to make such investments or to meet the
distribution requirements imposed by the REIT provisions of the Code to the
extent that cash flows from the Company's investments and working capital is
insufficient. The Company has adopted a policy to limit its total consolidated
indebtedness so that at the time any debt is incurred, the Company's debt to
total market capitalization ratio does not exceed 50%. Upon consummation of
the Offering and the Formation Transactions, the Company's debt to total
market capitalization ratio will be approximately 20%. The Company's Charter
and Bylaws, however, do not limit the amount or percentage of indebtedness
that the Company may incur. The Company may, from time to time, modify its
debt policy in light of current economic conditions, relative costs of debt
and equity capital, market values of its properties, general conditions in the
market for debt and equity securities, fluctuations in the market price of the
Common Stock, growth and acquisition opportunities, the Company's continued
REIT qualification requirements and other factors. Accordingly, the Company
may increase or decrease its debt to total market capitalization ratio beyond
the limits described above. If these policies were changed, the Company could
become more highly leveraged, resulting in an increased risk of default on its
obligations and a related increase in debt service requirements that could
adversely affect the Company's financial condition and its ability to make
distributions to stockholders. See "Risk Factors--Changes in Policies Without
Stockholder Approval" and "--No Limitation on Debt."
The Company has established its debt policy relative to the total market
capitalization of the Company computed at the time debt is incurred, rather
than relative to the book value of its assets. The Company believes that the
book value of its assets (which to a large extent is the depreciated value of
real property, the Company's primary tangible asset) does not accurately
reflect its ability to borrow and to meet debt service requirements and that a
debt to total market capitalization ratio, therefore, provides a more
appropriate indication of leverage. A debt to total market capitalization
ratio, however, is based, in part, upon the aggregate market value of the
outstanding shares of Common Stock and will fluctuate with changes in the
price of the Common Stock (and the issuance of additional shares of Common
Stock). Accordingly, because the measurement of the Company's total
consolidated indebtedness to total market capitalization is made at the time
debt is incurred, the debt to total market capitalization ratio could later
exceed the 50% level.
To the extent that the Board of Directors desires to obtain additional
capital, the Company may raise such capital through additional public and
private equity offerings, debt financings, retention of cash flow (subject to
satisfying the Company's distribution requirements under the REIT provisions
of the Code) or a combination of these methods. The Company's debt may consist
of a combination of property level debt and corporate level debt, and
financing may consist of floating and/or fixed rate debt. Borrowings may be
unsecured or secured by any or all of the assets of the Company and may have
full or limited recourse to all or any portion of the assets of the Company.
Indebtedness may be in the form of bank borrowings, purchase money obligations
to sellers of properties, publicly or privately placed debt instruments or
financing from institutional investors or other lenders. The proceeds from any
borrowings by the Company may be used (subject to limitations which may be
contained in the instruments governing such indebtedness) to pay
distributions, to provide working capital, to pay existing indebtedness or to
finance acquisitions, expansions or selective development of new properties.
The Company has not established any limit on the number or amount of mortgages
that may be placed on any single property or on its portfolio.
CONFLICT OF INTEREST POLICIES
The Company has entered into agreements with Messrs. Sudarsky, Marcus, Gold,
Stone, Kreitzer and Nelson designed to eliminate or minimize potential
conflicts of interest. The respective agreements prohibit each
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of them from engaging in any activity competitive with the business of the
Company during the term of each such officer's employment agreement with the
Company and for any period during which such officer is entitled to severance
benefits thereunder. See "Management--Employment Agreements." In addition, the
Board of Directors is subject to certain provisions of Maryland law that are
designed to eliminate or minimize certain potential conflicts of interest.
There can be no assurance, however, that these policies will be successful in
eliminating the effects of such conflicts, and if they are not successful,
decisions could be made that might fail to reflect fully the interests of all
stockholders.
Pursuant to Maryland law, each director will be subject to restrictions on
misappropriation of corporate opportunities. In addition, a contract or other
transaction between the Company and a director or between the Company and any
other corporation or other entity in which a director of the Company is a
director or has a material financial interest is not void or voidable solely
on the grounds of such interest if (i) the fact of the common directorship is
disclosed or known to the Board of Directors (or committee thereof) or the
stockholders, as applicable, and the contract or transaction is authorized,
approved or ratified by the affirmative vote of a majority of the
disinterested directors or the stockholders, or (ii) the transaction is
established to have been fair and reasonable to the Company. The Company's
Charter provides, however, that directors of the Company who are affiliates of
AEW have no obligation to present to the Company opportunities that may be
pursued by AEW, unless such opportunities were presented to the director in
his capacity as such.
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company has authority to offer Common Stock, Preferred Stock or options
to purchase capital stock in exchange for property and to repurchase or
otherwise acquire its Common Stock or other securities in the open market or
otherwise and may engage in such activities in the future. The Board of
Directors, however, has no present intention of causing the Company to
repurchase any capital stock. The Company may issue Preferred Stock from time
to time, in one or more series, as authorized by the Board of Directors
without stockholder approval. See "Description of Capital Stock--Preferred
Stock." The Company has not engaged in trading, underwriting or agency
distribution or sale of securities of other issuers nor has the Company
invested in the securities of other issuers for the purposes of exercising
control (other than with respect to QRS), and does not intend to do so (other
than with respect to (i) the Acquisition LLC, GSA-QRS or other subsidiaries or
(ii) the acquisition of properties). The Company has not made any loans to
third parties, although the Company may in the future make loans to third
parties, including, without limitation, to joint ventures in which it
participates. The Company intends to make investments in such a manner as to
maintain its qualification as a REIT, unless because of circumstances or
changes in the Code (or the Treasury Regulations), the Board of Directors
determines that it is no longer in the best interest of the Company to qualify
as a REIT.
The Company will be required to file reports and other information with the
Commission pursuant to the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). In addition to applicable legal or NYSE requirements, if any,
holders of shares of Common Stock will receive annual reports containing
audited financial statements with a report thereon by the Company's
independent certified public accountants.
FORMATION AND STRUCTURE
FORMATION AND RELATED TRANSACTIONS
Formation. Holdings filed its Articles of Incorporation in the State of
Maryland on September 30, 1993 and was capitalized in January 1994 by its
founders, Jerry Sudarsky, Joel Marcus, Alan Gold, Gary Kreitzer and Steven
Stone. In connection with such capitalization, Holdings issued securities to
Mr. Sudarsky in exchange for cash and to Mr. Marcus in exchange for a
promissory note that was subsequently forgiven by Holdings in consideration
for services rendered to Holdings. In addition, Holdings issued securities to
Messrs. Gold, Kreitzer and Stone in exchange for the assets of Bernardo
Capital, Inc., a real estate company, valued by the Board of Directors of
Holdings pursuant to arm's length negotiations at $55,640. No independent
appraisal of the assets was performed at the time of contribution. Bernardo
Capital, Inc. acquired the contributed assets over the duration of its
operations from September 1992 through January 1994 at a nominal cost. Messrs.
Sudarsky,
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Marcus and Gold, are officers and directors of both Holdings and Alexandria
and are officers of QRS. Messrs. Sudarsky and Marcus are also directors of
QRS.
On October 27, 1994, Alexandria filed its Articles of Incorporation in the
State of Maryland. In connection with the formation of Alexandria, and as
required by the Company's working capital lender, Holdings contributed
substantially all of its assets and liabilities (other than certain
outstanding unsecured notes) to Alexandria in exchange for all of the issued
and outstanding shares of Common Stock. On September 6, 1996, as required in
connection with the PaineWebber Facility, QRS filed its Articles of
Incorporation in the State of Maryland. In connection with the formation of
QRS, Alexandria contributed 1413 Research Boulevard in Rockville, Maryland to
QRS in exchange for all of the issued and outstanding shares of common stock
of QRS.
In connection with the refinancing of existing mortgage debt on 1431 Harbor
Bay Parkway, prior to consummation of the Offering the Company will form GSA-
QRS, a special-purpose entity, of which Alexandria will hold a 99% non-
managing interest and QRS will hold a 1% managing interest. In connection with
such formation, 1431 Harbor Bay Parkway in Alameda, California will be
contributed to GSA-QRS.
Stock Split. Prior to consummation of the Offering, each then outstanding
share of Common Stock will be split into 1,765.923 shares of Common Stock (the
"Stock Split"). As a result, Holdings will directly own 1,765,923 shares of
Common Stock, representing approximately 17.0% of the shares of Common Stock
to be outstanding upon consummation of the Offering and the Formation
Transactions.
Redemption of Outstanding Shares of Series T Preferred Stock. In December
1994, Alexandria issued four shares of Series T Preferred Stock to each of
Messrs. Sudarsky, Marcus and Gold, each of whom are officers and directors of
the Company, in connection with certain REIT requirements of the Code.
Pursuant to the terms thereof, upon consummation of the Offering, each
outstanding share of Series T Preferred Stock will be redeemed for cash in an
amount equal to its stated value of $100.
Conversion of Series U Preferred Stock. In January 1996, Alexandria issued
220 shares of Series U Preferred Stock to 126 holders, including certain
officers and directors of the Company, in connection with certain REIT
requirements of the Code. Upon the effectiveness of the Registration
Statement, the outstanding shares of Series U Preferred Stock will be
converted into an aggregate of 7,071 shares of Common Stock, representing 0.1%
of the shares of Common Stock to be outstanding upon consummation of the
Offering and the Formation Transactions.
Conversion of Series V Preferred Stock. In 1996, Alexandria issued 27,500
shares of Series V Preferred Stock to AEW in a series of transactions to raise
additional equity capital. Pursuant to the terms of the Series V Preferred
Stock, the Company notified AEW that it intended to (i) convert one-half of
the outstanding shares of Series V Preferred Stock into shares of Common Stock
and (ii) redeem the remaining shares of Series V Preferred Stock for cash.
Notwithstanding the option of the Company to effectuate the foregoing
conversion and redemption, AEW has exercised its right to convert all of its
shares of Series V Preferred Stock into shares of Common Stock. As a result of
such conversion (and after giving effect to an approximately 2.4% adjustment
to the conversion rate agreed to between AEW and the Company in connection
with the Offering), AEW will own 1,659,239 shares of Common Stock,
representing approximately 16.0% of the shares of Common Stock to be
outstanding upon consummation of the Offering and the Formation Transactions.
Purchase of the Acquisition LLC. Pursuant to the terms of the Agreement for
Sale and Purchase of Membership Interests (the "LLC Agreement") entered into
between certain affiliates of PaineWebber and the Company on January 13, 1997,
the Company assigned its rights to purchase the Acquisition LLC Properties to
the Acquisition LLC, which is controlled by PaineWebber Real Estate Holdings
Inc. and PW Realty Partners, LLC (the "PW Affiliates"). Thereafter, the
Acquisition LLC acquired the Acquisition LLC Properties. In connection with
the Offering, and as required by the LLC Agreement, the Company will acquire
100% of the membership interests in the Acquisition LLC from the PW
Affiliates. Thereafter, the Company expects that
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Alexandria will hold a 99% non-managing interest in the Acquisition LLC, and
QRS will hold a 1% managing interest therein. As a result of the acquisition
of the membership interests in the Acquisition LLC, the Company will acquire
the Acquisition LLC Properties located at 1550 East Gude Drive, Rockville,
Maryland, 1330 Piccard Drive, Rockville, Maryland and 14225 Newbrook Drive,
Chantilly, Virginia.
Under the terms of the LLC Agreement, the Company is required to acquire the
membership interests in the Acquisition LLC upon the earlier to occur of
September 30, 1998, the Offering or certain events of default as specified
therein. The purchase price for the Acquisition LLC will equal the original
purchase price of the Acquisition LLC Properties (as adjusted for certain cash
flow amortization from the Acquisition LLC Properties) and a percentage of the
aggregate fair market value (as defined) of the Acquisition LLC Properties on
the date of purchase of the Acquisition LLC by the Company in excess of the
adjusted purchase price. The Company currently anticipates that the purchase
price for the membership interests in the Acquisition LLC will be
approximately $60.6 million. The terms of the LLC Agreement, including the
purchase price, were determined through arm's-length negotiations, and none of
the Continuing Investors has any direct or indirect interest in the
Acquisition LLC or the Properties owned thereby. In connection with the
Offering, PaineWebber agreed to amend the LLC Agreement to reduce the purchase
price required to be paid by the Company for the membership interests in the
Acquisition LLC by approximately $766,000.
NEW MORTGAGE DEBT
Upon consummation of the Offering and the Formation Transactions, the
Company will repay approximately $78.1 million of its existing mortgage debt
with a portion of the net proceeds of the Offering, as well as the net
proceeds from: (i) a new $8.5 million mortgage loan on 1431 Harbor Bay Parkway
and (ii) a new $6.9 million mortgage loan on 1102 and 1124 Columbia Street.
The $8.5 million mortgage loan will bear interest at a fixed rate equal to
approximately 70 basis points over the interpolated 7-year Treasury rate,
which would result in an interest rate of approximately 7.30% (as of May 1,
1997), and will mature in January 2014. The $6.9 million mortgage loan will
initially bear interest at a variable rate based on 90 basis points over
LIBOR. This rate is anticipated to be fixed (based on the terms of the loan)
in August 1997 at a rate equal to approximately 90 basis points over the
interpolated 20-year Treasury rate, which would result in a fixed interest
rate of approximately 7.70% (as of May 1, 1997). This loan will mature in July
2016.
BENEFITS TO RELATED PARTIES
Accretion in Value. As a result of the Offering and the Formation
Transactions, Holdings and the officers and directors of the Company directly
will realize an immediate accretion in the net tangible book value per share
of Common Stock of $9.11 and $14.94 per share of Common Stock, respectively.
Stock Grants and Stock Options. In connection with the Offering, officers,
directors and certain employees of the Company will be granted (i) an
aggregate of 152,615 shares of Common Stock and (ii) options to purchase
57,000 shares of Common Stock under the 1996 Plan in substitution for
previously granted Holdings Stock Options (such stock options will be
exercised in connection with the Offering at a nominal exercise price, and
thereafter no further stock options will be issued under the 1996 Plan). In
addition to their respective ownership interests in Holdings, upon
consummation of the Offering and the Formation Transactions, officers,
directors and certain employees of the Company will directly own 209,615
shares of Common Stock, representing approximately 2.0% of the outstanding
shares of Common Stock.
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The following table lists the number of shares to be issued to officers and
directors of the Company and the number of shares issuable upon exercise of
stock options under the 1996 Plan.
<TABLE>
<CAPTION>
SHARES OF COMMON
STOCK ISSUABLE
UPON EXERCISE OF
OPTIONS UNDER
SHARES OF COMMON THE 1996 PLAN
NAME STOCK TO BE ISSUED (1)
---- ------------------ ----------------
<S> <C> <C>
Jerry M. Sudarsky........................ 5,555 4,164
Joel S. Marcus........................... 54,160 29,140
Alan D. Gold............................. 33,329 7,619
Peter J. Nelson.......................... 3,097 --
Gary A. Kreitzer......................... 13,887 3,822
Steven A. Stone.......................... 13,887 4,212
Vincent R. Ciruzzi....................... 4,166 --
Joseph Elmaleh........................... 3,703 1,190
Viren Mehta.............................. 3,703 1,190
David M. Petrone......................... 3,703 1,190
Anthony M. Solomon....................... 3,703 1,190
</TABLE>
- --------
(1) All options issued under the 1996 Plan will be exercised in connection
with the Offering and, thereafter, no further stock options will be issued
under the 1996 Plan.
In connection with the Offering, the Company will also grant options to
officers, directors and certain employees of the Company to purchase an
aggregate of 600,000 shares of Common Stock at the initial public offering
price pursuant to the Company's 1997 Stock Option Plan. See "Management--
Benefit Plans." Options granted to officers and directors of the Company under
the 1997 Stock Option Plan will vest ratably over a three-year period. Options
granted to non-employee directors under the 1997 Stock Option Plan will vest
immediately upon the date of grant.
Registration Rights. In connection with the Offering, the Company will grant
to Holdings customary transferable registration rights with respect to the
shares of Common Stock held by it. See "Shares Eligible for Future Sale."
Related Party Loans and Reimbursements. During 1996, certain stockholders of
Holdings, including Jacobs Engineering Group, Inc., Southern Shipping &
Energy, Inc., Joseph Jacobs, Jerry Sudarsky, Joseph Flom and Joseph Elmaleh,
loaned in the aggregate $2.5 million to Holdings. Such loans mature on June
30, 1997, bear interest at the rate of 10% per annum, and are payable in
monthly installments. The proceeds from such loans were subsequently advanced
to the Company for general working capital purposes. Holdings will receive
$2.5 million from the proceeds of the Offering as repayment of the advance to
the Company and will use the proceeds thereof to repay the loans from the
stockholders of Holdings. See "Use of Proceeds."
Upon consummation of the Offering and the Formation Transactions, Bernardo
Capital, Inc. (a corporation of which Messrs. Gold, Kreitzer and Stone are
stockholders) will receive from Holdings approximately $517,000 as
reimbursement for certain expenses, including accrued salaries and benefits
paid to each of Messrs. Gold, Kreitzer and Stone, incurred in connection with
the formation of Holdings in 1993. These funds will be paid by Holdings, and
no proceeds of the Offering will be utilized for this purpose. Bernardo
Capital, Inc. has had no active operations since January 1994.
Benefits to Lead Managing Underwriter. PaineWebber will receive certain
material benefits from the Offering and the Formation Transactions in addition
to underwriting discounts and commissions and a fee for structural and
advisory services. Certain affiliates of PaineWebber are expected to receive
approximately $60.6 million of the net proceeds as consideration for the sale
of the Acquisition LLC to the Company and will receive $44.4 million of the
net proceeds as repayment of amounts outstanding under the PaineWebber
Facility. See "Use of Proceeds," "--Formation and Related Transactions" and
"Underwriting."
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND SENIOR MANAGEMENT
The following table sets forth certain information with respect to the
directors and executive officers of the Company, as well as certain of its
senior management.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Jerry M. Sudarsky....... 78 Chairman of the Board
Joel S. Marcus.......... 49 Chief Executive Officer and Director
Alan D. Gold............ 36 President and Director
Peter J. Nelson......... 39 Chief Financial Officer, Treasurer and Secretary
Gary A. Kreitzer........ 42 Senior Vice President and In-House Counsel
Steven A. Stone......... 35 Corporate Vice President
Vincent R. Ciruzzi...... 34 Vice President
Joseph Elmaleh.......... 58 Director
Viren Mehta............. 47 Director
David M. Petrone........ 52 Director
Anthony M. Solomon...... 77 Director
</TABLE>
JERRY M. SUDARSKY has served as the Company's Chairman of the Board of
Directors since its inception. Mr. Sudarsky also served as Chief Executive
Officer of the Company from its inception until March 1997. Mr. Sudarsky
served as Vice Chairman of Jacobs Engineering Group, Inc., an engineering and
construction firm, from 1986 to 1994. Mr. Sudarsky has had extensive
experience in the design, engineering, construction and operation of
commercial properties, including Life Science Facilities. In 1967,
Mr. Sudarsky founded and became Chairman of Israel Chemicals, where he served
until 1972, and in 1946, he founded Bioferm Corp., a pioneer in the production
of Vitamin B12 and the first commercial bio-insecticide products, where he
served until 1965.
JOEL S. MARCUS has served as the Company's Chief Executive Officer since
March 1997 and has served as a director since inception. Mr. Marcus previously
served as the Company's Vice Chairman of the Board and Chief Operating Officer
from its inception until his appointment as Chief Executive Officer in March
1997 and as Secretary from inception until Mr. Nelson's appointment as
Secretary in April 1997. Mr. Marcus was a partner in the law firm of Brobeck,
Phleger & Harrison, and a predecessor firm, from 1986 to 1994, specializing in
corporate finance and acquisitions. From 1984 to 1994, he also served as
General Counsel and Secretary of Kirin-Amgen, Inc., a joint venture that
financed the development of two genetically engineered pharmaceuticals.
Mr. Marcus has served on the Board of Directors of Ariad Pharmaceuticals, a
publicly traded biotechnology company, since 1995. Mr. Marcus was formerly a
practicing Certified Public Accountant specializing in the financing and
taxation of real estate, including REITs. Mr. Marcus has a broad-based network
of working relationships in the real estate and Life Science industries. He
received his undergraduate and Juris Doctor Degrees from the University of
California at Los Angeles and is a member of NAREIT.
ALAN D. GOLD has served as President and a director of the Company since its
inception. Mr. Gold previously served as the Company's Treasurer from
inception until Mr. Nelson's appointment as Treasurer in April 1997. Mr. Gold
has served as managing partner of GoldStone Real Estate Finance and
Investments, a partnership engaged in the real estate and mortgage business,
since 1989. The partnership ceased active operations in January 1994. He also
served as Assistant Vice President of Commercial Real Estate for Northland
Financial Company, a full service commercial property mortgage banker, from
1989 to 1990 and as Real Estate Investment Officer-Commercial Real Estate for
John Burnham Company, a regional full service real estate company, from 1985
to 1989. Mr. Gold received his Bachelor of Science Degree in Business
Administration and his Master of Business Administration with an emphasis in
real estate finance from San Diego State University.
PETER J. NELSON has served as the Chief Financial Officer, Treasurer and
Secretary of the Company since April 1997. Prior to joining the Company, from
1995 to 1997, Mr. Nelson served as Chief Financial Officer of
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Lennar Partners, a diversified real estate company, where he was responsible
for the financial management of the firm's real estate portfolio. From 1990 to
1995, Mr. Nelson was Chief Financial Officer of Westrec Properties, Inc., a
national owner and operator of boat marinas and resort properties. Mr. Nelson
also served as Vice President, Corporate Financial Planning at Public Storage,
Inc. from 1986 to 1990, and as an Audit Manager at Ernst & Young LLP from 1979
to 1986. Mr. Nelson is a Certified Public Accountant and a member of the
American Institute of CPAs and the California Society of CPAs where he has
served on the Real Estate Committee. Mr. Nelson received his Bachelor of
Science Degree from California State University.
GARY A. KREITZER has served as Senior Vice President and In-House Counsel of
the Company since its inception. From 1990 to 1994, Mr. Kreitzer was In-House
Counsel and Vice President for Seawest Energy Corporation, an alternative
energy facilities development company. Mr. Kreitzer also served as In-House
Counsel, Secretary and Vice President for The Christiana Companies, Inc., a
publicly traded investment and real estate development company from 1982 to
1989. Mr. Kreitzer received his Juris Doctor Degree, with honors, from the
University of San Francisco and a Bachelor of Arts Degree in economics from
the University of California, San Diego. Mr. Kreitzer is a member of the
California State Bar, the American Bar Association and the American Corporate
Counsel Association.
STEVEN A. STONE has served as Corporate Vice President of the Company since
its inception. Since 1989, Mr. Stone has served as a partner in GoldStone Real
Estate Finance and Investments, which ceased active operations in January
1994. Mr. Stone served as Asset Manager for Baldwin Industrial Properties,
Ltd., a commercial real estate developer, from 1986 to 1989, Assistant to Vice
President-Business and Real Estate Development at Grant General Contractors
from 1986 to 1989, and Appraiser for the Bank of America from 1983 to 1984.
Mr. Stone holds a Bachelor of Science Degree in Business Administration from
San Diego State University.
VINCENT R. CIRUZZI has served as a Vice President of the Company since
September 1996. In 1993, Mr. Ciruzzi founded a real estate consulting
business, which provided consulting services to the Company from September
1995 until his appointment as Vice President. Mr. Ciruzzi served as Project
Manager for Home Capital Development Corporation, a real estate development
company, from 1986 to 1993, where he specialized in project management of
master planned communities as well as real estate development. Mr. Ciruzzi
received his Bachelor of Science Degree in Finance and Real Estate from the
University of Southern California.
JOSEPH ELMALEH has served as a director of the Company since its inception.
Dr. Elmaleh is a chemical engineer and international financier, with
businesses in the United States, Europe and the Middle East. He served as
Chairman and Chief Executive Officer of Passport Ltd., an oil and gas and real
estate company, from 1989 to 1995 and of J.O.E.L. Ltd., an oil and gas and
real estate company, from 1981 to 1995. Dr. Elmaleh also served as Chairman,
Chief Executive Officer and a director of Isramco, Inc., a publicly traded oil
and gas exploration company, from 1981 to 1996. Dr. Elmaleh has been a
director of Panatech Research and Development Inc., a manufacturer of tips for
spray guns, since 1980. Dr. Elmaleh received his Bachelor of Science Degree in
chemical engineering from the Technion-Israel Institute of Technology and his
Doctorate in Operations Research from the Imperial College of Science and
Technology, London.
VIREN MEHTA has served as a director of the Company since January 1995.
Since 1989, Mr. Mehta has been a partner of Mehta and Isaly, a pharmaceutical
and biotechnology industry advisory and investment firm. Mr. Mehta served as a
Vice President at S.G. Warburg & Co., Inc., a merchant bank, from 1987 to
1989. In 1986, he established the pharmaceutical investment research division
in Wood MacKenzie & Company Inc., New York, of which he became a Vice
President and served until 1987. Mr. Mehta also worked with the international
division of Merck & Co., a pharmaceutical manufacturer, from 1983 to 1986. Mr.
Mehta received his Doctor of Pharmacy Degree from the University of Southern
California and his Master of Business Administration from the University of
California at Los Angeles.
DAVID M. PETRONE has served as a director of the Company since its
inception. Mr. Petrone has been Chairman of the Board of Housing Capital
Corporation, a real estate finance company, since 1994. From 1986
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until 1992, Mr. Petrone was Vice Chairman of the Board of Wells Fargo and
Company. Mr. Petrone also served as Chief Executive Officer and President of
Wells Fargo Realty Advisors from 1978 to 1981 and of Wells Fargo Mortgage and
Equity Trust, a publicly held REIT, from 1981 to 1988. Mr. Petrone has served
as a director of Jacobs Engineering Group, Inc. since 1986 and of Spieker
Properties, a publicly held REIT, since 1993. He received his Bachelor of
Science and Master of Business Administration Degrees from the University of
Oregon.
ANTHONY M. SOLOMON has served as a director of the Company since October
1994. Mr. Solomon is an economist and banker and has served as Chairman of The
Blackstone Alternate Asset Management Advisory Board since 1994. Mr. Solomon
also has served as Chairman of The Europe Fund, a closed end fund investing in
Europe since 1990 and of The United Kingdom Fund, a closed end fund investing
in the United Kingdom since 1987. Mr. Solomon has served as an economic
advisor to the Banca Comerciale Italiana since 1985. Mr. Solomon was a
director of S.G. Warburg p.l.c. London from 1985 until 1991 and Chairman of
S.G. Warburg USA from 1985 until 1989. Mr. Solomon also served as President
and Chief Executive Officer of the Federal Reserve Bank of New York from 1980
to 1985 and was Under Secretary of the Treasury from 1977 to 1980. Mr. Solomon
received his Bachelor of Arts Degree in Economics from the University of
Chicago and his Masters Degree in Economics and Public Administration from
Harvard University.
ELECTION OF DIRECTORS AND DIRECTOR COMPENSATION
All directors are elected to hold office until the next annual meeting of
stockholders of the Company and until their successors are duly elected and
qualify. Pursuant to an agreement with the Company, AEW has the right to
include two nominees on the ballot for the election of directors of the
Company, and one nominee on the ballot for the election of directors of QRS,
so long as AEW owns Common Stock representing more than 15% of the voting
securities of the Company, and the right to include one nominee on the ballot
for the election of directors of the Company so long as AEW owns Common Stock
representing more than 7% of such securities. Holdings has agreed to vote its
shares of Common Stock for such nominees included on the ballot for the
election of directors of the Company, and the Company has agreed to take all
actions necessary to cause the election of the nominee at QRS. No directors
currently serve on the board of directors of the Company or QRS pursuant to
such arrangement, although AEW may, at its discretion, exercise its right to
include nominees on the ballot in the future. If, at any time, AEW's ownership
of Common Stock represents less than 15% of the voting securities of the
Company, within 10 days of such decrease in ownership, AEW has agreed to cause
one director elected or nominated by it to resign from the Board of Directors
and all committees thereof, and from the board of directors of QRS and all
committees thereof. Upon AEW's ownership of Common Stock decreasing to less
than 7% of the outstanding voting securities of the Company, within 10 days of
such decrease in ownership, AEW shall cause all directors nominated by it
pursuant to this arrangement to resign from the Board of Directors and all
committees thereof. Upon consummation of the Offering and the Formation
Transactions, AEW will own approximately 16.0% of the outstanding Common
Stock. See "Formation and Structure--Benefits to Related Parties."
Following the Offering, the Company intends to pay each of its non-employee
directors annual compensation of $12,000 for their services. In addition, each
non-employee director will receive a fee of $1,000 for each meeting of the
Board of Directors attended in person and $500 for attendance at each
telephonic meeting of the Board of Directors, and will be reimbursed for
reasonable expenses incurred to attend director and committee meetings. Non-
employee directors also will be eligible to receive options to purchase Common
Stock as compensation for their service as directors under the 1997 Stock
Option Plan. Officers of the Company who are also directors will not be paid
any fees for services as directors. Prior to the Offering, non-employee
directors received no annual compensation for their services but were entitled
to stock options under the 1996 Stock Option Plan and to reimbursement for
reasonable expenses incurred to attend director and committee meetings.
Directors of the Company will also receive certain benefits in connection with
the Offering and the Formation Transactions. See "Formation and Structure."
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COMMITTEES OF THE BOARD OF DIRECTORS
The Board currently has two committees, the principal functions of which are
described below. The Board of Directors may, from time to time, establish
other committees, composed of one or more directors, and delegate to such
committees various powers, to the extent permitted by Maryland law.
The Audit Committee, among other things, recommends the firm to be appointed
as independent accountants to audit the Company's financial statements,
discusses the scope and results of the audit with the independent accountants,
reviews with management and the independent accountants the Company's interim
and year-end operating results, considers the adequacy of the internal
accounting controls and audit procedures of the Company and reviews the non-
audit services to be performed by the independent accountants. The members of
the Audit Committee currently are Messrs. Petrone and Elmaleh.
The Compensation Committee has authority to, among other things, renew and
approve salary arrangements, including annual incentive awards, for directors,
officers and other employees of the Company; adopt and amend employment
agreements for officers and other employees of the Company; and administer the
Company's option and other incentive plans. Members of the Compensation
Committee currently include Messrs. Sudarsky, Elmaleh and Petrone. Mr.
Sudarsky will resign from the Compensation Committee immediately prior to
consummation of the Offering.
EXECUTIVE COMPENSATION
The following table sets forth, in summary form, the compensation paid by
the Company to its Chief Executive Officer and the four other most highly
compensated executive officers of the Company (the "Named Executive Officers")
for services rendered to the Company in all capacities for the year ended
December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG TERM COMPENSATION
COMPENSATION(1) AWARDS
------------------ ----------------------
SECURITIES UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITIONS(2) YEAR SALARY($) BONUS($) OPTIONS (#) COMPENSATION($)
- ------------------------------- ---- --------- -------- ---------------------- ---------------
<S> <C> <C> <C> <C> <C>
Jerry M. Sudarsky....... 1996 $244,339 -- -- --
Chairman of the Board
Joel S. Marcus.......... 1996 $213,797 $100,000 369(3) $6,343(4)
Chief Executive Officer
and Director
Alan D. Gold............ 1996 $179,076 $ 65,000 -- $1,510(5)
President and Director
Gary A. Kreitzer........ 1996 $127,260 $ 35,000 -- $2,300(6)
Senior Vice President
and In-House Counsel
Steven A. Stone......... 1996 $ 95,260 $ 35,000 -- $1,194(7)
Corporate Vice
President
</TABLE>
- --------
(1) While each of the five named individuals received perquisites or other
personal benefits in the years shown, in accordance with applicable
regulations, the value of these benefits is not indicated because they did
not exceed in the aggregate the lesser of $50,000 or 10% of the
individual's salary and bonus in 1996.
(2) During 1996, Mr. Sudarsky served as Chairman of the Board and Chief
Executive Officer; Mr. Marcus served as Vice Chairman of the Board, Chief
Operating Officer and Secretary; and Mr. Gold served as President,
Treasurer and Director.
(3) In 1996, Holdings granted to Mr. Marcus a non-qualified option under the
1994 Plan to purchase 369 shares of common stock of Holdings exercisable
at $2.55 per share. As of January 28, 1997, the value of the shares of
common stock of Holdings subject to the option was $6.91 per share. In
connection with the Offering, the Company will grant to Mr. Marcus an
option under the 1996 Plan to purchase 1,756 shares of Common Stock in
substitution for such option, which will be fully vested and exercisable
at a nominal exercise price. Such option will be exercised in connection
with the Offering. See "Formation and Structure--Benefits to Related
Parties."
(4) Consists of $1,540 paid by the Company for term life insurance premiums,
$2,767 for individual disability insurance premiums and $2,036 for long-
term disability insurance premiums.
(5) Consists of $948 paid by the Company for individual disability insurance
premiums and $562 for long-term disability insurance premiums.
(6) Consists of $1,060 paid by the Company for term life insurance premiums
and $1,240 for long-term disability insurance premiums.
(7) Consists of $820 paid by the Company for term life insurance premiums and
$374 for long-term disability insurance premiums.
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<PAGE>
BENEFIT PLANS
1997 Stock Option Plan. The Company will adopt a stock option and incentive
plan (the "1997 Stock Option Plan") prior to consummation of the Offering. The
1997 Stock Option Plan will be administered by the Compensation Committee of
the Board of Directors. The 1997 Stock Option Plan is expected to provide for
the grant of incentive stock options intended to qualify as such under Section
422 of the Code, non-qualified stock options, stock appreciation rights and
restricted stock to employees, officers, directors and independent contractors
(including non-employee directors) of the Company with respect to 900,000
shares of Common Stock; provided, that incentive stock options may be granted
only to employees of the Company. The 1997 Stock Option Plan will permit the
Compensation Committee to select eligible employees, officers, directors and
independent contractors (including non-employee directors) of the Company to
receive awards, to determine the type and number of awards to be granted and
to determine the terms, conditions, restrictions and performance criteria
relating to any award. In connection with the Offering, the Company will grant
options to officers, directors and certain employees of the Company under the
1997 Stock Option Plan with respect to an aggregate of 600,000 shares of
Common Stock. See "Formation and Structure--Benefits to Related Parties."
1996 Stock Option Plan. Options may be granted under the Company's Amended
and Restated 1996 Stock Option Plan ("1996 Plan") to employees and non-
employee directors of the Company. Options issued under the 1996 Plan may be
either incentive stock options intended to qualify as such under Section 422
of the Code or non-qualified stock options; provided, that incentive stock
options may be granted only to employees of the Company. Recipients of stock
options must enter into a written stock option agreement with the Company. As
adjusted for the Stock Split, there are 423,134 shares of Common Stock
reserved for issuance under the 1996 Plan, of which 382,985 shares are
currently eligible for issuance thereunder. No options or stock appreciation
rights were granted under the 1996 Plan for the year ended December 31, 1996,
and no Named Executive Officer exercised options during such period. Moreover,
as of December 31, 1996, no Named Executive Officer held unexercised options
granted pursuant to the 1996 Plan. Following consummation of the Offering, no
further grants of options will be made under the 1996 Plan.
Unless otherwise determined by the administrator of the 1996 Plan (the
"Administrator"), options granted to non-employee members of the Board of
Directors are exercisable immediately, and options granted to other eligible
employees may be exercised as follows: 50% of the option shares, one year
following the grant date, 75% of the option shares, two years following the
grant date and 100% of the option shares, three years following the grant
date. The Administrator may waive such installment exercise provisions at any
time based on such factors as the Administrator may determine in its sole
discretion. No stock option is exercisable more than ten years after the date
such stock option is granted.
Any option that is outstanding and not yet fully exercisable under the 1996
Plan shall become fully and immediately exercisable upon (i) the termination
of the employment of the option holder by reason of death or disability or by
the Company without "cause" or by the option holder for "good reason," if and
to the extent that either term is defined in any employment or similar
agreement between the option holder and the Company, (ii) the consummation of
an underwritten initial public offering of Common Stock by the Company or
(iii) a change in control (as defined in the 1996 Plan).
The purchase price for shares issued to an optionee upon exercise of an
option is the price determined by the Administrator at the time of grant and
may not be less than the Fair Market Value (as defined in the 1996 Plan) of
the Common Stock as of the grant date.
Holders of options granted under Holdings' 1994 Stock Option Plan, as
amended, or Holdings' 1994 Stock Option Plan for Non-Employee Directors, as
amended ("Holdings Stock Options"), may be eligible to be granted substitute
stock options under the 1996 Plan in the event of certain changes in the
capital or corporate structure of the Company or a subsidiary of the Company,
including an initial public offering of the Common Stock. Substitute stock
options will be granted under the 1996 Plan in substitution for then
outstanding Holdings Stock Options to the extent that the Administrator
determines, in its sole discretion, that the grant of substitute stock options
is necessary to provide that holders of Holdings Stock Options not be deprived
of benefits to which
78
<PAGE>
they would otherwise have been entitled had such event or events not occurred.
Any grant of a substitute stock option will be subject to the prior
cancellation and surrender of the corresponding Holdings Stock Option. The
terms and conditions of substitute stock options shall be substantially
equivalent to those of the Holdings Stock Options in respect of which the
substitute stock options are granted.
Each substitute stock option will entitle the holder to purchase that number
of shares of Common Stock equal to the product of (i)(a) the fair market value
of a share of Holdings common stock divided by (b) the fair market value of a
share of Common Stock (the "Conversion Ratio") and (ii) the number of shares
of Holdings' common stock subject to such option (rounded to the nearest whole
share). The exercise price of the substitute stock option will be equal to the
per share exercise price of the Holdings Stock Option divided by the
Conversion Ratio (rounded to the nearest cent). The Company intends to grant
substitute stock options under the 1996 Plan in connection with the Offering.
See "Formation and Structure." All of such options will be exercised in
connection with the Offering.
401(k) Plan. The Company adopted its 401(k) Plan (the "401(k) Plan")
effective January 1, 1997. Each employee of the Company may enroll in the
401(k) Plan on such employee's date of hire. An employee actively employed by
the Company is eligible to receive a matching contribution under the 401(k)
Plan. Plan participants are immediately vested in their contributions to the
401(k) Plan and the matching contributions by the Company. The 401(k) Plan
permits each participant to elect to defer up to 15% of base compensation,
subject to the annual statutory limitation prescribed by Section 402(g) of the
Code, on a pre-tax basis. The Company will make matching contributions equal
to 50% of each participant's contribution.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with each of Messrs. Sudarsky, Marcus,
Gold, Kreitzer, Stone and Nelson. Mr. Sudarsky's employment agreement
previously provided that commencing on January 1, 1997 and ending on December
31, 2000, he would serve as Chairman of the Board of Directors. In connection
with the Offering, Mr. Sudarsky's employment agreement was amended to provide
that, upon consummation of the Offering, Mr. Sudarsky will retire from
employment with the Company and will continue to serve as non-executive
Chairman of the Board with no annual salary (other than the payment of
directors' fees) for a term that ends upon the next annual election of
officers. The amendment also provides that Mr. Sudarsky will begin receiving
an annual retirement benefit of $150,000 per year for the first three years
following the consummation of the Offering, at which time his benefit will be
reduced to $90,000 per year plus an annual cost of living increase of 2%.
Through the closing of the Offering, Mr. Sudarsky will be paid a base salary
of $240,000 per year.
Mr. Marcus' employment agreement provides that he will serve as the
Company's Chief Executive Officer through December 31, 2000. Mr. Marcus'
employment agreement provides for automatic one-year extensions until either
Mr. Marcus or the Company notifies the other that such party does not wish to
extend the agreement. Mr. Marcus will be paid a base salary of $235,000 per
year.
The employment agreements with each of Messrs. Gold, Kreitzer and Stone
provide for a term ending on December 31, 1998, and, with respect to Mr.
Nelson, on April 3, 1998, in each case with provision for automatic one-year
extensions until either the executive or the Company notifies the other that
such party does not wish to extend the agreement. Messrs. Gold, Nelson,
Kreitzer and Stone are paid base salaries of $190,000, $165,000, $140,000 and
$105,000 per year, respectively.
Each of the employment agreements with Messrs. Marcus, Gold, Nelson,
Kreitzer and Stone provides that such executive will be entitled to a
discretionary annual bonus and that his base salary will be subject to annual
increases, each as may be determined by the Board of Directors or a committee
thereof. In connection with the Offering, the employment agreements with
Messrs. Marcus and Gold were amended to eliminate the stated minimums with
respect to such officers' annual bonus. In connection with the Offering, in
March 1997 the Company agreed to pay bonuses to Messrs. Marcus and Gold in the
amount of $352,500 and $190,000, respectively, in consideration for past
services and the amendment of such employment agreements.
79
<PAGE>
The employment agreements with each of Messrs. Marcus, Gold, Nelson,
Kreitzer and Stone also provide for standard employee benefits, including,
without limitation, participation in the Company's pension, welfare and stock
incentive plans, to the extent the Company maintains any such plans. In
addition, the employment agreements with each of Messrs. Marcus, Gold,
Kreitzer and Stone provide that the Company will maintain term life insurance
on the life of each executive in the aggregate amount of $1 million.
Each of the employment agreements with Messrs. Marcus, Gold, Kreitzer and
Stone provides that if the Company terminates the executive's employment
without "cause" or if the executive terminates his employment for "good
reason" (each as defined in the employment agreements), then such executive
shall be entitled to receive a severance payment ("Severance Payment"),
payable in monthly installments (except that portion of the Severance Payment
that represents the executive's bonus will be payable on the dates such
amounts would have been paid had such executive continued in the Company's
employment), equal to the sum of his base salary plus bonus otherwise payable
during the remainder of the term of his agreement (the "Severance Period");
provided, however, that if any of Messrs. Marcus, Gold, Kreitzer or Stone
terminates his employment for "good reason" following a "change in control"
(as defined), then such executive shall be entitled to receive a lump sum
Severance Payment equal to three times the sum of his base salary plus bonus
otherwise payable during the remaining term of the agreement. Upon termination
by reason of death or disability, Mr. Marcus will receive a Severance Payment
equal to the sum of his base salary and bonus otherwise payable during the
remaining term of his agreement. In the event that any such executive is
entitled to any Severance Payment, he will also be entitled to full and
immediate vesting of all awards granted under any of the Company's stock
option or incentive compensation plans and continued participation throughout
the Severance Period in all employee welfare and pension benefits plans. In
addition, in the event that amounts payable to executive are subject to the
excise tax imposed under Section 4999 of the Code, the Company will provide
such executive with a tax "gross up" payment in an amount sufficient to offset
the effects of such excise tax. Mr. Nelson's agreement provides that if he is
terminated for any reason other than "cause" (as defined in the agreement), he
will receive a Severance Payment, payable in monthly installments, equal to
seven and one-half months of his base salary.
The employment agreements with each of Messrs. Sudarsky, Marcus, Gold,
Nelson, Kreitzer and Stone also provide that during the term of employment,
and any period, if any, which such executive is entitled to receive Severance
Payments, such executive will not engage in any activity competitive with the
business of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
From January 1, 1996 through September 9, 1996, Messrs. Sudarsky, Marcus,
Gold, Petrone, Mehta, Elmaleh and Solomon constituted the Board of Directors
of each of Holdings and Alexandria, and Messrs. Sudarsky, Petrone and Elmaleh
constituted the Compensation Committee of each such entity. From September 9,
1996 through March 14, 1997, Thomas Eastman and Thomas Nolan, each an AEW
nominee, also served on the Board of Directors of Alexandria. In addition, on
September 9, 1996, Mr. Elmaleh resigned from the Compensation Committee of
Alexandria, and Mr. Eastman served thereon until December 5, 1996, at which
time he was replaced by Mr. Nolan, who resigned from the Compensation
Committee in March 1997. In March 1997, Mr. Elmaleh was reappointed to the
Compensation Committee.
Messrs. Sudarsky, Petrone, Elmaleh, Eastman and Nolan each served on the
Compensation Committee during 1996. Mr. Sudarsky also served as Chief
Executive Officer of the Company during 1996. Messrs. Kreitzer and Stone,
executive officers of the Company, serve on the Board of Directors of Bernardo
Capital, Inc. Mr. Gold, an executive officer of Bernardo Capital, Inc., serves
as a director of the Company. Bernardo Capital, Inc. has had no active
operations since January 1994. See "Formation and Structure--Benefits to
Related Parties."
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting
80
<PAGE>
from (i) actual receipt of an improper benefit or profit in money, property or
services or (ii) active and deliberate dishonesty established by a final
judgment as being material to the cause of action. The Charter of the Company
contains a provision that eliminates such liability to the maximum extent
permitted by the MGCL.
The Charter authorizes the Company, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (i) any
present or former director or officer or (ii) any individual who, while a
director or officer of the Company and at the request of the Company, serves
or has served another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a director, officer, partner or
trustee from and against any claim or liability to which such person may
become subject or to which such person may incur by reason of his or her
serving as a present or former director or officer of the Company.
The Bylaws obligate the Company, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in advance of
final disposition of a proceeding to (i) any present or former director or
officer who is made a party to the proceeding by reason of his service in that
capacity or (ii) any individual who, while a director or officer of the
Company and at the request of the Company, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a director, officer, partner or trustee and who is made a
party to the proceeding by reason of his service in that capacity. The Charter
and Bylaws also permit the Company, with the approval of the Board of
Directors, to indemnify and advance expenses to any person who served a
predecessor of the Company in any of the capacities described above and to any
employee or agent of the Company or a predecessor of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service in those or other capacities unless it is established that (i) the act
or omission of the director or officer was material to the matter giving rise
to the proceeding and (a) was committed in bad faith or (b) was the result of
active and deliberate dishonesty, (ii) the director or officer actually
received an improper personal benefit in money, property or services or
(iii) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However,
under the MGCL, a Maryland corporation may not indemnify for an adverse
judgment in a suit by or in the right of the corporation. In addition, the
MGCL requires the Company, as a condition to advancing expenses, to obtain a
written affirmation by the director or officer of his good faith belief that
he has met the standard of conduct necessary for indemnification by the
Company as authorized by the Bylaws and a written statement by or on his
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
Each of the employment agreements with Messrs. Sudarsky, Marcus, Gold,
Nelson, Kreitzer and Stone requires that the Company indemnify such officers
to the maximum extent permitted by Maryland law, and to pay such persons'
expenses in defending any civil or criminal proceeding in advance of final
disposition of such proceeding.
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<PAGE>
CERTAIN TRANSACTIONS
Jacobs Engineering Group, Inc., a stockholder of Holdings, subleases space
to the Company in Pasadena, California. The Company paid $3,762 per month plus
expenses to Jacobs Engineering Group, Inc. in 1996 under such sublease. The
terms of the sublease, which expires on October 30, 1997, were determined
through arm's-length negotiations. Jacobs Engineering Group, Inc. also has,
from time to time, provided non-exclusive consulting, engineering, design and
related services to the Company. The Company has not paid any fees to Jacobs
Engineering Group, Inc. for such services. Mr. Petrone, a director of the
Company, is also a director of Jacobs Engineering Group, Inc.
Holdings, a stockholder of the Company, will receive $2.5 million from the
proceeds of the Offering as repayment of an advance made to the Company for
general working capital purposes. Such proceeds will be used by Holdings to
repay certain loans from stockholders of Holdings. See "Use of Proceeds" and
"Formation and Structure--Benefits to Related Parties."
A partner of Skadden, Arps, Slate, Meagher & Flom LLP, special counsel to
the Company and Holdings, owns certain debt and equity securities of Holdings
and will receive $197,500 from Holdings in connection with the Offering as
repayment of certain loans made to Holdings that were advanced to the Company
for general working corporate purposes. During 1996, the Company paid $1.4
million to Skadden, Arps, Slate, Meagher & Flom LLP for legal services
provided to the Company. See "Formation and Structure."
Upon consummation of the Offering and the Formation Transactions, Bernardo
Capital, Inc. (a corporation of which Messrs. Gold, Kreitzer and Stone are
stockholders) will receive from Holdings approximately $517,000 as
reimbursement for certain expenses, including accrued salaries and benefits
paid to each of Messrs. Gold, Kreitzer and Stone, incurred in connection with
the formation of Holdings in 1993. These funds will be paid by Holdings, and
no proceeds of the Offering will be utilized for this purpose. See "Use of
Proceeds" and "Formation and Structure--Benefits to Related Parties."
In December 1994, Alexandria issued four shares of Series T Preferred Stock
to each of Messrs. Sudarsky, Marcus and Gold, each of whom are officers and
directors of the Company, in connection with certain REIT requirements of the
Code. Pursuant to the terms thereof, upon consummation of the Offering, each
outstanding share of Series T Preferred Stock will be redeemed for cash in an
amount equal to its stated value of $100. See "Formation and Structure."
In January 1996, Alexandria issued 220 shares of Series U Preferred Stock to
126 holders, including certain officers and directors of the Company (or
members of their immediate families), in connection with certain REIT
requirements of the Code. Upon the effectiveness of the Registration
Statement, the outstanding shares of Series U Preferred Stock will be
converted into an aggregate of approximately 7,071 shares of Common Stock,
representing 0.1% of the shares of Common Stock to be outstanding upon
consummation of the Offering and the Formation Transactions. See "Formation
and Structure."
In 1996, Alexandria issued 27,500 shares of Series V Preferred Stock to AEW
in a series of transactions to raise additional equity capital. In connection
with the issuance of the Series V Preferred Stock, the Company granted to AEW
certain registration rights with respect to the shares of Common Stock to be
received in exchange for its shares of Series V Preferred Stock. See "Shares
Eligible for Future Sale." The terms of the Series V Preferred Stock were
determined through arm's-length negotiations. As a result of the conversion of
the shares of Series V Preferred Stock, AEW will own 1,659,239 shares of
Common Stock, representing approximately 16.0% of the shares of Common Stock
to be outstanding upon consummation of the Offering and the Formation
Transactions. See "Formation and Structure."
In connection with the Offering, as compensation for services rendered to
the Company, officers, directors and certain employees of the Company will be
granted an aggregate of 152,615 shares of Common Stock. In addition, in
connection with the Offering, officers, directors and certain employees of the
Company will be granted options to purchase 57,000 shares of Common Stock
pursuant to the Company's existing stock option
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<PAGE>
plan in substitution for previously granted Holdings Stock Options (such stock
options will be exercised in connection with the Offering at a nominal
exercise price and thereafter no further stock options will be issued under
this plan). In connection with the Offering, the Company will grant options to
officers, directors and certain employees of the Company to purchase an
aggregate of 600,000 shares of Common Stock at the initial public offering
price under the 1997 Stock Option Plan. See "Formation and Structure--Benefits
to Related Parties." Options granted to officers and directors of the Company
under the 1997 Stock Option Plan will vest ratably over a three-year period.
Options granted to non-employee directors under the 1997 Stock Option Plan
will vest immediately upon the date of grant.
In connection with the Offering, the Company will grant to Holdings
customary transferable registration rights with respect to the shares of
Common Stock held by it. See "Shares Eligible for Future Sale."
In connection with the Offering, and as required by the LLC Agreement, the
Company will acquire 100% of the membership interests in the Acquisition LLC
from the PW Affiliates. The Company currently anticipates that the purchase
price for the Acquisition LLC will be approximately $60.6 million. The
purchase price was determined through arm's-length negotiations and will equal
the original purchase price of the Acquisition LLC Properties (as adjusted for
certain cash flow amortization from the Acquisition LLC Properties) and a
percentage of the aggregate fair market value of the Acquisition LLC
Properties on the date of purchase of the membership interests in the
Acquisition LLC by the Company in excess of the adjusted purchase price. The
aggregate fair market value on the date of purchase of the Acquisition LLC by
the Company will be based on the "IPO Multiple" (as defined in the LLC
Agreement) and "Funds From Operations generated by the Properties" (as defined
in the LLC Agreement). In addition, PaineWebber, lead managing Underwriter of
the Offering, and certain of its affiliates, will receive certain other
benefits in connection with the Offering. In connection with the Offering,
PaineWebber agreed to amend the LLC Agreement to reduce the purchase price
required to be paid by the Company for the membership interests in the
Acquisition LLC by approximately $766,000. See "Use of Proceeds," "Formation
and Structure" and "Underwriting."
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<PAGE>
SHARE OWNERSHIP
PRINCIPAL STOCKHOLDERS OF ALEXANDRIA
The following table sets forth certain information as of April 30, 1997
regarding the beneficial ownership of the Common Stock with respect to (i)
each director of the Company, (ii) each Named Executive Officer, (iii) each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock and (iv) all directors and executive
officers as a group, assuming exercise of options to purchase 57,000 shares of
Common Stock to be granted under the 1996 Plan and the issuance of 152,615
shares of Common Stock in connection with the Offering. The following table
excludes options to purchase 600,000 shares of Common Stock to be granted to
officers, directors and certain employees under the Company's 1997 Stock
Option Plan. See "Formation and Structure--Benefits to Related Parties."
<TABLE>
<CAPTION>
PERCENTAGE
BENEFICIALLY
NUMBER OF SHARES OWNED
BENEFICIALLY -----------------
OWNED PRIOR TO PRIOR TO AFTER
BENEFICIAL OWNER(1) OFFERING OFFERING OFFERING
- ------------------- ---------------- -------- --------
<S> <C> <C> <C>
Jerry M. Sudarsky(2)....................... 1,775,642 89.9% 17.1%
Joel S. Marcus(3).......................... 1,846,223 93.5 17.8
Alan D. Gold(4)............................ 1,806,871 91.5 17.4
Gary A. Kreitzer........................... 17,709 * *
Steven A. Stone............................ 18,099 * *
Joseph Elmaleh(5).......................... 1,770,816 89.6 17.0
Viren Mehta................................ 4,893 * *
David M. Petrone........................... 4,893 * *
Anthony M. Solomon......................... 4,893 * *
Holdings(6)................................ 1,765,923 89.4 17.0
AEW Partners II, L.P.
225 Franklin Street
Boston, Massachusetts(7).................. -- * 16.0
Executive officers and directors as a group
(10 persons)(8)........................... 1,958,367 99.1 18.0
</TABLE>
- --------
* less than 1%.
(1) Unless otherwise indicated, the business address of each beneficial owner
is c/o Alexandria Real Estate Equities, Inc., 251 S. Lake Avenue, Suite
700, Pasadena, CA 91101.
(2) Includes 1,765,923 shares owned by Holdings, which may be deemed to be
beneficially owned by Mr. Sudarsky. Mr. Sudarsky disclaims beneficial
ownership of the shares of Common Stock owned by Holdings.
(3) Includes 1,765,923 shares owned by Holdings, which may be deemed to be
beneficially owned by Mr. Marcus. Mr. Marcus disclaims beneficial
ownership of the shares of Common Stock owned by Holdings.
(4) Includes 1,765,923 shares owned by Holdings, which may be deemed to be
beneficially owned by Mr. Gold. Mr. Gold disclaims beneficial ownership of
the shares of Common Stock owned by Holdings.
(5) Includes 1,765,923 shares owned by Holdings, which may be deemed to be
beneficially owned by Mr. Elmaleh. Mr. Elmaleh disclaims beneficial
ownership of the shares of Common Stock owned by Holdings.
(6) Each of Messrs. Sudarsky, Marcus, Gold and Elmaleh is a member of the
board of directors and a stockholder of Holdings. See "--Certain
Beneficial Ownership of Holdings." As a result, each such individual may
be deemed to be the beneficial owner of the shares of Common Stock owned
by Holdings. In addition, Jacobs Engineering Group, Inc. and an affiliate
own approximately 26.1% of the outstanding voting securities of Holdings
but disclaim beneficial ownership of the shares of Common Stock owned by
Holdings.
(7) AEW owns 27,500 shares of Series V Preferred Stock, including 6,666 shares
held by AEW Health Science Properties Co-Investment, L.P., which may be
deemed to be beneficially owned by AEW Partners II, L.P. Upon consummation
of the Offering and the Formation Transactions, such shares of Series V
Preferred Stock will be converted into 1,659,239 shares of Common Stock.
(8) See notes (2) through (6) above.
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CERTAIN BENEFICIAL OWNERSHIP IN HOLDINGS
The following table sets forth certain information regarding the beneficial
ownership of the Holdings' common stock as of April 30, 1997, with respect to
(i) each director of Alexandria, (ii) each Named Executive Officer and (iii)
all directors and executive officers of Alexandria as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
HOLDINGS' COMMON STOCK PERCENTAGE
BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED(1)
- ---------------- ---------------------- ---------------------
<S> <C> <C>
Jerry M. Sudarsky(2)............. 11,340 10.4%
Joel S. Marcus(3)................ 6,626 6.1
Alan D. Gold(4).................. 10,729 9.8
Gary A. Kreitzer(5).............. 6,012 5.5
Steven A. Stone(6)............... 8,055 7.4
Joseph Elmaleh(7)................ 9,969 9.1
Viren Mehta(8)................... 500 *
David M. Petrone(9).............. 500 *
Anthony M. Solomon(10)........... 500 *
Executive officers and directors
as a group (9 persons)(11)...... 54,231 49.7
</TABLE>
- --------
* Less than 1%
(1) Excludes the effect of shares issuable upon conversion or exchange of
certain convertible and exchangeable securities of Holdings currently
outstanding. Such securities are not convertible or exchangeable until the
occurrence of certain events.
(2) Excludes 875 shares issuable upon the exercise of options granted under
the 1994 Plan for which substitute stock options will be granted under the
1996 Plan.
(3) Excludes 6,123 shares issuable upon the exercise of options granted under
the 1994 Plan for which substitute stock options will be granted under the
1996 Plan.
(4) Excludes 1,601 shares issuable upon the exercise of options granted under
the 1994 Plan for which substitute stock options will be granted under the
1996 Plan.
(5) Excludes 803 shares issuable upon the exercise of options granted under
the 1994 Plan for which substitute stock options will be granted under the
1996 Plan.
(6) Excludes 885 shares issuable upon the exercise of options granted under
the 1994 Plan for which substitute stock options will be granted under the
1996 Plan.
(7) Excludes 250 shares issuable upon the exercise of options granted under
the 1994 Plan for which substitute stock options will be granted under the
1996 Plan. Includes shares beneficially owned by Southern Shipping and
Energy, Inc., of which Mr. Elmaleh is the Chairman of the Board.
(8) Excludes 250 shares issuable upon the exercise of options granted under
the 1994 Plan for which substitute stock options will be granted under the
1996 Plan. Includes 500 shares held by Mehta and Isaly, of which Mr. Mehta
is a partner.
(9) Excludes 250 shares issuable upon the exercise of options granted under
the 1994 Plan for which substitute stock options will be granted under the
1996 Plan.
(10) Excludes 250 shares issuable upon the exercise of options granted under
the 1994 Plan for which substitute stock options will be granted under
the 1996 Plan.
(11) See notes (2) through (10) above.
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DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the stock of the Company existing upon
consummation of the Offering and the Formation Transactions does not purport
to be complete and is subject to and qualified in its entirety by reference to
the Company's Charter and Bylaws, copies of which are exhibits to the
Registration Statement. See "Additional Information."
GENERAL
The Charter provides that the Company may issue up 100,000,000 shares of
Common Stock, 100,000,000 shares of Preferred Stock and 200,000,000 shares of
Excess Stock (as defined below). Upon consummation of the Offering and the
Formation Transactions, 10,391,848 shares of Common Stock will be issued and
outstanding and no shares of Preferred Stock will be issued and outstanding.
See "Formation and Structure." Under Maryland law, stockholders generally are
not liable for a corporation's debts or obligations.
COMMON STOCK
All shares of Common Stock offered hereby will be duly authorized, fully
paid and nonassessable. Subject to the preferential rights of any other class
or series of stock and to the provisions of the Charter regarding the
restrictions on transfer of stock, holders of shares of Common Stock are
entitled to receive distributions on such shares if, as and when authorized
and declared by the Board of Directors out of assets legally available
therefor and to share ratably in the assets of the Company legally available
for distribution to its stockholders in the event of its liquidation,
dissolution or winding up after payment of or adequate provision for all known
debts and liabilities of the Company.
Subject to the provisions of the Charter regarding the restrictions on
transfer of stock, each outstanding share of Common Stock entitles the holder
thereof to one vote on all matters submitted to a vote of stockholders,
including the election of directors, and, except as provided with respect to
any other class or series of stock, the holders of such shares will possess
the exclusive voting power. There is no cumulative voting in the election of
directors, which means that the holders of a majority of the outstanding
shares of Common Stock can elect all of the directors then standing for
election, and the holders of the remaining shares will not be able to elect
any directors.
Holders of shares of Common Stock have no preference, conversion, exchange,
sinking fund, redemption or appraisal rights and have no preemptive rights to
subscribe for any securities of the Company. Subject to the provisions of the
Charter regarding restriction on transfer of stock, shares of Common Stock
will have equal distribution, liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business, unless approved by the affirmative vote of stockholders holding at
least two thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be
cast on the matter) is set forth in the corporation's charter. The Company's
Charter provides for approval of such matters by the affirmative vote of a
majority of all of the votes entitled to be cast thereon.
The Charter authorizes the Board of Directors to reclassify any unissued
shares of Common Stock into other classes or series of classes of stock and to
establish the number of shares in each class or series and to set the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption for each such class or series.
PREFERRED STOCK
The Charter authorizes the Board of Directors, without the approval of the
stockholders of the Company, to classify any unissued shares of Preferred
Stock and to reclassify any previously classified but unissued shares of
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any series, as authorized by the Board of Directors. Prior to issuance of
shares of each series, the Board of Directors is required by the MGCL and the
Charter of the Company to set, subject to the provisions of the Charter
regarding restrictions on transfer of stock, the terms, preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends or other distributions, qualifications and terms or conditions of
redemption for each such series. Thus, the Board of Directors could authorize
the issuance of shares of Preferred Stock with terms and conditions which
could have the effect of delaying, deferring or preventing a transaction or a
change in control of the Company that might involve a premium price for
holders of Common Stock or otherwise be in their best interest. Upon
consummation of the Offering and the Formation Transactions, there will be no
shares of Preferred Stock outstanding, and the Company has no present plans to
issue any additional shares of Preferred Stock. See "Formation and Structure."
POWER TO ISSUE ADDITIONAL SHARES OF COMMON STOCK AND PREFERRED STOCK
The Company believes that the power of the Board of Directors to issue
additional authorized but unissued shares of Common Stock or Preferred Stock
and to classify or reclassify unissued shares of Common Stock or Preferred
Stock and thereafter to cause the Company to issue such classified or
reclassified shares of stock will provide the Company with increased
flexibility in structuring possible future financing and acquisitions and in
meeting other needs which might arise. The additional classes or series, as
well as the Common Stock, will be available for issuance without further
action by the Company's stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation
system on which the Company's securities may be listed or traded. Although the
Board of Directors has no present intention to do so, it could authorize the
Company to issue a class or series that could, depending upon the terms of
such class or series, delay, defer or prevent a transaction or a change in
control of the Company that might involve a premium price for holders of
Common Stock or otherwise be in their best interest. See "Risk Factors--Anti-
takeover Effect of Ownership Limit and Power to Issue Additional Stock."
RESTRICTIONS ON TRANSFER
For the Company to qualify as a REIT under the Code, not more than 50% of
the value of its outstanding stock may be owned, directly or constructively,
by five or fewer individuals or entities (as set forth in the Code) during the
last half of a taxable year (other than the first year for which an election
to be a REIT has been made). Also, shares of its outstanding stock must be
beneficially owned by 100 or more persons during at least 335 days of a
taxable year of 12 months (other than the first year for which an election to
be a REIT has been made) or during a proportionate part of a shorter taxable
year.
In order for the Company to maintain its qualification as a REIT, the
Company's Charter provides for the Ownership Limit, which prohibits, with
certain exceptions, direct or constructive ownership of shares of stock
representing more than 9.8% of the combined total value of outstanding shares
of the Company's stock by any person.
The Board of Directors, in its sole discretion, may waive the Ownership
Limit for any person. However, the Board may not grant such waiver if, after
giving effect to such waiver, five individuals could beneficially own, in the
aggregate, more than 49.9% of the value of the Company's outstanding stock. As
a condition to waiving the Ownership Limit, the Board of Directors may require
a ruling from the IRS or an opinion of counsel in order to determine the
Company's status as a REIT. The Charter excepts Holdings and AEW from the
Ownership Limit. Therefore, Holdings and AEW will be permitted to own in the
aggregate, actually or constructively, 17.0% and 16.0% of the Common Stock,
respectively.
The Company's Charter further prohibits (a) any person from beneficially or
constructively owning shares of stock of the Company that would result in the
Company being "closely held" under Section 856(h) of the Code and (b) any
person from transferring shares of stock of the Company if such transfer would
result in shares of stock of the Company being owned by fewer than 100
persons. Any transfer in violation of any of such restrictions is void ab
initio. Any person who acquires or attempts to acquire beneficial or
constructive ownership
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of shares of stock of the Company in violation of the foregoing restrictions
on transferability and ownership is required to give notice immediately to the
Company and provide the Company with such other information as the Company may
request in order to determine the effect of such transfer on the Company's
status as a REIT. The foregoing restrictions on transferability and ownership
will not apply if the Board of Directors determines that it is no longer in
the best interests of the Company to attempt to qualify, or to continue to
qualify, as a REIT.
If any transfer of shares of stock of the Company or other event occurs
that, if effective, would result in any person beneficially or constructively
owning shares of stock of the Company in excess or in violation of the above
transfer or ownership limitations (a "Prohibited Owner"), then that number of
shares of stock of the Company the beneficial or constructive ownership of
which otherwise would cause such person to violate such limitations (rounded
to the nearest whole share) shall be automatically exchanged for an equal
number of shares of excess stock (the "Excess Stock") and such shares of
Excess Stock shall be automatically transferred to a trust (the "Trust") for
the exclusive benefit of one or more charitable beneficiaries (the "Charitable
Beneficiary"), and the Prohibited Owner shall generally not acquire any rights
in such shares. Such automatic exchange shall be deemed to be effective as of
the close of business on the business day prior to the date of such violative
transfer. Shares of Excess Stock held in the Trust shall be issued and
outstanding shares of stock of the Company. The Prohibited Owner shall not
benefit economically from ownership of any shares of Excess Stock held in the
Trust, shall have no rights to distributions and shall not possess any rights
to vote or other rights attributable to the shares of Excess Stock held in the
Trust. The trustee of the Trust (the "Trustee") shall have all voting rights
and rights to dividends or other distributions with respect to shares of stock
held in the Trust, which rights shall be exercised for the exclusive benefit
of the Charitable Beneficiary. Any dividend or other distribution paid prior
to the discovery by the Company that shares of stock have been transferred to
the Trustee shall be paid by the recipient of such dividend or distribution to
the Company upon demand, or, at the Company's sole election, shall be offset
against any future dividends or distributions payable to the purported
transferee or holder, and any dividend or distribution authorized but unpaid
shall be rescinded as void ab initio with respect to such shares of stock and
promptly thereafter paid over to the Trustee with respect to such shares of
Excess Stock, as trustee of the Trust for the exclusive benefit of the
Charitable Beneficiary. The Prohibited Owner shall have no voting rights with
respect to shares of Excess Stock held in the Trust and, subject to Maryland
law, effective as of the date that such shares of stock have been transferred
to the Trustee, the Trustee shall have the authority (at the Trustee's sole
discretion) (i) to rescind as void any vote cast by a Prohibited Owner prior
to the discovery by the Company that such shares have been transferred to the
Trustee and (ii) to recast such vote in accordance with the desires of the
Trustee acting for the benefit of the Charitable Beneficiary. However, if the
Company has already taken irreversible corporate action, then the Trustee
shall not have the authority to rescind and recast such vote.
Within 180 days after the date of the event that resulted in shares of
Excess Stock of the Company being transferred to the Trust (or as soon as
possible thereafter if the Trustee did not learn of such event within such
period), the Trustee shall sell the shares of stock held in the Trust to a
person, designated by the Trustee, whose ownership of the shares will not
violate the ownership limitations set forth in the Charter. Upon such sale,
the interest of the Charitable Beneficiary in the shares sold shall terminate
and such shares of Excess Stock shall be automatically exchanged for an equal
number of shares of the same class or series of stock that originally were
exchanged for the Excess Stock. The Trustee shall distribute to the Prohibited
Owner, as appropriate (i) the price paid by the Prohibited Owner for the
shares, (ii) if the Prohibited Owner did not give value for the shares in
connection with the event causing the shares to be held in the Trust (e.g., a
gift, devise or other such transaction), the Market Price (as defined in the
Charter) of such shares on the day of the event causing the shares to be held
in the Trust, or (iii) if the exchange for Excess Stock did not arise as a
result of a purported transfer, the Market Price of such Shares on the day of
the other event causing the Shares to be held in the Trust. If such shares are
sold by a Prohibited Owner, then to the extent that the Prohibited Owner
received an amount for such shares that exceeds the amount that such
Prohibited Owner was entitled to receive pursuant to the aforementioned
requirement, such excess shall be paid to the Trustee.
All certificates representing shares of Common Stock and Preferred Stock
will bear a legend referring to the restrictions described above.
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Every owner of more than 5% (or such lower percentage as required by the
Code or the regulations promulgated thereunder) of all classes or series of
the Company's stock, including shares of Common Stock, within 30 days after
the end of each taxable year, is required to give written notice to the
Company stating the name and address of such owner, the number of shares of
each class and series of stock of the Company which the owner beneficially
owns and a description of the manner in which such shares are held. Each such
owner shall provide to the Company such additional information as the Company
may reasonably request in order to determine the effect, if any, of such
beneficial ownership on the Company's status as a REIT. In addition, each
stockholder shall upon demand be required to provide to the Company such
information as the Company may reasonably request in order to determine the
Company's status as a REIT, to comply with the requirements of any taxing
authority or governmental authority or to determine such compliance, or to
comply with the REIT provisions of the Code.
These ownership limits could delay, defer or prevent a transaction or a
change in control of the Company that might involve a premium price for the
Common Stock or otherwise be in the best interest of the stockholders. See
"Risk Factors--Anti-takeover Effect of Ownership Limit and Power to Issue
Additional Stock."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S CHARTER AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Charter and Bylaws of the Company does not purport to be complete and is
subject to and qualified in its entirety by reference to Maryland law and the
Charter and Bylaws of the Company, copies of which are exhibits to the
Registration Statement. See "Additional Information."
BOARD OF DIRECTORS
The Company's Bylaws provide that the number of directors of the Company may
be established by the Board of Directors, but may not be fewer than the
minimum number required by the MGCL nor more than 15. Any vacancy will be
filled, at any regular meeting or at any special meeting called for that
purpose, by a majority of the remaining directors, except that a vacancy
resulting from an increase in the number of directors must be filled by a
majority of the entire Board of Directors. All directors are elected to hold
office until the next annual meeting of stockholders of the Company and until
their successors are duly elected and qualify. Pursuant to a contractual
arrangement with the Company, AEW has the right to include two nominees on the
ballot for the election of directors of the Company, and one nominee on the
ballot for the election of directors of QRS, so long as AEW owns Common Stock
representing more than 15% of the voting securities of the Company, and the
right to include one nominee on the ballot for the election of directors of
the Company so long as AEW owns Common Stock representing more than 7% of such
securities. Holdings has agreed to vote its shares of Common Stock for such
nominees included on the ballot for the election of directors of the Company,
and the Company has agreed to take all actions necessary to cause the election
of the nominees at QRS. No directors currently serve on the board of directors
of the Company or QRS pursuant to such arrangement, although AEW may, at its
discretion, exercise its right to include nominees on the ballot in the
future. If, at any time, AEW's ownership of Common Stock represents less than
15% of the voting securities of the Company, within 10 days of such decrease
in ownership, AEW will cause one director elected or nominated by it to resign
from the Board of Directors and all committees thereof, and from the board of
directors of QRS and all committees thereof. Upon AEW's ownership of Common
Stock decreasing to less than 7% of the outstanding voting securities of the
Company, within 10 days of such decrease in ownership, AEW shall cause all
directors nominated by it pursuant to this arrangement to resign from the
Board of Directors and all committees thereof. Upon consummation of the
Offering and the Formation Transactions, AEW will own 16.0% of the outstanding
voting securities of the Company. See "Management--Election of Directors and
Director Compensation."
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BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting
power of the corporation's shares or an affiliate of the corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation (an "Interested Stockholder") or an affiliate
of such an Interested Stockholder are prohibited for five years after the most
recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative
vote of at least (i) 80% of the votes entitled to be cast by holders of
outstanding shares of voting stock of the corporation and (ii) two thirds of
the votes entitled to be cast by holders of voting stock of the corporation
other than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares. These provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. Pursuant to an act of the Board of Directors, any
business combination between the Company and AEW is exempt from the above-
described provisions of the MGCL. As a result, AEW may be able to enter into
business combinations with the Company that may not be in the best interest of
the stockholders, without compliance by the Company with the supermajority
vote requirements and other provisions of the MGCL. Additionally, immediately
prior to the consummation of the Offering, the Board of Directors will adopt a
resolution providing that the "business combination" provisions of the MGCL
shall not apply to the Company generally. This resolution will only be revoked
if the Board of Directors determines that such revocation is in the best
interests of the Company and its stockholders.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation acquired
in a "control share acquisition" have no voting rights except to the extent
approved by a vote of two-thirds of the votes entitled to be cast on the
matter, excluding shares of stock owned by the acquiror, by officers or by
directors who are employees of the corporation. "Control Shares" are voting
shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquiror or in respect of which the acquiror is
able to exercise or direct the exercise of voting power (except solely by
virtue of a revocable proxy), would entitle the acquiror to exercise voting
power in electing directors within one of the following ranges of voting
power: (i) one-fifth or more but less than one-third, (ii) one-third or more
but less than a majority, or (iii) a majority or more of all voting power.
Control shares do not include shares the acquiring person is then entitled to
vote as a result of having previously obtained stockholder approval. A
"control share acquisition" means the acquisition of control shares, subject
to certain exceptions.
Under Maryland law, a person who has made or proposes to make a control
share acquisition, upon satisfaction of certain conditions (including an
undertaking to pay expenses), may compel the board of directors of the
corporation to call a special meeting of stockholders to be held within 50
days of demand to consider the voting rights of the shares. If no request for
a meeting is made, the corporation may itself present the question at any
meeting of the stockholders.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of
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such shares are considered and not approved. If voting rights for control
shares are approved at a meeting of the stockholders and the acquiror becomes
entitled to vote a majority of the shares entitled to vote, all other
stockholders may exercise appraisal rights. The fair value of the shares as
determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (i) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (ii) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
The Bylaws contain a provision exempting from the control share acquisition
statute any acquisition by any person of the Company's shares of stock. There
can be no assurance that such provision will not be amended or eliminated in
the future.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Bylaws of the Company provide that (i) with respect to an annual meeting
of stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(a) pursuant to the Company's notice of the meeting, (b) by the Board of
Directors or (c) by a stockholder who is entitled to vote at the meeting and
has complied with the advance notice procedures set forth in the Bylaws and
(ii) with respect to special meetings of stockholders, only the business
specified in the Company's notice of meeting may be brought before the meeting
of stockholders and nominations of persons for election to the Board of
Directors may be made only (a) pursuant to the Company's notice of the
meeting, (b) by the Board of Directors or (c) provided that the Board of
Directors has determined that directors shall be elected at such meeting, by a
stockholder who is entitled to vote at the meeting and has complied with the
advance notice provisions set forth in the Bylaws.
AMENDMENT TO THE CHARTER OR BYLAWS
As permitted by the MGCL, the Charter provides that it may be amended by the
affirmative vote of the holders of a majority of votes entitled to be cast on
the matter. The Board of Directors has the exclusive power to adopt, alter,
repeal or amend the Bylaws.
DISSOLUTION OF THE COMPANY
As permitted by the MGCL, the Charter provides that dissolution of the
Company must be approved by the affirmative vote of the holders of not less
than a majority of all of the votes entitled to be cast on the matter. See
"Description of Capital Stock--Common Stock."
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER
AND BYLAWS
The business combination provisions and, if the applicable provision in the
Bylaws is rescinded, the control share acquisition provisions of the MGCL and
the advance notice provisions of the Bylaws could delay, defer or prevent a
transaction or a change in control of the Company that might involve a premium
price for holders of Common Stock or otherwise be in their best interest.
SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering and the Formation Transactions, there will
be 10,391,848 shares of Common Stock issued and outstanding (11,404,348 if the
Underwriters' over-allotment option is exercised in full). The shares
outstanding will include 1,765,923 shares of Common Stock held by Holdings,
209,615 shares of Common Stock held directly by officers and directors of the
Company, and 1,659,239 shares of Common Stock held by AEW (collectively, the
"Restricted Shares"). In addition, the Company has reserved 900,000
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shares of Common Stock for issuance to officers, directors and certain
employees of the Company pursuant to the 1997 Stock Option Plan, of which
options for 600,000 shares will be issued in connection with the Offering. All
of the Shares issued in the Offering will be freely tradeable by persons other
than Affiliates (as defined below) without registration or other restrictions
under the Securities Act, subject to limitations set forth in the Charter and,
in certain cases, to the additional contractual restrictions described below.
The Restricted Shares and shares issued upon the exercise of options (unless
issued pursuant to an effective registration statement) will be "restricted
securities" under the meaning of Rule 144 promulgated under the Securities Act
("Rule 144"), and may be sold only pursuant to an effective registration
statement under the Securities Act or an applicable exemption, including an
exemption under Rule 144, under the Securities Act.
In general, under Rule 144 as in effect as of April 29, 1997, a person (or
persons whose shares are aggregated), including an "affiliate" as that term is
defined in Rule 144 (an "Affiliate"), who has beneficially owned his or her
"restricted securities" for at least one year, is entitled to sell within any
three-month period a number of shares of Common Stock that does not exceed the
greater of 1% of the then outstanding shares of Common Stock (approximately
103,918 shares immediately after the Offering) or the average weekly trading
volume of Common Stock during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. Sales under Rule 144
are also subject to certain restrictions on the manner of sale, notice
requirements and the availability of current public information about the
Company. If two years have elapsed since the date of acquisition of
"restricted securities" from the Company or from any Affiliate of the Company,
and the acquiror or subsequent holder thereof is deemed not to have been an
Affiliate of the Company at any time during the 90 days preceding a sale, such
person would be entitled to sell such shares of Common Stock in the public
market under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements.
The Company and the Continuing Investors have agreed with the Underwriters,
subject to certain limited exceptions, not to offer, sell, contract to sell,
pledge, grant any option to purchase or otherwise dispose of any shares of
Common Stock (or any securities convertible into, or exercisable, exchangeable
or redeemable for, shares of Common Stock) for a period of 360 days from the
date of this Prospectus, without the prior written consent of PaineWebber.
Management of the Company, including Messrs. Sudarsky, Marcus, Gold, Nelson,
Kreitzer, Stone and Ciruzzi, have agreed with the Underwriters, subject to
certain limited exceptions, not to offer, sell, contract to sell, pledge or
otherwise dispose of any shares of Common Stock (or any securities convertible
into, or exercisable, exchangeable or redeemable for, shares of Common Stock),
including any shares of Common Stock that any such persons may have the right
to receive by virtue of their ownership interest in Holdings, for a period of
two years from the date of this Prospectus, without the prior written consent
of PaineWebber. After such time, such shares of Common Stock may be sold in
the public market, subject to applicable securities laws restrictions or
exemptions from registration, if available. The Company has granted to AEW
certain registration rights in connection with the Restricted Shares owned by
them. AEW has the ability to "demand" that the Company under certain
circumstances and subject to certain conditions, prepare and file a shelf
registration statement within a specified time period after the Offering with
respect to the resale of shares of Common Stock issued upon conversion of the
Series V Preferred Stock. AEW also has certain rights following an initial
public offering to have shares of Common Stock registered incidentally to any
registration being conducted by the Company with respect to the Common Stock.
The Company will also grant to Holdings customary transferable registration
rights with respect to the shares of Common Stock held by it. See "Formation
and Structure--Benefits to Related Parties."
The Company intends to issue options to purchase shares of Common Stock to
directors, officers and certain key employees of the Company from time to time
after the Offering. See "Management--Benefits Plans." The Company expects to
file a registration statement on Form S-8 with the Commission with respect to
the shares of Common Stock issuable under stock option plans of the Company
following the Offering. Shares of Common Stock issued after the effective date
of any such registration statement on Form S-8 upon the exercise of options
granted under any such plan will be available for sale in the public market
without restriction to the extent that such shares are held by persons who are
not Affiliates of the Company.
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Prior to the Offering, there has been no public market for the Common Stock.
Trading of the Common Stock on the NYSE is expected to commence immediately
following consummation of the Offering, upon official notice of issuance,
under the symbol "ARE." No prediction can be made as to the effect, if any,
that future sales of shares, or the availability of shares for future sale,
will have on the market price prevailing from time to time. Sales of
substantial amounts of Common Stock, or the perception that such sales occur,
could adversely affect prevailing market prices of the Common Stock.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding an investment in Common Stock of the Company is based on current
law, is for general information only and is not tax advice. This discussion
does not purport to deal with all aspects of taxation that may be relevant to
particular investors in light of their personal investment or tax
circumstances, or, except to the extent discussed under the headings "Taxation
of Tax-Exempt Stockholders" and "Taxation of Non-U.S. Stockholders," to
certain types of investors (including insurance companies, tax-exempt
organizations, financial institutions or broker-dealers, foreign corporations
and persons who are not citizens or residents of the U.S.) that are subject to
special treatment under the federal income tax laws. This discussion assumes
that investors will hold the Common Stock as a "capital asset" (generally,
property held for investment) under the Code.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT WITH ITS TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF THE COMMON
STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT
TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General. The REIT provisions of the Code are highly technical and complex.
The following sets forth the material aspects of the provisions of the Code
that govern the federal income tax treatment of a REIT and its stockholders.
This summary is qualified in its entirety by the applicable Code provisions,
rules and regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all of which are subject to change which may apply
retroactively.
The Board of Directors intends that the Company will operate in a manner
that permits it to elect, and that it will elect, REIT status for the taxable
year ended December 31, 1996, and the Company intends to continue to operate
in such a manner. Skadden, Arps, Slate, Meagher & Flom LLP will deliver an
opinion on or before the effectiveness of the Registration Statement that,
commencing with the Company's taxable year ending December 31, 1996, the
Company was organized in conformity with the requirements for qualification as
a REIT, and its proposed method of operation, and its actual method of
operation since January 1, 1996 through the date of this Prospectus, has and
will enable it to meet the requirements for qualification and taxation as a
REIT under the Code. It must be emphasized that this opinion will be based and
conditioned upon certain assumptions and representations made by the Company
as to factual matters (including representations of the Company concerning,
among other things, its business and properties, the amount of rents
attributable to personal property and other items regarding the Company's
ability to meet the various requirements for qualification as a REIT). The
opinion will be expressed as of its date, and Skadden, Arps, Slate, Meagher &
Flom LLP will have no obligation to advise holders of Common Stock of any
subsequent change in the matters stated, represented or assumed or any
subsequent change in the applicable law. Moreover, such qualification and
taxation as a REIT depends upon the Company having met and continuing to meet,
through actual annual operating results, distribution levels and diversity of
stock ownership, the various qualification tests imposed under the Code as
discussed below, the results of which will not be reviewed by Skadden, Arps,
Slate, Meagher & Flom LLP. Accordingly, no assurance can be given that the
actual results of the Company's operation for
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any particular taxable year have satisfied or will satisfy such requirements.
See "--Failure to Qualify." An opinion of counsel is not binding on the IRS,
and no assurance can be given that the IRS will not challenge the Company's
eligibility for taxation as a REIT.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from investment in a corporation. However, the Company will be subject
to federal income tax as follows: First, the Company will be taxed at regular
corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business other than
foreclosure property), such income will be subject to a 100% tax. Fourth, if
the Company should fail to satisfy the 75% gross income test or the 95% gross
income test (as discussed below), but has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on an amount equal to (a) the gross income
attributable to the greater of the amount by which the Company fails the 75%
or 95% test multiplied by (b) a fraction intended to reflect the Company's
profitability. Fifth, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and
(iii) any undistributed taxable income from prior periods, the Company would
be subjected to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed during such year. Sixth, if during the
10-year period (the "Recognition Period") beginning on the first day on the
first taxable year for which the Company qualified as a REIT, the Company
recognizes gain on the disposition of any asset held by the Company as of the
beginning of such Recognition Period, then, to the extent of the excess of (a)
the fair market value of such asset as of the beginning of such Recognition
Period over (b) the Company's adjusted basis in such asset as of the beginning
of such Recognition Period (the "Built-in Gain"), such gain will be subject to
tax at the highest regular corporate tax rate pursuant to IRS regulations that
have not yet been promulgated. Seventh, if the Company acquires any asset from
a C corporation (i.e., generally a corporation subject to full corporate level
tax) in a transaction in which the basis of the asset in the Company's hands
is determined by reference to the basis of the asset (or any other property)
in the hands of the C corporation, and the Company recognizes gain on the
disposition of such asset during the Recognition Period beginning on the date
on which such asset was acquired by the Company, then, to the extent of the
Built-in Gain, such gain will be subject to tax at the highest regular
corporate rate pursuant to IRS regulations that have not yet been promulgated.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (3) that would be taxable
as a domestic corporation, but for the special Code provisions applicable to
REITs; (4) that is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (5) the beneficial ownership of
which is held by 100 or more persons; (6) in which, during the last half of
each taxable year, not more than 50% in value of the outstanding stock is
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities); and (7) that meets certain other tests
described below (including with respect to the nature of its income and
assets). The Code provides that conditions (1) through (4) must be met during
the entire taxable year, and that condition (5) must be met during at least
335 days of a taxable year of 12 months, or during a proportionate part of a
taxable year of less than 12 months.
The Company believes that it has already issued sufficient shares to allow
it to satisfy conditions (5) and (6) above. In order to comply with the share
ownership tests described in conditions (5) and (6) above, the Company's
Charter provides certain restrictions on the transfer of its capital stock to
prevent concentration of stock ownership. These restrictions may not ensure
that, in all cases, the Company will be able to satisfy the share ownership
tests set forth above. If the Company fails to satisfy such requirements, the
Company's status as a REIT will terminate.
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To monitor the Company's compliance with such share ownership requirements,
the Company is required to maintain records regarding the actual ownership of
its shares. To do so, the Company must demand written statements each year
from the record holders of certain percentages of its stock in which the
record holders are to disclose the actual owners of the shares (i.e., the
persons required to include in gross income the REIT dividends). A list of
those persons failing or refusing to comply with this demand must be
maintained as part of the Company's records. A stockholder who fails or
refuses to comply with the demand must submit a statement with its tax return
disclosing the actual ownership of the shares and certain other information.
See "Description of Capital Stock--Restrictions on Transfer."
In the case of a REIT that is a partner in a partnership, regulations
provide that the REIT is deemed to own its proportionate share of the
partnership's assets and to earn its proportionate share of the partnership's
income. In addition, the assets and gross income of the partnership retain the
same character in the hands of the REIT for purposes of the gross income and
asset tests applicable to REITs as described below. Thus, the Company's
proportionate share of the assets, liabilities and items of income of any
partnership will be treated as assets, liabilities and items of income of the
Company for purposes of applying the REIT requirements described below. There
can be no assurance, however, that any partnerships will be organized or
operated in a manner that will enable the Company to continue to satisfy the
REIT requirements of the Code.
Income Tests. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from "prohibited
transactions," i.e., certain sales of property held primarily for sale to
customers in the ordinary course of business) for each taxable year must be
derived directly or indirectly from investments relating to real property or
mortgages on real property (including "rents from real property" and, in
certain circumstances, interest) or from certain types of temporary
investments. Second, at least 95% of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable year must be
derived from such real property investments, and from other dividends,
interest and gain from the sale or disposition of stock or securities (or from
any combination of the foregoing). Third, short-term gain from the sale or
other disposition of stock or securities, gain from certain sales of property
held primarily for sale, and gain on the sale or other disposition of real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property) must, in the aggregate, represent less than 30%
of the Company's gross income for each taxable year.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income tests described above only if several conditions
are met, including the following. First, if rent attributable to personal
property, leased in connection with real property, is greater than 15% of the
total rent received under any particular lease, then all of the rent
attributable to such personal property will not qualify as rents from real
property. The determination of whether an item of property constitutes real
property or personal property under the REIT provisions of the Code is subject
to both legal and factual considerations and, as such, is subject to differing
interpretations. Counsel has advised the Company with respect to the legal
considerations underlying such determination. After consulting with counsel
and considering such advice, the Company has reviewed its properties and has
determined that rents attributable to personal property do not exceed 15% of
the total rent with respect to any particular lease. Due to the highly
specialized nature of the Company's properties, however, there can be no
assurance that the IRS will not assert that the rent attributable to personal
property with respect to a particular lease is greater than 15% of the total
rent with respect to such lease. If the IRS were successful, and the amount of
such non-qualifying income, together with other non-qualifying income, exceeds
5% of the Company's taxable income, the Company may fail to qualify as a REIT.
See "Risk Factors--Adverse Consequences of Failure to Qualify as a REIT."
In addition, rents received by the Company will not qualify as rents from
real property of the Company if an owner of 10% or more of the Company
directly or constructively owns 10% or more in such tenant (a "Related
Tenant"). Moreover, an amount received or accrued will not qualify as rents
from real property (or as interest income) if it is based in whole or part of
the income or profits of any person. Rent or interest will not be
disqualified, however, solely by reason of being based on a fixed percentage
or percentages of receipts or
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sales. Finally, for rents received to qualify as rents from real property, the
REIT generally must not operate or manage the property or furnish or render
services to the tenants of such property, other than through an "independent
contractor" from which the REIT derives no revenue. However, the Company (or
its affiliates) is permitted to, and does directly perform services that are
"usually or customarily rendered" in connection with the rental of space for
occupancy only and are not otherwise considered rendered to the occupant of
the property. The Company regularly attempts to monitor such requirements.
There can be no assurance, however, that the Company will not realize income
from a Related Tenant that does not qualify as "rents from real property."
The Company will provide certain services with respect to the Properties and
any newly acquired Properties. The Company believes that the services provided
by the Company with respect to the Properties are usually and customarily
rendered in connection with the rental of space occupancy only, and therefore
the provision of such services will not cause the rents received with respect
to the Properties to fail to qualify as rents from real property for purposes
of the 75% and the 95% gross income tests.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests (though not the 30% gross income test) for any taxable year, it may
nevertheless qualify as a REIT for such year if it is entitled to relief under
certain provisions of the Code. These relief provisions will be generally
available if the Company's failure" to meet such tests was due to reasonable
cause and not due to willful neglect, the Company attaches a schedule of the
sources of its income to its return, and any incorrect information on the
schedule was not due to fraud with intent to evade tax. It is not possible,
however, to state whether in all circumstances the Company would be entitled
to the benefit of these relief provisions. If these relief provisions are
inapplicable to a particular set of circumstances involving the Company, the
Company will not qualify as a REIT. As discussed above in "--General," even
where these relief provisions apply, a tax is imposed with respect to the
excess net income.
Asset Tests. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by
real estate assets, stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of the Company, cash, cash items and U.S. government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of
the investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the
Company's total assets, and the Company may not own more than 10% of any one
issuer's outstanding voting securities.
The Company expects that substantially all of its assets will be real estate
assets. In addition, the Company does not expect that the value of any
security of any one entity would ever exceed 5% of the Company's total assets,
and the Company does not expect to own more than 10% of any one issuer's
voting securities.
The Company intends to monitor closely the purchase, holding and disposition
of its assets in order to comply with the REIT asset tests. In particular, the
Company intends to limit and diversify its ownership of any assets not
qualifying as real estate assets to less than 25% of the value of the
Company's assets and to less than (i) 5%, by value, of any single issuer and
(ii) 10% of the outstanding voting securities of any one issuer. If it is
anticipated that these limits would be exceeded, the Company intends to take
appropriate measures, including the disposition of non-qualifying assets, to
avoid exceeding such limits.
QRS is a wholly owned corporate subsidiary of the Company organized and
operated as a "qualified REIT subsidiary" within the meaning of the Code.
Qualified REIT subsidiaries are not treated as separate entities from their
parent REIT for federal income tax purposes. Instead, all assets, liabilities
and items of income, deduction and credit of a qualified REIT subsidiary are
treated as assets, liabilities and items of the Company. A qualified REIT
subsidiary therefore will not be subject to federal corporate income taxation,
although it may be subject to state or local taxation. In addition, the
Company's ownership of the voting stock of a qualified REIT subsidiary does
not violate the general restriction against ownership of more than 10% of the
voting securities of any issuer.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends)
to its stockholders in an amount at least equal to (i) the sum of
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(a) 95% of the Company's "REIT taxable income" (computed without regard to the
dividends paid deduction and the Company's net capital gain) and (b) 95% of
the net income (after tax), if any, from foreclosure property, minus (ii) the
sum of certain items of noncash income. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its tax return for such year and if
paid with or before the first regular dividend payment after such declaration.
To the extent that the Company does not distribute all of its net capital gain
or distributes at least 95%, but less than 100%, of its "REIT taxable income,"
as adjusted, it will be subject to tax thereon at the capital gains or
ordinary corporate tax rates, as the case may be. Furthermore, if the Company
should fail to distribute during each calendar year at least the sum of (1)
85% of its REIT ordinary income for such year, (2) 95% of its REIT capital
gain income for such year, and (3) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. The Company
believes that it has made, and intends to make, timely distributions
sufficient to satisfy this annual distribution requirement.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in arriving at taxable income of the Company. In the event that
such timing differences occur, in order to meet the 95% distribution
requirement, the Company may find it necessary to arrange for short-term, or
possibly long-term, borrowings or to pay dividends in the form of taxable
distributions of property.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based on the amount of
any deduction taken for deficiency dividends.
Absence of Earnings and Profits. The Company, in order to qualify as a REIT,
must not have accumulated earnings and profits attributable to any non-REIT
years. A REIT has until the close of its first taxable year in which it has
non-REIT earnings and profits to distribute any such accumulated earnings and
profits. Unless the "deficiency dividend" procedures described above apply and
the Company complies with those procedures, failure to distribute such
accumulated earnings and profits would result in the disqualification of the
Company as a REIT. The Company believes that the Company had no accumulated
earnings and profits as of December 31, 1995. The determination of accumulated
earnings and profits, however, depends upon a number of factual matters
related to the activities and operations of the Company during its entire
corporate existence and is subject to review and challenge by the IRS. There
can be no assurance that the IRS will not examine the tax returns of the
Company for prior years and propose adjustments to increase its taxable
income. In this regard, the IRS can consider all taxable years of the Company
as open for review for purposes of determining the amount of such earnings and
profits.
Failure to Qualify. If the Company fails to qualify for taxation as a REIT
in any taxable year, and certain relief provisions do not apply, the Company
will be subject to tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates. Distributions to stockholders
in any year in which the Company fails to qualify will not be deductible by
the Company nor will they be required to be made under the Code. In such
event, to the extent of current and accumulated earnings and profits, all
distributions to stockholders will be taxable as ordinary income, and, subject
to certain limitations of the Code, corporate distributees may be eligible for
the dividends received deduction. Unless entitled to relief under specific
statutory provisions, the Company will also be disqualified from taxation as a
REIT for the four taxable years following the year during which qualification
was lost. It is not possible to state whether in all circumstances the Company
would be entitled to such statutory relief. In addition, a recent federal
budget proposal contains language which, if enacted in its present form, would
result in the immediate taxation of all gain inherent in a C corporation's
assets upon an election by the corporation to become a REIT, and thus could
effectively preclude the Company from re-electing REIT status following a
termination of its REIT qualification.
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TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
General. As long as the Company qualifies as a REIT, distributions made to
the Company's taxable domestic stockholders out of current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
taken into account by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions that are
designated as capital gain dividends will be taxed as long-term capital gains
(to the extent that they do not exceed the Company's actual net capital gain
for the taxable year) without regard to the period for which the stockholder
has held its stock. However, corporate stockholders may be required to treat
up to 18% of certain capital gain dividends as ordinary income.
Distributions in excess of current and accumulated earnings and profits will
not be taxable to a stockholder to the extent that they do not exceed the
adjusted basis of the stockholder's shares, but rather will reduce the
adjusted basis of such shares. To the extent that such distributions exceed
the adjusted basis of a stockholder's shares, they will be included in income
as long-term capital gain (or short-term capital gain if the shares have been
held for one year or less). In addition, any dividend declared by the Company
in October, November or December of any year and payable to a stockholder of
record on a specified date in any such month shall be treated as both paid by
the Company and received by the stockholder on December 31 of such year,
provided that the dividend is actually paid by the Company during January of
the following calendar year. Stockholders may not include in their individual
income tax returns any net operating losses or capital losses of the Company.
Upon a sale or other disposition of the Common Stock, a stockholder will
generally recognize a capital gain or loss in an amount equal to the
difference between the amount realized and the stockholder's adjusted basis in
such shares, which gain or loss will be long-term if such shares have been
held for more than one year. To the extent of any long-term capital gain
dividends received by a stockholder, any loss on the sale or other disposition
of Common Stock held by such stockholder for six months or less will generally
be treated as a long-term capital loss.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Based upon a published ruling by the IRS, distributions by the Company to a
stockholder that is a tax-exempt entity will not constitute "unrelated
business taxable income" ("UBTI"), provided that the tax-exempt entity has not
financed the acquisition of its shares with "acquisition indebtedness" within
the meaning of the Code and the shares are not otherwise used in an unrelated
trade or business of the tax-exempt entity.
Notwithstanding the preceding paragraph, however, a portion of the dividends
paid by the Company may be treated as UBTI to certain domestic private pension
trusts if the Company is treated as a "pension-held REIT." The Company
believes that it is not, and does not expect to become, a "pension-held REIT."
If the Company were to become a pension-held REIT, these rules generally would
only apply to certain pension trusts that hold more than 10% of the Company's
stock.
TAXATION OF NON-U.S. HOLDERS
The following is a discussion of certain anticipated U.S. federal income and
estate tax consequences of the ownership and disposition of the Company's
Common Stock applicable to Non-U.S. Holders of such stock. A "Non-U.S. Holder"
is any person other than (i) a citizen or resident of the U.S., (ii) a
corporation or partnership created or organized in the U.S. or under the laws
of the U.S. or of any state thereof, (iii) an estate whose income is
includable in gross income for U.S. federal income tax purposes regardless of
its source, or (iv) a trust whose administration is subject to the primary
supervision of a U.S. court and which has one or more U.S. fiduciaries who
have the authority to control all substantial decisions of the trust. The
discussion is based on current law and is for general information only. The
discussion addresses only certain and not all aspects of U.S. federal income
and estate taxation.
Ordinary Dividends. The portion of dividends received by Non-U.S. Holders
payable out of the Company's earnings and profits which are not attributable
to capital gains of the Company and which are not
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effectively connected with a U.S. trade or business of the Non-U.S. Holder
will be subject to U.S. withholding tax at the rate of 30% (unless reduced by
treaty). In general, Non-U.S. Holders will not be considered engaged in a U.S.
trade or business solely as a result of their ownership of stock of the
Company. In cases where the dividend income from a Non-U.S. Holder's
investment in stock of the Company is (or is treated as) effectively connected
with the Non-U.S. Holder's conduct of a U.S. trade or business, the Non-U.S.
Holder generally will be subject to U.S. tax at graduated rates, in the same
manner as U.S. stockholders are taxed with respect to such dividends (and may
also be subject to the 30% branch profits tax in the case of a Non-U.S. Holder
that is a foreign corporation).
Non-Dividend Distributions. Unless the Company's stock constitutes a USRPI
(as defined below), distributions by the Company which are not dividends out
of the earnings and profits of the Company will not be subject to U.S. income
or withholding tax. If it cannot be determined at the time a distribution is
made whether or not such distribution will be in excess of current and
accumulated earnings and profits, the distribution will be subject to
withholding at the rate applicable to dividends. However, the Non-U.S. Holder
may seek a refund of such amounts from the IRS if it is subsequently
determined that such distribution was, in fact, in excess of current and
accumulated earnings and profits of the Company. If the Company's stock
constitutes a USRPI, such distribution shall be subject to 10% withholding tax
and may be subject to taxation under FIRPTA (as defined below).
Capital Gain Dividends. Under the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA"), a distribution made by the Company to a Non-U.S.
Holder, to the extent attributable to gains from dispositions of U.S. Real
Property Interests ("USRPIs") such as the properties beneficially owned by the
Company ("'USRPI Capital Gains"), will be considered effectively connected
with a U.S. trade or business of the Non-U.S. Holder and subject to U.S.
income tax at the rate applicable to U.S. individuals or corporations, without
regard to whether such distribution is designated as a capital gain dividend.
In addition, the Company will be required to withhold tax equal to 35% of the
amount of dividends to the extent such dividends constitute USRPI Capital
Gains. Distributions subject to FIRPTA may also be subject to a 30% branch
profits tax in the hands of a foreign corporate stockholder that is not
entitled to treaty exemption.
Disposition of Stock of the Company. Unless the Company's stock constitutes
a USRPI, a sale of such stock by a Non-U.S. Holder generally will not be
subject to U.S. taxation under FIRPTA. The stock will not constitute a USRPI
if the Company is a "domestically controlled REIT." A domestically controlled
REIT is a REIT in which, at all times during a specified testing period, less
than 50% in value of its shares is held directly or indirectly by Non-U.S.
Holders. The Company believes that it is, and it expects to continue to be a
domestically controlled REIT, and therefore that the sale of the Company's
stock will not be subject to taxation under FIRPTA. Because the Company's
stock will be publicly traded, however, no assurance can be given that the
Company will continue to be a domestically controlled REIT.
If the Company does not constitute a domestically controlled REIT, a Non-
U.S. Holder's sale of stock generally will still not be subject to tax under
FIRPTA as a sale of a USRPI provided that (i) the stock is "regularly traded"
(as defined by applicable Treasury regulations) on an established securities
market (e.g., the NYSE, on which the Company's Common Stock will be listed)
and (ii) the selling Non-U.S. Holder held 5% or less of the Company's
outstanding stock at all times during a specified testing period.
If gain on the sale of stock of the Company were subject to taxation under
FIRPTA, the Non-U.S. Holder would be subject to the same treatment as a U.S.
stockholder with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals) and the purchaser of the stock could be required to
withhold 10% of the purchase price and remit such amount to the IRS.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Holder in two cases: (i) if the Non-U.S. Holder's
investment in the stock of the Company is effectively connected with a U.S.
trade or business conducted by such Non-U.S. Holder, the Non-U.S. Holder will
be subject to the same
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treatment as a U.S. stockholder with respect to such gain, or (ii) if the Non-
U.S. Holder is a nonresident alien individual who was present in the U.S. for
183 days or more during the taxable year and has a "tax home" in the United
States, the nonresident alien individual will be subject to a 30% tax on the
individual's capital gain.
Estate Tax. Stock of the Company owned or treated as owned by an individual
who is not a citizen or resident (as specially defined for U.S. federal estate
tax purposes) of the United States at the time of death will be includable in
the individual's gross estate for U.S. federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise. Such individual's estate may
be subject to U.S. federal estate tax on the property includable in the estate
for U.S. federal estate tax purposes.
Information Reporting and Backup Withholding. The Company must report
annually to the IRS and to each Non-U.S. Holder the amount of dividends
(including any capital gain dividends) paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply
regardless of whether withholding was reduced or eliminated by an applicable
tax treaty. Copies of these returns may also be made available under the
provisions of a specific treaty or agreement with the tax authorities in the
country in which the Non-U.S. Holder resides.
U.S. backup withholding (which generally is imposed at the rate of 31% on
certain payments to persons that fail to furnish the information required
under the U.S. information reporting requirements) and information reporting
will generally not apply to dividends (including any capital gain dividends)
paid on stock of the Company to a Non-U.S. Holder at an address outside the
United States.
The payment of the proceeds from the disposition of stock of the Company to
or through a U.S. office of a broker will be subject to information reporting
and backup withholding unless the owner, under penalties of perjury,
certifies, among other things, its status as a Non-U.S. Holder, or otherwise
establishes an exemption. The payment of the proceeds from the disposition of
stock to or through a non-U.S. office of a non-U.S. broker generally will not
be subject to backup withholding and information reporting.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-U.S.
Holder's U.S. federal income tax liability, provided that the required
information is furnished to the IRS.
These information reporting and backup withholding rules are under review by
the U.S. Treasury and their application to the Common Stock could be changed
by future regulations. On April 15, 1996, the IRS issued proposed Treasury
Regulations concerning the withholding of tax and reporting for certain
amounts paid to non-resident individuals and foreign corporations. The
proposed Treasury Regulations, if adopted in their present form, would be
effective for payments made after December 31, 1997. Prospective purchasers
should consult their tax advisors concerning the potential adoption of such
proposed Treasury Regulations and the potential effect on their ownership of
Common Stock.
OTHER TAX CONSEQUENCES
Possible Legislative or Other Actions Affecting Tax Consequences. Prospective
investors should recognize that the present federal income tax treatment of an
investment in the Company may be modified by legislative, judicial or
administrative action at any time, and that any such action may affect
investments and commitments previously made. The rules dealing with federal
income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the U.S. Treasury Department, resulting
in revisions of regulations and revised interpretations of established concepts
as well as statutory changes. For example, a recent federal budget proposal
contains language which, if enacted in its present form, would result in the
immediate taxation of all gain inherent in a C corporation's assets upon an
election by the corporation to become a REIT, and thus could effectively
preclude the Company from re-electing REIT status following a termination of its
REIT qualification. Revisions in federal tax laws and interpretations thereof
could adversely affect the tax consequences of an investment in the
Company.
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State and Local Taxes. The Company and its stockholders may be subject to
state or local taxation in various state or local jurisdictions, including
those in which it or they transact business or reside. The state and local tax
treatment of the Company and its stockholders may not conform to the federal
income tax consequences discussed above. Consequently, prospective
stockholders should consult their tax advisors regarding the effect of state
and local tax laws on an investment in the Company.
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UNDERWRITING
Subject to the terms and conditions in the underwriting agreement (the
"Underwriting Agreement"), the Company has agreed to sell to each of the
Underwriters named below, and each of such Underwriters, for whom PaineWebber,
Lehman Brothers Inc., Smith Barney Inc. and EVEREN Securities, Inc. are acting
as representatives of the Underwriters (the "Representatives"), has severally
agreed to purchase from the Company, the respective number of shares of Common
Stock set forth opposite their names. Pursuant to the terms of the
Underwriting Agreement, the Underwriters are obligated to purchase all such
shares of Common Stock if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
SHARES TO BE
UNDERWRITERS PURCHASED
------------ ------------
<S> <C>
PaineWebber Incorporated.......................................
Lehman Brothers Inc............................................
Smith Barney Inc...............................................
EVEREN Securities, Inc.........................................
----
Total........................................................
====
</TABLE>
The Representatives have advised the Company that the Underwriters propose
to offer the Shares to the public at the initial public offering price set
forth on the cover page of this Prospectus and to certain dealers at such
price less a concession not in excess of $ per Share. The Underwriters may
allow, and such dealers may re-allow, a discount not in excess of $ per
Share on sales to certain other brokers and dealers. After the Offering, the
public offering price, concession and discount may be changed.
At the request of the Company, the Underwriters have reserved up to 250,000
shares of Common Stock for sale at the initial public offering price to
directors, officers, employees, business associates and related persons of the
Company. The number of shares of Common Stock available for sale to the
general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares which are not so purchased will be
offered by the Underwriters to the general public on the same basis as the
other shares offered hereby.
The Company has granted to the Underwriters an option, exercisable for 30
days after the date of this Prospectus, to purchase up to 1,012,500 additional
shares of Common Stock to cover over-allotments, if any, at the initial public
offering price, less the underwriting discounts and commissions set forth on
the cover page of this Prospectus. If the Underwriters exercise this option,
each of the Underwriters will have a firm commitment, subject to certain
conditions, to purchase approximately the same percentage thereof that the
number of shares of Common Stock to be purchased by it shown in the foregoing
table bears to the number of Shares initially offered hereby.
In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
federal securities laws, or to contribute to payments that the Underwriters
may be required to make in respect thereof.
The Company and the Continuing Investors have agreed with the Underwriters,
subject to certain limited exceptions, not to offer, sell, contract to sell,
pledge, grant any option to purchase or otherwise dispose of any shares of
Common Stock (or any securities convertible into, or exercisable, exchangeable
or redeemable for, shares of Common Stock) for a period of 360 days from the
date of this Prospectus, without the prior written consent of PaineWebber.
Management of the Company, including Messrs. Sudarsky, Marcus, Gold, Nelson,
Kreitzer, Stone and Ciruzzi, have agreed with the Underwriters, subject to
certain limited exceptions, not to offer, sell, contract to sell, pledge or
otherwise dispose of any shares of Common Stock (or any securities convertible
into, or exercisable, exchangeable or redeemable for, shares of Common Stock),
including any shares of
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Common Stock that any such persons may have the right to receive by virtue of
their ownership interest in Holdings, for a period of two years from the date
of this Prospectus, without the prior written consent of PaineWebber. After
such time, such shares of Common Stock may be sold in the public market,
subject to applicable securities laws restrictions or exemptions from
registration, if available. See "Shares Eligible for Future Sale."
The Underwriters do not intend to confirm sales of Shares to any account
over which they exercise discretionary authority.
Prior to the Offering, there has been no public market for the shares of
Common Stock of the Company. The initial public offering price will be
determined through negotiations among the Company and the Representatives.
Among the factors considered in such negotiations, in addition to prevailing
market conditions, are dividend yields and financial characteristics of
publicly traded REITs that the Company and the Representatives believe to be
comparable to the Company, the expected results of operations of the Company
and the Properties, estimates of the future business potential and earnings
prospects of the Company as a whole, the current state of the real estate
market in the Company's target markets and the economy as a whole.
The Common Stock has been approved for listing on the NYSE, subject to
official notice of issuance, under the symbol "ARE." In order to meet one of
the requirements for listing the shares of Common Stock on the NYSE, the
Underwriters have undertaken to sell lots of 100 or more shares of Common
Stock to a minimum of 2,000 beneficial holders.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, the Representatives are permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price
of the Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the offering, i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus, the Representatives
may reduce that short position by purchasing shares of Common Stock in the
open market. The Representatives may also elect to reduce any short position
by exercising all or part of the over-allotment option described above.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of a security to the extent that it
were to discourage resales of the security before the distribution is
completed.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above might have on the price of the Common Stock. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
The Company has agreed to pay PaineWebber an advisory fee equal to 1.0% of
the gross proceeds of the Offering for structural and advisory services. In
addition, affiliates of PaineWebber will receive $44.4 million of the net
proceeds as repayment of amounts outstanding under the PaineWebber Facility
and are expected to receive
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approximately $60.6 million as consideration for the acquisition of the
Acquisition LLC. See "Use of Proceeds" and "Formation and Structure" for a
description of the payments to be received by affiliates of PaineWebber and
the manner in which the purchase price for the Acquisition LLC membership
interests will be calculated.
Certain of the Underwriters, including the Representatives, have in the past
performed and may continue to perform investment banking, broker-dealer and
financial advisory services for the Company and have received customary
compensation therefor.
Although the Conduct Rules of the NASD exempt REITs from the conflict of
interest provisions thereof, because affiliates of PaineWebber will receive
more than 10% of the net proceeds of the Offering as described above, the
Underwriters have determined to conduct the Offering in accordance with the
applicable provisions of Rules 2710(c)(8) and 2720(c)(3) of the Conduct Rules.
In accordance with these requirements, Lehman Brothers Inc. (the "Independent
Underwriter") is assuming the responsibilities of acting as "qualified
independent underwriter" and will recommend the maximum initial public
offering price for the Shares in compliance with the requirements of the
Conduct Rules. In connection with the Offering, the Independent Underwriter is
performing due diligence investigations and is reviewing and participating in
the preparation of this Prospectus and the Registration Statement. The initial
public offering price of the Shares will be no higher than the price
recommended by the Independent Underwriter.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Skadden, Arps,
Slate, Meagher & Flom LLP, Los Angeles, California, and certain legal matters
with respect to Maryland law, including the validity of the issuance of the
Shares offered hereby, will be passed upon for the Company by Ballard Spahr
Andrews & Ingersoll, Baltimore, Maryland. Certain legal matters will be passed
upon for the Underwriters by Goodwin, Procter & Hoar llp, Boston,
Massachusetts. Goodwin, Procter & Hoar llp will rely on the legal opinion of
Ballard Spahr Andrews & Ingersoll with respect to certain matters relating to
Maryland law. A partner at Skadden, Arps, Slate, Meagher & Flom LLP owns
certain debt and equity securities of Holdings and will receive $197,500 from
Holdings in connection with the Offering as repayment of certain loans. See
"Certain Transactions."
EXPERTS
The consolidated financial statements of Alexandria Real Estate Equities,
Inc. at December 31, 1996 and 1995, and for each of the two years in the
period ended December 31, 1996, and for the period October 27, 1994
(inception) through December 31, 1994, and the statements of revenue and
certain expenses for the year ending December 31, 1995, of 1413 Research
Boulevard; 300 and 401 Professional Drive; 25, 35, and 45 W. Watkins Mill
Road; 1311, 1401 and 1431 Harbor Bay Parkway; the statement of revenue and
certain expenses of 1550 East Gude Drive for the year ending December 31,
1996; and the financial statements of PW Acquisitions I, LLC at March 31,
1997, and for the quarter ended March 31, 1997, all appearing in this
Prospectus and Registration Statement, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their reports thereon appearing
elsewhere herein, and are included in reliance upon such reports given upon
the authority of such firm as experts in accounting and auditing.
Certain market information included in this Prospectus and Registration
Statement has been prepared by Rosen Consulting Group and is set forth in a
report dated May 1, 1997 (the "RCG Study"). Certain information from the RCG
Study is included herein in reliance upon the authority of such firm as an
expert in, among other things, urban economics and real estate market
analysis.
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ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-11 under the Securities Act and the rules and regulations promulgated
thereunder, with respect to the Shares offered pursuant to this Prospectus.
This Prospectus, which is part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the
exhibits and financial statement schedules thereto. For further information
with respect to the Company and the Shares, reference is made to the
Registration Statement and such exhibits and financial statement schedules,
copies of which may be examined without charge at or obtained upon payment of
prescribed fees from, the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and will also
be available for inspection and copying at the regional offices of the
Commission located at 13th Floor, 7 World Trade Center, New York, New York
10048, and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. The Commission maintains a Website at http:/www.sec.gov, and reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission (including the Company) can be
obtained from that site.
Statements contained in this Prospectus as to the contents of any contract
or other document that is filed as an exhibit to the Registration Statement
are not necessarily complete, and each such statement is qualified in its
entirety by reference to the full text of such contract or document.
The Company will be required to file reports and other information with the
Commission pursuant to the Exchange Act. In addition to applicable legal or
NYSE requirements, if any, holders of shares of Common Stock will receive
annual reports containing audited financial statements with a report thereon
by the Company's independent certified public accountants.
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GLOSSARY
As used in this Prospectus, the capitalized and other terms listed below
have the meanings indicated.
"401(k) Plan" means the Company's 401(k) Plan.
"1940 Act" means the Investment Company Act of 1940, as amended.
"1994 Plan" means the Holdings' Amended and Restated 1994 Stock Option Plan.
"1994 Acquired Properties" means the four Properties acquired by the Company
in 1994.
"1996 Acquired Properties" means the eight Properties acquired by the
Company in 1996.
"1996 Plan" means the Company's Amended & Restated 1996 Stock Option Plan.
"1997 Stock Option Plan" means the Company's stock option and incentive plan
to be adopted prior to the Offering.
"ACMs" means asbestos-containing materials.
"Acquisition LLC" means PW Acquisitions I, LLC.
"Acquisition LLC Properties" means 1550 East Gude Drive, Rockville,
Maryland, 1330 Piccard Drive, Rockville, Maryland and 14225 Newbrook Drive,
Chantilly, Virginia.
"ADA" means the Americans with Disabilities Act of 1990, as amended.
"AEW" means AEW Partners II, L.P. and certain of its affiliates.
"Affiliate" of a person means a person that directly, or indirectly through
one or more intermediaries, controls, or is controlled by, or is under common
control with such person.
"Alexandria" means Alexandria Real Estate Equities, Inc., a Maryland
corporation.
"Annualized Base Rent" means the annualized fixed base rental amount
(determined in accordance with GAAP) in effect as of April 30, 1997 paid by
tenants under the terms of their leases. In the case of triple net leases,
Annualized Base Rent does not include real estate taxes and insurance, common
area and other operating expenses, substantially all of which are borne by the
tenants.
"Annualized Net Effective Rent" means the Annualized Base Rent in effect as
of April 30, 1997, less (for gross leases) real estate taxes and insurance,
common area and other operating expenses and (for all leases) amortized tenant
improvements and leasing commissions.
"Bank of America" means the Bank of America National Trust and Savings
Association.
"Bankruptcy Code" means Title 11 of the United States Code.
"Built-in Gain" means the excess of the fair market value of an asset as of
the beginning of the Recognition Period over the Company's adjusted basis in
such asset as of the beginning of the Recognition Period.
"Bylaws" means the Amended and Restated Bylaws of Alexandria.
"Capitalization Rate" means, for each acquired property, the initial annual
projected property EBITDA for the 12 months following acquisition, divided by
the consideration paid by the Company for such property, including closing
costs and budgeted capital improvements.
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"Charter" means the Articles of Amendment and Restatement of Alexandria to
be filed prior to the consummation of the Offering.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, par value $.01 per share, of
Alexandria.
"Company" means Alexandria, QRS, GSA-QRS and the Acquisition LLC, unless the
context otherwise requires.
"Continuing Investors" means, collectively, Holdings, the Company's
officers, directors and employees and AEW.
"Control Share Acquisition" means the acquisition of Control Shares, subject
to certain exceptions.
"Control Shares" means voting shares of stock which, if aggregated with all
other such shares of stock previously acquired by the acquiror or in respect
of which the acquiror is able to exercise or direct the exercise of voting
power (except solely by virtue of revocable proxy), would entitle the acquiror
to exercise voting power in electing directors within one of the following
ranges of voting power: (i) one-fifth or more but less than one-third, (ii)
one-third or more but less than a majority, or (iii) a majority or more of all
voting power, but does not include shares the acquiring person is then
entitled to vote as a result of having previously obtained shareholder
approval.
"CPI" means a consumer price index.
"Credit Facility" means the revolving credit facility for up to $150
million, for which the Company has received a commitment from the Bank of
America.
"EBITDA" means earnings before interest, taxes, depreciation and
amortization.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"FDA" means the U.S. Food and Drug Administration.
"FFO" means Funds from Operations as defined in the White Paper as net
income (loss) (computed in accordance with GAAP), excluding gains (or losses)
from debt restructuring and sales of property, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures.
"FIRPTA" means the Foreign Investment in Real Property Tax Act of 1980.
"Formation Transactions" means the transactions described in "Formation and
Structure."
"GAAP" means generally accepted accounting principles as from time to time
in effect.
"GSA-QRS" means a special purpose entity to be formed prior to consummation
of the Offering of which Alexandria will hold a 99% non-managing interest and
QRS will hold a 1% managing interest.
"Holdings" means Health Science Properties Holding Corporation, a Maryland
corporation.
"Holdings Stock Options" means options granted under Holdings 1994 Stock
Option Plan, as amended, or Holdings 1994 Stock Option Plan for Non-Employee
Directors, as amended.
"HVAC" means heating, ventilation and air conditioning.
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"Independent Underwriter" means Lehman Brothers Inc., who will act as
"qualified independent underwriter" and will recommend the maximum initial
public offering price for the Shares.
"Interested Stockholder" means any person who beneficially owns 10% or more
of the voting power of a corporation's shares or an affiliate of a corporation
who, at any time within the two-year period prior to the date in question, was
the beneficial owner of 10% or more of the voting power of the then-
outstanding voting stock of the corporation.
"IRS" means the Internal Revenue Service.
"Life Science Facilities" means office buildings containing scientific
research and development laboratories and other improvements that are generic
to tenants operating in the Life Science Industry.
"Life Science Industry" means the industry comprised of pharmaceutical,
biotechnology, diagnostic and personal care products companies, major
scientific research institutions and related government agencies.
"LLC Agreement" means the Agreement for Sale and Purchase of Membership
Interests entered into between certain affiliates of PaineWebber and the
Company on January 13, 1997, as amended.
"MGCL" means the Maryland General Corporation Law, as amended.
"Named Executive Officers" means the Company's Chief Executive Officer and
the four other most highly compensated executive officers of the Company.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"NIH" means the National Institutes of Health.
"Non-U.S. Holder" means any person other than (i) a citizen or resident of
the United States, (ii) a corporation or partnership created or organized in
the United States or under the laws of the United States or of any state
thereof, (iii) an estate whose income is includable in gross income for U.S.
federal income tax purposes regardless of its source, or (iv) a trust whose
administration is subject to the primary supervision of a U.S. court and which
has one or more U.S. fiduciaries who have the authority to control all
substantial decisions of the trust.
"NYSE" means the New York Stock Exchange.
"Offering" means the offering of Shares hereby.
"Ownership Limit" means the direct or constructive ownership of shares of
capital stock representing more than 9.8% of the combined total value of
outstanding shares of the Company's capital stock by any person.
"PaineWebber" means PaineWebber Incorporated, the lead managing Underwriter
of the Offering.
"PaineWebber Facility" means the Company's acquisition facility with certain
affiliates of PaineWebber entered into on September 9, 1996, as amended.
"PhRMA" means Pharmaceutical Research and Manufacturers of America.
"Preferred Stock" means preferred stock, par value $.01 per share, of the
Company.
"Prohibited Owner" means a person who beneficially or constructively owns
shares of stock of the Company in excess or in violation of the transfer or
ownership limitations.
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"Properties" means the 15 Properties the Company will own upon consummation
of the Offering and the Formation Transactions.
"PW Affiliates" means PaineWebber Real Estate Holdings Inc. and PW Realty
Partners, LLC.
"QRS" means ARE-QRS Corp., a Maryland corporation, a wholly owned subsidiary
of Alexandria.
"RCG Study" means the market study prepared by the Rosen Consulting Group
dated May 1, 1997.
"Recognition Period" means the 10-year period beginning on the first day of
the first taxable year for which the Company qualified as a REIT.
"REIT" means a real estate investment trust.
"Registration Statement" means the Registration Statement of which this
Prospectus forms a part.
"Related Tenant" means an owner of 10% or more of the Company who directly
or constructively owns 10% or more in a tenant.
"Representatives" means PaineWebber, Lehman Brothers Inc., Smith Barney Inc.
and EVEREN Securities, Inc.
"Restricted Securities" means the Restricted Shares and shares of Common
Stock that will be restricted securities under Rule 144.
"Restricted Shares" means shares of Common Stock held by the Continuing
Investors upon consummation of the Offering and the Formation Transactions.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Series T Preferred Stock" means the Series T Preferred Stock, par value
$.01 per share, of Alexandria.
"Series U Preferred Stock" means the Series U Preferred Stock, par value
$.01 per share, of Alexandria.
"Series V Preferred Stock" means the Series V Preferred Stock, par value
$.01 per share, of Alexandria.
"Shares" means the shares of Common Stock to be offered and sold in the
Offering.
"Stock Split" means the split of each share of outstanding Common Stock into
1,765.923 shares of Common Stock in connection with the Offering.
"UBTI" means unrelated business taxable income.
"Underwriters" means the Underwriters named in this Prospectus for whom
PaineWebber, Lehman Brothers Inc., Smith Barney Inc. and EVEREN Securities,
Inc. are acting as Representatives.
"Underwriting Agreement" means the Underwriting Agreement to be entered into
between the Company and the Underwriters.
"USRPIs" means U.S. Real Property Interests.
"USRPI Capital Gains" means gains from dispositions of USRPIs, such as the
properties beneficially owned by the Company.
"White Paper" means the White Paper on FFO approved by the Board of
Governors of NAREIT in March 1995.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
Unaudited Pro Forma Condensed Consolidated Financial Statements.......... F-2
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31,
1997................................................................... F-3
Unaudited Pro Forma Condensed Consolidated Income Statement for the
Three Months Ended March 31, 1997...................................... F-4
Unaudited Pro Forma Condensed Consolidated Income Statement for the Year
Ended December 31, 1996................................................ F-5
Adjustments to the Unaudited Pro Forma Condensed Consolidated Financial
Statements............................................................. F-6
Historical Consolidated Financial Statements
Report of Independent Auditors.......................................... F-9
Consolidated Balance Sheets as of March 31, 1997 (Unaudited) and
December 31, 1996 and 1995............................................. F-10
Consolidated Statements of Operations for the Three Months Ended March
31, 1997 and 1996 (Unaudited) and for the Years Ended December 31, 1996
and 1995 and the period October 27, 1994 (inception) through December
31, 1994............................................................... F-11
Consolidated Statements of Stockholders' Equity for the Three Months
Ended March 31, 1997 (Unaudited) and for the Years Ended December 31,
1996 and 1995 and the period October 27, 1994 (inception) through
December 31, 1994...................................................... F-12
Consolidated Statements of Cash Flows for the Three Months Ended March
31, 1997 and 1996 (Unaudited) and for the Years Ended December 31, 1996
and 1995 and the period October 27, 1994 (inception) through December
31, 1994............................................................... F-13
Notes to Consolidated Financial Statements.............................. F-14
Schedule III--Rental Properties and Accumulated Depreciation............ F-24
1413 RESEARCH BLVD.
Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................... F-25
Statement of Revenue and Certain Expenses for the Period January 1, 1996
to July 2, 1996 (Unaudited) and for the Year Ended December 31, 1995... F-26
Notes to Statement of Revenue and Certain Expenses...................... F-27
300 AND 401 PROFESSIONAL DRIVE
Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................... F-28
Statement of Revenue and Certain Expenses for the Period January 1, 1996
to September 10, 1996 (Unaudited) and for the Year Ended December 31,
1995................................................................... F-29
Notes to Statement of Revenue and Certain Expenses...................... F-30
25, 35 AND 45 W. WATKINS MILL ROAD
Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................... F-31
Statement of Revenue and Certain Expenses for the Period January 1, 1996
to October 18, 1996 (Unaudited) and for the Year Ended December 31,
1995................................................................... F-32
Notes to Statement of Revenue and Certain Expenses...................... F-33
1311, 1401 AND 1431 HARBOR BAY PARKWAY
Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................... F-34
Statement of Revenue and Certain Expenses for the Period January 1, 1996
to December 12, 1996 (Unaudited) and for the Year Ended December 31,
1995................................................................... F-35
Notes to Statement of Revenue and Certain Expenses...................... F-36
1550 EAST GUDE DRIVE
Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................... F-37
Statement of Revenue and Certain Expenses for the Year Ended December
31, 1996............................................................... F-38
Notes to Statement of Revenue and Certain Expenses...................... F-39
PW ACQUISITIONS I, LLC
Report of Independent Auditors.......................................... F-40
Balance Sheet as of March 31, 1997...................................... F-41
Income Statement and Changes in Members' Capital for the Quarter Ended
March 31, 1997......................................................... F-42
Statement of Cash Flows for the Quarter Ended March 31, 1997............ F-43
Notes to Financial Statements........................................... F-44
Schedule III--Rental Properties and Accumulated Depreciation............ F-47
</TABLE>
F-1
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
(FORMERLY KNOWN AS HEALTH SCIENCE PROPERTIES, INC.)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited pro forma condensed consolidated balance sheet as of March 31,
1997 is presented as if the Offering, the application of the net proceeds
thereof and the transactions described in "Formation and Structure" all had
occurred on March 31, 1997.
The unaudited pro forma condensed consolidated income statements for the
three months ended March 31, 1997, and for the year ended December 31, 1996
are presented as if the Offering, the application of the net proceeds thereof,
the transactions described in "Formation and Structure" (including the
acquisition of PW Acquisitions I, LLC) and the acquisition of the eight
Properties acquired during 1996 (the "1996 Acquired Properties") all had
occurred on January 1, 1996.
The pro forma condensed consolidated financial statements are not
necessarily indicative of what the Company's financial position or results of
operations would have been assuming consummation of the transactions described
in "Formation and Structure" and the Offering on such date or at the beginning
of the period indicated, nor do they purport to project the Company's
financial position or results of operations at any future date or for any
future period.
F-2
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
ALEXANDRIA PW PROCEEDS
REAL ESTATE ACQUISITIONS I, FROM THE PRO FORMA COMPANY
EQUITIES, INC. LLC (A) OFFERING (B) ADJUSTMENTS PRO FORMA
-------------- --------------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Rental properties--net.. $147,315 $ 51,669 $198,984
Cash and cash
equivalents............ 2,750 (60,515) $128,114 $ 14,520 (C) 6,606
(78,262)(D)
(1)(G)
Tenant security deposit
funds and other
restricted cash........ 4,735 302 5,037
Tenant receivables and
deferred rents......... 1,552 123 1,675
Loan fees and costs--
net.................... 2,468 840 (C) 1,262
(2,046)(E)
Leasing commissions--
net.................... 337 337
Other assets............ 2,533 (298) 2,235
-------- -------- -------- -------- --------
Total assets........ $161,690 $ (8,421) $127,816 $(64,949) $216,136
======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Secured notes payable... $112,815 $(72,794)(D) $ 55,381
15,360 (C)
Accounts payable and
accrued expenses....... 4,924 $ 66 (382)(D) 4,608
Prepaid rents........... -- 151 151
Tenant security
deposits............... 490 302 792
Unsecured line of
credit................. 2,500 (2,500)(D) --
Due to Holdings......... 2,300 (2,300)(D) --
Advances from Holdings.. 286 (286)(D) --
-------- -------- -------- -------- --------
Total liabilities... 123,315 519 (62,902) 60,932
Mandatorily redeemable
Series V Preferred
Stock.................. 25,929 (25,929)(F) --
Stockholders' equity
Preferred stock
Undesignated Preferred
Stock................ -- --
Series T 8.5%
Preferred Stock...... 1 (1)(G) --
Series U 8.5%
Preferred Stock...... 110 (110)(G) --
Common Stock............ -- $ 68 16 (F) 104
20 (G)
Additional paid-in
capital................ 15,308 127,748 25,913 (F) 172,264
110 (G)
(20)(G)
3,205 (G)
Accumulated deficit..... (2,973) (8,940) (2,046)(E) (17,164)
(3,205)(G)
-------- -------- -------- -------- --------
Total stockholders'
equity............. 12,446 (8,940) 127,816 23,882 155,204
-------- -------- -------- -------- --------
Total liabilities
and equity......... $161,690 $ (8,421) $127,816 $(64,949) $216,136
======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
ALEXANDRIA PW PRO COMPANY
REAL ESTATE ACQUISITIONS I, FORMA PRO
EQUITIES, INC. LLC ADJUSTMENTS FORMA
-------------- --------------- ----------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental revenue........ $5,175 $1,450 $ 257 (H) $ 6,925
43 (I)
Tenant recoveries..... 1,897 14 (14)(H) 1,897
Other................. 89 3 1 (H) 129
36 (K)
------ ------ ------- ----------
Total revenues...... 7,161 1,467 323 8,951
------ ------ ------- ----------
Expenses:
Rental properties..... 1,830 54 (36)(H) 1,893
45 (J)
General and
administrative ...... 954 (229)(L) 725
Post retirement
benefit.............. 632 632
Stock grant
compensation......... -- (M) --
Interest ............. 2,509 (1,329)(N) 1,180
PW Acquisitions I, LLC
financing costs...... -- (O) --
Depreciation and
amortization......... 1,003 327 (P) 1,330
------ ------ ------- ----------
Total expenses...... 6,928 54 (1,222) 5,760
------ ------ ------- ----------
Net income.............. $ 233 $1,413 $ 1,545 $ 3,191
====== ====== ======= ==========
Pro forma Common Stock
outstanding............ 10,391,848
==========
Pro forma net income per
share.................. $ 0.31(Q)
==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRE-
ACQUISITION
PERIOD FOR
1996
ACQUIRED PRE-
PROPERTIES ACQUISITION
HISTORICAL EXCLUDING PERIOD FOR
ALEXANDRIA 1102 AND 1124 1102 AND 1124 PW PRO COMPANY
REAL ESTATE COLUMBIA COLUMBIA ACQUISITIONS I, FORMA PRO
EQUITIES, INC. STREET STREET(H) LLC (H) ADJUSTMENTS FORMA
-------------- ------------- ------------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Rental revenue........ $12,941 $5,248 $1,976 $6,781 $ 175 (I) $ 27,121
Tenant recoveries..... 4,169 1,323 763 62 352 (J) 6,669
Other................. 563 3 201 (109)(K) 658
------- ------ ------ ------ ------- ----------
Total revenues...... 17,673 6,574 2,940 6,843 418 34,448
------- ------ ------ ------ ------- ----------
Expenses:
Rental properties..... 4,356 1,853 745 62 179 (J) 7,195
General and
administrative 1,972 928 (L) 2,900
Post retirement
benefit.............. 438 438
Stock grant
compensation......... -- (M) --
Interest ............. 6,327 (1,610)(N) 4,717
PW Acquisitions I, LLC
financing costs...... -- (O) --
Depreciation and
amortization......... 2,405 2,548 (P) 4,953
------- ------ ------ ------ ------- ----------
Total expenses...... 15,498 1,853 745 62 2,045 20,203
------- ------ ------ ------ ------- ----------
Net income.............. $ 2,175 $4,721 $2,195 $6,781 $(1,627) $ 14,245
======= ====== ====== ====== ======= ==========
Pro forma common stock
outstanding............ 10,391,848
==========
Pro forma net income per
share.................. $ 1.37(Q)
==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The adjustments to the Unaudited Pro Forma Condensed Consolidated Balance
Sheet as of March 31, 1997 are as follows:
(A) Acquisition of PW Acquisitions I, LLC. Rental Properties (net) consists
of the following:
<TABLE>
<CAPTION>
PROPERTY
--------
<S> <C>
1150 East Gude Drive.............................................. $ 4,898
1330 Piccard Drive................................................ 14,333
14225 Newbrook Drive.............................................. 32,438
-------
51,669
</TABLE>
The acquisition price reflected differs from the total amount paid by the
Company ($60,609). The difference ($8,940) is treated as a financing cost that
will be recognized when the transaction is completed. Other assets and
liabilities of PW Acquisitions I, LLC have been reflected at their book value.
<TABLE>
<S> <C>
(B) Sale of 6,750,000 shares Common Stock in the Offering:
Proceeds from the Offering based on initial price of $21.00 per
share......................................................... $141,750
Costs associated with the Offering............................. (13,636)
--------
128,114
Offering costs paid by Alexandria prior to Offering............ (298)
--------
$127,816
========
Par Value of Common Stock issued, excluding conversion of
Series V preferred stock...................................... 68
Additional paid in capital from proceeds of sale of Common
Stock......................................................... 127,748
--------
$127,816
========
(C) Net proceeds from mortgage financing and line of credit
commitment fees
Gross proceeds from new debt.................................. $ 15,360
Costs associated with new debt origination.................... (290)
Costs associated with new line of credit...................... (550)
--------
$ 14,520
========
(D) Repayment of certain secured notes payable and Due to Holdings
Payment of certain secured notes payable...................... $(72,794)
Payment of unsecured line of credit........................... (2,500)
Payment Due to Holdings....................................... (2,300)
Payment of advances from Holdings............................. (286)
Payment of accrued interest................................... (382)
--------
$(78,262)
========
(E) Write off of unamortized loan fees
</TABLE>
F-6
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<S> <C>
(F) Conversion of mandatorily redeemable Series V Preferred Stock
exchanged for 1,659,239 shares of Common Stock
Par Value of Common Stock....................................... $ 16
Additional paid-in-capital...................................... 25,913
-------
$25,929
=======
(G) Redemption of Series T 8.5% Preferred Stock for cash............ $ (1)
Conversion of Series U 8.5% Preferred Stock exchanged for 7,071
shares of the Common Stock...................................... (110)
Stock split on Holdings stock and grant of the Company's Common
Stock and substitute options.................................... 20
Non-cash compensation expense associated with the issuance of
152,615 shares of fully vested common stock..................... 3,205
</TABLE>
2. ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED INCOME
STATEMENT
The pro forma adjustments reflected in the Unaudited Pro Forma Condensed
Consolidated Income Statement for the three months ended March 31, 1997 and
for the year ended December 31, 1996 are as follows:
(H) Increase in revenue and expenses to adjust for the previously
owner-occupied period for certain acquired properties and PW
Acquisitions I, LLC:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31, 1997 YEAR ENDED DECEMBER 31, 1996
--------------------------------- -------------------------------
PW PW
1102/1104 ACQUISITIONS I, 1102/1104 ACQUISITIONS I,
COLUMBIA STREET LLC COLUMBIA STREET LLC
----------------- ---------------- --------------- ---------------
<S> <C> <C> <C> <C>
Rental revenue.......... $ -- $ 257 $ 1,976 $ 6,781
Tenant recoveries....... -- (14) 763 62
Other................... -- 1 201 --
Rental properties
expense................ -- (36) 745 62
</TABLE>
(I) Increase in rental revenue to adjust the 1996 Acquired Properties and
PW Acquisitions I, LLC to straight-line rental revenue for the pro
forma period.
(J) Increase in rental properties expenses (primarily due to insurance) and
tenant recoveries which are directly related to the increase in pro
forma expenses to be recovered in excess of historical amounts.
(K) Increase (decrease) in other income to eliminate non-recurring
construction management fees which would not have been realized by the
Company as a public REIT.
(L) Increase (decrease) in general and administrative expense related to
expected level of operations as a public REIT.
(M) In connection with the Offering, certain officers, directors and
employees of the Company will be granted an aggregate of 152,615 shares
of the Company's Common Stock. The Company will recognize $3,205 of
compensation expense relating to such stock grants.
F-7
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE YEAR ENDED
ENDED MARCH 31, 1997 DECEMBER 31, 1996
-------------------- ------------------
<S> <C> <C>
(N) Decrease in interest expense
Decrease in interest expense
due to repayment of certain
mortgage loans................ $(1,658) $(2,924)
Increase in interest expense
related to mortgage debt to be
incurred in connection with
the Offering.................. 294 1,177
Increase in amortization of fi-
nance costs related to the
Company's new credit facili-
ty............................ 35 137
------- -------
Net decrease in interest ex-
pense....................... $(1,329) $(1,610)
======= =======
(O) In connection with the Offering, the Company will acquire the
membership interests in PW Acquisitions I, LLC for $60,609. This
exceeds the price paid by PW Acquisitions I, LLC for the
PW Acquisitions I, LLC Properties by $8,940. This difference will be
accounted for as a financing cost that will be recognized when the
transaction is completed.
(P) Increase in depreciation
expense to reflect a full
period of depreciation for the
1996 Acquired Properties and
the PW Acquisitions I, LLC
Properties utilizing a 40-year
useful life for buildings and a
10-year useful life for
improvements................... $ 327 $ 2,548
======= =======
Historical depreciation of the
Company......................... $ 1,003 $ 2,405
Additional depreciation of the
1996 Acquired Properties and the
PW Acquisitions I, LLC
Properties:
Pro forma depreciation as if
the 1996 Acquired Properties
were purchased on January 1,
1996.......................... -- 1,884
Historical depreciation re-
corded by the Company......... -- 645
------- -------
Net increase in depreciation
expense..................... -- 2,529
Depreciation on the PW Acquisi-
tions I, LLC Properties......... 327 1,308
------- -------
Total pro forma depreciation..... $ 1,330 $ 6,242
======= =======
</TABLE>
(Q) Pro forma net income per share includes pro forma net income from the
properties owned by PW Acquisitions I, LLC. If such net income (and the
related shares of Common Stock to be sold in the Offering, the net
proceeds of which will be used for the purchase of the membership
interests in PW Acquisitions I, LLC) were excluded, pro forma net
income would be $1,778,000 and $7,464,000, for the three months ended
March 31, 1997 and the year ended December 31, 1996, respectively, and
pro forma net income per share would be $0.25 and $1.04, for the three
months ended March 31, 1997 and the year ended December 31, 1996,
respectively.
F-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Alexandria Real Estate Equities, Inc.
We have audited the accompanying consolidated balance sheets of Alexandria
Real Estate Equities, Inc. (formerly known as Health Science Properties, Inc.)
(the "Company") as of December 31, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
two years ended December 31, 1996 and 1995 and the period October 27, 1994
(inception) through December 31, 1994. Our audits also included the financial
statement schedule III, rental properties and accumulated depreciation. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company
as of December 31, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the two years ended December 31,
1996 and 1995 and the period October 27, 1994 (inception) through December 31,
1994, in conformity with generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Los Angeles, California
February 13, 1997,
except for Note 11,
as to which the date is
May 1, 1997
F-9
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
MARCH 31,
1997 1996 1995
----------- -------- -------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Rental properties, net......................... $147,315 $146,960 $54,353
Cash and cash equivalents...................... 2,750 1,696 919
Tenant security deposit funds and other
restricted cash............................... 4,735 5,585 1,214
Tenant receivables and deferred rent........... 1,552 1,244 830
Loan fees and costs (net of accumulated
amortization of $186, $131 and $25,
respectively)................................. 2,468 2,502 206
Leasing commissions (net of accumulated
amortization of $118, $92 and $26,
respectively)................................. 337 353 258
Other assets (net of accumulated amortization
of $117, $103 and $69, respectively).......... 2,533 2,052 922
-------- -------- -------
Total assets............................... $161,690 $160,392 $58,702
======== ======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Secured notes payable.......................... $112,815 $113,182 $36,894
Accounts payable and accrued expenses.......... 4,924 3,026 834
Dividends payable.............................. -- 1,550 --
Tenant security deposits....................... 490 536 536
Unsecured line of credit....................... 2,500 -- 4,000
Due to Health Science Properties Holding
Corporation................................... 2,300 2,300 --
Advances from Health Science Properties Holding
Corporation................................... 286 225 105
-------- -------- -------
Total liabilities.......................... 123,315 120,819 42,369
Commitments and contingencies.................. -- -- --
Manditorily redeemable Series V cumulative
convertible preferred stock, $0.01 par value,
$1,000 stated value per share, 50,000 shares
authorized; 27,500 issued and outstanding..... 25,929 25,042 --
Stockholders' equity:
Preferred stock:
Undesignated preferred stock, $0.01 par value
per share, 14,625 shares authorized; no
shares were issued and outstanding.......... -- -- --
Series T 8.5% preferred stock, $0.01 par
value and $100 stated value per share, 125
shares authorized; 12 shares issued and
outstanding................................. 1 1 1
Series U 8.5% cumulative convertible
preferred stock, $0.01 par value and $500
stated value per share, 250 shares
authorized; 220 shares issued and
outstanding................................. 110 110 --
Common stock, $0.01 par value per share, 65,000
shares authorized; 1,000 issued and
outstanding................................... -- -- --
Additional paid-in capital..................... 15,308 16,195 17,128
Accumulated deficit............................ (2,973) (1,775) (796)
-------- -------- -------
Total stockholders' equity................. 12,446 14,531 16,333
-------- -------- -------
Total liabilities and stockholders'
equity.................................... $161,690 $160,392 $58,702
======== ======== =======
</TABLE>
See accompanying notes.
F-10
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THE PERIOD
OCTOBER 27, 1994
THREE MONTHS YEAR ENDED (INCEPTION)
ENDED MARCH 31, DECEMBER 31, THROUGH
----------------- -------------- DECEMBER 31,
1997 1996 1996 1995 1994
-------- ------- ------- ------ ----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Rental.................... $5,175 $2,090 $12,941 $8,020 $ 834
Tenant recoveries......... 1,897 486 4,169 1,699 87
Other..................... 89 34 563 204 90
-------- ------- ------- ------ ------
7,161 2,610 17,673 9,923 1,011
Expenses:
Rental operations......... 1,830 554 4,356 2,228 252
General and
administrative........... 954 406 1,972 1,608 1,016
Post retirement benefit... 632 -- 438 -- --
Interest.................. 2,509 918 6,327 3,553 328
Depreciation and
amortization............. 1,003 413 2,405 1,668 63
-------- ------- ------- ------ ------
6,928 2,291 15,498 9,057 1,659
-------- ------- ------- ------ ------
Income (loss) from
operations................. 233 319 2,175 866 (648)
Charge in lieu of income
taxes...................... -- -- -- 105 --
-------- ------- ------- ------ ------
Net income (loss)........... $ 233 $ 319 $ 2,175 $ 761 $ (648)
======== ======= ======= ====== ======
Net income allocated to
preferred stockholders..... $ 1,378 $ -- $ 1,256 $ -- $ --
======== ======= ======= ====== ======
Net income (loss) allocated
to common stockholders..... $ (1,145) $ 319 $ 919 $ 761 $ (648)
======== ======= ======= ====== ======
</TABLE>
See accompanying notes.
F-11
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
SERIES T SERIES T SERIES U SERIES U NUMBER OF ADDITIONAL
PREFERRED PREFERRED PREFERRED PREFERRED COMMON COMMON PAID-IN ACCUMULATED
SHARES STOCK SHARES STOCK SHARES STOCK CAPITAL DEFICIT TOTAL
--------- --------- --------- --------- --------- ------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at October 27,
1994................... $ $ $ $ $ $
Issuance of common
stock................. -- -- -- -- 1,000 -- 17,128 -- 17,128
Net loss............... -- -- -- -- -- -- -- (648) (648)
--- ---- --- ---- ----- ---- ------- ------- -------
Balance at December 31,
1994................... -- -- -- -- 1,000 -- 17,128 (648) 16,480
Issuance of Series T
preferred stock....... 12 1 -- -- -- -- -- -- 1
Cash dividends on
common stock.......... -- -- -- -- -- -- -- (909) (909)
Net income............. -- -- -- -- -- -- -- 761 761
--- ---- --- ---- ----- ---- ------- ------- -------
Balance at December 31,
1995................... 12 1 -- -- 1,000 -- 17,128 (796) 16,333
Issuance of Series U
preferred stock....... -- -- 220 110 -- -- -- -- 110
Accretion on Series V
preferred stock....... -- -- -- -- -- -- (933) -- (933)
Cash dividends on
Series T & U preferred
stock................. -- -- -- -- -- -- -- (9) (9)
Cash dividends on
Series V preferred
stock................. -- -- -- -- -- -- -- (656) (656)
Cash dividends on
common stock.......... -- -- -- -- -- -- -- (939) (939)
Dividends declared on
common stock.......... -- -- -- -- -- -- -- (1,550) (1,550)
Net income............. -- -- -- -- -- -- -- 2,175 2,175
--- ---- --- ---- ----- ---- ------- ------- -------
Balance at December 31,
1996................... 12 1 220 110 1,000 -- 16,195 (1,775) 14,531
Accretion on Series V
preferred stock....... -- -- -- -- -- -- (887) -- (887)
Cash dividends on
Series T & U preferred
stock................. -- -- -- -- -- -- -- (2) (2)
Cash dividends on
Series V preferred
stock................. -- -- -- -- -- -- -- (688) (688)
Cash dividends on
common stock.......... -- -- -- -- -- -- -- (741) (741)
Net income............. -- -- -- -- -- -- -- 233 233
--- ---- --- ---- ----- ---- ------- ------- -------
Balance at March 31,
1997 (unaudited)....... 12 $ 1 220 $110 1,000 $-- $15,308 $(2,973) $12,446
=== ==== === ==== ===== ==== ======= ======= =======
</TABLE>
See accompanying notes.
F-12
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS THE PERIOD
ENDED YEAR ENDED OCTOBER 27, 1994
MARCH 31, DECEMBER 31, (INCEPTION) THROUGH
--------------- ----------------- DECEMBER 31,
1997 1996 1996 1995 1994
------- ------ -------- ------- -------------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss)....... $ 233 $ 319 $ 2,175 $ 761 $ (648)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization......... 1,058 419 2,405 1,668 63
Changes in operating
assets and
liabilities:
Tenant security
deposit funds and
other restricted
cash............... 850 456 (4,371) (779) (130)
Loan fees and
costs.............. (21) -- (2,402) (15) --
Leasing
commissions........ (10) (2) (67) (258) --
Other assets........ (802) (749) (1,578) (1,433) 86
Accounts payable and
accrued expenses... 1,898 530 2,192 267 (384)
Tenant security
deposits........... (46) (1) -- 144 (11)
------- ------ -------- ------- --------
Net cash provided by
(used in) operating
activities............. 3,160 972 (1,646) 355 (1,024)
INVESTING ACTIVITIES
Additions to rental
properties............. (1,319) (86) (1,578) (1,554) --
Purchase of rental
properties............. -- -- (93,322) -- (29,924)
------- ------ -------- ------- --------
Net cash used in
investing activities... (1,319) (86) (94,900) (1,554) (29,924)
FINANCING ACTIVITIES
Proceeds from secured
notes payable.......... -- -- 77,260 1,250 19,711
Cash portion of
contributed net
assets................. -- -- -- -- 9,427
Proceeds from issuance
of Series T preferred
stock.................. -- -- -- -- 1
Proceeds from issuance
of Series U preferred
stock.................. -- 105 110 -- --
Proceeds from issuance
of Series V preferred
stock (net of issuance
costs of $3,391)....... -- -- 24,109 -- --
Proceeds from unsecured
line of credit......... 2,500 -- -- 1,000 3,000
Increase in due to
Health Science
Properties Holding
Corporation............ -- (17) 2,300 -- --
Increase in advances
from Health Science
Properties Holding
Corporation............ 61 -- 120 105 --
Principal reductions of
unsecured line of
credit................. -- -- (4,000) -- --
Principal reductions of
secured notes payable.. (367) (139) (972) (519) --
Common dividends paid... (2,291) -- (939) (909) --
Preferred dividends
paid................... (690) (1) (665) -- --
------- ------ -------- ------- --------
Net cash provided by
(used in) financing
activities............. (787) (52) 97,323 927 32,139
Net increase (decrease)
in cash and cash
equivalents............ 1,054 834 777 (272) 1,191
Cash and cash
equivalents at
beginning of year...... 1,696 919 919 1,191 --
------- ------ -------- ------- --------
Cash and cash
equivalents at end of
year................... $ 2,750 $1,735 $ 1,696 $ 919 $ 1,191
======= ====== ======== ======= ========
SUPPLEMENTAL DISCLOSURE
OF CASH FLOW
INFORMATION
Cash paid during the
year for interest...... $ 2,192 $ 851 $ 5,953 $ 3,409 $ 293
======= ====== ======== ======= ========
Cash paid during the
year for income taxes.. $ -- $ -- $ -- $ -- $ --
======= ====== ======== ======= ========
</TABLE>
See accompanying notes.
F-13
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE
PERIOD OCTOBER 27, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Alexandria Real Estate Equities, Inc. (formerly known as Health Science
Properties, Inc.--see Note 11), a Maryland corporation (the "Company"), was
formed on October 27, 1994. The common stock of the Company is wholly owned by
Health Science Properties Holding Corporation ("Holdings").
The Company and its wholly owned subsidiary, ARE-QRS Corp. ("ARE-QRS"), were
formed to acquire, manage and develop properties for lease to the life science
industry. As of December 31, 1996, the Company had acquired the following
properties:
<TABLE>
<CAPTION>
NUMBER NUMBER
OF OF RENTABLE
PROPERTY NAME LOCATION BUILDINGS TENANTS SQUARE FEET
------------- -------- --------- ------- -----------
<S> <C> <C> <C> <C>
10933 N. Torrey Pines
Road.................... San Diego, California 1 3 108,133
11099 N. Torrey Pines
Road.................... San Diego, California 1 4 86,962
3535 General Atomics
Court................... San Diego, California 1 3 76,084
3565 General Atomics
Court................... San Diego, California 1 1 43,600
1102 and 1124 Columbia
Street.................. Seattle, Washington 1 2 213,397
1413 Research Blvd....... Rockville, Maryland 1 1 105,000
300 and 401 Professional
Drive................... Gaithersburg, Maryland 2 3 111,179
25, 35 and 45 W. Watkins
Mill Road............... Gaithersburg, Maryland 1 6 138,938
1311, 1401 and 1431
Harbor Bay Parkway...... Alameda, California 3 4 147,777
---------
1,031,070
=========
</TABLE>
Principles of Consolidation
All significant intercompany accounts and transactions have been eliminated
in consolidation.
Proposed Transactions
The Company expects to elect real estate investment trust ("REIT") status
effective 1996 for federal income tax purposes. The Company currently intends
to consummate an Initial Public Offering ("Offering") of the Company's common
stock to enable it, ARE-QRS and a special-purpose entity to be formed by the
Company prior to the Offering ("GSA-QRS") to (i) acquire a limited liability
company formed and owned by certain affiliates of PaineWebber Incorporated
(see Note 11), (ii) repay certain existing debt, (iii) provide a vehicle for
future acquisitions, and (iv) comply with certain requirements under the
federal income tax laws and regulations relating to REITs.
In connection with the Offering, the Company will redeem all of the
outstanding shares of its Series T preferred stock and convert into shares of
Common Stock all of the outstanding shares of its Series U preferred stock. In
addition, the Company has notified AEW Partners II, L.P. and certain of its
affiliates (collectively, "AEW"), the sole holders of the Series V preferred
stock, of its intention to (i) convert one-half of the outstanding shares of
its Series V preferred stock into shares of Common Stock and (ii) redeem the
remaining shares of Series V preferred stock for cash (see Note 11).
Notwithstanding the option of the Company to effectuate the foregoing
conversion and redemption, AEW has elected to convert all of the outstanding
shares of Series V preferred stock into shares of Common Stock. As a result,
the officers, directors and employees of the Company, together with Holdings
and AEW (the "Continuing Investors"), will hold 3,634,777 shares of Common
Stock after the Offering. Simultaneous with consummation of the Offering, the
Company also will
F-14
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
acquire 100% of the ownership interests in the Acquisition LLC (see Note 11),
thereby acquiring three additional properties. None of the current
shareholders has any direct or indirect interest in the Acquisition LLC or the
additional properties owned thereby.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
The Company considers all highly liquid investments with original maturities
of three months or less when purchased to be cash equivalents.
Rental Properties
Rental properties are recorded at cost. Costs associated with acquiring and
renovating properties are capitalized as incurred. At such times that events
or circumstances indicate that the carrying amount of a property may be
impaired, the Company makes an assessment of its recoverability by estimating
the future undiscounted cash flows, excluding interest charges, of the
property. If the carrying amount exceeds the aggregate future cash flows, the
Company would recognize an impairment loss to the extent the carrying amount
exceeds the fair value of the property. Based upon such periodic assessments,
no impairment has been determined and no rental properties carrying amounts
have been adjusted.
Maintenance and repairs are expensed as incurred. Major replacements and
betterments are capitalized and depreciated over their estimated useful lives.
Depreciation is computed on the straight-line method using estimated lives
of 30 to 40 years for building and improvements, and the term of the
respective lease for tenant improvements.
Restricted Cash
Restricted cash consists of security deposit funds and a $4,715,000 tenant
improvement reserve established by the Company pursuant to a lease with a
tenant at one of the Company's properties.
Rental Income
Rental income from leases with scheduled rent increases, free rent and other
rent concessions are recognized on a straight-line basis over the lease term.
Amounts currently recognized as income, and expected to be received in later
years, are included in tenant receivables and deferred rent. Amounts received
currently, but recognized as income in future years, are included in unearned
rent.
Loan Fees and Costs
Fees and costs incurred in obtaining long-term financing are amortized over
the terms of the related loan agreements and included in interest expense.
Leasing Commissions
Leasing commissions are amortized on a straight-line basis over the term of
the related lease.
F-15
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Offering Costs and Yield Adjustment
Offering costs associated with the issuance of preferred shares are deducted
from the proceeds of the preferred stock. The Company accretes the difference
between the minimum yield requirement on the preferred stock and the minimum
dividend payment as a charge to additional paid-in capital.
Fair Value of Financial Instruments
The Company believes the carrying amounts of its financial instruments,
except certain secured notes payable, approximate their fair values (see Note
4).
Earnings Per Share
Per share data is not meaningful because the Company is a wholly owned
subsidiary of Holdings and the Company's capital structure will be materially
affected by the Proposed Transactions.
Income Taxes
For the taxable year ended December 31, 1996, the Company intends to make an
election to be taxed as a REIT under Sections 856 through 860 of the Internal
Revenue Code. As a REIT, the Company generally will not be subject to federal
income tax if it meets a number of organizational and operational requirements
and distributes at least 95% of its taxable income for each tax year to its
stockholders. If the Company fails to qualify as a REIT in any taxable year,
the Company will be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate tax rates.
Even if the Company qualifies for taxation as a REIT, the Company may be
subject to state and local income taxes and to federal income tax and excise
tax on its undistributed income. None of the Company's distributions made for
the year ended December 31, 1996, represented a return of capital.
For the year ended December 31, 1995, deferred income taxes are recognized
for tax consequences of temporary differences resulting from income and
expense items reported for financial accounting and tax purposes in different
periods and tax net operating loss ("NOL") carryforwards.
Unaudited Interim Statements
The consolidated financial statements as of March 31, 1997 and for the three
months ended March 31, 1997 and 1996, are unaudited. In the opinion of
management, such financial statements reflect all adjustments necessary for a
fair presentation of the results of the respective interim periods. All such
adjustments are of a recurring nature.
2. RENTAL PROPERTIES
Rental properties are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1996 1995
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Land.................................................... $ 28,383 $10,444
Building and improvements............................... 121,236 45,397
Tenant and other improvements........................... 1,535 413
-------- -------
151,154 56,254
Less accumulated depreciation........................... (4,194) (1,901)
-------- -------
$146,960 $54,353
======== =======
</TABLE>
F-16
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
All of the Company's rental properties are encumbered by deeds of trust and
assignments of the rents and leases associated with the properties. The
Company leases space, under noncancelable leases with remaining terms of 1 to
20 years. Certain tenants are also obligated to reimburse the Company for
specific operating expenses.
Minimum lease payments to be received under the terms of the operating lease
agreements, excluding expense reimbursements, as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997........................................................ $21,663
1998........................................................ 20,371
1999........................................................ 16,107
2000........................................................ 12,459
2001........................................................ 9,004
Thereafter.................................................. 28,299
</TABLE>
3. UNSECURED LINE OF CREDIT
The unsecured line of credit to the Company from a bank had a maximum
commitment of $3,000,000 (which was subject to increase, with certain
limitations, to $4,000,000) bore interest at LIBOR plus 2.5% (or prime plus
1.5%) and matured on October 31, 1995.
In September 1995, certain terms of the line of credit were amended. The
limitation to increase the maximum commitment to $4,000,000 was removed and
the maximum commitment was increased to $4,000,000. The interest rate was
increased to LIBOR plus 3.00% (or prime plus 1.75%) and the due date was
extended to January 31, 1996. The loan was further extended to June 30, 1996.
This loan was repaid in full during the year ended December 31, 1996.
4. SECURED NOTES PAYABLE
Secured notes payable are as follows:
<TABLE>
<CAPTION>
1996 1995
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Line of credit, with PaineWebber Incorporated, secured by
four of the Company's properties, with a maximum
commitment of $44,400,000, bearing interest at LIBOR plus
2.5%, and due in 1999, convertible to a 10 year term
loan..................................................... $ 44,400 $ --
Notes payable to banks, an insurance company, and a
tenant/prior owner secured by first and second deeds of
trust on the rental properties, bearing interest at fixed
rates ranging from 8.25% to 9.00% and due at various
dates through 2014....................................... 67,152 35,204
Note payable to a bank, secured by certain building
improvements, bearing interest at prime plus 1.5% and due
in 1997.................................................. 380 440
Line of credit with a maximum commitment of $1,250,000,
secured by deeds of trust on rental properties, bearing
interest at LIBOR plus 2.5% and due in 1997.............. 1,250 1,250
-------- -------
$113,182 $36,894
======== =======
</TABLE>
F-17
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Future principal payments due on secured notes payable, as of December 31,
1996, are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997........................................................ $ 25,016
1998........................................................ 1,430
1999........................................................ 49,523
2000........................................................ 1,192
2001........................................................ 1,295
Thereafter.................................................. 34,726
--------
$113,182
========
</TABLE>
The prime and LIBOR rates of interest at December 31, 1996 were 8.25% and
5.78%, respectively.
Based on the borrowing rates currently available to the Company for bank
loans with similar maturities, the fair value of secured notes payable as of
December 31, 1996 and 1995 are approximately $113,215,000 and $37,650,000,
respectively.
Effective October 1, 1996, the Company entered into two interest rate floor
and cap transactions with notional amounts of $44,500,000 to convert its
floating rate line of credit with PaineWebber Incorporated to a fixed rate
liability. The agreements limit the risk of rising interest rates associated
with the Company's line of credit by fixing the variable portion of the
interest rate on variable rate debt at 8.0% through October 1, 1999. The
Company does not hold or issue the interest rate agreements for trading
purposes and is exposed to possible credit risk if the counterparties fail to
perform on the contracts. The cost of the derivative is included as a loan
cost and amortized over the term of the line of credit as an adjustment to the
interest rate yield.
5. INCOME TAXES
As of December 31, 1996, the Company had net deferred tax assets totaling
$1,246,000 arising primarily from differences between financial accounting and
income tax reporting for the effects of (i) straight line rents;
(ii) depreciation and amortization; (iii) unearned rents; (iv) the present
value of a post-retirement benefit and (v) an NOL carryforward totaling
$213,000. Since the Company intends to qualify as a REIT it has fully reserved
the amount of income tax benefit relating to its deferred tax assets to the
extent they exceed deferred tax liabilities, and has not recognized any
deferred tax expense.
6. MANDATORILY REDEEMABLE PREFERRED STOCK
Series V cumulative convertible preferred stock
Series V preferred stockholders are entitled to dividends at an annual rate
of 10% of the stated value per share during the first twelve dividend periods
or such larger amount as would be payable on an as converted basis were the
Series V preferred stock converted to common stock. Beginning with the
thirteenth dividend period, the annual dividend rate increases to 15%. The
stated value of each share is $1,000. Dividends are cumulative and are payable
in quarterly equal installments on March 31, June 30, September 30, and
December 31 of each year. In the event of any liquidation events, the Series V
preferred stockholders are entitled to a liquidation preference that will
provide an internal rate of return of 15% on the stated value per share.
Upon the closing of an Offering during the four years following the issue
date of the shares of Series V preferred stock, the Company has the right to
redeem no less than one-half of the Series V preferred stock for cash and to
convert the balance into fully paid and nonassessable shares of common stock.
The redemption price per share of Series V preferred stock is the stated value
plus an amount calculated to provide an internal rate of
F-18
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
return of 20%. Notwithstanding the Company's option to redeem and convert the
Series V preferred stock as set forth above, the Series V preferred
stockholders have elected to convert all of the Series V preferred stock at
the conversion share price (as defined). In addition, each share of Series V
preferred stock may convert at the conversion share price into common stock at
the option of the holder (i) prior to the closing of a merger or consolidation
of the Company, (ii) at any time after the fourth anniversary of the issue
date or (iii) upon consummation of the Offering.
Other than in connection with a partial cash redemption (as defined), the
Company may not redeem the Series V preferred stock prior to the third
anniversary of the issue date. Thereafter, such shares may be redeemed in
whole but not in part, at an amount which provides the holders an internal
rate of return equal to 25%, for the first three years and 20% thereafter.
The Series V preferred stock is subject to certain procedural and operating
covenants including payment of regular dividends and maintaining minimum cash
available for distribution (as defined). Following the first anniversary of
the issue date, the holder of the Series V preferred stock shall have the
option upon a breach of such covenants to cause the Company to redeem such
shares for an amount in cash necessary to provide an internal rate of return
ranging from 15% to 20% depending on the covenant breach which triggered such
redemptions.
The Series V preferred stock ranks senior to the common stock and all other
classes of preferred stock issued by the Company with respect to dividends,
liquidations, and for all other purposes. The difference between the amount of
dividends and the internal rate of return to be earned upon the closing of the
Offering is accreted to the recorded value of the stock.
7. PREFERRED STOCK
Series T 8.5% preferred stock
Holders of the Series T preferred stock are entitled to dividends at an
annual rate of 8.5% of the stated value per share. Dividends are fully
cumulative and are payable, in arrears, on July 1 and January 1 of each year.
The Series T preferred stock may be redeemed from time to time, in whole or
in part, at the option of the Company, at a redemption price equal to 100% of
the stated value per share, plus all accrued and unpaid dividends, whether or
not authorized and declared. The stated value per share of the Series T
preferred stock is $100.
In addition to separate class voting rights on certain matters directly
effecting the specific status and rights of the Series T preferred
stockholders, the Series T preferred stockholders are entitled to vote upon
all matters upon which holders of common stock have the right to vote.
Series T preferred stock ranks on parity with Series U 8.5% preferred stock
and is junior to Series V preferred stock with respect to dividends,
liquidations, and all other purposes.
Series U 8.5% cumulative convertible preferred stock
Holders of the Series U 8.5% preferred stock are entitled to dividends at an
annual rate of 8.5% of the stated value per share. Dividends are fully
cumulative and are payable in arrears on January 1 of each year.
Commencing on the fifth anniversary of the issue date, the Series U
preferred stock may be redeemed, at a redemption price equal to 135% of the
stated value per share, plus all accrued and unpaid dividends. The stated
value per share of the Series U preferred stock is $500.
F-19
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Series U preferred stock is mandatorily convertible into common stock if
(i) shares of common stock are registered under the Securities Act of 1933, as
amended, pursuant to an effective registration statement, and (ii) the Company
has entered into an underwriting agreement to sell shares of common stock
(which underwriting agreement sets forth the price at which such shares will
be offered for sale). Upon such conversion, each share of Series U preferred
stock will convert into a number of shares of common stock having a value
equal to 135% of the Series U stated value plus all accrued and unpaid
dividends.
The Series U holders have no voting rights other than on certain matters
directly affecting the specific status and rights of the Series U.
The Series U preferred stock ranks on parity with Series T preferred stock
and is junior to Series V preferred stock with respect to dividends,
liquidations, and all other purposes.
8. COMMITMENTS AND CONTINGENCIES
Litigation
To the Company's knowledge, no litigation is pending against the Company,
other than routine actions and administrative proceedings, substantially all
of which are expected to be covered by liability insurance or which, in the
aggregate, are not expected to have a material adverse effect on the financial
condition, results of operations or cash flows of the Company.
Employment Agreements
Two of the Company's executives have signed employment agreements that run
through December 31, 2000. For the year ended December 31, 1997, these
executives will earn a combined salary of $475,000. For the remaining three
years they will earn a combined salary of $415,000. One of the executives will
earn an annual retirement benefit of $150,000 per year for the first three
years following the consummation of the Offering, at which time his benefit
will be reduced to $90,000 per year, plus an annual cost of living increase of
2% per year for the remainder of his life and his then living spouse's life.
For the year ended December 31, 1996, the Company recorded a post-retirement
benefit for past services provided by this executive equal to $438,000.
Three employees are subject to employment agreements that provide for a
combined annual salary of $435,000 per year and are for a term ending on
December 31, 1998, with a provision for automatic one year extensions until
either the executive or the Company notifies the other that such party does
not wish to extend the agreement.
Each of the employment agreements of the executives and employees provides
for bonuses and base salary adjustments. With respect to two of these
individuals, the bonus is tied to the annual increase in funds from operations
(as defined).
Concentration of Credit Risk
The Company maintains its cash and cash equivalents at insured financial
institutions. The combined account balances at each institution periodically
exceeds FDIC insurance coverage, and, as a result, there is a concentration of
credit risk related to amounts on deposit in excess of FDIC insurance
coverage. Management believes that the risk is not significant.
The Company is dependent on rental payments from a limited number of tenants
and the inability of any single tenant to make its lease payments could
adversely affect the Company and its ability to make distributions to
stockholders. The Company currently has approximately 31 leases with a total
of approximately 26 tenants,
F-20
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and eight of the Company's 15 properties (including the properties to be
acquired in connection with the Company's acquisition of the Acquisition LLC--
see Note 11) are single-tenant properties. At February 1, 1997, three of the
Company's tenants, accounted for approximately 37% of the Company's aggregate
annualized base rent.
The Company does not generally require collateral or other security from its
tenants other than security deposits. The Company has available two
irrevocable letters of credit totaling $858,000 which are used as security
deposits for two leases.
9. STOCK OPTION PLANS
1996 Stock Option Plan
The Company has a ten-year incentive and nonqualified stock option plan (the
"Plan") for certain employees and non-employee directors of the Company. Under
the Plan, options to purchase shares of common stock of the Company are
granted to eligible participants at an exercise price to be determined by the
Administrator of the Plan (the "Administrator") at the time of grant, which
may not be less than the Fair Market Value (as defined in the Plan) of the
common stock as of the grant date. The Plan resulted from the consolidation of
the Company's 1996 Stock Option Plan, 1996 Stock Option Plan for Non-Employee
Directors, 1995 Substitute Stock Option Plan and 1995 Substitute Stock Option
Plan for Non-employee Directors. Non-employee directors of the Company are
only eligible to receive non-qualified stock options under the Plan. Unless
otherwise determined by the Administrator, the option shares may be exercised
as follows:
. 50% one year following the grant date.
. 75% two years following the grant date.
. 100% three years following the grant date.
The Administrator may waive such installment exercise provisions at any time
based on such factors as the Administrator may determine in its sole
discretion. In addition, any option that is outstanding and not yet fully
exercisable under the Plan shall become fully and immediately exercisable upon
(i) certain events of termination of employment as set forth in the Plan, (ii)
the underwritten initial public offering of common stock by the Company or
(iii) a Change in Control (as defined in the Plan). A maximum of 239.60 shares
of common stock are authorized for issuance under the Plan and none are
outstanding.
Under the Plan, holders of options granted under the Holdings 1994 Stock
Option Plan, as amended, or the Holdings 1994 Stock Option Plan for Non-
Employee Directors, as amended, ("Holdings Stock Options") may be eligible to
be granted substitute stock options in the event of certain changes in the
capital or corporate structure of the Company or a subsidiary of the Company
(including upon the consummation of the Offering). Substitute stock options
may be granted under the Plan in substitution for then outstanding Holdings
Stock Options to the extent that the Administrator determines, in its sole
discretion, that the grant of substitute stock options is necessary to provide
that holders of Holdings Stock Options not be deprived of benefits to which
they would otherwise have been entitled had such event or events not occurred.
Any grant of a substitute stock option will be subject to the prior
cancellation and surrender of the corresponding Holdings Stock Option. The
terms and conditions of substitute stock options shall be substantially
equivalent to those of the Holdings Stock Options in respect of which the
substitute stock options are granted. In connection with the proposed Offering
substitute stock options will be granted under the 1996 Plan in substitution
for outstanding Holdings Stock Options. As of December 31, 1996, 7,932
Holdings Stock Options had been issued and are outstanding. In January 1997,
an additional 4,045 options were issued by Holdings. No substitute stock
options were outstanding at December 31, 1996.
F-21
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee and director stock options.
Post-IPO Stock Option Plan
The Company will adopt a stock option and incentive plan (the "1997 Stock
Option Plan") prior to consummation of the Offering. The 1997 Stock Option
Plan will be administered by the Compensation Committee of the Board of
Directors. The 1997 Stock Option Plan is expected to provide for the grant of
incentive stock options intended to qualify as such under Section 422 of the
Internal Revenue Code, non-qualified stock options, stock appreciation rights
and restricted stock to employees, officers, directors and independent
contractors (including non-employee directors) of the Company with respect to
900,000 shares of Common Stock; provided, that incentive stock options may be
granted only to employees of the Company. The 1997 Stock Option Plan will
permit the Compensation Committee to select eligible employees, officers,
directors and independent contractors (including non-employee directors) of
the Company to receive awards, to determine the type and number of awards to
be granted and to determine the terms, conditions, restrictions and
performance criteria relating to any award. In connection with the Offering,
the Company will grant options to officers, directors and certain employees of
the Company under the 1997 Stock Option Plan with respect to an aggregate of
600,000 shares of Common Stock.
10. RELATED PARTY TRANSACTIONS
During 1996 and 1995, the Company incurred $1,708,000 and $369,000,
respectively, for legal services provided by a law firm of which a shareholder
of Holdings is a member.
General and administrative expenses for 1996 and 1995 include $49,000 and
$35,000, respectively, for payroll accounting and office space provided by a
shareholder of Holdings.
Holdings advanced to the Company $2,483,000 at a rate of 10% which is due on
demand. For the year ended December 31, 1996, $162,000 of interest was accrued
and $42,000 was paid on this advance.
11. SUBSEQUENT EVENTS
Subsequent to December 31, 1996, the following events occurred:
The Company assigned its rights to purchase three properties to PW
Acquisitions I, LLC, a limited liability company ("Acquisition LLC")
controlled by PaineWebber Real Estate Holdings, Inc. and PW Realty Partners
LLC (together "PaineWebber"). In January 1997, the Acquisition LLC acquired
the three properties for approximately $52 million. The Company, upon
occurrence of certain events (but no later than September 30, 1998), is
required to purchase the outstanding membership interests in the Acquisition
LLC. The purchase price for the membership interests in the Acquisition LLC
will equal the original purchase price of the properties (adjusted for certain
cash flow amortization from the Acquisition LLC Properties), plus 50% of the
difference between the aggregate fair value, as defined, over PaineWebber's
adjusted purchase price. PaineWebber has agreed to amend the purchase
agreement to reduce the purchase price (as thus calculated) by approximately
$766,000. Based upon the above formula, the Company will be required to
purchase the membership interests in the Acquisition LLC for approximately
$60.6 million with a portion of the net proceeds of the Offering.
On January 24, 1997, the Company entered into an unsecured line of credit of
$2,500,000 which bears interest at either the "Reference Rate" or the LIBOR
rate, plus a margin based upon the ratio of liabilities to gross asset value,
and matures on December 31, 1997. The Company has drawn $2,500,000 subsequent
to
F-22
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
December 31, 1996. The line of credit contains certain financial covenants,
and repayment is guaranteed by Holdings.
Subsequent to year-end, the Company adopted a 401(k) plan which became
effective January 1, 1997. Each employee of the Company may enroll in the plan
on such employee's date of hire. An actively employed employee is eligible to
receive a matching contribution under the plan equal to 50% of each
participant's contribution. Plan participants are immediately vested in their
contributions to the plan and the matching contributions by the Company.
Subsequent to year-end, the Company changed its name from Health Science
Properties, Inc. to Alexandria Real Estate Equities, Inc. and changed the name
of its consolidated subsidiary from HSP-QRS Corp. to ARE-QRS Corp.
Subsequent to year-end, AEW notified the Company of its election to convert
all of its Series V preferred stock into shares of Common Stock in connection
with the Offering.
12. NON-CASH TRANSACTION
In connection with the formation of the Company, the following net assets
were contributed from Holdings, on November 4, 1994:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Rental properties, net...................................... $ 24,544
Cash and cash equivalents................................... 9,427
Tenant security deposit funds............................... 306
Other assets, net........................................... 655
Secured notes payable and unsecured line of credit.......... (16,453)
Tenants security deposits................................... (403)
Accounts payable and accrued expenses....................... (948)
--------
Net assets................................................ $ 17,128
========
</TABLE>
F-23
<PAGE>
SCHEDULE III
ALEXANDRIA REAL ESTATE EQUITIES, INC.
RENTAL PROPERTIES AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COSTS
CAPITALIZED
SUBSEQUENT TO
INITIAL COSTS ACQUISITION TOTAL COSTS
--------------------- ------------- ------------------------------
SQUARE BUILDINGS AND BUILDINGS AND ACCUMULATED
PROPERTY FOOTAGE LAND IMPROVEMENTS IMPROVEMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION ENCUMBRANCES
- -------- --------- ------- ------------- ------------- ------- ------------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
10933 N. Torrey
Pines Road..... 108,133 $ 3,903 $ 5,960 $1,048 $ 3,903 $ 7,008 $ 10,911 $ 586 $ 7,741
11099 N. Torrey
Pines Road..... 86,962 2,663 10,649 1,545 2,663 12,194 14,857 1,069 10,106
3535 General
Atomics Court.. 76,084 2,651 18,046 153 2,651 18,199 20,850 1,244 12,180
3565 General
Atomics Court.. 43,600 1,227 9,554 -- 1,227 9,554 10,781 650 6,303
1102 and 1124
Columbia
Street......... 213,397 6,566 23,528 73 6,566 23,601 30,167 339 32,452
1413 Research
Boulevard...... 105,000 2,317 9,611 238 2,317 9,849 12,166 121 8,600
300 and 401
Professional
Drive.......... 111,179 2,000 12,302 22 2,000 12,324 14,324 95 10,800
25, 35 and 45 W.
Watkins Mill
Road........... 138,938 3,281 14,416 32 3,281 14,448 17,729 69 11,700
1311, 1401 and
1431 Harbor Bay
Parkway........ 147,777 3,775 15,526 68 3,775 15,594 19,369 21 13,300
--------- ------- -------- ------ ------- -------- -------- ------ --------
1,031,070 $28,383 $119,592 $3,179 $28,383 $122,771 $151,154 $4,194 $113,182
========= ======= ======== ====== ======= ======== ======== ====== ========
<CAPTION>
PROPERTY YEAR BUILT
- -------- ----------
<S> <C>
10933 N. Torrey
Pines Road..... 1971
11099 N. Torrey
Pines Road..... 1986
3535 General
Atomics Court.. 1991
3565 General
Atomics Court.. 1991
1102 and 1124
Columbia
Street......... 1975
1413 Research
Boulevard...... 1967
300 and 401
Professional
Drive.......... 1989/1987
25, 35 and 45 W.
Watkins Mill
Road........... 1989
1311, 1401 and
1431 Harbor Bay
Parkway........ 1984/1985/
1986
</TABLE>
A summary of activity of rental office properties and accumulated
depreciation is as follows:
<TABLE>
<CAPTION>
RENTAL PROPERTIES
DECEMBER 31,
------------------------
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Balance at beginning of period................... $ 56,254 $54,700 $ --
Improvements..................................... 1,578 1,554 47
Acquisition of land, building and improvements... 93,322 -- 54,653
-------- ------- -------
Balance at end of period......................... $151,154 $56,254 $54,700
======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED DEPRECIATION
DECEMBER 31,
--------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Balance at beginning of period................... $ 1,901 $ 333 $ 270
Depreciation expense............................. 2,293 1,568 63
-------- -------- ------
Balance at end of period......................... $ 4,194 $ 1,901 $ 333
======== ======== ======
</TABLE>
F-24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors Alexandria Real Estate Equities, Inc.
We have audited the accompanying statement of revenue and certain expenses
of 1413 Research Blvd. (the "Property") for the year ended December 31, 1995.
This statement of revenue and certain expenses is the responsibility of the
management of the Property. Our responsibility is to express an opinion on the
statement of revenue and certain expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Alexandria Real Estate Equities, Inc. Certain expenses (described in Note
1) that would not be comparable to those resulting from the proposed future
operations of the Property are excluded and the statement is not intended to
be a complete presentation of the revenue and expenses of the Property.
In our opinion, the statement of revenue and certain expenses presents
fairly, in all material respects, the revenue and certain expenses, as defined
above, of the Property for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
February 20, 1997
F-25
<PAGE>
1413 RESEARCH BLVD.
STATEMENT OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRE ACQUISITION
PERIOD FOR THE YEAR
JANUARY 1, ENDED
1996 TO DECEMBER 31,
JULY 2, 1996 1995
--------------- ------------
(UNAUDITED)
<S> <C> <C>
Revenue:
Rental........................................... $ 711 $407
Tenant recoveries................................ 595 243
------ ----
Total revenue.................................. 1,306 650
Certain Expenses:
Utilities........................................ 194 128
Repairs and maintenance.......................... 389 134
Insurance........................................ 10 --
Taxes and license................................ 87 174
------ ----
Total certain expenses......................... 680 436
------ ----
Excess of revenue over certain expenses........ $ 626 $214
====== ====
</TABLE>
See accompanying notes to statement of revenue and certain expenses.
F-26
<PAGE>
1413 RESEARCH BLVD.
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The accompanying statement of revenue and certain expenses includes the
operations of 1413 Research Blvd. located in Rockville, Maryland (the
"Property") which was acquired by Alexandria Real Estate Equities, Inc., a
Maryland corporation (the "Company") from a nonaffiliated third party. The
Property is 100% leased to the United States Government.
Basis of Presentation
The accompanying statement has been prepared to comply with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
registration statement on Form S-11 of the Company.
The accompanying statement is not representative of the actual operations
for the period presented as certain expenses that may not be comparable to the
expenses expected to be incurred by the Company in the future operations of
the Property have been excluded. Excluded expenses consist of interest,
depreciation and amortization and property general and administrative costs
not directly comparable to the future operations of the Property.
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the terms of the
related leases.
Risks and Uncertainties
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Statement
The statement of revenue and certain expenses for the period January 1,
1996, to July 2, 1996 (date of acquisition) is unaudited. In the opinion of
management, this financial statement reflects all adjustments necessary for a
fair presentation of the results of the respective interim period. All such
adjustments are of a normal, recurring nature.
2. RENTAL OFFICE PROPERTY
The future minimum lease payments to be received under noncancelable
operating leases as of December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997........................................................... $ 1,563,000
1998........................................................... 1,563,000
1999........................................................... 1,366,000
2000........................................................... 1,225,000
2001........................................................... 919,000
Thereafter..................................................... --
</TABLE>
The above future minimum lease payments do not include specified payments
for tenant recoveries of operating expenses.
F-27
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors Alexandria Real Estate Equities, Inc.
We have audited the accompanying statement of revenue and certain expenses
of 300 and 401 Professional Drive (the "Property") for the year ended December
31, 1995. This statement of revenue and certain expenses is the responsibility
of the management of the Property. Our responsibility is to express an opinion
on the statement of revenue and certain expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Alexandria Real Estate Equities, Inc. Certain expenses (described in Note
1) that would not be comparable to those resulting from the proposed future
operations of the Property are excluded and the statement is not intended to
be a complete presentation of the revenue and expenses of the Property.
In our opinion, the statement of revenue and certain expenses presents
fairly, in all material respects, the revenue and certain expenses, as defined
above, of the Property for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
February 20, 1997
F-28
<PAGE>
300 AND 401 PROFESSIONAL DRIVE
STATEMENT OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRE ACQUISITION
PERIOD FOR THE YEAR
JANUARY 1, 1996 ENDED
TO SEPTEMBER 10, DECEMBER 31,
1996 1995
---------------- ------------
(UNAUDITED)
<S> <C> <C>
Revenue:
Rental.......................................... $1,096 $1,582
Tenant recoveries............................... 350 525
------ ------
Total revenue................................. 1,446 2,107
Certain Expenses:
Utilities....................................... 75 76
Repairs and maintenance......................... 85 260
Insurance....................................... 13 8
Taxes and license............................... 177 181
------ ------
Total certain expenses........................ 350 525
------ ------
Excess of revenue over certain expenses....... $1,096 $1,582
====== ======
</TABLE>
See accompanying notes to statement of revenue and certain expenses.
F-29
<PAGE>
300 AND 401 PROFESSIONAL DRIVE
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The accompanying statement of revenue and certain expenses includes the
operations of 300 and 401 Professional Drive located in Gaithersburg, Maryland
(the "Property") which was acquired by Alexandria Real Estate Equities, Inc.,
a Maryland corporation (the "Company") from a nonaffiliated third party. The
Property consists of two buildings that are 100% occupied and leased to three
tenants under triple net leases which require the tenants to pay substantially
all expenses associated with the Property including operating and maintenance,
utilities, taxes and insurance.
Basis of Presentation
The accompanying statement has been prepared to comply with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
registration statement on Form S-11 of the Company.
The accompanying statement is not representative of the actual operations
for the period presented as certain expenses that may not be comparable to the
expenses expected to be incurred by the Company in the future operations of
the Property have been excluded. Excluded expenses consist of interest,
depreciation and amortization and property general and administrative costs
not directly comparable to the future operations of the Property.
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the terms of the
related leases.
Risks and Uncertainties
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Statement
The statement of revenue and certain expenses for the period January 1,
1996, to September 10, 1996 (date of acquisition) is unaudited. In the opinion
of management, this financial statement reflects all adjustments necessary for
a fair presentation of the results of the respective interim period. All such
adjustments are of a normal, recurring nature.
2. RENTAL OFFICE PROPERTY
The future minimum lease payments to be received under noncancelable
operating leases as of December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997.............................................................. $1,640,000
1998.............................................................. 1,674,000
1999.............................................................. 1,030,000
2000.............................................................. 1,023,000
2001.............................................................. 1,039,000
Thereafter........................................................ 4,592,000
</TABLE>
The above future minimum lease payments do not include specified payments
for tenant recoveries of operating expenses.
F-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors Alexandria Real Estate Equities, Inc.
We have audited the accompanying statement of revenue and certain expenses
of 25, 35 and 45 W. Watkins Mill Road (the "Property") for the year ended
December 31, 1995. This statement of revenue and certain expenses is the
responsibility of the management of the Property. Our responsibility is to
express an opinion on the statement of revenue and certain expenses based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Alexandria Real Estate Equities, Inc. Certain expenses (described in Note
1) that would not be comparable to those resulting from the proposed future
operations of the Property are excluded and the statement is not intended to
be a complete presentation of the revenue and expenses of the Property.
In our opinion, the statement of revenue and certain expenses presents
fairly, in all material respects, the revenue and certain expenses, as defined
above, of the Property for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
February 20, 1997
F-31
<PAGE>
25, 35 AND 45 W. WATKINS MILL ROAD
STATEMENT OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRE ACQUISITION
PERIOD
JANUARY 1, FOR THE
1996 TO YEAR ENDED
OCTOBER 18, DECEMBER 31,
1996 1995
--------------- ------------
(UNAUDITED)
<S> <C> <C>
Revenue:
Rental........................................... $1,296 $1,739
Tenant recoveries................................ 300 287
------ ------
Total revenue.................................. 1,596 2,026
Certain Expenses:
Utilities........................................ 31 46
Repairs and maintenance.......................... 74 52
Insurance........................................ 11 12
Taxes and license................................ 216 198
------ ------
Total certain expenses......................... 332 308
------ ------
Excess of revenue over certain expenses........ $1,264 $1,718
====== ======
</TABLE>
See accompanying notes to statement of revenue and certain expenses.
F-32
<PAGE>
25, 35 AND 45 W. WATKINS MILL ROAD
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The accompanying statement of revenue and certain expenses includes the
operations of 25, 35 and 45 W. Watkins Mill Road located in Gaithersburg,
Maryland (the "Property") which was acquired by Alexandria Real Estate
Equities, Inc., a Maryland corporation (the "Company") from a nonaffiliated
third party. The Property consists of three buildings that are 100% occupied
and leased to five tenants under triple net leases which require the tenants
to pay substantially all expenses associated with the property including
operating and maintenance, utilities, taxes and insurance.
Basis of Presentation
The accompanying statement has been prepared to comply with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
registration statement on Form S-11 of the Company.
The accompanying statement is not representative of the actual operations
for the period presented as certain expenses that may not be comparable to the
expenses expected to be incurred by the Company in the future operations of
the Property have been excluded. Excluded expenses consist of interest,
depreciation and amortization and property general and administrative costs
not directly comparable to the future operations of the Property.
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the terms of the
related leases.
Risks and Uncertainties
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Statement
The statement of revenue and certain expenses for the period January 1,
1996, to October 18, 1996 (date of acquisition) is unaudited. In the opinion
of management, this financial statement reflects all adjustments necessary for
a fair presentation of the results of the respective interim period. All such
adjustments are of a normal, recurring nature.
2. RENTAL OFFICE PROPERTY
The future minimum lease payments to be received under noncancelable
operating leases as of December 31, 1996 are as follows:
<TABLE>
<S> <C>
1997............................................................ $1,572,000
1998............................................................ 1,591,000
1999............................................................ 1,618,000
2000............................................................ 1,667,000
2001............................................................ 1,074,000
Thereafter...................................................... 7,358,000
</TABLE>
The above future minimum lease payments do not include specified payments
for tenant recoveries of operating expenses.
F-33
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors Alexandria Real Estate Equities, Inc.
We have audited the accompanying statement of revenue and certain expenses
of 1311, 1401 and 1431 Harbor Bay Parkway (the "Property") for the year ended
December 31, 1995. This statement of revenue and certain expenses is the
responsibility of the management of the Property. Our responsibility is to
express an opinion on the statement of revenue and certain expenses based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Alexandria Real Estate Equities, Inc. Certain expenses (described in Note
1) that would not be comparable to those resulting from the proposed future
operations of the Property are excluded and the statement is not intended to
be a complete presentation of the revenue and expenses of the Property.
In our opinion, the statement of revenue and certain expenses presents
fairly, in all material respects, the revenue and certain expenses, as defined
above, of the Property for the year ended December 31, 1995, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
February 20, 1997
F-34
<PAGE>
1311, 1401 AND 1431 HARBOR BAY PARKWAY
STATEMENT OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRE ACQUISITION
PERIOD
JANUARY 1, FOR THE
1996 TO YEAR ENDED
DECEMBER 12, DECEMBER 31,
1996 1995
--------------- ------------
(UNAUDITED)
<S> <C> <C>
Revenue:
Rental........................................... $2,144 $2,188
Tenant recoveries................................ 142 207
Other income..................................... 4 --
------ ------
Total revenue.................................. 2,290 2,395
Certain Expenses:
Utilities........................................ 62 126
Repairs and maintenance.......................... 271 269
Insurance........................................ 22 21
Taxes and license................................ 200 200
------ ------
Total certain expenses......................... 555 616
------ ------
Excess of revenue over certain expenses........ $1,735 $1,779
====== ======
</TABLE>
See accompanying notes to statement of revenue and certain expenses.
F-35
<PAGE>
1311, 1401 AND 1431 HARBOR BAY PARKWAY
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The accompanying statement of revenue and certain expenses includes the
operations of 1311, 1401 and 1431 Harbor Bay Parkway located in Alameda,
California (the "Property") which was acquired by Alexandria Real Estate
Equities, Inc., a Maryland corporation (the "Company") from a nonaffiliated
third party. The Property consists of three buildings that are 86% occupied
and leased to four tenants under triple net leases which require the tenants
to pay substantially all expenses associated with the property including
operating and maintenance, utilities, taxes and insurance.
Basis of Presentation
The accompanying statement has been prepared to comply with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
registration statement on Form S-11 of the Company.
The accompanying statement is not representative of the actual operations
for the period presented as certain expenses that may not be comparable to the
expenses expected to be incurred by the Company in the future operations of
the Property have been excluded. Excluded expenses consist of interest,
depreciation and amortization and property general and administrative costs
not directly comparable to the future operations of the Property.
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the terms of the
related leases.
Risks and Uncertainties
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Unaudited Interim Statement
The statement of revenue and certain expenses for the period January 1,
1996, to December 12, 1996 (date of acquisition) is unaudited. In the opinion
of management, this financial statement reflects all adjustments necessary for
a fair presentation of the results of the respective interim period. All such
adjustments are of a normal, recurring nature.
2. RENTAL OFFICE PROPERTY
The future minimum lease payments to be received under noncancelable
operating leases as of December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997........................................................... $ 3,555,000
1998........................................................... 3,595,000
1999........................................................... 2,763,000
2000........................................................... 2,116,000
2001........................................................... 2,116,000
Thereafter..................................................... 11,732,000
</TABLE>
The above future minimum lease payments do not include specified payments
for tenant recoveries of operating expenses.
1431 Harbor Bay Parkway is 100% leased to the US Food and Drug
Administration. This lease has a monthly base rent of $246,000 with step downs
in monthly base rent to $176,000 and $63,000 on January 1, 1999 and January 1,
2004, respectively.
F-36
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors Alexandria Real Estate Equities, Inc.
We have audited the accompanying statement of revenue and certain expenses
of 1550 East Gude Drive (the "Property") for the year ended December 31, 1996.
This statement of revenue and certain expenses is the responsibility of the
management of the Property. Our responsibility is to express an opinion on the
statement of revenue and certain expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of revenue and certain
expenses is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statement. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of revenue and certain expenses was prepared for
the purpose of complying with the rules and regulations of the Securities and
Exchange Commission for inclusion in the registration statement on Form S-11
of Alexandria Real Estate Equities, Inc. Certain expenses (described in Note
1) that would not be comparable to those resulting from the proposed future
operations of the Property are excluded and the statement is not intended to
be a complete presentation of the revenue and expenses of the Property.
In our opinion, the statement of revenue and certain expenses presents
fairly, in all material respects, the revenue and certain expenses, as defined
above, of the Property for the year ended December 31, 1996, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
February 20, 1997
F-37
<PAGE>
1550 EAST GUDE DRIVE
STATEMENT OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE
YEAR ENDED
DECEMBER 31,
1996
------------
<S> <C>
Revenue:
Rental........................................................... $539
Tenant recoveries................................................ 62
----
Total revenue.................................................. 601
Certain Expenses:
Taxes and license................................................ 62
----
Excess of revenue over certain expenses........................ $539
====
</TABLE>
See accompanying notes to statement of revenue and certain expenses.
F-38
<PAGE>
1550 EAST GUDE DRIVE
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1996
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The accompanying statement of revenue and certain expenses includes the
operations of 1550 East Gude Drive located in Rockville, Maryland (the
"Property") which was acquired by PW Acquisitions I, LLC (the "Acquisition
LLC"). Concurrently with the consummation of a proposed initial public
offering of the Common Stock of Alexandria Real Estate Equities, Inc., a
Maryland corporation, (the "Company"), the Acquisition LLC will be acquired by
the Company. The Property is 100% leased to a single tenant under a triple net
lease which requires the tenant to pay for substantially all costs associated
with the building including a reimbursement to the owner for real estate
taxes.
Basis of Presentation
The accompanying statement has been prepared to comply with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
registration statement on Form S-11 of the Company.
The accompanying statement is not representative of the actual operations
for the period presented as certain expenses that may not be comparable to the
expenses expected to be incurred by the Company in the future operations of
the Property have been excluded. Excluded expenses consist of interest,
depreciation and amortization and property general and administrative costs
not directly comparable to the future operations of the Property.
Revenue Recognition
Rental revenue is recognized on a straight-line basis over the term of the
related lease.
Risks and Uncertainties
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
2. RENTAL OFFICE PROPERTY
The future minimum lease payments to be received under the noncancelable
operating lease as of December 31, 1996, are as follows:
<TABLE>
<S> <C>
1997.............................................................. $527,000
1998.............................................................. 590,000
1999.............................................................. 609,000
2000.............................................................. 627,000
2001.............................................................. 646,000
Thereafter........................................................ 54,000
</TABLE>
The above future minimum lease payments do not include specified payments
for tenant recoveries of operating expenses.
F-39
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
Alexandria Real Estate Equities, Inc.
We have audited the accompanying balance sheet of PW Acquisitions I, LLC
(the "Company") as of March 31, 1997, and the related statements of income and
changes in member's capital, and cash flows for the quarter ended March 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Company as of March
31, 1997, and the results of its operations and its cash flows for the quarter
ended March 31, 1997, in conformity with generally accepted accounting
principles.
Los Angeles, California
April 24, 1997
F-40
<PAGE>
PW ACQUISITIONS I, LLC
BALANCE SHEET
(IN THOUSANDS)
MARCH 31, 1997
<TABLE>
<S> <C>
ASSETS
Rental properties, net................................................. $51,435
Cash................................................................... 187
Tenant security deposit funds and other restricted cash................ 302
Tenant receivables and deferred rent................................... 123
-------
Total assets......................................................... $52,047
=======
LIABILITIES AND MEMBERS' CAPITAL
Accounts payable and accrued expenses.................................. $ 66
Tenant security deposits............................................... 302
Prepaid rents.......................................................... 151
-------
Total liabilities.................................................... 519
Commitments and contingencies --
Member's capital....................................................... 51,528
-------
Total liabilities and member's capital............................... $52,047
=======
</TABLE>
See accompanying notes.
F-41
<PAGE>
PW ACQUISITIONS I, LLC
INCOME STATEMENT AND CHANGES IN MEMBERS' CAPITAL
(IN THOUSANDS)
FOR THE QUARTER ENDED MARCH 31, 1997
<TABLE>
<S> <C>
Revenue:
Rental............................................................ $ 1,450
Tenant recoveries................................................. 14
Other............................................................. 3
-------
1,467
Expenses:
Rental operations................................................. 54
General and administrative........................................ 32
Depreciation and amortization..................................... 234
-------
320
-------
Net income.......................................................... 1,147
-------
Contributions....................................................... 51,709
Distributions....................................................... (1,328)
Beginning Member's capital.......................................... --
-------
Ending Member's capital............................................. $51,528
=======
</TABLE>
See accompanying notes.
F-42
<PAGE>
PW ACQUISITIONS I, LLC
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
FOR THE QUARTER ENDED MARCH 31, 1997
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Net income.......................................................... $ 1,147
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization..................................... 234
Changes in operating assets and liabilities:
Tenant security deposit funds and other restricted cash......... (302)
Tenant receivables and deferred rent............................ (123)
Accounts payable and accrued expenses........................... 66
Tenant security deposits........................................ 302
Unearned rental income.......................................... 151
--------
Net cash provided by operating activities........................... 1,475
INVESTING ACTIVITIES
Purchase of rental properties....................................... (51,669)
--------
Net cash used in investing activities............................... (51,669)
FINANCING ACTIVITIES
Contributions from members.......................................... 51,709
Distributions to members............................................ (1,328)
--------
Net cash provided by financing activities........................... 50,381
Net increase in cash................................................ 187
Cash at beginning of period......................................... --
--------
Cash at end of period............................................... $ 187
========
</TABLE>
See accompanying notes.
F-43
<PAGE>
PW ACQUISITIONS I, LLC
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PW Acquisitions I, LLC, a Delaware limited liability company (the
"Company"), was formed on December 23, 1996, by PW Realty Partners LLC and
PaineWebber Real Estate Holdings, Inc. (collectively the "Owner") who own 99%
and 1% of the membership interests, respectively. The Company commenced
operations on January 13, 1997, and shall continue until December 31, 2040
unless terminated at a earlier date pursuant to the terms of the operating
agreement. The Company was formed to acquire, own and lease the following
Properties:
<TABLE>
<CAPTION>
ACQUISITION RENTABLE
PROPERTY NAME LOCATION PRICE ACQUISITION DATE SQUARE FEET
- ------------- -------- ----------- ---------------- -----------
<S> <C> <C> <C> <C>
14225 Newbrook Drive..... Chantilly, VA $32,439,000 January 13, 1997 248,186
1330 Piccard Drive....... Rockville, MD 14,333,000 January 15, 1997 131,511
1550 East Guide.......... Rockville, MD 4,897,000 January 24, 1997 44,500
----------- -------
$51,669,000 424,197
=========== =======
</TABLE>
Income of the Company is allocated in accordance with each member's
respective percentage interests. To the extent any allocation of losses causes
a deficit capital balance for any member, such allocation shall be reallocated
among the other members in accordance with their respective percentage
interest.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
RENTAL PROPERTIES
Rental properties are recorded at cost. Costs associated with acquiring and
renovating properties are capitalized as incurred. At such times that events
or circumstances indicate that the carrying amount of a property may be
impaired, the Company makes an assessment of its recoverability by estimating
the future undiscounted cash flows, excluding interest charges, of the
property. If the carrying amount exceeds the aggregate future cash flows, the
Company would recognize an impairment loss to the extent the carrying amount
exceeds the fair value of the property. Based upon such periodic assessments,
no impairment has been determined and no rental properties carrying amounts
have been adjusted.
Maintenance and repairs are expensed as incurred. Major replacements and
betterments are capitalized and depreciated over their estimated useful lives.
Depreciation is computed on the straight-line method using an estimated life
of 40 years for building and improvements, and the term of the respective
lease for tenant improvements.
RESTRICTED CASH
Restricted cash consists of security deposit funds held on behalf of a
tenant at one of the properties.
F-44
<PAGE>
PW ACQUISITIONS I, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
RENTAL INCOME
Rental income from leases with scheduled rent increases are recognized on a
straight-line basis over the lease term. Amounts currently recognized as income,
and expected to be received in later years, are included in tenant receivables
and deferred rent. Amounts received currently, but recognized as income in
future years, are included in unearned rent.
SALE AGREEMENT
The Company has an agreement with Alexandria Real Estate Equities, Inc.
("ARE") to sell all rights, title and interest in the Company to ARE at a
sales price based on an agreed-upon calculation upon consummation of the
initial public offering of ARE, but in no event later than September 30, 1998.
INCOME TAXES
The financial statements contain no provision for federal income taxes since
the taxable income from the Company is reported on the separate tax returns of
the members based on their allocable membership shares. The members are
responsible for including their share of taxable results of operations in
their respective federal income tax returns.
2. RENTAL PROPERTIES
Rental properties are as follows as of March 31, 1997:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Land....................................................... $ 8,375
Building and improvements.................................. 43,294
-------
51,669
Less accumulated depreciation.............................. (234)
-------
$51,435
=======
</TABLE>
The Company leases space, under noncancelable leases with remaining terms
ranging from 3 to 20 years. Certain tenants are also obligated to reimburse
the Company for specific operating expenses. Minimum lease payments to be
received under the terms of the operating lease agreements, excluding expense
reimbursements, as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1997....................................................... $ 5,997
1998....................................................... 6,264
1999....................................................... 6,281
2000....................................................... 6,343
2001....................................................... 5,820
Thereafter................................................. 77,489
--------
$108,194
========
</TABLE>
F-45
<PAGE>
PW ACQUISITIONS I, LLC
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
MARCH 31, 1997
3. COMMITMENTS AND CONTINGENCIES
CONCENTRATION OF CREDIT RISK
The Company maintains its cash at insured and uninsured financial
institutions. The combined insured account balances at each institution
periodically exceed FDIC insurance coverage, and, as a result, there is a
concentration of credit risk related to amounts on deposit in excess of FDIC
insurance coverage. Management believes that the risk is not significant.
The Company is dependent on rental payments from a limited number of tenants
and the inability of any single tenant to make its lease payments could
adversely affect the Company and its ability to make distributions to members.
The Company's three properties are all 100% leased to three unrelated tenants.
The Company does not generally require collateral or other security from its
tenants, other than security deposits.
Pursuant to the terms of a management agreement, the Company's properties
are managed by ARE. For the period ended March 31, 1997, $65,000 in management
fees were paid to ARE by the Company.
F-46
<PAGE>
SCHEDULE III
PW ACQUISITIONS I, LLC
RENTAL PROPERTIES AND ACCUMULATED DEPRECIATION
MARCH 31, 1997
(IN THOUSANDS, EXCEPT SQUARE FOOT DATA)
<TABLE>
<CAPTION>
INITIAL COSTS TOTAL COSTS
-------------------- ----------------------------
SQUARE BUILDINGS AND BUILDINGS AND ACCUMULATED
PROPERTY NAME FOOTAGE LAND IMPROVEMENTS LAND IMPROVEMENTS TOTAL DEPRECIATION ENCUMBRANCES YEAR BUILT
- ------------- ------- ------ ------------- ------ ------------- ------- ------------ ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
14225 Newbrook Drive.... 248,186 $4,800 $27,638 $4,800 $27,638 $32,438 $151 -- 1992
1330 Piccard Drive...... 131,511 2,800 11,533 2,800 11,533 14,333 63 -- 1978
1550 East Gude Drive.... 44,500 775 4,123 775 4,123 4,898 20 -- 1981
------- ------ ------- ------ ------- ------- ---- ----
424,197 $8,375 $43,294 $8,375 $43,294 $51,669 $234 $--
======= ====== ======= ====== ======= ======= ==== ====
</TABLE>
A summary of activity of rental properties and
accumulated depreciation is as follows:
<TABLE>
<CAPTION>
RENTAL PROPERTIES
MARCH 31, 1997
-----------------
<S> <C>
Balance at beginning of period........................... $ --
Acquisition of land, building and improvements........... 51,669
-------
Balance at end of period................................. $51,669
=======
<CAPTION>
ACCUMULATED
DEPRECIATION
-----------------
<S> <C>
Balance at beginning of period........................... $ --
Depreciation expense..................................... 234
-------
Balance at end of period................................. $ 234
=======
</TABLE>
F-47
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDER-
WRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMA-
TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLIC-
ITATION IS UNLAWFUL.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 16
The Company.............................................................. 29
Target Markets........................................................... 35
Distributions............................................................ 38
Use of Proceeds.......................................................... 41
Capitalization........................................................... 42
Dilution................................................................. 43
Selected Financial Data.................................................. 44
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 46
The Properties........................................................... 53
Policies with Respect to Certain Activities.............................. 68
Formation and Structure.................................................. 70
Management............................................................... 74
Certain Transactions..................................................... 82
Share Ownership.......................................................... 84
Description of Capital Stock............................................. 86
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws.................................................................. 89
Shares Eligible for Future Sale.......................................... 91
Federal Income Tax Considerations........................................ 93
Underwriting............................................................. 102
Legal Matters............................................................ 104
Experts.................................................................. 104
Additional Information................................................... 105
Glossary................................................................. 106
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECU-
RITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DE-
LIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,750,000 SHARES
[LOGO OF ALEXANDRIA REAL ESTATE EQUITIES, INC.]
ALEXANDRIA REAL
ESTATE EQUITIES, INC.
COMMON STOCK
---------------
PROSPECTUS
---------------
PAINEWEBBER INCORPORATED
LEHMAN BROTHERS
SMITH BARNEY INC.
EVEREN SECURITIES, INC.
---------------
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
COVER
Inside front cover: Title Caption - ALEXANDRIA.
Map of the United States highlighting in green the states in which the
Properties are located, including California, Washington, Maryland, Washington,
D.C. and Virginia, with the major cities in or near which the Properties are
located, including San Diego, San Francisco, Seattle and Washington, D.C.,
marked with a star. Enlargements of each area with a red dot depicting the
location of each Property are included across the center of the map. A list of
Properties by city appears under the map.
GATEFOLD
Title Caption: ALEXANDRIA REAL ESTATE EQUITIES, INC.
Photograph depicting 3565 General Atomics Court, San Diego, California;
photograph depicting the Atrium at 11099 North Torrey Pines Road, San Diego,
California; photograph depicting improved laboratory space at 3535 General
Atomics Court, San Diego, California; photograph depicting 1401 Harbor Bay
Parkway, Alameda, California; photograph depicting 14225 Newbrook Drive,
Chantilly, Virginia; photograph depicting 25,35 and 45 West Watkins Mill Road,
Gaithersburg, Maryland; photograph depicting 10933 North Torrey Pines Road, San
Diego, California. Text at bottom of pictures reads: "The Company believes that
the pictorial representation herein, which includes 12 of the Company's 15
Properties, is representative of the Company's Properties and tenants. See "The
Properties" for square footage, Annualized Base Rent and Annualized Net
Effective Rent with respect to the Properties and tenants pictured."
Inside Back Cover: Title Caption: ALEXANDRIA.
Photograph depicting 401 Professional Drive, Gaithersburg, Maryland; photograph
depicting 1311 Harbor Bay Parkway, Alameda, California; photograph depicting
1330 Piccard Drive, Rockville, Maryland; photograph depicting 3535 General
Atomics Court, San Diego, California; photograph depicting improved laboratory
space of 1431 Harbor Bay Parkway, Alameda, California; photograph depicting 1102
and 1124 Columbia Street, Seattle, Washington.
<PAGE>
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses expected to be incurred by the
Registrant in connection with the sale and distribution of the securities
being registered hereby, other than underwriting discounts and commissions.
All amounts are estimated except the Securities and Exchange Commission
registration fee and the NASD filing fee.
<TABLE>
<S> <C>
Registration Fee--Securities and Exchange Commission................... $52,364
NASD Fee............................................................... $17,985
New York Stock Exchange Listing Fee.................................... $ *
Transfer Agent and Registrar's Fees.................................... $ *
Printing and Engraving Expenses........................................ $ *
Legal Fees and Expenses................................................ $ *
Accounting Fees and Expenses........................................... $ *
Miscellaneous Expenses................................................. $ *
-------
Total.............................................................. $ *
=======
</TABLE>
- --------
* To be filled in by Amendment
ITEM 32. SALES TO SPECIAL PARTIES.
See Item 33.
ITEM 33. RECENT SALES OF UNREGISTERED SECURITIES.
On November 3, 1994, Alexandria issued 1,000 shares of Common Stock to
Holdings, an accredited investor, in exchange for the contribution by Holdings
of substantially all of its assets and liabilities to Alexandria. The issuance
of such shares was effected in reliance upon an exemption from registration
under Section 4(2) of the Securities Act as a transaction by an issuer not
involving a public offering.
On December 31, 1994, Alexandria issued four shares of Series T Preferred
Stock to each of Messrs. Sudarsky, Marcus and Gold, accredited investors, for
an aggregate purchase price of $1,200. The issuance of such shares was
effected in reliance upon an exemption from registration under Section 4(2) of
the Securities Act as a transaction by an issuer not involving a public
offering. Such shares will be redeemed in connection with the Offering.
On January 29, 1996, Alexandria issued 220 shares of Series U Preferred
Stock to 126 holders for an aggregate purchase price of $110,000, in
connection with certain REIT requirements of the Code. The purchasers of the
shares were accredited investors. The issuance of such shares was effected in
reliance upon an exemption from registration under Section 4(2) of the
Securities Act as a transaction by an issuer not involving a public offering.
Prior to consummation of the Offering, shares of Common Stock will be issued
in exchange for the shares of Series U Preferred Stock in reliance upon an
exemption from registration under Section 3(a)(9) of the Securities Act.
On September 9, 1996, Alexandria issued 16,000 shares of Series V Preferred
Stock to AEW, an accredited investor. Subsequently, on October 16, 1996, and
on December 10, 1996, Alexandria issued an additional 6,000 and 5,500 shares,
respectively, of Series V Preferred Stock to AEW, for a total of 27,500 shares
for an aggregate purchase price of $27,500,000. The issuance of such shares
was effected in reliance upon an exemption from registration under Section
4(2) of the Securities Act as a transaction by an issuer not involving a
public offering. In connection with the Offering, shares of Common Stock will
be issued in exchange for the shares of Series V Preferred Stock in reliance
upon an exemption from registration under Section 3(a)(9) of the Securities
Act.
II-1
<PAGE>
The Board of Directors has approved the issuance of an aggregate of 152,615
shares of Common Stock in connection with the Offering to officers, directors
and certain employees of the Company. The issuance of such shares upon
consummation of the Offering and the Formation Transactions will be effected
in reliance upon an exemption from registration under Section 4(2) of the
Securities Act as a transaction by an issuer not involving a public offering.
In connection with the Offering, officers, directors and certain employees
of the Company will be granted options to purchase in the aggregate
approximately 57,000 shares of Common Stock under the 1996 Plan in
substitution for previously granted Holdings Stock Options. The issuance of
such options will be effected in reliance upon an exemption from registration
under Section 4(2) of the Securities Act as a transaction by an issuer not
involving a public offering.
In connection with the Offering, an aggregate of approximately 57,000 shares
of Common Stock will be issued to officers and directors of the Company upon
the exercise of options held by such officers and directors at an exercise
price of approximately $0.54 per share. The issuance of such shares upon
consummation of the Offering and the Formation Transactions will be effected
in reliance upon an exemption from registration under Section 4(2) of the
Securities Act as a transaction by an issuer not involving a public offering.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (i) actual receipt of an improper benefit or profit in money,
property or services or (ii) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter of the
Company contains such a provision which eliminates such liability to the
maximum extent permitted by Maryland law.
The Charter of the Company authorizes it, to the maximum extent permitted by
Maryland law, to obligate itself to indemnify and to pay or reimburse
reasonable expenses in advance of final disposition of a proceeding to (i) any
present or former director or officer or (ii) any individual who, while a
director or officer of the Company and at the request of the Company, serves
or has served another corporation, partnership, joint venture, trust, employee
benefit plan or any other enterprise as a director, officer, partner or
trustee from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his or her serving
as a present or former director or office of the Company.
The Bylaws obligate the Company, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in advance of
final disposition of a proceeding to (i) any present or former director or
officer who is made a party to the proceeding by reason of his or her service
in that capacity or (ii) any individual who, while a director or officer of
the Company and at the request of the Company, serves or has served another
corporation, partnership, joint venture, trust, employee benefit plan or any
other enterprise as a director, officer, partner or trustee and who is made a
party to the proceeding by reason of his or her service in that capacity. The
Charter and Bylaws also permit the Company to indemnify and advance expenses
to any person who served a predecessor of the Company in any of the capacities
described above and to any employee or agent of the Company or a predecessor
of the Company.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Company's Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he or she is made a party by reason of his other service
in that capacity. The MGCL permits a corporation to indemnify its present and
former directors and officers, among others, against judgments, penalties,
fines, settlements and reasonable expenses actually incurred by them in
connection with any proceeding to which they may be made a party by reason of
their service in those or other capacities unless it is established that (i)
the act or omission of the director or officer was material to the matter
giving rise to the proceeding and (a) was committed in bad faith or (b) was
the result of active and deliberate dishonesty, (ii) the director or officer
actually received an improper personal benefit in money, property or services
or (iii) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission
II-2
<PAGE>
was unlawful. However, under the MGCL, a Maryland corporation may not indemnify
for an adverse judgment in a suit by or in the right of the corporation. In
addition, the MGCL requires the Company, as a condition to advancing expenses,
to obtain a written affirmation by the director or officer of his good faith
belief that he has met the standard of conduct necessary for indemnification by
the Company as authorized by the Bylaws and a written statement by or on his
behalf to repay the amount paid or reimbursed by the Company if it shall
ultimately be determined that the standard of conduct was not met.
Each of the employment agreements with Messrs. Sudarsky, Marcus, Gold,
Nelson, Kreitzer and Stone requires that the Company indemnify such officers to
the maximum extent permitted by Maryland law, and to pay such persons expenses
in defending any civil or criminal proceeding in advance of final disposition
of such proceeding.
ITEM 35. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements. See page F-1 of the Prospectus for a list of the
financial statements included as part of the Prospectus.
(b) Schedules Included in Part II: None
All schedules have been omitted because they are either not applicable or the
information required has been disclosed in the financial statements and related
notes included in this Prospectus.
(c) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
1.1* Form of Underwriting Agreement between the Registrant and the
Representatives
3.1+ Articles of Amendment and Restatement of the Registrant
3.2 Form of Articles of Amendment and Restatement of the Registrant
3.3+ Amended and Restated Bylaws of the Registrant
3.4 Form of Amended and Restated Bylaws of the Registrant
4.1* Specimen Certificate representing shares of Common Stock
5.1* Opinion of Ballard Spahr Andrews & Ingersoll regarding the validity of
the Common Stock being registered
8.1 Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding
certain federal income tax matters
10.1+ Health Science Properties, Inc. Amended and Restated 1996 Stock Option
Plan
10.2 Form of Non-Employee Director Substitute Stock Option Agreement for
use in connection with options issued pursuant to the 1996 Plan
10.3 Form of Nonqualified Substitute Stock Option Agreement for use in
connection with options issued pursuant to the 1996 Plan
10.4 Employment Agreement between the Registrant and Peter Nelson
10.5+ Form of Director Indemnification Agreement
10.6+ Employment Agreement between the Registrant and Jerry M. Sudarsky
10.7+ Amendment to Employment Agreement between the Registrant and Jerry M.
Sudarsky
10.8+ Employment Agreement between the Registrant and Joel S. Marcus
10.9+ Amendment to Employment Agreement between the Registrant and Joel S.
Marcus
10.10+ Employment Agreement between the Registrant and Alan Gold
10.11+ Amendment to Employment Agreement between the Registrant and Alan Gold
10.12+ Employment Agreement between the Registrant and Gary Kreitzer
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
10.13+ Amendment to Employment Agreement between the Registrant and Gary
Kreitzer
10.14+ Employment Agreement between the Registrant and Steven Stone
10.15+ Amendment to Employment Agreement between the Registrant and Steven
Stone
10.16+ Standard Lease Form to be executed by tenant and the Registrant as
Landlord
10.17+ Second Amended and Restated Loan Agreement by and between PaineWebber
Incorporated and HSP-QRS Corp., dated September 9, 1996
10.18+ First Amendment to Second Amended and Restated Loan Agreement by and
among PaineWebber Incorporated, PaineWebber Real Estate Securities
Inc. and HSP-QRS Corp., dated January 13, 1997
10.19+ Amended and Restated Promissory Note executed by Registrant in favor
of PaineWebber Incorporated, dated September 9, 1996
10.20+ Unsecured Line of Credit Loan Agreement by and between Bank of America
NT&SA and the Registrant, dated January 24, 1997
10.21+ Promissory Note executed by Registrant in favor of Bank of America
National Trust and Savings Association, dated January 24, 1997
10.22+ Loan Agreement by and between the Registrant and Bank Audi
(California), dated November 23, 1994
10.23+ Promissory Note executed by Registrant in favor of Bank Audi
(California), dated November 23, 1994
10.24+ Form of Management Agreement
10.25+ Agreement for Sale and Purchase of Membership Interest by and among
PaineWebber Real Estate Holdings, Inc., PW Realty Partners LLC,
Registrant and HSP-QRS, dated January 13, 1997
10.26+ Stockholders Agreement by and among the Registrant, Health Science
Properties Holding Corporation and AEW Partners II, L.P., dated
September 9, 1996
10.27+ Series V Convertible Preferred Stock Purchase Agreement, by and among
Health Science Properties Holding Corporation, Registrant and AEW
Partners II, L.P., dated September 9, 1996
10.28 Form of 1997 Stock Award and Incentive Plan of the Registrant
10.29 Form of Non-Employee Director Stock Option Agreement for use in
connection with options issued pursuant to the 1997 Stock Option Plan
10.30 Form of Incentive Stock Option Agreement for use in connection with
Options issued pursuant to the 1997 Stock Option Plan
10.31 Form of Substitute Incentive Stock Option Agreement
10.32 Form of Nonqualified Stock Option Agreement
10.33* Form of Amendment to Agreement for Sale and Purchase of Membership
Interest by and among PaineWebber Real Estate Holdings, Inc., PW
Realty Partners LLC, Registrant and HSP-QRS, dated January 13, 1997
10.34* Amended and Restated Executive Employment Agreement by and between the
Registrant and Joel S. Marcus
10.35* Amended and Restated Executive Employment Agreement by and between the
Registrant and Alan D. Gold
10.36 Form of Amended and Restated Executive Employment Agreement by and
between the Registrant and Gary Kreitzer
10.37 Form of Amended and Restated Executive Employment Agreement by and
between the Registrant and Steven Stone
10.38* Second Amendment to the Executive Employment Agreement and General and
Special Release by and between the Registrant and Jerry Sudarsky
10.39* Form of Registration Rights Agreement to be entered into by and
between the Registrant and Health Science Properties Holding
Corporation
21.1+ List of Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Rosen Consulting Group
24.1+ Powers of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by Amendment
+ Previously filed
II-4
<PAGE>
ITEM 37. UNDERTAKINGS.
The undersigned Company hereby undertakes to provide to the Underwriters at
the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described under Item 33 above, or otherwise, the
Company has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in
the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned Company hereby undertakes that:
(1) For the purposes of determining any liability under the Securities
Act, the information omitted from the form of Prospectus filed as part of
the Registration Statement in reliance upon Rule 430A and contained in the
form of Prospectus filed by the Company pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of the
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY
THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF LOS ANGELES, STATE
OF CALIFORNIA ON THE 5TH DAY OF MAY, 1997.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
/s/ Joel S. Marcus
By: __________________________________
JOEL S. MARCUS
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act, this Amendment to
Registration Statement has been signed below by the following persons in the
capacities on May 5, 1997.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
* Chairman of the Board
____________________________________ of Directors
JERRY M. SUDARSKY
/s/ Joel S. Marcus Chief Executive Officer
____________________________________ (Principal Executive
JOEL S. MARCUS Officer)
* President and Director
____________________________________
ALAN D. GOLD
/s/ Peter J. Nelson Chief Financial Officer,
____________________________________ Treasurer and Secretary
PETER J. NELSON (Principal Financial
Officer)
* Director
____________________________________
JOSEPH ELMALEH
* Director
____________________________________
VIREN MEHTA
Director
____________________________________
DAVID M. PETRONE
* Director
____________________________________
ANTHONY M. SOLOMON
By: /s/ Joel S. Marcus Attorney-in-fact for
__________________________________ the persons marked
JOEL S. MARCUS above with an *
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement between the Registrant
and the Representatives
3.1+ Articles of Amendment and Restatement of the Registrant
3.2 Form of Articles of Amendment and Restatement of the
Registrant
3.3+ Amended and Restated Bylaws of the Registrant
3.4 Form of Amended and Restated Bylaws of the Registrant
4.1* Specimen Certificate representing shares of Common
Stock
5.1* Opinion of Ballard Spahr Andrews & Ingersoll regarding
the validity of the Common Stock being registered
8.1 Form of Opinion of Skadden, Arps, Slate, Meagher & Flom
LLP regarding certain federal income tax matters
10.1+ Health Science Properties, Inc. Amended and Restated
1996 Stock Option Plan
10.2 Form of Non-Employee Director Substitute Stock Option
Agreement for use in connection with options issued
pursuant to the 1996 Plan
10.3 Form of Nonqualified Substitute Stock Option Agreement
for use in connection with options issued pursuant to
the 1996 Plan
10.4 Employment Agreement between the Registrant and Peter
Nelson
10.5+ Form of Director Indemnification Agreement
10.6+ Employment Agreement between the Registrant and Jerry
M. Sudarsky
10.7+ Amendment to Employment Agreement between the
Registrant and Jerry M. Sudarsky
10.8+ Employment Agreement between the Registrant and Joel S.
Marcus
10.9+ Amendment to Employment Agreement between the
Registrant and Joel S. Marcus
10.10+ Employment Agreement between the Registrant and Alan
Gold
10.11+ Amendment to Employment Agreement between the
Registrant and Alan Gold
10.12+ Employment Agreement between the Registrant and Gary
Kreitzer
10.13+ Amendment to Employment Agreement between the
Registrant and Gary Kreitzer
10.14+ Employment Agreement between the Registrant and Steven
Stone
10.15+ Amendment to Employment Agreement between the
Registrant and Steven Stone
10.16+ Standard Lease Form to be executed by tenant and the
Registrant as Landlord
10.17+ Second Amended and Restated Loan Agreement by and
between PaineWebber Incorporated and HSP-QRS Corp.,
dated September 9, 1996
10.18+ First Amendment to Second Amended and Restated Loan
Agreement by and among PaineWebber Incorporated,
PaineWebber Real Estate Securities Inc. and HSP-QRS
Corp., dated January 13, 1997
10.19+ Amended and Restated Promissory Note executed by
Registrant in favor of PaineWebber Incorporated, dated
September 9, 1996
10.20+ Unsecured Line of Credit Loan Agreement by and between
Bank of America NT&SA and the Registrant, dated
January 24, 1997
10.21+ Promissory Note executed by Registrant in favor of Bank
of America National Trust and Savings Association,
dated January 24, 1997
10.22+ Loan Agreement by and between the Registrant and Bank
Audi (California), dated November 23, 1994
10.23+ Promissory Note executed by Registrant in favor of Bank
Audi (California), dated November 23, 1994
10.24+ Form of Management Agreement
10.25+ Agreement for Sale and Purchase of Membership Interest
by and among PaineWebber Real Estate Holdings, Inc.,
PW Realty Partners LLC, Registrant and HSP-QRS, dated
January 13, 1997
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
<C> <S> <C>
10.26+ Stockholders Agreement by and among the Registrant,
Health Science Properties Holding Corporation and AEW
Partners II, L.P., dated September 9, 1996
10.27+ Series V Convertible Preferred Stock Purchase
Agreement, by and among Health Science Properties
Holding Corporation, Registrant and AEW Partners II,
L.P., dated September 9, 1996
10.28 Form of 1997 Stock Award and Incentive Plan of the
Registrant
10.29 Form of Non-Employee Director Stock Option Agreement
for use in connection with options issued pursuant to
the 1997 Stock Option Plan
10.30 Form of Incentive Stock Option Agreement for use in
connection with Options issued pursuant to the 1997
Stock Option Plan
10.31 Form of Substitute Incentive Stock Option Agreement
10.32 Form of Nonqualified Stock Option Agreement
10.33* Form of Amendment to Agreement for Sale and Purchase of
Membership Interest by and among PaineWebber Real
Estate Holdings, Inc., PW Realty Partners LLC,
Registrant and HSP-QRS, dated January 13, 1997
10.34* Amended and Restated Executive Employment Agreement by
and between the Registrant and Joel S. Marcus
10.35* Amended and Restated Executive Employment Agreement by
and between the Registrant and Alan D. Gold
10.36 Form of Amended and Restated Executive Employment
Agreement by and between the Registrant and Gary
Kreitzer
10.37 Form of Amended and Restated Executive Employment
Agreement by and between the Registrant and Steven
Stone
10.38* Second Amendment to the Executive Employment Agreement
and General and Special Release by and between the
Registrant and Jerry Sudarsky
10.39* Form of Registration Rights Agreement to be entered
into by and between the Registrant and Health Science
Properties Holding Corporation
21.1+ List of Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP
23.2 Consent of Rosen Consulting Group
24.1+ Powers of Attorney (included on signature page)
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by Amendment
+ Previously filed
<PAGE>
EXHIBIT 3.2
FORM OF
ALEXANDRIA REAL ESTATE EQUITIES, INC.
-------------------------------------
ARTICLES OF AMENDMENT AND RESTATEMENT
FIRST: Alexandria Real Estate Equities, Inc., a Maryland corporation
-----
(the "Corporation"), desires to amend and restate its charter as currently in
effect and as hereinafter amended.
SECOND: The following provisions are all the provisions of the
------
charter currently in effect and as hereinafter amended:
ARTICLE I
NAME
The name of the corporation (the "Corporation") is:
Alexandria Real Estate Equities, Inc.
ARTICLE II
PURPOSES
The purposes for which the Corporation is formed are to engage in any
lawful act or activity (including, without limitation or obligation, engaging in
business as a real estate investment trust under the Internal Revenue Code of
1986, as amended, or any successor statute (the "Code")) for which corporations
may be organized under the general laws of the State of Maryland as now or
hereafter in force. For purposes of these Articles, "REIT" means a real estate
investment trust under Sections 856 through 860 of the Code.
ARTICLE III
PRINCIPAL OFFICE IN STATE
The address of the principal office of the Corporation in the State of
Maryland is c/o The Prentice-Hall Corporation System, Maryland, 11 East Chase
Street, Suite 7C, Baltimore, Maryland 21202.
-1-
<PAGE>
ARTICLE IV
RESIDENT AGENT
The name of the resident agent of the Corporation in the State of
Maryland is c/o The Prentice-Hall Corporation System, Maryland, 11 East Chase
Street, Suite 7C, Baltimore, Maryland 21202. The resident agent is a Maryland
corporation.
ARTICLE V
PROVISIONS FOR DEFINING, LIMITING
AND REGULATING CERTAIN POWERS OF THE
CORPORATION AND OF THE STOCKHOLDERS AND DIRECTORS
Section 5.1. Number and Classification of Directors. The business and
--------------------------------------
affairs of the Corporation shall be managed under the direction of the Board of
Directors. The number of directors of the Corporation shall be seven, which
number may be increased or decreased pursuant to the Bylaws, but shall never be
less than the minimum number required by the Maryland General Corporation Law
(the "MGCL") nor more than 15. The names of the directors who shall currently
serve until their successors are duly elected and qualify are:
Jerry M. Sudarsky
Joel S. Marcus
Alan D. Gold
Joe Elmaleh
Viren Mehta
David Petrone
Anthony Solomon
The directors may increase the number of directors and may fill any vacancy,
whether resulting from an increase in the number of directors or otherwise, on
the Board of Directors in the manner provided in the Bylaws. Each director
shall be elected to hold office for a term ending on the date of the next annual
meeting of stockholders and until a successor is duly elected and qualifies.
Section 5.2. Extraordinary Actions. Notwithstanding any provision of
---------------------
law permitting or requiring any action to be taken or authorized by the
affirmative vote of the holders of a greater number of votes, any such action
shall be effective and valid if taken or authorized by the affirmative vote of
holders of shares entitled to cast a majority of all the votes entitled to be
cast on the matter.
Section 5.3. Authorization by Board of Stock Issuance. The Board of
----------------------------------------
Directors may authorize the issuance from time to time of shares of stock of the
Corporation of any class or series, whether now or hereafter authorized, or
securities or rights convertible into shares of its stock of any class or
series, whether now or hereafter authorized, for such consideration as the Board
of Directors may deem advisable (or without consideration in the case of a stock
split or stock dividend), subject to such restrictions or limitations, if any,
as may be set forth in the charter or the Bylaws.
-2-
<PAGE>
Section 5.4. Preemptive Rights. Except as may be provided by the
-----------------
Board of Directors in setting the terms of classified or reclassified shares of
stock pursuant to Section 6.4, no holder of shares of stock of the Corporation
shall, as such holder, have any preemptive right to purchase or subscribe for
any additional shares of stock of the Corporation or any other security of the
Corporation which it may issue or sell.
Section 5.5. Indemnification. The Corporation shall have the power,
---------------
to the maximum extent permitted by Maryland law in effect from time to time, to
obligate itself to indemnify, and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to, (a) any individual who is a
present or former director or officer of the Corporation or (b) any individual
who, while a director or officer of the Corporation and at the request of the
Corporation, serves or has served as a director, officer, partner or trustee of
another corporation, partnership, joint venture, trust, employee benefit plan or
any other enterprise from and against any claim or liability to which such
person may become subject or which such person may incur by reason of his status
as a present or former director or officer of the Corporation. The Corporation
shall have the power, with the approval of the Board of Directors, to provide
such indemnification and advancement of expenses to a person who served a
predecessor of the Corporation in any of the capacities described in (a) or (b)
above and to any employee or agent of the Corporation or a predecessor of the
Corporation.
Section 5.6. Determinations by Board. The determination as to any of
-----------------------
the following matters, made in good faith by or pursuant to the direction of the
Board of Directors consistent with the charter and the MGCL and in the absence
of actual receipt of an improper benefit in money, property or services or
active and deliberate dishonesty established by a court, shall be final and
conclusive and shall be binding upon the Corporation and every holder of shares
of its stock: the amount of the net income of the Corporation for any period
and the amount of assets at any time legally available for the payment of
dividends, redemption of its stock or the payment of other distributions on its
stock; the amount of paid-in surplus, net assets, other surplus, annual or other
net profit, net assets in excess of capital, undivided profits or excess of
profits over losses on sales of assets; the amount, purpose, time of creation,
increase or decrease, alteration or cancellation of any reserves or charges and
the propriety thereof (whether or not any obligation or liability for which such
reserves or charges shall have been created shall have been paid or
discharged); the fair value, or any sale, bid or asked price to be applied in
determining the fair value, of any asset owned or held by the Corporation; and
any matters relating to the acquisition, holding and disposition of any assets
by the Corporation.
Section 5.7. REIT Qualification. If the Corporation elects to qualify
------------------
for federal income tax treatment as a REIT, the Board of Directors shall use its
reasonable best efforts to take such actions as are necessary or appropriate to
preserve the status of the Corporation as a REIT; however, if the Board of
Directors determines that it is no longer in the best interests of the
Corporation to continue to be qualified as a REIT, the Board of Directors may
revoke or otherwise terminate the Corporation's REIT election pursuant to
Section 856(g) of the Code. The Board of Directors also may determine that
compliance with any restriction or limitation on stock ownership and transfers
set forth in Article VII is no longer required for REIT qualification.
-3-
<PAGE>
Section 5.8. Removal of Directors. Subject to the rights of holders
--------------------
of one or more classes or series of Preferred Stock to elect one or more
directors, any director, or the entire Board of Directors, may be removed from
office at any time, by the affirmative vote of the holders of at least a
majority of the votes entitled to be cast in the election of directors.
Section 5.9. Advisor Agreements. Subject to such approval of
------------------
stockholders and other conditions, if any, as may be required by any applicable
statute, rule or regulation, the Board of Directors may authorize the execution
and performance by the Corporation of one or more agreements with any person,
corporation, association, company, trust, partnership (limited or general) or
other organization whereby, subject to the supervision and control of the Board
of Directors, any such other person, corporation, association, company, trust,
partnership (limited or general) or other organization shall render or make
available to the Corporation managerial, investment, advisory and/or related
services, office space and other services and facilities (including, if deemed
advisable by the Board of Directors, the management or supervision of the
investments of the Corporation) upon such terms and conditions as may be
provided in such agreement or agreements (including, if deemed fair and
equitable by the Board of Directors, the compensation payable thereunder by the
Corporation).
Section 5.10. Authority of Directors.
----------------------
It is acknowledged that AEW Partners II, L.P., a Delaware limited
partnership ("AEW"), engages in business competitive with the Corporation. It is
further acknowledged that any director of the Corporation which is an affiliate
of AEW shall have no obligation to present to the Corporation opportunities that
may be pursued by AEW, unless such opportunities were presented to such director
in his or her capacity as a director of the Corporation.
ARTICLE VI
STOCK
Section 6.1. Authorized Shares. The Corporation has authority to
-----------------
issue 100,000,000 shares of Common Stock, $.01 par value per share ("Common
Stock"), 100,000,000 shares of Preferred Stock, $.01 par value per share
("Preferred Stock") (of which 125 shares are designated as Series T Preferred
Stock, $.01 par value per share ("Series T Preferred Stock"), 250 shares are
==============
designated as Series U Preferred Stock, $.01 par value per share ("Series U
===========================================================================
Preferred Stock"), and 50,000 shares are designated as Series V Preferred Stock,
=================
$.01 par value per share ("Series V Preferred Stock")), and 200,000,000 shares
===========
of Excess Stock, $.01 par value per share ("Excess Stock"). The aggregate par
value of all authorized shares of stock having par value is $4,000,000.
Section 6.2. Common Stock. Subject to the provisions of Article VII,
------------
each share of Common Stock shall entitle the holder thereof to one vote. The
Board of Directors may reclassify any unissued shares of Common Stock from time
to time in one or more classes or series of stock.
Section 6.3. Preferred Stock.
---------------
-4-
<PAGE>
Section 6.3(a). General. The Board of Directors may classify any
-------
unissued shares of Preferred Stock and reclassify any previously classified but
unissued shares of Preferred Stock of any series from time to time, in one or
more series of stock.
Section 6.3(b). Series T Preferred Stock
------------------------
1. Fractional Shares; Stated Value. The Series T Preferred Stock is
issuable solely in whole shares that shall entitle the holder thereof to
exercise the voting rights, to participate in the distributions and to have the
benefit of all other rights of holders of the Series T Preferred Stock as set
forth in the charter of the Corporation. The Stated Value of each such share of
Series T Preferred Stock shall be $100.
2. Dividends.
(a) Subject to any preference rights with respect to the payment of
dividends attaching to any other stock of the Corporation ranking prior to the
Series T Preferred Stock, holders of each share of Series T Preferred Stock
shall be entitled to receive out of the assets of the Corporation, at the time
legally available therefor, dividends at an annual rate equal to 8.5% of the
Stated Value thereof, and no more, which shall be fully cumulative, shall accrue
from January 1, 1995, and shall be payable, in cash, semi-annually in arrears on
July 1 and January 1 of each year (as used in this Section 6.3(b), each such
date a "Dividend Payment Date"), commencing July 1, 1995, as set forth below
(except that, if any such date is a Saturday, Sunday or legal holiday, then such
dividend shall be payable on the next day that is not a Saturday, Sunday or
legal holiday), to holders of record as they appear upon the stock transfer
books of the Corporation at the close of business ten business days preceding
the related Dividend Payment Dates, or on such other date fixed by the Board (as
used in this Section 6.3(b), each such date a "Record Date"). Subject to
Section 6.3(b)(2)(d) hereof, dividends on account of arrearages for any past
Dividend Payment Date may be authorized, declared and paid at any time, without
reference to any regular Dividend Payment Date. Holders at the close of
business on a Record Date of shares of Series T Preferred Stock that are called
for redemption on a redemption date during the period between such Record Date
and the corresponding Dividend Payment Date shall not, in their capacity as
such, be entitled to receive the dividend payment on such Dividend Payment Date.
(b) The dividend payable on each share of Series T Preferred Stock
shall be computed on the basis of a 360-day year consisting of twelve 30-day
months. The aggregate dividend paid to a holder of shares of Series T Preferred
Stock shall be based on the aggregate number of shares of Series T Preferred
Stock held by such holder at the close of business on the applicable Record Date
and rounded to the nearest whole cent (with one-half cent rounded upward).
Unless otherwise provided herein, dividends on each share of Series T Preferred
Stock shall accrue from and including January 1, 1995 to and excluding the
earliest to occur of (i) the date of redemption of such share and (ii) the date
of final distribution of assets upon Liquidation (as defined below). All
dividend payments made on shares of Series T Preferred Stock shall first be
credited against the earliest accumulated but unpaid dividends with respect to
such shares.
-5-
<PAGE>
(c) If, on any Dividend Payment Date, the holders of the Series T
Preferred Stock shall not have received the full dividends provided for herein,
then such dividends shall cumulate, whether or not earned, authorized or
declared, with additional dividends thereon for each succeeding full dividend
period during which such dividend shall remain unpaid.
(d) No dividends or other distributions (other than a dividend or
distribution in Common Stock or any other stock of the Corporation ranking
junior to the Series T Preferred Stock as to dividends and upon a liquidation,
dissolution or winding up of the Corporation or other distribution of the
Corporation's assets among stockholders for the purpose of winding up the
Corporation's affairs, whether voluntary or involuntary (any such event, a
"Liquidation")) shall be authorized, declared, made or paid, or set apart for
payment or distribution, upon the Common Stock or upon any other stock of the
Corporation ranking junior to or on a parity with the Series T Preferred Stock
as to dividends, nor may any Common Stock or any other stock of the Corporation
ranking junior to or on a parity with the Series T Preferred Stock as to
dividends or upon Liquidation be redeemed, purchased or otherwise acquired for
any consideration (or any moneys be paid to or made available for a sinking fund
for the redemption of any shares of such stock) by the Corporation (except by
conversion into or in exchange for Common Stock or any other stock of the
Corporation ranking junior to the Series T Preferred Stock as to dividends and
upon Liquidation), unless full accrued dividends on all outstanding shares of
the Series T Preferred Stock have been, or contemporaneously are, authorized,
declared and paid, or authorized, declared and a sum sufficient for the
payment thereof is set apart for the payment thereof, to the date of such
authorization, declaration, payment, distribution, setting apart, making monies
available, redemption, purchase or acquisition. Notwithstanding the foregoing,
(i) nothing herein shall prevent the Corporation from making contributions to,
or purchasing stock in connection with, any employee benefit or dividend
reinvestment plans or (ii) if at any time full accrued or accumulated dividends
have not been authorized, declared and paid on the Series T Preferred Stock and
on any of the Corporation's Preferred Stock ranking on a parity as to dividends
with the Series T Preferred Stock, partial dividends may be authorized, declared
and paid on the Series T Preferred Stock and such other Preferred Stock so long
as such dividends are authorized, declared and paid pro rata so that the amounts
of dividends authorized, declared and paid per share on the Series T Preferred
Stock and such other Preferred Stock will in all cases bear to each other the
same ratio that accrued or accumulated and unpaid dividends per share on the
Series T Preferred Stock and such other Preferred Stock bear to each other.
(e) Any reference to "distribution" contained in this Section
6.3(b)(2) shall not include any distribution made in connection with any
Liquidation.
3. Liquidation Preference. In the event of any Liquidation, and
subject to the rights, privileges, conditions and restrictions attaching to any
other stock of the Corporation ranking prior to the Series T Preferred Stock
upon Liquidation, each holder of a share of Series T Preferred Stock shall be
entitled to receive, and be paid out of the assets of the Corporation available
for distribution to its stockholders, an amount in cash per share equal to 100%
of the Stated Value thereof, plus all accrued and unpaid dividends on such share
to the date of final distribution to the holders of shares of Series T Preferred
Stock, whether or not authorized and declared, and no more, before any payment
shall be made or any assets distributed to the holders of
-6-
<PAGE>
Common Stock or any other class or series of the Corporation's stock ranking
junior to the Series T Preferred Stock upon such Liquidation. If, upon any
Liquidation the amounts payable with respect to the liquidation preference of
the Series T Preferred Stock and any other shares of the Corporation's stock
ranking on a parity with the Series T Preferred Stock upon such Liquidation are
not paid in full, holders of the Series T Preferred Stock and of such other
shares will share pro rata in the amounts payable and other property
distributable with respect to such Liquidation so that the per share amounts to
which holders of the Series T Preferred Stock and such other shares are entitled
will in all cases bear to each other the same ratio that the liquidation
preferences of the Series T Preferred Stock and such other stock bear to each
other. After payment in full of the preferences in respect of shares of the
Series T Preferred Stock upon Liquidation, the holders of such shares in their
capacity as such shall not be entitled to any further right or claim to any
remaining assets of the Corporation. For purposes hereof, a consolidation or
merger of the Corporation with or into another corporation, or a merger of any
other corporation with or into the Corporation, or the sale of all or
substantially all of the Corporation's property or business (other than in
connection with a winding up of its business) will not be considered a
Liquidation.
4. Redemption at Option of the Corporation.
(a) Shares of the Series T Preferred Stock may be redeemed by the
Corporation, at its option, on any date set by the Board, in whole or from time
to time in part, out of assets legally available therefor, at a redemption price
per share of 100% of the Stated Value thereof plus, in each case, an amount
equal to all accrued and unpaid dividends thereon, whether or not authorized and
declared, to but excluding the date fixed for redemption (as used in this
Section 6.3(b), the "Redemption Price"). The aggregate Redemption Price paid to
a holder of shares of the Series T Preferred Stock shall be the product of the
aggregate number of shares of Series T Preferred Stock redeemed from such holder
and the per share Redemption Price, with such product being rounded to the
nearest whole cent (with one-half cent rounded upward), and shall be payable in
cash. In case of the redemption of less than all of the then outstanding shares
of Series T Preferred Stock, the Corporation shall designate the shares to be
redeemed pro rata so that the number of shares redeemed from each holder will in
all cases bear to each other the same ratio that the aggregate number of shares
held by each holder bear to each other. The Corporation shall not redeem less
than all of the shares of Series T Preferred Stock at any time outstanding
unless all dividends accumulated and in arrears upon all shares of Series T
Preferred Stock shall have been paid for all dividend periods ending on or prior
to the redemption date.
(b) Not more than sixty nor less than thirty days prior to the
redemption date fixed by the Board, notice by first class mail, postage prepaid,
shall be given to the holders of record of shares of the Series T Preferred
Stock to be redeemed, addressed to such holders at their last addresses as shown
upon the stock transfer books of the Corporation. Each such notice of redemption
shall specify (i) the date fixed for redemption, (ii) the number of shares of
Series T Preferred Stock to be redeemed, and if less than all shares held by
such holder are to be redeemed, the number of such shares to be redeemed from
such holder, (iii) the Redemption Price, (iv) the place or places of payment,
(v) that payment will be made upon presentation and surrender of the
certificates representing shares of the Series T Preferred Stock at the place
designated in such
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notice and (vi) that on and after the date fixed for redemption dividends will
cease to accrue on such shares (unless the Corporation defaults in the payment
of the Redemption Price).
(c) Any notice that is mailed as provided herein shall be conclusively
presumed to have been duly given, whether or not the holder of shares of the
Series T Preferred Stock receives such notice; and failure to give such notice
by mail, or any defect in such notice to the holders of any shares designated
for redemption, shall not affect the validity of the proceedings for the
redemption of any other shares of the Series T Preferred Stock. On or after the
date fixed for redemption as stated in such notice, each holder of shares of the
Series T Preferred Stock called for redemption shall surrender the certificate
representing such shares to the Corporation at the place designated in such
notice and shall thereupon be entitled to receive payment of the Redemption
Price for each such share. If less than all shares of the Series T Preferred
Stock represented by any surrendered certificate are redeemed, a new certificate
shall be issued representing the unredeemed shares of Series T Preferred
Stock, such unredeemed shares shall remain outstanding and the rights of holders
of such shares of Series T Preferred Stock thereafter shall continue to be only
those of a holder of shares of the Series T Preferred Stock. Notice having been
given as aforesaid, if, on the date fixed for redemption, assets necessary for
the redemption shall be legally available therefor and shall have been
irrevocably deposited or set aside, then, notwithstanding that the
certificates representing any shares of the Series T Preferred Stock so called
for redemption shall not have been surrendered, (i) dividends with respect to
the shares so called for redemption shall cease to accrue on the date fixed for
redemption, (ii) such shares shall no longer be deemed outstanding, (iii) the
holders thereof shall cease to be stockholders of the Corporation to the extent
of their interest in such shares and (iv) all rights whatsoever with respect to
the shares so called for redemption (except the right of the holders to receive
the Redemption Price for each such share, without interest or any sum of money
in lieu of interest thereon, upon surrender of their certificates therefor at a
place designated in such notice) shall terminate. If assets legally available
for such purpose are not sufficient for redemption of all of the shares of
Series T Preferred Stock that were to be redeemed, then such assets shall be
applied pro rata to the redemption of all of the shares of Series T Preferred
Stock to be redeemed.
(d) Shares of the Series T Preferred Stock shall not be subject to the
operation of any mandatory redemption, purchase, retirement or sinking fund and
holders of shares of the Series T Preferred Stock shall have no right to require
redemption of the Series T Preferred Stock.
5. Voting Rights.
(a) General. In addition to the voting rights provided in Section
6.3(b)(5)(b) hereof, the holders of each share of Series T Preferred Stock shall
be entitled to one vote upon all matters upon which holders of the Common Stock
have the right to vote, such vote to be counted together with all other shares
of stock having general voting powers and not separately as a class. In all
cases where the holders of shares of Series T Preferred Stock have the right to
vote separately as a class, such holders shall be entitled to one vote for each
such share held by them respectively. Any shares of Series T Preferred Stock
held by the Corporation, or any subsidiary of the Corporation in which the
Corporation owns shares entitled to cast a majority of all votes
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<PAGE>
entitled to be cast, shall not have voting rights, and shall not be counted in
determining the presence of a quorum or in calculating any percentage of shares,
under this Section 6.3(b)(5).
(b) Class Voting Rights. So long as shares of the Series T Preferred
Stock are outstanding, the Corporation shall not, without the affirmative vote
or consent of the holders of at least a majority of all outstanding shares of
Series T Preferred Stock, voting separately as a class, amend any provision of
the charter of the Corporation so as to change the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption of the
Series T Preferred Stock. A class vote on the part of the Series T Preferred
Stock shall not be required (except as otherwise required by resolution of the
Board) in connection with any other matter.
6. Ranking. Any class or series of stock of the Corporation shall be
deemed to rank:
(a) prior to the Series T Preferred Stock, as to dividends or upon
Liquidation, if the holders of such class or series shall be entitled to the
receipt of dividends or of amounts distributable upon Liquidation, as the case
may be, in preference or priority to the holders of Series T Preferred Stock;
(b) on a parity with the Series T Preferred Stock, as to dividends
or upon Liquidation, whether or not the dividend rates, dividend payment dates
or redemption or liquidation preferences per share thereof are different from
those of the Series T Preferred Stock, if the holders of such class or series of
stock and the Series T Preferred Stock shall be entitled to the receipt of
dividends or of amounts distributable upon Liquidation, as the case may be, in
proportion to their respective amounts of accumulated or accrued and unpaid
dividends per share or liquidation preferences, as the case may be, without
preferences or priority one over the other; and
(c) junior to the Series T Preferred Stock, as to dividends or upon
Liquidation, if such stock shall be Common Stock or any other class or series of
stock of the Corporation if the holders of Series T Preferred Stock shall be
entitled to receipt of dividends or of amounts distributable upon Liquidation,
as the case may be, in preference or priority to the holders of shares of such
stock.
7. Outstanding Shares. For purposes hereof, all shares of the Series T
Preferred Stock issued by the Corporation shall be deemed outstanding except (i)
as provided in Section 6.3(b)(4) hereof and (ii) from the date of surrender of a
certificate representing shares of Series T Preferred Stock, all shares of
Series T Preferred Stock represented by such certificate.
8. Status of Acquired Shares. Shares of the Series T Preferred Stock
redeemed or otherwise acquired by the Corporation constitute authorized but
unissued shares of Common Stock, and may thereafter be issued, but not as shares
of Series T Preferred Stock.
Section 6.3(c) Series U Preferred Stock
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<PAGE>
1. Fractional Shares; and Stated Value. The Series U Preferred
Stock is issuable solely in whole shares that shall entitle the holder thereof
to exercise the voting rights, to participate in the distributions and to have
the benefit of all other rights of holders of the Series U Preferred Stock as
set forth in the charter of the Corporation. The Stated Value of each such
share of Series U Preferred Stock shall be $500.
2. Dividends.
(a) Subject to any preference rights with respect to the
payment of dividends attaching to any other stock of the Corporation ranking
prior to the Series U Preferred Stock as to the payment of dividends, holders of
each share of Series U Preferred Stock shall be entitled to receive out of the
assets of the Corporation, at the time legally available therefor, dividends at
an annual rate equal to 8.5% of the Stated Value thereof, and no more, which
shall be fully cumulative, shall accrue from the date shares of the Series U
Preferred Stock are first issued by the Corporation (as used in this Section
6.3(c), the "Issue Date"), and shall be payable, in cash, annually in arrears on
January 1 of each year (as used in this Section 6.3(c), each such date a
"Dividend Payment Date"), commencing January 1, 1997, as set forth below (except
that, if any such date is a Saturday, Sunday or legal holiday, then such
dividend shall be payable on the next day that is not a Saturday, Sunday or
legal holiday), to holders of record as they appear upon the stock transfer
books of the Corporation at the close of business on such record dates, not more
than sixty days nor less than ten days preceding the related Dividend Payment
Dates, as are fixed by the Board (as used in this Section 6.3(c), each such date
a "Record Date"). Subject to subsection 2(d) of this Section 6.3(c), dividends
on account of arrearages for any past Dividend Payment Date may be authorized,
declared and paid at any time, without reference to any regular Dividend Payment
Date. Holders at the close of business on a Record Date of shares of Series U
Preferred Stock that are called for redemption on a redemption date during the
period (as used herein, the "Ex-Dividend Period") between such Record Date and
the corresponding Dividend Payment Date shall not, in their capacity as such, be
entitled to receive the dividend payment on such Dividend Payment Date.
(b) The dividend payable on each share of Series U Preferred Stock
shall be computed on the basis of a 360-day year consisting of twelve 30-day
months. The aggregate dividend paid to a holder of shares of Series U Preferred
Stock shall be based on the aggregate number of shares of Series U Preferred
Stock held by such holder at the close of business on the applicable Record Date
and rounded to the nearest whole cent (with one-half cent rounded upward).
Unless otherwise provided herein, dividends on each share of Series U Preferred
Stock shall accrue from and including the Issue Date to and excluding the
earliest to occur of (i) the date of redemption of such share, (ii) the date of
conversion of such share and (iii) the date of final distribution of assets upon
any Liquidation. All dividend payments made on shares of Series U Preferred
Stock shall first be credited against the earliest accumulated but unpaid
dividends with respect to such shares.
(c) If, on any Dividend Payment Date, the holders of the Series U
Preferred Stock shall not have received the full dividends provided for herein,
then such dividends shall cumulate, whether or not earned, authorized or
declared, with additional dividends thereon for each succeeding full dividend
period during which such dividend shall remain unpaid.
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<PAGE>
(d) No dividends or other distributions (other than a dividend or
distribution in Common Stock or any other stock of the Corporation ranking
junior to the Series U Preferred Stock as to dividends and upon Liquidation)
shall be authorized, declared, made or paid, or set apart for payment or
distribution, upon the Common Stock, or upon any other stock of the Corporation
ranking junior to or on a parity with the Series U Preferred Stock as to
dividends, nor may any Common Stock or any other stock of the Corporation
ranking junior to or on a parity with the Series U Preferred Stock as to
dividends or upon Liquidation be redeemed, purchased or otherwise acquired for
any consideration (or any moneys be paid to or made available for a sinking fund
for the redemption of any shares of such stock) by the Corporation (except by
conversion into or in exchange for Common Stock or any other stock of the
Corporation ranking junior to the Series U Preferred Stock as to dividends and
upon Liquidation), unless full accrued dividends on all outstanding shares of
the Series U Preferred Stock have been, or contemporaneously are, authorized,
declared and paid, or authorized, declared and a sum sufficient for the payment
thereof is set apart for the payment thereof, to the date of such authorization,
declaration, payment, distribution, setting apart, making monies available,
redemption, purchase or acquisition. Notwithstanding the foregoing, (i) nothing
herein shall prevent the Corporation from making contributions to, or purchasing
stock in connection with, any employee benefit or dividend reinvestment plans or
(ii) if at any time full accrued or accumulated dividends have not been
authorized, declared and paid on the Series U Preferred Stock and on any of the
Corporation's Preferred Stock ranking on a parity as to dividends with the
Series U Preferred Stock, partial dividends may be authorized, declared and paid
on the Series U Preferred Stock and such other Preferred Stock so long as such
dividends are authorized, declared and paid pro rata so that the amounts of
dividends authorized, declared and paid per share on the Series U Preferred
Stock and such other Preferred Stock will in all cases bear to each other the
same ratio that accrued or accumulated and unpaid dividends per share on the
Series U Preferred Stock and such other Preferred Stock bear to each other.
(e) Any reference to "distribution" contained in this subsection 2 of
this Section 6.3(c) shall not include any distribution made in connection with
any Liquidation.
3. Liquidation Preference. In the event of any Liquidation, and
subject to the rights, privileges, conditions and restrictions attaching to any
other stock of the Corporation ranking prior to the Series U Preferred Stock
upon Liquidation, each holder of a share of Series U Preferred Stock shall be
entitled to receive, and be paid out of the assets of the Corporation available
for distribution to its stockholders, an amount in cash per share equal to 100%
of the Stated Value thereof, plus all accrued and unpaid dividends on such share
to the date of final distribution to the holders of shares of Series U Preferred
Stock, whether or not authorized and declared, and no more, before any payment
shall be made or any assets distributed to the holders of Common Stock or any
other class or series of the Corporation's stock ranking junior to the Series U
Preferred Stock upon such Liquidation. If, upon any Liquidation the amounts
payable with respect to the liquidation preference of the Series U Preferred
Stock and any other shares of the Corporation's stock ranking on a parity with
the Series U Preferred Stock upon such Liquidation are not paid in full, holders
of the Series U Preferred Stock and of such other shares will share pro rata in
the amounts payable and other property distributable with respect to such
Liquidation so that the per share amounts to which holders of the Series U
Preferred Stock and such other shares are entitled
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<PAGE>
will in all cases bear to each other the same ratio that the liquidation
preferences of the Series U Preferred Stock and such other stock bear to each
other. After payment in full of the preferences in respect of shares of the
Series U Preferred Stock upon Liquidation, the holders of such shares in their
capacity as such shall not be entitled to any further right or claim to any
remaining assets of the Corporation. For purposes of this Section, a
consolidation or merger of the Corporation with or into another corporation, or
a merger of any other corporation with or into the Corporation, or the sale of
all or substantially all of the Corporation's property or business (other than
in connection with a winding up of its business) will not be considered a
Liquidation.
4. Redemption at Option of the Corporation.
(a) Commencing on the fifth anniversary of the Issue Date, shares of
the Series U Preferred Stock may be redeemed by the Corporation, at its option,
on any date set by the Board, in whole or from time to time in part, out of
assets legally available therefor, at a redemption price per share of 135% of
the Stated Value thereof plus, in each case, an amount equal to all accrued and
unpaid dividends thereon, whether or not authorized and declared, to but
excluding the date fixed for redemption (as used in this Section 6.3(c), the
"Redemption Price"). The aggregate Redemption Price paid to a holder of shares
of the Series U Preferred Stock shall be the product of the aggregate number of
shares of Series U Preferred Stock redeemed from such holder and the per share
Redemption Price, with such product being rounded to the nearest whole cent
(with one-half cent rounded upward), and shall be payable in cash. In case of
the redemption of less than all of the then outstanding shares of Series U
Preferred Stock, the Corporation shall designate the shares to be redeemed pro
rata so that the number of shares redeemed from each holder will in all cases
bear to each other the same ratio that the aggregate number of shares held by
each holder bear to each other. The Corporation shall not redeem less than all
of the shares of Series U Preferred Stock at any time outstanding unless all
dividends accumulated and in arrears upon all shares of Series U Preferred Stock
shall have been paid for all dividend periods ending on or prior to the
redemption date.
(b) Not more than sixty nor less than thirty days prior to the
redemption date fixed by the Board, notice by first class mail, postage prepaid,
shall be given to the holders of record of shares of the Series U Preferred
Stock to be redeemed, addressed to such holders at their last addresses as shown
upon the stock transfer books of the Corporation. Each such notice of redemption
shall specify (i) the date fixed for redemption, (ii) the number of shares of
Series U Preferred Stock to be redeemed, and if less than all shares held by
such holder are to be redeemed, the number of such shares to be redeemed from
such holder, (iii) the Redemption Price, (iv) the place or places of payment,
(v) that payment will be made upon presentation and surrender of the
certificates representing shares of the Series U Preferred Stock at the place
designated in such notice and (vi) that on and after the date fixed for
redemption dividends will cease to accrue on such shares (unless the Corporation
defaults in the payment of the Redemption Price).
(c) Any notice that is mailed as provided herein shall be conclusively
presumed to have been duly given, whether or not the holder of shares of the
Series U Preferred Stock receives such notice; and failure to give such notice
by mail, or any defect in such notice to the holders of any shares designated
for redemption, shall not affect the validity of the
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<PAGE>
proceedings for the redemption of any other shares of the Series U Preferred
Stock. On or after the date fixed for redemption as stated in such notice, each
holder of shares of the Series U Preferred Stock called for redemption shall
surrender the certificate representing such shares to the Corporation at the
place designated in such notice and shall thereupon be entitled to receive
payment of the Redemption Price for each such share. If less than all shares of
the Series U Preferred Stock represented by any surrendered certificate are
redeemed, a new certificate shall be issued representing the unredeemed shares
of Series U Preferred Stock, such unredeemed shares shall remain outstanding and
the rights of holders of such shares of Series U Preferred Stock thereafter
shall continue to be those of a holder of shares of the Series U Preferred
Stock. Notice having been given as aforesaid, if, on the date fixed for
redemption, assets necessary for the redemption shall be legally available
therefor and shall have been irrevocably deposited or set aside, then,
notwithstanding that the certificates representing any shares of the Series U
Preferred Stock so called for redemption shall not have been surrendered, (i)
dividends with respect to the shares so called for redemption shall cease to
accrue on the date fixed for redemption, (ii) such shares shall no longer be
deemed outstanding, (iii) the holders thereof shall cease to be stockholders of
the Corporation to the extent of their interest in such shares and (iv) all
rights whatsoever with respect to the shares so called for redemption (except
the right of the holders to receive the Redemption Price for each such share,
without interest or any sum of money in lieu of interest thereon, upon surrender
of their certificates therefor at a place designated in such notice) shall
terminate. If assets legally available for such purpose are not sufficient for
redemption of all of the shares of Series U Preferred Stock that were to be
redeemed, then such assets shall be applied pro rata to the redemption of all of
the shares of Series U Preferred Stock to be redeemed.
(d) Shares of the Series U Preferred Stock shall not be subject to the
operation of any mandatory redemption, purchase, retirement or sinking fund and
holders of shares of the Series U Preferred Stock shall have no right to require
redemption of the Series U Preferred Stock.
5. Mandatory Conversion.
(a) On the first date on which (i) shares of Common Stock are
registered under the Securities Act of 1933, as amended (the "Securities Act"),
pursuant to an effective registration statement, and (ii) the Corporation has
entered into an underwriting agreement to sell shares of Common Stock (which
underwriting agreement sets forth the price at which such shares will be offered
for sale (as used in this Section 6.3(c), the "Offering Price")), the shares of
Series U Preferred Stock held by each holder not otherwise redeemed in
accordance herewith shall automatically convert as of the date immediately prior
thereto (as used in this Section 6.3(c), the "Conversion Date") without further
action on the part of the Corporation or any such holder, into that number of
fully paid and nonassessable shares of Common Stock (calculated to the nearest
1/100th of a share, with .5/100 rounded upwards) determined by dividing (i) the
product of (x) 135%, (y) the Stated Value thereof (plus all accrued and unpaid
dividends thereon to but excluding the Conversion Date, unless the Corporation
shall elect to pay such amount in cash on such date) and (z) the aggregate
number of shares of Series U Preferred Stock held at such time by such holder by
(ii) the Offering Price.
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<PAGE>
(b) Each holder of shares of Series U Preferred Stock shall, as soon
as practicable after the Conversion Date, surrender all shares of Series U
Preferred Stock held by such holder and the Corporation shall, as soon as
practicable after such surrender, deliver at the offices of the Corporation to
such holder, or to the nominee or nominees of such holder, certificates
representing the number of full shares of Common Stock to which such holder
shall be entitled, together with a cash payment in respect of any accrued and
unpaid dividends and any fraction of a share of Common Stock, in each case as
provided below. Conversion of shares of Series U Preferred Stock shall be
deemed to have been effected on the Conversion Date, without regard to the time
of surrender of such shares of Series U Preferred Stock and (i) dividends with
respect to such shares of Series U Preferred Stock shall cease to accrue and
accumulate on the Conversion Date, (ii) such shares of Series U Preferred Stock
shall no longer be deemed outstanding, (iii) the holders thereof shall cease to
be stockholders of the Corporation to the extent of their interest in such
shares, (iv) all rights whatsoever with respect to shares of Series U Preferred
Stock shall terminate (except the right of a holder to receive certificates
representing the number of full shares of Common Stock to which such holder
shall be entitled, together with a cash payment in respect of any fraction of a
share of Common Stock as provided herein) and (v) the holders entitled to
receive the shares of Common Stock deliverable upon conversion of such shares of
Series U Preferred Stock shall be treated for all purposes as the record holder
or holders of such shares of Common Stock on the Conversion Date, unless the
stock transfer books of the Corporation shall be closed on such date, in which
event such person or persons shall be deemed to become such holder or holders of
record at the close of business on the next succeeding day on which such stock
transfer books are open, but such conversion shall be at the Conversion Price in
effect on the Conversion Date.
6. No Fractional Shares. No fractional shares or scrip representing
fractional shares of Common Stock shall be issued upon conversion of shares of
Series U Preferred Stock. If a certificate or certificates representing more
than one share of Series U Preferred Stock shall be surrendered for conversion
at one time by the same record holder, the number of full shares of Common Stock
issuable upon conversion thereof shall be computed on the basis of the aggregate
number of shares of Series U Preferred Stock so surrendered by such record
holder. In lieu of any fractional share of Common Stock that would otherwise be
issuable upon conversion of any shares of Series U Preferred Stock, the
Corporation shall pay a cash adjustment in respect of such fractional share in
an amount equal to the same fraction as the Offering Price, calculated to the
nearest whole cent, with one-half cent rounded upward.
7. Reservation of Shares; Transfer Taxes. The Corporation shall at all
times reserve and keep available, out of its authorized and unissued stock,
solely for the purpose of effecting the conversion of shares of Series U
Preferred Stock, such number of shares of Common Stock free of preemptive rights
as shall be sufficient to effect the conversion of all shares of Series U
Preferred Stock outstanding. The Corporation shall, in accordance with the laws
of the State of Maryland, use its reasonable best efforts to increase the
authorized number of shares of Common Stock if at such time the number of shares
of authorized and unissued Common Stock shall not be sufficient to permit the
conversion of all the then outstanding shares of Series U Preferred Stock. The
Corporation shall not be required to deliver shares of Common Stock upon
conversion
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if, in the opinion of its counsel, such delivery would violate the laws of the
State of Maryland or any other United States jurisdiction or any jurisdiction
outside the United States.
The Corporation shall pay any and all issue or other taxes that may be
payable in respect of any issue or delivery of shares of Common Stock upon
conversion of the Series U Preferred Stock. The Corporation shall not, however,
be required to pay any tax which may be payable in respect of any transfer
involved in the issue or delivery of Common Stock in a name other than that in
which the shares of Series U Preferred Stock so converted were registered, and
no such issue or delivery shall be made unless and until the person requesting
such issue has paid to the Corporation the amount of such tax or has established
to the satisfaction of the Corporation that such tax has been paid.
8. Voting Rights.
(a) General. Holders of shares of the Series U Preferred Stock shall
not have any voting rights except as set forth below. In connection with any
such right to vote, each holder of shares of the Series U Preferred Stock will
have one vote for each such share held. Any shares of Series U Preferred Stock
held by the Corporation, or any subsidiary of the Corporation in which the
Corporation owns shares entitled to cast a majority of all votes entitled to be
cast, shall not have voting rights, and shall not be counted in determining the
presence of a quorum or in calculating any percentage of shares, under this
Section 6.3(c).8.
(b) Class Voting Rights. So long as shares of the Series U Preferred
Stock are outstanding, the Corporation shall not, without the affirmative vote
or consent of the holders of at least a majority (or such higher percentage, if
any, as may then be required by applicable law) of all outstanding shares of
Series U Preferred Stock, voting separately as a class, (i) amend any provision
of the charter of the Corporation so as to change the preferences, conversion or
other rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption of the
Series U Preferred Stock or (ii) create, authorize or issue, or reclassify any
authorized stock of the Corporation into, or increase the authorized amount of,
any class or series of stock of the Corporation ranking senior to the Series U
Preferred Stock as to dividends or upon Liquidation (other than up to $50.0
million aggregate liquidation preference of Preferred Stock, to accredited
investors who are not current holders of any class or series of stock of the
Corporation (or of any other securities of the Corporation convertible into, or
exchangeable or exercisable for, such stock of the Corporation) in an offering
exempt from the registration requirements of the Securities Act, such stock to
have the designation, preferences, conversion or other rights, voting powers,
restrictions, limitations as to dividends or other distributions,
qualifications, terms or conditions of redemption, and Stated Value thereof, as
determined by the Board). A class vote on the part of the Series U Preferred
Stock shall not be required (except as otherwise required by law or resolution
of the Board) in connection with any other matter, including, without
limitation, the authorization, issuance or increase in the authorized amount of
any shares of any class or series of stock of the Corporation that either (A)
ranks junior to, or on a parity with, the Series U Preferred Stock as to
dividends and upon Liquidation or (B) is, at the time of such increase,
undesignated as to ranking with respect to dividends and upon Liquidation.
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9. Ranking. Any class or series of stock of the Corporation shall be
deemed to rank:
(a) prior to the Series U Preferred Stock, as to dividends or upon
Liquidation, if the holders of such class or series shall be entitled to the
receipt of dividends or of amounts distributable upon Liquidation, as the case
may be, in preference or priority to the holders of Series U Preferred Stock;
(b) on a parity with the Series U Preferred Stock, as to dividends or
upon Liquidation, whether or not the dividend rates, dividend payment dates or
redemption or liquidation prices per share thereof are different from those of
the Series U Preferred Stock, if the holders of such class or series of stock
and the Series U Preferred Stock shall be entitled to the receipt of dividends
or of amounts distributable upon Liquidation, as the case may be, in proportion
to their respective amounts of accumulated or accrued and unpaid dividends per
share or liquidation prices, as the case may be, without preferences or priority
one over the other; and
(c) junior to the Series U Preferred Stock, as to dividends or upon
Liquidation, if such stock shall be Common Stock or any other class or series of
stock of the Corporation if the holders of Series U Preferred Stock shall be
entitled to receipt of dividends or of amounts distributable upon Liquidation,
as the case may be, in preference or priority to the holders of shares of such
stock.
For purposes hereof, the Series T Preferred Stock shall rank on parity
with the Series U Preferred Stock as to dividends and upon Liquidation.
10. Outstanding Shares. For purposes hereof, all shares of the Series U
Preferred Stock issued by the Corporation shall be deemed outstanding except (i)
as provided in subsections 4 and 5 of this Section 6.3(c) and (ii) from the date
of surrender of a certificate representing shares of Series U Preferred Stock,
all shares of Series U Preferred Stock represented by such certificate.
11. Status of Acquired Shares. Shares of the Series U Preferred Stock
redeemed or otherwise acquired by the Corporation constitute authorized but
unissued shares of undesignated Preferred Stock, and may thereafter be issued,
but not as shares of Series U Preferred Stock.
Section 6.3(d). Series V Preferred Stock. Any term defined in this Section
------------------------
6.3(d) shall only have the meaning as set forth in this Section 6.3(d)
notwithstanding any other definition contained elsewhere in the charter of the
Corporation.
1. Designation, Notice, Fractional Shares, Taxes.
(a) Designation of Amount and Stated Value. The Series V Preferred
--------------------------------------
Stock is issuable solely in whole shares and shall entitle the holder thereof to
exercise the voting rights, to participate in distributions and to have the
benefits of all other rights of holders of
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the Series V Preferred Stock as set forth herein. The stated value per share of
the Series V Preferred Stock shall be $1,000 ("STATED VALUE"). The number of
------------
shares which shall constitute such series shall not be more than 50,000 shares,
par value $.01 per share, which number of shares may be decreased (but not below
the number thereof then outstanding plus the number required to fulfill the
Corporation's obligations under options, warrants or similar rights to acquire
Series V Preferred Stock issued by the Corporation) from time to time by the
Board of Directors of the Corporation (the "BOARD OF DIRECTORS") by
------------------
reclassifying any unissued shares as shares of Preferred Stock or Common Stock.
(b) Notices. Any written notice required by the provisions of this
-------
Section 6.3(d) to be given to the holders of shares of Series V Preferred Stock
shall be given and shall be deemed to have been given (i) upon receipt if
delivered in person; (ii) one Business Day (as defined below) after transmission
of a facsimile, telegram or telex; or (iii) two Business Days after deposit in
United States registered mail or certified mail (postage prepaid, return receipt
requested); or (iv) one Business Day after delivery to a respectable overnight
courier, to the respective parties at such address appearing on the books of the
Corporation. Any notice to AEW Partners II, L.P. ("AEW") that calls for a
---
response by AEW shall be clearly marked on the envelope of any letter and the
cover page of any facsimile and the first page of any notice as follows:
"IMMEDIATE RESPONSE REQUIRED. DEADLINE FOR REPLY IS ________________. FAILURE
TO REPLY BY SUCH DATE WILL ELIMINATE AEW'S RIGHTS TO OBJECT."
(c) No Fractional Shares. No fractional shares or scrip representing
--------------------
fractions of Common Stock shall be issued upon conversion of Series V Preferred
Stock in accordance with this Section 6.3(d). Instead of any fractional
interest in a share of Common Stock that would otherwise be delivered upon
conversion of Series V Preferred Stock, the Corporation shall pay to the holder
of such share an amount in cash based upon the initial public offering price of
Common Stock or, if not determinable, an amount in cash equal to the fair market
value of such fractional interest as determined in good faith by the Board of
Directors. If more than one share of Series V Preferred Stock shall be
surrendered for conversion at any one time by the same holder, the number of
full shares of Common Stock issuable upon conversion thereof shall be computed
on the basis on the aggregate number of Series V Preferred Stock so surrendered.
(d) Reservation of Stock Issuable Upon Conversion. The Corporation
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of Series V Preferred Stock outstanding, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of Series V Preferred Stock and if at any time the
number of authorized but unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then-outstanding shares of Series V Preferred
Stock, then, in addition to such other remedies as shall be available to the
holder of such Series V Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, reasonably be necessary
to increase its authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purposes.
-17-
<PAGE>
(e) Taxes. The Corporation will pay any and all documentary
-----
stamp or similar issue or transfer taxes payable in respect of the issue or
delivery of Common Stock or other securities or property on conversion of the
Series V Preferred Stock pursuant to this Section 6.3(d); provided, however,
-------- -------
that the Corporation shall not be required to pay any tax that may be payable in
respect of any transfer involved in the issue or delivery of Common Stock or
other securities or property in a name other than that of the holder of the
Series V Preferred Stock to be converted, and no such issue or delivery shall be
made unless and until the person requesting such issue or delivery has paid to
the Corporation the amount of any such tax or established, to the reasonable
satisfaction of the Corporation, that such tax has been paid.
2. Cumulative Dividends.
(a) Rights to Payment. The holders of Series V Preferred
-----------------
Stock shall be entitled to receive quarterly cash dividends, when, as and if
authorized by the Board of Directors out of funds legally available for that
purpose. The quarterly dividend periods (the "DIVIDEND PERIODS") shall commence
----------------
on January 1, April 1, July 1 and October 1 of each year and end on and shall
include March 31, June 30, September 30 and December 31 of such year,
respectively (other than the initial Dividend Period, which shall commence on
the issue date of each such share of Series V Preferred Stock). For each of the
first twelve Dividend Periods after the date on which each share of Series V
Preferred Stock was issued and sold and during the portion of the thirteenth
Dividend Period equal to the number of days from the first day of the Dividend
Period during which each such share of Series V Preferred Stock was issued to
the date that such share was issued, each holder of Series V Preferred Stock
shall be entitled to receive an amount per share equal to the accrued but unpaid
dividends from all prior Dividend Periods plus the greater of (i) $25.00 per
full Dividend Period, and (ii) 100% of the quarterly dividend (excluding any
Securities Dividends (as defined below)) payable per share of Common Stock
during the corresponding Common Stock dividend period (determined as of the date
on which the applicable Common Stock dividend for the corresponding Common Stock
dividend period is paid) multiplied by the Conversion Share Ratio then in effect
(as defined in subsection 4 of this Section 6.3(d)) (the "Assumed Common
Dividend"). Thereafter, each holder of Series V Preferred Stock shall be
entitled to receive an amount per share equal to the accrued but unpaid
dividends from all prior Dividend Periods plus the greater of (i) $37.50 per
full Dividend Period and (ii) the Assumed Common Dividend. The calculation of
any such quarterly dividend shall be made to the nearest cent (with $.005 being
rounded upward). Such dividends shall begin to accumulate and shall be fully
cumulative with respect to each share of Series V Preferred Stock from the issue
date of each such share, whether or not authorized by the Board of Directors and
whether or not in any Dividend Period or Periods there shall be funds of the
Corporation legally available for the payment of such dividends until the
earliest to occur of (i) the date of redemption or conversion of such share and
(ii) the date of final distribution of assets upon the occurrence of a
Liquidation Event (as defined below). Nothwithstanding any other provision
hereof, (a) the Corporation, upon approval of a majority of the Board of
Directors, including the approval of the Series V Directors, may pay dividends
to Parent on the Common Stock before October 31, 1996 in an aggregate amount
equal to the lesser of (i) the aggregate amount of the Corporation's net income
(for book purposes) for the period from April 1, 1996 through September 9, 1996,
and (ii) $942,528, and (b) such dividends shall be excluded in the calculation
of Assumed Common Dividend.
-18-
<PAGE>
Such dividends shall be payable quarterly in immediately available
funds, when, as and if authorized by the Board of Directors on a date which
shall not be later than the last day of the applicable Dividend Period;
provided, however, that if any dividend payment date falls on any day other than
- -------- -------
a Business Day (as defined below), the dividend payment due on such dividend
payment date shall be paid (without any effect on the amount due) on the
Business Day immediately following such dividend payment date (the "DIVIDEND
--------
PAYMENT DATE") or such other dates as provided herein, commencing on the first
- ------------
Dividend Payment Date after the date on which Series V Preferred Stock is first
issued (the "ISSUE DATE"). In addition to the above dividends, the holders of
----------
the Series V Preferred Stock shall be entitled to receive a pro rata share of
--- ----
all securities (including warrants, options and convertible securities) of
issuers other than the Corporation that are distributed to the holders of the
Corporation's Common Stock (the "Securities Dividends"). Such holder's pro rata
-------------------- --- ----
share, for purposes of this subsection 2, shall be a fraction of which the
numerator is the number of shares of Common Stock into which the Series V
Preferred Stock can be converted (by multiplying the number of shares of Series
V Preferred Stock held by such holder by the Conversion Share Ratio) and the
denominator is the sum of all shares of Common Stock outstanding immediately
before the issuance of the Securities Dividend plus all shares of Common Stock
then issuable upon conversion or exchange of all convertible or exchangeable
securities (including Series U and V Preferred Stock). Such Securities Dividend
shall be distributed to the holders of the Series V Preferred Stock (i) on the
same date that the distribution of Securities Dividends are made to the holders
of Common Stock and (ii) who are holders of Series V Preferred Stock on the
record date used to determine the record holders of the Common Stock for such
Securities Dividends.
A "BUSINESS DAY" shall mean any day other than a Saturday, Sunday or a
------------
day on which state or federally chartered banking institutions in Los Angeles,
California are not required to be opened. Each such dividend shall be payable
to the holders of record of Series V Preferred Stock, as they appear on the
stock records of the Corporation at the close of business on such record dates,
not more than 30 days preceding such Dividend Payment Dates thereof, as shall be
fixed by the Board of Directors. Accumulated and unpaid dividends for any past
Dividend Periods may be authorized and paid at any time and for such interim
periods, without reference to any regular Dividend Payment Date, to holders of
record on such date, not more than 30 days preceding the payment date thereof,
as may be fixed by the Board of Directors. Dividend payments shall be
aggregated per holder and shall be made to the nearest cent (with $.005 being
rounded upward).
(b) Computation and Limitations on Dividends. The amount of dividends
----------------------------------------
payable for the initial Dividend Period, or any other period shorter than a full
Dividend Period on the Series V Preferred Stock shall be computed on the basis
of twelve 30-day months and a 360-day year. Holders of Series V Preferred Stock
shall not be entitled to any dividends, whether payable in cash, property or
stocks in excess of the dividend set forth in this Section 6.3(d). No interest,
or sum of money in lieu of interest, shall be payable in respect of any dividend
payment or payments on the Series V Preferred Stock that may be in arrears.
(c) Payment of Dividends on Series V Preferred Stock Relative to
------------------------------------------------------------
Dividends on Parity Shares. So long as any shares of Series V Preferred Stock
- --------------------------
are outstanding, no dividends shall be authorized or paid or Set Apart for
Payment (as defined below) on any class
-19-
<PAGE>
or series of Parity Shares (as defined below) for any period unless full
cumulative dividends have been or contemporaneously are authorized and paid or
authorized and a sum sufficient for the payment thereof set apart for such
payment on the Series V Preferred Stock for all Dividend Periods terminating on
or prior to the dividend payment date on such class or series of Parity Shares.
"PARITY SHARES" shall mean shares on a parity with the Series V
-------------
Preferred Stock, as to the payment of dividends and as to distribution of assets
upon liquidation, dissolution or winding up, whether or not the dividend rates,
dividend payment dates or redemption or liquidation prices per share thereof are
different from those of the Series V Preferred Stock, if the holders of such
class of stock or series and the Series V Preferred Stock shall be entitled to
the receipt of dividends and of amounts distributable upon liquidation,
dissolution or winding up in proportion to their respective amounts of
accumulated and unpaid dividends per share or Liquidation Preferences (as
defined in subsection 3(a) below), without preference or priority one over the
other.
"SET APART FOR PAYMENT" shall be deemed to include, without any action
---------------------
by the Corporation other than the following, the recording by the Corporation in
its accounting ledgers of any accounting or bookkeeping entry which indicates,
pursuant to an authorization of dividends or other distribution by the Board of
Directors, the allocation of funds to be so paid on any series or class of stock
of the Corporation; provided, however, that if any funds for any class or series
-------- -------
of Junior Shares (defined below) or any Parity Shares are placed in a separate
account of the Corporation or delivered to a disbursing, paying or other similar
agent, then "Set Apart for Payment" with respect to the Series V Preferred Stock
shall mean placing such funds in a separate account or delivering such funds to
a disbursing, paying or other similar agent.
(d) Priority of Dividends on Series V Preferred Stock Over Junior
-------------------------------------------------------------
Shares. So long as any shares of Series V Preferred Stock are outstanding, no
- ------
dividends shall be authorized or paid or Set Apart for Payment or other
distribution authorized or made upon Junior Shares, nor shall any Junior Shares
be redeemed, purchased or otherwise acquired (other than a redemption, purchase
or other acquisition of Common Stock, as approved by a unanimous vote of the
Board of Directors or the Corporation's Compensation Committee) for any
consideration (or any moneys to be paid to or made available for a sinking fund
for the redemption of any shares of any such stock) by the Corporation, directly
or indirectly (except by conversion into or exchange for Fully Junior Shares),
unless (i) the full cumulative dividends on all outstanding Series V Preferred
Stock shall have been paid or authorized and Set Apart for Payment for all past
Dividend Periods with respect to the Series V Preferred Stock, (ii) sufficient
funds shall have been paid or authorized with respect to the dividend on the
Series V Preferred Stock for the current Dividend Period and (iii) such
dividends per Junior Share do not exceed the dividends paid during the
corresponding Dividend Period on the Series V Preferred Stock on an
as-converted-to Common Stock basis unless the holders of the Series V Preferred
Stock shall simultaneously receive such higher dividend on an as-converted-to
Common Stock basis, in which case the amount paid to the holders of Series V
Preferred Stock on account of such higher dividend shall be offset against the
payment otherwise due on the next Dividend Payment Date. "FULLY JUNIOR SHARES"
-------------------
shall mean the shares of Common Stock and any other class or series of stock of
the Corporation now or hereafter issued and outstanding over which the Series V
Preferred Stock has preference or priority in both (i) the payment of dividends
and (ii) the distribution of assets on any liquidation, dissolution or winding
-20-
<PAGE>
up of the Corporation, including the Series T Preferred Stock and the Series U
Preferred Stock. "JUNIOR SHARES" or "JUNIOR STOCK" shall mean the Fully Junior
------------- ------------
Shares and any other class or series of stock of the Corporation now or
hereafter issued and outstanding over which the Series V Preferred Stock shall
have preference or priority in the payment of dividends or in the distribution
of assets on any liquidation, dissolution or winding up of the Corporation.
3. Liquidation Preference.
(a) Rights to Payment. In the event of any Liquidation Event (as
-----------------
defined below), before and in preference to any payment or distribution of any
of the assets or surplus funds of the Corporation made to or Set Apart for
Payment for the holders of Fully Junior Shares or shares which are Junior Shares
as to liquidation, each holder of the Series V Preferred Stock shall be entitled
to receive in immediately available funds to the extent available (i) the Stated
Value of the holder's shares of Series V Preferred Stock plus (ii) an amount per
share that will provide such holder with an Internal Rate of Return (as defined
below) equal to 15% on the Stated Value thereof (the "LIQUIDATION PREFERENCE");
----------------------
but such holders shall not be entitled to any further payment. "INTERNAL RATE
-------------
OF RETURN" shall be calculated using the effective annualized return with the
- ---------
Stated Value as the investment "out-flows," and all payments of dividends,
including Securities Dividends, and other distributions received with respect to
such share of Series V Preferred Stock as "in-flows"; provided that (i) the fact
--------
that such holders may from time to time borrow, finance or leverage the funds
invested in the purchase of Series V Preferred Stock shall not affect either
characterization or calculation of such investment amount (i.e., neither the
- -
receipt of the proceeds of any such financing nor the payment of any debt
service or costs related to such financing shall be taken into account); (ii)
neither the fact of any transfer of Series V Preferred Stock from the original
holders nor the amount of any consideration received by the original holders or
paid by the successor holder in connection with any transfer shall affect the
calculation of Internal Rate of Return; (iii) all items of investment/expense
and receipt shall be deemed to have been invested/expended or received on the
last day of the calendar month in which they occur; and (iv) all Securities
Dividends shall have a value equal to the fair market value of the Securities
Dividends as of the date of actual receipt as determined in good faith by the
Board of Directors.
A "LIQUIDATION EVENT" shall, unless the holders of a majority of the
-----------------
shares of Series V Preferred Stock otherwise agree, include (i) any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
(ii) any sale or transfer of all, or substantially all of the assets of the
Corporation and its subsidiaries (determined on a consolidated basis), (iii) a
consolidation or merger of the Corporation in which the Corporation or its
parent, Health Science Properties Holding Corporation, a Maryland corporation
("PARENT"), is not the surviving entity (other than for purposes of
------
reincorporation or in connection with an initial public offering of the Common
Stock of the Corporation (an "IPO")), and (iv) the acquisition by any
---
individual, firm, partnership, corporation or other entity or any successor by
merger of such entity (a "PERSON") of more than a majority of the outstanding
------
shares of Common Stock of the Corporation other than any acquisition by (A) any
holder of Series V Preferred Stock, (B) an acquisition as a result of the
conversion of the Series V Preferred Stock pursuant to subsections 4 and 5 of
this Section 6.3(d), (C) holders of the outstanding Common Stock of the
Corporation or its Parent as of the Issue Date, (D) management of the
Corporation or its Parent as of the Issue Date, (E) an
-21-
<PAGE>
underwriter in a public offering or private placement of the Common Stock or (F)
any affiliates or members of the immediate families (their spouse, issues,
brothers, sisters and their respective issue and trusts for the benefit of such
persons) of the foregoing.
(b) Liquidation Relative to Parity Shares. If, upon any Liquidation
-------------------------------------
Event, the assets of the Corporation (or proceeds thereof) distributable among
the holders of the Series V Preferred Stock and any Parity Shares shall be
insufficient to pay in full the Liquidation Preference and liquidating payments
on such shares, then such assets, or the proceeds thereof, shall be distributed
among the holders of Series V Preferred Stock and any such other Parity Shares
ratably in accordance with the respective amounts that would be payable on such
Series V Preferred Stock and any such other Parity Shares if all amounts payable
thereon were paid in full. The holders of Series V Preferred Stock shall be
entitled to written notice at least thirty (30) days in advance of any
Liquidation Event or such shorter period if the Corporation does not have notice
of the Liquidation Event in which case written notice shall be given promptly
following the Corporation's receipt of notice of such event.
(c) Liquidation Rights of Parity and Junior Shares. Subject to the
----------------------------------------------
rights of the holders of shares of any series or class or classes of stock
ranking on a parity with or prior to the Series V Preferred Stock upon
liquidation, dissolution or winding up of the Corporation, after payment shall
have been made in full to the holders of the Series V Preferred Stock, as
provided in this subsection 3, any other series or class or classes of Junior
Shares shall, subject to the respective terms and provisions (if any) applying
thereto, be entitled to receive any and all assets remaining to be paid or
distributed, and the holders of the Series V Preferred Stock shall not be
entitled to share therein.
(d) No Effect on Conversion. Nothing hereinabove set forth shall
-----------------------
affect in any way the right of each holder of Series V Preferred Stock to
convert such shares at any time and from time to time into Common Stock in
accordance with subsection 4 of this Section 6.3(d).
4. Conversion at the Option of the Holder.
(a) Right to Convert. Subject to and upon compliance with the
----------------
provisions of this subsection 4, each share of Series V Preferred Stock shall be
convertible at the option of the holder (i) at any time after three Business
Days prior to the closing of a merger or consolidation of the Corporation (other
than a merger or consolidation for purposes of reincorporation or a merger or
consolidation in which a shareholder or shareholders of the Parent immediately
prior to the merger or consolidation owns more than 75% of the stock of the
merged or consolidated company outstanding after the transaction), (ii) at any
time after the fourth anniversary of the Issue Date, or (iii) upon consummation
of an IPO in which the shares of Series V Preferred Stock are proposed to be
redeemed and converted in accordance with subsection 5(a) hereof, in the case of
(i) and (ii) above, into such number of fully paid and nonassessable shares of
Common Stock that is the result of multiplying the number of Series V Preferred
Stock to be converted by the Conversion Share Ratio and, in the case of (iii)
above, in accordance with subsection 5(a) hereof. The "CONVERSION SHARE RATIO"
----------------------
shall be determined by dividing the Stated
-22-
<PAGE>
Value per share by the Conversion Share Price. The initial "CONVERSION SHARE
----------------
PRICE" shall be $30,000 and the initial Conversion Share Ratio shall be .033333,
- -----
provided, however, that the Conversion Share Price and thus the Conversion Share
- -------- -------
Ratio shall be subject to adjustments as set forth below.
(b) Mechanics of Conversion. In order to exercise the conversion
-----------------------
right set forth above, the holder of each share of Series V Preferred Stock to
be converted shall surrender the certificate or certificates representing such
shares to be converted, duly endorsed or assigned to the Corporation or in
blank, at the principal office of the Corporation, or any agent or agents of the
Corporation as may be designated by the Board of Directors or their designee as
the transfer agent for the Series V Preferred Stock (the "TRANSFER AGENT"),
--------------
accompanied by written notice to the Corporation of the number of shares the
holder thereof elects to convert. Unless the shares of Common Stock issuable on
conversion are to be issued in the same name as the name in which such Series V
Preferred Stock is registered, each share surrendered for conversion shall be
accompanied by instruments of transfer, in form satisfactory to the Corporation,
duly executed by the holder or such holder's duly authorized attorney and an
amount sufficient to pay any transfer or similar tax (or evidence reasonably
satisfactory to the Corporation demonstrating that such taxes have been paid)
and any required payment in respect of dividends as set forth below. Holders of
Series V Preferred Stock at the close of business on a dividend payment record
date shall be entitled to receive the dividend payable on such shares on the
corresponding Dividend Payment Date notwithstanding the conversion thereof
following such dividend payment record date and prior to such Dividend Payment
Date. However, Series V Preferred Stock surrendered for conversion during the
period between the close of business on any dividend payment record date and the
opening of business on the corresponding dividend payment date must be
accompanied by the payment of an amount equal to the dividend payable on such
shares on such dividend payment date multiplied by a fraction, the numerator of
which shall be the number of days between the conversion date and the dividend
payment date (assuming such date is the last day of the applicable Dividend
Period regardless of when actually paid) and the denominator of which shall be
the number of days in the Dividend Period during which the conversion occurred.
Each conversion shall be deemed to have been effected immediately prior to the
close of business on the date on which the certificates for Series V Preferred
Stock shall have been surrendered (together with any required payments in
respect of dividends or transfer or similar taxes payable on such shares), and
the person or persons in whose name or names any certificate or certificates for
Common Stock shall be issuable upon such conversion shall be deemed to have
become the holder or holders of record of the shares represented thereby at such
time on such date.
(c) Conversion Share Price Adjustments. The Conversion Share Price of
----------------------------------
Series V Preferred Stock shall be subject to adjustments from time to time as
follows:
(i) Special Definitions. For purposes of this subsection 4, the
-------------------
following definitions shall apply:
(1) "OPTIONS" shall mean rights, options or warrants to
subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities (other than options as approved by the Board of
Directors or Compensation Committee to acquire Common Stock and granted (or
with respect to the Corporation's
-23-
<PAGE>
substitute employee and non-employee director stock option plans, reserved
for issuance upon substitution of outstanding options issued pursuant to
the Parent's employee and non-employee director stock option plans) under
the Corporation's or the Parent's employee and non-employee director stock
option plans existing on the Issue Date or at any time thereafter
("PERMITTED OPTIONS")).
-----------------
(2) "CONVERTIBLE SECURITIES" shall mean any evidence of
----------------------
indebtedness, shares (other than Common Stock, Series V Preferred Stock or
Series U Preferred Stock) or other securities convertible into, exercisable
or exchangeable for Common Stock (other than Options).
(3) "ADDITIONAL STOCK" shall mean all Common Stock issued (or
----------------
pursuant to subsection 4(c)(iii), deemed to be issued) by the Corporation
after the Issue Date, other than Common Stock issued or issuable at any
time: (A) upon conversion of this Series V Preferred Stock; (B) upon
exercise of Options; (C) upon conversion of Convertible Securities; (D)
upon issuance or exercise of Permitted Options; (E) as a dividend or
distribution on Series V Preferred Stock or any event for which adjustment
is made pursuant to subparagraph (c)(vi) hereof; (F) by way of dividend or
other distribution on Common Stock excluded from the definition of
Additional Stock by the foregoing clauses (A), (B), (C), (D), (E) or this
clause (F) or on Common Stock so excluded.
(ii) No Adjustment of Conversion Share Price. No adjustment of the
---------------------------------------
Conversion Share Price shall be made except as provided herein. Notwithstanding
any other provision hereof, no adjustment of the Conversion Share Price shall be
made (i) with respect to securities issued in any merger involving solely Parent
and the Corporation and approved in accordance with Section 8 hereof, or (ii)
with respect to issuances to holders of Series V Preferred Stock solely with
respect to their holdings of Series V Preferred Stock.
(iii) Deemed Issue of Additional Shares of Common Stock.
-------------------------------------------------
(1) Options and Convertible Securities. Except as otherwise
----------------------------------
provided herein, in the event the Corporation at any time or from time to
time after the Issue Date shall issue any Options or Convertible
Securities, the maximum number of shares (as set forth in the instrument
relating thereto without regard to any provisions contained therein for a
subsequent adjustment of such number) of Common Stock issuable upon the
exercise of such Options or, in the case of Convertible Securities and
Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be shares of Additional Stock issued as of
the time of such issue, provided that Additional Stock shall not be deemed
to have been issued unless the consideration per share (determined pursuant
to subsection 4(c)(v) hereof) of such Additional Stock will be less than
the Conversion Price in effect on the date of and immediately prior to such
issue and provided further that in any such case in which Additional Stock
is deemed to be issued:
(A) no further adjustment in the Conversion Share Price
shall be made upon the subsequent issue of Options or Convertible
Securities or shares of Common Stock upon the exercise of such Options
or
-24-
<PAGE>
conversion or exchange of such Convertible Securities for which
adjustment has been made as a result of a deemed issuance pursuant to
this subsection 4(c)(iii);
(B) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase
or decrease in the consideration payable to the Corporation, or in the
number of shares of Common Stock issuable, upon the exercise,
conversion or exchange thereof, the Conversion Share Price computed
upon the original issue thereof, and any subsequent adjustments based
thereon, shall, upon any such increase or decrease becoming effective,
be recomputed to reflect such increase or decrease insofar as it
affects such Options or rights of conversion or exchange under such
Convertible Securities;
(C) upon the expiration of any such Options or any rights
of conversion or exchange under such Convertible Securities which
shall not have been exercised, the Conversion Price computed upon the
original issue thereof, and any subsequent adjustments based thereon,
shall, upon such expiration, be recomputed as if:
(I) in the case of Convertible Securities or Options
for Common Stock, the only Additional Stock issued was Common
Stock, if any, actually issued upon the exercise of such Options
or the conversion or exchange of such Convertible Securities and
the consideration received therefor was the consideration
actually received by the Corporation for the issue of all such
Options, whether or not exercised, plus the consideration
actually received by the Corporation upon such exercise, or for
the issue of all such Convertible Securities whether or not
actually converted or exchanged plus the additional
consideration, if any, actually received by the Corporation upon
such conversion or exchange, and
(II) in the case of Options for Convertible
Securities, only the Additional Stock, if any, actually issued
upon the exercise thereof were issued at the time of issue of
such Options, and the consideration received by the Corporation
for the shares of Additional Stock deemed to have been then
issued was consideration actually received by the Corporation for
the issue of all such Options, whether or not exercised, plus the
consideration deemed to have been received by the Corporation
upon the issue of the Convertible Securities with respect to
which such Options were actually exercised;
(D) no readjustment pursuant to Clause (B) or (C) above
shall have the effect of increasing the Conversion Share Price to an
amount which exceeds the lower of (i) the Conversion Share Price on
the date immediately prior to the original adjustment date, or (ii)
the Conversion Price that would have
-25-
<PAGE>
resulted from any issuance of Additional Stock between such date and
such readjustment date; and
(E) in the case of any Options or Convertible Securities
which expire by their terms not more than ninety (90) days after the
date of issue thereof, no adjustment of the Conversion Share Price
shall be made until the expiration, conversion or exercise of all such
Options or Convertible Securities.
(iv) Adjustment of Conversion Share Price Upon Issuance of Additional
----------------------------------------------------------------
Stock.
- -----
(1) Prior to the second anniversary of the Issue Date. If prior
-------------------------------------------------
to the second anniversary of the Issue Date the Corporation shall issue
Additional Stock (including Additional Stock deemed to be issued pursuant
to subsection 4(c)(iii)) for a consideration per share less than the
Conversion Share Price for the Series V Preferred Stock in effect on the
date of and immediately prior to such issue, then and in such event, such
Conversion Share Price shall be reduced, concurrently with such issue, to a
price equal to the consideration per share received by the Corporation for
such Additional Stock.
(2) On or after the second anniversary of the Issue Date. If on
----------------------------------------------------
or after the second anniversary of the Issue Date the Corporation shall
issue Additional Stock (including Additional Stock deemed to be issued
pursuant to subsection 4(c)(iii)) for a consideration per share less than
the Conversion Share Price for the Series V Preferred Stock in effect on
the date of and immediately prior to such issue, then and in such event,
such Conversion Share Price shall be reduced concurrently with such issue
to a price (calculated to the nearest cent) determined by multiplying such
Conversion Share Price by a fraction (i) the numerator of which shall be
the number of shares of Common Stock outstanding immediately prior to such
issue (including all shares of Common Stock issuable upon conversion of the
outstanding Series U and Series V Preferred Stock and all outstanding
Permitted Options) plus the number of shares of Common Stock which the
aggregate consideration received by the Corporation for the payment of
shares of Additional Stock so issued would purchase at such Conversion
Share Price; and (ii) the denominator of which shall be the number of
shares of Common Stock outstanding immediately prior to such issue
(including all shares of Common Stock issuable upon conversion of the
outstanding Series V and Series U Preferred Stock and all outstanding
Permitted Options) plus the number of shares of Additional Stock so issued.
An example of such an adjustment is set forth on EXHIBIT A to the charter
---------
of the Corporation.
(v) Determination of Consideration. For purposes of this subsection
------------------------------
4(c), the consideration received by the Corporation for the issue of any shares
of Additional Stock shall be computed as follows:
(1) Cash and Property: Such consideration shall (A) insofar as
-----------------
it consists of cash, be the gross aggregate amount of cash received by the
Corporation excluding amounts paid or payable for accrued interest or
accrued dividends; (B) insofar as it consists of property (other than cash)
or services, be computed at the fair
-26-
<PAGE>
value thereof at the time of such issue, as determined in good faith by the
Board of Directors; and (C) in the event Additional Stock is issued
together with other shares of securities or other assets of the Corporation
for consideration which covers both, be the proportion of such
consideration so received which relates to Additional Stock, computed as
provided in Clause (A) and (B) above, as determined in good faith by the
Board of Directors.
(2) Options and Convertible Securities: The consideration per
----------------------------------
share received by the Corporation for Additional Stock deemed to have been
issued pursuant to subsection 4(c)(iii)(1), relating to Options and
Convertible Securities, shall be determined by dividing: (i) the total
amount, if any, received or receivable by the Corporation as consideration
for the issue of such Options or Convertible Securities plus the minimum
aggregate amount of additional consideration (as set forth in the
instruments relating thereto, without regard to any provision contained
therein for a subsequent adjustment of such consideration) payable to the
Corporation upon the exercise of such Options to purchase the maximum
number of shares of Common Stock issuable thereunder or the conversion or
exchange of such Convertible Securities for the maximum number of shares of
Common Stock issuable in exchange therefor, or in the case of Options for
Convertible Securities, the exercise of Options for Convertible Securities
and the conversion or exchange of such Convertible Securities; by (ii) the
maximum number of shares of Common Stock (as set forth in the instruments
relating thereto, without regard to any provision contained therein for a
subsequent adjustment of such number) issuable upon the exercise of such
Options or the Conversion or exchange of such Convertible Securities for
such minimum aggregate amount of additional consideration.
(vi) Adjustments for Subdivisions, Combinations or Consolidation of
--------------------------------------------------------------
Common Stock. In the event the outstanding shares of Common Stock shall be
- ------------
subdivided (by stock split, or otherwise), into a greater number of shares of
Common Stock, or there shall be a dividend of Junior Stock convertible into
Common Stock paid to the holders of Junior Stock, the Conversion Share Price
then in effect shall, concurrently with the effectiveness of such subdivision,
be proportionately decreased. In the event the outstanding shares of Common
Stock shall be combined or consolidated, by reclassification or otherwise, into
a lesser number of shares of Common Stock, the Conversion Share Price then in
effect shall, concurrently with the effectiveness of such combination or
consolidation, be proportionately increased.
(vii) Adjustments for Other Distributions. In the event the
-----------------------------------
Corporation at any time or from time to time makes or fixes a record date for
the determination of holders of Common Stock entitled to receive any
distribution payable in securities of the Corporation other than shares of
Common Stock and an adjustment under this subsection 4 is not otherwise made,
then and in each such event, provision shall be made so that the holders of
Series V Preferred Stock shall receive upon conversion thereof, in addition to
the number of shares of Common Stock receivable thereupon, the amount of
securities of the Corporation which they would have received had their shares of
Series V Preferred Stock been converted into shares of Common Stock on the date
of such event and had they thereafter, during the period from the date of such
event to and including the date of conversion, retained such securities
receivable by them as aforesaid during such
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<PAGE>
period, subject to all other adjustments called for during such period under
this subsection 4 with respect to the rights of the holders of this Series V
Preferred Stock.
(viii) Adjustments for Reclassification, Exchange and Substitution.
-----------------------------------------------------------
If the Common Stock issuable upon conversion of the Series V Preferred Stock
shall be changed into the same or a different number of shares of any other
class or classes of stock, whether by capital reorganization, reclassification
or otherwise (other than a subdivision or combination of shares, consolidation
or merger provided for above), the Conversion Share Price then in effect shall,
concurrently with the effectiveness of such reorganization or reclassification,
be proportionately adjusted such that the shares of Series V Preferred Stock
shall be convertible into, in lieu of the number of shares Common Stock which
the holders would otherwise have been entitled to receive, a number of shares of
such other class or classes of stock equivalent to the number of shares of such
stock that would have been subject to receipt by the holders upon conversion of
the Series V Preferred Stock immediately before that change.
(d) No Impairment. The Corporation will not take action without the
-------------
consent of the holders of a majority of the shares of Series V Preferred Stock,
by amendment of its charter or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issuance or sale of securities or any other
voluntary action, with the intent of avoiding the observance or performance of
any of the terms to be observed or performed under this subsection 4 by the
Corporation but will at all times in good faith assist in the carrying out of
all provisions of this subsection 4.
(e) Certificate of Adjustments. Upon the occurrence of each adjustment
--------------------------
or readjustment of the Conversion Share Price of the Series V Preferred Stock
pursuant to this subsection 4, the Corporation, at its expense, shall promptly
compute or cause to be computed such adjustment or readjustment in accordance
with the terms hereof and furnish each holder of such Series V Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in
reasonable detail the facts upon which such adjustment or readjustment is based.
The Corporation shall, upon the written request at any time of any holder of
Series V Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustments and readjustments, (ii) the
Conversion Share Price then in effect, and (iii) the number of shares of Common
Stock and the amount, if any, of other property which at the time would be
received upon the conversion of such Series V Preferred Stock.
(f) Notices of Record Date. In the event of any taking by the
----------------------
Corporation of a record of the holders of any class of securities which does not
include Series V Preferred Stock for the purpose of determining the holders
thereof who are entitled to receive any dividend or other distribution, or any
right to subscribe for, purchase, or otherwise acquire any shares of stock of
any class or any other securities or property, or to receive any other right,
this Corporation shall mail to each holder of Series V Preferred Stock, at least
20 days prior to the date specified therein, a written notice (in accordance
with subsection 1(b) of this Section 6.3(d)) specifying the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right, and the amount and character of such dividend, distribution or right.
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<PAGE>
5. Conversion and Redemption at the Option of the Corporation.
(a) Right to Convert Upon the closing of an IPO at any time during
----------------
the four years following the Issue Date and subject to the rights of the holder
of Series V Preferred Stock to approve the terms of an IPO in which the
Corporation would be unable to exercise its rights under this subsection 5(a),
the Corporation shall have the right, at its option, at any time, in whole but
not in part, to redeem (a "PARTIAL CASH EXCHANGE") no less than one-half of each
---------------------
holder's outstanding shares of Series V Preferred Stock for cash at the Cash
Return Redemption Price (defined below) and to convert the balance into that
number of fully paid and nonassessable shares of Common Stock determined by
dividing (i) the aggregate Cash Return Redemption Price for the shares to be
converted, by (ii) the per share price that the Common Stock is offered to the
public in the IPO.
Notwithstanding the Corporation's right to require a Partial Cash
Exchange, not later than 15 days after receipt of a written Notice of Exchange
(as defined below) of such Partial Cash Exchange, a holder of Series V Preferred
Stock may elect, in its sole discretion, to convert up to 100% of such holder's
shares of Series V Preferred Stock into that number of shares of Common Stock
determined by multiplying the number of shares of Series V Preferred Stock by
the Conversion Share Ratio if such holder provides written notice (in accordance
with subsection 1(b) of this Section 6.3(d)) of such election to the
Corporation. Such election may be conditioned upon consummation of the IPO. If
requested by the underwriter in an IPO, any shares of Common Stock issuable upon
a Partial Cash Exchange (including shares issuable if the holder elects to
convert 100% of such holder's shares of Series V Preferred Stock) shall be
subject to a lock-up of not greater than three hundred and sixty (360) days
provided that all officers, directors and substantially all 1% shareholders of
the Corporation are bound by the same lock-up terms.
The "CASH RETURN REDEMPTION PRICE" per share of Series V Preferred
----------------------------
Stock shall be the Stated Value plus an Internal Rate of Return (as defined in
subsection 3 of this Section 6.3(d)) of 20%; provided, however, that if such
-------- -------
conversion should occur prior to the first anniversary of the Issue Date, a
minimum holding period of one year shall be assumed for purposes of calculating
the 20% Internal Rate of Return; and provided further that for purposes of the
-------- -------
determination of Internal Rate of Return in this subsection, any Securities
Dividends shall be deemed to have no value.
(b) Notice. In order to effect a Partial Cash Exchange, a written
------
notice of exchange (a "NOTICE OF EXCHANGE") of the Series V Preferred Stock
------------------
shall be given by the Corporation to each record holder of Series V Preferred
Stock to be exchanged not later than thirty (30) days prior to the effective
date of an IPO. For purposes of the calculation of the date of exchange and the
dates on which notices are given pursuant to this Section 5, a Notice of
Exchange shall be deemed to be given as provided in subsection 1(b) of this
Section 6.3(d). No defect in the Notice of Exchange or in the mailing thereof
or publication of its contents shall affect the validity of the Partial Cash
Exchange proceedings. The Corporation may only exercise its option under this
subsection 5(b) if, at the time a Notice of Exchange is given, there are no
accumulated and unpaid dividends on the Series V Preferred Stock being redeemed
for any completed Dividend Period for which the Dividend Payment Date has
passed. "TRADING DAY" shall mean any day on which the securities in question
-----------
are traded on the NYSE, or if such securities are not listed or admitted for
-29-
<PAGE>
trading on the NYSE, on the principal national securities exchange on which such
securities are listed or admitted, or if not listed or admitted for trading on
any national securities exchange, on The NASDAQ Stock Market, or if such
securities are not quoted on The NASDAQ Stock Market, in the applicable
securities market in which the securities are traded.
(c) Mechanics of Exchange. As promptly as practicable after a Notice
---------------------
of Exchange is given by the Corporation, the Corporation shall issue and shall
deliver to each holder of Series V Preferred Stock to be exchanged, against the
surrender of the certificate or certificates representing such shares of Series
V Preferred Stock (together with any required payments in respect of dividends
and transfer and similar taxes payable on such shares), a certificate or
certificates representing the number of full shares of Common Stock issuable
upon the Partial Cash Exchange of such shares in accordance with the provisions
of this subsection 5, and any fractional interest in respect of a Common Share
arising upon such exchange shall be settled as provided in subsection 5(d).
Each Partial Cash Exchange shall be deemed to have been effected immediately
prior to the first day of trading following an IPO, and the person or persons in
whose name or names any certificate or certificates for the Common Stock shall
be issuable upon such exchange shall be deemed to have become the holder or
holders of record of the shares represented thereby at such time on such date.
At such time on such date, all rights of the holders of the Series V Preferred
Stock to be exchanged as such holders shall cease, and such holders shall
thereupon and thereafter be deemed to be and be for all purposes the holders of
the Common Stock issued in exchange therefor regardless of whether the
certificate representing the Series V Preferred Stock is actually surrendered.
Holders of Series V Preferred Stock at the close of business on a dividend
payment record date shall be entitled to receive the dividend payable on such
shares on the corresponding Dividend Payment Date notwithstanding the Partial
Cash Exchange thereof following such dividend payment record date and prior to
such Dividend Payment Date. However, Series V Preferred Stock subject to a
Partial Cash Exchange during the period between the close of business on any
dividend payment record date and the opening of business on the corresponding
Dividend Payment Date must be accompanied by payment of an amount equal to the
dividend payable on such shares on such Dividend Payment Date. A holder of
Series V Preferred Stock on a dividend payment record date whose (or whose
transferee's) shares are subject to a Partial Cash Exchange on the corresponding
Dividend Payment Date will receive the dividend payable by the Corporation on
Series V Preferred Stock on such date.
(d) Validity of Common Stock. Any shares of Common Stock issued upon
------------------------
conversion of shares of Series V Preferred Stock shall be validly issued, fully
paid and nonassessable. Before taking any action that would cause an adjustment
reducing the Conversion Share Price below the then-par value of the Common Stock
deliverable upon conversion of the shares of Series V Preferred Stock, the
Corporation will take any corporate action that, in the opinion of its counsel,
may be reasonably necessary in order that the Corporation may validly and
legally issue fully paid and nonassessable shares of Common Stock at such
adjusted Conversion Share Price.
(e) Listing of Common Stock. The Corporation shall endeavor to list
-----------------------
the shares of Common Stock required to be delivered upon conversion of the
Series V Preferred Stock, prior to such delivery, upon each national securities
exchange, if any, upon which the outstanding shares of Common Stock are listed
at the time of such delivery.
-30-
<PAGE>
(f) Compliance with Laws. Prior to the delivery of any securities
--------------------
that the Corporation shall deliver upon conversion of the Series V Preferred
Stock, the Corporation and the holders of such shares shall endeavor to comply
with all federal and state laws and regulations thereunder requiring the
registration of such securities with, or any approval of or consent to the
delivery thereof by, any governmental authority.
6. Mandatory Conversion. Unless all shares of Series V Preferred Stock
are earlier converted or redeemed pursuant to subsections 4, 5 or 7 of this
Section 6.3(d) and provided that the holders of Series V Preferred Stock have
approved the terms of an IPO as required in accordance with subsection 8 hereof,
then on the first Trading Day of the Corporation's Common Stock (the "CONVERSION
----------
DATE"), all outstanding shares of Series V Preferred Stock shall be
- ----
converted into that number of fully paid and nonassessable shares of Common
Stock that is the result of multiplying the number of shares of Series V
Preferred Stock held by each holder by the Conversion Share Ratio then in
effect. Each holder of shares of Series V Preferred Stock shall, as soon as
practicable after the Conversion Date, surrender all shares of Series V
Preferred Stock held by such holder and any payment in respect of dividends as
set forth in subsection 4(b) and the Corporation shall, as soon as practicable
after such surrender, deliver to such holder, or to the nominee or nominees of
such holder, certificates representing the number of full shares of Common Stock
to which such holder shall be entitled, together with a cash payment in respect
of any fraction of a share of Common Stock, in each case as provided herein.
Conversion of shares of Series V Preferred Stock shall be deemed to have been
effected on the Conversion Date, without regard to the time of surrender of such
shares of Series V Preferred Stock and (i) dividends with respect to such shares
of Series V Preferred Stock shall cease to accrue and accumulate on the
Conversion Date, (ii) such shares of Series V Preferred Stock shall no longer be
deemed outstanding, (iii) the holders thereof shall cease to be holders of
Series V Preferred Stock of the Corporation, (iv) all rights of the holders of
Series V Preferred Stock shall terminate (except the right of a holder to
receive certificates representing the number of full shares of Common Stock to
which such holder shall be entitled, together with a cash payment in respect of
any fraction of a share of Common Stock as provided herein), and (v) the holder
entitled to receive the shares of Common Stock deliverable upon conversion of
such shares of Series V Preferred Stock shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on the Conversion Date.
7. Redemption. The shares of Series V Preferred Stock shall be
subject to the redemption as follows:
(a) Redemption at the Option of the Corporation. Except as set
-------------------------------------------
forth in subsection 5, the Series V Preferred Stock may not be redeemed by the
Corporation prior to the third anniversary of the Issue Date. On and after such
third anniversary of the Issue Date, the Series V Preferred Stock may be
redeemed in whole (but not in part) at the option of the Corporation. The
Corporation shall give written notice to the holders of the Series V Preferred
Stock of its intent to redeem the Series V Preferred Stock not less than 30 nor
more than 60 days prior to the date set for redemption addressed to such holders
at their last address shown upon the transfer books of the Corporation. The
redemption price for each share of the Series V Preferred Stock to be redeemed
pursuant to this subsection (a) shall be the cash amount equal to the Stated
Value plus an Internal Rate of Return of 25% during the period from the Issue
Date until the third anniversary of the Issue
-31-
<PAGE>
Date and an Internal Rate of Return of 20% during the period from and after the
third anniversary date of the Issue Date until the date of redemption. Such
redemption shall be subject to the limitations, if any, imposed by the MGCL, and
shall be paid in immediately available funds. The Series V Preferred Stock
shall not be subject to the operation of any mandatory purchase, retirement or
sinking fund. Any notice that is mailed as provided in this subsection 7(a)
shall be conclusively presumed to have been duly given, whether or not the
holder of shares of the Series V Preferred Stock receives such notice; and
failure to give such notice by mail, or any defect in such notice to the holders
of any shares designated for redemption, shall not affect the validity of the
redemption of any other shares of the Series V Preferred Stock.
On or after the date fixed for redemption as stated in such notice,
each holder of shares of the Series V Preferred Stock called for redemption
shall surrender the certificate representing such shares to the Corporation at
the place designated in such notice and shall thereupon be entitled to receive
payment of the redemption price for each such share. Notice having been given
as aforesaid, if, on the date fixed for redemption, the cash funds necessary for
the redemption shall be legally available therefor and shall have been
irrevocably deposited or set aside in trust with a bank or trust company, then,
notwithstanding that any certificates representing any shares of the Series V
Preferred Stock so called for redemption shall not have been surrendered, (i)
dividends with respect to the shares so called for redemption shall cease to
accrue on the date fixed for redemption, (ii) such shares shall no longer be
deemed outstanding, (iii) the holders thereof shall cease to be stockholders of
the Corporation to the extent of their interest in such shares and (iv) all
rights whatsoever with respect to the shares so called for redemption (except
the right of the holders to receive the redemption price for each such share,
without interest or any sum of money in lieu of interest thereon, upon surrender
of their certificates therefor at a place designated in such notice) shall
terminate.
(b) Redemption at the Option of the Holder. The Series V Preferred
--------------------------------------
Stock may not be redeemed at the option of the holder thereof on or prior to the
first anniversary of the Issue Date. After the first anniversary of the Issue
Date, the Corporation will be required, at the option of the holder of the
Series V Preferred Stock, to redeem fully, but not in part, the shares of Series
V Preferred Stock held by such holder upon the occurrence of any one or more of
the following events: (i) a failure in two consecutive quarters to pay in full
the quarterly dividends on Series V Preferred Stock required by subsection 2 of
this Section 6.3(d) (including all dividends accumulated but unpaid for all
prior quarters); (ii) a default on the payment of principal or interest on any
institutional debt (or debts) having an outstanding balance (or balances)
aggregating greater than (a) $5 million for nonrecourse debt and (b) $2 million
for recourse debt (which default, in either case, shall not have been cured by
the Corporation within 30 Business Days from the time the Corporation receives
written notification of the default); (iii) failure to comply with subsection 8
hereof; (iv) from September 9, 1996 to December 31, 1996, the Corporation's FAD
(as defined below) fails to equal the required dividend payable on the
outstanding Series V Preferred Stock (calculated from the issue date of such
shares of Series V Preferred Stock to December 31, 1996) and an assumed annual
cash dividend on the outstanding Common Stock equal to at least $560 per share
(subject to adjustment for stock splits, stock dividends, combinations and the
like); (v) for calendar year 1997, the Corporation's FAD fails to equal the
required dividend payable on the outstanding Series V Preferred Stock and an
assumed annual cash dividend on the outstanding
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<PAGE>
Common Stock equal to at least $2,100 per share (subject to adjustment for stock
splits, stock dividends, combinations and the like); (vi) for calendar year 1998
and subsequent years, the Corporation's FAD fails to equal the required dividend
payable on the outstanding Series V Preferred Stock and an assumed annual cash
dividend on the outstanding Common Stock equal to at least $2,400 per share
(subject to adjustment for stock splits, stock dividends, combinations and the
like); or (vii) failure of the Corporation to consummate an IPO by the fourth
anniversary of the Issue Date. For purposes of this Section 6.3(d), "FAD" shall
---
mean Funds From Operations (as defined below) minus "Non-Revenue Enhancing
Capital Expenditures" (as defined below). The calculation of FAD shall be made
by the Corporation and confirmed by the Corporation's independent public
accounting firm.
"FUNDS FROM OPERATIONS" or "FFO" shall be defined in accordance with
--------------------- ---
the FFO White Paper prepared in March 1995 by the National Association of Real
Estate Investment Trusts (the "WHITE PAPER") and shall mean the Corporation's
-----------
net income (computed in accordance with generally accepted accounting principles
in effect on December 31, 1995, applied in a manner consistent with the
Corporation's accounting policies and practices as of that date), excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. Adjustments for unconsolidated partnerships
and joint ventures will be calculated to reflect Funds From Operations on the
same basis. As the White Paper provides, only depreciation and amortization of
assets uniquely significant to the real estate industry will be added back.
Amounts added back would include real property depreciation, depreciation of
trade fixtures, including, for example, fume hoods and autoclaves, amortization
of capitalized leasing expenses, including leasing commissions, tenant
allowances or improvements, and the like. Specifically excluded are the add-
back of items such as the amortization of deferred financing costs, depreciation
of computer software, company office improvements, and other items commonly
found in other industries and required to be recognized as expenses in the
calculation of net income. Items classified by generally accepted accounting
principles as extraordinary or unusual, along with significant non-recurring
items of income or expense that materially distort the comparative measurement
of the Corporation's performance over time, are not meant to be reductions or
increases in FFO, and should be disregarded in its calculation. The use of a
corporate form versus a partnership form for unconsolidated partnerships and
joint ventures should not affect the determination of whether an entity is to be
treated as a joint venture for purposes of the definition. Gains or losses on
sales of securities or undepreciated land shall be included in FFO, unless they
are unusual and non-recurring. Notwithstanding any other provision hereof,
dividends on the Series V Preferred Stock shall not be deducted from net income
in computing FAD.
"NON-REVENUE ENHANCING CAPITAL EXPENDITURES" shall mean those capital
------------------------------------------
expenditures (computed in accordance with generally accepted accounting
principles consistently applied) made with respect to existing real property
that the Corporation has owned and leased to others in order to continue (but
not those expenditures designed to enhance) the revenue-generating capacity of
the property; the following categories of capital expenditures shall not be
---
included for this purpose (and accordingly, the listed capital expenditures will
not be deducted from FFO in computing FAD): capital expenditures relating to
(i) acquisitions, (ii) deferred maintenance on acquisitions, (iii) tenant
improvements (including initial shell build out) and leasing commissions
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<PAGE>
on square footage that was not leased at the time of acquisition, (iv)
development of new properties or material new elements of existing properties,
and (v) improvements to bring a property into compliance with government
regulations.
The redemption price for each share of the Series V Preferred Stock to
be redeemed pursuant to this subsection (b) shall be the cash amount equal to
the Stated Value plus an Internal Rate of Return of 20%, except that an Internal
Rate of Return of 15% shall be paid in connection with a redemption on account
of the failure of the Corporation to consummate an IPO of the Corporation's
Common Stock by the fourth anniversary of the Issue Date as specified in
subsection (vii) above. Notwithstanding subsections (iv), (v) and (vi) above,
the Corporation shall not be deemed to have failed the FAD tests set forth in
such sections if and to the extent that any such failure is based directly on
lost revenues or expenses incurred arising out of a casualty, civil unrest,
natural disaster or similar act of God as to which the Corporation was not
insured (and prudent institutional owners in the market or markets where the
affected assets are located would not have been insured) or the Corporation has
experienced a delay in the receipt of insurance proceeds for reasons beyond the
reasonable control of the Corporation, provided that no single casualty event
shall operate to excuse failure to satisfy a FAD test as to more than one
calendar year.
(c) Waiver. The Corporation shall promptly notify in writing each
------
holder of Series V Preferred Stock of the occurrence of any events set forth or
referred to in subsection (b) (a "TRIGGER EVENT") and such notice shall specify
-------------
the redemption price and place at which the holders may obtain payment of the
redemption price. Unless such holder submits to the Corporation a written
notice electing to redeem (the "ELECTION NOTICE") on or before 90 days after
---------------
receipt of the Corporation's notice, the holder shall be deemed to have waived
the right to have shares of Series V Preferred Stock redeemed as a result of
such occurrence. No such waiver shall constitute the waiver of rights with
respect to any subsequent occurrence.
(d) Redemption Date, Notice of Redemption. The redemption date shall
-------------------------------------
be 180 days after receipt of the Election Notice by the Corporation in the case
of a redemption at the option of a holder. On or before the redemption date,
each holder of shares called for redemption shall surrender the certificate or
certificates representing such shares to the Corporation at the place designated
in the redemption notice and shall thereupon be entitled to receive payment of
the redemption price on the redemption date. If on or before the redemption
date the Corporation has cash funds available or has deposited for such purpose
in trust with a bank or trust company sufficient funds to pay the redemption
price in full to the holders of all shares called for redemption, then,
notwithstanding that the certificates representing any shares of the Series V
Preferred Stock so called for redemption shall not have been surrendered, (i)
dividends with respect to the shares so called for redemption shall cease to
accrue on the date fixed for redemption, (ii) such shares shall no longer be
deemed outstanding, (iii) the holders thereof shall cease to be stockholders of
the Corporation to the extent of their interest in such shares and (iv) all
rights whatsoever with respect to the shares so called for redemption (except
the right of the holders to receive the redemption price for each such share,
without interest or any sum of money in lieu of interest thereon, upon surrender
of their certificates therefor at a place designated in such notice) shall
terminate.
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<PAGE>
(e) Continuing Rights to Conversion. All rights to convert shares in
-------------------------------
accordance with subsections 4, 5 and 6 of this Section 6.3(d) shall remain valid
and effective following the Corporation's notice of redemption, provided that
the right to convert shares of Series V Preferred Stock shall terminate as to a
holder's shares at the close of business on the 5th day prior to the redemption
date if such holder's conversion rights are not exercised in accordance with
subsections 4, 5 and 6 on or prior to such date. Any amounts so deposited on
account of the redemption price of shares converted subsequent to the date of
deposit shall be repaid to the Corporation forthwith upon conversion of such
shares of Series V Preferred Stock into shares of Common Stock. Notwithstanding
anything contained herein to the contrary, no shares of Series V Preferred Stock
shall be required to be redeemed by the Corporation if, prior to the actual
receipt by the Corporation of the Election Notice, the Trigger Event has been
cured.
(f) Payment In Cash. All redemption payments shall be made in cash.
---------------
If the Corporation fails to make a redemption payment because the payment is
prohibited by the MGCL or similar statute, then on the redemption date the
Corporation shall provide to the holders of Series V Preferred Stock, whose
shares are subject to redemption, payment of the maximum amount that may then be
legally paid, on a pro rata basis, together with a certificate of the chief
--- ----
executive or chief financial officer of the Corporation setting forth the
computation made under the applicable statutory provision to determine what
amount could be legally paid. Thereafter, until the shares subject to
redemption have been fully redeemed, within 15 days after the end of each month,
the Corporation shall provide the holders of Series V Preferred Stock whose
shares are subject to redemption, a similar certificate showing the computation
of the maximum legally permitted redemption payment that may be made as of the
end of such month, together with the maximum permitted payment, if any, on a pro
---
rata basis. All shares of Series V Preferred Stock for which a redemption
- ----
payment has not been made on a redemption date shall be considered to be
outstanding for all purposes. Nothing in this subsection (f) is intended to
limit the other rights of holders of the Series V Preferred Stock relating to
failure of the Corporation to make a redemption payment.
8. Protective Provisions. In addition to any other approval that
may be required by law and the charter of the Corporation, (A) the Corporation
shall not take any of the following actions (other than the actions specified in
clause (vii) below) and the Corporation shall not permit any subsidiary of the
Corporation (the "Subsidiary") to take any of the actions specified in clauses
(i), (ii), (iii), (iv), (v), (vi) or (viii) below without first obtaining prior
written approval of (x) the holders of a majority of the outstanding shares of
Series V Preferred Stock or (y) if AEW does not own a majority of the
outstanding shares of Series V Preferred Stock, the directors elected by the
holders of Series V Preferred Stock and (B) the Corporation shall not take any
of the actions specified in clause (vii) below without first obtaining prior
unanimous approval of the board of directors:
(i) the issuance of or modification in a manner materially adverse to
the Corporation or Subsidiary of any debt if the principal amount of such debt
exceeds $10 million or the conversion to a term loan of any amounts owed to
PaineWebber Incorporated, provided that such approval will not be required upon
such issuance or modification necessary in connection with the redemption in
full of the Series V Preferred Stock in accordance with Section 7 hereof or an
IPO in
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which the shares of Series V Preferred Stock are converted and redeemed in
accordance with Section 5(a) hereof.
(ii) new investments, including a purchase of a real estate operating
company or REIT, with a purchase price equal to or greater than $10 million, or
any series of investments within any 90-day period with an aggregate purchase
price exceeding $25 million;
(iii) issuance of any equity securities by the Corporation or
Subsidiary in an IPO of Common Stock other than an IPO in which the shares of
Series V Preferred Stock are converted and redeemed in accordance with Section
5(a) hereof or redeemed in accordance with Section 7(a) hereof.
(iv) issuance of any equity security by the Subsidiary (other than to
the Corporation) or issuance of any equity security by the Corporation (other
than (i) securities issuable upon conversion, exercise or exchange of any Share
of Series V Preferred Stock, Convertible Security (provided the issuance of such
Convertible Security was made in accordance with the provisions of this Section
8), Option or Permitted Option, (ii) securities issuable in consideration of the
acquisition of assets or shares of another entity as long as the acquisition is
approved in accordance with this Section 8, (iii) securities issuable in
connection with any stock split or stock dividend payable in Common Stock or
(iv) Substitute Securities (as defined in the Series V Convertible Stock
Purchase Agreement, dated as of September 9, 1996, between the Corporation,
Health Science Properties Holding Corporation and AEW Partners II, L.P.)) unless
the following conditions are satisfied, (A) such securities do not rank senior
in liquidation preferences, dividend payment or redemption to the Series V
Preferred Stock, (B) the rights of such securities do not impair the voting or
approval rights of the holders of the Series V Preferred Stock or prevent the
holders of shares of Series V Preferred Stock from electing a majority of the
members of the Board of Directors under circumstances set forth in Section 11 of
this Section 6.3(d), (C) the holders of the Series V Preferred Stock are offered
transferable preemptive rights to purchase their Pro Rata Portion (as defined
below) of such securities on terms no less favorable to the Corporation, and (D)
if such securities are Common Stock or securities convertible into Common Stock,
and if the Common Stock purchase price or Common Stock conversion share price is
less than the then Conversion Share Price then the Conversion Share Price will
be adjusted as set forth in Section 4 (and the Conversion Share Ratio adjusted
accordingly), provided however that prior approval will not be required upon
issuance of any equity securities fully to redeem the Series V Preferred Stock
or as part of an IPO in which the shares of Series V Preferred Stock are
converted and redeemed in accordance with Section 5(a) hereof.
(v) payment of dividends on any equity securities when the
Corporation's FAD fails to equal the required dividends payable on the
outstanding Series V Preferred Stock and the assumed dividends on the
outstanding Common Stock as set forth in any of Sections 7(b)(iv), 7(b)(v) or
7(b)(vi) hereof;
(vi) sale in any one transaction of any asset or assets with a sales
price in excess of $10 million, or any series of sales within a 90-day period
exceeding $25 million; provided, however, that such approval will not be
-------- -------
required in connection of such sale of assets necessary in
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connection with a complete redemption of the Series V Preferred Stock in
accordance with Section 7(a) hereof or as part of an IPO in which the shares of
Series V Preferred Stock are converted and redeemed in accordance with
subsection 5(a) hereof;
(vii) institution of any bankruptcy action (as defined below)
provided, however, that such approval will not be required in connection with
such bankruptcy action if obtaining such approval is determined by a court of
competent jurisdiction to be unenforceable under applicable state or federal
law;
(viii) sale, consolidation or merger of the Corporation or Subsidiary;
(ix) the voluntary termination of the Corporation's status as a REIT
for tax purposes;
(x) any substantial change in the Corporation's current business
strategies substantially as described in the Corporation's Confidential Offering
Memorandum dated September 11, 1995;
(xi) Jerry Sudarsky ceasing to serve as the full-time Chairman of the
Corporation (other than by reason of his death or disability) during the period
ending on the earlier of January 1, 1998 or consummation of a public offering of
the securities of the Corporation or Joel Marcus ceasing to serve as the full-
time Chief Executive Officer or Chief Operating Officer of the Corporation
(other than by reason of his death or disability);
(xii) the sale or disposition by Mr. Sudarsky or Mr. Marcus of 20% or
more of his stock ownership interest in the Parent as of the Issue Date. For the
purposes of this paragraph, shares held in (a) a trust for estate planning
purposes for the benefit of Mr. Sudarsky or Mr. Marcus or members of their
immediate families (spouse, issues and siblings), or (b) held by members of
their immediate families or (c) an entity wholly-owned by any of the foregoing,
shall be deemed to be held by Mr. Sudarsky or Mr. Marcus as the case may be;
(xiii) the distribution to any shareholder of the Corporation of any
securities of any issuer other than the Corporation other than by means of a pro
---
rata distribution to the holders of Common and Series V Preferred Stock (on an
- ----
as-converted-to Common Stock basis).
The term "Pro Rata Share" shall mean a fraction of the entire issuance
of equity securities the numerator of which shall be the sum of the number of
the shares of Common Stock then owned (or issuable upon conversion of Shares
then owned) by the holder of Series V Preferred Stock and the denominator of
which shall be the total number of the shares of Common Stock outstanding
immediately prior to the issuance of such equity securities assuming full
conversion or exercise of all outstanding Common Stock and Shares, Convertible
Securities, Options and Permitted Options.
Any offer of equity securities made to the holders of Series V
Preferred Stock shall be made by notice in writing at least 20 days prior to the
date on which the Corporation intends to
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issue and sell such securities. Such notice shall set forth (i) the number and
type of securities proposed to be issued and sold and the terms of such
securities, (ii) the approximate price at which such securities are proposed to
be sold and the terms of payment, (iii) the number of securities offered to the
holders of Series V Preferred Stock in compliance with the provisions of this
Section, and (iv) the proposed date of issuance and sale of such securities.
Not later than 10 Business Days after receipt of such notice, each holder of
Series V Preferred Stock shall notify the Corporation in writing whether it
elects to purchase all or any portion of its Pro Rata Portion of the securities
offered pursuant to such notice. If any holder of Series V Preferred Stock does
not so notify the Corporation, such holder shall be deemed to have waived rights
to purchase any of the securities. If a holder of Series V Preferred Stock
shall elect to purchase any such securities, the securities which it shall have
elected to purchase shall be issued and sold to such holder by the Corporation
at the same time and on the same terms and conditions as the securities are
issued and sold to third parties. If, for any reason, the sale of securities to
third parties is not consummated, such holder's election shall terminate,
subject to such holder's ongoing subscription right with respect to issuances of
securities at later dates or times.
The term "bankruptcy action" shall mean:
(a) Commencing any case, proceeding or other action seeking protection
for the Corporation as a debtor under any existing or future law of any
jurisdiction relating to bankruptcy, insolvency, reorganization or relief of
debtors;
(b) Consenting to the entry of an order of relief in any involuntary
bankruptcy case against the Corporation;
(c) Filing an answer in any involuntary case described in clause (b)
above admitting the material allegations of the petition therein;
(d) Seeking or consenting to the appointment of a receiver,
liquidator, assignee, trustee, sequestrator, custodian or any similar official
for the Corporation or for a substantial portion of its properties;
(e) Making any assignment for the benefit of the creditors of the
Corporation; and
(f) Admitting in writing the inability of the Corporation to generally
pay its debts as they mature or that the Corporation is generally not paying its
debts as they become due.
If any director of the Corporation votes against the initiation of any
bankruptcy action, such director shall not be liable for monetary damages to the
Corporation or its stockholders for voting against such bankruptcy action. This
exculpation shall be in addition to, and shall not in any way limit or modify
any other exculpation contained in the charter of the Corporation.
With respect to each of the above transactions, if their approval is
required, the holders of Series V Preferred Stock shall be provided with the
information regarding the proposed transaction at least 10 Business Days prior
to the scheduled approval date. If the holders of the
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Series V Preferred Stock shall not deliver written notice objecting to the
particular transaction before the end of such 10 Business Day period, such
holders shall be deemed to have consented to such transaction.
The above requirements to obtain prior approval of certain actions
shall terminate if (i) the Corporation shall have an IPO in which the
Corporation issues primary shares of Common Stock with an aggregate offering
price of $100 million or more of new equity or (ii) at any time prior to or
following conversion into Common Stock if the holders of Series V Preferred
Stock own less than 15% of the total equity stock of the Corporation assuming a
conversion of Series V Preferred Stock in accordance with subsection 4 of this
Section 6.3(d). Notwithstanding the above, the requests to obtain prior
approval of certain actions and unless otherwise required by law, no approval
shall be required if the Board of Directors determines in good faith that such
action must be taken to establish or maintain the Corporation's qualification as
a real estate investment trust (as defined in Section 856 of the Internal
Revenue Code of 1986 ("REIT")).
----
9. Shares to Be Retired. All shares of Series V Preferred Stock
which shall have been issued and reacquired in any manner by the Corporation
shall be restored to the status of authorized but unissued shares of Preferred
Stock of the Corporation, without designation as to class or series.
10. Ranking. Any class or series of stock of the Corporation shall
be deemed to rank:
(a) prior to the Series V Preferred Stock, as to the payment of
dividends or as to distribution of assets upon liquidation, dissolution or
winding up, if the holders of such class or series shall be entitled to the
receipt of dividends or of amounts distributable upon liquidation, dissolution
or winding up, as the case may be, in preference or priority to the holders of
Series V Preferred Stock ("SENIOR SHARES");
-------------
(b) on a parity with the Series V Preferred Stock as to the
payment of dividends and as to the distribution of assets upon liquidation,
dissolution or winding up if such stock or series shall be Parity Shares;
(c) junior to the Series V Preferred Stock, as to the payment of
dividends or as to the distribution of assets upon liquidation, dissolution or
winding up, if such stock or series shall be Junior Shares; and
(d) junior to the Series V Preferred Stock, as to the payment of
dividends and as to the distribution of assets upon liquidation, dissolution or
winding up, if such stock or series shall be Fully Junior Shares.
11. Voting Rights. Except as expressly provided below or otherwise
in this charter or required by law, the holders of Series V Preferred Stock
shall have no voting rights.
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<PAGE>
(a) Directors. Subject to subsection (c) below, the holders of
---------
shares of Series V Preferred Stock as a class shall have the right to elect two
members of the Board of Directors and the holders of Common Stock shall have the
right to elect the remaining directors; provided, however, that if at any time:
-------- -------
(i) the Corporation has failed in two consecutive quarters to
pay in full the quarterly dividends on Series V Preferred Stock as required by
subsection 2 of this Section 6.3(d) (including all dividends accumulated but
unpaid for all prior quarters);
(ii) the Corporation violates Section 8(xi) and (xii) hereof;
(iii) the Corporation has failed to close an IPO of its
Common Stock by the fourth anniversary of the Issue Date; or
(iv) the Corporation fails to pay the full redemption price
on the Series V Preferred Stock subject to redemption pursuant to subsection
7(b) on any redemption date (provided, that such redemption was made at the
request of the holders of the majority of the then-outstanding shares of Series
V Preferred Stock), then the holders of Series V Preferred Stock shall
immediately (and regardless of any subsequent cure) and thereafter be entitled
to elect the smallest number of directors constituting a majority of the Board
of Directors, and the holders of Common Stock, as a class, shall retain the
right to elect the remaining directors. In order to facilitate the effective
control of the Board of Directors by the holders of Series V Preferred Stock
upon the occurrence of any event identified in (i), (ii), (iii) or (iv) above,
the size of the Board shall automatically be increased to 15, and the holders of
Series V Preferred Stock, voting together as a single class, shall have the
exclusive right to elect six persons to fill such newly created vacancies on the
Board of Directors. All Directors elected by a vote of the holders of Series V
Preferred Stock shall be referred to as "Series V Directors." The initial two
Series V Directors serving as directors of the Corporation shall be a Class B
Director and a Class C Director. If more than the two Series V Directors are
serving then they shall be assigned to classes to make the number of directors
in each class as nearly equal as possible. Holders of Series V Preferred Stock
may elect the Series V Directors by unanimous written consent, by a special
meeting of the holders of the Series V Preferred Stock, or at an annual meeting
of stockholders of the Corporation. Any special meeting of the holders of the
Series V Preferred Stock may be called by holders who hold at least 10% of the
outstanding shares of Series V Preferred Stock or by a Series V Director and
shall be held at a time and place specified by the holder or Series V Director
calling a meeting. The presence in person or by proxy at a meeting of persons
entitled to cast a majority of all the votes entitled to be cast by the holders
of a majority of the outstanding shares of Series V Preferred Stock shall
constitute a quorum for the purposes of any such special meeting. In the case of
any vacancy occurring among the Series V Directors, a majority of the remaining
Series V Directors, if any, may elect a successor to hold office until the
earlier of the expiration of the remaining term of such Series V Director or the
next meeting of the stockholders of that class or series, which shall not be
later than the next annual meeting of holders of the Common Stock. If all Series
V Directors shall cease to serve as directors before their terms expire, the
holders of Series V Preferred Stock then outstanding may, by unanimous written
consent or at an annual or special meeting of the holders of Series V Preferred
Stock, elect successors to hold office for the unexpired terms of the Series V
Directors.
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<PAGE>
(b) Amendment. Notwithstanding any other provision in the charter of
---------
the Corporation, any amendment to the charter of the Corporation which will
materially adversely affect the preferences or rights of the Series V Preferred
Stock shall be approved only by the affirmative vote of the holders of at least
a majority of the outstanding shares of Series V Preferred Stock, voting
together as a single class or, if AEW does not own a majority of the outstanding
shares of Series V Preferred Stock, the directors nominated by the holders of
Series V Preferred Stock.
(c) Termination. The voting rights set forth in (a) and (b) above
-----------
shall terminate if the number of shares of Common Stock issuable upon conversion
of the outstanding shares of Series V Preferred Stock by applying the Conversion
Share Ratio shall represent less than 15% of the total of (i) the number of
outstanding shares of Common Stock plus (ii) the number of shares of Common
Stock that would be outstanding upon conversion of the outstanding shares of
Series U Preferred Stock, together with the outstanding shares of Series V
Preferred Stock applying the Conversion Share Ratio plus all outstanding
Convertible Securities. If the number of shares of Common Stock issuable upon
conversion of the Series V Preferred Stock by applying the Conversion Share
Ratio represents less than 15% but 7% or more of such total, the holders of
shares of Series V Preferred Stock as a class shall only have the right to elect
one member of the Board of Directors rather than two and such right to elect one
member of the Board of Directors shall terminate if the number of shares of
Common Stock issuable upon conversion of the outstanding shares of Series V
Preferred Stock at the Conversion Share Ratio represents less than 7% of such
total. In the event the voting rights with respect to any one or more Series V
Directors terminates in accordance with this Subsection (c), the term of any
such Series V Director elected in accordance herewith shall immediately
terminate.
(d) Mechanics. Solely for the purpose of this subsection 11, each
---------
holder of shares of Series V Preferred Stock shall be entitled to one vote for
each such share of Series V Preferred Stock held on a record date for vote or
consent of stockholders.
(e) Notice of Meetings. The holder of each share of Series V
------------------
Preferred Stock shall be entitled to written notice of any stockholders' meeting
in the manner provided in the Bylaws of the Corporation.
(f) Service on Compensation Committee. At least one Series V Director
---------------------------------
shall serve on the Compensation Committee of the Board of Directors, which
committee shall be made up of not more than three Directors during such time as
the holders of Series V Preferred Stock have the right to elect at least one
Series V Director. The number of members on the Compensation Committee may not
be increased without the prior approval of the holders of a majority of
outstanding shares of the Series V Preferred Stock during such time as the
holders of Series V Preferred Stock have the right to elect at least one Series
V Director.
12. Record Holders. The Corporation and the Transfer Agent may deem
and treat the record holder of any Series V Preferred Stock as the true and
lawful owner thereof for all purposes, and neither the Corporation nor the
Transfer Agent shall be affected by any notice to the contrary.
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<PAGE>
13. Fees and Expenses. In the event any holder of Series V Preferred
Stock takes any legal action to enforce any of its rights under this Section
6.3(d) of the Corporation's charter, the non-prevailing party shall be required
to pay the costs and expenses of the prevailing party in connection with such
action, including reasonable attorney and witness fees. Section 6.4. Classified
----------
or Reclassified Shares. Prior to issuance of classified or reclassified shares
- ----------------------
of any class or series, the Board of Directors by resolution shall: (a)
designate that class or series to distinguish it from all other classes and
series of stock of the Corporation; (b) specify the number of shares to be
included in the class or series; (c) set or change, subject to the provisions of
Article VII and subject to the express terms of any class or series of stock of
the Corporation outstanding at the time, the preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms and conditions of redemption for each
class or series; and (d) cause the Corporation to file articles supplementary
with the State Department of Assessments and Taxation of Maryland ("SDAT"). Any
of the terms of any class or series of stock set or changed pursuant to clause
(c) of this Section 6.4 may be made dependent upon facts or events ascertainable
outside the charter (including determinations by the Board of Directors or other
facts or events within the control of the Corporation) and may vary among
holders thereof, provided that the manner in which such facts, events or
variations shall operate upon the terms of such class or series of stock is
clearly and expressly set forth in the articles supplementary filed with the
SDAT.
Section 6.5. Charter and Bylaws. All persons who shall acquire stock in
------------------
the Corporation shall acquire the same subject to the provisions of the charter
and the Bylaws.
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ARTICLE VII
EXCESS SHARE PROVISIONS
Section 7.1 Definitions. As used in this Article VII, the following
-----------
terms shall have the following meanings:
"AEW" shall mean AEW Partners II, L.P., a Delaware limited
partnership.
"Beneficial Ownership" shall mean ownership of Capital Stock either
directly or constructively through application of section 544 of the Code, as
modified by section 856(h) of the Code. The terms "Beneficial Owner,"
"Beneficially Owns" and "Beneficially Owned" shall have correlative meanings.
"Beneficial Transferee" shall mean the transferee that acquires for
consideration Capital Stock from the Trustee pursuant to Section 7.3.5 of this
Article VII.
"Capital Stock" shall mean all classes and series of stock of the
Corporation, including, without limitation, Common Stock, Excess Stock, and
Preferred Stock.
"Charitable Beneficiary" shall mean the beneficiary or beneficiaries
of the Trust which shall be the United Jewish Appeal and, if necessary either
(i) to prevent the Corporation from becoming Closely Held, as defined below, or
(ii) to prevent beneficial ownership of Capital Stock by fewer than 100 Persons
(determined without reference to any rules of attribution), one or more
additional persons exempt from tax under section 501(c)(3) of the Code to be
selected by the Trustee.
"Closely Held" shall have the meaning set forth in Section 7.2.1(d) of
this Article VII.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Excepted Holder" shall mean (i) AEW, (ii) an assignee of AEW who is
an Excepted Holder pursuant to Section 7.2.10(b), and (iii) any stockholder of
the Corporation for whom an exemption to the Ownership Limit is created by the
Board of Directors pursuant to Section 7.2.10(a). Notwithstanding anything to
the contrary in this Article VII, unless otherwise agreed in writing by the
Board of Directors, an Excepted Holder shall cease to be an Excepted Holder if,
as a result of a sale or other disposition of Capital Stock by such Excepted
Holder, the Excepted Holder Beneficially Owns Capital Stock less than the
Ownership Limit.
"Excepted Holder Limit" shall mean (i) with respect to AEW (or any
assignee of AEW who is an Excepted Holder pursuant to Section 7.2.10(b)), ___%
of the Capital Stock of the Corporation, reduced in each case by the percentage
of Capital Stock of the Corporation disposed of by AEW or any such assignee
after __________, 1997, and (ii) with respect to any other Excepted
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Holder, such percentage of the Capital Stock of the Corporation as determined by
the Board of Directors pursuant to Section 7.2.10.
"Excess Stock" shall mean stock that is exchanged for Capital Stock
pursuant to Section 7.2.2 of this Article VII.
"Individual" shall mean any Person that is treated as an individual
for purposes of section 542(a)(2) of the Code as the application of such section
may be modified by section 856(h) of the Code and by applying the "look through"
rule of section 856(h)(3) of the Code to any trust described in section 401(a)
of the Code and exempt from tax under section 501(a) of the Code.
"Market Price" on any date shall mean the fair market value as
determined by a nationally recognized investment banking firm selected by the
Board of Directors.
"Ownership Limit" shall mean 9.8% of the value of the outstanding
shares of Capital Stock of the Corporation, subject to adjustment as set forth
in Section 7.2.8.
"Person" shall mean an individual, corporation, partnership, estate,
trust (including a trust qualified under section 401(a) or 501(c)(17) of the
Code), a portion of a trust permanently set aside for or to be used exclusively
for the purposes described in section 642(c) of the Code, association, private
foundation within the meaning of section 509(a) of the Code, joint stock compa
ny or other entity or any government or agency or political subdivision thereof
and also includes a "group" as that term is used for purposes of Section
13(d)(3) of the Securities Exchange Act of 1934, as amended.
"Purported Holder" shall mean, with respect to any event, other than a
purported Transfer, that results in Excess Stock, the record holder of the
Capital Stock but for this Article VII.
"Purported Transferee" shall mean, with respect to any purported
Transfer of Capital Stock, including (without limitation) a purported Transfer
that results in Excess Stock, the person who would be the record holder of the
Capital Stock but for this Article VII.
"Restriction Termination Date" shall mean the first day on which the
Board of Directors determines that it is no longer in the best interests of the
Corporation to attempt to, or continue to, qualify as a REIT.
"REIT" shall mean a real estate investment trust under the Code.
"Transfer" shall mean any sale, issuance, transfer, gift,
hypothecation, pledge, assign ment, devise or other disposition (including (i)
the granting of any option or entering into any agreement for the sale, transfer
or other disposition of Capital Stock, or (ii) the sale, transfer, assign ment
or other disposition of any securities or rights convertible into or
exchangeable for Capital Stock), whether voluntary or involuntary, whether of
record, constructively or beneficially and whether by operation of law or
otherwise. The terms "Transfers" and "Transferred" shall have the correlative
meanings.
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"Trust" shall mean the trust created pursuant to Section 7.3.1 of this
Article VII.
"Trustee" shall mean such person, as trustee of the Trust, as shall be
selected from time to time by the Board of Directors.
Section 7.2 Capital Stock.
-------------
Section 7.2.1 Restriction on Transfers. Prior to the Restriction
Termination Date:
(a) No Person, other than an Excepted Holder, shall Beneficially Own
Capital Stock in excess of the Ownership Limit. In addition, no Excepted Holder
shall Beneficially Own Capital Stock in excess of the Excepted Holder Limit with
respect to such Excepted Holder.
(b) Any Transfer that, if effective, would result in any Person,
other than an Excepted Holder, Beneficially Owning Capital Stock in excess of
the Ownership Limit shall be void ab initio as to the Transfer of such Capital
-- ------
Stock that would be otherwise Beneficially Owned by such Person in excess of the
Ownership Limit; and the intended transferee shall acquire no rights in such
Capital Stock.
(c) Any Transfer that, if effective, would result in an Excepted
Holder Bene ficially Owning Capital Stock in excess of the applicable Excepted
Holder Limit shall be void ab initio as to the Transfer of such Capital Stock
-- ------
that would be otherwise Beneficially Owned by such Excepted Holder in excess of
the applicable Excepted Holder Limit; and such Excepted Holder shall acquire no
rights in such Capital Stock.
(d) Any Transfer that, if effective, would result in the Corporation
being "closely held" within the meaning of section 856(h) of the Code at any
time during the taxable year ("Closely Held") shall be void ab initio as to the
-- ------
Transfer of that number of shares of Capital Stock that would otherwise cause
the Corporation to be Closely Held; and the intended transferee shall acquire no
rights in such shares of Capital Stock.
(e) Any Transfer that, if effective, would result in the Capital Stock
being beneficially owned, in the aggregate, by fewer than 100 Persons
(determined without reference to any rules of attribution) shall be void ab
--
initio as to the Transfer of that number of shares that would result in
- ------
beneficial ownership of Capital Stock, in the aggregate, by fewer than 100
Persons (determined without reference to any rules of attribution); and the
intended transferee shall acquire no rights in such shares of Capital Stock.
Section 7.2.2 Exchange for Excess Stock.
(a) If, notwithstanding the other provisions contained in this Article
VII, at any time prior to the Restriction Termination Date, there is a purported
Transfer or any other event such that any Person, other than an Excepted Holder,
would Beneficially Own Capital Stock in excess of the Ownership Limit, then such
shares of Capital Stock in excess of such Ownership Limit (such shares to be
rounded up to the nearest whole share) shall be automatically exchanged for an
equal
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number of shares of Excess Stock and shall be subject to the terms of Section
7.3 hereof. Such exchange shall be effective as of the close of business on
the business day prior to the date of the Transfer or other event.
(b) If, notwithstanding the other provisions contained in this Article
VII, at any time prior to the Restriction Termination Date, there is a purported
Transfer or any other event such that any Excepted Holder would Beneficially Own
Capital Stock in excess of the applicable Excepted Holder Limit, then such
shares of Capital Stock in excess of such Excepted Holder Limit (such shares to
be rounded up to the nearest whole share) shall be automatically exchanged for
an equal number of shares of Excess Stock and shall be subject to the terms of
Section 7.3 hereof. Such exchange shall be effective as of the close of
business on the business day prior to the date of the Transfer or other event.
(c) If, notwithstanding the other provisions contained in this Article
VII, at any time prior to the Restriction Termination Date, there is a purported
Transfer or any other event that would result in the Corporation being Closely
Held, then such shares of Capital Stock that would otherwise cause the
Corporation to become Closely Held (such shares to be rounded up to the nearest
whole share) shall be automatically exchanged for an equal number of shares of
Excess Stock and shall be subject to the terms of Section 7.3 hereof. Such
exchange shall be effective as of the close of business on the business day
prior to the date of the Transfer or other event.
(d) If, notwithstanding the other provisions contained in this Article
VII, at any time prior to the Restriction Termination Date, there is a purported
Transfer or any other event that would result in beneficial ownership of Capital
Stock by fewer than 100 Persons (determined without reference to any rules of
attribution), then such shares of Capital Stock that would otherwise cause such
beneficial ownership to be held by fewer than 100 Persons shall be automatically
exchanged for an equal number of shares of Excess Stock and shall be subject to
the terms of Section 7.3 hereof. Such exchange shall be effective as of the
close of business on the business day prior to the date of the Transfer or other
event.
Section 7.2.3 Remedies for Breach. If the Board of Directors, or a
duly authorized committee thereof, at any time determines in good faith that a
Transfer has taken place in violation of Section 7.2.1 or that a Person intends
to acquire or has attempted to acquire Beneficial Ownership of any shares of
Capital Stock in violation of Section 7.2.1, the Board of Directors or a
committee thereof shall take such action as it deems advisable to refuse to give
effect to or to prevent such Transfer, including, but not limited to, refusing
to give effect to such Transfer on the books of the Corporation or instituting
proceedings to enjoin or rescind such Transfer; provided, however, that any
-------- -------
Transfers or attempted Transfers in violation of Section 7.2.1 shall be void ab
--
initio and shall automatically be treated in the manner provided in Section
- ------
7.2.2 irrespective of any action (or non-action) by the Board of Directors or
its designees.
Section 7.2.4 Notice of Ownership or Attempted Ownership in Violation
of Section 7.2.1. Any Person who acquires or attempts to acquire Beneficial
Ownership of shares of Capital Stock in violation of Section 7.2.1 of this
Article VII, shall immediately give written notice to the Corporation of such
event and shall provide to the Corporation such other information as the
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Corporation may request in order to determine the effect, if any, of such
acquisition or attempted acquisition on the Corporation's qualification as a
REIT.
Section 7.2.5 Owners Required to Provide Information. Prior to the
Restriction Termination Date:
(a) The Corporation shall demand written notice, within 30 days after
the close of each taxable year, from every stockholder of record of more than 5%
(during any periods in which the number of such owners exceeds 2000) or 1%
(during any periods in which the number of such owners is greater than 200 but
no more than 2000), or such lower percentages as required pursuant to
regulations under the Code, of the outstanding shares of Capital Stock of the
Corporation stating the name and address of such Beneficial Owner, the number of
shares of Capital Stock Beneficially Owned, and a description of how such shares
are held. Each such Beneficial Owner shall provide to the Corporation such
additional information as the Corporation may reasonably request in order to
determine the effect, if any, of such Beneficial Ownership on the Corporation's
status as a REIT.
(b) Each Person who is a Beneficial Owner of Capital Stock and each
Person (in cluding the stockholder of record) who is holding Capital Stock for
a Beneficial Owner shall provide to the Corporation such information as the
Corporation may reasonably request in order to determine the Corporation's
status as a REIT, to comply with the requirements of any taxing authority or
governmental agency or to determine such compliance, or to comply with
regulations promulgated under the REIT provisions of the Code including, without
limitation, Treasury Regulation Section 1.857-8 or any successor regulation.
(c) Every stockholder of record who holds shares of Capital Stock as
nominee for another Person shall give written notice to the Corporation of the
name and address of such other Person and the number of shares of Capital Stock
which the stockholder of record holds as nominee for such Person.
Section 7.2.6 Ambiguity. In the case of an ambiguity in the
application of any of the provisions of this Article VII, including any
definition contained in Section 7.1 and any ambiguity with respect to whether
Capital Stock is to be exchanged for Excess Stock in a given situation, the
Board of Directors shall have the power to determine the application of the
provisions of this Article VII with respect to any situation based on the facts
known to it and any such determination by the Board of Directors shall be final
and conclusive for all purposes.
Section 7.2.7 Modifications of Ownership Limit. Subject to the
limitations provided in Section 7.2.8, the Board of Directors may from time to
time increase or decrease the Ownership Limit.
Section 7.2.8 Limitations on Modifications.
(a) The Ownership Limit may not be increased if, after giving effect
to such increase, five Individuals could Beneficially Own, in the aggregate,
more than 49.9% of the value of the outstanding Capital Stock.
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(b) Prior to the modification of any Ownership Limit pursuant to
Section 7.2.7, the Board of Directors may require such opinions of counsel,
affidavits, undertakings or agreements as it may deem necessary or advisable in
order to determine or ensure the Corporation's status as a REIT.
Section 7.2.9 Exceptions to Ownership Limit.
(a) Subject to Section 7.2.1(d), the Board of Directors may exempt a
Person from the Ownership Limit if, prior to such exemption, the Board of
Directors receives such opinions of counsel, rulings, affidavits, undertakings
or agreements as it may deem necessary or advisable in order to determine or
ensure the Corporation's status as a REIT. Notwithstanding the receipt of any
such opinion, ruling, affidavit, undertaking, or agreement, the Board of
Directors may impose such conditions or restrictions as it deems appropriate in
connection with granting such exception.
(b) AEW may Transfer or assign all or a portion of its interest held
in Common Stock of the Corporation on ________, 1997 to another Person or
Persons, provided that, as a result of such Transfer, no Individual would
Beneficially Own shares of Capital Stock in excess of the Ownership Limit. Any
such transferee shall be an Excepted Holder until such time as it disposes of
such Common Stock.
Section 7.2.10 Legend. Each certificate for Capital Stock shall bear
substantially the following legend:
The shares represented by this Certificate are subject to restrictions
on transfer for the purpose of establishing or maintaining the
Corporation's status as a real estate investment trust under the Internal
Revenue Code of 1986, as amended (the "Code"). No Person may Beneficially
Own shares in excess of the Ownership Limit, which may increase or decrease
from time to time, unless such Person is an Excepted Holder. Any Person
who attempts to beneficially own shares in violation of the above
limitation must immediately notify the Corporation. All capitalized terms
in this legend have the meanings defined in the Corporation's charter. If
the restrictions on ownership or transfer are violated, the shares
represented hereby will be automatically exchanged for shares of Excess
Stock, which will then be held in trust for a Charitable Beneficiary. The
foregoing is qualified in its entirety by reference to the Corporation's
charter, a copy of which, including the restrictions on transfer, will be
sent without charge to each stockholder who so requests.
Section 7.3 Excess Stock.
------------
Section 7.3.1 Ownership in Trust. Upon any purported Transfer or
other event that results in the exchange of shares of Capital Stock for Excess
Stock pursuant to Section 7.2.2 of this Article VII, such shares of Excess Stock
shall be deemed to have been Transferred to the Trustee, as trustee of a Trust
for the exclusive benefit of the Charitable Beneficiary. Shares of Excess Stock
so held in the Trust shall continue to be issued and outstanding shares of stock
of the Corporation of such class. The Purported Transferee or Purported Holder
shall have no rights in such shares of Excess Stock except for the rights
provided in Sections 7.3.3 and 7.3.5.
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Section 7.3.2 Dividend Rights. Dividends or other distributions that
have been declared on any shares of Capital Stock that have been exchanged for
Excess Stock pursuant to Section 7.2.2 shall be paid with respect to such Excess
Stock when due to the Trustee, as trustee of the Trust for the exclusive benefit
of the Charitable Beneficiary, until such time as the Trustee shall transfer the
Excess Stock to the Beneficial Transferee pursuant to Section 7.3.5 of this
Article VII. Any dividend or distribution paid prior to the discovery by the
Corporation that the shares of Capital Stock have been exchanged for Excess
Stock shall be repaid to the Corporation upon demand or, at the Corporation's
sole election, shall be offset against any future dividends or distributions
payable to the Purported Transferee or Purported Holder, and any dividend or
distribution authorized but unpaid shall be rescinded as void ab initio with
-- ------
respect to such shares of Capital Stock, as the case may be, and promptly
thereafter paid over to the Trustee with respect to such shares of Excess Stock,
as trustee of the Trust for the exclusive benefit of the Charitable Beneficiary.
Section 7.3.3 Rights Upon Liquidation. At such time as (i) the
Corporation has received the necessary stockholder approval with respect to a
voluntary liquidation or dissolution of the Corporation, or (ii) the Corporation
has become the subject of an order of a court of competent jurisdiction
compelling an involuntary liquidation or dissolution of the Corporation, the
Trustee, as trustee of the Trust for the exclusive benefit of the Charitable
Beneficiary, shall be entitled to receive that amount of distributable assets of
the Corporation to which such Excess Stock would be entitled if such Excess
Stock were entitled to share ratably in the distributable assets of the
Corporation as shares of Capital Stock (the "Distributed Amount"). The Trustee
shall distribute to the Purported Transferee or Purported Holder an amount equal
to the lesser of (a) the Distributed Amount, or (b) as appropriate, either (1)
the price per share paid by such Purported Transferee for the shares of Capital
Stock that were exchanged for Excess Stock, (2) if the Purported Transferee did
not give value for such shares of Capital Stock (having received such through a
gift, devise or otherwise), a price per share equal to the Market Price on the
date of the purported Transfer that resulted in the Excess Stock, or (3) if the
exchange for Excess Stock did not arise as a result of a purported Transfer, a
price per share equal to the Market Price on the date of the other event that
resulted in the exchange for Excess Stock. Payment to the Purported Transferee
or Purported Holder shall be without interest. Subject to applicable law, if
the Corporation causes such liquidation or dissolution to be revoked or
otherwise rescinded, any Excess Stock previously automatically cancelled
pursuant to this Section 7.3.3 of this Article VII shall be automatically
reissued.
Section 7.3.4 Voting Rights. The Trustee, as holder of any Excess
Stock and as trustee for the benefit of the Charitable Beneficiary, shall have
the right to vote any such Excess Stock in connection with any matter on which
the holders of the Capital Stock are entitled to vote until such time as the
Trustee shall transfer such Excess Stock pursuant to Section 7.3.5. The holders
of shares of Excess Stock (other than the Trustee) shall have no voting rights
with respect to Excess Stock and, subject to Maryland law, effective as of the
date that the Excess Stock has been transferred to the Trustee, the Trustee
shall have the authority (at the Trustee's sole discretion) (i) to rescind as
void any vote cast by a Purported Transferee prior to the discovery by the
Corporation that the shares of Excess Stock have been transferred to the Trustee
and (ii) to recast such vote in accor dance with the desires of the Trustee
acting for the benefit of the Charitable Beneficiary; provided, however, that if
-------- -------
the Corporation has already taken irreversible corporate action, then the
Trustee shall not have the authority to rescind or recast such vote.
Notwithstanding the provisions of this
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Article VII, until the Corporation has received notification that shares of
Excess Stock have been transferred to the Trustee, the Corporation shall be
entitled to rely on its stock transfer and other stockholder records for
purposes of preparing lists of stockholders entitled to vote at meetings,
determining the validity and authority of proxies and otherwise conducting votes
of stockholders.
Section 7.3.5 Restrictions on Transfer.
(a) Any shares of Excess Stock that were issued in exchange for
Capital Stock pursuant to Section 7.2.2 of this Article VII and are held by the
Trustee pursuant to Section 7.3.1 of this Article VII shall be Transferred by
the Trustee only as provided for in this subparagraph 7.3.5(a). The Trustee
shall, within 180 days after the date of the purported Transfer or other event
that resulted in the Excess Stock being issued in exchange for Capital Stock (or
as soon as possible thereafter if the Trustee does not learn of such purported
Transfer or other event within such period), Transfer for consideration the
Excess Stock held in Trust to a Beneficial Transferee, to be designated by the
Corporation, provided that (i) such shares would not be Excess Stock in the
hands of such Beneficial Transferee and (ii) simultaneously with such Transfer
such shares shall be automatically exchanged for an equal number of shares of
the same class or series of Capital Stock which originally was exchanged for
the Excess Stock. The Trustee shall distribute to the Purported Transferee or
Purported Holder from and to the extent of the consideration received by the
Trustee from the Beneficial Transferee an amount equal to, as appropriate (i)
the price per share paid by the Purported Transferee for the shares of the same
class or series of Capital Stock that were exchanged for Excess Stock, as the
case may be, or (ii) if the Purported Transferee did not give value for such
shares of Capital Stock (having received such through a gift, devise or
otherwise), a price per share equal to the Market Price on the date of the
purported Transfer that resulted in Excess Stock or (iii) if the exchange for
Excess Stock did not arise as a result of a purported Transfer, a price per
share equal to the Market Price on the date of the other event that resulted in
the exchange for Excess Stock.
(b) Notwithstanding the foregoing, if a Purported Transferee receives
a price for its interest in the shares of Capital Stock that were exchanged for
Excess Stock that exceeds the amounts such Purported Transferee would receive
under Section 7.3.5(a) of this Article VII, such Purported Transferee shall pay,
or cause to be paid, such excess to the Trustee, as trustee of the Trust for the
exclusive benefit of the Charitable Beneficiary.
(c) If any of the foregoing restrictions are determined to be void,
invalid or unenforceable by any court of competent jurisdiction, then the
Purported Transferee may be deemed, at the option of the Corporation, to have
acted as an agent of the Corporation, acting in turn as agent on behalf of a
third-party purchaser, in acquiring such Excess Stock and to hold such Excess
Stock on behalf of the Corporation (acting, in turn, as agent as aforesaid).
Section 7.4 NYSE Transactions. Nothing contained in this Article VII or
-----------------
in any other provision of this charter shall preclude the settlement of any
transaction entered into through the facilities of the NYSE or any other
national securities exchange or automated inter-dealer quotation system. The
fact that the settlement of any transaction is so permitted shall not negate the
effect of any other provision of this Article VII and any transferee in such
transaction shall be subject to all of the provisions and limitations set forth
in this Article VII.
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Section 7.5 Further Authority. Nothing contained in this Article VII or
-----------------
in any other provision of this charter shall limit the authority of the Board of
Directors to take such other action as it in its sole discretion deems necessary
or advisable to protect the Corporation and the interests of the stockholders by
maintaining the Corporation's eligibility to be, and preserving the
Corporation's status as, a qualified REIT under the Code. The Corporation is
authorized specifically to seek equitable relief, including injunctive relief,
to enforce the provisions of this Article VII.
Section 7.6 Non-Waiver. No delay or failure on the part of the
----------
Corporation or the Board of Directors in exercising any right hereunder shall
operate as a waiver of any right of the Corporation or the Board of Directors,
as the case may be, except to the extent specifically waived in writing.
Section 7.7 Severability. If any provision of this Article VII or any
------------
application of any such provision is determined to be invalid by any Federal or
state court having jurisdiction over the issues, the validity of the remaining
provisions shall not be affected and other applications of such provision shall
be affected only to the extent necessary to comply with the determination of
such court.
ARTICLE VIII
AMENDMENTS
The Corporation reserves the right from time to time to make any amendment
to its charter, now or hereafter authorized by law, including any amendment
altering the terms or contract rights, as expressly set forth in this charter,
of any shares of outstanding stock. All rights and powers conferred by the
charter on stockholders, directors and officers are granted subject to this
reservation.
ARTICLE IX
LIMITATION OF LIABILITY
To the maximum extent that Maryland law in effect from time to time permits
limitation of the liability of directors and officers of a corporation, no
director or officer of the Corporation shall be liable to the Corporation or its
stockholders for money damages. Neither the amendment nor repeal of this
Article IX, nor the adoption or amendment of any other provision of the charter
or Bylaws inconsistent with this Article IX, shall apply to or affect in any
respect the applicability of the preceding sentence with respect to any act or
failure to act which occurred prior to such amendment, repeal or adoption.
ARTICLE X
CONTROL SHARE RIGHTS
Notwithstanding any other provision of the charter or the Bylaws of the
Corporation, Title 3, Subtitle 7 of the Corporations and Associations Article of
the Annotated Code of Maryland (or any successor statute) shall not apply to any
acquisition by any person of shares of stock of the
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Corporation. This Article X may be repealed, in whole or in part, at any time,
whether before or after an acquisition of control shares and, upon such repeal,
may to the extent provided by any amendment to this Article X, apply to any
prior or subsequent control share acquisition; provided, however, in addition to
any other requirement set forth by law or in the charter of the Corporation,
that, while shares of Series V Preferred this Article X may not be modified or
repealed with the prior approval of the holders of a majority of the shares of
Series V Preferred Stock, voting separately as a class.
THIRD: The amendment to and restatement of the charter as hereinabove set
-----
forth has been duly advised by the Board of Directors and approved by the
stockholders of the Corporation as required by law.
FOURTH: The current address of the principal office of the Corporation in
------
the State is as set forth in Article III of the foregoing amendment and
restatement of the charter.
FIFTH: The name and address of the Corporation's current resident agent is
-----
as set forth in Article IV of the foregoing amendment and restatement of the
charter.
SIXTH: The number of directors of the Corporation and the names of those
-----
currently in office are as set forth in Article V of the foregoing amendment and
restatement of the charter.
SEVENTH: The total number of shares of stock which the Corporation had
-------
authority to issue immediately prior to this amendment and restatement was
200,000, consisting of 65,000 shares of Common Stock, $.01 par value per share,
70,000 shares of Excess Stock, $.01 par value per share, and 65,000 shares of
Preferred Stock, $.01 par value per share. The aggregate par value of all
shares of stock having par value was $2,000.
EIGHTH: The total number of shares of stock which the Corporation has
------
authority to issue pursuant to the foregoing amendment and restatement of the
charter is 400,000,000, consisting of 100,000,000 shares of Common Stock, $.01
par value per share, 100,000,000 shares of Preferred Stock, $.01 par value per
share, and 200,000,000 shares of Excess Stock, $.01 par value per share. The
aggregate par value of all authorized shares of stock having par value is
$4,000,000.
NINTH: Each share of Common Stock of the Corporation outstanding
-----
immediately prior to the effective time of these Articles of Amendment and
Restatement is hereby split into shares of Common Stock. The charter
of the corporation is further amended so that each share of Common Stock
outstanding after the stock split shall have a par value of $.01.
TENTH: The undersigned Chairman of the Board acknowledges these Articles
-----
of Amendment and Restatement to be the corporate act of the Corporation and as
to all matters or facts required to be verified under oath, the undersigned
Chairman of the Board acknowledges that to the best of his knowledge,
information and belief, these matters and facts are true in all material
respects and that this statement is made under the penalties for perjury.
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IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
and Restatement to be signed in its name and on its behalf by its Chairman of
the Board and attested to by its Secretary on this _____ day of ____________,
1997.
ATTEST: ALEXANDRIA REAL ESTATE EQUITIES, INC.
_____________________________ By:_________________________________(SEAL)
Secretary Chairman of the Board
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EXHIBIT 3.4
FORM OF
ALEXANDRIA REAL ESTATE EQUITIES, INC.
-------------------------------------
AMENDED AND RESTATED BYLAWS
(Adopted _______________, 1997, Effective _____________, 1997)
ARTICLE I
OFFICES
Section 1. PRINCIPAL OFFICE. The principal office of the Corporation
----------------
shall be located at such place or places as the Board of Directors may
designate.
Section 2. ADDITIONAL OFFICES. The Corporation may have additional
------------------
offices at such places as the Board of Directors may from time to time determine
or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. PLACE. All meetings of stockholders shall be held at the
-----
principal office of the Corporation or at such other place within the United
States as shall be stated in the notice of the meeting.
Section 2. ANNUAL MEETING. An annual meeting of the stockholders for
--------------
the election of directors and the transaction of any business within the powers
of the Corporation shall be held on a date and at the time set by the Board of
Directors during the month of May in each year.
Section 3. SPECIAL MEETINGS. The chairman of the board, the vice
----------------
chairman of the board, the chief executive officer, the chief operating officer
or Board of Directors may call special meetings of the stockholders. Special
meetings of stockholders shall also be called by the secretary of the
Corporation upon the written request of the holders of shares entitled to cast
not less than a majority of all the votes entitled to be cast at such meeting.
Such request shall state the purpose of such meeting and the matters proposed to
be acted on at such meeting. The secretary shall inform such stockholders of
the reasonably estimated cost of preparing and mailing notice of the meeting
and, upon payment to the Corporation by such stockholders of such costs, the
secretary shall give notice to each stockholder entitled to notice of the
meeting.
Section 4. NOTICE. Not less than ten nor more than 90 days before
------
each meeting of stockholders, the secretary shall give to each stockholder
entitled to vote at such meeting and to each
<PAGE>
stockholder not entitled to vote who is entitled to notice of the meeting
written or printed notice stating the time and place of the meeting and, in the
case of a special meeting or as otherwise may be required by any statute, the
purpose for which the meeting is called, either by mail or by presenting it to
such stockholder personally or by leaving it at his residence or usual place of
business. If mailed, such notice shall be deemed to be given when deposited in
the United States mail addressed to the stockholder at his post office address
as it appears on the records of the Corporation, with postage thereon prepaid.
Section 5. SCOPE OF NOTICE. Any business of the Corporation may be
---------------
transacted at an annual meeting of stockholders without being specifically
designated in the notice, except such business as is required by any statute to
be stated in such notice. No business shall be transacted at a special meeting
of stockholders except as specifically designated in the notice.
Section 6. ORGANIZATION. At every meeting of stockholders, the
------------
chairman of the board or the vice chairman of the board, if there shall be one,
shall conduct the meeting or, in the case of vacancy in office or absence of the
chairman of the board or the vice chairman of the board, one of the following
officers present shall conduct the meeting in the order stated: the chief
executive officer, the chief operating officer, the president, the vice
presidents in their order of rank and seniority, or a chairman chosen by the
stockholders entitled to cast a majority of the votes which all stockholders
present in person or by proxy are entitled to cast, shall act as chairman, and
the secretary, or, in his absence, an assistant secretary, or in the absence of
both the secretary and assistant secretaries, a person appointed by the chairman
shall act as secretary.
Section 7. QUORUM. At any meeting of stockholders, the presence in
------
person or by proxy of stockholders entitled to cast a majority of all the votes
entitled to be cast at such meeting shall constitute a quorum; but this section
shall not affect any requirement under any statute or the charter of the
Corporation for the vote necessary for the adoption of any measure. If,
however, such quorum shall not be present at any meeting of the stockholders,
the stockholders entitled to vote at such meeting, present in person or by
proxy, shall have the power to adjourn the meeting from time to time to a date
not more than 120 days after the original record date without notice other than
announcement at the meeting. At such adjourned meeting at which a quorum shall
be present, any business may be transacted which might have been transacted at
the meeting as originally notified.
Section 8. VOTING. A plurality of all the votes cast at a meeting of
------
stockholders duly called and at which a quorum is present shall be sufficient to
elect a director. Each stockholder may vote, without cumulation, for as many
individuals as there are directors to be elected. A majority of the votes cast
at a meeting of stockholders duly called and at which a quorum is present shall
be sufficient to approve any other matter which may properly come before the
meeting, unless more than a majority of the votes cast is required by statute or
by the charter of the Corporation. Unless otherwise provided in the charter,
each outstanding share, regardless of class, shall be entitled to one vote on
each matter submitted to a vote at a meeting of stockholders.
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Section 9. PROXIES. A stockholder may cast the votes entitled to be
-------
cast by the shares of the stock owned of record by him either in person or by
proxy executed in writing by the stockholder or by his duly authorized attorney
in fact. Such proxy shall be filed with the secretary of the Corporation
before or at the time of the meeting. No proxy shall be valid after eleven
months from the date of its execution, unless otherwise provided in the proxy.
Section 10. VOTING OF STOCK BY CERTAIN HOLDERS. Stock of the
----------------------------------
Corporation registered in the name of a corporation, partnership, trust or other
entity, if entitled to be voted, may be voted by the president or a vice
president, a general partner or trustee thereof, as the case may be, or a proxy
appointed by any of the foregoing individuals, unless some other person who has
been appointed to vote such stock pursuant to a bylaw or a resolution of the
governing body of such corporation or other entity or agreement of the partners
of a partnership presents a certified copy of such bylaw, resolution or
agreement, in which case such person may vote such stock. Any director or other
fiduciary may vote stock registered in his name as such fiduciary, either in
person or by proxy.
Shares of stock of the Corporation directly or indirectly owned by it
shall not be voted at any meeting and shall not be counted in determining the
total number of outstanding shares entitled to be voted at any given time,
unless they are held by it in a fiduciary capacity, in which case they may be
voted and shall be counted in determining the total number of outstanding shares
at any given time.
The Board of Directors may adopt by resolution a procedure by which a
stockholder may certify in writing to the Corporation that any shares of stock
registered in the name of the stockholder are held for the account of a
specified person other than the stockholder. The resolution shall set forth the
class of stockholders who may make the certification, the purpose for which the
certification may be made, the form of certification and the information to be
contained in it; if the certification is with respect to a record date or
closing of the stock transfer books, the time after the record date or closing
of the stock transfer books within which the certification must be received by
the Corporation; and any other provisions with respect to the procedure which
the Board of Directors considers necessary or desirable. On receipt of such
certification, the person specified in the certification shall be regarded as,
for the purposes set forth in the certification, the stockholder of record of
the specified stock in place of the stockholder who makes the certification.
Notwithstanding any other provision of the charter of the Corporation
or these Bylaws, Title 3, Subtitle 7 of the Corporations and Associations
Article of the Annotated Code of Maryland (or any successor statute) shall not
apply to any acquisition by any person of shares of stock of the Corporation.
This section may be repealed, in whole or in part, at any time, whether before
or after an acquisition of control shares and, upon such repeal, may, to the
extent provided by any successor bylaw, apply to any prior or subsequent control
share acquisition.
Section 11. INSPECTORS. At any meeting of stockholders, the chairman
----------
of the meeting may appoint one or more persons as inspectors for such meeting.
Such inspectors shall
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ascertain and report the number of shares represented at the meeting based upon
their determination of the validity and effect of proxies, count all votes,
report the results and perform such other acts as are proper to conduct the
election and voting with impartiality and fairness to all the stockholders.
Each report of an inspector shall be in writing and signed by him or by
a majority of them if there is more than one inspector acting at such meeting.
If there is more than one inspector, the report of a majority shall be the
report of the inspectors. The report of the inspector or inspectors on the
number of shares represented at the meeting and the results of the voting shall
be prima facie evidence thereof.
----- -----
Section 12. NOMINATIONS AND PROPOSALS BY STOCKHOLDERS.
-----------------------------------------
(a) Annual Meetings of Stockholders. (1) Nominations of persons for
-------------------------------
election to the Board of Directors and the proposal of business to be considered
by the stockholders may be made at an annual meeting of stockholders (i)
pursuant to the Corporation's notice of meeting, (ii) by or at the direction of
the Board of Directors or (iii) by any stockholder of the Corporation who was a
stockholder of record both at the time of giving of notice provided for in this
Section 12(a) and at the time of the annual meeting, who is entitled to vote at
the meeting and who complied with the notice procedures set forth in this
Section 12(a).
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (iii) of paragraph (a)(1) of
this Section 12, the stockholder must have given timely notice thereof in
writing to the secretary of the Corporation and such other business must
otherwise be a proper matter for action by stockholders. To be timely, a
stockholder's notice shall be delivered to the secretary at the principal
executive offices of the Corporation not later than the close of business on the
60th day nor earlier than the close of business on the 90th day prior to the
first anniversary of the preceding year's annual meeting; provided, however,
that in the event that the date of the annual meeting is advanced by more than
30 days or delayed by more than 60 days from such anniversary date or if the
Corporation has not previously held an annual meeting, notice by the stockholder
to be timely must be so delivered not earlier than the close of business on the
90th day prior to such annual meeting and not later than the close of business
on the later of the 60th day prior to such annual meeting or the tenth day
following the day on which public announcement of the date of such meeting is
first made by the Corporation. In no event shall the public announcement of a
postponement or adjournment of an annual meeting to a later date or time
commence a new time period for the giving of a stockholder's notice as described
above. Such stockholder's notice shall set forth (i) as to each person whom the
stockholder proposes to nominate for election or reelection as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest, or is
otherwise required, in each case pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (including such person's
written consent to being named in the proxy statement as a nominee and to
serving as a director if elected); (ii) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any
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material interest in such business of such stockholder and of the beneficial
owner, if any, on whose behalf the proposal is made; and (iii) as to the
stockholder giving the notice and the beneficial owner, if any, on whose behalf
the nomination or proposal is made, (x) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (y) the number of shares of each class of stock of the Corporation
which are owned beneficially and of record by such stockholder and such
beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(a)(2) of this Section 12 to the contrary, in the event that the number of
directors to be elected to the Board of Directors is increased and there is no
public announcement by the Corporation naming all of the nominees for director
or specifying the size of the increased Board of Directors at least 70 days
prior to the first anniversary of the preceding year's annual meeting, a
stockholder's notice required by this Section 12(a) shall also be considered
timely, but only with respect to nominees for any new positions created by such
increase, if it shall be delivered to the secretary at the principal executive
offices of the Corporation not later than the close of business on the tenth day
following the day on which such public announcement is first made by the
Corporation.
(b) Special Meetings of Stockholders. Only such business shall be
--------------------------------
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of meeting. Nominations of
persons for election to the Board of Directors may be made at a special meeting
of stockholders at which directors are to be elected (i) pursuant to the
Corporation's notice of meeting, (ii) by or at the direction of the Board of
Directors or (iii) provided that the Board of Directors has determined that
directors shall be elected at such special meeting, by any stockholder of the
Corporation who is a stockholder of record both at the time of giving of notice
provided for in this Section 12(b) and at the time of the special meeting, who
is entitled to vote at the meeting and who complied with the notice procedures
set forth in this Section 12(b). In the event the Corporation calls a special
meeting of stockholders for the purpose of electing one or more directors to the
Board of Directors, any such stockholder may nominate a person or persons (as
the case may be) for election to such position as specified in the Corporation's
notice of meeting, if the stockholder's notice containing the information
required by paragraph (a)(2) of this Section 12 shall be delivered to the
secretary at the principal executive offices of the Corporation not earlier than
the close of business on the 90th day prior to such special meeting and not
later than the close of business on the later of the 60th day prior to such
special meeting or the tenth day following the day on which public announcement
is first made of the date of the special meeting and of the nominees proposed by
the Board of Directors to be elected at such meeting. In no event shall the
public announcement of a postponement or adjournment of a special meeting to a
later date or time commence a new time period for the giving of a stockholder's
notice as described above.
(c) General. (1) Only such persons who are nominated in accordance
-------
with the procedures set forth in this Section 12 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 12. The chairman of the meeting shall have the power
and duty to determine whether a nomination or any business proposed to be
brought before
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the meeting was made or proposed, as the case may be, in accordance with the
procedures set forth in this Section 12 and, if any proposed nomination or
business is not in compliance with this Section 12, to declare that such
nomination or proposal shall be disregarded.
(2) For purposes of this Section 12, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable news service or in a document publicly filed by the
Corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Section 12, a
stockholder shall also comply with all applicable requirements of state law and
of the Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this Section 12. Nothing in this Section 12 shall be
deemed to affect any rights of stockholders to request inclusion of proposals in
the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Section 13. VOTING BY BALLOT. Voting on any question or in any
----------------
election may be viva voce unless the presiding officer shall order or any
---------
stockholder shall demand that voting be by ballot.
ARTICLE III
DIRECTORS
Section 1. GENERAL POWERS. The business and affairs of the
--------------
Corporation shall be managed under the direction of its Board of Directors.
Section 2. NUMBER, TENURE AND QUALIFICATIONS. At any regular meeting
---------------------------------
or at any special meeting called for that purpose, a majority of the entire
Board of Directors may establish, increase or decrease the number of directors,
provided that the number thereof shall never be less than the minimum number
required by the Maryland General Corporation Law, nor more than 15, and further
provided that the tenure of office of a director shall not be affected by any
decrease in the number of directors.
Section 3. ANNUAL AND REGULAR MEETINGS. An annual meeting of the
---------------------------
Board of Directors shall be held immediately after and at the same place as the
annual meeting of stockholders, no notice other than this Bylaw being necessary.
The Board of Directors may provide, by resolution, the time and place, either
within or without the State of Maryland, for the holding of regular meetings of
the Board of Directors without other notice than such resolution.
Section 4. SPECIAL MEETINGS. Special meetings of the Board of
----------------
Directors may be called by or at the request of the chairman or vice chairman of
the board, the chief executive officer, the chief operating officer or by a
majority of the directors then in office. The person or persons authorized to
call special meetings of the Board of Directors may fix any place, either within
or
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without the State of Maryland, as the place for holding any special meeting of
the Board of Directors called by them.
Section 5. NOTICE. Notice of any special meeting of the Board of
------
Directors shall be delivered personally or by telephone, facsimile transmission,
United States mail or courier to each director at his business or residence
address. Notice by personal delivery, by telephone or a facsimile transmission
shall be given at least one day prior to the meeting. Notice by mail shall be
given at least two days prior to the meeting and shall be deemed to be given
when deposited in the United States mail properly addressed, with postage
thereon prepaid. Telephone notice shall be deemed to be given when the director
is personally given such notice in a telephone call to which he is a party.
Facsimile transmission notice shall be deemed to be given upon completion of the
transmission of the message to the number given to the Corporation by the
director and receipt of a completed answer-back indicating receipt. Neither the
business to be transacted at, nor the purpose of, any annual, regular or special
meeting of the Board of Directors need be stated in the notice, unless
specifically required by statute or these Bylaws.
Section 6. QUORUM. A majority of the directors shall constitute a
------
quorum for transaction of business at any meeting of the Board of Directors,
provided that, if less than a majority of such directors are present at said
meeting, a majority of the directors present may adjourn the meeting from time
to time without further notice, and provided further that if, pursuant to the
charter of the Corporation or these Bylaws, the vote of a majority of a
particular group of directors is required for action, a quorum must also include
a majority of such group.
The directors present at a meeting which has been duly called and
convened may continue to transact business until adjournment, notwithstanding
the withdrawal of enough directors to leave less than a quorum.
Section 7. VOTING. The action of the majority of the directors
------
present at a meeting at which a quorum is present shall be the action of the
Board of Directors, unless the concurrence of a greater proportion is required
for such action by applicable statute. If enough directors have withdrawn from
a meeting to leave less than a quorum but the meeting is not adjourned, the
action of the majority of the directors still present at such meeting shall be
the action of the Board of Directors, unless the concurrence of a greater
proportion is required for such action by applicable statute.
Section 8. ORGANIZATION. At each meeting of the Board of Directors,
------------
the chairman of the board and the vice chairman of the board, if any, shall act
as Co-Chairman. In the absence of both the chairman and vice chairman of the
board, the chief executive officer or in the absence of the chief executive
officer, the president or in the absence of the president, a director chosen by
a majority of the directors present, shall act as Chairman. The Secretary or,
in his or her absence, an Assistant Secretary of the corporation, or in the
absence of the Secretary and all Assistant Secretaries, a person appointed by
the Co-Chairman, shall act as Secretary of the meeting.
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Section 9. TELEPHONE MEETINGS. Directors may participate in a meeting
------------------
by means of a conference telephone or similar communications equipment if all
persons participating in the meeting can hear each other at the same time.
Participation in a meeting by these means shall constitute presence in person at
the meeting.
Section 10. INFORMAL ACTION BY DIRECTORS. Any action required or
----------------------------
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting, if a consent in writing to such action is signed by each
director and such written consent is filed with the minutes of proceedings of
the Board of Directors.
Section 11. VACANCIES. If for any reason any or all the directors
---------
cease to be directors, such event shall not terminate the Corporation or affect
these Bylaws or the powers of the remaining directors hereunder (even if fewer
than three directors remain). Any vacancy on the Board of Directors for any
cause other than an increase in the number of directors shall be filled by a
majority of the remaining directors, although such majority is less than a
quorum. Any vacancy in the number of directors created by an increase in the
number of directors may be filled by a majority vote of the entire Board of
Directors. Any individual so elected as director shall hold office until the
next annual meeting of stockholders and until his successor is elected and
qualifies.
Section 12. COMPENSATION. Directors shall not receive any stated
------------
salary for their services as directors but, by resolution of the Board of
Directors, may receive fixed sums per year and/or per meeting and/or per visit
to real property or other facilities owned or leased by the Corporation and for
any service or activity they performed or engaged in as directors. Directors
may be reimbursed for expenses of attendance, if any, at each annual, regular or
special meeting of the Board of Directors or of any committee thereof and for
their expenses, if any, in connection with each property visit and any other
service or activity they performed or engaged in as directors; but nothing
herein contained shall be construed to preclude any directors from serving the
Corporation in any other capacity and receiving compensation therefor.
Section 13. LOSS OF DEPOSITS. No director shall be liable for any
----------------
loss which may occur by reason of the failure of the bank, trust company,
savings and loan association, or other institution with whom moneys or stock
have been deposited.
Section 14. SURETY BONDS. Unless required by law, no director shall
------------
be obligated to give any bond or surety or other security for the performance of
any of his duties.
Section 15. RELIANCE. Each director, officer, employee and agent of
--------
the Corporation shall, in the performance of his duties with respect to the
Corporation, be fully justified and protected with regard to any act or failure
to act in reliance in good faith upon the books of account or other records of
the Corporation, upon an opinion of counsel or upon reports made to the
Corporation by any of its officers or employees or by the advisers, accountants,
appraisers or other experts or consultants selected by the Board of Directors or
officers of the Corporation, regardless of whether such counsel or expert may
also be a director.
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Section 16. CERTAIN RIGHTS OF DIRECTORS, OFFICERS, EMPLOYEES AND
----------------------------------------------------
AGENTS. The directors shall have no responsibility to devote their full time to
- ------
the affairs of the Corporation. Any director or officer, employee or agent of
the Corporation, in his personal capacity or in a capacity as an affiliate,
employee, or agent of any other person, or otherwise, may have business
interests and engage in business activities similar to or in addition to or in
competition with those of or relating to the Corporation.
ARTICLE IV
COMMITTEES
Section 1. NUMBER, TENURE AND QUALIFICATIONS. The Board of Directors
---------------------------------
may appoint from among its members an Executive Committee, an Audit Committee, a
Compensation Committee and other committees, composed of one or more directors,
to serve at the pleasure of the Board of Directors.
Section 2. POWERS. The Board of Directors may delegate to committees
------
appointed under Section 1 of this Article any of the powers of the Board of
Directors, except as prohibited by law.
Section 3. MEETINGS. Notice of committee meetings shall be given in
--------
the same manner as notice for special meetings of the Board of Directors. A
majority of the members of the committee shall constitute a quorum for the
transaction of business at any meeting of the committee. The act of a majority
of the committee members present at a meeting shall be the act of such
committee. The Board of Directors may designate a chairman of any committee,
and such chairman or a majority of the members of any committee may fix the time
and place of its meeting unless the Board shall otherwise provide. In the
absence of any member of any such committee, the members thereof present at any
meeting, whether or not they constitute a quorum, may appoint another director
to act in the place of such absent member. Each committee shall keep minutes of
its proceedings.
Section 4. TELEPHONE MEETINGS. Members of a committee of the Board of
------------------
Directors may participate in a meeting by means of a conference telephone or
similar communications equipment if all persons participating in the meeting can
hear each other at the same time. Participation in a meeting by these means
shall constitute presence in person at the meeting.
Section 5. INFORMAL ACTION BY COMMITTEES. Any action required or
-----------------------------
permitted to be taken at any meeting of a committee of the Board of Directors
may be taken without a meeting, if a consent in writing to such action is signed
by each member of the committee and such written consent is filed with the
minutes of proceedings of such committee.
Section 6. VACANCIES. Subject to the provisions hereof, the Board of
---------
Directors shall have the power at any time to change the membership of any
committee, to fill all vacancies, to
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designate alternate members to replace any absent or disqualified member or to
dissolve any such committee.
ARTICLE V
OFFICERS
Section 1. NUMBER. The officers of the Corporation shall be a
------
chairman of the board, a vice chairman of the board, a chief executive officer,
a chief operating officer, a president, one or more vice presidents, a
secretary, a treasurer, and such other officers as may be established and
appointed by the Board of Directors in accordance with the provisions of this
Section l of Article V. Any two or more offices, except those of chairman and
vice chairman or president and vice president, may be held by the same person.
The Board of Directors may from time to time appoint such other officers and
agents of the Corporation as it may deem necessary, including one or more
assistant treasurers and assistant secretaries. The Board of Directors may from
time to time authorize any officer or officers to appoint and remove agents and
employees and to prescribe their powers and duties. Such officers, agents and
employees shall hold office for such period, have such authority and perform
such duties as the Board of Directors or the officer or officers appointing the
same may from time to time prescribe. The Board of Directors may establish and
appoint one or more officers of the Board of Directors, which officers of the
Board of Directors shall not be deemed to be officers of the Corporation.
Section 2. ELECTION, TERM OF OFFICE AND QUALIFICATIONS. The
-------------------------------------------
officers shall be elected annually by the Board of Directors. Unless otherwise
set forth in a written agreement between an officer and the Corporation,
officers shall hold their respective office until the next annual election of
officers and until a successor shall have been duly elected and qualified, or
until the death, resignation or removal in the manner hereinafter provided of
any such officer.
Section 3. DUTIES. The respective officers of the Corporation
------
shall have such authority, responsibilities and duties as may be prescribed
therefor from time to time by resolution of the Board of Directors or by a
written agreement between any such officer and the Corporation.
Section 4. REMOVAL. Subject to the terms of a written agreement
-------
between an officer and the Corporation, any officer may be removed, either with
or without cause, by the vote of a majority of the Board of Directors or, except
in the case of any officer elected by the Board of Directors, by any superior.
Section 5. RESIGNATIONS. Subject to the terms of a written
------------
agreement between an officer and the Corporation, any officer may resign at any
time by giving written notice to the Board of Directors or to the president or
to the secretary of the Corporation. Any such resignation shall take effect at
the time specified therein; and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
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Section 6. VACANCIES. A vacancy in any office because of death,
---------
resignation, removal, disqualification or any other cause shall be filled for
the unexpired portion of the term in the manner prescribed in these Bylaws for
regular election or appointment to such office.
Section 7. SALARIES. The salaries of the officers shall be fixed
--------
from time to time by the Board of Directors or a committee thereof and may be
evidenced by a written agreement executed from time to time between the
Corporation and any of such officers. No officer shall be pre vented from
receiving such salary by reason of the fact that such officer is also a director
of the Corporation or a member of any committee.
Section 8. ACTION WITH RESPECT TO SECURITIES OF OTHER CORPORATIONS.
-------------------------------------------------------
Unless otherwise directed by the Board of Directors, the chairman or the vice
chairman of the board, the chief executive officer or any officer of the
Corporation authorized by the president shall have power to vote and otherwise
act on behalf of the Corporation, in person or by proxy, at any meeting of
stockholders of or with respect to any action of stockholders of any other
corporation in which the Corporation may hold securities and otherwise to
exercise any and all rights and powers which the Corporation may possess by
reason of its ownership or securities in such other corporation.
Section 9. CHAIRMAN OF THE BOARD. The chairman of the board shall
---------------------
be an agent of the Corporation and, subject to the direction of the Board of
Directors, shall perform such functions and duties as from time to time may be
assigned to him or her by the Board of Directors. The chairman of the board, if
present, shall preside with the vice chairman of the board, if any, at all
meetings of the stockholders and all meetings of the Board of Directors.
Section 10. VICE CHAIRMAN OF THE BOARD. The vice chairman of the
--------------------------
board shall be an agent of the Corporation and, subject to the direction of the
Board of Directors, shall perform such functions and duties as from time to time
may be assigned to him or her by the Board of Directors. The vice chairman of
the Board, if present, shall preside with the chairman of the board at all
meetings of the stockholders and all meetings of the Board of Directors.
Section 11. CHIEF EXECUTIVE OFFICER. The chief executive officer of
-----------------------
the Corporation shall, subject to the direction of the Board of Directors, have
general charge of the business, affairs and property of the Corporation and
general supervision over its other officers and agents. In general, the chief
executive officer shall perform all duties incident to such office of a stock
corporation and shall see that all orders and resolutions of the Board of
Directors are carried into effect. Unless otherwise prescribed by the Board of
Directors, the chief executive officer shall have full power and authority on
behalf of the Corporation to attend, act and vote at any meeting of stockholders
of other corporations in which the Corporation may hold securities. At any such
meeting, the chief executive officer shall possess and may exercise any and all
rights and powers incident to the ownership of such securities which the
Corporation possesses and has the power to exercise. The Board of Directors
from time to time may confer like powers upon any other person or persons.
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Section 12. CHIEF OPERATING OFFICER. The chief operating officer of
-----------------------
the Corpo ration shall, subject to the direction of the Board of Directors and
the chief executive officer, have day-to-day general charge over the operation
of the business, affairs and property of the Corporation and general supervision
over its other officers and agents. In general, the chief operating officer
shall perform all duties incident to the office of chief operating officer of a
stock corporation. In the absence or disability of the chief operating officer,
the chief executive officer shall perform the duties and exercise the powers of
the chief operating officer.
Section 13. PRESIDENT. The president of the Corporation shall perform
---------
such functions and duties as from time to time may be assigned to him or her by
the Board, the Chief Executive Officer or the Chief Operating Officer. In the
absence or disability of the chief operating officer, the president shall
perform the duties and exercise the powers of the chief operating officer.
Section 14. VICE PRESIDENTS. In the absence or disability of the
---------------
president, the vice president, if any (or in the event there is more than one,
the vice presidents in the order designated, in the order of their election),
shall perform the duties and exercise the powers of the president. The vice
president(s) also generally shall assist the president, the chief executive
officer and the chief operating officer and shall perform such other duties and
have such other powers as from time to time may be prescribed by the Board of
Directors.
Section 15. SECRETARY. The secretary shall attend all meetings of the
---------
Board of Directors and of the stockholders and shall record all votes and the
proceedings of all meetings in a book to be kept for such purposes. The
secretary also shall perform like duties for the committees, if required by any
such committee. The secretary shall give (or cause to be given) notice of all
meetings of stockholders and all special meetings of the Board and shall perform
such other duties as from time to time may be prescribed by the Board of
Directors, the chairman or vice chairman of the board or the president. The
secretary shall have custody of the seal of the Corporation, shall have
authority (as shall any assistant secretary) to affix the same to any instrument
requiring it, and to attest the seal by his or her signature. The Board of
Directors may give general authority to officers other than the secretary or any
assistant secretary to affix the seal of the Corporation and to attest the
affixing thereof by his or her signature.
Section 16. ASSISTANT SECRETARY. The assistant secretary, if any (or
-------------------
in the event there is more than one, the assistant secretaries in the order
designated, or in the absence of any designation, in the order of their
election), in the absence or disability of the secretary, shall perform the
duties and exercise the powers of the secretary. The assistant secretary(ies)
shall perform such other duties and have such other powers as from time to time
may be prescribed by the Board of Directors.
Section 17. TREASURER. The treasurer shall be the chief financial
---------
officer of the Corporation and shall monitor the custody of the corporate funds,
securities, other similar valuable effects, and evidences of indebtedness, shall
keep full and accurate accounts of receipts and disbursements in books belonging
to the Corporation and payroll matters and shall cause to be
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deposited all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as from time to time may be designated by
the Board of Directors. The treasurer shall cause to be disbursed the funds of
the Corporation in such manner as may be ordered by the Board of Directors from
time to time and shall render to the chairman or vice chairman of the board, the
president and the Board, at regular meetings of the Board or whenever any of
them may so require, an account of all transactions and of the financial
condition of the Corporation.
Section 18. ASSISTANT TREASURER. The assistant treasurer, if any (or
-------------------
in the event there is more than one, the assistant treasurers in the order
designated, or in the absence of any designation, in the order of their
election), in the absence or disability of the treasurer, shall perform the
duties and exercise the powers of the treasurer. The assistant treasurer(s)
shall perform such other duties and have such other powers as from time to time
may be prescribed by the Board of Directors.
ARTICLE VI
CONTRACTS, LOANS, CHECKS AND DEPOSITS
Section 1. CONTRACTS. The Board of Directors may authorize any
---------
officer or agent to enter into any contract or to execute and deliver any
instrument in the name of and on behalf of the Corporation and such authority
may be general or confined to specific instances. Any agreement, deed,
mortgage, lease or other document executed by one or more of the directors or by
an authorized person shall be valid and binding upon the Board of Directors and
upon the Corporation when authorized or ratified by action of the Board of
Directors.
Section 2. CHECKS AND DRAFTS. All checks, drafts or other orders
-----------------
for the payment of money, notes or other evidences of indebtedness issued in the
name of the Corporation shall be signed by such officer or agent of the
Corporation in such manner as shall from time to time be determined by the Board
of Directors.
Section 3. DEPOSITS. All funds of the Corporation not otherwise
--------
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board of Directors
may designate.
ARTICLE VII
STOCK
Section 1. CERTIFICATES. Each stockholder shall be entitled to a
------------
certificate or certificates which shall represent and certify the number of
shares of each class of stock held by him in the Corporation. Each certificate
shall be signed by the chairman of the board, the president or a vice president
and countersigned by the secretary or an assistant secretary or the treasurer or
an assistant treasurer and may be sealed with the seal, if any, of the
Corporation. The signatures may be either manual or facsimile. Certificates
shall be consecutively numbered; and if the Corporation
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shall, from time to time, issue several classes of stock, each class may have
its own number series. A certificate is valid and may be issued whether or not
an officer who signed it is still an officer when it is issued. Each
certificate representing shares which are restricted as to their transferability
or voting powers, which are preferred or limited as to their dividends or as to
their allocable portion of the assets upon liquidation or which are redeemable
at the option of the Corporation, shall have a statement of such restriction,
limitation, preference or redemption provision, or a summary thereof, plainly
stated on the certificate. If the Corporation has authority to issue stock of
more than one class, the certificate shall contain on the face or back a full
statement or summary of the designations and any preferences, conversion and
other rights, voting powers, restrictions, limitations as to dividends and other
distributions, qualifications and terms and conditions of redemption of each
class of stock and, if the Corporation is authorized to issue any preferred or
special class in series, the differences in the relative rights and preferences
between the shares of each series to the extent they have been set and the
authority of the Board of Directors to set the relative rights and preferences
of subsequent series. In lieu of such statement or summary, the certificate may
state that the Corporation will furnish a full statement of such information to
any stockholder upon request and without charge. If any class of stock is
restricted by the Corporation as to transferability, the certificate shall
contain a full statement of the restriction or state that the Corporation will
furnish information about the restrictions to the stockholder on request and
without charge.
Section 2. TRANSFERS. Upon surrender to the Corporation or the
---------
transfer agent of the Corporation of a stock certificate duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, the Corporation shall issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
The Corporation shall be entitled to treat the holder of record of any
share of stock as the holder in fact thereof and, accordingly, shall not be
bound to recognize any equitable or other claim to or interest in such share or
on the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise provided by the laws of the State of
Maryland.
Notwithstanding the foregoing, transfers of shares of any class of
stock will be subject in all respects to the charter of the Corporation and all
of the terms and conditions contained therein.
Section 3. REPLACEMENT CERTIFICATE. Any officer designated by the
-----------------------
Board of Directors may direct a new certificate to be issued in place of any
certificate previously issued by the Corporation alleged to have been lost,
stolen or destroyed upon the making of an affidavit of that fact by the person
claiming the certificate to be lost, stolen or destroyed. When authorizing the
issuance of a new certificate, an officer designated by the Board of Directors
may, in his discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, stolen or destroyed certificate or the owner's
legal representative to advertise the same in such manner as he shall require
and/or to give bond, with sufficient surety, to the Corporation to indemnify it
against any loss or claim which may arise as a result of the issuance of a new
certificate.
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Section 4. CLOSING OF TRANSFER BOOKS OR FIXING OF RECORD DATE. The
--------------------------------------------------
Board of Directors may set, in advance, a record date for the purpose of
determining stockholders entitled to notice of or to vote at any meeting of
stockholders or determining stockholders entitled to receive payment of any
dividend or the allotment of any other rights, or in order to make a
determination of stockholders for any other proper purpose. Such date, in any
case, shall not be prior to the close of business on the day the record date is
fixed and shall be not more than 90 days and, in the case of a meeting of
stockholders, not less than ten days, before the date on which the meeting or
particular action requiring such determination of stockholders of record is to
be held or taken.
In lieu of fixing a record date, the Board of Directors may provide
that the stock transfer books shall be closed for a stated period but not longer
than 20 days. If the stock transfer books are closed for the purpose of
determining stockholders entitled to notice of or to vote at a meeting of
stockholders, such books shall be closed for at least ten days before the date
of such meeting.
If no record date is fixed and the stock transfer books are not closed
for the determination of stockholders, (a) the record date for the determination
of stockholders entitled to notice of or to vote at a meeting of stockholders
shall be at the close of business on the day on which the notice of meeting is
mailed or the 30th day before the meeting, whichever is the closer date to the
meeting; and (b) the record date for the determination of stockholders entitled
to receive payment of a dividend or an allotment of any other rights shall be
the close of business on the day on which the resolution of the directors,
declaring the dividend or allotment of rights, is adopted.
When a determination of stockholders entitled to vote at any meeting of
stockholders has been made as provided in this section, such determination shall
apply to any adjournment thereof, except when (i) the determination has been
made through the closing of the transfer books and the stated period of closing
has expired or (ii) the meeting is adjourned to a date more than 120 days after
the record date fixed for the original meeting, in either of which case a new
record date shall be determined as set forth herein.
Section 5. STOCK LEDGER. The Corporation shall maintain at its
------------
principal office or at the office of its counsel, accountants or transfer agent,
an original or duplicate share ledger containing the name and address of each
stockholder and the number of shares of each class held by such stockholder.
Section 6. FRACTIONAL STOCK; ISSUANCE OF UNITS. The Board of
-----------------------------------
Directors may issue fractional stock or provide for the issuance of scrip, all
on such terms and under such conditions as they may determine. Notwithstanding
any other provision of the charter or these Bylaws, the Board of Directors may
issue units consisting of different securities of the Corporation. Any security
issued in a unit shall have the same characteristics as any identical securities
issued by the Corporation, except that the Board of Directors may provide that
for a specified period securities of the Corporation issued in such unit may be
transferred on the books of the Corporation only in such unit.
-15-
<PAGE>
ARTICLE VIII
ACCOUNTING YEAR
The Board of Directors shall have the power, from time to time, to fix
the fiscal year of the Corporation by a duly adopted resolution.
ARTICLE IX
DISTRIBUTIONS
Section 1. AUTHORIZATION. Dividends and other distributions upon
-------------
the stock of the Corporation may be authorized and declared by the Board of
Directors, subject to the provisions of law and the charter of the Corporation.
Dividends and other distributions may be paid in cash, property or stock of the
Corporation, subject to the provisions of law and the charter.
Section 2. CONTINGENCIES. Before payment of any dividends or other
-------------
distributions, there may be set aside out of any assets of the Corporation
available for dividends or other distributions such sum or sums as the Board of
Directors may from time to time, in its absolute discretion, think proper as a
reserve fund for contingencies, for equalizing dividends or other distributions,
for repairing or maintaining any property of the Corporation or for such other
purpose as the Board of Directors shall determine to be in the best interest of
the Corporation, and the Board of Directors may modify or abolish any such
reserve in the manner in which it was created.
ARTICLE X
INVESTMENT POLICY
Subject to the provisions of the charter of the Corporation, the Board
of Directors may from time to time adopt, amend, revise or terminate any policy
or policies with respect to investments by the Corporation as it shall deem
appropriate in its sole discretion.
ARTICLE XI
SEAL
Section 1. SEAL. The Board of Directors may authorize the adoption
----
of a seal by the Corporation. The seal shall contain the name of the
Corporation and the year of its incorporation and the words "Incorporated
Maryland." The Board of Directors may authorize one or more duplicate seals and
provide for the custody thereof.
Section 2. AFFIXING SEAL. Whenever the Corporation is permitted or
-------------
required to affix its seal to a document, it shall be sufficient to meet the
requirements of any law, rule or regulation
-16-
<PAGE>
relating to a seal to place the word "(SEAL)" adjacent to the signature of the
person authorized to execute the document on behalf of the Corporation.
ARTICLE XII
INDEMNIFICATION AND ADVANCE OF EXPENSES; INSURANCE
To the maximum extent permitted by Maryland law in effect from time to
time, the Corporation shall indemnify and, without requiring a preliminary
determination of the ultimate entitlement to indemnification, shall pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
(a) any individual who is a present or former director or officer of the
Corporation and who is made a party to the proceeding by reason of his service
in that capacity or (b) any individual who, while a director of the Corporation
and at the request of the Corporation, serves or has served another corporation,
partnership, joint venture, trust, employee benefit plan or any other enterprise
as a director, officer, partner or trustee of such corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise and who is made
a party to the proceeding by reason of his service in that capacity. The
Corporation may, with the approval of its Board of Directors, provide such
indemnification and advance for expenses to a person who served a predecessor of
the Corporation in any of the capacities described in (a) or (b) above and to
any employee or agent of the Corporation or a predecessor of the Corporation.
Neither the amendment nor repeal of this Article, nor the adoption or
amendment of any other provision of the Bylaws or charter of the Corporation
inconsistent with this Article, shall apply to or affect in any respect the
applicability of the preceding paragraph with respect to any act or failure to
act which occurred prior to such amendment, repeal or adoption.
The Corporation shall have the power to purchase and maintain insurance
on behalf of any person entitled to indemnification or whom the Corporation may
indemnify under the charter of the Corporation or under Maryland law against any
liability, whether or not the Corporation would have the power to indemnify him
or her against such liability. The rights to indemnification set forth in the
charter or in these Bylaws are in addition to all rights which any such
indemnitee may be entitled as a matter of law and shall inure to the benefit of
the heirs and personal representatives of each such indemnitee.
ARTICLE XIII
WAIVER OF NOTICE
Whenever any notice is required to be given pursuant to the charter of
the Corporation or these Bylaws or pursuant to applicable law, a waiver thereof
in writing, signed by the person or persons entitled to such notice, whether
before or after the time stated therein, shall be deemed equivalent to the
giving of such notice. Neither the business to be transacted at nor the purpose
of any meeting need be set forth in the waiver of notice, unless specifically
required by statute. The attendance of any person at any meeting shall
constitute a waiver of notice of such meeting, except where such person attends
a meeting for the express purpose of objecting to the transaction of any
business on the ground that the meeting is not lawfully called or convened.
-17-
<PAGE>
ARTICLE XIV
AMENDMENT OF BYLAWS
The Board of Directors shall have the exclusive power to adopt, alter
or repeal any provision of these Bylaws and to make new Bylaws.
-18-
<PAGE>
EXHIBIT 8.1
DRAFT
FORM OF OPINION
May [ ], 1997
Alexandria Real Estate Equities, Inc.
251 South Lake Avenue
Suite 535
Pasadena, CA 91101
Re: Certain Federal Income Tax Considerations
-----------------------------------------
Ladies and Gentlemen:
You have requested our opinion concerning certain Federal income tax
considerations in connection with the offering for sale by Alexandria Real
Estate Equities, Inc., a Maryland corporation ("ARE"), of shares of its Common
Stock, par value $.01 per share, pursuant to the Registration Statement on Form
S-11 (No. 333-23545) filed with the Securities and Exchange Commission, dated as
of the date hereof (the "Registration Statement")./1/
You have provided to us and we have reviewed certain documents
(collectively, the "Documents") that we have deemed necessary or appropriate as
a basis for our opinion, including, without limitation (i) organizational
documents of ARE and ARE-QRS Corp., a Maryland corporation (the "Subsidiary"),
(ii) copies of certain leases, management contracts and other agreements, (iii)
a certificate executed by duly appointed officers of ARE (the "Officer's Certifi
cate") setting forth certain factual representations, and (iv) certain
schedules, memoranda, financial information and other records.
- ------------------------
/1/ Unless otherwise specifically defined herein, all capitalized terms
have the meanings assigned to them in the Registration Statement, as
amended to date.
<PAGE>
DRAFT
In our examination, we have assumed the legal capacity of all natural
persons, the genuineness of all signatures, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified, conformed or photostatic copies, and the
authenticity of the originals of such copies.
Our opinion is based on the correctness of the following specific
assumptions: (i) ARE and the Subsidiary have been and will continue to be
operated in accordance with the laws of the State of Maryland in the manner
described in their respective organizational documents; (ii) there will be no
changes in the applicable laws of the State of Maryland; and (iii) each of the
representations contained in the Officer's Certificate is true, correct and
complete. For purposes of our opinion, we have not made an independent
investigation of the facts set forth in the Officer's Certificate and other
Documents, including, without limitation, any investigation as to the accuracy
of (i) whether the shares of ARE are beneficially owned by 100 or more persons,
(ii) whether ARE is "closely held" within the meaning of section 856(h) of the
Internal Revenue Code of 1986, as amended (the "Code"), (iii) the proper
allocation of lease payments between real property and personal property, or
(iv) whether ARE owns, directly or indirectly, 10% or more of any tenant of ARE
or the Subsidiary, applying the principles of sections 856(d)(2)(B) and (d)(5)
of the Code. No facts have come to our attention, however, that would cause us
to question the accuracy and completeness of such facts or documents in a
material way. We have, consequently, relied on your representations that the
facts and information presented in the Officer's Certificate and other Documents
or otherwise furnished to us are true, correct, and complete.
In rendering our opinion, we have also considered and relied upon the
Code, the regulations promulgated thereunder by the Treasury Department (the
"Regulations"), administrative rulings and the other interpretations of the Code
and the Regulations by the courts and the Internal Revenue Service, all as they
exist at the date of this letter. With respect to the latter assumption, it
should be noted that statutes, regulations, judicial decisions, and
administrative interpretations are subject to change at any time and, in some
circumstances, with retroactive effect. A material change that is made after
the date hereof in any of the foregoing bases for our opinion could affect our
conclusions.
We express no opinion as to the laws of any jurisdiction other than
the Federal laws of the United States of America to the extent specifically
referred to herein.
<PAGE>
DRAFT
Based on the foregoing, we are of the opinion that,
1. Commencing with ARE's taxable year beginning January 1, 1996 and
ending on December 31, 1996, ARE has been organized and operated in conformity
with the requirements for qualification as a real estate investment trust
("REIT") under the Code for the taxable year ended December 31, 1996. It is also
our opinion that ARE's organization and actual method of operation through the
date of this letter and its planned method of operation as represented in the
Officer's Certificate will continue to enable it to meet the requirements for
qualification and taxation as a REIT for the taxable year ended December 31,
1997 and thereafter.
2. The discussion in the Registration Statement under the heading
"FEDERAL INCOME TAX CONSIDERATIONS" is, in all material respects, a fair and
accurate summary of the Federal income tax consequences of the purchase,
ownership, and disposition of the Common Stock, subject to the qualifications
set forth therein -
Qualification and taxation as a REIT will depend upon ARE's continuing
ability to meet, through actual annual operating results, certain requirements,
including requirements relating to distribution levels and diversity of stock
ownership, and the various qualification tests imposed under the Code, the
results of which will not be reviewed by us. Accordingly, no assurance can be
given that the actual results of ARE's operation for any one taxable year, if
inconsistent with ARE's projected results, will be able to satisfy or will
actually satisfy such requirements. We do not undertake to monitor whether the
Company will, in fact, through actual operating results, satisfy the various
qualification tests, and we express no opinion whether the Company will actually
satisfy these various qualification tests in the future.
Other than as expressly stated above, we express no opinion on any
issue relating to ARE, the Subsidiary, or to any investment therein.
This opinion is intended for the exclusive use of ARE and its
shareholders and except as set forth herein, it may not be used, circulated,
quoted or relied upon for any other purpose without our prior written consent.
This opinion is expressed as of the date hereof, and we disclaim any undertaking
to advise you of any subsequent changes of the matters stated, represented, or
assumed herein or any subsequent changes in applicable law.
Very truly yours,
<PAGE>
EXHIBIT 10.2
FORM OF NON-EMPLOYEE DIRECTOR
SUBSTITUTE STOCK OPTION AGREEMENT
---------------------------------
This SUBSTITUTE STOCK OPTION AGREEMENT (the "Agreement"), is entered
into effective as of the __ day of _____, 199_, by and between ALEXANDRIA REAL
ESTATE EQUITIES, INC., a Maryland corporation (the "Corporation"), and
__________, a Non-Employee Director of the Corporation (the "Optionee"). Any
capitalized terms not defined herein shall have the meaning set forth in the
Subsidiary Plan (defined below).
WHEREAS, on the ___ day of ____, 199_, Health Science Properties
Holding Corporation, Inc., a Maryland corporation (the "Parent" ), granted
Optionee a nonqualified option to purchase [____] shares of the Parent's common
stock, par value $.01 per share ("Parent Common Stock") at an exercise price of
[$____] per share pursuant to the terms and conditions of its Amended and
Restated 1994 Stock Option Plan (the "Parent Plan"), which option is currently
outstanding and exercisable (the "Parent Option"); and
WHEREAS, pursuant to the Corporation's Amended and Restated 1996 Stock
Option Plan (the "Subsidiary Plan"), in the event of any merger, reorganization,
consolidation, recapitalization, stock dividend or other change in the capital
or corporate structure of the Corporation and/or the Parent including without
limitation an initial public offering ("IPO"), the Administrator of such plan
may, in its sole discretion, grant substitute stock options to purchase the
Corporation's Common Stock ("Substitute Stock Options") in order to preserve the
benefits otherwise inherent in the Parent Options, subject to the surrender and
cancellation of the corresponding Parent Option; and
WHEREAS, in accordance with the provisions of the Subsidiary Plan, as
set forth above, the Administrator of the Subsidiary Plan has determined that,
as a result of the filing by the Corporation of a Registration Statement on Form
S-11 with the Securities and Exchange Commission, the grant of Substitute Stock
Options is necessary and appropriate in order to preserve the benefits to which
holders of Parent Options would otherwise have been entitled had such filing not
occurred.
NOW, THEREFORE, effective as of the date first set forth above, the
Administrator of the Subsidiary Plan hereby grants to the Optionee Substitute
Stock Options subject to the following terms and conditions.
<PAGE>
TERMS AND CONDITIONS OF THE SUBSTITUTE OPTION
- ---------------------------------------------
1. NUMBER OF SHARES AND SUBSTITUTE STOCK OPTION. Subject to the
--------------------------------------------
surrender and cancellation of the corresponding Parent Option, the Substitute
Stock Option entitles Optionee to purchase _____ shares of the Corporation's
common stock in lieu of Optionee's option to purchase ____ shares of Parent's
common stock./1/
2. PRICE OF SUBSTITUTE STOCK OPTION. The exercise price per share
--------------------------------
of the Substitute Stock Option shall be an amount equal to $______./2/
3. PERIOD OF SUBSTITUTE STOCK OPTION. The term of the Substitute
---------------------------------
Stock Option and of this Agreement shall commence on __________ (the "Date of
Grant") and terminate upon the expiration of ten (10) years from the Date of
Grant. Upon the termination of the Substitute Stock Option, all rights of the
Optionee hereunder shall cease.
4. CONDITIONS OF EXERCISE. The Substitute Stock Option shall be
----------------------
exercisable in full immediately upon grant, and the right of the Optionee to
purchase shares with respect to which this Substitute Stock Option has become
exercisable as herein provided may be exercised in whole or in part at any time
or from time to time, prior to the tenth (10th) anniversary of the Date of
Grant.
5. NONTRANSFERABILITY OF SUBSTITUTE STOCK OPTION. The Substitute
---------------------------------------------
Stock Option and this Agreement shall not be transferable otherwise than by will
or by the laws of descent and distribution or a qualified domestic relations
order ("QDRO"); and the Substitute Stock Option may be exercised, during the
lifetime of the Optionee, only by the Optionee or by his or her legal
representative or as otherwise provided by a QDRO.
- -----------------------
/1/ The number of shares of the Common Stock subject to the Substitute Stock
Option is an amount equal to the product of (i) the quotient of the fair
market value of the common stock of Parent divided by the value of the
Common Stock (each determined in good faith by the Administrator as of the
date the Substitute Stock Option is granted) and (ii) the number of shares
of Parent Stock underlying the Parent Option.
/2/ The exercise price per share of the Substitute Stock Option is an amount
equal to the quotient of the aggregate exercise price of the Parent Option
divided by the number of shares subject to the Substitute Stock Option.
2
<PAGE>
6. EXERCISE OF SUBSTITUTE STOCK OPTION. The Substitute Stock Option
-----------------------------------
shall be exercised in the following manner: the Optionee, or other person or
persons having the right to exercise the Substitute Stock Option, shall deliver
to the Corporation written notice specifying the number of Substitute Stock
Option Shares which he or she elects to purchase, together with cash in an
amount equal to the total price to be paid upon the exercise of the Substitute
Stock Option, and the stock purchased shall thereupon be promptly delivered. In
addition, the Grantee or other such person shall be entitled to exercise this
option in any other manner permitted under the Substitute Plan and approved by
the Administrator. The Optionee will not be deemed to be a holder of any shares
pursuant to exercise of the Substitute Stock Option until the date of the
issuance of a stock certificate to him or her for such shares and until the
shares are paid in full.
7. NOTICES. Any notice required or permitted under this Agreement
-------
shall be deemed given when delivered personally, or when deposited in a United
States Post Office, postage prepaid, addressed, as appropriate, to the Optionee
either at his address hereinbelow set forth or such other address as he or she
may designate in writing to the Corporation, or to the Corporation: Attention:
Joel S. Marcus (or his designee), at the Corporation's address or such other
address as the Corporation may designate in writing to the Optionee.
8. FAILURE TO ENFORCE NOT A WAIVER. The failure of the Corporation
-------------------------------
to enforce at any time any provision of this Agreement shall in no way be
construed to be a waiver of such provision or of any other provision hereof.
9. GOVERNING LAW. This Agreement shall be governed by and construed
-------------
according to the laws of the State of Maryland without regard to its principles
of conflict of laws.
10. INCORPORATION OF SUBSIDIARY PLAN. The Subsidiary Plan is hereby
--------------------------------
incorporated by reference and made a part hereof, and the Substitute Stock
Option and this Agreement are subject to all terms and conditions of the
Subsidiary Plan.
11. AMENDMENTS. This Agreement may be amended or modified at any
----------
time by an instrument in writing signed by the parties hereto.
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement on this
_____ day of ____ 199_.
ALEXANDRIA REAL ESTATE
EQUITIES, INC.
By: ________________________________
Joel S. Marcus
Chief Executive Officer
The undersigned hereby accepts and
agrees to all the terms and
provisions of the foregoing
Agreement and to all the terms and
provisions of the Plan herein
incorporated by reference.
______________________________
Optionee
______________________________
______________________________
______________________________
Address
4
<PAGE>
EXHIBIT 10.3
FORM OF NONQUALIFIED
SUBSTITUTE STOCK OPTION AGREEMENT
---------------------------------
This SUBSTITUTE STOCK OPTION AGREEMENT (the "Agreement"), is entered
into effective as of the __ day of _____, 199_, by and between ALEXANDRIA REAL
ESTATE EQUITIES, INC., a Maryland corporation (the "Corporation"), and
__________, an employee of the Corporation (the "Optionee"). Any capitalized
terms not defined herein shall have the meaning set forth in the Subsidiary Plan
(defined below).
WHEREAS, on the ___ day of ____, 199_, Health Science Properties
Holding Corporation, Inc., a Maryland corporation (the "Parent" ), granted
Optionee a nonqualified option to purchase [____] shares of the Parent's common
stock, par value $.01 per share ("Parent Common Stock") at an exercise price of
[$____] per share pursuant to the terms and conditions of its Amended and
Restated 1994 Stock Option Plan (the "Parent Plan"), which option is currently
outstanding and exercisable (the "Parent Option"); and
WHEREAS, pursuant to the Corporation's Amended and Restated 1996 Stock
Option Plan (the "Subsidiary Plan"), in the event of any merger, reorganization,
consolidation, recapitalization, stock dividend or other change in the capital
or corporate structure of the Corporation and/or the Parent including without
limitation an initial public offering ("IPO"), the Administrator of such plan
may, in its sole discretion, grant substitute stock options to purchase the
Corporation's Common Stock ("Substitute Stock Options") in order to preserve the
benefits otherwise inherent in the Parent Options, subject to the surrender and
cancellation of the corresponding Parent Option; and
WHEREAS, in accordance with the provisions of the Subsidiary Plan, as
set forth above, the Administrator of the Subsidiary Plan has determined that,
as a result of the filing by the Corporation of a Registration Statement on Form
S-11 with the Securities and Exchange Commission, the grant of Substitute Stock
Options is necessary and appropriate in order to preserve the benefits to which
holders of Parent Options would otherwise have been entitled had such filing not
occurred.
NOW, THEREFORE, effective as of the date first set forth above, the
Administrator of the Subsidiary Plan hereby grants to the Optionee Substitute
Stock Options subject to the following terms and conditions.
<PAGE>
TERMS AND CONDITIONS OF THE SUBSTITUTE OPTION
- ---------------------------------------------
1. NUMBER OF SHARES AND SUBSTITUTE STOCK OPTION. Subject to the
--------------------------------------------
surrender and cancellation of the corresponding Parent Option, the Substitute
Stock Option entitles Optionee to purchase _____ shares of the Corporation's
common stock in lieu of Optionee's option to purchase ____ shares of Parent's
common stock./1/
2. PRICE OF SUBSTITUTE STOCK OPTION. The exercise price per share
--------------------------------
of the Substitute Stock Option shall be an amount equal to $______./2/
3. PERIOD OF SUBSTITUTE STOCK OPTION. The term of the Substitute
---------------------------------
Stock Option and of this Agreement shall commence on __________ (the "Date of
Grant") and terminate upon the expiration of ten (10) years from the Date of
Grant. Upon the termination of the Substitute Stock Option, all rights of the
Optionee hereunder shall cease.
4. CONDITIONS OF EXERCISE. The Substitute Stock Option shall be
----------------------
exercisable in full immediately upon grant, and the right of the Optionee to
purchase shares with respect to which this Substitute Stock Option has become
exercisable as herein provided may be exercised in whole or in part at any time
or from time to time, prior to the tenth (10th) anniversary of the Date of
Grant.
5. NONTRANSFERABILITY OF SUBSTITUTE STOCK OPTION. The Substitute
---------------------------------------------
Stock Option and this Agreement shall not be transferable otherwise than by will
or by the laws of descent and distribution or a qualified domestic
- -----------------
/1/ The number of shares of the Common Stock subject to the Substitute Stock
Option is an amount equal to the product of (i) the quotient of the fair
market value of the common stock of Parent divided by the value of the
Common Stock (each determined in good faith by the Administrator as of the
date the Substitute Stock Option is granted) and (ii) the number of shares
of Parent Stock underlying the Parent Option.
/2/ The exercise price per share of the Substitute Stock Option is an amount
equal to the quotient of the aggregate exercise price of the Parent Option
divided by the number of shares subject to the Substitute Stock Option.
2
<PAGE>
relations order ("QDRO"); and the Substitute Stock Option may be exercised,
during the lifetime of the Optionee, only by the Optionee or by his or her legal
representative or as otherwise provided by a QDRO.
6. EXERCISE OF SUBSTITUTE STOCK OPTION. The Substitute Stock Option
-----------------------------------
shall be exercised in the following manner: the Optionee, or other person or
persons having the right to exercise the Substitute Stock Option, shall deliver
to the Corporation written notice specifying the number of Substitute Stock
Option Shares which he or she elects to purchase, together with cash in an
amount equal to the total price to be paid upon the exercise of the Substitute
Stock Option, and the stock purchased shall thereupon be promptly delivered. In
addition, the Grantee or other such person shall be entitled to exercise this
option in any other manner permitted under the Substitute Plan and approved by
the Administrator. The Optionee will not be deemed to be a holder of any
shares pursuant to exercise of the Substitute Stock Option until the date of
the issuance of a stock certificate to him or her for such shares and until the
shares are paid in full.
7. TERMINATION BY DEATH. If the Optionee's employment with the
--------------------
Company and any Subsidiary terminates by reason of death, the Substitute Stock
Option may thereafter be exercised by the legal representative of the estate or
the legatee of the Optionee under the will of the Optionee until the expiration
of the stated term of such Substitute Stock Option.
8. TERMINATION BY REASON OF DISABILITY. If the Optionee's
-----------------------------------
employment with the Company or any Subsidiary terminates by reason of
Disability, the Substitute Stock Option may thereafter be exercised for a period
of twelve (12) months from the date of such termination of employment or until
the expiration of the stated term of the Option, whichever period is shorter;
provided, however, that, if the Optionee dies within such twelve (12) month
- -------- -------
period (or such shorter period as the Administrator shall specify at grant) and
prior to the expiration of the stated term of the Substitute Stock Option, the
Substitute Stock Option shall thereafter be exercisable until the expiration of
the stated term of the Substitute Stock Option.
9. OTHER TERMINATION. The Optionee's employment with the
-----------------
Corporation or any Subsidiary terminates for any reason other than death or
Disability, the Option may be exercised until the earlier to occur of (A) three
months from the date of such termination or (B) the expiration of the term of
the Option.
3
<PAGE>
10. NOTICES. Any notice required or permitted under this Agreement
-------
shall be deemed given when delivered personally, or when deposited in a United
States Post Office, postage prepaid, addressed, as appropriate, to the Optionee
either at his address hereinbelow set forth or such other address as he or she
may designate in writing to the Corporation, or to the Corporation: Attention:
Joel S. Marcus (or his designee), at the Corporation's address or such other
address as the Corporation may designate in writing to the Optionee.
11. FAILURE TO ENFORCE NOT A WAIVER. The failure of the Corporation
-------------------------------
to enforce at any time any provision of this Agreement shall in no way be
construed to be a waiver of such provision or of any other provision hereof.
12. GOVERNING LAW. This Agreement shall be governed by and construed
-------------
according to the laws of the State of Maryland without regard to its principles
of conflict of laws.
13. INCORPORATION OF SUBSIDIARY PLAN. The Subsidiary Plan is hereby
--------------------------------
incorporated by reference and made a part hereof, and the Substitute Stock
Option and this Agreement are subject to all terms and conditions of the
Subsidiary Plan.
14. AMENDMENTS. This Agreement may be amended or modified at any
----------
time by an instrument in writing signed by the parties hereto.
15. RIGHTS AS A SHAREHOLDER. Neither the Optionee nor any successor
-----------------------
in interest shall have rights as a stockholder of the Company with respect to
any shares of common stock subject to the Substitute Stock Option until the date
of issuance of a stock certificate for such shares of common stock.
16. AGREEMENT NOT A CONTRACT OF EMPLOYMENT. Neither the Subsidiary
--------------------------------------
Plan, the granting of the Substitute Stock Option, this Substitute Stock Option
Agreement nor any other action taken pursuant to the Subsidiary Plan shall
constitute or be evidence of any agreement or understanding, express or implied,
that the Optionee has a right to continue as an employee of the Company or any
Subsidiary or affiliate for any period of time at any specific rate of
compensation.
17. INVESTMENT REPRESENTATION. Upon the exercise of all or any part
-------------------------
of the Substitute Stock Option, the Administrator may require the
4
<PAGE>
Optionee to furnish to the Company an agreement (in such form as the
Administrator may specify) in which the Optionee shall represent that the shares
of common stock to be acquired upon exercise of the Substitute Stock Option are
to be acquired for the Optionee's own account and not with a view to the sale or
distribution thereof.
18. AUTHORITY OF THE ADMINISTRATOR. The Administrator shall have
------------------------------
full authority to interpret and construe the terms of the Subsidiary Plan and
this Substitute Stock Option Agreement. The determination of the Administrator
as to any such matter of interpretation or construction shall be final, binding
and conclusive.
IN WITNESS WHEREOF, the parties have executed this Agreement on this
_____ day of ____ 199_.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
By: ________________________________
Joel S. Marcus
Chief Executive Officer
The undersigned hereby accepts and agrees
to all the terms and provisions of the
foregoing Agreement and to all the terms
and provisions of the Plan herein
incorporated by reference.
______________________________
Optionee
______________________________
______________________________
______________________________
Address
5
<PAGE>
EXHIBIT 10.4
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
THIS EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") is made and entered
into as of this 22nd day of April, 1997, and the employment hereunder shall
commence as of the 3rd day of April, 1997 (the latter date shall be referred to
as the "Effective Date"), by and between ALEX ANDRIA REAL ESTATE EQUITIES, INC.,
a Maryland corporation ("Corporation"), and PETER J. NELSON, an individual
("Officer").
RECITAL
-------
Corporation desires to employ Officer as its Chief Financial Officer,
Treasurer and Secretary, and officer is willing to accept such employment by
Corporation, on the terms and subject to the conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree as follows:
1. POSITION AND DUTIES; LOCATION.
-----------------------------
During the term of this Agreement, Officer agrees to be employed by
and to serve Corporation as its Chief Financial Officer, Treasurer and
Secretary. Corporation agrees to employ and retain Officer in such capacities.
Officer shall devote such of his business time, energy, and skill to the affairs
of Corporation as shall be necessary to perform the duties of such positions.
Officer shall report to Joel S. Marcus. Officer shall be based at the principal
executive offices of Corporation in the Los Angeles, California metropolitan
area, except for required travel on Corporation's business.
2. TERM OF EMPLOYMENT.
------------------
The term of this Agreement shall commence on the Effective Date and
shall continue until the first anniversary of the Effective Date (the "Term");
provided, however, that on April 1, 1998, and on each anniversary thereof, the
Term of this Agreement shall automatically be extended for one additional year
unless, not later than 90 days prior to April 1, 1998 or such anniversary
thereof, either party shall have given written notice to the other that it does
not wish to extend the Term of the Agreement. If Officer's employment hereunder
shall
<PAGE>
terminate by reason of the expiration of the Term (including any extensions
thereof), the date of such termination shall be referred to as the "Termination
Date."
3. COMPENSATION, BENEFITS AND REIMBURSEMENT.
----------------------------------------
3.1. BASE SALARY. During the Term of this Agreement and subject to
-----------
the terms and conditions set forth herein, Corporation agrees to pay to Officer
an initial annual "Base Salary" of One Hundred Sixty Five Thousand Dollars
($165,000), or such higher amount as may from time to time be determined by
Corporation. Unless otherwise agreed in writing by Officer and Corporation,
the Base Salary shall be payable in substantially equal semimonthly installments
in accordance with the standard policies of Corporation in existence from time
to time.
3.2. INCREASES IN BASE SALARY. Officer's Base Salary shall be
------------------------
reviewed for adjustment no less frequently than on each anniversary of the
Effective Date during the Term of this Agreement.
3.3. BONUS. Officer shall be eligible to receive a bonus for each
-----
fiscal year of Corporation during the Term of this Agreement, with the actual
amount of any such bonus to be determined in the sole discretion of the Board of
Directors (or a committee of the Board) based upon its evaluation of the
Corporation's performance during such year and such other factors and conditions
as the Board (or a committee of the Board) deems relevant.
3.4. STOCK OPTIONS. Subject to the determination of the Compensation
-------------
Committee of the Board of Directors and pursuant to the terms of the stock
option agreement issued under Corporation's Stock Option Plan, Corporation
shall grant to Officer the right and option to purchase shares of the
authorized but unissued Common Stock of Corporation on the terms and conditions
set forth therein. Nothing contained herein shall be construed to increase or
decrease Officer's compensation and/or benefits in existence at the time the
options are granted.
3.5. ADDITIONAL BENEFITS. Officer shall be entitled to the following
-------------------
additional benefits under this Agreement:
(a) OFFICER BENEFITS. During the Term of this Agreement, Officer
----------------
shall be eligible to participate in Corporation's medical plan, 401(k) plan
2
<PAGE>
and such stock incentive plans available to senior management and established
upon the contemplated initial public offering of Corporation. For purposes of
establishing the length of service under any benefit plans or programs of
Corporation, Officer's employment with the Corporation will be deemed to have
commenced on the Effective Date of this Agreement. Corporation shall pay one
hundred percent (100%) of Officer's medical premiums under Corporation's medical
plan.
(b) VACATION. Officer shall be entitled to three (3) weeks of
--------
vacation during each year during the Term of this Agreement. Any accrued
vacation not taken during any year may be carried forward to subsequent years in
accordance with Corporation's existing policy.
(c) REIMBURSEMENT FOR EXPENSES. During the Term of this Agreement,
--------------------------
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 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.
(d) 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 THE AGREEMENT.
----------------------------
4.1. TERMINATION WITHOUT CAUSE. In the event that Corporation
-------------------------
terminates this Agreement without Cause (as defined below), Officer shall be
entitled to a severance payment ("Severance Payment") equal to seven and one-
half (7 1/2) months ("Severance Period") of Officer's annualized Base Salary.
Such severance payment shall be payable in monthly installments during the
Severance Period, in accordance with the provisions set forth in Paragraph 3.1
above. Officer shall not be entitled to receive a Severance Payment hereunder
if he voluntarily terminates his employment or is terminated by reason of death
or disability or for Cause.
3
<PAGE>
4.2. TERMINATION FOR CAUSE. Prior to the Termination Date, the
---------------------
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. 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 or habitual willful neglect of Officer's
duties under this Agreement;
(ii) Officer's criminal conviction of fraud, embezzlement,
misappropriation of assets, malicious mischief, or any felony; or
(iii) Officer's willful Material Breach (as defined below) of
this Agreement, if such willful Material Breach is not cured by Officer within
thirty (30) days after Corporation's written notice thereof specifying the
nature of such willful Material Breach. For purposes of this Paragraph 4.2, the
term willful "Material Breach" shall mean the substantial and continual willful
nonperformance of Officer's duties under this Agreement which the Board of
Directors determines has resulted in material injury to Corporation.
4.3. 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
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 of this Agreement.
5. NONCOMPETITION.
--------------
During the Term of this Agreement, including the period, if any, with
respect to which Officer shall be entitled to Severance Payments, Officer shall
not engage in any activity competitive with the business of Corporation.
6. MISCELLANEOUS.
-------------
6.1. 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 of this Agreement,
except as may be permitted in writing by Corporation's Board of Directors or as
such
4
<PAGE>
information is within the public domain or comes within the public domain
without any breach of this Agreement.
6.2. 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.
6.3. 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.
6.4. 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, CA 91101
Phone: (818) 578-0777
Facsimile: (818) 578-0770
Attn: Joel S. Marcus
If to Officer: Peter J. Nelson
11978 Shoshone Ave.
Granada Hills, California 91344
Phone: (818) 368-2465
5
<PAGE>
6.5. HEADINGS. The Paragraph headings herein are intended for
--------
reference and shall not by themselves determine the construction or
interpretation of this Agreement.
6.6. GOVERNING LAW. This Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of California without regard
to its principles of conflicts of laws.
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. The
arbitrator shall make such determination and apportionment whether or not the
dispute proceeds to a final award.
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, all other provisions of this Agreement shall be
deemed valid and enforceable to the extent possible.
6
<PAGE>
6.9. COUNTERPARTS. This Agreement may be executed in one or more
------------
counterparts, all of which taken together shall constitute one and the same
Agreement.
6.10 INDEMNIFICATION. In addition to any rights to indemnification
---------------
to which Officer is entitled under the Corporation's Articles of Incorporation
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.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
CORPORATION:
ALEXANDRIA REAL ESTATE
EQUITIES, INC.
a Maryland corporation
By: /s/ Joel S. Marcus
---------------------------------
Joel S. Marcus
Chief Executive Officer
Date: April 28, 1997
-------------------------------
OFFICER:
/s/ Peter J. Nelson
------------------------------------
Peter J. Nelson
Date: April 28, 1997
-------------------------------
7
<PAGE>
EXHIBIT 10.28
FORM OF
ALEXANDRIA REAL ESTATE EQUITIES, INC.
1997 STOCK AWARD AND INCENTIVE PLAN
<PAGE>
FORM OF ALEXANDRIA REAL ESTATE EQUITIES, INC.
1997 STOCK AWARD AND INCENTIVE PLAN
<TABLE>
<CAPTION>
Section Page
------- ----
<S> <C>
1. Purpose; Types of Awards; Construction...................... 1
2. Definitions................................................. 1
3. Administration.............................................. 6
4. Eligibility................................................. 7
5. Stock Subject to the Plan................................... 8
6. Specific Terms of Awards.................................... 9
7. Change of Control Provisions................................ 13
8. Loan Provisions............................................. 13
9. General Provisions.......................................... 14
</TABLE>
i
<PAGE>
FORM OF
ALEXANDRIA REAL ESTATE EQUITIES, INC.
1997 STOCK AWARD AND INCENTIVE PLAN
1. Purpose; Types of Awards; Construction.
--------------------------------------
The purpose of the Alexandria Real Estate Equities, Inc. 1997 Stock
Award and Incentive Plan (the "Plan") is to afford an incentive to selected
officers, employees and independent contractors (including non-employee
directors) of Alexandria Real Estate Equities, Inc. (the "Company"), or any
Subsidiary or Affiliate that now exists or hereafter is organized or acquired,
to acquire a proprietary interest in the Company, to continue as employees or
independent contractors (including non-employee directors), as the case may be,
to increase their efforts on behalf of the Company and to promote the success of
the Company's business. Pursuant to Section 6 of the Plan, there may be granted
Options (including "incentive stock options" and "nonqualified stock options"),
Stock Appreciation Rights, Restricted Stock, and Other Stock-Based Awards or
Other Cash-Based Awards. The Plan also provides the authority to make loans to
purchase shares of Stock. From and after the consummation of the Initial Public
Offering, the Plan is designed to comply with the requirements of Regulation G
(12 C.F.R. (S) 207) regarding the purchase of shares on margin, the requirements
for "performance-based compensation" under Section 162(m) of the Code and the
conditions for exemption from short-swing profit recovery rules under Rule 16b-3
of the Exchange Act, and shall be interpreted in a manner consistent with the
requirements thereof.
2. Definitions.
-----------
2.1 For purposes of the Plan, the following terms shall be
defined as set forth below:
(a) "Affiliate" means any entity if, at the time of
granting of an Award or a Loan, (i) the Company, directly or indirectly, owns at
least 20% of the combined voting power of all classes of stock of such entity or
at least 20% of the ownership interests in such entity or (ii) such entity,
directly or indirectly, owns at least 20% of the combined voting power of all
classes of stock of the Company.
<PAGE>
(b) "Award" means any Option, SAR, Restricted Stock, or
Other Stock-Based Award or Other Cash-Based Award granted under the Plan.
(c) "Award Agreement" means any written agreement,
contract, or other instrument or document evidencing an Award.
(d) "Beneficiary" means the person, persons, trust or
trusts that have been designated by a Grantee in his or her most recent written
beneficiary designation filed with the Company to receive the benefits specified
under the Plan upon his or her death, or, if there is no designated Beneficiary
or surviving designated Beneficiary, then the person, persons, trust or trusts
entitled by will or the laws of descent and distribution to receive such
benefits.
(e) "Board" means the Board of Directors of the Company.
(f) "Change of Control" shall mean the occurrence of any of
the following events:
(i) Any Person (as such term is used in section
3(a)(9) of the Exchange Act, as modified and used in sections 13(d) and 14(d)
thereof, except that such term shall not include (A) the Company or any of its
subsidiaries, (B) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its affiliates, (C) an
underwriter temporarily holding securities pursuant to an offering of such
securities, (D) a corporation owned, directly or indirectly, by the stockholders
of the Company in substantially the same proportions as their ownership of stock
of the Company, or (E) a person or group as used in Rule 13d-1(b) under the
Exchange Act) that is or becomes the Beneficial Owner, as such term is defined
in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of
the Company (not including in the securities beneficially owned by such Person
any securities acquired directly from the Company or its affiliates other than
in connection with the acquisition by the Company or its affiliates of a
business) representing twenty-five percent (25%) or more of the combined voting
power of the Company's then outstanding securities; or
(ii) The following individuals cease for any reason
to constitute a majority of the number of directors then serving: individuals
who, on the date hereof, constitute the Board and any new director
2
<PAGE>
(other than a director whose initial assumption of office is in connection with
an actual or threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election by the
Company's stockholders was approved or recommended by a vote of at least two-
thirds (2/3) of the directors then still in office who either were directors on
the date hereof or whose appointment, election or nomination for election was
previously so approved or recommended; or
(iii) There is consummated a merger or consolidation
of the Company with any other corporation, other than (A) a merger or
consolidation that would result in the voting securities of the Company
outstanding immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity or any parent thereof), in combination with
the ownership of any trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any subsidiary of the Company, at least
seventy-five percent (75%) of the combined voting power of the securities of the
Company or such surviving entity or any parent thereof outstanding immediately
after such merger or consolidation, or (B) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which
no Person is or becomes the Beneficial Owner, directly or indirectly, of
securities of the Company (not including in the securities beneficially owned by
such Person any securities acquired directly from the Company or its affiliates
other than in connection with the acquisition by the Company or its affiliates
of a business) representing twenty-five percent (25%) or more of the combined
voting power of the Company's then outstanding securities; or
(iv) The stockholders of the Company approve a plan
of complete liquidation or dissolution of the Company or there is consummated an
agreement for the sale or disposition by the Company of all or substantially all
of the Company's assets, other than a sale or disposition by the Company of all
or substantially all of the Company's assets to an entity, at least seventy-five
(75%) of the combined voting power of the voting securities of which are owned
by stockholders of the Company in substantially the same proportions as their
ownership of the Company immediately prior to such sale.
(g) "Code" means the Internal Revenue Code of 1986, as
amended from time to time.
3
<PAGE>
(h) "Committee" means the Board or the committee designated
or established by the Board to administer the Plan from and after the
consummation of the Initial Public Offering, the composition of which shall at
all times satisfy the provisions of Rule 16b-3. With respect to the period
prior to consummation of the Initial Public Offering, references to the
"Committee" shall be deemed to refer to the Board.
(i) "Company" means Alexandria Real Estate Equities, Inc.,
a corporation organized under the laws of the State of Maryland, or any
successor corporation or to the Compensation Committee of the Board.
(j) "Exchange Act" means the Securities Exchange Act of
1934, as amended from time to time, and as now or hereafter construed,
interpreted and applied by regulations, rulings and cases.
(k) "Fair Market Value" means, with respect to Stock or
other property, the fair market value of such Stock or other property determined
by such methods or procedures as shall be established from time to time by the
Committee. Unless otherwise determined by the Committee in good faith, the per
share Fair Market Value of Stock as of a particular date shall mean (i) the
closing sales price per share of Stock on the national securities exchange on
which the Stock is principally traded for the last preceding date on which there
was a sale of such Stock on such exchange, or (ii) if the shares of Stock are
then traded in an over-the-counter market, the average of the closing bid and
ask prices for the shares of Stock in such over-the-counter market for the last
preceding date on which there was a sale of such Stock in such market, or (iii)
if the shares of Stock are not then listed on a national securities exchange or
traded in an over-the-counter market, such value as the Committee, in its sole
discretion, shall determine.
(l) "Grantee" means a person who, as an employee or
independent contractor of the Company, a Subsidiary or an Affiliate, has been
granted an Award or Loan under the Plan.
(m) "Initial Public Offering" shall mean the initial public
offering of shares of Stock of the Company, as more fully described in the
Registration Statement on Form S-11 filed with the Securities and Exchange
Commission on March 18, 1997, as such Registration Statement may be amended from
time to time.
4
<PAGE>
(n) "Incentive Stock Option" or "ISO" means any Option
intended to be and designated as an incentive stock option within the meaning of
Section 422 of the Code.
(o) "Loan" means the proceeds from the Company borrowed by
a Plan participant under Section 8 of the Plan.
(p) "Non-Employee Director" means any director who is not
an employee of the Company or any of its subsidiaries or affiliates. For
purposes of this Plan, such non-employee director shall be treated as an
independent contractor.
(q) "Nonqualified Stock Option" or "NQSO" means any Option
that is designated as a nonqualified stock option.
(r) "Option" means a right, granted to a Grantee under
Section 6.2, to purchase shares of Stock. An Option may be either an ISO or an
NQSO; provided that ISOs may be granted only to employees of the Company or of a
Subsidiary.
(s) "Other Cash-Based Award" means cash awarded to a
Grantee under Section 6.6, including cash awarded as a bonus or upon the
attainment of specified performance objectives or otherwise as permitted under
the Plan.
(t) "Other Stock-Based Award" means a right or other
interest granted to a Grantee under Section 6.6 that may be denominated or
payable in, valued in whole or in part by reference to, or otherwise based on,
or related to, Stock, including, but not limited to (1) unrestricted Stock
awarded as a bonus or upon the attainment of specified performance objectives or
otherwise as permitted under the Plan and (2) a right granted to a Grantee to
acquire Stock from the Company for cash and/or a promissory note containing
terms and conditions prescribed by the Committee.
(u) "Plan" means this Alexandria Real Estate Equities, Inc.
1997 Stock Award and Incentive Plan, as amended from time to time.
5
<PAGE>
(v) "Restricted Stock" means an Award of shares of Stock to
a Grantee under Section 6.4 that may be subject to certain restrictions and to a
risk of forfeiture.
(w) "Rule 16b-3" means Rule 16b-3, as from time to time in
effect promulgated by the Securities and Exchange Commission under Section 16 of
the Exchange Act, including any successor to such Rule.
(x) "Securities Act" means the Securities Act of 1933, as
amended from time to time, and as now or hereafter construed, interpreted and
applied by the regulations, rulings and cases.
(y) "Stock" means shares of the common stock, par value
$.01 per share, of the Company.
(z) "Stock Appreciation Right" or "SAR" means the right,
granted to a Grantee under Section 6.3, to be paid an amount measured by the
appreciation in the Fair Market Value of Stock from the date of grant to the
date of exercise of the right, with payment to be made in cash, Stock, or
property as specified in the Award or determined by the Committee.
(aa) "Subsidiary" means any corporation (other than the
Company) in an unbroken chain of corporations beginning with the Company if, at
the time of granting of an Award, each of the corporations (other than the last
corporation in the unbroken chain) owns stock possessing 50% or more of the
total combined voting power of all classes of stock in one of the other
corporations in the chain.
3. Administration.
--------------
The Plan shall be administered by the Committee. The Committee shall
have the authority in its discretion, subject to and not inconsistent with the
express provisions of the Plan, to administer the Plan and to exercise all the
powers and authorities either specifically granted to it under the Plan or
necessary or advisable in the administration of the Plan including, without
limitation, the authority to grant Awards and make Loans; to determine the
persons to whom and the time or times at which Awards shall be granted and Loans
shall be made; to determine the type and number of Awards to be granted and the
amount of any Loan, the number of shares of Stock to which an Award may relate
and the terms, conditions, restrictions and performance criteria relating to any
Award or
6
<PAGE>
Loan; and to determine whether, to what extent, and under what circumstances an
Award may be settled, cancelled, forfeited, exchanged, or surrendered; to make
adjustments in the terms and conditions of, and the criteria and performance
objectives (if any) included in, Awards and Loans in recognition of unusual or
non-recurring events affecting the Company or any Subsidiary or Affiliate or the
financial statements of the Company or any Subsidiary or Affiliate, or in
response to changes in applicable laws, regulations, or accounting principles;
to designate Affiliates; to construe and interpret the Plan and any Award or
Loan; to prescribe, amend and rescind rules and regulations relating to the
Plan; to determine the terms and provisions of the Award Agreements and any
promissory note or agreement related to any Loan (which need not be identical
for each Grantee); and to make all other determinations deemed necessary or
advisable for the administration of the Plan.
The Committee may appoint a chairperson and a secretary and may make
such rules and regulations for the conduct of its business as it shall deem
advisable, and shall keep minutes of its meetings. All determinations of the
Committee shall be made by a majority of its members either present in person or
participating by conference telephone at a meeting or by written consent. The
Committee may delegate to one or more of its members or to one or more agents
such administrative duties as it may deem advisable, and the Committee or any
person to whom it has delegated duties as aforesaid may employ one or more
persons to render advice with respect to any responsibility the Committee or
such person may have under the Plan. All decisions, determinations and
interpretations of the Committee shall be final and binding on all persons,
including the Company, and any Subsidiary, Affiliate or Grantee (or any person
claiming any rights under the Plan from or through any Grantee) and any
stockholder.
No member of the Board or Committee shall be liable for any action
taken or determination made in good faith with respect to the Plan or any Award
granted or Loan made hereunder.
4. Eligibility.
-----------
Subject to the provisions set forth below, Awards and Loans may be
granted to selected employees, officers and independent contractors (including
Non-Employee Directors) of the Company and its present or future Subsidiaries
and Affiliates, in the discretion of the Committee; provided that ISOs may be
granted only to employees of the Company or of a Subsidiary. In determining the
persons to whom Awards and Loans shall be granted and the type (including
7
<PAGE>
the number of shares to be covered) of any Award or the amount of any Loan, the
Committee shall take into account such factors as the Committee shall deem
relevant in connection with accomplishing the purposes of the Plan.
5. Stock Subject to the Plan.
-------------------------
The maximum number of shares of Stock reserved for the grant of Awards
under the Plan shall be [1,030,000], subject to adjustment as provided herein.
No more than 100% of the total shares available for grant may be awarded to a
single individual in a single year. Such shares may, in whole or in part, be
authorized but unissued shares or shares that shall have been or may be
reacquired by the Company in the open market, in private transactions or
otherwise. If any shares subject to an Award are forfeited, cancelled,
exchanged or surrendered, or if an Award otherwise terminates or expires without
a distribution of shares to the Grantee, the shares of stock with respect to
such Award shall, to the extent of any such forfeiture, cancellation, exchange,
surrender, termination or expiration, again be available for Awards under the
Plan; provided that, in the case of forfeiture, cancellation, exchange or
surrender of shares of Restricted Stock with respect to which dividends have
been paid or accrued, the number of shares with respect to such Awards shall not
be available for Awards hereunder unless, in the case of shares with respect to
which dividends were accrued but unpaid, such dividends are also forfeited,
cancelled, exchanged or surrendered. Upon the exercise of any Award granted in
tandem with any other Awards or awards, such related Awards or awards shall be
cancelled to the extent of the number of shares of Stock as to which the Award
is exercised and, notwithstanding the foregoing, such number of shares shall no
longer be available for Awards under the Plan.
In the event that the Committee shall determine that any dividend or
other distribution (whether in the form of cash, Stock, or other property),
recapitalization, stock split, reverse split, reorganization, merger,
consolidation, spin-off, combination, repurchase, or share exchange, or other
similar corporate transaction or event, affects the Stock such that an
adjustment is appropriate in order to prevent dilution or enlargement of the
rights of Grantees under the Plan, then the Committee shall make such equitable
changes or adjustments as it deems necessary or appropriate to any or all of (a)
the number and kind of shares of Stock which may thereafter be issued in
connection with Awards, (b) the number and kind of shares of Stock issued or
issuable in respect of outstanding Awards, and (c) the exercise price, grant
price, or purchase price relating to any Award;
8
<PAGE>
provided that, with respect to ISOs, such adjustment shall be made in accordance
with Section 424(h) of the Code.
6. Specific Terms of Awards.
------------------------
6.1 General. The term of each Award shall be for such period
-------
as may be determined by the Committee. Subject to the terms of the Plan and any
applicable Award Agreement, payments to be made by the Company or a Subsidiary
or Affiliate upon the grant, maturation, or exercise of an Award may be made in
such forms as the Committee shall determine at the date of grant or thereafter,
including, without limitation, cash, Stock, or other property, and may be made
in a single payment or transfer, in installments, or on a deferred basis. The
Committee may make rules relating to installment or deferred payments with
respect to Awards, including the rate of interest to be credited with respect to
such payments. In addition to the foregoing, the Committee may impose on any
Award or the exercise thereof, at the date of grant or thereafter, such
additional terms and conditions, not inconsistent with the provisions of the
Plan, as the Committee shall determine .
6.2 Options. The Committee is authorized to grant Options to
-------
Grantees on the following terms and conditions:
(a) Type of Award. The Award Agreement evidencing the
-------------
grant of an Option under the Plan shall designate the Option as an ISO or an
NQSO.
(b) Exercise Price. The exercise price per share of Stock
--------------
purchasable under an Option shall be determined by the Committee; provided that,
in the case of an ISO, such exercise price shall be not less than the Fair
Market Value of a share on the date of grant of such Option, and in no event
shall the exercise price for the purchase of shares be less than par value. The
exercise price for Stock subject to an Option may be paid in cash or by an
exchange of Stock previously owned by the Grantee, or a combination of both, in
an amount having a combined value equal to such exercise price. A Grantee may
also elect to pay all or a portion of the aggregate exercise price by having
shares of Stock with a Fair Market Value on the date of exercise equal to the
aggregate exercise price withheld by the Company or sold by a broker-dealer
under circumstances meeting the requirements of 12 C.F.R. (S) 220 or any
successor thereof.
9
<PAGE>
(c) Term and Exercisability of Options. The date on which
----------------------------------
the Committee adopts a resolution expressly granting an Option shall be
considered the day on which such Option is granted; provided that, Option grants
in connection with the Initial Public Offering shall be deemed to have been
granted immediately following consummation of the Initial Public Offering.
Options shall be exercisable over the exercise period (which shall not exceed
ten years from the date of grant), at such times and upon such conditions as the
Committee may determine, as reflected in the Award Agreement; provided that, the
Committee shall have the authority to accelerate the exercisability of any
outstanding Option at such time and under such circumstances as it, in its sole
discretion, deems appropriate. An Option may be exercised to the extent of any
or all full shares of Stock as to which the Option has become exercisable, by
giving written notice of such exercise to the Committee or its designated agent.
(d) Termination of Employment, etc. An Option may not be
------------------------------
exercised unless the Grantee is then in the employ of, or then maintains an
independent contractor relationship with, the Company or a Subsidiary or an
Affiliate (or a company or a parent or Subsidiary company of such company
issuing or assuming the Option in a transaction to which Section 424(a) of the
Code applies); provided that ISOs may be granted only to employees of the
Company or of a Subsidiary, and unless the Grantee has remained continuously so
employed, or continuously maintained such relationship, since the date of grant
of the Option; provided that, the Award Agreement may contain provisions
extending the exercisability of Options, in the event of specified terminations,
to a date not later than the expiration date of such Option.
(e) Other Provisions. Options may be subject to such other
----------------
conditions including, but not limited to, restrictions on transferability of the
shares acquired upon exercise of such Options, as the Committee may prescribe in
its discretion or as may be required by applicable law, including but not
limited to the requirements respecting ISOs set forth in Section 422 of the
Code.
6.3 SARs. The Committee is authorized to grant SARs to Grantees
----
on the following terms and conditions:
(a) In General. Unless the Committee determines otherwise,
----------
(i) an SAR granted in tandem with an NQSO may be granted at the time of grant of
the related NQSO or at any time thereafter or (ii) an SAR granted in tandem with
an ISO may only be granted at the time of grant of the
10
<PAGE>
related ISO. An SAR granted in tandem with an Option shall be exercisable only
to the extent the underlying Option is exercisable.
(b) SARs. An SAR shall confer on the Grantee a right to
----
receive an amount with respect to each share subject thereto, upon exercise
thereof, equal to the excess of (i) the Fair Market Value of one share of Stock
on the date of exercise over (ii) the grant price of the SAR (which in the case
of an SAR granted in tandem with an Option shall be equal to the exercise price
of one share of Stock underlying the Option, and which in the case of any other
SAR shall be such price as the Committee may determine).
6.4 Restricted Stock. The Committee is authorized to grant
----------------
Restricted Stock to Grantees on the following terms and conditions:
(a) Issuance and Restrictions. Restricted Stock shall be
-------------------------
subject to such restrictions on transferability and other restrictions, if any,
as the Committee may impose at the date of grant or thereafter, which
restrictions may lapse separately or in combination at such times, under such
circumstances, in such installments, or otherwise, as the Committee may
determine. Such restrictions may include factors relating to the increase in
the value of the Stock or to individual or Company performance such as the
attainment of certain specified individual or Company-wide performance goals or
earnings per share. Except to the extent restricted under the Award Agreement
relating to the Restricted Stock, a Grantee granted Restricted Stock shall have
all of the rights of a stockholder including, without limitation, the right to
vote Restricted Stock and the right to receive dividends thereon.
(b) Forfeiture. Upon termination of employment with or
----------
service to the Company, or upon termination of the independent contractor
relationship, as the case may be, during the applicable restriction period,
Restricted Stock and any accrued but unpaid dividends that are at that time
subject to restrictions shall be forfeited; provided that, the Committee may
provide, by rule or regulation or in any Award Agreement, or may determine in
any individual case, that restrictions or forfeiture conditions relating to
Restricted Stock will be waived in whole or in part in the event of terminations
resulting from specified causes, and the Committee may in other cases waive in
whole or in part the forfeiture of Restricted Stock.
(c) Certificates for Stock. Restricted Stock granted
----------------------
under the Plan may be evidenced in such manner as the Committee shall deter-
11
<PAGE>
mine. If certificates representing Restricted Stock are registered in the name
of the Grantee, such certificates shall bear an appropriate legend referring to
the terms, conditions, and restrictions applicable to such Restricted Stock, and
the Company shall retain physical possession of the certificate.
(d) Dividends. Dividends paid on Restricted Stock shall
---------
either be paid at the dividend payment date, or be deferred for payment to such
date as determined by the Committee, in cash or in shares of unrestricted Stock
having a Fair Market Value equal to the amount of such dividends. Stock
distributed in connection with a stock split or stock dividend, and other
property distributed as a dividend, shall be subject to restrictions and a risk
of forfeiture to the same extent as the Restricted Stock with respect to which
such Stock or other property has been distributed.
6.5 Stock Awards in Lieu of Cash Awards. The Committee is
-----------------------------------
authorized to grant Stock to Grantees as a bonus, or to grant other Awards, in
lieu of Company commitments to pay cash under other plans or compensatory
arrangements. Stock or Awards granted hereunder shall have such other terms as
shall be determined by the Committee.
6.6 Other Stock-Based or Cash-Based Awards. The Committee is
--------------------------------------
authorized to grant to Grantees Other Stock-Based Awards or Other Cash-Based
Awards alone or in addition to any other Award under the Plan, as deemed by the
Committee to be consistent with the purposes of the Plan. Such Awards may be
granted with value and payment contingent upon performance of the Company or any
other factors designated by the Committee, or valued by reference to the
performance of specified Subsidiaries or Affiliates.
The Committee shall determine the terms and conditions of such Awards
at the date of grant or thereafter; provided, that performance objectives for
each year shall be established by the Committee not later than the latest date
permissible under Section 162(m) of the Code. Such performance objectives may
be expressed in terms of one or more financial or other objective goals.
Financial goals may be expressed, for example, in terms of earnings per share,
stock price, return on equity, net earnings growth, net earnings, related return
ratios, cash flow, earnings before interest, taxes, depreciation and
amortization (EBITDA), return on assets or total stockholder return. Other
objective goals may include the attainment of various productivity and long-term
growth objectives. Any criteria may be measured in absolute terms or as
compared to another corporation or corporations. To the extent applicable, any
such performance
12
<PAGE>
objective shall be determined (a) in accordance with the Company's audited
financial statements and generally accepted accounting principles and reported
upon by the Company's independent accountants or (b) so that a third party
having knowledge of the relevant facts could determine whether such performance
objective is met. Performance objectives shall include a threshold level of
performance below which no Award payment shall be made, levels of performance
above which specified percentages of target Awards shall be paid, and a maximum
level of performance above which no additional Award shall be paid.
Performance objectives established by the Committee may be (but need not be)
different from year-to-year and different performance objectives may be
applicable to different Grantees.
7. Change of Control Provisions. The following provisions shall
----------------------------
apply in the event of a Change of Control, unless otherwise determined by the
Committee or the Board in writing at or after grant (including under any
individual agreement), but not prior to the occurrence of such Change of
Control:
7.1 any Award carrying a right to exercise that was not
previously exercisable and vested shall become fully exercisable and vested;
7.2 the restrictions, deferral limitations, payment conditions,
and forfeiture conditions applicable to any other Award granted under the Plan
shall lapse and such Awards shall be deemed fully vested, and any performance
conditions imposed with respect to Awards shall be deemed to be fully achieved;
and
7.3 any indebtedness incurred pursuant to Section 8 of this Plan
shall be forgiven and the collateral pledged in connection with any such Loan
shall be released.
8. Loan Provisions. Subject to the provisions of the Plan and all
---------------
applicable federal and state laws, rules and regulations (including the
requirements of Regulation G (12 C.F.R. (S) 207)), the Committee shall have the
authority to make Loans to Grantees (on such terms and conditions as the
Committee shall determine), to enable such Grantees to purchase shares in
connection with the Initial Public Offering or otherwise in connection with the
realization of Awards under the Plan. Loans shall be evidenced by a promissory
note or other agreement, signed by the borrower, which shall contain provisions
for repayment and such other terms and conditions as the Committee shall
determine.
13
<PAGE>
9. General Provisions.
------------------
9.1 Approval of Stockholders. The Plan shall take effect upon
------------------------
its adoption by the Board but the Plan (and any grants of Awards made prior to
the stockholder approval mentioned herein) shall be subject to ratification by
the holder(s) of a majority of the issued and outstanding shares of voting
securities of the Company entitled to vote, which ratification must occur within
twelve (12) months of the date that the Plan is adopted by the Board. In the
event that the stockholders of the Company do not ratify the Plan at a meeting
of the stockholders at which such issue is considered and voted upon, then upon
such event the Plan and all rights hereunder shall immediately terminate and no
Grantee (or any permitted transferee thereof) shall have any remaining rights
under the Plan or any Award Agreement entered into in connection herewith.
9.2 Nontransferability. Awards shall not be transferable by a
------------------
Grantee except by will or the laws of descent and distribution or, if then
permitted under Rule 16b-3, pursuant to a qualified domestic relations order as
defined under the Code or Title I of the Employee Retirement Income Security Act
of 1974, as amended, or the rules thereunder, and shall be exercisable during
the lifetime of a Grantee only by such Grantee or his guardian or legal
representative.
9.3 No Right to Continued Employment, etc. Nothing in the Plan
-------------------------------------
or in any Award or Loan granted or any Award Agreement, promissory note or other
agreement entered into pursuant hereto shall confer upon any Grantee the right
to continue in the employ of or to continue as an independent contractor of the
Company, any Subsidiary or any Affiliate, or to be entitled to any remuneration
or benefits not set forth in the Plan or such Award Agreement, promissory note,
or other agreement or to interfere with or limit in any way the right of the
Company or any such Subsidiary or Affiliate to terminate such Grantee's
employment or independent contractor relationship.
9.4 Taxes. The Company or any Subsidiary or Affiliate is
-----
authorized to withhold from any Award granted, any payment relating to an Award
under the Plan, including from a distribution of Stock, or any other payment to
a Grantee, amounts of withholding and other taxes due in connection with any
transaction involving an Award, and to take such other action as the Committee
may deem advisable to enable the Company and Grantees to satisfy obligations for
the payment of withholding taxes and other tax obligations relating to any
Award. This authority includes the authority to withhold or receive Stock
14
<PAGE>
or other property and to make cash payments in respect thereof in satisfaction
of a Grantee's tax obligations.
9.5 Amendment and Termination of the Plan. The Board may at
-------------------------------------
any time and from time to time alter, amend, suspend, or terminate the Plan in
whole or in part; provided that, no amendment which requires stockholder
approval in order for the Plan to continue to comply with Rule 16b-3, shall be
effective unless the same shall be approved by the requisite vote of the
stockholders of the Company entitled to vote thereon. Notwithstanding the
foregoing, no amendment shall affect adversely any of the rights of any Grantee,
without such Grantee's consent, under any Award or Loan theretofore granted
under the Plan.
9.6 No Rights to Awards or Loans; No Stockholder Rights. No
---------------------------------------------------
Grantee shall have any claim to be granted any Award or Loan under the Plan, and
there is no obligation for uniformity of treatment of Grantees. Except as
provided specifically herein, a Grantee or a transferee of an Award shall have
no rights as a stockholder with respect to any shares covered by the Award until
the date of the issuance of a stock certificate to him for such shares.
9.7 Unfunded Status of Awards. The Plan is intended to
-------------------------
constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Grantee pursuant to an Award, nothing
contained in the Plan or any Award shall give any such Grantee any rights that
are greater than those of a general creditor of the Company.
9.8 No Fractional Shares. No fractional shares of Stock shall
--------------------
be issued or delivered pursuant to the Plan or any Award. The Committee shall
determine whether cash, other Awards, or other property shall be issued or paid
in lieu of such fractional shares or whether such fractional shares or any
rights thereto shall be forfeited or otherwise eliminated.
9.9 Regulations and Other Approvals.
-------------------------------
(a) The obligation of the Company to sell or deliver Stock
with respect to any Award granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Committee.
15
<PAGE>
(b) Each Award is subject to the requirement that, if at
any time the Committee determines, in its absolute discretion, that the listing,
registration or qualification of Stock issuable pursuant to the Plan is required
by any securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body is necessary or desirable as a
condition of, or in connection with, the grant of an Award or the issuance of
Stock, no such Award shall be granted or payment made or Stock issued, in whole
or in part, unless listing, registration, qualification, consent or approval has
been effected or obtained free of any conditions not acceptable to the
Committee.
(c) In the event that the disposition of Stock acquired
pursuant to the Plan is not covered by a then current registration statement
under the Securities Act and is not otherwise exempt from such registration,
such Stock shall be restricted against transfer to the extent required by the
Securities Act or regulations thereunder, and the Committee may require a
Grantee receiving Stock pursuant to the Plan, as a condition precedent to
receipt of such Stock, to represent to the Company in writing that the Stock
acquired by such Grantee is acquired for investment only and not with a view to
distribution.
9.10 Governing Law. The Plan and all determinations made and
-------------
actions taken pursuant hereto shall be governed by the laws of the State of
Maryland without giving effect to the conflict of laws principles thereof.
9.11 Effective Date; Plan Termination. The Plan shall take
--------------------------------
effect upon its adoption by the Board (the "Effective Date"), but the Plan (and
any grants of Awards made prior to the stockholder approval mentioned herein),
shall be subject to the approval of the holder(s) of a majority of the issued
and outstanding shares of voting securities of the Company entitled to vote,
which approval must occur within twelve (12) months of the date the Plan is
adopted by the Board. In the absence of such approval, such Awards shall be null
and void. Notwithstanding the foregoing, the effectiveness of the Plan and the
validity of any Award or Loan granted hereunder is conditioned upon the
consummation of the Initial Public Offering, and shall be of no force and effect
if the Initial Public Offering is not consummated.
16
<PAGE>
EXHIBIT 10.29
FORM OF NON-EMPLOYEE DIRECTOR
STOCK OPTION AGREEMENT
----------------------
This OPTION AGREEMENT (the "Agreement"), is entered into this __ day
of _____, 1997, by and between ALEXANDRIA REAL ESTATE EQUITIES, INC., a Maryland
corporation (the "Corporation"), and __________, a non-employee director of the
Corporation (the "Optionee"). Any capitalized terms not defined herein shall
have the meaning set forth in the Plan (defined below).
Pursuant to the Alexandria Real Estate Equities, Inc. 1997 Stock Award
and Incentive Plan (the "Plan"), the Committee has determined that the Optionee
is to be granted, on the terms and conditions set forth herein (and subject to
the terms and provisions of the Plan), a nonqualified stock option (an "Option")
to purchase shares of the Corporation's common stock and hereby grants such
Option. It is intended that the Option constitute a "nonqualified stock option"
that is not an "incentive stock option" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). Any capitalized terms
not defined herein shall have the meaning set forth in the Plan.
TERMS AND CONDITIONS OF THE OPTION
- ----------------------------------
1. NUMBER OF SHARES AND OPTION PRICE. The Option entitles the
---------------------------------
Optionee to purchase [ ] shares of the Corporation's common stock, par value
[$ ] per share (the "Option Shares"), at a price (the "Option Price") of
[$ ] per share.
2. PERIOD OF OPTION. Unless the Option is previously terminated
----------------
pursuant to this Agreement, the term of the Option and of this Agreement shall
commence on the date hereof (the "Date of Grant") and terminate upon the
expiration of ten (10) years from the Date of Grant. Upon the termination of
the Option, all rights of the Optionee hereunder shall cease.
3. CONDITIONS OF EXERCISE. The Option shall be exercisable in full
----------------------
immediately upon grant, and the right of the Optionee to purchase shares with
respect to which this Option has become exercisable as herein provided may be
exercised in whole or in part at any time or from time to time, prior to the
tenth (10th) anniversary of the Date of Grant.
<PAGE>
4. NONTRANSFERABILITY OF OPTION. The Option and this Agreement
----------------------------
shall not be transferable otherwise than by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order ("QDRO"), and
the Option may be exercised during the lifetime of the Optionee, only by the
Optionee or by his or her legal representative or as otherwise provided by a
QDRO.
5. EXERCISE OF OPTION. The Option shall be exercised in the
------------------
following manner: the Optionee, or other person or persons having the right to
exercise the Option, shall deliver to the Corporation written notice specifying
the number of Option Shares which he or she elects to purchase, together with
cash in an amount equal to the Option Price and the Option Shares purchased
shall thereupon be promptly delivered. In addition, the Optionee or other such
person shall be entitled to exercise in any other manner permitted under the
Plan and approved by the Committee. The Optionee will not be deemed to be a
holder of any Option Shares until the date of the issuance of a stock
certificate to him or her for such shares and until such shares are paid for in
full.
6. NOTICES. Any notice required or permitted under this Agreement
-------
shall be deemed given when delivered personally, or when deposited in a United
States Post Office, postage prepaid, addressed, as appropriate, to the Optionee
either at his address set forth below or such other address as he or she may
designate in writing to the Corporation, or to the Corporation: Attention:
Joel S. Marcus (or his designee), at the Corporation's address or such other
address as the Corporation may designate in writing to the Optionee.
7. FAILURE TO ENFORCE NOT A WAIVER. The failure of the Corporation
-------------------------------
to enforce at any time any provision of this Agreement shall in no way be
construed to be a waiver of such provision or of any other provision hereof.
8. GOVERNING LAW. This Agreement shall be governed by and construed
-------------
according to the laws of the State of Maryland without regard to its principles
of conflict of laws.
9. INCORPORATION OF PLAN. The Plan is hereby incorporated by
---------------------
reference and made a part hereof, and the Option and this Agreement are subject
to all of the terms and conditions of the Plan.
2
<PAGE>
10. AMENDMENTS. This Agreement may be amended or modified at any
----------
time by an instrument in writing signed by the parties hereto.
11. RIGHTS AS A SHAREHOLDER. Neither the Optionee nor any successor
-----------------------
in interest shall have rights as a stockholder of the Corporation with respect
to any of the Option Shares until the date of issuance of a stock certificate
for such Option Shares.
12. AUTHORITY OF THE COMMITTEE. The Committee shall have full
--------------------------
authority to interpret and construe the terms of the Plan and this Option
Agreement. The determination of the Committee as to any such matter of
interpretation or construction shall be final, binding and conclusive.
IN WITNESS WHEREOF, the parties have executed this Agreement on this
_____ day of ____ 199_.
ALEXANDRIA REAL ESTATE
EQUITIES, INC.
By: ________________________________
Joel S. Marcus
Chief Executive Officer
The undersigned hereby accepts and
agrees to all the terms and
provisions of the foregoing
Agreement and to all the terms and
provisions of the Plan herein
incorporated by reference.
______________________________
Optionee
______________________________
______________________________
______________________________
Address
3
<PAGE>
EXHIBIT 10.30
FORM OF
INCENTIVE STOCK OPTION AGREEMENT
--------------------------------
This OPTION AGREEMENT (the "Agreement"), is entered into this __ day
of _____, 1997, by and between ALEXANDRIA REAL ESTATE EQUITIES, INC., a Maryland
corporation (the "Corporation"), and _______, an employee of the Corporation
(the "Optionee"). Any capitalized terms not defined herein shall have the
meaning set forth in the Plan (defined below).
Pursuant to the Alexandria Real Estate Equities, Inc. 1997 Stock Award
and Incentive Plan (the "Plan"), the Committee has determined that the Optionee
is to be granted, on the terms and conditions set forth herein (and subject to
the terms and provisions of the Plan), an option (the "Option") to purchase
shares of the Corporation's common stock and hereby grants such Option. It is
intended that the Option constitute an "incentive stock option" within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"). Any capitalized terms not defined herein shall have the meaning set
forth in the Plan.
TERMS AND CONDITIONS OF THE OPTION
- ----------------------------------
1. NUMBER OF SHARES AND OPTION PRICE. The Option entitles Optionee
---------------------------------
to purchase [ ] shares of the Corporation's common stock, par value [$ ] per
share (the "Option Shares"), at a price (the "Option Price") of [$ ] per share,
which is not less than the Fair Market Value of the Option Shares as of the date
hereof, as determined by the Committee.
2. PERIOD OF OPTION. Unless the Option is previously terminated
----------------
pursuant to this Agreement, the term of the Option and of this Agreement shall
commence on the date hereof (the "Date of Grant") and terminate upon the
expiration of ten (10) years from the Date of Grant. Upon the termination of
the Option, all rights of the Optionee hereunder shall cease.
3. CONDITIONS OF EXERCISE. Subject to the provisions of this
----------------------
Agreement and the Plan, the Option Shares may be exercised as follows:
[TO FOLLOW]
<PAGE>
4. NONTRANSFERABILITY OF OPTION. The Option and this Agreement
----------------------------
shall not be transferable otherwise than by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order ("QDRO"), and
the Option may be exercised during the lifetime of the Optionee, only by the
Optionee or by his or her legal representative or as otherwise provided by a
QDRO.
5. EXERCISE OF OPTION. The Option shall be exercised in the
------------------
following manner: the Optionee, or other person or persons having the right to
exercise the Option upon the death or Disability of the Optionee, shall deliver
to the Corporation written notice specifying the number of Option Shares which
he or she elects to purchase, together with either (i) cash in an amount equal
to the Option Price, (ii) the number of shares of common stock having a Fair
Market Value (as of the date of exercise) equal to the Option Price, or (iii)
any combination of cash and shares of common stock, the sum of which equals the
Option Price and the Option Shares purchased shall thereupon be promptly
delivered. In addition, the Optionee or such other person shall be entitled to
exercise the Option in any other manner permitted under the Plan and approved by
the Committee. The Optionee will not be deemed to be a holder of any Option
Shares until the date of the issuance of a stock certificate to him or her for
such shares and until such shares are paid for in full.
6. TERMINATION BY DEATH. If the Optionee's employment with the
--------------------
Company or any Subsidiary terminates by reason of death, the Option may
thereafter be exercised by the legal representative of the estate or the legatee
of the Optionee under the will of the Optionee until the expiration of the
stated term of such Option.
7. TERMINATION BY REASON OF DISABILITY. If the Optionee's
-----------------------------------
employment with the Company or any Subsidiary terminates by reason of
Disability, the Option may thereafter be exercised for a period of twelve (12)
months from the date of such termination of employment or until the expiration
of the stated term of the Option, whichever period is shorter; provided,
--------
however, that, if the Optionee dies within such twelve (12) month period (or
- -------
such shorter period as the Committee shall specify at grant) and prior to the
expiration of the stated term of the Option, the Option shall thereafter be
exercisable until the expiration of the stated term of the Option.
8. OTHER TERMINATION. The Optionee's employment with the
-----------------
Corporation or any Subsidiary terminates for any reason other than death or
2
<PAGE>
Disability, the Option may be exercised until the earlier to occur of (A) three
(3) months from the date of such termination or (B) the expiration of the term
of the Option.
9. NOTICES. Any notice required or permitted under this Agreement
-------
shall be deemed given when delivered personally, or when deposited in a United
States Post Office, postage prepaid, addressed, as appropriate, to the Optionee
either at his address set forth below or such other address as he or she may
designate in writing to the Corporation, or to the Corporation: Attention:
Joel S. Marcus (or his designee), at the Corporation's address or such other
address as the Corporation may designate in writing to the Optionee.
10. FAILURE TO ENFORCE NOT A WAIVER. The failure of the Corporation
-------------------------------
to enforce at any time any provision of this Agreement shall in no way be
construed to be a waiver of such provision or of any other provision hereof.
11. GOVERNING LAW. This Agreement shall be governed by and construed
-------------
according to the laws of the State of Maryland without regard to its principles
of conflict of laws.
12. INCORPORATION OF PLAN. The Plan is hereby incorporated by
---------------------
reference and made a part hereof, and the Option and this Agreement are subject
to all of the terms and conditions of the Plan.
13. AMENDMENTS. This Agreement may be amended or modified at any
----------
time by an instrument in writing signed by the parties hereto.
14. RIGHTS AS A SHAREHOLDER. Neither the Optionee nor any successor
-----------------------
in interest shall have rights as a stockholder of the Corporation with respect
to any Option Shares until the date of issuance of a stock certificate for such
Option Shares.
15. AGREEMENT NOT A CONTRACT OF EMPLOYMENT. Neither the Plan, the
--------------------------------------
granting of an Option, this Option Agreement nor any other action taken pursuant
to the Plan shall constitute or be evidence of any agreement or understanding,
express or implied, that the Optionee has a right to continue as an employee of
the Corporation or any Subsidiary for any period of time at any specific rate of
compensation.
3
<PAGE>
16. INVESTMENT REPRESENTATION. Upon the exercise of all or any part
-------------------------
of the Option, the Committee may require the Optionee to furnish to the
Corporation an agreement (in such form as the Committee may specify) in which
the Optionee shall represent that the Option Shares are to be acquired for the
Optionee's own account and not with a view to the sale or distribution thereof.
17. AUTHORITY OF THE COMMITTEE. The Committee shall have full
--------------------------
authority to interpret and construe the terms of the Plan and this Option
Agreement. The determination of the Committee as to any such matter of
interpretation or construction shall be final, binding and conclusive.
18. IN WITNESS WHEREOF, the parties have executed this
Agreement on this _____ day of ____ 199_.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
By: ________________________________
Joel S. Marcus
Chief Executive Officer
The undersigned hereby accepts and agrees
to all the terms and provisions of the
foregoing Agreement and to all the terms
and provisions of the Plan herein
incorporated by reference.
______________________________
Optionee
______________________________
______________________________
______________________________
Address
4
<PAGE>
EXHIBIT 10.31
FORM OF
SUBSTITUTE INCENTIVE STOCK OPTION AGREEMENT
-------------------------------------------
This SUBSTITUTE STOCK OPTION AGREEMENT (the "Agreement"), is entered
into effective as of the __ day of _____, 199_, by and between ALEXANDRIA REAL
ESTATE EQUITIES, INC., a Maryland corporation (the "Corporation"), and
__________, an employee of the Corporation (the "Optionee"). Any capitalized
terms not defined herein shall have the meaning set forth in the Subsidiary Plan
(defined below).
WHEREAS, on the ___ day of ____, 199_, Health Science Properties
Holding Corporation, Inc., a Maryland corporation (the "Parent" ), granted
Optionee a nonqualified option to purchase [____] shares of the Parent's common
stock, par value $.01 per share ("Parent Common Stock") at an exercise price of
[$____] per share pursuant to the terms and conditions of its Amended and
Restated 1994 Stock Option Plan (the "Parent Plan"), which option is currently
outstanding and exercisable (the "Parent Option"); and
WHEREAS, pursuant to the Corporation's Amended and Restated 1996 Stock
Option Plan (the "Subsidiary Plan"), in the event of any merger, reorganization,
consolidation, recapitalization, stock dividend or other change in the capital
or corporate structure of the Corporation and/or the Parent including without
limitation an initial public offering ("IPO"), the Administrator of such plan
may, in its sole discretion, grant substitute stock options to purchase the
Corporation's Common Stock ("Substitute Stock Options") in order to preserve the
benefits otherwise inherent in the Parent Options, subject to the surrender and
cancellation of the corresponding Parent Option; and
WHEREAS, in accordance with the provisions of the Subsidiary Plan, as
set forth above, the Administrator of the Subsidiary Plan has determined that,
as a result of the filing by the Corporation of a Registration Statement on Form
S-11 with the Securities and Exchange Commission, the grant of Substitute Stock
Options is necessary and appropriate in order to preserve the benefits to which
holders of Parent Options would otherwise have been entitled had such filing not
occurred.
NOW, THEREFORE, effective as of the date first set forth above, the
Administrator of the Subsidiary Plan hereby grants to the Optionee Substitute
Stock Options subject to the following terms and conditions.
<PAGE>
TERMS AND CONDITIONS OF THE SUBSTITUTE OPTION
- ---------------------------------------------
1. NUMBER OF SHARES AND SUBSTITUTE STOCK OPTION. Subject to the
--------------------------------------------
surrender and cancellation of the corresponding Parent Option, the Substi tute
Stock Option entitles Optionee to purchase _____ shares of the Corporation's
common stock in lieu of Optionee's option to purchase ____ shares of Parent's
common stock./1/
2. PRICE OF SUBSTITUTE STOCK OPTION. The exercise price per share
--------------------------------
of the Substitute Stock Option shall be an amount equal to $______ ./2/
3. PERIOD OF SUBSTITUTE STOCK OPTION. The term of the Substitute
---------------------------------
Stock Option and of this Agreement shall commence on __________ (the "Date of
Grant") and terminate upon the expiration of ten (10) years from the Date of
Grant. Upon the termination of the Substitute Stock Option, all rights of the
Optionee hereunder shall cease.
4. CONDITIONS OF EXERCISE. The Substitute Stock Option shall be
----------------------
exercisable in full immediately upon grant, and the right of the Optionee to
purchase shares with respect to which this Substitute Stock Option has become
exercisable as herein provided may be exercised in whole or in part at any time
or from time to time, prior to the tenth (10th) anniversary of the Date of
Grant.
- -----------------------
/1/ The number of shares of the Common Stock subject to the Substitute Stock
Option is an amount equal to the product of (i) the quotient of the fair
market value of the common stock of Parent divided by the value of the
Common Stock (each determined in good faith by the Administrator as of the
date the Substitute Stock Option is granted) and (ii) the number of shares
of Parent Stock underlying the Parent Option subject to such adjustments as
may be necessary to preserve the status of the Substitute Option as an
incentive stock option for purposes of Section 422 of the Code.
/2/ The exercise price per share of the Substitute Stock Option is an amount
equal to the quotient of the aggregate exercise price of the Parent Option
divided by the number of shares subject to the Substitute Stock Option
subject to such adjustments as may be necessary to preserve the status of
the Substitute Option as an incentive stock option for purposes of Section
422 of the Code.
2
<PAGE>
5. NONTRANSFERABILITY OF SUBSTITUTE STOCK OPTION. The Substitute
---------------------------------------------
Stock Option and this Agreement shall not be transferable otherwise than by will
or by the laws of descent and distribution or a qualified domestic relations
order ("QDRO"); and the Substitute Stock Option may be exercised, during the
lifetime of the Optionee, only by the Optionee or by his or her legal
representative or as otherwise provided by a QDRO.
6. EXERCISE OF SUBSTITUTE STOCK OPTION. The Substitute Stock Option
-----------------------------------
shall be exercised in the following manner: the Optionee, or other person or
persons having the right to exercise the Substitute Stock Option, shall deliver
to the Corporation written notice specifying the number of Substitute Stock
Option Shares which he or she elects to purchase, together with cash in an
amount equal to the total price to be paid upon the exercise of the Substitute
Stock Option, and the stock purchased shall thereupon be promptly delivered. In
addition, the Grantee or other such person shall be entitled to exercise this
option in any other manner permitted under the Substitute Plan and approved by
the Administrator. The Optionee will not be deemed to be a holder of any
shares pursuant to exercise of the Substitute Stock Option until the date of
the issuance of a stock certificate to him or her for such shares and until the
shares are paid in full.
7. TERMINATION BY DEATH. If the Optionee's employment with the
--------------------
Company and any Subsidiary terminates by reason of death, the Substitute Stock
Option may thereafter be exercised by the legal representative of the estate or
the legatee of the Optionee under the will of the Optionee until the expiration
of the stated term of such Substitute Stock Option.
8. TERMINATION BY REASON OF DISABILITY. If the Optionee's
-----------------------------------
employment with the Company or any Subsidiary terminates by reason of
Disability, the Substitute Stock Option may thereafter be exercised for a period
of twelve (12) months from the date of such termination of employment or until
the expiration of the stated term of the Option, whichever period is shorter;
provided, however, that, if the Optionee dies within such twelve (12) month
- -------- -------
period (or such shorter period as the Administrator shall specify at grant) and
prior to the expira tion of the stated term of the Substitute Stock Option, the
Substitute Stock Option shall thereafter be exercisable until the expiration of
the stated term of the Substitute Stock Option.
9. NOTICES. Any notice required or permitted under this Agreement
-------
shall be deemed given when delivered personally, or when deposited in a United
States Post Office, postage prepaid, addressed, as appropriate, to the
3
<PAGE>
Optionee either at his address hereinbelow set forth or such other address as he
or she may designate in writing to the Corporation, or to the Corporation:
Attention: Joel S. Marcus (or his designee), at the Corporation's address or
such other address as the Corporation may designate in writing to the Optionee.
10. FAILURE TO ENFORCE NOT A WAIVER. The failure of the Corporation
-------------------------------
to enforce at any time any provision of this Agreement shall in no way be
construed to be a waiver of such provision or of any other provision hereof.
11. GOVERNING LAW. This Agreement shall be governed by and construed
-------------
according to the laws of the State of Maryland without regard to its principles
of conflict of laws.
12. INCORPORATION OF SUBSIDIARY PLAN. The Subsidiary Plan is hereby
--------------------------------
incorporated by reference and made a part hereof, and the Substitute Stock
Option and this Agreement are subject to all terms and conditions of the
Subsidiary Plan.
13. AMENDMENTS. This Agreement may be amended or modified at any
----------
time by an instrument in writing signed by the parties hereto.
14. RIGHTS AS A SHAREHOLDER. Neither the Optionee nor any successor
-----------------------
in interest shall have rights as a stockholder of the Company with respect to
any shares of common stock subject to the Substitute Stock Option until the date
of issuance of a stock certificate for such shares of common stock.
15. AGREEMENT NOT A CONTRACT OF EMPLOYMENT. Neither the Subsidiary
--------------------------------------
Plan, the granting of the Substitute Stock Option, this Substitute Stock Option
Agreement nor any other action taken pursuant to the Subsidiary Plan shall
constitute or be evidence of any agreement or understanding, express or implied,
that the Optionee has a right to continue as an employee of the Company or any
Subsidiary or affiliate for any period of time at any specific rate of
compensation.
16. INVESTMENT REPRESENTATION. Upon the exercise of all or any part
-------------------------
of the Substitute Stock Option, the Administrator may require the Optionee to
furnish to the Company an agreement (in such form as the Administrator may
specify) in which the Optionee shall represent that the shares of common stock
to be acquired upon exercise of the Substitute Stock Option are to
4
<PAGE>
be acquired for the Optionee's own account and not with a view to the sale or
distribution thereof.
17. AUTHORITY OF THE ADMINISTRATOR. The Administrator shall have
------------------------------
full authority to interpret and construe the terms of the Subsidiary Plan and
this Substitute Stock Option Agreement. The determination of the Administrator
as to any such matter of interpretation or construction shall be final, binding
and conclusive.
IN WITNESS WHEREOF, the parties have executed this Agreement on this
_____ day of ____ 199_.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
By: ____________________________________
Joel S. Marcus
Chief Executive Officer
The undersigned hereby accepts and agrees
to all the terms and provisions of the
foregoing Agreement and to all the terms
and provisions of the Plan herein
incorporated by reference.
______________________________
Optionee
______________________________
______________________________
______________________________
Address
5
<PAGE>
EXHIBIT 10.32
FORM OF NONQUALIFIED
STOCK OPTION AGREEMENT
----------------------
This OPTION AGREEMENT (the "Agreement"), is entered into this __ day
of _____, 1997, by and between ALEXANDRIA REAL ESTATE EQUITIES, INC., a Maryland
corporation (the "Corporation"), and _________, an employee of the Corporation
(the "Optionee"). Any capitalized terms not defined herein shall have the
meaning set forth in the Plan (defined below).
Pursuant to the Alexandria Real Estate Equities, Inc. 1997 Stock Award
and Incentive Plan (the "Plan"), the Committee has determined that the Optionee
is to be awarded, on the terms and conditions set forth herewith (and subject to
the terms and provision of the Plan), a nonqualified stock option (an "Option")
to purchase shares of the Corporation's common stock and hereby grants such
Option. It is intended that the Option constitute a "nonqualified stock option"
that is not an "incentive stock option" within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"). Any capitalized terms
not defined herein shall have the meaning set forth in the Plan.
TERMS AND CONDITIONS OF THE OPTION
- ----------------------------------
1. NUMBER OF SHARES AND OPTION. The Option entitles Optionee to
---------------------------
purchase [ ] shares of the Corporation's common stock, par value
[$ ] per share (the "Option Shares"), at a price (the "Option Price") of
[$ ] per share.
2. PERIOD OF OPTION. Unless the Option is previously terminated
----------------
pursuant to this Agreement, the term of the Option and of this Agreement shall
commence on the date hereof (the "Date of Grant") and terminate upon the
expiration of ten (10) years from the Date of Grant. Upon the termination of
the Option, all rights of the Optionee hereunder shall cease.
3. CONDITIONS OF EXERCISE. Subject to the provisions of this
----------------------
Agreement and the Plan, the Option Shares may be exercised as follows:
[TO FOLLOW]
4. NONTRANSFERABILITY OF OPTION. The Option and this Agreement
----------------------------
shall not be transferable otherwise than by will or by the laws of descent and
distribution or pursuant to a qualified domestic relations order ("QDRO"),
<PAGE>
and the Option may be exercised, during the lifetime of the Optionee, only by
the Optionee or by his or her legal representative or as otherwise provided by a
QDRO.
5. EXERCISE OF OPTION. The Option shall be exercised in the
------------------
following manner: the Optionee, or other person or persons having the right to
exercise the Option upon the death or Disability of the Optionee, shall deliver
to the Corporation written notice specifying the number of Option Shares which
he or she elects to purchase, together with either (i) cash in an amount equal
to the Option Price, (ii) the number of shares of common stock having a Fair
Market Value (as of the date of exercise) equal to the Option Price, or (iii)
any combination of cash and shares of Common Stock, the sum of which equals the
Option Price, and the Option Shares purchased shall thereupon be promptly
delivered. In addition, the Optionee or other such person shall be entitled to
exercise the Option in any other manner permitted under the Plan and approved by
the Committee. The Optionee will not be deemed to be a holder of any Option
Shares until the date of the issuance of a stock certificate to him or her for
such shares and until such shares are paid for in full.
6. TERMINATION BY DEATH. If the Optionee's employment with the
--------------------
Company or any Subsidiary terminates by reason of death, the Option may
thereafter be exercised by the legal representative of the estate or the legatee
of the Optionee under the will of the Optionee until the expiration of the
stated term of such Option.
7. TERMINATION BY REASON OF DISABILITY. If the Optionee's
-----------------------------------
employment with the Company or any Subsidiary terminates by reason of
Disability, the Option may thereafter be exercised for a period of twelve (12)
months from the date of such termination of employment or until the expiration
of the stated term of the Option, whichever period is shorter; provided,
--------
however, that, if the Optionee dies within such twelve (12) month period (or
- -------
such shorter period as the Committee shall specify at grant) and prior to the
expiration of the stated term of the Option, the Option shall thereafter be
exercisable until the expiration of the stated term of the Option.
8. OTHER TERMINATION. The Optionee's employment with the
-----------------
Corporation or any Subsidiary terminates for any reason other than death or
Disability, the Option may be exercised until the earlier to occur of (A) three
(3) months from the date of such termination or (B) the expiration of the term
of the Option.
2
<PAGE>
9. NOTICES. Any notice required or permitted under this Agreement
-------
shall be deemed given when delivered personally, or when deposited in a United
States Post Office, postage prepaid, addressed, as appropriate, to the Optionee
either at his address set forth below or such other address as he or she may
designate in writing to the Corporation, or to the Corporation: Attention:
Joel S. Marcus (or his designee), at the Corporation's address or such other
address as the Corporation may designate in writing to the Optionee.
10. FAILURE TO ENFORCE NOT A WAIVER. The failure of the Corporation
-------------------------------
to enforce at any time any provision of this Agreement shall in no way be
construed to be a waiver of such provision or of any other provision hereof.
11. GOVERNING LAW. This Agreement shall be governed by and construed
-------------
according to the laws of the State of Maryland without regard to its principles
of conflict of laws.
12. INCORPORATION OF PLAN. The Plan is hereby incorporated by
---------------------
reference and made a part hereof, and the Option and this Agreement are subject
to all of the terms and conditions of the Plan.
13. AMENDMENTS. This Agreement may be amended or modified at any
----------
time by an instrument in writing signed by the parties hereto.
14. RIGHTS AS A SHAREHOLDER. Neither the Optionee nor any successor
-----------------------
in interest shall have rights as a stockholder of the Corporation with respect
to any Option Shares until the date of issuance of a stock certificate for such
Option Shares.
15. AGREEMENT NOT A CONTRACT OF EMPLOYMENT. Neither the Plan, the
--------------------------------------
granting of an Option, this Option Agreement nor any other action taken pursuant
to the Plan shall constitute or be evidence of any agreement or understanding,
express or implied, that the Optionee has a right to continue as an employee of
the Corporation or any Subsidiary for any period of time at any specific rate of
compensation.
16. INVESTMENT REPRESENTATION. Upon the exercise of all or any part
-------------------------
of the Option, the Committee may require the Optionee to furnish to the
Corporation an agreement (in such form as the Committee may specify) in which
3
<PAGE>
the Optionee shall represent that the Option Shares are to be acquired for the
Optionee's own account and not with a view to the sale or distribution thereof.
17. AUTHORITY OF THE COMMITTEE. The Committee shall have full
--------------------------
authority to interpret and construe the terms of the Plan and this Option
Agreement. The determination of the Committee as to any such matter of inter-
pretation or construction shall be final, binding and conclusive.
IN WITNESS WHEREOF, the parties have executed this Agreement on this
_____ day of ____ 199_.
ALEXANDRIA REAL ESTATE
EQUITIES, INC.
By: ________________________________
Joel S. Marcus
Chief Executive Officer
The undersigned hereby accepts and
agrees to all the terms and
provisions of the foregoing
Agreement and to all the terms and
provisions of the Plan herein
incorporated by reference.
______________________________
Optionee
______________________________
______________________________
______________________________
Address
4
<PAGE>
EXHIBIT 10.36
- --------------------------------------------------------------------------------
FORM OF
-------
AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT
---------------------------------------------------
by and between
ALEXANDRIA REAL ESTATE EQUITIES, INC.,
a Maryland corporation,
and
GARY A. KREITZER,
an individual
- --------------------------------------------------------------------------------
<PAGE>
FORM OF
-------
AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT
---------------------------------------------------
THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement")
originally made and entered into as of the fifth (5th) day of January, 1994,
(the "Original Effective Date"), by and between Health Science Properties
Holding Corp., a Maryland corporation (the "Parent") and Gary A. Kreitzer, an
individual (the "Officer") is hereby amended and restated in its entirety
effective as of March 28, 1997 (the "Effective Date") to read as follows:
RECITAL
-------
WHEREAS, on November 3, 1994, Parent transferred to its then wholly-
owned subsidiary Alexandria Real Estate Equities, Inc., a Maryland corporation
(formerly, Health Science Properties, Inc.) (the "Corporation") substantially
all of its property, assets and certain liabilities, including Parent's rights
and obligations under this Agreement;
WHEREAS, on July 30, 1996, this Agreement was amended pursuant to an
agreement between the Corporation and Officer;
WHEREAS, Corporation desires to continue to employ Officer as its
Senior Vice President and In-House Counsel, and Officer is willing to continue
to accept such employment by Corporation, on the terms and subject to the
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree to amend
and restate this Agreement as follows:
1. POSITION AND DUTIES; LOCATION.
-----------------------------
During the term of this Agreement, Officer agrees to be employed by
and to serve Corporation as its Senior Vice President and In-House Counsel or in
such other capacity consistent with the Officer's current position as a senior
executive officer, as may be determined by the Board of Directors of the
Corporation (the "Board"). Corporation agrees to employ and retain Officer in
such capacities. Officer shall devote such of his business time, energy, and
skill to the affairs of Corporation as shall be necessary to perform the
1
<PAGE>
duties of such positions. Officer shall report to the President or such other
officer as the Board shall direct, and at all times during the term of this
Agreement shall have powers and duties at least commensurate with his position
as a senior executive officer. Officer shall be based at the offices of
Corporation in the San Diego, California metropolitan area, except for required
travel on Corporation's business.
2. TERM OF EMPLOYMENT.
------------------
2.1 TERM. The term of this Agreement shall be for a period
----
commencing on the Original Effective Date and ending on December 31, 1998 (the
"Term"), unless terminated earlier pursuant to this Agreement ("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 of this
Agreement shall refer to both the initial Term and any such extended Term.
3. COMPENSATION, BENEFITS AND REIMBURSEMENT.
----------------------------------------
3.1 BASE SALARY. During the Term of this Agreement, Officer shall be
-----------
entitled to the following base salary:
(a) MINIMUM BASE. Commencing on the Effective Date, during the Term
------------
of this Agreement and subject to the terms and conditions set forth herein,
Corporation agrees to pay to Officer an annual "Base Salary" of One Hundred
Forty Thousand Dollars ($140,000) or such higher amount as may from time to time
be determined by Corporation. Unless otherwise agreed to 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 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 of Officer's employment hereunder by the Board (or such
committee as may be appointed by the Board for such purpose). The Base Salary
payable to Officer shall be increased on each such
2
<PAGE>
anniversary date (and such other times as the Board or a committee of the Board
may deem appropriate during the Term of this Agreement) by 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; provided, however, that, at
-------- -------
a minimum, such increase shall be equal to the cumulative cost-of-living
increment as reported in the "Consumer Price Index, Los Angeles, California, All
Items," published by the U.S. Department of Labor (using January 1, 1994, as the
base date for comparison). 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. Officer shall be eligible to receive a bonus for each
-----
fiscal year of Corporation (or portion thereof) during the Term of this
Agreement, 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. The Board shall, at an appropriate subsequent
time, consider for the benefit of Officer and other specified executive officers
of Corporation the establishment of an annual incentive compensation plan
providing for the payment of a minimum annual bonus based upon the achievement
of certain objective criteria.
3.4 ADDITIONAL BENEFITS. During the Term of this Agreement, 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, 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 Original Effective Date of this Agreement. Until
Corporation adopts a package of health and medical benefits, Corporation shall
promptly reimburse Officer for payments made by Officer (i) with respect to the
continuation of benefits provided by Officer's previous employer pursuant to
Section 4980B ("COBRA") of the Internal Revenue Code of 1986, as amended (the
"Code"), (ii) upon expiration of COBRA coverage to maintain substantially
similar health and medical benefits coverage for Officer and his family, and
(iii) if Officer is
3
<PAGE>
not covered by COBRA, to maintain reasonable health and medical benefits
coverage for Officer and his family.
(b) VACATION. Officer shall be entitled to four (4) weeks of
--------
vacation during each year during the Term of this Agreement 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 INSURANCE. During the Term of this Agreement, Corporation
--------------
shall, at its sole cost and expense, procure and keep in effect term life
insurance (a minimum three (3) year term certain policy) 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.
(d) DISABILITY INSURANCE. During the Term of this Agreement,
--------------------
Corporation shall, at its sole cost and expense, procure and keep in effect
disability insurance similar to Officer's current disability insurance policy on
Officer, payable to Officer in an annual amount not less than sixty percent
(60%) of Officer's then-existing Base Salary (the "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.
(e) REIMBURSEMENT FOR EXPENSES. During the Term of this Agreement,
--------------------------
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 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.
(f) 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
<PAGE>
4. TERMINATION OF THE 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.
(b) TERMINATION FOR CAUSE. Subject to the provisions set forth in
---------------------
Paragraph 4.3 below, prior to the end of the Term ("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 or habitual willful neglect of
Officer's duties under this Agreement;
(ii) Officer's criminal conviction of fraud, embezzlement,
misappropriation of assets, malicious mischief, or any felony;
(iii) Officer's willful Material Breach (as defined below) of
this Agreement, if such willful Material Breach is not cured by Officer
within thirty (30) days after Corporation's written notice thereof
specifying the nature of such willful Material Breach. For purposes of
this Paragraph 4.1(b), the term willful "Material Breach" shall mean the
substantial and continual willful nonperformance of Officer's duties under
this Agreement which the Board determines has resulted in material injury
to Corporation.
(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 Permanent 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
5
<PAGE>
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(e) 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(e) 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 written notice
thereof specifying the nature of such breach has been delivered to Corporation:
(a) the assignment to Officer of any duties inconsistent with the
position in Corporation that Officer held immediately prior to the Change in
Control, or an adverse alteration in the nature or status of Officer's
responsibilities from those in effect immediately prior to such change;
(b) a reduction by Corporation in Officer's annual base salary as
in effect on the date hereof or as the same may be increased from time to time;
(c) the relocation of Officer's offices to a location outside the
San Diego metropolitan area (or, if different, the metropolitan area in which
such offices are located immediately prior to the Change in Control) or
Corporation's requiring Officer to travel on Corporation's business to an extent
not substantially consistent with Officer's business travel obligations
immediately prior to the Change in Control;
(d) the failure by Corporation to pay Officer any portion of his
current compensation except pursuant to an across-the-board compensation
deferral similarly affecting all officers of Corporation and all officers of any
person whose actions resulted in a Change in Control or any person affiliated
with Corporation or such person, or to pay Officer any portion of an installment
of deferred compensation under any deferred compensation program of
Corporation, within seven (7) days of the date such compensation is due;
6
<PAGE>
(e) the failure by Corporation to continue in effect any
compensation plan in which Officer participates immediately prior to the Change
in Control which is material to Officer's total compensation, unless an
equitable arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan, or the failure by Corporation to
continue Officer's participation therein (or in such substitute or alternative
plan) on a basis not materially less favorable, both in terms of the amount of
benefits provided and the level of participation relative to other participants,
as existed at the time of the Change in Control;
(f) the failure by Corporation to continue to provide Officer
with benefits substantially similar to those under any of Corporation's life
insurance, medical, health and accident, or disability plans in which Officer
was participating at the time of the Change in Control, the taking of any action
by Corporation which would directly or indirectly materially reduce any of such
benefits or deprive Officer of any material fringe benefit enjoyed by him at the
time of the Change in Control, or the failure by Corporation to provide Officer
with the number of paid vacation days to which he is entitled on the basis of
years of service with Corporation in accordance with Corporation's normal
vacation policy, in effect at the time of the Change in Control; or
(g) the failure of Corporation to obtain a satisfactory agreement
from any successor to assume and agree to perform this Agreement.
Officer's right to terminate Officer's employment for Good Reason
shall not be affected by Officer's incapacity due to physical or mental illness.
Officer's continued employment shall not constitute consent to, or a waiver of
rights with respect to, any circumstance constituting Good Reason hereunder.
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 Paragraph 4 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 6.11 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:
7
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(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 PERMANENT DISABILITY. In
----------------------------------------------------
the event that Corporation terminates this Agreement for Cause pursuant to
Paragraph 4.1(b) above or by reason of Permanent 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 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).
4.4 SEVERANCE PAYMENT.
-----------------
8
<PAGE>
(a) DEFINITION OF "SEVERANCE PAYMENT." For purposes of this
--------------------------------
Agreement, the term "Severance Payment" shall mean an amount 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) for each full year remaining in the Severance Period, 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) ("Average Bonus"); provided, however, that in the event that,
-------- -------
following a Change in Control as defined in Paragraph 4.4(e) 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 then in effect and the Average Bonus; and further provided, however, that
------- -------- -------
in the event that (i) Officer's employment is terminated in connection with or
following the Board's good faith determination that the possible long-run loss
of Corporation may reasonably be expected to increase unreasonably if
Corporation is not dissolved and (ii) such dissolution is effected in accordance
with applicable law, the term "Severance Payment" shall mean the Base Salary
then in effect, and the term "Severance Period" shall mean the one-year period
immediately following Officer's date of termination of employment.
(b) PAYMENT OF SEVERANCE PAYMENT. In the event that Officer is
----------------------------
entitled to any Severance Payment pursuant to Paragraph 4.3 above, that portion
of such Severance Payment that represents Base Salary shall be payable in
monthly installments, and that portion of such Severance Payment that represents
the Average Bonus shall be payable on the dates such amounts would have been
paid had Officer continued in Corporation's employment for the Severance
Period; provided, however, that in the event of a Termination Upon a Change in
-------- -------
Control as defined in Paragraph 4.4(e) below, the Severance Payment shall be
payable in a lump sum within ten (10) days following such termination.
(c) 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, and continued
participation throughout the Severance Period in all employee welfare and
pension benefit plans, programs or arrangements. In the event Officer's
participation in any such plan, program or arrangement is barred, Corporation
shall arrange to provide Officer with substantially similar benefits.
(d) FULL SETTLEMENT OF ALL OBLIGATIONS. Officer hereby acknowledges
----------------------------------
and agrees that any Severance Payment paid to Officer hereunder shall be deemed
to be in full and complete settlement of all obligations of Corporation under
this Agreement.
9
<PAGE>
(e) 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
Exchange Act, as modified and used in sections 13(d) and 14(d) thereof, except
that such term shall not include (A) the Corporation or any of its subsidiaries,
(B) a trustee or other fiduciary holding securities under an employee benefit
plan of the Corporation or any of its affiliates, (C) an underwriter temporarily
holding securities pursuant to an offering of such securities, (D) a corporation
owned, directly or indirectly, by the stockholders of the Corporation in
substantially the same proportions as their ownership of stock of the
Corporation, or (E) a person or group as used in Rule 13d-1(b) under the
Exchange Act, which is or becomes the Beneficial Owner, as such term is defined
in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of
the Corporation (not including in the securities beneficially owned by such
Person any securities acquired directly from the Corporation or its affiliates
other than in connection with the acquisition by the Corporation or its
affiliates of a business) representing twenty-five percent (25%) or more of the
combined voting power of the Corporation's then outstanding securities; or
(ii) The following individuals cease for any reason to
constitute a majority of the number of directors then serving: individuals who,
on the date hereof, constitute the Board and any new director (other than a
director whose initial assumption of office is in connection with an actual or
threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors of the Corporation) whose
appointment or election by the Board or nomination for election by the
Corporation's stockholders was approved or recommended by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
on the date hereof or whose appointment, election or nomination for election
was previously so approved or recommended; or
(iii) There is consummated a merger or consolidation of the
Corporation with any other corporation, other than (A) a merger or
consolidation which would result in the voting securities of the Corporation
outstanding immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity or any parent thereof), in combination with
the ownership of any trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation or any subsidiary of the Corporation,
at least seventy-five percent (75%) of the combined voting power of the
securities of the Corporation or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation, or (B) a merger or
consolidation effected to implement a recapitalization of the
10
<PAGE>
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 imposed by Section 4999 of 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 and state and local income tax
upon the payment provided for by this paragraph, shall be equal to the excess of
the Total Payments over the payment provided for by this paragraph. 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 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
11
<PAGE>
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 of this
Agreement; provided, however, that this Paragraph 4.6 shall not apply in the
-------- -------
event of a Termination Upon a Change in Control.
5. NONCOMPETITION.
--------------
During the term of this Agreement, including the period, if any, with
respect to which Officer shall be entitled to Severance Payments, Officer shall
not engage in any activity competitive with the business of Corporation.
6. MISCELLANEOUS.
-------------
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 Articles of Incorporation
and By-Laws, indemnify Officer for Officer's 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 of this Agreement,
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.
12
<PAGE>
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
Pasadena, California 91101
Phone: (818) 578-6812
Facsimile: (818) 578-6966
If to Officer: Gary A. Kreitzer
17511 Caminito Canasto
San Diego, California 92127
Phone: (619) 485-9425
Any Party may change such Party's address for notices by notice duly given
pursuant hereto.
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 GOVERNING LAW. Other than with respect to Paragraph 6.13 below,
-------------
this Agreement shall be governed by and construed in accordance with the laws of
the State of California without regard to its principles of conflict of laws.
13
<PAGE>
6.8 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, as provided in
Exhibit A, 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.
6.9 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 extent lawfully permitted.
6.10 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
14
<PAGE>
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.
6.11 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, 6.10, 6.11 and 6.13 hereof shall survive the termination of this
Agreement.
6.12 COUNTERPARTS. This Agreement may be executed in one or more
------------
counterparts, all of which taken together shall constitute one and the same
Agreement.
6.13 INDEMNIFICATION. In addition to any rights to indemnification
---------------
to which Officer is entitled under the Corporation's Articles of Incorporation
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.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
CORPORATION:
ALEXANDRIA REAL ESTATE EQUITIES, INC.,
a Maryland corporation
By:_______________________________________
Joel S. Marcus
Chief Executive Officer
Date:_____________________________________
OFFICER:
_________________________________________
Gary A. Kreitzer
Date:_____________________________________
16
<PAGE>
EXHIBIT 10.37
- --------------------------------------------------------------------------------
FORM OF
-------
AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT
---------------------------------------------------
by and between
ALEXANDRIA REAL ESTATE EQUITIES, INC.
a Maryland corporation,
and
STEVEN A. STONE,
an individual
- --------------------------------------------------------------------------------
<PAGE>
FORM OF
-------
AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT
---------------------------------------------------
THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement")
originally made and entered into as of the fifth (5th) day of January, 1994,
(the "Original Effective Date"), by and between Health Science Properties
Holding Corp., a Maryland corporation (the "Parent") and Steven A. Stone, an
individual (the "Officer") is hereby amended and restated in its entirety
effective as of March 28, 1997 (the "Effective Date") to read as follows:
RECITAL
-------
WHEREAS, on November 3, 1994, Parent transferred to its then wholly-
owned subsidiary Alexandria Real Estate Equities, Inc., a Maryland corporation
(formerly, Health Science Properties, Inc.) (the "Corporation") substantially
all of its property, assets and certain liabilities, including Parent's rights
and obligations under this Agreement;
WHEREAS, on July 30, 1996, this Agreement was amended pursuant to an
agreement between the Corporation and Officer;
WHEREAS, Corporation desires to continue to employ Officer as its Vice
President, and Officer is willing to continue to accept such employment by
Corporation, on the terms and subject to the conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which is hereby acknowledged, the parties hereto agree to amend and restate this
Agreement as follows:
1. POSITION AND DUTIES; LOCATION.
-----------------------------
During the term of this Agreement, Officer agrees to be employed by
and to serve Corporation as its Vice President or in such other capacity
consistent with the Officer's current position as a senior executive officer as
may be determined by the Board of Directors of the Corporation (the "Board").
Corporation agrees to employ and retain Officer in such capacities. Officer
shall devote such of his business time, energy, and skill to the affairs of
Corporation as shall be necessary to perform the duties of such positions.
Officer shall report to the President or such other officer as the Board shall
direct, and at all times during the term of this Agreement shall have powers and
duties at least commensurate with his
1
<PAGE>
position as a senior executive officer. Officer shall be based at the offices
of Corporation in the San Diego, California metropolitan area, except for
required travel on Corporation's business.
2. TERM OF EMPLOYMENT.
------------------
2.1 TERM. The term of this Agreement shall be for a period
----
commencing on the Original Effective Date and ending on December 31, 1998 (the
"Term"), unless terminated earlier pursuant to this Agreement ("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 of this
Agreement shall refer to both the initial Term and any such extended Term.
3. COMPENSATION, BENEFITS AND REIMBURSEMENT.
----------------------------------------
3.1 BASE SALARY. During the term of this Agreement, Officer shall be
-----------
entitled to the following base salary:
(a) MINIMUM BASE. Commencing on the Effective Date, during the Term
------------
of this Agreement and subject to the terms and conditions set forth herein,
Corporation agrees to pay to Officer an annual "Base Salary" of One Hundred Five
Thousand Dollars ($105,000), or such 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 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 of Officer's employment hereunder by the Board (or such
committee as may be appointed by the Board for such purpose). The Base Salary
payable to Officer shall be increased on each such anniversary date (and such
other times as the Board or a committee of the Board may deem appropriate during
the Term of this Agreement) to an amount determined by the Board (or a
2
<PAGE>
committee of the Board). Each such new Base Salary shall become the base for
each successive year increase; provided, however, that such increase, at a
-------- -------
minimum, shall be equal to the cumulative cost-of-living increment as reported
in the "Consumer Price Index, Los Angeles, California, All Items," published by
the U.S. Department of Labor (using January 1, 1994 as the base date for
comparison). 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. Officer shall be eligible to receive a bonus for each
-----
fiscal year of Corporation (or portion thereof) during the Term of this
Agreement, 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. The Board shall, at an appropriate subsequent
time, consider the establishment of an annual incentive compensation plan
providing for the payment of a minimum annual bonus based upon the achievement
of certain objective criteria for the benefit of Officer and other specified
executive officers of Corporation.
3.4 ADDITIONAL BENEFITS. During the term of this Agreement, 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, 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 Original Effective Date of this Agreement. Until
Corporation adopts a package of health and medical benefits, Corporation shall
promptly reimburse Officer for payments made by Officer (i) with respect to the
continuation of benefits provided by Officer's previous employer pursuant to
Section 4980B ("COBRA") of the Internal Revenue Code of 1986, as amended (the
"Code"), (ii) upon expiration of COBRA coverage to maintain substantially
similar health and medical benefits coverage for Officer and his family, and
(iii) if Officer is not covered by COBRA, to maintain reasonable health and
medical benefits coverage for Officer and his family.
3
<PAGE>
(b) VACATION. Officer shall be entitled to four (4) weeks of
--------
vacation during each year during the Term of this Agreement 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 INSURANCE. During the Term of this Agreement, Corporation
--------------
shall, at its sole cost and expense, procure and keep in effect term life
insurance (a minimum three (3) year term certain policy) 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.
(d) DISABILITY INSURANCE. During the Term of this Agreement,
--------------------
Corporation shall, at its sole cost and expense, procure and keep in effect
disability insurance similar to Officer's current disability insurance policy on
Officer, payable to Officer in an annual amount not less than sixty percent
(60%) of Officer's then existing Base Salary (the "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.
(e) REIMBURSEMENT FOR EXPENSES. During the Term of this Agreement,
--------------------------
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 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.
(f) 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
<PAGE>
4. TERMINATION OF THE 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.
(b) TERMINATION FOR CAUSE. Subject to the provisions set forth in
---------------------
Paragraph 4.3 below, prior to the end of the Term ("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 or habitual willful neglect of Officer's
duties under this Agreement;
(ii) Officer's criminal conviction of fraud, embezzlement,
misappropriation of assets, malicious mischief, or any felony;
(iii) Officer's willful Material Breach (as defined below) of
this Agreement, if such willful Material Breach is not cured by Officer within
thirty (30) days after Corporation's written notice thereof specifying the
nature of such willful Material Breach. For purposes of this Paragraph 4.1(b),
the term willful "Material Breach" shall mean the substantial and continual
willful nonperformance of Officer's duties under this Agreement which the Board
determines has resulted in material injury to Corporation.
(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 Permanent 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
5
<PAGE>
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(e) 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(e) 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 written notice
thereof specifying the nature of such breach has been delivered to Corporation:
(a) the assignment to Officer of any duties inconsistent with the
position in Corporation that Officer held immediately prior to the Change in
Control, or an adverse alteration in the nature or status of Officer's
responsibilities from those in effect immediately prior to such change;
(b) a reduction by Corporation in Officer's annual base salary as
in effect on the date hereof or as the same may be increased from time-to-time;
(c) the relocation of Officer's offices to a location outside the
San Diego metropolitan area (or, if different, the metropolitan area in which
such offices are located immediately prior to the Change in Control) or
Corporation's requiring Officer to travel on Corporation's business to an extent
not substantially consistent with Officer's business travel obligations
immediately prior to the Change in Control;
(d) the failure by Corporation to pay Officer any portion of his
current compensation except pursuant to an across-the-board compensation
deferral similarly affecting all officers of Corporation and all officers of any
person whose actions resulted in a Change in Control or any person affiliated
with Corporation or such person, or to pay Officer any portion of an installment
of deferred compensation under any deferred compensation program of Corporation,
within seven (7) days of the date such compensation is due;
6
<PAGE>
(e) the failure by Corporation to continue in effect any
compensation plan in which Officer participates immediately prior to the Change
in Control which is material to Officer's total compensation, unless an
equitable arrangement (embodied in an ongoing substitute or alternative plan)
has been made with respect to such plan, or the failure by Corporation to
continue Officer's participation therein (or in such substitute or alternative
plan) on a basis not materially less favorable, both in terms of the amount of
benefits provided and the level of participation relative to other participants,
as existed at the time of the Change in Control;
(f) the failure by Corporation to continue to provide Officer
with benefits substantially similar to those under any of Corporation's life
insurance, medical, health and accident, or disability plans in which Officer
was participating at the time of the Change in Control, the taking of any action
by Corporation which would directly or indirectly materially reduce any of such
benefits or deprive Officer of any material fringe benefit enjoyed by him at the
time of the Change in Control, or the failure by Corporation to provide Officer
with the number of paid vacation days to which he is entitled on the basis of
years of service with Corporation in accordance with Corporation's normal
vacation policy in effect at the time of the Change in Control; or
(g) the failure of Corporation to obtain a satisfactory agreement
from any successor to assume and agree to perform this Agreement.
Officer's right to terminate Officer's employment for Good Reason
shall not be affected by Officer's incapacity due to physical or mental illness.
Officer's continued employment shall not constitute consent to, or a waiver of
rights with respect to, any circumstance constituting Good Reason hereunder.
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 Paragraph 4 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 6.11 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:
7
<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 PERMANENT DISABILITY. In
----------------------------------------------------
the event that Corporation terminates this Agreement for Cause pursuant to
Paragraph 4.1(b) above or by reason of Permanent 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 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).
8
<PAGE>
4.4 SEVERANCE PAYMENT.
-----------------
(a) DEFINITION OF "SEVERANCE PAYMENT." For purposes of this
----------------------------------
Agreement, the term "Severance Payment" shall mean an amount 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) for each full year remaining in the Severance Period, 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) ("Average Bonus"); provided, however, that in the event that,
-------- -------
following a Change in Control as defined in Paragraph 4.4(e) 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 then in effect and the Average Bonus; and further provided, however, that
------- -------- -------
in the event that (i) Officer's employment is terminated in connection with or
following the Board's good faith determination that the possible long-run loss
of Corporation may reasonably be expected to increase unreasonably if
Corporation is not dissolved and (ii) such dissolution is effected in accordance
with applicable law, the term "Severance Payment" shall mean the Base Salary
then in effect, and the term "Severance Period" shall mean the one-year period
immediately following Officer's date of termination of employment.
(b) PAYMENT OF SEVERANCE PAYMENT. In the event that Officer is
----------------------------
entitled to any Severance Payment pursuant to Paragraph 4.3 above, that portion
of such Severance Payment that represents Base Salary shall be payable in
monthly installments, and that portion of such Severance Payment that represents
the Average Bonus shall be payable on the dates such amounts would have been
paid had Officer continued in Corporation's employment for the Severance
Period; provided, however, that in the event of a Termination upon a Change in
-------- -------
Control as defined in Paragraph 4.4(e) below, the Severance Payment shall be
payable in a lump sum within ten (10) days following such termination.
(c) 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, and continued
participation throughout the Severance Period in all employee welfare and
pension benefit plans, programs or arrangements. In the event Officer's
participation in any such plan, program or arrangement is barred, Corporation
shall arrange to provide Officer with substantially similar benefits.
9
<PAGE>
(d) FULL SETTLEMENT OF ALL OBLIGATIONS. Officer hereby acknowledges
----------------------------------
and agrees that any Severance Payment paid to Officer hereunder shall be deemed
to be in full and complete settlement of all obligations of Corporation under
this Agreement.
(e) 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
Exchange Act, as modified and used in sections 13(d) and 14(d) thereof, except
that such term shall not include (A) the Corporation or any of its subsidiaries,
(B) a trustee or other fiduciary holding securities under an employee benefit
plan of the Corporation or any of its affiliates, (C) an underwriter temporarily
holding securities pursuant to an offering of such securities, (D) a corporation
owned, directly or indirectly, by the stockholders of the Corporation in
substantially the same proportions as their ownership of stock of the
Corporation, or (E) a person or group as used in Rule 13d-1(b) under the
Exchange Act, which is or becomes the Beneficial Owner, as such term is defined
in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of
the Corporation (not including in the securities beneficially owned by such
Person any securities acquired directly from the Corporation or its affiliates
other than in connection with the acquisition by the Corporation or its
affiliates of a business) representing twenty-five percent (25%) or more of the
combined voting power of the Corporation's then outstanding securities; or
(ii) The following individuals cease for any reason to
constitute a majority of the number of directors then serving: individuals who,
on the date hereof, constitute the Board and any new director (other than a
director whose initial assumption of office is in connection with an actual or
threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors of the Corporation) whose
appointment or election by the Board or nomination for election by the
Corporation's stockholders was approved or recommended by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
on the date hereof or whose appointment, election or nomination for election was
previously so approved or recommended; or
(iii) There is consummated a merger or consolidation of the
Corporation with any other corporation, other than (A) a merger or consolidation
which would result in the voting securities of the Corporation outstanding
immediately prior to such merger or consolidation continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity or any parent thereof), in combination with the ownership
of any trustee or other fiduciary holding securities under an employee
10
<PAGE>
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 herein-after defined)
--------
will be subject to the tax imposed by Section 4999 of 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 and state and local income tax
upon the payment provided for by this paragraph, shall be equal to the excess of
the Total Payments over the payment provided for by this paragraph. 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 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)(l) of the Code) shall
be
11
<PAGE>
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 of this
Agreement; provided, however, that this Paragraph 4.6 shall not apply in the
-------- -------
event of a Termination Upon a Change in Control.
5. NONCOMPETITION.
--------------
During the term of this Agreement, including the period, if any, with
respect to which Officer shall be entitled to Severance Payments, Officer shall
not engage in any activity competitive with the business of Corporation.
6. MISCELLANEOUS.
-------------
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 Articles of Incorporation
and By-Laws, indemnify Officer for Officer's 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 of this Agreement,
except as may be permitted in writing by
12
<PAGE>
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
Pasadena, California 91101
Phone: (818) 578-6812
Facsimile: (818) 578-6966
If to Officer: Steven A. Stone
3536 Santa Flora Court
Escondido, California 92029
Phone: (619) 432-0270
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.
13
<PAGE>
6.7 GOVERNING LAW. Other than with respect to Paragraph 6.13 below,
-------------
this Agreement shall be governed by and construed in accordance with the laws of
the State of California without regard to its principles of conflict of laws.
6.8 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, as provided in
Exhibit A, 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.
6.9 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, all other provisions of this Agreement shall be
deemed valid and enforceable to the extent possible.
6.10 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
14
<PAGE>
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.
6.11 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, 6.10, 6.11 and 6.13 hereof shall survive the termination of this
Agreement.
6.12 COUNTERPARTS. This Agreement may be executed in one or more
------------
counterparts, all of which taken together shall constitute one and the same
Agreement.
6.13 INDEMNIFICATION. In addition to any rights to indemnification
---------------
to which Officer is entitled under the Corporation's Articles of Incorporation
and Bylaws, 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.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
CORPORATION:
ALEXANDRIA REAL ESTATE EQUITIES,
INC.,
a Maryland corporation
By:_____________________________
Joel S. Marcus
Chief Executive Officer
Date:___________________________
OFFICER:
________________________________
Steven A. Stone
Date:___________________________
16
<PAGE>
EXHIBIT 23.1
CONSENT
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports on Alexandria Real Estate Equities, Inc. dated February
13, 1997 (except Note 11, as to which the date is May 1, 1997), 1413 Research
Blvd. dated February 20, 1997, 300 and 401 Professional Drive dated February
20, 1997, 25, 35 and 45 W. Watkins Mill Road dated February 20, 1997, 1311,
1401 and 1431 Harbor Bay Parkway dated February 20, 1997, 1550 East Gude Drive
dated February 20, 1997, and PW Acquisitions I, LLC dated April 24, 1997, in
Amendment No. 1 to the Registration Statement (Form S-11 No. 333-23545), and
related Prospectus of Alexandria Real Estate Equities, Inc. for the
registration of 6,750,000 shares of its common stock.
Ernst & Young LLP
Los Angeles, California
May 1, 1997
<PAGE>
EXHIBIT 23.2
Rosen Consulting Group consents to all references to our firm in the
registration statement of Alexandria Real Estate Equities, Inc. on Form S-11
(File No. 333-23545) (the "Registration Statement"), including under the
caption "Experts," and to the incorporation by reference therein of our report
dated May 1, 1997, entitled Scientific Research Facilities Market Analysis:
San Diego, San Francisco Bay Area, Seattle, and Suburban Washington, D.C. (the
"Report"). Rosen Consulting Group agrees that each of PaineWebber
Incorporated, Lehman Brothers Inc., Smith Barney Inc. and EVEREN Securities,
Inc. (as representatives of the several underwriters) may rely upon the Report
as if it were prepared for them in the first instance.
May 5, 1997 Rosen Consulting Group
By: /s/ Kenneth T. Rosen
----------------------------------
Kenneth T. Rosen
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