<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 19, 1997
REGISTRATION NO. 333-23545
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2 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 LLP GOODWIN, PROCTER & HOAR LLP
300 SOUTH GRAND AVENUE EXCHANGE PLACE
LOS ANGELES, CALIFORNIA 90071 BOSTON, MASSACHUSETTS 02109
TELEPHONE: (213) 687-5000 TELEPHONE: (617) 570-1000
FACSIMILE: (213) 687-5600 FACSIMILE: (617) 523-1231
----------------
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. [_]
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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 19, 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 17 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 equal to 1% of the gross proceeds of the Offering,
approximately $60.6 million in connection with the sale to the Company of the
Acquisition LLC (defined herein), which owns three of the Properties that
were originally purchased by the Acquisition LLC for approximately $52
million, 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 $4,700,000, 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
Structure of the Company................................................. 9
The Offering............................................................. 12
Distributions............................................................ 12
Tax Status of the Company................................................ 13
Summary Financial Information............................................ 13
RISK FACTORS.............................................................. 17
Lack of Industry Diversification; Reliance on Life Science Industry
Tenants................................................................. 17
Environmental Matters................................................... 17
Uncertainty of Government Regulatory Requirements and Funding........... 17
Dependence on Reimbursement............................................. 17
Dependence on Tenants.................................................... 18
Geographic Concentration; Dependence on Certain Markets.................. 18
Conflicts of Interest.................................................... 19
Benefits to Managing Underwriter......................................... 19
Rapid Growth............................................................. 19
Limited Operating History................................................ 20
Experience of Management................................................. 20
Real Estate Financing.................................................... 20
Debt Financing and Existing Debt Maturities............................. 20
Requirement of Additional Financing..................................... 21
Rising Interest Rates................................................... 21
Acquisition and Renovation............................................... 21
Real Estate Investment................................................... 22
Variability of Revenues and Expenses.................................... 22
Cost of Improvements.................................................... 22
Bankruptcy of Tenants................................................... 22
Expansion and Development............................................... 22
Illiquidity of Investments.............................................. 23
Competition for Investment Opportunities................................ 23
Adverse Consequences of Failure to Qualify as a REIT..................... 23
Influence of Certain Stockholders........................................ 24
Anti-takeover Effect of Ownership Limit and Power to Issue Additional
Stock................................................................... 24
Uninsured Loss........................................................... 25
Possible Environmental Liabilities....................................... 26
Costs of Compliance with Americans with Disabilities Act................. 27
Changes in Laws.......................................................... 27
Reliance on Key Personnel................................................ 27
</TABLE>
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<S> <C>
Change in Policies Without Stockholder Approval......................... 27
No Limitation on Debt................................................... 27
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........................... 29
Immediate and Substantial Dilution...................................... 29
Shares Eligible for Future Sale......................................... 29
THE COMPANY.............................................................. 30
Growth Strategies....................................................... 31
Tenant Demand........................................................... 34
TARGET MARKETS........................................................... 36
Existing Markets........................................................ 36
Additional Target Markets............................................... 37
Market Study............................................................ 37
DISTRIBUTIONS............................................................ 39
USE OF PROCEEDS.......................................................... 42
CAPITALIZATION........................................................... 43
DILUTION................................................................. 44
SELECTED FINANCIAL DATA.................................................. 45
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................... 48
Overview................................................................ 48
Results of Operations................................................... 48
Pro Forma Results of Operations......................................... 50
Liquidity and Capital Resources......................................... 51
Historical Cash Flows................................................... 53
Funds from Operations................................................... 54
Inflation............................................................... 54
THE PROPERTIES........................................................... 55
General................................................................. 55
Location and Type of Space.............................................. 58
Lease Expirations....................................................... 58
Lease Expirations--Property by Property................................. 59
Tenants................................................................. 62
Property Descriptions................................................... 63
California.............................................................. 63
Seattle, Washington..................................................... 65
Suburban Washington, D.C. .............................................. 66
Acquisition LLC Properties.............................................. 67
Competition............................................................. 67
Insurance............................................................... 68
Environmental Matters................................................... 68
Legal Proceedings....................................................... 69
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES................................ 70
Investment Policies....................................................... 70
Disposition Policy........................................................ 70
Financing Policies........................................................ 71
Conflict of Interest Policies............................................. 71
Policies with Respect to Other Activities................................. 72
FORMATION AND STRUCTURE.................................................... 72
Formation and Related Transactions........................................ 72
New Mortgage Debt......................................................... 74
Benefits to Related Parties............................................... 75
MANAGEMENT................................................................. 77
Directors, Executive Officers and Senior Management....................... 77
Election of Directors and Director Compensation........................... 79
Committees of the Board of Directors...................................... 80
Executive Compensation.................................................... 80
Benefit Plans............................................................. 81
Employment Agreements..................................................... 82
Compensation Committee Interlocks and Insider Participation............... 83
Limitation of Liability and Indemnification............................... 83
CERTAIN TRANSACTIONS....................................................... 85
SHARE OWNERSHIP............................................................ 87
Principal Stockholders of Alexandria...................................... 87
Certain Beneficial Ownership in Holdings.................................. 88
DESCRIPTION OF CAPITAL STOCK............................................... 89
General................................................................... 89
Common Stock.............................................................. 89
Preferred Stock........................................................... 89
Power to Issue Additional Shares of Common Stock and Preferred Stock...... 90
</TABLE>
<TABLE>
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<S> <C>
Restrictions on Transfer................................................. 90
Transfer Agent and Registrar............................................. 92
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S CHARTER AND
BYLAWS................................................................... 92
Board of Directors....................................................... 92
Business Combinations.................................................... 93
Control Share Acquisitions............................................... 93
Advance Notice of Director Nominations and New Business ................. 94
Amendment to the Charter or Bylaws....................................... 94
Dissolution of the Company............................................... 94
Anti-takeover Effect of Certain Provisions of Maryland Law and of the
Charter and Bylaws...................................................... 94
SHARES ELIGIBLE FOR FUTURE SALE........................................... 95
FEDERAL INCOME TAX CONSIDERATIONS......................................... 96
Taxation of the Company.................................................. 96
Taxation of Taxable Domestic Stockholders................................ 101
Taxation of Tax-Exempt Stockholders...................................... 101
Taxation of Non-U.S. Holders............................................. 101
Other Tax Consequences................................................... 103
UNDERWRITING.............................................................. 105
LEGAL MATTERS............................................................. 107
EXPERTS................................................................... 107
ADDITIONAL INFORMATION.................................................... 108
GLOSSARY.................................................................. 109
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 in
connection with the Offering ("GSA-QRS"), and (iv) PW Acquisitions I, LLC (the
"Acquisition LLC"). See "Formation and Structure." Unless otherwise indicated,
the information in this Prospectus assumes that: (i) the Underwriters' over-
allotment option is not exercised; (ii) the Formation Transactions have
occurred; and (iii) the initial public offering price is $21.00 per Share (the
midpoint of the price range set forth on the cover page of this Prospectus).
THE COMPANY
Alexandria was formed in October 1994 to acquire, manage, expand and
selectively develop high quality, strategically located properties containing
office and laboratory space designed and improved for lease principally to
pharmaceutical, biotechnology, diagnostic and personal care products companies,
major scientific research institutions and related government agencies
(collectively, the "Life Science Industry"). The Company's tenant base is broad
and diverse within the Life Science Industry and reflects the Company's focus
on regional, national and international tenants with substantial financial and
operational resources. Significant tenants include affiliates of major
pharmaceutical companies (e.g., Johnson & Johnson and Novartis AG, the company
resulting from the merger of Ciba-Geigy AG and Sandoz AG); biotechnology
companies and their affiliates (e.g., Chiron Corporation, Agouron
Pharmaceuticals, Inc. and Advanced Tissue Sciences, Inc.); affiliates of
personal care products companies (The Gillette Company); major scientific
research institutions (e.g., the Fred Hutchinson Cancer Research Center and The
Scripps Research Institute); clinical laboratories (American Medical
Laboratories, Inc.); and government agencies (e.g., the U.S. Food and Drug
Administration and the U.S. Army Corps of Engineers). See "The Properties--
Tenants" for the percentage of the aggregate portfolio Annualized Net Effective
Rent contributed by each of the foregoing tenants.
Upon consummation of the Offering and the Formation Transactions, the Company
will own 15 Properties, including three Properties to be acquired in connection
with the Offering, containing approximately 1.5 million rentable square feet of
office and laboratory space located in California (in the San Diego and San
Francisco Bay areas), Seattle, Washington and suburban Washington, D.C.
(including Maryland and Virginia), each of which is a leading market in the
United States for the Life Science Industry. To facilitate research and
development, technology transfer and recruitment of scientific professionals,
Life Science Industry companies generally cluster near major scientific
research institutions, universities and government agencies, all of which drive
demand for properties combining office and laboratory space suitable for such
tenants. As a result, the Company focuses its operations and acquisition
activities principally in a limited number of target markets, including all of
the Company's existing markets and certain other markets where Life Science
Industry tenants are concentrated, including Boston/Cambridge and the New
York/New Jersey and suburban Philadelphia areas. As of April 30, 1997, the
Properties were approximately 98% leased, at an average Annualized Net
Effective Rent per leased square foot of $18.20.
The multibillion dollar Life Science Industry comprises some of the fastest
growing segments of the U.S. economy and includes thousands of public and
private companies and scientific research institutions engaged principally in
the research, development, testing, manufacture, sale and regulation of
pharmaceuticals, diagnostics, personal care products, medical devices,
laboratory instrumentation and other related applications. Properties leased to
tenants in the Life Science Industry typically consist of suburban office
buildings containing scientific research and development laboratories and other
improvements that are generic to tenants operating in the Life Science Industry
(such properties, "Life Science Facilities"). Unlike traditional office space,
the
1
<PAGE>
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.
The Company is led by a senior management team with extensive experience in
both the real estate and Life Science industries and is supported by a highly
experienced board of directors. Management believes that it has achieved
favorable returns on its Properties as a result of: (i) the strong and growing
demand by tenants for Life Science Facilities; (ii) the constrained supply and
lack of speculative development of Life Science Facilities due to the expertise
generally required to develop and manage this property type; (iii) the highly
fragmented and inefficient market for ownership of Life Science Facilities;
(iv) the Company's adherence to strict evaluation criteria and due diligence
review when assessing prospective properties and tenants; and (v) the Company's
knowledge and understanding of Life Science Industry tenants and their real
estate needs. Additionally, the personal and business relationships that
management has developed over time within the real estate and Life Science
industries have contributed significantly to the Company's ability to identify
and consummate favorable acquisitions and to lease space to high quality Life
Science Industry tenants. Management believes that the Company will be the
first publicly traded entity focusing primarily on the acquisition, management,
expansion and selective development of Life Science Facilities.
Upon consummation of the Offering and the Formation Transactions, Health
Science Properties Holding Corporation ("Holdings"), which is owned principally
by founding stockholders (including officers and directors) of the Company,
will own approximately 17.0% of the outstanding shares of Common Stock. The
Company's Continuing Investors, consisting of Holdings, AEW Partners II, L.P.
and certain of its affiliates (collectively, "AEW"), and officers, directors
and certain employees of the Company, will own an aggregate of approximately
35.0% of the outstanding shares of Common Stock. See "Formation and Structure"
for a detailed discussion of the Formation Transactions. See also "Share
Ownership."
RISK FACTORS
An investment in the Shares involves various risks, and prospective investors
should carefully consider the matters discussed under "Risk Factors" prior to
an investment in the Company. Such risks include, among others:
. The lack of industry diversification and the Company's reliance on the
Life Science Industry, including the extensive government regulation of
Life Science Industry tenants and certain related environmental
concerns, and the potential inability of the Company to identify
suitable Life Science Industry tenants. See "Risk Factors--Lack of
Industry Diversification; Reliance on Life Science Industry Tenants."
. Reliance on a limited number of major tenants, of which the three
largest (American Medical Laboratories, Inc., the Fred Hutchinson Cancer
Research Center and Agouron Pharmaceuticals, Inc.) account for
approximately 37.5% of the Company's Annualized Base Rent from the
Properties, and on the ability of such tenants to make rental payments,
and related property management risks, including nonrenewal of space or
inability to relet space. Leases representing 21.2% of Annualized Base
Rent will expire by the end of 1999. See "Risk Factors--Dependence on
Tenants."
. The concentration of the Properties in a limited number of markets and
the resulting dependence of the Company on economic conditions in such
markets. See "Risk Factors--Geographic Concentration; Dependence on
Certain Markets."
. Conflicts of interest in connection with the Offering and the Formation
Transactions, including material benefits to certain officers, directors
and affiliates of the Company (including the increase in the net
tangible book value of the shares of Common Stock held by them). See
"Risk Factors--Conflicts of Interest."
2
<PAGE>
. 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
equal to 1% of the gross proceeds of the Offering, approximately $60.6
million in connection with the sale to the Company of the Acquisition
LLC, which owns the three Acquisition LLC Properties that were
originally purchased by the Acquisition LLC for approximately $52
million, 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 numerous 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 (as well as certain related improvements to the Property),
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
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 in
effect as of April 30, 1997 (using rental revenue calculated on a straight-
line basis in accordance with generally accepted accounting principles
("GAAP")). 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>
STRUCTURE OF THE COMPANY
FORMATION AND STRUCTURE
The Company was formed in October 1994 and currently has outstanding 1,000
shares of Common Stock, 12 shares of Series T Preferred Stock, 220 shares of
Series U Preferred Stock, and 27,500 shares of Series V Preferred Stock. 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 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, from certain
affiliates of PaineWebber, 100% of the membership interests in the Acquisition
LLC, thereby acquiring the Acquisition LLC Properties. 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 structure and approximate ownership of
the Company prior to consummation of the Offering and the Formation
Transactions.
Chart depicting structure and approximate ownership of the Company prior to
consummation of the Offering and the Formation Transactions. Alexandria is
shown in center of chart with a notation that it owns five Properties. QRS is
shown below Alexandria, with a line indicating that Alexandria owns 1,000 shares
(100%) of QRS Common Stock and that QRS owns seven Properties. Each of
Directors, Officers and Employees of Alexandria; Holdings; AEW; and Series U
Preferred Stockholders is shown in separate box above Alexandria, with share
ownership and percentage ownership noted as follows: Directors, Officers and
Employees of Alexandria, 12 shares of Series T Preferred Stock and 54,231 shares
(49.7%) of common stock of Holdings (1); Holdings, 1,000 shares (100%) of Common
Stock; AEW, 27,500 shares of Series V Preferred Stock; and Series U Preferred
Stockholders, 220 shares of Series U Preferred Stock.
- --------
(1) See "Share Ownership--Certain Beneficial Ownership in Holdings." Excludes
the effect of shares issuable upon conversion or exchange of certain
convertible and exchangeable securities of Holdings currently outstanding.
9
<PAGE>
The following diagram illustrates the resulting structure and approximate
ownership of the Company upon consummation of the Offering and the Formation
Transactions.
Chart depicting resulting structure of the Company and the approximate
ownership of Alexandria upon consummation of the Offering and the Formation
Transactions. Alexandria is shown in center of chart with a notation that it
owns 5 Properties. Each of GSA-QRS, QRS and Acquisition LLC is shown below
Alexandria, with the number of Properties owned by each and the ownership of
each noted as follows: GSA-QRS (4), 1 Property, 99% non-managing interest owned
by Alexandria and 1% managing interest owned by QRS; QRS, 6 Properties, 1,000
shares (100%) of common stock owned by Alexandria; and Acquisition LLC (5), 3
Properties, 99% non-managing interest owned by Alexandria and 1% managing
interest owned by QRS. Each of Directors, Officers and Employees of Alexandria;
Holdings; AEW; and Public Stockholders is shown in separate box above
Alexandria, with share ownership and percentage ownership noted as follows:
Directors, Officers and Employees of Alexandria, 209,615 shares (2%) of Common
Stock (2) and 54,231 shares (49.7%) of common stock of Holdings (1); Holdings,
1,765,923 shares (17%) of Common Stock; AEW, 1,659,239 shares (16%) of Common
Stock; and Public Stockholders, 6,757,071 (65%) of Common Stock (3).
- --------
(1) See "Share Ownership--Certain Beneficial Ownership in Holdings." Excludes
the effect of shares issuable upon conversion or exchange of certain
convertible and exchangeable securities of Holdings currently outstanding.
(2) Excludes 900,000 shares reserved for issuance pursuant to the Company's
1997 Stock Option Plan (as defined in "Management--Benefit Plans"), of
which options to purchase 600,000 shares will be granted in connection with
the Offering.
(3) Includes 7,071 shares of Common Stock to be issued upon conversion of 220
shares of Series U Preferred Stock.
(4) In connection with a new $8.5 million mortgage loan on 1431 Harbor Bay
Parkway, the Company will form GSA-QRS and transfer 1431 Harbor Bay Parkway
from QRS to GSA-QRS.
(5) Upon consummation of the Offering, and as required by the LLC Agreement,
the Company will acquire 100% of the membership interests in the
Acquisition LLC from certain affiliates of PaineWebber. The Acquisition LLC
owns the three Acquisition LLC Properties.
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 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 an aggregate of 152,615 shares of Common Stock.
Officers, directors and certain employees of the Company will also receive
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, in connection with the Offering,
officers, directors and 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, employee directors and other employees 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 loans from certain
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 23.1% 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 eight Properties acquired during 1996 (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 -- --
Stock grant
compensation(1)....... -- -- -- -- -- -- --
Interest............... 1,180 2,509 918 4,717 6,327 3,553 328
Acquisition LLC
financing costs(2).... -- -- -- -- -- -- --
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........... $ -- $ 1,577 $ -- $ -- $ 1,590 $ -- $ --
========== ========= ======= ========== ========= ======= =======
Net income (loss)
allocated to common
stockholders........... $ 3,191 $ (1,344) $ 319 $ 14,245 $ 585 $ 761 $ (648)
========== ========= ======= ========== ========= ======= =======
Net income per pro forma
share of Common Stock.. $ 0.31 $ 0.06 $ 1.37 $ 0.60
========== ========= ========== =========
Pro forma shares of
Common Stock
outstanding(3)......... 10,391,848 3,641,848 10,391,848 3,641,848
========== ========= ========== =========
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(1)(2)........ $ 3,191 $ 233 $ 319 $ 14,245 $ 2,175 $ 761 $ (648)
Add:
Accrual of a post-
retirement
benefit(4)............ 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(5)......... $ 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 of properties
owned at period end.... -- 97% 96% -- 97% 96% 88%
</TABLE>
- --------
(1) In connection with the Offering, officers, directors and certain employees
will be granted an aggregate of 152,615 shares of the Company's Common
Stock. The Company will recognize $3,205,000 of compensation expense upon
granting such stock. This amount is not reflected in net income for any
historical or pro forma period set forth above.
(2) In connection with the Offering, the Company will acquire the membership
interests in the Acquisitions LLC for $60,609,000, which exceeds the
purchase price paid by the Acquisition LLC for the Acquisition LLC
Properties by $8,940,000. This difference will be accounted for as a
financing cost and recognized when the transaction is completed.
15
<PAGE>
(3) Pro forma shares of Common Stock outstanding on a pro forma net income
basis (10,391,848) include all shares outstanding at the end of the period,
including shares to be issued in the Offering. Pro forma shares of Common
Stock outstanding on a historical net income basis (3,641,848) include all
shares outstanding at the end of the period, but exclude the shares to be
issued in the Offering.
Additional supplemental pro forma net income and per share information is
included below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
-------------------- -----------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
The following table sets
forth the pro forma
effect of the Offering
and the repayment of the
Company's debt with the
proceeds of the Offering
only for the repayment of
debt:
Historical net income of
the Company............ $ 233 $ 2,175
Pro forma decrease in
interest expense
associated with the
repayment of debt...... 1,363 2,841
--------- ----------
Pro forma net income of
the Company adjusted
for repayment of debt.. $ 1,596 $ 5,016
========= ==========
Pro forma shares of
Common Stock
outstanding, on a
historical basis plus
only the number of
shares issued for
repayment of debt ..... 6,954,268 6,954,268
========= ==========
Net income per pro forma
share of Common Stock.. $ 0.23 $ 0.72
========= ==========
The following table sets
forth the pro forma
effect of the purchase of
the Acquisition LLC with
proceeds from the
Offering:
Historical net income of
the Company............ $ 233 $ 2,175
Pro forma net income of
the Acquisition LLC.... 1,379 5,571
--------- ----------
Pro forma net income of
the Company and the
Acquisition LLC........ $ 1,612 $ 7,746
========= ==========
Pro forma shares of
Common Stock
outstanding on a
historical basis plus
only the number of
shares issued to
purchase the
Acquisition LLC........ 6,842,627 6,842,627
========= ==========
Net income per pro forma
share of Common Stock.. $ 0.24 $ 1.13
========= ==========
</TABLE>
(4) 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.
(5) 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 believes FFO is helpful to investors as a measure of the
performance of an equity REIT because, along with cash flows from operating
activities, financing activities and investing activities, it provides
investors with an understanding of the ability of the Company to incur and
service debt, and make capital expenditures. 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.
16
<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
17
<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 performance of
the Life Science Industry and the economy in general in each geographic market
in which the
18
<PAGE>
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." Messrs. Sudarsky, Marcus and Gold are also 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 an aggregate of 152,615 shares of Common Stock.
Officers, directors and certain employees of the Company also will receive
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 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 equal to 1% of the gross proceeds of the Offering. 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, which owns the
three Acquisition LLC Properties that were originally purchased by the
Acquisition LLC for approximately $52 million, and $44.4 million of the net
proceeds as repayment of amounts outstanding under the PaineWebber Facility.
See "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources,"
"Formation and Structure" and "Underwriting." In accordance with
Rules 2710(c)(8) and 2720(c)(3) of the Conduct Rules of the National
Association of Securities Dealers, Inc. (the "Conduct Rules"), Lehman Brothers
Inc. is assuming the responsibilities of acting as "qualified independent
underwriter" and will recommend the maximum initial public offering price of
the Shares in compliance with the requirements of the Conduct Rules. Lehman
Brothers Inc. is performing due diligence investigations and is reviewing and
participating in the preparation of this Prospectus and the Registration
Statement of which this Prospectus forms a part (the "Registration
Statement"). The initial public offering price of the Shares will be no higher
than the price recommended by the "qualified independent underwriter." See
"Underwriting."
RAPID GROWTH
The Company is currently experiencing a period of rapid growth. As the
Company acquires additional properties, it will be subject to risks associated
with managing new properties, including lease-up and tenant
19
<PAGE>
retention. In addition, the Company's ability to manage its growth effectively
will require it to successfully integrate new acquisitions into its existing
management structure. No assurances can be given that the Company will be able
to succeed with such integration or effectively manage additional properties
or that newly acquired properties will perform as expected. Additionally,
there can be no assurance that the Company will be able to maintain its
current rate of growth in the future.
LIMITED OPERATING HISTORY
Upon consummation of the Offering and the Formation Transactions, the
Company will own 15 Properties, including the Acquisition LLC Properties,
consisting of approximately 1.5 million rentable square feet of office and
laboratory space. All of the Properties have been under the Company's
management for less than three years, and a substantial majority of the
Properties have been owned for less than one year. The Properties may have
characteristics or deficiencies unknown to the Company that could affect such
Properties' valuation or revenue potential. There can be no assurance that the
operating performance of the Properties will not decline under the Company's
management.
EXPERIENCE OF MANAGEMENT
Although certain of the Company's officers and directors have extensive
experience in the acquisition, leasing, operation, financing and development
of real properties, prior to commencement of the Company's operations, no
officer had significant experience in operating a business in accordance with
the requirements for maintaining qualification as a REIT under the Code. See
"--Adverse Consequences of Failure to Qualify as a REIT."
REAL ESTATE FINANCING
DEBT FINANCING AND EXISTING DEBT MATURITIES. The Company is subject to the
risks normally associated with debt financing, including the risk that the
Company's cash flow from operations will be insufficient to meet required
payments of principal and interest, that existing indebtedness will not be
able to be refinanced or extended, and that the terms of any such refinancing
will not be as favorable as the terms of existing indebtedness. Upon
consummation of the Offering and the Formation Transactions, the Company will
have outstanding mortgage indebtedness of approximately $55.2 million, of
which approximately $18.3 million will be secured by 3535 General Atomics
Court and 3565 General Atomics Court; $8.5 million will be secured by 1431
Harbor Bay Parkway; and two mortgages of approximately $21.5 million and $6.9
million will be secured by 1102 and 1124 Columbia Street. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources." In the event of a default by the Company,
the lender may be able to foreclose on or otherwise transfer such Properties
to the mortgagee, resulting in a loss of income and asset value to the
Company. As a result, the Company's financial condition and its ability to
make distributions to stockholders may be adversely affected.
The Credit Facility will contain conditions to borrowing and cross-default
provisions. The conditions to borrowing will include compliance with customary
financial covenants and restrictions on certain activities, such as incurring
indebtedness, making investments and distributions to stockholders, as well as
a requirement to maintain a pool of unencumbered assets approved by the
lenders. Under the cross default provisions, a default under the terms of any
Company indebtedness in excess of $5 million, with the exception of non-
recourse debt, could result in a default under the Credit Facility and could
lead to acceleration of the outstanding indebtedness under the Credit
Facility. Similarly, under the terms of the $6.9 million mortgage secured by
1102 and 1124 Columbia Street, a default under the terms of the $21.5 million
mortgage secured by the same Property could result in a default under the $6.9
million mortgage.
The Company has financed the acquisition of the Properties in part, and may
finance future investments, with debt obligations that provide for the
repayment of principal in a lump-sum or "balloon" payment at maturity. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--
20
<PAGE>
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. The Company has adopted a policy to incur debt only if, upon
such incurrence, its debt to total market capitalization ratio would not
exceed 50%. If the Company is unable to obtain additional equity financing,
and the incurrence of additional debt would cause the Company's debt to total
market capitalization ratio to exceed 50%, the Company may have to revise its
existing policy to fund acquisitions of additional properties. See "--No
Limitation on Debt."
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."
21
<PAGE>
REAL ESTATE INVESTMENT
The Company's investments in real property are subject to varying degrees of
risk, including risks common to commercial properties in general and risks
specific to the Company.
VARIABILITY OF REVENUES AND EXPENSES. The yields the Company receives from
equity investments in real estate depend in large part on the amount of
revenue generated and expenses incurred. 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).
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 (whether due to inflation or other factors), unless the lease
provides for a rent adjustment based on escalations in operating expenses. In
addition, 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. Finally, real estate
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.
COST OF IMPROVEMENTS. 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. While the Company has
historically been able to reflect the additional investment in generic
infrastructure improvements in higher rental rates, there can be no assurances
that the Company will be able to continue to do so in the future.
BANKRUPTCY OF TENANTS. 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.
EXPANSION AND DEVELOPMENT. The Company 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 and conversion opportunities at
several of its Properties. In addition, although the Company currently intends
to emphasize acquisitions over development, 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. The Company is currently evaluating certain development
opportunities.
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The Company's expansion and development activities subject the Company to
risks generally related to development and redevelopment projects, including
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.
ILLIQUIDITY OF INVESTMENTS. 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 FOR INVESTMENT OPPORTUNITIES. 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. However, various entities, including insurance companies, pension
and investment funds, partnerships, developers, investment companies and other
REITs invest in Life Science Facilities and therefore compete for investment
opportunities with the Company. Many of these entities have substantially
greater financial resources than the Company and 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. Although 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, in the future,
competition from these entities 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.
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On or before the effectiveness of the Registration Statement, the Company
will receive an opinion of Skadden, Arps, Slate, Meagher and Flom LLP, tax
counsel to the Company, concerning the qualification of the Company as a REIT.
In rendering this opinion, Skadden, Arps, Slate, Meagher & Flom LLP will rely
on certain assumptions and representations by the Company as to factual
matters (including representations of the Company concerning, among other
things, its business and properties, the amounts of rents attributable to
personal property and other items regarding the Company's ability to meet the
various requirements for qualification as a REIT) and on opinions of local
counsel with respect to matters of local law. The opinion will be expressed
based upon facts, representations and assumptions as of its date and Skadden,
Arps, Slate, Meagher & Flom LLP will have no obligation to advise holders of
Common Stock of any subsequent change in the matters stated, represented or
assumed or any subsequent change in applicable law. No assurance can be given
that the Company has met or will continue to meet these requirements in the
future, and a legal opinion is not binding on the IRS.
If in any taxable year the Company fails to qualify as a REIT, the Company
would not be allowed a deduction for distributions to stockholders in
computing taxable income and would be subject to federal income tax on its
taxable income at regular corporate rates. Unless entitled to relief under
certain statutory provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. As a result of the additional tax liability, the
Company might need to borrow funds or liquidate certain investments in order
to pay the applicable tax and the funds available for investment or
distribution to the Company's stockholders would be reduced for each of the
years involved. In addition, the Company would no longer be required by the
Code to make any distributions. Although the Company currently intends to
operate in a manner designed to qualify as a REIT, it is possible that future
economic, market, legal, tax or other considerations may cause the Company to
fail to qualify as a REIT or may cause the Board of Directors to revoke the
REIT election. See "Federal Income Tax Considerations."
INFLUENCE OF CERTAIN STOCKHOLDERS
Upon consummation of the Offering and the Formation Transactions, Holdings
and AEW will own approximately 17.0% and 16.0%, respectively, of the
outstanding shares of Common Stock of the Company. These stockholders will
have significant influence over the election of directors of the Company and
other matters to be voted on by the stockholders of the Company. Pursuant to
an agreement with the Company, AEW has the right to include two nominees on
the ballot for the election of directors of the Company, and one nominee on
the ballot for the election of directors of QRS, so long as AEW owns Common
Stock representing more than 15% of the voting securities of the Company, and
the right to include one nominee on the ballot for the election of directors
of the Company so long as AEW owns Common Stock representing more than 7% of
such securities. Holdings has agreed to vote its shares of Common Stock for
the AEW nominees included on the ballot for the election of directors of the
Company. No directors currently serve on the board of directors of the Company
or QRS pursuant to such arrangement, although AEW may, at its discretion,
exercise its right to include nominees on the ballot in the future. See
"Management--Election of Directors and Director Compensation." Additionally,
the concentration of ownership by Holdings and AEW may have the effect of
delaying, deferring or preventing a change in control of the Company and may
result in significant influence and control over the Board of Directors and
various corporate actions. See "Management" and "Share Ownership--Principal
Stockholders of Alexandria."
ANTI-TAKEOVER EFFECT OF OWNERSHIP LIMIT AND POWER TO ISSUE ADDITIONAL STOCK
In order for the Company to maintain its qualification as a REIT, not more
than 50% of the value of its outstanding capital stock may be owned, directly
or constructively, by five or fewer individuals or entities (as defined in the
Code). The Company's Charter prohibits, with exceptions for certain Continuing
Investors, direct or constructive ownership of shares of stock representing
more than 9.8% of the combined total value of outstanding shares of the
Company's stock by any person (the "Ownership Limit"). The constructive
ownership rules are complex and may cause shares of the Common Stock owned
directly or constructively by a group of related individuals or entities to be
constructively owned by one individual or entity. A transfer of shares to a
person who, as a result of the transfer, violates the Ownership Limit may be
void or may be transferred to a
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trust, for the benefit of one or more qualified charitable organizations
designated by the Company, with the intended transferee having only a right to
share (to the extent of the transferee's original purchase price for such
shares) in proceeds from the trust's sale of such shares. See "Description of
Capital Stock--Restrictions on Transfer."
The Ownership Limit may have the effect of delaying, deferring or preventing
a transaction or a change in control of the Company that might involve a
premium price for the Common Stock or otherwise be in the best interest of the
stockholders. See "Description of Capital Stock--Restrictions on Transfer."
The Company's Charter authorizes the Board of Directors to cause the Company
to issue additional authorized but unissued shares of Common Stock or
preferred stock, par value $.01 per share (the "Preferred Stock"), and to
classify or reclassify any unissued shares of Common Stock or Preferred Stock
and to set the preferences, rights and other terms of such classified or
reclassified shares. See "Description of Capital Stock--Common Stock" and "--
Preferred Stock." Preferred Stock will be available for possible future
financing of, or acquisitions by, the Company and for general corporate
purposes without any legal requirement that further stockholder authorization
for issuance be obtained. The issuance of Preferred Stock could make more
difficult any attempt to gain control of the Company by means of a merger,
tender offer, proxy contest or otherwise. Although the Board of Directors has
no present intention to do so, it could establish a series of Preferred Stock
that could, depending on the terms of such series, delay, defer or prevent a
transaction or a change in control of the Company that might involve a premium
price for the Common Stock or otherwise be in the best interest of the
stockholders. Preferred Stock could also be issued with a preference on
dividend payments, which could affect the ability of the Company to pay
dividends or make other distributions to the holders of Common Stock. The
Charter and the Amended and Restated Bylaws of the Company (the "Bylaws") also
contain other provisions that may delay, defer or prevent a transaction or a
change in control of the Company that involves a premium price for the Common
Stock or may otherwise be in the best interest of the stockholders. See
"Certain Provisions of Maryland Law and of the Company's Charter and Bylaws,"
"--Control Share Acquisitions" and "--Advance Notice of Director Nominations
and New Business."
UNINSURED LOSS
The Company carries comprehensive liability, fire, extended coverage and
rental loss insurance with respect to the Properties, with policy
specifications, insured limits and deductibles that the Company believes are
consistent with those customarily carried for similar properties. The Company
also has obtained environmental remediation insurance for the Properties. The
insurance, subject to certain exclusions and deductibles, covers the cost to
remediate environmental damage caused by unintentional future spills or the
historic presence of previously undiscovered hazardous substances. The Company
intends to carry similar insurance with respect to future acquisitions, as
appropriate. In addition, the Company requires its tenants to maintain
comprehensive insurance, including liability and casualty insurance, that is
customarily obtained for similar properties. There are, however, certain types
of losses that are not generally insured because they are either uninsurable
or not economically insurable. In addition, certain disaster-type insurance
(covering catastrophic events, such as earthquakes) may not be available or
may only be available at rates that, in the opinion of management of the
Company, are prohibitive. Many of the Properties are located in the vicinity
of potentially active earthquake faults. The Company has obtained earthquake
insurance for all of the Properties. Should an uninsured disaster or a loss in
excess of insured limits occur, including losses resulting from earthquake or
other seismic activity, the Company could lose its capital invested in the
affected properties, as well as the anticipated future revenues from such
properties, and would continue to be obligated on any mortgage indebtedness or
other obligations related to the properties. Any such loss could adversely
affect the Company and its ability to make distributions to stockholders.
The Company will obtain updates of or endorsements to its existing title
insurance policies bringing such policies current through the closing of the
Offering. However, because such policies were originally obtained at the time
the applicable Property was acquired in an amount equal to the initial
purchase price of the Property, any such policy may be in an amount less than
the current value of the Property at the closing of the Offering. In
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the event of an underinsured loss with respect to a Property relating to a
title defect, the Company could lose a portion of its capital invested in, and
anticipated profits from, such Property, which could adversely affect the
Company and its ability to make distributions to stockholders.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws and regulations, a
current or previous owner or operator of real estate, as well as certain other
parties, may be required to investigate and remediate the effects of hazardous
or toxic substances or petroleum product releases on, under, in or from such
property, and may be held liable to a governmental entity or to third parties
for investigation and cleanup costs and certain damages resulting from such
releases. Such laws and regulations typically impose responsibility and
liability without regard to whether such person knew of or caused the
releases, and the liability under such laws and regulations has been
interpreted to be joint and several unless the harm is divisible and there is
a reasonable basis for allocation of responsibility. The cost of investigating
and remediating such contamination may be substantial, and the presence of
such contamination, or the failure to properly remediate it, may adversely
affect the owner's ability to sell or rent such property or to borrow using
such property as collateral. In addition, the owner of a site may be subject
to governmental fines and common law claims by third parties seeking to
recover damages and costs resulting from such contamination.
Certain other federal, state and local laws and regulations govern the
management and disposal of asbestos-containing materials ("ACMs"). Such laws
and regulations may impose liability for the release of ACMs and may provide
for third parties to seek recovery from owners or operators of such property
for personal injury associated with ACMs. In connection with the ownership and
operation of its properties, the Company may be potentially liable for such
costs. ACMs have been detected at certain of the Properties, but are not
expected to result in material environmental costs or liabilities to the
Company. Federal, state and local laws and regulations also require the
removal or upgrading of certain underground storage tanks and regulate the
discharge of storm water, wastewater and any water pollutants, the emission of
air pollutants, the generation, management and disposal of hazardous or toxic
chemicals, substances or wastes, and workplace health and safety.
The Company's leases generally provide that (i) the tenant is responsible
for all environmental liabilities relating to the tenant's operations, (ii)
the Company is indemnified for such liabilities and (iii) the tenant must
comply with all environmental laws and regulations. Such a contractual
arrangement, however, does not eliminate the Company's statutory liability or
preclude claims against the Company by governmental authorities or persons who
are not parties to such an arrangement. Noncompliance with environmental or
health and safety requirements may also result in the need to cease or alter
operations at a property, which could affect the financial health of a tenant
and its ability to make lease payments. In addition, if there is a violation
of such a requirement in connection with a tenant's operations, it is possible
that the Company, as the owner of the property, could be held accountable by
governmental authorities for such violation and could be required to correct
the violation and pay related fines.
All of the Properties have been, and it is contemplated that all future
acquisitions will be, subjected to a Phase I or similar environmental
assessment (which generally includes a site inspection, interviews and a
records review, but no subsurface sampling). These assessments and certain
follow-up investigations (including, as appropriate, asbestos, radon and lead
surveys, additional public records review, subsurface sampling and other
testing) of the Properties have not revealed any environmental liability that
the Company believes would have a material adverse effect on the Company's
business or results of operations. Nevertheless, it is possible that the
assessments on the Properties have not revealed, or that the assessments on
future acquisitions will not reveal, all environmental liabilities and that
there may be material environmental liabilities of which the Company is
unaware. No assurances can be given that (i) the Company will not incur
material liability under current or future laws and regulations or (ii) the
current environmental condition of the Properties will not be adversely
affected by tenant operations or by environmental conditions in the vicinity
of such Properties. See "The Properties--Environmental Matters."
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COSTS OF COMPLIANCE WITH AMERICANS WITH DISABILITIES ACT
Under the Americans with Disabilities Act of 1990 (the "ADA"), places of
public accommodation and/or commercial facilities are required to meet certain
federal requirements related to access and use by disabled persons. Although
management of the Company believes that the Properties are substantially in
compliance with the present requirements of the ADA, the Company may incur
additional costs in connection with such compliance in the future. In
addition, a number of additional federal, state and local laws and regulations
exist that may require modifications to the Company's properties, or affect
certain future renovations thereof, with respect to access by disabled
persons. Non-compliance with the ADA could result in the imposition of fines
or an award of damages to private litigants, and also could result in an order
to correct any non-complying feature. Under certain of the Company's leases,
the tenant is responsible for ensuring that the property complies with all
laws and regulations, including the ADA. Notwithstanding the foregoing, the
Company may be required to make substantial capital expenditures to comply
with this law. In addition, provisions of the ADA may impose limitations or
restrictions on the completion of certain renovations and thus may limit the
overall returns on the Company's investments.
CHANGES IN LAWS
Because increases in taxes (including income, service and transfer taxes)
are generally not passed through to tenants under leases, such increases may
adversely affect the Company and its ability to make distributions to
stockholders. The Properties are also subject to various federal, state and
local regulatory requirements and to state and local fire and life-safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that the Properties are currently in
compliance with all such regulatory requirements. However, there can be no
assurance that these requirements will not be changed or that new requirements
will not be imposed which would require significant unanticipated expenditures
by the Company and could have an adverse effect on the Company and its
distributions to stockholders.
RELIANCE ON KEY PERSONNEL
The Company will depend upon the services of its executive officers,
particularly Messrs. Marcus, Gold and Nelson. For example, the Company seeks
to utilize the extensive personal and business relationships that members of
management (primarily Messrs. Marcus and Gold) have 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. Consequently, the loss of the services of any one of these
officers could have an adverse effect on the Company's business, financial
condition and prospects. 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
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Directors could alter or eliminate this policy. If this policy were changed,
the Company could become more highly leveraged, resulting in an increase in
debt service obligations that could adversely affect the Company's cash flow
and, consequently, the amount available for distribution to stockholders, and
could increase the risk of default on the Company's indebtedness. See "The
Company--Growth Strategies."
The Company has established its debt policy relative to the total market
capitalization of the Company rather than relative to the book value of its
assets because it believes that the book value of its assets (which to a large
extent is the depreciated original cost of real property, the Company's
primary tangible assets) does not accurately reflect its ability to borrow and
to meet debt service requirements. The market capitalization of the Company,
however, is more variable than book value, and does not necessarily reflect
the fair market value of the underlying assets of the Company at all times.
The Company also will consider factors other than market capitalization in
making decisions regarding the incurrence of indebtedness, such as the
purchase price of properties to be acquired with debt financing, the estimated
market value of its properties upon refinancing and the ability of particular
properties and the Company as a whole to generate cash flow to cover expected
debt service.
INABILITY TO SUSTAIN DISTRIBUTIONS
Distributions will be determined by the Board of Directors and will be
dependent on a number of factors, including the amount of the Company's cash
available for distribution, the Company's financial condition, any decision by
the Board of Directors to reinvest funds rather than to distribute such funds,
the Company's capital expenditures, the annual distribution requirements under
the REIT provisions of the Code and such other factors as the Board of
Directors deems relevant. See "Distributions."
The Company's initial distribution level is based on a number of
assumptions, including assumptions relating to the future operations of the
Company. These assumptions concern, among other matters, occupancy levels,
capital expenditures and other costs relating to the Properties, the level of
rental activity and decisions by the Company to reinvest rather than
distribute cash available for distribution. The Company expects to maintain
its distribution level for at least the 12-month period following consummation
of the Offering. However, certain of the assumptions described above are
beyond the control of the Company, and a significant change in any such
assumption could cause a reduction in cash available for distributions, which
could affect the Company's ability to sustain the initial distribution level.
See "Distributions." Moreover, the Company has not attempted to estimate the
sustainability of its distribution level past the first anniversary of the
Offering. As a result, no assurance can be given that the Company will be able
to maintain its initial distribution level. Any such failure to do so could
result in a decrease in the market price of the Common Stock.
ABSENCE OF PRIOR MARKET FOR SHARES
Prior to the Offering, there has been no public market for shares of the
Common Stock. The shares of Common Stock have been approved for listing on the
NYSE, subject to official notice of issuance. There can be no assurance that,
upon listing, the Company will continue to meet the criteria for continued
listing of the Common Stock on the NYSE. See "Underwriting." The initial
public offering price may not be indicative of the market price for the Common
Stock after the Offering, and there can be no assurance that an active public
market for the Common Stock will develop or continue after the Offering. The
market value of the Common Stock could be substantially affected by general
market conditions, including changes in interest rates. Moreover, numerous
other factors, such as governmental regulatory action and changes in tax laws,
could have significant effects on the future market price of the Common Stock.
See "Underwriting" for a discussion of factors considered in establishing the
initial public offering price.
EFFECT OF MARKET INTEREST RATES ON PRICE OF SHARES
One of the factors that may influence the market price of the Common Stock
in public trading markets will be the annual yield on the Common Stock
compared to yields on other financial instruments. Thus, an increase
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in market interest rates will result in higher yields on other financial
instruments, which may lead prospective purchasers of the Common Stock to
demand a higher annual distribution rate from the Company. The requirement for
a higher distribution rate may have an adverse effect on the market price of
the Common Stock.
EFFECT OF FUTURE OFFERINGS ON PRICE OF SHARES
The Company in the future may increase its capital resources by making
additional private or public offerings of its Common Stock, securities
convertible into its Common Stock, Preferred Stock or debt securities. See
"Description of Capital Stock--Power to Issue Additional Shares of Common
Stock and Preferred Stock." The actual or perceived effect of such offerings,
the timing of which cannot be predicted, may be the dilution of the book value
or earnings per share of the Common Stock outstanding, which may result in a
reduction of the market price of the Common Stock.
IMMEDIATE AND SUBSTANTIAL DILUTION
As set forth more fully under "Dilution," the pro forma net tangible book
value per share after the Offering will be substantially less than the
expected initial public offering price per Share in the Offering. Accordingly,
stockholders acquiring Shares in the Offering will experience immediate and
substantial dilution of $4.96 per Share in the net tangible book value of the
Shares. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, of future sales of
shares of Common Stock, or the availability of shares of Common Stock for
future sale, on the market price of the Common Stock prevailing from time to
time. Sales of substantial amounts of capital stock (including Common Stock
issued upon the exercise of stock options), or the perception that such sales
could occur, could adversely affect prevailing market prices for the Common
Stock. Upon consummation of the Offering and the Formation Transactions,
3,634,777 shares of Common Stock will be owned by the Continuing Investors.
The Company and the Continuing Investors have agreed with the Underwriters,
subject to certain limited exceptions, not to offer, sell, contract to sell,
pledge, grant any option to purchase or otherwise dispose of any shares of
Common Stock (or any securities convertible into, or exercisable, exchangeable
or redeemable for, shares of Common Stock) for a period of 360 days from the
date of this Prospectus, without the prior written consent of PaineWebber.
Management of the Company, including Messrs. Sudarsky, Marcus, Gold, Nelson,
Kreitzer, Stone and Ciruzzi, have agreed with the Underwriters, subject to
certain limited exceptions, not to offer, sell, contract to sell, pledge, or
otherwise dispose of any shares of Common Stock (or any securities convertible
into, or exercisable, exchangeable or redeemable for, shares of Common Stock),
including any shares of Common Stock that any such persons may have the right
to receive by virtue of their ownership interest in Holdings, for a period of
two years from the date of this Prospectus, without the prior written consent
of PaineWebber. After such time, such shares of Common Stock may be sold in
the public market, subject to applicable securities law restrictions or
exemptions from registration, if available. The Company has agreed to prepare
and file a shelf registration statement or such other registration statement
as may then be available within a specified time period after the Offering,
and the expiration of the applicable lock-up period, with respect to the
resale from time to time of shares of Common Stock issued to AEW in connection
with the Offering and the Formation Transactions. Accordingly, AEW will have
the ability to sell its shares of Common Stock at such time pursuant to such
registration statement or any applicable exemption then available under the
Securities Act of 1933, as amended (the "Securities Act"), including Rule 144
promulgated thereunder. The Company also will grant to Holdings customary
transferable registration rights with respect to the shares of Common Stock
held by it. See "Shares Available for Future Sale" and "Underwriting." In
addition, the Company has reserved 900,000 shares of Common Stock for issuance
to officers, directors and 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, including the Acquisition LLC 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.
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
30
<PAGE>
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 numerous 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.
31
<PAGE>
The Company acquired the 1996 Acquired Properties for an aggregate purchase
price (including closing costs and budgeted capital improvements) of
approximately $95.2 million. 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.
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
32
<PAGE>
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 (as
well as certain related improvements to the Property), 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 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 capital
expenditures (such as roof replacements, parking lot resurfacing and HVAC
maintenance expenditures), which the Company believes would typically be borne
by the landlord in traditional office leases.
Development. Given the current favorable acquisition environment for Life
Science Facilities, the Company intends to emphasize acquisitions over
development in pursuing its growth objectives. However, the Company intends to
pursue selective build-to-suit and retrofit development projects where it
expects to achieve investment returns that will equal or exceed its returns on
acquisitions. Build-to-suit projects involve the construction of new Life
Science Facilities for specified tenants. Retrofit projects involve the
conversion of existing office space for use by Life Science Industry tenants,
generally through the addition of laboratory space and other generic
infrastructure improvements. The Company intends to undertake build-to-suit
and retrofit projects only if it can secure long-term leases (generally 10
years or more) with high quality Life Science Industry tenants prior to
construction and the Company's investment in infrastructure will be generic in
nature and not tenant specific.
The Company's 10933 North Torrey Pines Road Property in San Diego,
California, is situated on approximately 16 acres of land. The Company has
rights to construct up to an additional 163,000 square feet of office and
laboratory space on this parcel. The Company also has entered into a purchase
agreement to acquire two parcels of land, aggregating approximately 4.2 acres,
adjacent to the Company's 3535 and 3565 General Atomics Court Properties, also
in the Torrey Pines area of San Diego, California. The purchase price for the
land is approximately $2.7 million, of which the Company has paid a deposit of
$200,000. The Company will have the ability (subject to receipt of necessary
governmental approvals and licenses) to develop and construct two buildings on
the land, containing an aggregate of approximately 90,000 square feet of
office and laboratory space. There can be no assurance, however, that the
Company will acquire the land or will be able to enter into desirable build-
to-suit arrangements.
Financing. Upon consummation of the Offering and the Formation Transactions,
the Company will have a debt to total market capitalization ratio of
approximately 20%. The Company has a commitment from the Bank of America to
provide, upon consummation of the Offering, the Credit Facility for up to $150
million, which will be used primarily for the acquisition of additional
properties. The Company has adopted a policy of incurring debt in the future
only if, upon such incurrence, its debt to total market capitalization ratio
will not exceed 50%. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources" for a
description of certain conditions to borrowing and other provisions applicable
to the Credit Facility and "Policies With Respect to Certain Activities" for a
discussion of the Company's policy of incurring debt.
The Company expects to finance future acquisitions initially through the
Credit Facility and then to refinance such indebtedness with debt or equity
capital. The Company may also issue Common Stock or interests
33
<PAGE>
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
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Measurement Period DOMESTIC RESEARCH AND
(Fiscal Year Covered) 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.
34
<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
[GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
Measurement Period RESEARCH AND DEVELOPMENT AS A PERCENTAGE
(Fiscal Year Covered) 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.
35
<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
36
<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 and 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 STUDY
In connection with the Offering, the Company has obtained a market study
from Rosen Consulting Group, dated May 5, 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, which has been filed as an
Exhibit to the Registration Statement, 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.
37
<PAGE>
Generally, published statistics are not available on scientific research
facilities. The RCG Study noted that the owners of such properties varied by
market and included user institutions and companies, local developer/owners
and select other investors, and that the Company was the only identified
national investor. The RCG Study further noted that, given the lack of
published statistics, the estimated inventory of scientific research
facilities reflected in the RCG Study may not be inclusive of all such space
in each market, but that the research indicates that the reported occupancy
and rents were accurate for the entire inventory in each market. In
determining market rental rates in each market, the provider reviewed
comparable leases and surveyed active market brokers and other market
participants.
The RCG Study indicated that scientific research facilities were
substantially fully leased (98-100%) in each of the Company's existing
markets, with only a small structural vacancy accounting for downtime between
leases and during periods of renovation. In each market, occupancy for
scientific research facilities exceeded occupancy for suburban office space
and R&D 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
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.
While the RCG Study noted that market rents were sufficient to support new
construction of scientific research facilities, the provider only found build
to suit projects planned in San Diego and San Francisco and did not identify
any speculative construction projects.
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 (4-6 months). 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.
38
<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 23.1% (or $0.37 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
39
<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 April 30, 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).
40
<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%.
41
<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 upon consummation of, or shortly following, 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."
42
<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 notes 3 and 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.
43
<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.
44
<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 -- --
Stock grant
compensation(1)....... -- -- -- -- -- -- --
Interest............... 1,180 2,509 918 4,717 6,327 3,553 328
Acquisition LLC
financing costs(2).... -- -- -- -- -- -- --
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........... $ -- $ 1,577 $ -- $ -- $ 1,590 $ -- $ --
========== ========= ======= ========== ========= ======= =======
Net income (loss)
allocated to common
stockholders........... $ 3,191 $ (1,344) $ 319 $ 14,245 $ 585 $ 761 $ (648)
========== ========= ======= ========== ========= ======= =======
Net income per share of
pro forma Common
Stock.................. $ 0.31 $ 0.06 $ 1.37 $ 0.60
========== ========= ========== =========
Pro forma shares of
Common Stock
outstanding(3)......... 10,391,848 3,641,848 10,391,848 3,641,848
========== ========= ========== =========
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>
45
<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(1)(2)........ $ 3,191 $ 233 $ 319 $ 14,245 $ 2,175 $ 761 $ (648)
Add:
Accrual of a post-
retirement
benefit(4)............ 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(5)......... $ 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 of properties
owned at period end.... -- 97% 96% -- 97% 96% 88%
</TABLE>
- --------
(1) In connection with the Offering, officers, directors and certain employees
will be granted an aggregate of 152,615 shares of the Company's Common
Stock. The Company will recognize $3,205,000 of compensation expense upon
granting such stock. This amount is not reflected in net income for any
historical or pro forma period set forth above.
(2) In connection with the Offering, the Company will acquire the membership
interests in the Acquisition LLC for $60,609,000, which exceeds the
purchase price paid by the Acquisition LLC for the Acquisition LLC
Properties by $8,940,000. This difference will be accounted for as a
financing cost and recognized when the transaction is completed.
46
<PAGE>
(3) Pro forma shares of Common Stock outstanding on a pro forma net income
basis (10,391,848) include all shares outstanding at the end of the
period, including shares to be issued in the Offering. Pro forma shares of
Common Stock outstanding on a historical net income basis (3,641,848)
include all shares outstanding at the end of the period, but exclude the
shares to be issued in the Offering.
Additional supplemental pro forma net income and per share information is
included below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
--------------------- ------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
The following table sets
forth the pro forma
effects of the Offering
and the repayment of the
Company's debt with the
proceeds of the Offering
only for the repayment of
debt:
Historical net income of
the Company............ $ 233 $ 2,175
Pro forma decrease in
interest expense
associated with the
repayment of debt...... 1,363 2,841
--------- ---------
Pro forma net income of
the Company adjusted
for repayment of debt.. $ 1,596 $ 5,016
========= =========
Pro forma shares of
Common Stock
outstanding, on a
historical basis plus
only the number of
shares issued for
repayment of debt...... 6,954,268 6,954,268
========= =========
Net income per pro forma
share of Common Stock.. $ 0.23 $ 0.72
========= =========
The following table sets
forth the pro forma
effect of the purchase of
the Acquisition LLC with
proceeds from the
Offering:
Historical net income of
the Company............ $ 233 $ 2,175
Pro forma net income of
the Acquisition LLC.... 1,379 5,571
--------- ---------
Pro forma net income of
the Company and the
Acquisition LLC........ $ 1,612 $ 7,746
========= =========
Pro forma shares of
Common Stock
outstanding on a
historical basis plus
only the number of
shares issued to
purchase the
Acquisition LLC........ 6,842,627 6,842,627
========= =========
Net income per pro forma
share of Common Stock.. $ 0.24 $ 1.13
========= =========
</TABLE>
(4) 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.
(5) 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 believes FFO is helpful to investors as a measure of the
performance of an equity REIT because, along with cash flows from
operating activities, financing activities and investing activities it
provides investors with an understanding of the ability of the Company to
incur and service debt, and make capital expenditures. 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.
47
<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 $353,000 resulted from the accrual of an
employee bonus to be paid in connection with the Offering.
48
<PAGE>
Post-retirement benefit expense for First Quarter 1997 reflects an
adjustment for a non-cash accrual associated with a one-time post-retirement
benefit for an officer of the Company. Subsequent to year end, the officer
announced his intention to retire upon completion of the Offering. In
connection therewith, the officer's post retirement benefit agreement was
amended and the post retirement benefit accrued was adjusted to reflect the
early retirement.
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.
49
<PAGE>
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
Rental revenue increased by $7.2 million, or 862%, to $8.0 million for the
year ended December 31, 1995 compared to $834,000 for the year ended December
31, 1994. The increase resulted primarily from a full year of rental revenue
from the 1994 Acquired Properties.
Tenant recoveries increased by $1.6 million, or 1,853%, to $1.7 million for
1995 compared to $87,000 for 1994. The increase resulted primarily from a full
year of tenant recoveries from the 1994 Acquired Properties.
Other income increased by $114,000, or 127%, to $204,000 for 1995 compared
to $90,000 for 1994. The increase resulted primarily from $56,500 of
additional storage income from the 1994 Acquired Properties and interest
income of $57,000 earned on the Company's cash balances for 1995 not earned
during 1994.
Rental operating expenses increased by $2.0 million, or 784%, to $2.2
million for 1995 compared to $252,000 for 1994. The increase resulted
primarily from a full year of rental operating expenses for the 1994 Acquired
Properties.
General and administrative expenses increased by $592,000, or 58%, to $1.6
million for 1995 compared to $1,016,000 for 1994. The increase resulted
primarily from a full year of general and administrative expenses in 1995
compared to 1994.
Interest expenses increased by $3.2 million, or 983%, to $3.6 million for
1995 compared to $328,000 for 1994. The increase resulted primarily from a
full year of interest expense on outstanding debt in 1995 compared to 1994.
Depreciation and amortization increased by $1.6 million, or 2,548%, to $1.7
million for 1995 compared to $63,000 for 1994. The increase resulted primarily
from a full year of depreciation and amortization from the 1994 Acquired
Properties.
As a result of the foregoing, net income increased by $1.4 million to
$761,000 for 1995 compared to a net loss of $648,000 for 1994.
PRO FORMA RESULTS OF OPERATIONS
Comparison of Pro Forma Three Months Ended March 31, 1997 to Historical Three
Months Ended March 31, 1997
For the three months ended March 31, 1997, pro forma rental revenue, tenant
recoveries, rental property operating expenses and depreciation and
amortization reflect increases over the historical amounts due to adjustments
for the previously owner-occupied periods for the Acquisition LLC Properties.
Pro forma interest expense of $1.2 million is $1.3 million lower than the
historical interest expense of $2.5 million due to the elimination of interest
on certain mortgage loans to be repaid with a portion of the proceeds of the
Offering, offset by interest expense on two new mortgage loans to be incurred
upon consummation of, or shortly following, the Offering. Pro forma general
and administrative expenses have been reduced from the historical period as a
result of the elimination of a $353,000 accrual for a bonus to an officer of
the Company to be paid in connection with the Offering, 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
50
<PAGE>
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
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, 17-year, self-amortizing mortgage on
1431 Harbor Bay Parkway and (ii) a new $6.9 million mortgage on 1102 and 1124
Columbia Street, each of which is expected to be incurred upon consummation
of, or shortly following, the Offering. 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 (as well as certain related
improvements to the Property) 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
51
<PAGE>
operations to meet annual REIT distribution requirements. The Company expects
to make distributions and to pay amortization of principal and interest on its
debt from cash available for distribution, which is expected to exceed cash
historically available for distribution as a result of the reduction in
overall debt described above. Amounts accumulated for distribution will be
invested by the Company primarily in interest-bearing accounts and other
short-term, interest-bearing securities that are consistent with the Company's
qualification for taxation as a REIT.
The Company expects to meet its short-term liquidity requirements generally
through its initial working capital and net cash provided by operations. The
Company believes that its net cash provided by operations will be sufficient
to allow the Company to make distributions necessary to enable the Company to
continue to qualify as a REIT. The Company also believes that the foregoing
sources of liquidity will be sufficient to fund its recurring non-revenue
enhancing capital expenditures, tenant improvements and leasing commissions.
The Company expects to meet certain long-term liquidity requirements, such
as property acquisitions, scheduled debt maturities, renovations, expansions
and other non-recurring capital improvements, through long-term secured and
unsecured indebtedness and the issuance of additional equity securities. The
Company anticipates that only a portion of the principal outstanding under its
outstanding indebtedness will be amortized prior to maturity and that the
Company will not have sufficient funds on hand to repay such indebtedness at
maturity. As a result, it will be necessary for the Company to refinance such
debt either through additional debt financing secured by individual properties
or groups of properties, by unsecured private or public debt offerings or by
additional equity offerings. See "Risk Factors--Real Estate Financing." The
Company's debt will mature at various dates through 2016.
The Company has received a commitment for the Credit Facility from the Bank
of America for up to $150,000,000, consisting of a $100,000,000 activated
tranche and a $50,000,000 tranche which may be activated at the Company's
discretion provided there is no event of default under the Credit Facility.
The Company expects to enter into the Credit Facility upon consummation of the
Offering and the Formation Transactions. The Credit Facility will provide for
syndicated borrowings bearing interest based on the lower of (i) the LIBOR
rate plus an applicable margin ranging from 1.10% to 1.50% and (ii) a bank
reference rate plus an applicable margin ranging from 0.0% to 0.25%. The
applicable margins will be determined initially by reference to the ratio of
the Company's total liabilities to gross asset value at the time of borrowing.
Upon completion of the Offering, the Company anticipates borrowing under the
Credit Facility at a rate equal to LIBOR plus 1.40%. The Company may also
solicit competitive bids for loans for up to one-third of the activated
commitment amount. The Company has paid certain fees in connection with the
acceptance of the commitment to lend and will be liable for additional fees
upon the closing of the Credit Facility and thereafter. The Credit Facility
will have customary conditions to closing and to borrowing, and will contain
representations and warranties customary in REIT financings. The Credit
Facility will contain financial covenants, including minimum market net worth;
total liabilities to gross asset value ratios; earnings to interest and fixed
charge coverage ratios; limitations on unsecured indebtedness and advances to
joint ventures; and requirements to maintain a pool of unencumbered assets
approved by the lenders under certain circumstances and meeting certain
defined characteristics. The Credit Facility will contain restrictions on,
among other things, indebtedness, investments, distributions and mergers.
There can be no assurance that the Company will be able to enter into the
Credit Facility on terms satisfactory to it. The Credit Facility will be used
to finance acquisitions and capital improvements, and for general corporate
purposes.
The Phase I environmental assessments of the Properties have not revealed
any environmental liabilities that the Company believes would have a material
adverse effect on the Company's financial condition or results of operations
taken as a whole, nor is the Company aware of any such material environmental
liabilities. See "Risk Factors--Possible Environmental Liabilities" and "The
Properties--Environmental Matters."
52
<PAGE>
HISTORICAL CASH FLOWS
The Company's principal sources of funding for operations and capital
expenditures have been cash flows from operating activities, private stock
offerings and secured debt financings. The Company had net income for the
years ended December 31, 1996 and 1995, and had a net loss for the year ended
December 31, 1994. The Company had net income for the three months ended March
31, 1997 and 1996.
Net cash provided by operating activities decreased by $2.0 million to a
deficit of $1.6 million for 1996 compared to net cash of $355,000 for 1995.
The decrease resulted primarily from loan fees associated with additional
financing and additional restricted cash reserves required by a tenant of one
of the 1996 Acquired Properties. Net cash provided by operating activities
increased by $1.4 million to $355,000 for 1995 compared to a deficit of $1.0
million for 1994. The increase resulted from a full year of operations for the
1994 Acquired Properties. Net cash provided by operating activities increased
by $2.2 million to $3.2 million for the three months ended March 31, 1997
compared to net cash of $972,000 for the three months ended March 31, 1996.
The increase resulted from the operations of the 1996 Acquired Properties.
Net cash used in investing activities increased by $93.3 million to $94.9
million for 1996 compared to net cash used in investing activities of $1.6
million for 1995. The increase resulted primarily from the 1996 Acquired
Properties. Net cash used in investing activities decreased by $28.3 million
to $1.6 million for 1995 compared to $29.9 million for 1994. The decrease
resulted from the fact that no properties were acquired in 1995. Net cash used
in investing activities increased by $1.2 million to $1.3 million for the
three months ended March 31, 1997 compared to the net cash used of $86,000 for
the three months ended March 31, 1996. The majority of the increase resulted
from improvements made to 1102 and 1124 Columbia Street.
Cash provided by financing activities increased by $96.4 million to $97.3
million for 1996 compared to $927,000 for 1995. The increase resulted
primarily from net borrowings of $80 million during 1996 compared to $2.3
million in 1995. In addition, the Company received net proceeds of $24.1
million from the issuance of mandatorily redeemable preferred stock in 1996.
Cash provided by financing activities decreased $31.2 million to $927,000 for
1995 compared to $32.1 million for 1994. This decrease resulted primarily from
borrowings incurred in 1994 in connection with the 1994 Acquired Properties.
Net cash used in financing activities increased by $735,000 to $787,000 for
the three months ended March 31, 1997 compared to the net cash used of $52,000
for the three months ended March 31, 1996. The increase resulted from a $3.0
million cash distribution, offset by a $2.5 million draw on the Company's line
of credit.
53
<PAGE>
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
THREE MONTHS ENDED MARCH 31, PRO FORMA FOR FOR THE YEAR ENDED
------------------------------- THE YEAR ENDED DECEMBER 31,
PRO FORMA HISTORICAL HISTORICAL DECEMBER 31, 1996 -------------------
1997 1997 1996 (UNAUDITED) 1996 1995
--------- ---------- ---------- ----------------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net income(1)(2)........ $3,191 $ 233 $319 $14,245 $ 2,175 $ 761
Add:
Accrual of a post-re-
tirement benefit(3).. 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(4).................. $5,153 $1,868 $732 $19,636 $ 5,018 $ 2,429
====== ====== ==== ======= ========= =========
</TABLE>
- --------
(1) In connection with the Offering, officers, directors and certain employees
will be granted an aggregate of 152,615 shares of the Company's Common
Stock. The Company will recognize $3,205,000 of compensation expense upon
granting such stock. This amount is not reflected in net income for any
historical or pro forma period set forth above.
(2) In connection with the Offering, the Company will acquire the membership
interests in the Acquisition LLC for $60,609,000, which exceeds the
purchase price paid by the Acquisition LLC for the Acquisition LLC
Properties by $8,940,000. This difference will be accounted for as a
financing cost and recognized when the transaction is completed.
(3) 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.
(4) 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 believes FFO is helpful to investors as a measure of the
performance of an equity REIT because, along with cash flows from
operating activities, financing activities and investing activities, it
provides investors with an understanding of the ability of the Company to
incur and service debt, and make capital expenditures. 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 "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.
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.
54
<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 capital
expenditures (such as 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.
55
<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, CA The Scripps Research
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>
56
<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
Drive 1981/1995 44,500 40 100 597,216 2.2 13.42 13.42
Rockville, MD
1330 Piccard Drive 1978/1995 131,511 75 100 1,903,656 6.9 14.48 14.48
Rockville, MD
14225 Newbrook
Drive 1992 248,186 60 100 4,340,256 15.8 17.49 17.49
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 in
effect as of April 30, 1997 (using rental revenue calculated on a
straight-line basis in accordance with GAAP). 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,
$21.21 and $22.05 for the years 1996, 1995 and 1994, respectively.
(6) The average Annualized Base Rent per Leased Square Foot was $25.66,
$25.97 and $14.03 for the years 1996, 1995 and 1994, respectively.
(7) The average Annualized Base Rent per Leased Square Foot was $33.57,
$33.80 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
$22.76.
(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
$13.56.
(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.
57
<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(6)................. 2 134,000 9.2 2,185 8.0
2007.................... 1 131,500 9.0 1,904 6.9
2014(7)................. 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(8) 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 in
effect as of April 30, 1997 (using rental revenue computed on a straight-
line basis in accordance with GAAP). 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) The Company's lease with MedImmune, Inc., covering 71,225 square feet at
25/35/45 West Watkins Mill Road, expires in 2006. The terms of the lease
allow MedImmune to terminate all or part of the lease at various dates
upon six to 12 months notice and the payment of a termination penalty
determined based on the date of termination.
(7) No leases are subject to expiration in the years 2008 to 2013, inclusive.
(8) Excludes 31,046 square feet of vacant office space, as of April 30, 1997.
58
<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 in
effect as of April 30, 1997 (using rental revenues computed on a straight-
line basis in accordance with GAAP). 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) This Property has no leases expiring during the 10 year period presented.
(4) 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.
(5) In addition to the base rent shown, this tenant, MedImmune, Inc., pays
$322,000 per year in reimbursements for improvements installed by the
prior owner of the property. These payments, which are accounted for as
tenant recovery revenue, continue through the term of the lease. The terms
of the lease with MedImmune allow it to terminate all or part of the lease
at various dates upon six to 12 months notice and the payment of a
termination penalty determined based on the date of the termination. In
the event of such early termination, the remaining amount due over the
term of the lease for improvements must be paid in full.
59
<PAGE>
<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>
1401 HARBOR BAY
PARKWAY
Square Footage
of Expiring
Leases.......... 47,777 47,777
Percentage of
Total Rentable
Sq. Ft. ........ 3.3% 3.3%
Annualized Base
Rent of Expiring
Leases(2)....... $519,144 $ 519,144
Percentage of
Total Annualized
Base Rent....... 1.9% 1.9%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 10.87 $ 10.87
1431 HARBOR BAY
PARKWAY(3)
Square Footage
of Expiring
Leases.......... 0
Percentage of
Total Rentable
Sq. Ft. ........ 0.0%
Annualized Base
Rent of Expiring
Leases(2)....... $ 0
Percentage of
Total Annualized
Base Rent....... 0.0%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 0.00
1102/1124
COLUMBIA STREET
Square Footage
of Expiring
Leases(4)....... 64,482 14,820 70,089 64,006 213,397
Percentage of
Total Rentable
Sq. Ft. ........ 4.5% 1.0% 4.8% 4.4% 14.7%
Annualized Base
Rent of Expiring
Leases(2)....... $1,467,096 $ 96,564 $1,446,684 $1,949,448 $4,959,792
Percentage of
Total Annualized
Base Rent....... 5.3% 0.4% 5.3% 7.1% 18.1%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 22.75 $ 6.52 $ 20.64 $ 30.46 $ 23.24
300 PROFESSIONAL
DRIVE
Square Footage
of Expiring
Leases.......... 33,386 15,054 48,440
Percentage of
Total Rentable
Sq. Ft. ........ 2.3% 1.0% 3.3%
Annualized Base
Rent of Expiring
Leases(2)....... $ 410,376 $259,464 $ 669,840
Percentage of
Total Annualized
Base Rent....... 1.5% 0.9% 2.4%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 12.29 $ 17.24 $ 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 in
effect as of April 30, 1997 (using rental revenues computed on a straight-
line basis in accordance with GAAP). 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) This Property has no leases expiring during the 10 year period presented.
(4) 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.
(5) In addition to the base rent shown, this tenant, MedImmune, Inc., pays
$322,000 per year in reimbursements for improvements installed by the
prior owner of the property. These payments, which are accounted for as
tenant recovery revenue, continue through the term of the lease. The terms
of the lease with MedImmune allow it to terminate such lease at various
dates during the lease upon six to 12 months notice and the payment of a
termination penalty determined based on the date of the termination. In
the event of such early termination, the remaining amount due over the
term of the lease for improvements as described above shall be paid in
full.
60
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
----------------------------------------------------------------------------------
PROPERTY 1997(1) 1998 1999 2000 2001 2002
- -------- ------- ---------- ------------ ---------- ---------- -------
<S> <C> <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(3)
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(3)
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 0
Percentage of
Total Rentable
Sq. Ft. ........ 0.2% 7.3% 13.5% 12.0% 13.3% 0.00%
Annualized Base
Rent of Expiring
Leases(2)....... $46,716 $2,084,928 $3,667,152 $3,847,560 $4,158,276 $ 0
Percentage of
Total Annualized
Base Rent....... 0.2% 7.6% 13.4% 14.0% 15.1% 0.00%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 21.00 $ 19.72 $ 18.73 $ 22.08 $ 21.54 $0.00
<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------------------------------------------
PROPERTY 2003 2004 2005 2006 TOTAL
- -------- -------- ---------- ---------- ---------- -----------
<S> <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(5) $ 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(3)
Square Footage
of Expiring
Leases.......... 0
Percentage of
Total Rentable
Sq. Ft. ........ 0.0%
Annualized Base
Rent of Expiring
Leases(2)....... $ 0
Percentage of
Total Annualized
Base Rent....... 0.0%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 0.00
14225 NEWBROOK
DRIVE(3)
Square Footage
of Expiring
Leases.......... 0
Percentage of
Total Rentable
Sq. Ft. ........ 0.0%
Annualized Base
Rent of Expiring
Leases(2)....... $ 0
Percentage of
Total Annualized
Base Rent....... 0.0%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 0.00
TOTAL PORTFOLIO
Square Footage
of Expiring
Leases.......... 35,346 70,089 64,006 133,964 974,524
Percentage of
Total Rentable
Sq. Ft. ........ 2.4% 4.8% 4.4% 9.2% 67.1%
Annualized Base
Rent of Expiring
Leases(2)....... $410,160 $1,446,684 $1,949,448 $2,185,092 $19,796,016
Percentage of
Total Annualized
Base Rent....... 1.5% 5.3% 7.1% 8.0% 72.2%
Annualized Base
Rent Per Square
Foot of Expiring
Leases.......... $ 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 in
effect as of April 30, 1997 (using rental revenues computed on a straight-
line basis in accordance with GAAP). 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) This Property has no leases expiring during the 10 year period presented.
(4) 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.
(5) In addition to the base rent shown, this tenant, MedImmune, Inc., pays
$322,000 per year in reimbursements for improvements installed by the
prior owner of the property. These payments, which are accounted for as
tenant recovery revenue, continue through the term of the lease. The terms
of the lease with MedImmune allow it to terminate such lease at various
dates during the lease upon six to 12 months notice and the payment of a
termination penalty determined based on the date of the termination. In
the event of such early termination, the remaining amount due over the
term of the lease for improvements as described above shall be paid in
full.
61
<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(2) SQUARE FEET FEET (IN THOUSANDS)(3) BASE RENT (IN THOUSANDS)(4) RENT
--------- ------ ---------- ----------- ------------- ----------------- ------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
American
Medical......... 1 19.7 248,200 17.4% $ 4,340 15.8% $ 4,340 16.7%
Laboratories,
Inc.
Fred Hutchinson
Cancer.......... 2 1.1 159,200 11.2 3,654 13.3 3,654 14.1
Research 7.6
Center(5)
Agouron
Pharmaceuticals, 2 4.4 70,500 5.0 2,310 8.4 2,251 8.7
Inc............. 3.4
PerImmune, Inc... 1 9.8 131,500 9.2 1,904 6.9 1,904 7.3
Advanced Tissue
Sciences,....... 2 3.4 84,500 5.9 1,721 6.3 1,353 5.2
Inc.
U.S. Army Corps.. 1 2.1 105,000 7.4 1,563 5.7 1,396 5.4
of Engineers(6) 4.4
FDA.............. 1 16.8 70,000 4.9 1,415 5.2 901 3.5
R.W. Johnson
Pharmaceutical.. 1 1.8 45,000 3.2 1,334 4.9 1,267 4.9
Research
Institute
The Scripps
Research
Institute....... 2 3.1 41,900 2.9 1,334 4.9 1,106 4.3
2.4
Sequana
Therapeutics,
Inc............. 1 4.7 55,500 3.9 1,263 4.6 1,195 4.6
Corixa
Corporation..... 2 7.7 37,600 2.6 1,198 4.4 1,150 4.5
1.1
MedImmune,
Inc.(7)......... 1 9.6 71,200 5.0 1,147 4.2 1,147 4.4
Gillette Capital
Corporation..... 1 8.9 62,700 4.4 1,039 3.8 1,039 4.0
Quest
Diagnostics,
Inc............. 1 2.9 44,500 3.1 597 2.2 597 2.3
Chiron
Diagnostics..... 1 2.7 47,800 3.4 519 1.9 519 2.0
Syntro
Corporation..... 1 2.7 12,800 0.9 430 1.6 430 1.7
Mobile
Telesystems,
Inc............. 1 1.7 33,400 2.3 410 1.5 410 1.6
Antex Biologics,
Inc............. 1 1.8 15,100 1.1 259 0.9 259 1.0
Genetic Therapy,
Inc............. 1 6.3 20,600 1.4 229 0.8 229 0.9
Photo Science,
Inc............. 1 6.2 14,800 1.0 182 0.7 182 0.7
--- ---- --------- ---- ------- ---- ------- ----
Total/Weighted
Average(8)..... 25 8.4 1,371,800 96.2% $26,848 98.0% $25,329 97.8%
=== ==== ========= ==== ======= ==== ======= ====
</TABLE>
- -------
(1) American Medical Laboratories, Inc., PerImmune, Inc. and Quest
Diagnostics, Inc. are tenants at the Acquisition LLC Properties.
(2) Renewal options for tenants leasing over 10% of the rentable space at
Properties with a book value in excess of 10% of the Company's total
assets as of December 31, 1996 or with gross revenues for the year ended
December 31, 1996 in excess of 10% of the aggregate gross revenues of the
Company for such period are as follows: (i) American Medical Laboratories,
Inc., two five-year renewal options; (ii) Fred Hutchinson Cancer Research
Center, none; (iii) Agouron Pharmaceuticals, Inc., (a) 11099 N. Torrey
Pines: one one-year renewal option and three five-year renewal options
thereafter and (b) 3565 General Atomics Court, three five-year renewal
options; (iv) Advanced Tissue Sciences, Inc., one five-year renewal
option; (v) R.W. Johnson Pharmaceutical Research Institute, two one-year
renewal options; (vi) The Scripps Research Institute, (a) 10933 N. Torrey
Pines Road, two two-year renewal options and (b) 3535 General Atomics
Court, two five-year renewal options; (vii) Sequana Therapeutics, Inc.,
two five-year renewal options; (viii) Corixa Corporation, two five-year
renewal options; (ix) MedImmune, Inc., two five-year renewal options; (x)
Syntro Corporation, one five-year renewal option; (xi) Genetic Therapy,
Inc., none; and (xii) Photo Science, Inc., one 4.5-year renewal option.
(3) Annualized Base Rent means the annualized fixed base rental amount in
effect as of April 30, 1997 (using rental revenues computed on a straight-
line basis in accordance with GAAP) 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.
(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.
(5) 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.
(6) 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.
(7) In addition to the base rent shown, this tenant, MedImmune, Inc. pays
$322,000 per year in reimbursements for improvements installed by the
prior owner of the property. These payments, which are accounted for as
tenant recovery revenue, continue through the term of the lease. The terms
of the lease with MedImmune allow it to terminate such lease at various
dates during the lease upon six to 12 months notice and the payment of a
termination penalty determined based on the date of the termination. In
the event of such early termination, the remaining amount due over the
term of the lease for improvements as described above must be paid in
full.
(8) Weighted Average based on percentage of aggregate leased square feet.
62
<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 were 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 March 31, 1997 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 three months ended March
31, 1997, the estimated annualized 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
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<PAGE>
Property has benefitted from over $4.0 million of tenant-financed generic
infrastructure improvements and is 100% leased to the following tenants:
Agouron Pharmaceuticals, Inc., a publicly traded company focusing on the
development and sale of synthetic drugs for viral, cancer and immuno-
inflammatory diseases; Sequana Therapeutics, Inc., a publicly traded company
focusing on the development of diagnostic and therapeutic products utilizing
gene discovery technology; and Cytel Corporation, a publicly traded company
focusing on therapeutics to treat acute and inflammatory diseases. Each of
Agouron Pharmaceuticals, Inc. and Sequana Therapeutics, Inc. leases over 10%
of the rentable space. The Property was 100% leased for the periods ending
December 31, 1996 and 1995, and was 75% leased for the period ending December
31, 1994. The Company owns fee simple title to the Property.
The Company's tax basis in the Property for federal income tax purposes as
of March 31, 1997 was approximately $13.5 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 three months ended March
31, 1997, the estimated annualized 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 100% 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., focusing on the research and development of
animal vaccines), 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 March 31, 1997 was approximately $19.5 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 three months ended March
31, 1997, the estimated annualized 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 March 31, 1997 was approximately $10.2 million. The Property is depreciated
using the modified accelerated cost recovery system
64
<PAGE>
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
three months ended March 31, 1997, the estimated annualized average
depreciation rate for the Property under the modified accelerated cost
recovery system was 2.8%. The 1996 property taxes on the Property were
assessed at an effective annual rate of approximately 1.118%. Such taxes on
the Property for the 12 month period ending June 30, 1997 totaled
approximately $119,800. The Company does not believe that any capital
improvements made during the 12 month period immediately following the
Offering should result in an increase in annual property taxes.
San Francisco Bay Area
1311 Harbor Bay Parkway, located in Alameda, California, was developed in
1984 and contains approximately 30,000 rentable square feet of office and
laboratory space. The building's exterior is finished with clay tile veneer
over concrete tilt-up shear walls, with gray solar glass windows. The Company
has a lease with Chiron Corporation covering approximately 6,800 square feet,
and a lease with E. Heller & Company covering approximately 2,200 square feet.
The Company is negotiating with E. Heller & Company to lease approximately
6,000 square feet of additional space and is negotiating with other potential
tenants with respect to the remaining available office space. The Company owns
a commercial condominium interest in the Property, together with an undivided
interest in the common areas of the project in which the Property is a part.
The Company acquired the Property in December 1996.
1401 Harbor Bay Parkway, located in Alameda, California, was developed in
1986, renovated in 1994 and acquired by the Company in December 1996. The
Property consists of approximately 48,000 rentable square feet of office and
laboratory space. The Property is constructed of concrete tilt-up shear walls
with structural steel framework and is fully leased to Chiron Diagnostics, a
wholly owned subsidiary of Chiron Corporation. The Company owns a commercial
condominium interest in the Property, together with an undivided interest in
the common areas of the project in which the Property is a part.
1431 Harbor Bay Parkway, located in Alameda, California, was developed in
1985 with significant renovations completed in 1989 and 1994. The building
consists of approximately 70,000 rentable square feet of office and laboratory
space. The Property is constructed of concrete tilt-up shear walls with
structural steel framework and is fully leased to the FDA under a lease with
the General Services Administration. The Company acquired the Property in
December 1996. Following the Offering, this Property will secure a mortgage of
approximately $8.5 million. The Company owns a commercial condominium interest
in the Property, together with an undivided interest in the common areas of
the project in which the Property is a part.
SEATTLE, WASHINGTON
1102 and 1124 Columbia Street, located in Seattle, Washington, consists of
two inter-connecting buildings with an aggregate of approximately 213,000
rentable square feet. Built in 1975, the seven story Columbia Building (1124
Columbia Street) is a main research facility of the Fred Hutchinson Cancer
Research Center, a leading non-profit cancer research institute. The Property
also includes a three-level subterranean annex that serves as a research
facility and the six-story Eklind Hall Building (1102 Columbia Street) that
contains additional office and laboratory space. The Company has converted
approximately 21,000 square feet of space in the Columbia Building, and in
1998 will convert an additional approximately 28,000 square feet of space in
such building into higher rent generic laboratory space. In addition to the
Fred Hutchinson Cancer Research Center, which leases nearly 75% of the
rentable space, approximately 18% of the Property is leased to Corixa
Corporation, a privately held company focusing on the development of cancer
vaccines, and the remainder is leased to Swedish Medical Center. Following the
Offering, the Property will secure approximately $28.4 million of outstanding
mortgage indebtedness. The Company owns fee simple title to the Property. The
Company acquired the Property in May 1996, and it has been 100% leased since
that time.
The Company's tax basis in the Property for federal income tax purposes as
of March 31, 1997 was approximately $29.4 million. The Property is depreciated
using the modified accelerated cost recovery system
65
<PAGE>
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
three months ended March 31, 1997, the estimated annualized average
depreciation rate for the Property under the modified accelerated cost
recovery system was 2.5%. 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 Capitol Cable &
Technology, Inc., an electronics distribution company, and Photo Science,
Inc., a commercial photography company, lease over 90% of the Property.
Capitol Cable & Technology, Inc.'s Annualized Base Rent is $143,436, and its
lease, which expires December 31, 2001, has no renewal options. The Company
owns fee simple title to the Property.
The Company's tax basis in the Property for federal income tax purposes as
of March 31, 1997 was approximately $17.3 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 three months ended March
31, 1997, the estimated annualized average depreciation rate for the
properties under the modified accelerated cost recovery system was 2.5%. 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
66
<PAGE>
acquired this Property in July 1996. The Property is fully leased to the U.S.
Army Corps of Engineers for the Walter Reed Army Institute of Research and the
Armed Forces Institute of Pathology. The Company owns fee simple title to the
Property. A $2.6 million renovation project recently was completed in 1996
with funds provided by the U.S. Army Corps of Engineers to renovate 45,000
square feet of the complex and convert office space to generic laboratory
space.
ACQUISITION LLC PROPERTIES
1550 East Gude Drive, consisting of 44,500 rentable square feet, is located
in Rockville Maryland. The two-story brick and masonry building was built in
1981 and underwent a complete interior renovation in 1995. The first floor
contains primarily laboratory space designed within an open space
configuration, and the entire second floor is devoted to office space. The
Property is fully leased to Quest Diagnostics, Inc., a subsidiary of Corning,
Inc., which has subleased the Property to Shire Laboratory, Inc., a wholly
owned subsidiary of Shire Pharmaceuticals Group p.l.c. focusing on the
development of advanced drug delivery systems. The Acquisition LLC acquired
this property in January 1997. Upon consummation of the Offering and the
Formation Transactions, the Company will own fee simple title to the Property.
1330 Piccard Drive, located in Rockville, Maryland, consists of
approximately 131,000 rentable square feet of office and laboratory space. The
Property was built in two phases in 1978 and 1984, was renovated in 1995 and
was acquired by the Acquisition LLC in January 1997. PerImmune, Inc., a
privately held company focusing on diagnostic and therapeutic applications for
cancer and other diseases, leases the Property. Upon consummation of the
Offering and the Formation Transactions, the Company will own fee simple title
to the Property.
14225 Newbrook Drive, located in Chantilly, Virginia, was developed by
American Medical Laboratories, Inc. ("AML"), a regional clinical laboratory,
in 1992. The Acquisition LLC acquired the Property from AML, which occupied
100% of the Property, 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. AML has a right of first offer to purchase the Property from the
Company in the event the Company determines to sell the Property. 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.
The Company's tax basis in the Property for federal income tax purposes as
of March 31, 1997 was approximately $27.9 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 three months ended March
31, 1997, the estimated average depreciation rate for the Property under the
modified accelerated cost recovery system was 2.5%. The 1996 realty taxes on
the Property were assessed at an effective annual rate of approximately 1.2%.
Such taxes on the Property for the 12 month period ending June 30, 1997
totaled approximately $155,600. 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.
COMPETITION
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. However, various entities,
including insurance companies, pension and investment funds, partnerships,
developers, investment companies and other REITs invest in Life Science
Facilities and therefore compete for investment opportunities with the
Company. Many of these entities have substantially greater financial resources
than the Company and
67
<PAGE>
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. Although 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,
in the future, competition from these entities may reduce the number of
suitable investment opportunities offered to the Company or increase the
bargaining power of property owners seeking to sell. See "Target Markets" for
a more detailed description of market conditions affecting competition for
tenants, including occupancy and rental rates, in each of the Company's
primary markets.
INSURANCE
The Company carries comprehensive liability, fire, extended coverage and
rental loss insurance with respect to the Properties, with policy
specifications, insured limits and deductibles that the Company believes are
consistent with those customarily carried for similar properties. The Company
has also obtained environmental remediation insurance for the Properties. The
insurance, subject to certain exclusions and deductibles, covers the cost to
remediate environmental damage caused by unintentional future spills or the
historic presence of previously undiscovered hazardous substances. The Company
intends to carry similar insurance with respect to future acquisitions as
appropriate. In addition, the Company requires its tenants to maintain
comprehensive insurance, including liability and casualty insurance, that is
customarily obtained for similar properties. There are, however, certain types
of losses that are not generally insured because they are either uninsurable
or not economically insurable. In addition, certain disaster-type insurance
(covering catastrophic events, such as earthquakes) may not be available or
may only be available at rates that, in the opinion of management of the
Company, are prohibitive. Many of the Properties are located in the vicinity
of potentially active earthquake faults. The Company has obtained earthquake
insurance for all of the Properties. Should an uninsured disaster or a loss in
excess of insured limits occur, including a loss resulting from earthquake or
other seismic activity, the Company could lose its capital invested in the
affected properties, as well as the anticipated future revenues from such
properties, and would continue to be obligated on any mortgage indebtedness or
other obligations related to the properties. Any such loss could adversely
affect the Company and its ability to make distributions to stockholders. See
"Risk Factors--Uninsured Loss." Management believes that the Properties are
currently adequately insured.
ENVIRONMENTAL MATTERS
Under various federal, state and local environmental laws and regulations, a
current or previous owner or operator of real estate, as well as certain other
parties, may be required to investigate and remediate the effects of hazardous
or toxic substances or petroleum product releases on, under, in or from such
property, and may be held liable to a governmental entity or to third parties
for investigation and cleanup costs and certain damages resulting from such
releases. Such laws and regulations typically impose responsibility and
liability without regard to whether such person knew of or caused the
releases, and the liability under such laws and regulations has been
interpreted to be joint and several, unless the harm is divisible and there is
a reasonable basis for allocation of responsibility. The cost of investigating
and remediating such contamination may be substantial, and the presence of
such contamination, or the failure to properly remediate it, may adversely
affect the owner's ability to sell or rent such property or to borrow using
such property as collateral. In addition, the owner of a site may be subject
to governmental fines and common law claims by third parties seeking to
recover damages and costs resulting from such contamination.
Certain other federal, state and local laws and regulations govern the
management and disposal of ACMs. Such laws and regulations may impose
liability for the release of ACMs and may provide for third parties to seek
recovery from owners or operators of such property for personal injury
associated with ACMs. In connection with the ownership and operation of its
properties, the Company may be potentially liable for such costs. ACMs have
been detected at certain of the Properties, but are not expected to result in
material environmental costs or liabilities to the Company.
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Federal, state and local laws and regulations also require the removal or
upgrading of certain underground storage tanks and regulate the discharge of
storm water, wastewater and any water pollutants, the emission of air
pollutants, the generation, management and disposal of hazardous or toxic
chemicals, substances or wastes, and workplace health and safety. Life Science
Industry tenants, including certain of the Company's tenants, engage in
various research and development activities involving the controlled use of
hazardous materials, chemicals, biological and radioactive compounds. Although
the Company believes that the tenants' activities involving such materials
comply in all material respects with applicable laws and regulations, the risk
of contamination or injury from these materials cannot be completely
eliminated. In the event of such contamination or injury, the Company could be
held liable for any damages that result, and any such liability could exceed
the Company's resources and its environmental remediation coverage. See "Risk
Factors--Lack of Industry Diversification; Reliance on Life Science Industry
Tenants."
The Company's leases generally provide that (i) the tenant is responsible
for all environmental liabilities relating to the tenant's operations, (ii)
the Company is indemnified for such liabilities and (iii) the tenant must
comply with all environmental laws and regulations. Such a contractual
arrangement, however, does not eliminate the Company's statutory liability or
preclude claims against the Company by governmental authorities or persons who
are not parties to such an arrangement. Noncompliance with environmental or
health and safety requirements may also result in the need to cease or alter
operations at a property, which could affect the financial health of a tenant
and its ability to make lease payments. In addition, if there is a violation
of such a requirement in connection with a tenant's operations, it is possible
that the Company, as the owner of the property, could be held accountable by
governmental authorities for such violation and could be required to correct
the violation and pay related fines.
All of the Properties have been, and it is contemplated that all future
acquisitions will be, subjected to a Phase I or similar environmental
assessment (which generally includes a site inspection, interviews and a
records review, but no subsurface sampling). These assessments and certain
follow-up investigations (including, as appropriate, asbestos, radon and lead
surveys, additional public records review, subsurface sampling and other
testing) of the Properties have not revealed any environmental liability that
the Company believes would have a material adverse effect on the Company's
business or results of operations. Nevertheless, it is possible that the
assessments on the Properties have not revealed, or that the assessments on
future acquisitions will not reveal, all environmental liabilities and that
there may be material environmental liabilities of which the Company is
unaware.
The Company believes that the Properties are in compliance in all material
respects with applicable environmental laws. No assurances can be given,
however, that (i) the Company will not incur material liability under current
or future environmental laws and regulations or (ii) the current environmental
condition of the Properties will not be adversely affected by tenant
operations or by environmental conditions in the vicinity of such Properties.
See "Risk Factors--Possible Environmental Liabilities."
LEGAL PROCEEDINGS
To the Company's knowledge, no litigation is pending against the Company,
other than routine actions and administrative proceedings, substantially all
of which are expected to be covered by liability insurance or which, in the
aggregate, are not expected to have a material adverse effect on the financial
condition, results of operations or cash flows of the Company.
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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
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duration of its operations from September 1992 through January 1994 at a
nominal cost. Messrs. Sudarsky, Marcus and Gold, are officers and directors of
both Holdings and Alexandria and are officers of QRS. Messrs. Sudarsky and
Marcus are also directors of QRS.
On October 27, 1994, Alexandria filed its Articles of Incorporation in the
State of Maryland. In connection with the formation of Alexandria, and as
required by the Company's working capital lender, Holdings contributed
substantially all of its assets and liabilities (other than certain
outstanding unsecured notes) to Alexandria in exchange for all of the issued
and outstanding shares of Common Stock. On September 6, 1996, as required in
connection with the PaineWebber Facility, QRS filed its Articles of
Incorporation in the State of Maryland. In connection with the formation of
QRS, Alexandria contributed 1413 Research Boulevard in Rockville, Maryland to
QRS in exchange for all of the issued and outstanding shares of common stock
of QRS.
In connection with the refinancing of existing mortgage debt on 1431 Harbor
Bay Parkway, prior to consummation of the Offering the Company will form GSA-
QRS, a special-purpose entity, of which Alexandria will hold a 99% non-
managing interest and QRS will hold a 1% managing interest. In connection with
such formation, 1431 Harbor Bay Parkway 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. In connection
with negotiations with AEW to facilitate the consummation of the Offering,
including AEW's election to convert all of its shares of Series V Preferred
Stock, the Company agreed to increase the number of shares of Common Stock
that AEW will receive upon conversion by approximately 2.4%. As a result, upon
conversion, 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. Reflecting AEW's
decision to convert the Series V Preferred Stock to Common Stock, the accreted
amount outstanding of the Series V Preferred Stock of $25,929,000 was
reclassified to par value of Common Stock ($16,000) and additional paid in
capital ($25,913,000) in the unaudited pro forma condensed consolidated
balance sheet as of March 31, 1997. In addition, AEW will receive its regular
quarterly dividend, pro rated from April 1, 1997 to the date of conversion
(approximately $398,000 in the aggregate).
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Purchase of the Acquisition LLC. In connection with seeking financing for
the acquisition of the Acquisition LLC Properties, the Company negotiated with
several third party lenders, including PaineWebber. Based on the financing
proposals presented by the various lenders, the Company determined that the
financing arrangement presented by PaineWebber was the most favorable
available to the Company. 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. The LLC Agreement requires that
the Company acquire the membership interests in the Acquisition LLC upon the
earlier to occur of September 30, 1998, the Offering, or certain events of
default specified therein. None of the Continuing Investors has any direct or
indirect interest in the Acquisition LLC or the Properties owned thereby.
Concurrently with the Offering, the Company will acquire 100% of the
membership interests in the Acquisition LLC from the PW Affiliates. 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. Pursuant to the LLC Agreement, (i)
the Company agreed to pay the PW Affiliates an acquisition fee and (ii) the
purchase price for the Acquisition LLC equals the original purchase price of
the Acquisition LLC Properties (as adjusted for the acquisition fee and cash
flow from the Acquisition LLC Properties) plus a percentage of the excess of
(x) the aggregate fair market value (as defined) of the Acquisition LLC
Properties on the date of purchase of the Acquisition LLC by the Company over
(y) the adjusted purchase price. To facilitate consummation of the Offering,
at the request of the Company, the PW Affiliates have agreed to amend the LLC
Agreement to reduce the purchase price by approximately $766,000. The Company
currently anticipates that the purchase price for the membership interests in
the Acquisition LLC (after giving effect to such reduction) will be
approximately $60.6 million. The Company will treat the difference ($8.9
million) between the purchase price for the membership interests in the
Acquisition LLC and the original purchase price of the Acquisition LLC
Properties paid by the Acquisition LLC ($51.7 million) as a financing cost
that will be recognized when the transaction is completed.
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 pay the
purchase price of the membership interests in the Acquisition LLC. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The LLC Agreement provides that the Acquisition LLC will not engage in any
business other than the acquisition and operation of the Acquisition LLC
Properties and that if PaineWebber had not been selected to act as lead
managing underwriter for the Offering on the terms set forth in the
PaineWebber Facility, the purchase price required to be paid by the Company
for the membership interests in the Acquisition LLC would have been increased
in an amount equal to 2% of the capital contributions previously made by the
PW Affiliates to the Acquisition LLC. See "Underwriting."
NEW MORTGAGE DEBT
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,
each expected to be incurred upon consummation of, or shortly following, the
Offering. 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.
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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 of their
investment in Alexandria 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 an aggregate of
152,615 shares of Common Stock. Officers, directors and certain employees of
the Company will also receive options to purchase 57,000 shares of Common
Stock under the 1996 Plan in substitution for previously granted Holdings
Stock Options (such stock options will be exercised in connection with the
Offering at a nominal exercise price, and thereafter no further stock options
will be issued under the 1996 Plan). In addition to their respective ownership
interests in Holdings, upon consummation of the Offering and the Formation
Transactions, officers, directors and certain employees of the Company will
directly own 209,615 shares of Common Stock, representing approximately 2.0%
of the outstanding shares of Common Stock.
The following table lists the number of shares to be issued to officers and
directors of the Company and the number of shares issuable upon exercise of
stock options under the 1996 Plan.
<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 officers,
directors and employees of the Company options 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, as follows: Jerry M. Sudarsky,
10,000; Joel S. Marcus, 140,000; Alan D. Gold, 100,000; Peter J. Nelson,
60,000; Gary A. Kreitzer, 60,000; Steven A. Stone, 60,000; Vincent R. Ciruzzi,
45,000; Joseph Elmaleh, 5,000; David Petrone, 5,000; Viren Mehta, 5,000;
Anthony Solomon, 5,000; and all other employees, 105,000. Options granted to
officers, employee directors and other employees 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. See "Management--Benefit Plans."
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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 loans from certain
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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<PAGE>
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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<PAGE>
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. Mr. Petrone
will resign from the Audit Committee immediately prior to consummation of the
Offering and, upon such resignation, Messrs. Mehta and Solomon will be
appointed to the Audit Committee.
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 and, upon such resignation, Mr. Mehta will be
appointed to the Compensation Committee.
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, Mr. Marcus will receive 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, employee 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"), are entitled to receive 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
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<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). In connection with the
Offering, officers, directors and certain employees of the Company will
receive substitute stock options under the 1996 Plan. 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.
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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
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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 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 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 permits a corporation to advance reasonable expenses to a director or
officer upon the corporation's receipt of (i) 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 corporation as authorized by the
Bylaws and (ii) a written statement by or on his behalf to repay the amount
paid or reimbursed by the corporation 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 loans from certain 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 9,465 shares of Holdings common stock
(representing approximately 9.0% of the outstanding shares of Holdings Common
Stock), 13,333 shares of Holdings Series A Preferred Stock and 1,042 shares of
Holdings Series B Preferred Stock. In addition, such partner 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. In addition, AEW will receive its regular quarterly dividend,
pro rated from April 1, 1997 to the date of conversion (approximately $398,000
in the aggregate). See "Formation and Structure." Prior to consummation of the
Offering, Holdings, as the holder of the outstanding shares of Common Stock,
will also receive a quarterly dividend, pro rated from April 1, 1997 to such
date (approximately $434,000 in the aggregate).
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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 receive options to purchase 57,000 shares of Common Stock
pursuant to the Company's existing stock option plan in substitution for
previously granted Holdings Stock Options (such stock options will be
exercised in connection with the Offering at a nominal exercise price and
thereafter no further stock options will be issued under this plan). In
connection with the Offering, the Company will grant options to officers,
directors and 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 seeking financing for the acquisition of the Acquisition
LLC Properties, the Company negotiated with several third party lenders,
including PaineWebber. Based on the financing proposals presented by the
various lenders, the Company determined that the financing arrangement
presented by PaineWebber was the most favorable available to the Company. The
parties entered into the LLC Agreement, which required that the Company
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, and the purchase contracts related to the Acquisition LLC
Properties were assigned to the Acquisition LLC. Concurrently with the
Offering, the Company will acquire 100% of the membership interests in the
Acquisition LLC from the PW Affiliates. Pursuant to the LLC Agreement, (i) the
Company agreed to pay the PW Affiliates an acquisition fee and (ii) the
purchase price for the Acquisition LLC equals the original purchase price of
the Acquisition LLC Properties (as adjusted for the acquisition fee and cash
flow from the Acquisition LLC Properties) plus a percentage of the excess of
(x) the aggregate fair market value (as defined) of the Acquisition LLC
Properties on the date of purchase of the Acquisition LLC by the Company over
(y) 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). To facilitate
consummation of the Offering, at the request of the Company, the PW Affiliates
have agreed to amend the LLC Agreement to reduce the purchase price by
approximately $766,000. The Company currently anticipates that the purchase
price for the Acquisition LLC (after giving effect to such reduction) will be
approximately $60.6 million. The Company will treat the difference ($8.9
million) between the purchase price for the membership interests in the
Acquisition LLC and the original purchase price of the Acquisition LLC
Properties paid by the Acquisition LLC ($51.7 million) as a financing cost
that will be recognized when the transaction is completed. In addition,
PaineWebber, lead managing Underwriter of the Offering, and certain of its
affiliates, will receive certain other benefits in connection with the
Offering. See "Use of Proceeds," "Formation and Structure" and "Underwriting."
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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 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 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).......................... 1,849,223 93.6 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(6)............................. 4,893 * *
David M. Petrone........................... 4,893 * *
Anthony M. Solomon......................... 4,893 * *
Holdings(7)................................ 1,765,923 89.4 17.0
AEW Partners II, L.P.
225 Franklin Street
Boston, Massachusetts(8).................. -- * 16.0
Executive officers and directors as a group
(10 persons)(9)........................... 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 shares held by the Jerry M. and Mildred Sudarsky 1979 Revocable
Trust, of which Mr. Sudarsky is the trustee, and 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 shares held by the Joel and Barbara Marcus Family Trust, of which
Mr. Marcus is the trustee, and 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) Includes shares held by Mehta and Isaly, of which Mr. Mehta is a partner.
(7) 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 in 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.
(8) 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.
(9) See notes (2) through (7) 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) Includes shares held by the Jerry M. and Mildred Sudarsky 1979 Revocable
Trust, of which Mr. Sudarsky is the Trustee. 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) Includes shares held by the Joel and Barbara Marcus Family Trust, of which
Mr. Marcus is the Trustee. 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. A plurality of all the votes cast at a meeting at
which a quorum is present is sufficient to elect a director. 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 without 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, as defined in the Charter.
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. Notwithstanding the receipt of any such ruling or
opinion, the Board of Directors may impose such conditions or restrictions as
it deems appropriate in connection with granting such waiver. 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
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<PAGE>
of stock of the Company being owned by fewer than 100 persons. Any transfer in
violation of any of such restrictions is void ab initio. Any person who
acquires or attempts to acquire beneficial or constructive ownership of shares
of stock of the Company in violation of the foregoing restrictions on
transferability and ownership is required to give notice immediately to the
Company and provide the Company with such other information as the Company may
request in order to determine the effect of such transfer on the Company's
status as a REIT. The foregoing restrictions on transferability and ownership
will not apply if the Board of Directors determines that it is no longer in
the best interests of the Company to attempt to qualify, or to continue to
qualify, as a REIT.
If any transfer of shares of stock of the Company or other event occurs
that, if effective, would result in any person beneficially or constructively
owning shares of stock of the Company in excess or in violation of the above
transfer or ownership limitations (a "Prohibited Owner"), then that number of
shares of stock of the Company the beneficial or constructive ownership of
which otherwise would cause such person to violate such limitations (rounded
to the nearest whole share) shall be automatically exchanged for an equal
number of shares of excess stock (the "Excess Stock") and such shares of
Excess Stock shall be automatically transferred to a trust (the "Trust") for
the exclusive benefit of one or more charitable beneficiaries (the "Charitable
Beneficiary"), and the Prohibited Owner shall generally not acquire any rights
in such shares. Such automatic exchange shall be deemed to be effective as of
the close of business on the business day prior to the date of such violative
transfer. Shares of Excess Stock held in the Trust shall be issued and
outstanding shares of stock of the Company. The Prohibited Owner shall not
benefit economically from ownership of any shares of Excess Stock held in the
Trust, shall have no rights to distributions and shall not possess any rights
to vote or other rights attributable to the shares of Excess Stock held in the
Trust. The trustee of the Trust (the "Trustee") shall have all voting rights
and rights to dividends or other distributions with respect to shares of stock
held in the Trust, which rights shall be exercised for the exclusive benefit
of the Charitable Beneficiary. Any dividend or other distribution paid prior
to the discovery by the Company that shares of stock have been transferred to
the Trustee shall be paid by the recipient of such dividend or distribution to
the Company upon demand, or, at the Company's sole election, shall be offset
against any future dividends or distributions payable to the purported
transferee or holder, and any dividend or distribution authorized but unpaid
shall be rescinded as void ab initio with respect to such shares of stock and
promptly thereafter paid over to the Trustee with respect to such shares of
Excess Stock, as trustee of the Trust for the exclusive benefit of the
Charitable Beneficiary. The Prohibited Owner shall have no voting rights with
respect to shares of Excess Stock held in the Trust and, subject to Maryland
law, effective as of the date that such shares of stock have been transferred
to the Trustee, the Trustee shall have the authority (at the Trustee's sole
discretion) (i) to rescind as void any vote cast by a Prohibited Owner prior
to the discovery by the Company that such shares have been transferred to the
Trustee and (ii) to recast such vote in accordance with the desires of the
Trustee acting for the benefit of the Charitable Beneficiary. However, if the
Company has already taken irreversible corporate action, then the Trustee
shall not have the authority to rescind and recast such vote.
Within 180 days after the date of the event that resulted in shares of
Excess Stock of the Company being transferred to the Trust (or as soon as
possible thereafter if the Trustee did not learn of such event within such
period), the Trustee shall sell the shares of stock held in the Trust to a
person, designated by the Trustee, whose ownership of the shares will not
violate the ownership limitations set forth in the Charter. Upon such sale,
the interest of the Charitable Beneficiary in the shares sold shall terminate
and such shares of Excess Stock shall be automatically exchanged for an equal
number of shares of the same class or series of stock that originally were
exchanged for the Excess Stock. The Trustee shall distribute to the Prohibited
Owner, as appropriate (i) the price paid by the Prohibited Owner for the
shares, (ii) if the Prohibited Owner did not give value for the shares in
connection with the event causing the shares to be held in the Trust (e.g., a
gift, devise or other such transaction), the Market Price (as defined in the
Charter) of such shares on the day of the event causing the shares to be held
in the Trust, or (iii) if the exchange for Excess Stock did not arise as a
result of a purported transfer, the Market Price of such Shares on the day of
the other event causing the Shares to be held in the Trust. If such shares are
sold by a Prohibited Owner, then to the extent that the Prohibited Owner
received an amount for such shares that exceeds the amount that such
Prohibited Owner was entitled to receive pursuant to the aforementioned
requirement, such excess shall be paid to the Trustee.
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All certificates representing shares of Common Stock and Preferred Stock
will bear a legend referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as required by the
Code or the regulations promulgated thereunder) of all classes or series of
the Company's stock, including shares of Common Stock, within 30 days after
the end of each taxable year, is required to give written notice to the
Company stating the name and address of such owner, the number of shares of
each class and series of stock of the Company which the owner beneficially
owns and a description of the manner in which such shares are held. Each such
owner shall provide to the Company such additional information as the Company
may reasonably request in order to determine the effect, if any, of such
beneficial ownership on the Company's status as a REIT. In addition, each
stockholder shall upon demand be required to provide to the Company such
information as the Company may reasonably request in order to determine the
Company's status as a REIT, to comply with the requirements of any taxing
authority or governmental authority or to determine such compliance, or to
comply with the REIT provisions of the Code.
These ownership limits could delay, defer or prevent a transaction or a
change in control of the Company that might involve a premium price for the
Common Stock or otherwise be in the best interest of the stockholders. See
"Risk Factors--Anti-takeover Effect of Ownership Limit and Power to Issue
Additional Stock."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF THE COMPANY'S CHARTER AND BYLAWS
The following summary of certain provisions of Maryland law and of the
Charter and Bylaws of the Company does not purport to be complete and is
subject to and qualified in its entirety by reference to Maryland law and the
Charter and Bylaws of the Company, copies of which are exhibits to the
Registration Statement. See "Additional Information."
BOARD OF DIRECTORS
The Company's Bylaws provide that the number of directors of the Company may
be established by the Board of Directors, but may not be fewer than the
minimum number required by the MGCL nor more than 15. Any vacancy will be
filled, at any regular meeting or at any special meeting called for that
purpose, by a majority of the remaining directors, except that a vacancy
resulting from an increase in the number of directors must be filled by a
majority of the entire Board of Directors. All directors are elected to hold
office until the next annual meeting of stockholders of the Company and until
their successors are duly elected and qualify. Pursuant to a contractual
arrangement with the Company, AEW has the right to include two nominees on the
ballot for the election of directors of the Company, and one nominee on the
ballot for the election of directors of QRS, so long as AEW owns Common Stock
representing more than 15% of the voting securities of the Company, and the
right to include one nominee on the ballot for the election of directors of
the Company so long as AEW owns Common Stock representing more than 7% of such
securities. Holdings has agreed to vote its shares of Common Stock for such
nominees included on the ballot for the election of directors of the Company,
and the Company has agreed to take all actions necessary to cause the election
of the nominees at QRS. No directors currently serve on the board of directors
of the Company or QRS pursuant to such arrangement, although AEW may, at its
discretion, exercise its right to include nominees on the ballot in the
future. If, at any time, AEW's ownership of Common Stock represents less than
15% of the voting securities of the Company, within 10 days of such decrease
in ownership, AEW will cause one director elected or nominated by it to resign
from the Board of Directors and all committees thereof, and from the board of
directors of QRS and all committees thereof.
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Upon AEW's ownership of Common Stock decreasing to less than 7% of the
outstanding voting securities of the Company, within 10 days of such decrease
in ownership, AEW shall cause all directors nominated by it pursuant to this
arrangement to resign from the Board of Directors and all committees thereof.
Upon consummation of the Offering and the Formation Transactions, AEW will own
16.0% of the outstanding voting securities of the Company. See "Management--
Election of Directors and Director Compensation."
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting
power of the corporation's shares or an affiliate of the corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation (an "Interested Stockholder") or an affiliate
of such an Interested Stockholder are prohibited for five years after the most
recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative
vote of at least (i) 80% of the votes entitled to be cast by holders of
outstanding shares of voting stock of the corporation and (ii) two thirds of
the votes entitled to be cast by holders of voting stock of the corporation
other than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares. These provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. Pursuant to an act of the Board of Directors, any
business combination between the Company and AEW is exempt from the above-
described provisions of the MGCL. 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 and that such resolution is irrevocable unless
revocation, in whole or in part, is approved by the holders of a majority of
the outstanding shares of Common Stock, but revocation will not affect any
business combination consummated, or the subject of any then existing
agreement entered into, prior to the revocation. As a result of the foregoing,
AEW and any person who becomes an Interested Stockholder following the
Offering 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 voting requirements and other provisions of the MGCL.
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.
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If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute,
then, subject to certain conditions and limitations, the corporation may
redeem any or all of the control shares (except those for which voting rights
have previously been approved) for fair value determined, without regard to
the absence of voting rights for the control shares, as of the date of the
last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a meeting of the
stockholders and the acquiror becomes entitled to vote a majority of the
shares entitled to vote, all other stockholders may exercise appraisal rights.
The fair value of the shares as determined for purposes of such appraisal
rights may not be less than the highest price per share paid by the acquiror
in the control share acquisition.
The control share acquisition statute does not apply (i) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (ii) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
The Bylaws contain a provision exempting from the control share acquisition
statute any acquisition by any person of the Company's shares of stock. The
Board of Directors has resolved that, subject to Maryland law, the provision
may not be amended or repealed without the approval of holders of at least a
majority of the outstanding shares of Common Stock. There can be no assurance,
however, that such provision will not be amended or eliminated in the future
or that such resolution is enforceable under Maryland law.
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 or at the
direction of 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 or at the direction of 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 the control share acquisition
provisions of the MGCL, in each case if such provisions ever become applicable
to the Company, 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.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon consummation of the Offering and the Formation Transactions, there will
be 10,391,848 shares of Common Stock issued and outstanding (11,404,348 if the
Underwriters' over-allotment option is exercised in full). The shares
outstanding will include 1,765,923 shares of Common Stock held by Holdings,
209,615 shares of Common Stock held directly by officers and directors of the
Company, and 1,659,239 shares of Common Stock held by AEW (collectively, the
"Restricted Shares"). In addition, the Company has reserved 900,000 shares of
Common Stock for issuance to officers, directors and certain employees of the
Company pursuant to the 1997 Stock Option Plan, of which options for 600,000
shares will be issued in connection with the Offering. All of the Shares
issued in the Offering will be freely tradeable by persons other than
Affiliates (as defined below) without registration or other restrictions under
the Securities Act, subject to limitations set forth in the Charter and, in
certain cases, to the additional contractual restrictions described below. The
Restricted Shares and shares issued upon the exercise of options (unless
issued pursuant to an effective registration statement) will be "restricted
securities" under the meaning of Rule 144 promulgated under the Securities Act
("Rule 144"), and may be sold only pursuant to an effective registration
statement under the Securities Act or an applicable exemption, including an
exemption under Rule 144, under the Securities Act.
In general, under Rule 144 as in effect as of April 29, 1997, a person (or
persons whose shares are aggregated), including an "affiliate" as that term is
defined in Rule 144 (an "Affiliate"), who has beneficially owned his or her
"restricted securities" for at least one year, is entitled to sell within any
three-month period a number of shares of Common Stock that does not exceed the
greater of 1% of the then outstanding shares of Common Stock (approximately
103,918 shares immediately after the Offering) or the average weekly trading
volume of Common Stock during the four calendar weeks preceding the date on
which notice of the sale is filed with the Commission. Sales under Rule 144
are also subject to certain restrictions on the manner of sale, notice
requirements and the availability of current public information about the
Company. If two years have elapsed since the date of acquisition of
"restricted securities" from the Company or from any Affiliate of the Company,
and the acquiror or subsequent holder thereof is deemed not to have been an
Affiliate of the Company at any time during the 90 days preceding a sale, such
person would be entitled to sell such shares of Common Stock in the public
market under Rule 144(k) without regard to the volume limitations, manner of
sale provisions, public information requirements or notice requirements.
The Company and the Continuing Investors have agreed with the Underwriters,
subject to certain limited exceptions, not to offer, sell, contract to sell,
pledge, grant any option to purchase or otherwise dispose of any shares of
Common Stock (or any securities convertible into, or exercisable, exchangeable
or redeemable for, shares of Common Stock) for a period of 360 days from the
date of this Prospectus, without the prior written consent of PaineWebber.
Management of the Company, including Messrs. Sudarsky, Marcus, Gold, Nelson,
Kreitzer, Stone and Ciruzzi, have agreed with the Underwriters, subject to
certain limited exceptions, not to offer, sell, contract to sell, pledge or
otherwise dispose of any shares of Common Stock (or any securities convertible
into, or exercisable, exchangeable or redeemable for, shares of Common Stock),
including any shares of Common Stock that any such persons may have the right
to receive by virtue of their ownership interest in Holdings, for a period of
two years from the date of this Prospectus, without the prior written consent
of PaineWebber. After such time, such shares of Common Stock may be sold in
the public market, subject to applicable securities laws restrictions or
exemptions from registration, if available. The Company has granted to AEW
certain registration rights in connection with the Restricted Shares owned by
them. AEW has the ability to "demand" that the Company under certain
circumstances and subject to certain conditions, prepare and file a shelf
registration statement within a specified time period after the Offering with
respect to the resale of shares of Common Stock issued upon conversion of the
Series V Preferred Stock. AEW also has certain rights following an initial
public offering to have shares of Common Stock registered incidentally to any
registration being conducted by the Company with respect to the Common Stock.
The Company will also grant to Holdings customary transferable registration
rights with respect to the shares of Common Stock held by it. See "Formation
and Structure--Benefits to Related Parties."
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The Company intends to issue options to purchase shares of Common Stock to
directors, officers and employees of the Company from time to time after the
Offering. See "Management--Benefits Plans." The Company expects to file a
registration statement on Form S-8 with the Commission with respect to the
shares of Common Stock issuable under stock option plans of the Company
following the Offering. Shares of Common Stock issued after the effective date
of any such registration statement on Form S-8 upon the exercise of options
granted under any such plan will be available for sale in the public market
without restriction to the extent that such shares are held by persons who are
not Affiliates of the Company.
Prior to the Offering, there has been no public market for the Common Stock.
Trading of the Common Stock on the NYSE is expected to commence immediately
following consummation of the Offering, upon official notice of issuance,
under the symbol "ARE." No prediction can be made as to the effect, if any,
that future sales of shares, or the availability of shares for future sale,
will have on the market price prevailing from time to time. Sales of
substantial amounts of Common Stock, or the perception that such sales occur,
could adversely affect prevailing market prices of the Common Stock.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding an investment in Common Stock of the Company is based on current
law, is for general information only and is not tax advice. This discussion
does not purport to deal with all aspects of taxation that may be relevant to
particular investors in light of their personal investment or tax
circumstances, or, except to the extent discussed under the headings "Taxation
of Tax-Exempt Stockholders" and "Taxation of Non-U.S. Stockholders," to
certain types of investors (including insurance companies, tax-exempt
organizations, financial institutions or broker-dealers, foreign corporations
and persons who are not citizens or residents of the U.S.) that are subject to
special treatment under the federal income tax laws. This discussion assumes
that investors will hold the Common Stock as a "capital asset" (generally,
property held for investment) under the Code.
EACH PROSPECTIVE PURCHASER SHOULD CONSULT WITH ITS TAX ADVISOR REGARDING THE
SPECIFIC TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND SALE OF THE COMMON
STOCK AND OF THE COMPANY'S ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT
TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX
CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP, SALE AND ELECTION, AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General. The REIT provisions of the Code are highly technical and complex.
The following sets forth the material aspects of the provisions of the Code
that govern the federal income tax treatment of a REIT and its stockholders.
This summary is qualified in its entirety by the applicable Code provisions,
rules and regulations promulgated thereunder, and administrative and judicial
interpretations thereof, all of which are subject to change which may apply
retroactively.
The Board of Directors intends that the Company will operate in a manner
that permits it to elect, and that it will elect, REIT status for the taxable
year ended December 31, 1996, and the Company intends to continue to operate
in such a manner. Skadden, Arps, Slate, Meagher & Flom LLP will deliver an
opinion on or before the effectiveness of the Registration Statement that,
commencing with the Company's taxable year ending December 31, 1996, the
Company was organized in conformity with the requirements for qualification as
a REIT, and its proposed method of operation, and its actual method of
operation since January 1, 1996 through the date of this Prospectus, has and
will enable it to meet the requirements for qualification and taxation as a
REIT under the Code. It must be emphasized that this opinion will be based and
conditioned upon certain assumptions and representations made by the Company
as to factual matters (including representations of the Company concerning,
among other things, its business and properties, the amount of rents
attributable to personal property and other items regarding the Company's
ability to meet the various requirements for
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qualification as a REIT). The opinion will be expressed as of its date, and
Skadden, Arps, Slate, Meagher & Flom LLP will have no obligation to advise
holders of Common Stock of any subsequent change in the matters stated,
represented or assumed or any subsequent change in the applicable law.
Moreover, such qualification and taxation as a REIT depends upon the Company
having met and continuing to meet, through actual annual operating results,
distribution levels and diversity of stock ownership, the various
qualification tests imposed under the Code as discussed below, the results of
which will not be reviewed by Skadden, Arps, Slate, Meagher & Flom LLP.
Accordingly, no assurance can be given that the actual results of the
Company's operation for any particular taxable year have satisfied or will
satisfy such requirements. See "--Failure to Qualify." An opinion of counsel
is not binding on the IRS, and no assurance can be given that the IRS will not
challenge the Company's eligibility for taxation as a REIT.
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income tax on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from investment in a corporation. However, the Company will be subject
to federal income tax as follows: First, the Company will be taxed at regular
corporate rates on any undistributed REIT taxable income, including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has net income from prohibited transactions
(which are, in general, certain sales or other dispositions of property held
primarily for sale to customers in the ordinary course of business other than
foreclosure property), such income will be subject to a 100% tax. Fourth, if
the Company should fail to satisfy the 75% gross income test or the 95% gross
income test (as discussed below), but has nonetheless maintained its
qualification as a REIT because certain other requirements have been met, it
will be subject to a 100% tax on an amount equal to (a) the gross income
attributable to the greater of the amount by which the Company fails the 75%
or 95% test multiplied by (b) a fraction intended to reflect the Company's
profitability. Fifth, if the Company should fail to distribute during each
calendar year at least the sum of (i) 85% of its REIT ordinary income for such
year, (ii) 95% of its REIT capital gain net income for such year, and
(iii) any undistributed taxable income from prior periods, the Company would
be subjected to a 4% excise tax on the excess of such required distribution
over the amounts actually distributed during such year. Sixth, if during the
10-year period (the "Recognition Period") beginning on the first day on the
first taxable year for which the Company qualified as a REIT, the Company
recognizes gain on the disposition of any asset held by the Company as of the
beginning of such Recognition Period, then, to the extent of the excess of (a)
the fair market value of such asset as of the beginning of such Recognition
Period over (b) the Company's adjusted basis in such asset as of the beginning
of such Recognition Period (the "Built-in Gain"), such gain will be subject to
tax at the highest regular corporate tax rate pursuant to IRS regulations that
have not yet been promulgated. Seventh, if the Company acquires any asset from
a C corporation (i.e., generally a corporation subject to full corporate level
tax) in a transaction in which the basis of the asset in the Company's hands
is determined by reference to the basis of the asset (or any other property)
in the hands of the C corporation, and the Company recognizes gain on the
disposition of such asset during the Recognition Period beginning on the date
on which such asset was acquired by the Company, then, to the extent of the
Built-in Gain, such gain will be subject to tax at the highest regular
corporate rate pursuant to IRS regulations that have not yet been promulgated.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association (1) that is managed by one or more trustees or directors;
(2) the beneficial ownership of which is evidenced by transferable shares, or
by transferable certificates of beneficial interest; (3) that would be taxable
as a domestic corporation, but for the special Code provisions applicable to
REITs; (4) that is neither a financial institution nor an insurance company
subject to certain provisions of the Code; (5) the beneficial ownership of
which is held by 100 or more persons; (6) in which, during the last half of
each taxable year, not more than 50% in value of the outstanding stock is
owned, directly or indirectly, by five or fewer individuals (as defined in the
Code to include certain entities); and (7) that meets certain other tests
described below (including with respect to the nature of its income and
assets). The Code provides that conditions (1) through (4) must be met during
the entire taxable year, and that condition (5) must be met during at least
335 days of a taxable year of 12 months, or during a proportionate part of a
taxable year of less than 12 months.
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The Company believes that it has already issued sufficient shares to allow
it to satisfy conditions (5) and (6) above. In order to comply with the share
ownership tests described in conditions (5) and (6) above, the Company's
Charter provides certain restrictions on the transfer of its capital stock to
prevent concentration of stock ownership. These restrictions may not ensure
that, in all cases, the Company will be able to satisfy the share ownership
tests set forth above. If the Company fails to satisfy such requirements, the
Company's status as a REIT will terminate.
To monitor the Company's compliance with such share ownership requirements,
the Company is required to maintain records regarding the actual ownership of
its shares. To do so, the Company must demand written statements each year
from the record holders of certain percentages of its stock in which the
record holders are to disclose the actual owners of the shares (i.e., the
persons required to include in gross income the REIT dividends). A list of
those persons failing or refusing to comply with this demand must be
maintained as part of the Company's records. A stockholder who fails or
refuses to comply with the demand must submit a statement with its tax return
disclosing the actual ownership of the shares and certain other information.
See "Description of Capital Stock--Restrictions on Transfer."
In the case of a REIT that is a partner in a partnership, regulations
provide that the REIT is deemed to own its proportionate share of the
partnership's assets and to earn its proportionate share of the partnership's
income. In addition, the assets and gross income of the partnership retain the
same character in the hands of the REIT for purposes of the gross income and
asset tests applicable to REITs as described below. Thus, the Company's
proportionate share of the assets, liabilities and items of income of any
partnership will be treated as assets, liabilities and items of income of the
Company for purposes of applying the REIT requirements described below. There
can be no assurance, however, that any partnerships will be organized or
operated in a manner that will enable the Company to continue to satisfy the
REIT requirements of the Code.
Income Tests. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from "prohibited
transactions," i.e., certain sales of property held primarily for sale to
customers in the ordinary course of business) for each taxable year must be
derived directly or indirectly from investments relating to real property or
mortgages on real property (including "rents from real property" and, in
certain circumstances, interest) or from certain types of temporary
investments. Second, at least 95% of the Company's gross income (excluding
gross income from prohibited transactions) for each taxable year must be
derived from such real property investments, and from other dividends,
interest and gain from the sale or disposition of stock or securities (or from
any combination of the foregoing). Third, short-term gain from the sale or
other disposition of stock or securities, gain from certain sales of property
held primarily for sale, and gain on the sale or other disposition of real
property held for less than four years (apart from involuntary conversions and
sales of foreclosure property) must, in the aggregate, represent less than 30%
of the Company's gross income for each taxable year.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income tests described above only if several conditions
are met, including the following. First, if rent attributable to personal
property, leased in connection with real property, is greater than 15% of the
total rent received under any particular lease, then all of the rent
attributable to such personal property will not qualify as rents from real
property. The determination of whether an item of property constitutes real
property or personal property under the REIT provisions of the Code is subject
to both legal and factual considerations and, as such, is subject to differing
interpretations. Counsel has advised the Company with respect to the legal
considerations underlying such determination. After consulting with counsel
and considering such advice, the Company has reviewed its properties and has
determined that rents attributable to personal property do not exceed 15% of
the total rent with respect to any particular lease. Due to the 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
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Company's taxable income, the Company may fail to qualify as a REIT. See "Risk
Factors--Adverse Consequences of Failure to Qualify as a REIT."
In addition, rents received by the Company will not qualify as rents from
real property of the Company if an owner of 10% or more of the Company
directly or constructively owns 10% or more in such tenant (a "Related
Tenant"). Moreover, an amount received or accrued will not qualify as rents
from real property (or as interest income) if it is based in whole or part of
the income or profits of any person. Rent or interest will not be
disqualified, however, solely by reason of being based on a fixed percentage
or percentages of receipts or sales. Finally, for rents received to qualify as
rents from real property, the REIT generally must not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an "independent contractor" from which the REIT derives no
revenue. However, the Company (or its affiliates) is permitted to, and does
directly perform services that are "usually or customarily rendered" in
connection with the rental of space for occupancy only and are not otherwise
considered rendered to the occupant of the property. The Company regularly
attempts to monitor such requirements. There can be no assurance, however,
that the Company will not realize income from a Related Tenant that does not
qualify as "rents from real property."
The Company will provide certain services with respect to the Properties and
any newly acquired Properties. The Company believes that the services provided
by the Company with respect to the Properties are usually and customarily
rendered in connection with the rental of space occupancy only, and therefore
the provision of such services will not cause the rents received with respect
to the Properties to fail to qualify as rents from real property for purposes
of the 75% and the 95% gross income tests.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests (though not the 30% gross income test) for any taxable year, it may
nevertheless qualify as a REIT for such year if it is entitled to relief under
certain provisions of the Code. These relief provisions will be generally
available if the Company's failure" to meet such tests was due to reasonable
cause and not due to willful neglect, the Company attaches a schedule of the
sources of its income to its return, and any incorrect information on the
schedule was not due to fraud with intent to evade tax. It is not possible,
however, to state whether in all circumstances the Company would be entitled
to the benefit of these relief provisions. If these relief provisions are
inapplicable to a particular set of circumstances involving the Company, the
Company will not qualify as a REIT. As discussed above in "--General," even
where these relief provisions apply, a tax is imposed with respect to the
excess net income.
Asset Tests. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets must be represented by
real estate assets, stock or debt instruments held for not more than one year
purchased with the proceeds of a stock offering or long-term (at least five
years) debt offering of the Company, cash, cash items and U.S. government
securities. Second, not more than 25% of the Company's total assets may be
represented by securities other than those in the 75% asset class. Third, of
the investments included in the 25% asset class, the value of any one issuer's
securities owned by the Company may not exceed 5% of the value of the
Company's total assets, and the Company may not own more than 10% of any one
issuer's outstanding voting securities.
The Company expects that substantially all of its assets will be real estate
assets. In addition, the Company does not expect that the value of any
security of any one entity would ever exceed 5% of the Company's total assets,
and the Company does not expect to own more than 10% of any one issuer's
voting securities.
The Company intends to monitor closely the purchase, holding and disposition
of its assets in order to comply with the REIT asset tests. In particular, the
Company intends to limit and diversify its ownership of any assets not
qualifying as real estate assets to less than 25% of the value of the
Company's assets and to less than (i) 5%, by value, of any single issuer and
(ii) 10% of the outstanding voting securities of any one issuer. If it is
anticipated that these limits would be exceeded, the Company intends to take
appropriate measures, including the disposition of non-qualifying assets, to
avoid exceeding such limits.
QRS is a wholly owned corporate subsidiary of the Company organized and
operated as a "qualified REIT subsidiary" within the meaning of the Code.
Qualified REIT subsidiaries are not treated as separate entities from
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their parent REIT for federal income tax purposes. Instead, all assets,
liabilities and items of income, deduction and credit of a qualified REIT
subsidiary are treated as assets, liabilities and items of the Company. A
qualified REIT subsidiary therefore will not be subject to federal corporate
income taxation, although it may be subject to state or local taxation. In
addition, the Company's ownership of the voting stock of a qualified REIT
subsidiary does not violate the general restriction against ownership of more
than 10% of the voting securities of any issuer.
Annual Distribution Requirements. The Company, in order to qualify as a
REIT, is required to distribute dividends (other than capital gain dividends)
to its stockholders in an amount at least equal to (i) the sum of (a) 95% of
the Company's "REIT taxable income" (computed without regard to the dividends
paid deduction and the Company's net capital gain) and (b) 95% of the net
income (after tax), if any, from foreclosure property, minus (ii) the sum of
certain items of noncash income. Such distributions must be paid in the
taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its tax return for such year and if
paid with or before the first regular dividend payment after such declaration.
To the extent that the Company does not distribute all of its net capital gain
or distributes at least 95%, but less than 100%, of its "REIT taxable income,"
as adjusted, it will be subject to tax thereon at the capital gains or
ordinary corporate tax rates, as the case may be. Furthermore, if the Company
should fail to distribute during each calendar year at least the sum of (1)
85% of its REIT ordinary income for such year, (2) 95% of its REIT capital
gain income for such year, and (3) any undistributed taxable income from prior
periods, the Company would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. The Company
believes that it has made, and intends to make, timely distributions
sufficient to satisfy this annual distribution requirement.
It is possible that the Company, from time to time, may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement due to
timing differences between (i) the actual receipt of income and actual payment
of deductible expenses and (ii) the inclusion of such income and deduction of
such expenses in arriving at taxable income of the Company. In the event that
such timing differences occur, in order to meet the 95% distribution
requirement, the Company may find it necessary to arrange for short-term, or
possibly long-term, borrowings or to pay dividends in the form of taxable
distributions of property.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends"
to stockholders in a later year, which may be included in the Company's
deduction for dividends paid for the earlier year. Thus, the Company may be
able to avoid being taxed on amounts distributed as deficiency dividends;
however, the Company will be required to pay interest based on the amount of
any deduction taken for deficiency dividends.
Absence of Earnings and Profits. The Company, in order to qualify as a REIT,
must not have accumulated earnings and profits attributable to any non-REIT
years. A REIT has until the close of its first taxable year in which it has
non-REIT earnings and profits to distribute any such accumulated earnings and
profits. Unless the "deficiency dividend" procedures described above apply and
the Company complies with those procedures, failure to distribute such
accumulated earnings and profits would result in the disqualification of the
Company as a REIT. The Company believes that the Company had no accumulated
earnings and profits as of December 31, 1995. The determination of accumulated
earnings and profits, however, depends upon a number of factual matters
related to the activities and operations of the Company during its entire
corporate existence and is subject to review and challenge by the IRS. There
can be no assurance that the IRS will not examine the tax returns of the
Company for prior years and propose adjustments to increase its taxable
income. In this regard, the IRS can consider all taxable years of the Company
as open for review for purposes of determining the amount of such earnings and
profits.
Failure to Qualify. If the Company fails to qualify for taxation as a REIT
in any taxable year, and certain relief provisions do not apply, the Company
will be subject to tax (including any applicable alternative minimum tax) on
its taxable income at regular corporate rates. Distributions to stockholders
in any year in which the Company fails to qualify will not be deductible by
the Company nor will they be required to be made under the Code. In such
event, to the extent of current and accumulated earnings and profits, all
distributions to stockholders will be taxable as ordinary income, and, subject
to certain limitations of the Code, corporate
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distributees may be eligible for the dividends received deduction. Unless
entitled to relief under specific statutory provisions, the Company will also
be disqualified from taxation as a REIT for the four taxable years following
the year during which qualification was lost. It is not possible to state
whether in all circumstances the Company would be entitled to such statutory
relief. In addition, a recent federal budget proposal contains language which,
if enacted in its present form, would result in the immediate taxation of all
gain inherent in a C corporation's assets upon an election by the corporation
to become a REIT, and thus could effectively preclude the Company from re-
electing REIT status following a termination of its REIT qualification.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
General. As long as the Company qualifies as a REIT, distributions made to
the Company's taxable domestic stockholders out of current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
taken into account by them as ordinary income and will not be eligible for the
dividends received deduction for corporations. Distributions that are
designated as capital gain dividends will be taxed as long-term capital gains
(to the extent that they do not exceed the Company's actual net capital gain
for the taxable year) without regard to the period for which the stockholder
has held its stock. However, corporate stockholders may be required to treat
up to 18% of certain capital gain dividends as ordinary income.
Distributions in excess of current and accumulated earnings and profits will
not be taxable to a stockholder to the extent that they do not exceed the
adjusted basis of the stockholder's shares, but rather will reduce the
adjusted basis of such shares. To the extent that such distributions exceed
the adjusted basis of a stockholder's shares, they will be included in income
as long-term capital gain (or short-term capital gain if the shares have been
held for one year or less). In addition, any dividend declared by the Company
in October, November or December of any year and payable to a stockholder of
record on a specified date in any such month shall be treated as both paid by
the Company and received by the stockholder on December 31 of such year,
provided that the dividend is actually paid by the Company during January of
the following calendar year. Stockholders may not include in their individual
income tax returns any net operating losses or capital losses of the Company.
Upon a sale or other disposition of the Common Stock, a stockholder will
generally recognize a capital gain or loss in an amount equal to the
difference between the amount realized and the stockholder's adjusted basis in
such shares, which gain or loss will be long-term if such shares have been
held for more than one year. To the extent of any long-term capital gain
dividends received by a stockholder, any loss on the sale or other disposition
of Common Stock held by such stockholder for six months or less will generally
be treated as a long-term capital loss.
TAXATION OF TAX-EXEMPT STOCKHOLDERS
Based upon a published ruling by the IRS, distributions by the Company to a
stockholder that is a tax-exempt entity will not constitute "unrelated
business taxable income" ("UBTI"), provided that the tax-exempt entity has not
financed the acquisition of its shares with "acquisition indebtedness" within
the meaning of the Code and the shares are not otherwise used in an unrelated
trade or business of the tax-exempt entity.
Notwithstanding the preceding paragraph, however, a portion of the dividends
paid by the Company may be treated as UBTI to certain domestic private pension
trusts if the Company is treated as a "pension-held REIT." The Company
believes that it is not, and does not expect to become, a "pension-held REIT."
If the Company were to become a pension-held REIT, these rules generally would
only apply to certain pension trusts that hold more than 10% of the Company's
stock.
TAXATION OF NON-U.S. HOLDERS
The following is a discussion of certain anticipated U.S. federal income and
estate tax consequences of the ownership and disposition of the Company's
Common Stock applicable to Non-U.S. Holders of such stock. A "Non-U.S. Holder"
is any person other than (i) a citizen or resident of the U.S., (ii) a
corporation or partnership created or organized in the U.S. or under the laws
of the U.S. or of any state thereof, (iii) an estate
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whose income is includable in gross income for U.S. federal income tax
purposes regardless of its source, or (iv) a trust whose administration is
subject to the primary supervision of a U.S. court and which has one or more
U.S. fiduciaries who have the authority to control all substantial decisions
of the trust. The discussion is based on current law and is for general
information only. The discussion addresses only certain and not all aspects of
U.S. federal income and estate taxation.
Ordinary Dividends. The portion of dividends received by Non-U.S. Holders
payable out of the Company's earnings and profits which are not attributable
to capital gains of the Company and which are not effectively connected with a
U.S. trade or business of the Non-U.S. Holder will be subject to U.S.
withholding tax at the rate of 30% (unless reduced by treaty). In general,
Non-U.S. Holders will not be considered engaged in a U.S. trade or business
solely as a result of their ownership of stock of the Company. In cases where
the dividend income from a Non-U.S. Holder's investment in stock of the
Company is (or is treated as) effectively connected with the Non-U.S. Holder's
conduct of a U.S. trade or business, the Non-U.S. Holder generally will be
subject to U.S. tax at graduated rates, in the same manner as U.S.
stockholders are taxed with respect to such dividends (and may also be subject
to the 30% branch profits tax in the case of a Non-U.S. Holder that is a
foreign corporation).
Non-Dividend Distributions. Unless the Company's stock constitutes a USRPI
(as defined below), distributions by the Company which are not dividends out
of the earnings and profits of the Company will not be subject to U.S. income
or withholding tax. If it cannot be determined at the time a distribution is
made whether or not such distribution will be in excess of current and
accumulated earnings and profits, the distribution will be subject to
withholding at the rate applicable to dividends. However, the Non-U.S. Holder
may seek a refund of such amounts from the IRS if it is subsequently
determined that such distribution was, in fact, in excess of current and
accumulated earnings and profits of the Company. If the Company's stock
constitutes a USRPI, such distribution shall be subject to 10% withholding tax
and may be subject to taxation under FIRPTA (as defined below).
Capital Gain Dividends. Under the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA"), a distribution made by the Company to a Non-U.S.
Holder, to the extent attributable to gains from dispositions of U.S. Real
Property Interests ("USRPIs") such as the properties beneficially owned by the
Company ("'USRPI Capital Gains"), will be considered effectively connected
with a U.S. trade or business of the Non-U.S. Holder and subject to U.S.
income tax at the rate applicable to U.S. individuals or corporations, without
regard to whether such distribution is designated as a capital gain dividend.
In addition, the Company will be required to withhold tax equal to 35% of the
amount of dividends to the extent such dividends constitute USRPI Capital
Gains. Distributions subject to FIRPTA may also be subject to a 30% branch
profits tax in the hands of a foreign corporate stockholder that is not
entitled to treaty exemption.
Disposition of Stock of the Company. Unless the Company's stock constitutes
a USRPI, a sale of such stock by a Non-U.S. Holder generally will not be
subject to U.S. taxation under FIRPTA. The stock will not constitute a USRPI
if the Company is a "domestically controlled REIT." A domestically controlled
REIT is a REIT in which, at all times during a specified testing period, less
than 50% in value of its shares is held directly or indirectly by Non-U.S.
Holders. The Company believes that it is, and it expects to continue to be a
domestically controlled REIT, and therefore that the sale of the Company's
stock will not be subject to taxation under FIRPTA. Because the Company's
stock will be publicly traded, however, no assurance can be given that the
Company will continue to be a domestically controlled REIT.
If the Company does not constitute a domestically controlled REIT, a Non-
U.S. Holder's sale of stock generally will still not be subject to tax under
FIRPTA as a sale of a USRPI provided that (i) the stock is "regularly traded"
(as defined by applicable Treasury regulations) on an established securities
market (e.g., the NYSE, on which the Company's Common Stock will be listed)
and (ii) the selling Non-U.S. Holder held 5% or less of the Company's
outstanding stock at all times during a specified testing period.
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If gain on the sale of stock of the Company were subject to taxation under
FIRPTA, the Non-U.S. Holder would be subject to the same treatment as a U.S.
stockholder with respect to such gain (subject to applicable alternative
minimum tax and a special alternative minimum tax in the case of nonresident
alien individuals) and the purchaser of the stock could be required to
withhold 10% of the purchase price and remit such amount to the IRS.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Holder in two cases: (i) if the Non-U.S. Holder's
investment in the stock of the Company is effectively connected with a U.S.
trade or business conducted by such Non-U.S. Holder, the Non-U.S. Holder will
be subject to the same treatment as a U.S. stockholder with respect to such
gain, or (ii) if the Non-U.S. Holder is a nonresident alien individual who was
present in the U.S. for 183 days or more during the taxable year and has a
"tax home" in the United States, the nonresident alien individual will be
subject to a 30% tax on the individual's capital gain.
Estate Tax. Stock of the Company owned or treated as owned by an individual
who is not a citizen or resident (as specially defined for U.S. federal estate
tax purposes) of the United States at the time of death will be includable in
the individual's gross estate for U.S. federal estate tax purposes, unless an
applicable estate tax treaty provides otherwise. Such individual's estate may
be subject to U.S. federal estate tax on the property includable in the estate
for U.S. federal estate tax purposes.
Information Reporting and Backup Withholding. The Company must report
annually to the IRS and to each Non-U.S. Holder the amount of dividends
(including any capital gain dividends) paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply
regardless of whether withholding was reduced or eliminated by an applicable
tax treaty. Copies of these returns may also be made available under the
provisions of a specific treaty or agreement with the tax authorities in the
country in which the Non-U.S. Holder resides.
U.S. backup withholding (which generally is imposed at the rate of 31% on
certain payments to persons that fail to furnish the information required
under the U.S. information reporting requirements) and information reporting
will generally not apply to dividends (including any capital gain dividends)
paid on stock of the Company to a Non-U.S. Holder at an address outside the
United States.
The payment of the proceeds from the disposition of stock of the Company to
or through a U.S. office of a broker will be subject to information reporting
and backup withholding unless the owner, under penalties of perjury,
certifies, among other things, its status as a Non-U.S. Holder, or otherwise
establishes an exemption. The payment of the proceeds from the disposition of
stock to or through a non-U.S. office of a non-U.S. broker generally will not
be subject to backup withholding and information reporting.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-U.S.
Holder's U.S. federal income tax liability, provided that the required
information is furnished to the IRS.
These information reporting and backup withholding rules are under review by
the U.S. Treasury and their application to the Common Stock could be changed
by future regulations. On April 15, 1996, the IRS issued proposed Treasury
Regulations concerning the withholding of tax and reporting for certain
amounts paid to non-resident individuals and foreign corporations. The
proposed Treasury Regulations, if adopted in their present form, would be
effective for payments made after December 31, 1997. Prospective purchasers
should consult their tax advisors concerning the potential adoption of such
proposed Treasury Regulations and the potential effect on their ownership of
Common Stock.
OTHER TAX CONSEQUENCES
Possible Legislative or Other Actions Affecting Tax
Consequences. Prospective investors should recognize that the present federal
income tax treatment of an investment in the Company may be modified by
legislative,
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judicial or administrative action at any time, and that any such action may
affect investments and commitments previously made. The rules dealing with
federal income taxation are constantly under review by persons involved in the
legislative process and by the IRS and the U.S. Treasury Department, resulting
in revisions of regulations and revised interpretations of established
concepts as well as statutory changes. For example, a recent federal budget
proposal contains language which, if enacted in its present form, would result
in the immediate taxation of all gain inherent in a C corporation's assets
upon an election by the corporation to become a REIT, and thus could
effectively preclude the Company from re-electing REIT status following a
termination of its REIT qualification. Revisions in federal tax laws and
interpretations thereof could adversely affect the tax consequences of an
investment in the Company.
State and Local Taxes. The Company and its stockholders may be subject to
state or local taxation in various state or local jurisdictions, including
those in which it or they transact business or reside. The state and local tax
treatment of the Company and its stockholders may not conform to the federal
income tax consequences discussed above. Consequently, prospective
stockholders should consult their tax advisors regarding the effect of state
and local tax laws on an investment in the Company.
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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.
In connection with the PaineWebber Facility and the LLC Agreement, the
Company granted PaineWebber the right, for a three year period, subject to
certain exceptions, to act as financial advisor and book running lead manager
in connection with an initial public offering of the Company or Holdings. In
addition, the Company agreed, subject to certain conditions, to use its
reasonable best efforts to cause PaineWebber to be selected as the exclusive
financial intermediary or principal, as applicable, in connection with certain
private financings by the Company or Holdings during such period and to pay an
affiliate of PaineWebber a fee of up to $1,500,000 if PaineWebber is not so
selected. The foregoing rights will terminate upon consummation of the
Offering.
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 9,465
shares of Holdings common stock (representing approximately 9.0% of the
outstanding shares of Holdings Common Stock), 13,333 shares of Holdings Series
A Preferred Stock and 1,042 shares of Holdings Series B Preferred Stock. In
addition, such partner 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
107
<PAGE>
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 5, 1997 (the "RCG Study"). Certain information from the RCG
Study is included herein in reliance upon the authority of such firm as an
expert in, among other things, urban economics and real estate market
analysis.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-11 under the Securities Act and the rules and regulations promulgated
thereunder, with respect to the Shares offered pursuant to this Prospectus.
This Prospectus, which is part of the Registration Statement, does not contain
all of the information set forth in the Registration Statement and the
exhibits and financial statement schedules thereto. For further information
with respect to the Company and the Shares, reference is made to the
Registration Statement and such exhibits and financial statement schedules,
copies of which may be examined without charge at or obtained upon payment of
prescribed fees from, the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and will also
be available for inspection and copying at the regional offices of the
Commission located at 13th Floor, 7 World Trade Center, New York, New York
10048, and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-
2511. The Commission maintains a Website at http:/www.sec.gov, and reports,
proxy and information statements and other information regarding registrants
that file electronically with the Commission (including the Company) can be
obtained from that site.
Statements contained in this Prospectus as to the contents of any contract
or other document that is filed as an exhibit to the Registration Statement
are not necessarily complete, and each such statement is qualified in its
entirety by reference to the full text of such contract or document.
The Company will be required to file reports and other information with the
Commission pursuant to the Exchange Act. In addition to applicable legal or
NYSE requirements, if any, holders of shares of Common Stock will receive
annual reports containing audited financial statements with a report thereon
by the Company's independent certified public accountants.
108
<PAGE>
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 in
effect as of April 30, 1997 paid by tenants under the terms of their leases
computed on a straight-line basis in accordance with GAAP. 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.
"Charter" means the Articles of Amendment and Restatement of Alexandria to
be filed prior to the consummation of the Offering.
109
<PAGE>
"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.
"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 in connection with the
Offering of which Alexandria will hold a 99% non-managing interest and QRS
will hold a 1% managing interest.
"Holdings" means Health Science Properties Holding Corporation, a Maryland
corporation.
"Holdings Stock Options" means options granted under Holdings 1994 Stock
Option Plan, as amended, or Holdings 1994 Stock Option Plan for Non-Employee
Directors, as amended.
"HVAC" means heating, ventilation and air conditioning.
"Independent Underwriter" means Lehman Brothers Inc., who will act as
"qualified independent underwriter" and will recommend the maximum initial
public offering price for the Shares.
110
<PAGE>
"Interested Stockholder" means any person who beneficially owns 10% or more
of the voting power of a corporation's shares or an affiliate of a corporation
who, at any time within the two-year period prior to the date in question, was
the beneficial owner of 10% or more of the voting power of the then-
outstanding voting stock of the corporation.
"IRS" means the Internal Revenue Service.
"Life Science Facilities" means office buildings containing scientific
research and development laboratories and other improvements that are generic
to tenants operating in the Life Science Industry.
"Life Science Industry" means the industry comprised of pharmaceutical,
biotechnology, diagnostic and personal care products companies, major
scientific research institutions and related government agencies.
"LLC Agreement" means the Agreement for Sale and Purchase of Membership
Interests entered into between certain affiliates of PaineWebber and the
Company on January 13, 1997, as amended.
"MGCL" means the Maryland General Corporation Law, as amended.
"Named Executive Officers" means the Company's Chief Executive Officer and
the four other most highly compensated executive officers of the Company.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"NIH" means the National Institutes of Health.
"Non-U.S. Holder" means any person other than (i) a citizen or resident of
the United States, (ii) a corporation or partnership created or organized in
the United States or under the laws of the United States or of any state
thereof, (iii) an estate whose income is includable in gross income for U.S.
federal income tax purposes regardless of its source, or (iv) a trust whose
administration is subject to the primary supervision of a U.S. court and which
has one or more U.S. fiduciaries who have the authority to control all
substantial decisions of the trust.
"NYSE" means the New York Stock Exchange.
"Offering" means the offering of Shares hereby.
"Ownership Limit" means the direct or constructive ownership of shares of
capital stock representing more than 9.8% of the combined total value of
outstanding shares of the Company's capital stock by any person.
"PaineWebber" means PaineWebber Incorporated, the lead managing Underwriter
of the Offering.
"PaineWebber Facility" means the Company's acquisition facility with certain
affiliates of PaineWebber entered into on September 9, 1996, as amended.
"PhRMA" means Pharmaceutical Research and Manufacturers of America.
"Preferred Stock" means preferred stock, par value $.01 per share, of the
Company.
"Prohibited Owner" means a person who beneficially or constructively owns
shares of stock of the Company in excess or in violation of the transfer or
ownership limitations.
"Properties" means the 15 Properties the Company will own upon consummation
of the Offering and the Formation Transactions.
"PW Affiliates" means PaineWebber Real Estate Holdings Inc. and PW Realty
Partners, LLC.
111
<PAGE>
"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 5, 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.
112
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<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-10
Consolidated Balance Sheets as of March 31, 1997 (Unaudited) and
December 31, 1996 and 1995............................................. F-11
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-12
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-13
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-14
Notes to Consolidated Financial Statements.............................. F-15
Schedule III--Rental Properties and Accumulated Depreciation............ F-26
1413 RESEARCH BLVD.
Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................... F-27
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-28
Notes to Statement of Revenue and Certain Expenses...................... F-29
300 AND 401 PROFESSIONAL DRIVE
Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................... F-30
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-31
Notes to Statement of Revenue and Certain Expenses...................... F-32
25, 35 AND 45 W. WATKINS MILL ROAD
Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................... F-33
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-34
Notes to Statement of Revenue and Certain Expenses...................... F-35
1311, 1401 AND 1431 HARBOR BAY PARKWAY
Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................... F-36
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-37
Notes to Statement of Revenue and Certain Expenses...................... F-38
1550 EAST GUDE DRIVE
Statement of Revenue and Certain Expenses:
Report of Independent Auditors.......................................... F-39
Statement of Revenue and Certain Expenses for the Year Ended December
31, 1996............................................................... F-40
Notes to Statement of Revenue and Certain Expenses...................... F-41
PW ACQUISITIONS I, LLC
Report of Independent Auditors.......................................... F-42
Balance Sheet as of March 31, 1997...................................... F-43
Income Statement and Changes in Members' Capital for the period January
13, 1997 (commencement of operations) to March 31, 1997................ F-44
Statement of Cash Flows for the period January 13, 1997 (commencement of
operations) to March 31, 1997.......................................... F-45
Notes to Financial Statements........................................... F-46
Schedule III--Rental Properties and Accumulated Depreciation............ F-49
</TABLE>
- -------
Note:
No financial statements have been presented for 1102 and 1124 Columbia
Street, 14225 Newbrook Drive and 1330 Piccard Drive, which were owned,
occupied and operated by the current major tenant prior to acquisition by the
Company or the Acquisition LLC. The operations of these properties prior to
such acquisition were different than the current operations because such
operations were a component of other businesses. Since the properties were
owner occupied, there was no rental revenue as under the current operations.
The properties were acquired subject to triple-net leases for all of the
premises. Further, since the properties were components of other businesses,
operating expenses (such as insurance, utilities and repairs and maintenance)
cannot be segregated for the properties from the other business components or
meaningfully compared to current operations.
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 (the "Acquisition LLC") and three
Properties owned thereby (the "Acquisition LLC Properties")) 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 PROCEEDS
REAL ESTATE ACQUISITION 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 PRO COMPANY
REAL ESTATE ACQUISITION 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......... -- -- (1) --
Interest ............. 2,509 (1,329)(M) 1,180
Acquisition LLC
financing costs...... -- -- (2) --
Depreciation and
amortization......... 1,003 327 (N) 1,330
--------- ------ ------- ----------
Total expenses...... 6,928 54 (1,222) 5,760
--------- ------ ------- ----------
Net income.............. $ 233 $1,413 $ 1,545 $ 3,191
========= ====== ======= ==========
Pro forma shares of
Common Stock
outstanding............ 3,641,848 10,391,848
========= ==========
Net income per pro forma
share of Common Stock.. $ 0.06 $ 0.31(O)
========= ==========
</TABLE>
- --------
(1) In connection with the Offering, officers, directors and certain employees
will be granted an aggregate of 152,615 shares of the Company's Common
Stock. The Company will recognize $3,205 of compensation expense upon
granting such stock.
(2) In connection with the Offering, the Company will acquire the membership
interests in the Acquisition LLC for $60,609, which exceeds the purchase
price paid by the Acquisition LLC for the Acquisition LLC Properties by
$8,940. This difference will be accounted for as a financing cost and be
recognized when the transaction is completed.
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 PRO COMPANY
REAL ESTATE COLUMBIA COLUMBIA ACQUISITION 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......... -- -- (1) --
Interest ............. 6,327 (1,610)(M) 4,717
Acquisition LLC
financing costs...... -- -- (2) --
Depreciation and
amortization......... 2,405 2,548 (N) 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 shares of
Common Stock
outstanding............ 3,641,848 10,391,848
========= ==========
Net income per pro forma
share of Common Stock.. $ 0.60 $ 1.37(O)
========= ==========
</TABLE>
- --------
(1) In connection with the Offering, officers, directors and certain employees
will be granted an aggregate 152,615 shares of the Company's Common Stock.
The Company will recognize $3,205 of compensation expense upon granting
such stock.
(2) In connection with the Offering, the Company will acquire the membership
interests in the Acquisition LLC for $60,609 which exceeds the purchase
price paid by the Acquisition LLC for the Acquisition LLC Properties by
$8,940. This difference will be accounted for as a financing cost and be
recognized when the transaction is completed.
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 the Acquisition LLC Properties (net) consists of the
following:
<TABLE>
<CAPTION>
PROPERTY
--------
<S> <C>
1150 East Gude Drive.............................................. $ 4,899
1330 Piccard Drive................................................ 14,333
14225 Newbrook Drive.............................................. 32,437
-------
$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 the Acquisition 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
into 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 Company's common stock........................... (110)
Stock split of the Company's common stock and grant of the
Company's common stock and issuance of 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 1102/1124 Columbia Street properties and the
Acquisition LLC, as to which separate historical financial statements
are not available:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
THREE MONTHS ENDED MARCH 31, 1997 1996
--------------------------------- ---------------------------
1102/1104 ACQUISITION 1102/1104 ACQUISITION
COLUMBIA STREET LLC COLUMBIA STREET LLC
------------------ ---------------- --------------- -----------
<S> <C> <C> <C> <C>
Rental revenue.......... $ -- $ 257 $1,976 $6,781
Tenant recoveries....... -- (14) 763 62
Other income............ -- 1 201 --
Rental properties
expense................ -- (36) 745 62
</TABLE>
The basis for presenting the financial information is as follows: (i) rental
revenue is calculated based on executed lease agreements, (ii) tenant
recoveries are calculated based on executed lease agreements which are triple
net, (iii) other income is based on historical results for 1102/1124 Columbia
Street since the date of acquisition, and (iv) rental properties expense is
calculated based on actual costs, contracts and historical results since the
date of acquisition.
(I) Increase in rental revenue to adjust the 1996 Acquired Properties and
the Acquisition 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.
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>
(L) Increase (decrease) in general
and administrative expense
Accrual for bonus for an
officer of the Company to be
paid in connection with the
Offering...................... $ (353) $ --
Other general and
administrative expenses
related to operations as a
public REIT consisting of
increased salaries and bonuses
(including that of the chief
financial officer), directors
and officers insurance,
investor relations and public
entity and listing fees....... 124 928
------- -------
Net change................... $ (229) $ 928
======= =======
(M) Increase (Decrease) in interest
expense
Interest expense due to
repayment of certain mortgage
loans......................... $(1,658) $(2,924)
Interest expense related to
mortgage debt to be incurred
in connection with the
Offering...................... 294 1,177
Amortization of finance costs
related to the Company's new
credit facility............... 35 137
------- -------
Net change................... $(1,329) $(1,610)
======= =======
(N) Increase in depreciation
expense to reflect a full
period of depreciation for the
1996 Acquired Properties and
the Acquisition LLC Properties
utilizing a 40-year useful life
for buildings and a 10-year
useful life for improvements... $ 327 $ 2,548
======= =======
Reconciliation of pro forma de-
preciation:
Historical depreciation of the
Company....................... $ 1,003 $ 2,405
Pro forma depreciation on the
1996 Acquired Properties:
Pro forma depreciation as if
the 1996 Acquired Properties
were purchased on January 1,
1996.......................... -- 1,885
Less historical depreciation
recorded by the Company....... -- (645)
------- -------
Net increase in depreciation
expense..................... -- 1,240
Pro forma depreciation on the
Acquisition LLC Properties as
if the Acquisition LLC
Properties were purchased on
January 1, 1996............... 327 1,308
------- -------
Total pro forma depreciation... $ 1,330 $ 4,953
======= =======
</TABLE>
F-8
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
ADJUSTMENTS TO THE UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(O) Pro forma shares of Common Stock outstanding on a pro forma net income
basis (10,391,848) include all shares outstanding at the end of the period,
including shares to be issued in the Offering. Pro forma shares of Common
Stock outstanding on a historical net income basis (3,641,848) include all
shares outstanding at the end of the period, but exclude the shares to be
issued in the Offering.
Additional supplemental pro forma net income and per share information is
included below:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
(DOLLARS IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
The following table sets forth the pro forma effects
of the Offering and the repayment of the Company's
debt with the proceeds of the Offering only for the
repayment of debt:
Historical net income of the Company............... $ 233 $ 2,175
Pro forma decrease in interest expense associated
with the repayment of debt........................ 1,363 2,841
--------- ---------
Pro forma net income of the Company adjusted for
repayment of debt ................................ $ 1,596 $ 5,016
========= =========
Pro forma shares of Common Stock outstanding, on a
historical basis plus only the number of shares
issued for repayment of debt...................... 6,954,268 6,954,268
========= =========
Net income per pro forma share of Common Stock..... $ 0.23 $ 0.72
========= =========
The following table sets forth the pro forma effect
of the purchase of the Acquisition LLC with proceeds
from the Offering:
Historical net income of the Company............... $ 233 $ 2,175
Pro forma net income of the Acquisition LLC........ 1,379 5,571
--------- ---------
Pro forma net income of the Company and the
Acquisition LLC................................... $ 1,612 $ 7,746
========= =========
Pro forma shares of Common Stock outstanding on a
historical basis plus only the number of shares
issued to purchase the Acquisition LLC............ 6,842,627 6,842,627
========= =========
Net income per pro forma share of Common Stock..... $ 0.24 $ 1.13
========= =========
</TABLE>
F-9
<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.
Ernst & Young LLP
Los Angeles, California
February 13, 1997,
except for Note 11,
as to which the date is
May 1, 1997
F-10
<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-11
<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........... $ 1,577 $ -- $ 1,590 $ -- $ --
========== ====== ========== ====== ======
Net (loss) income
allocated to common
stockholders........... $ (1,344) $ 319 $ 585 $ 761 $ (648)
========== ====== ========== ====== ======
Pro forma shares of
Common Stock
outstanding............ 3,641,848 3,641,848
========== ==========
Net income per pro forma
share of Common Stock.. $ 0.06 $ 0.60
========== ==========
</TABLE>
See accompanying notes.
F-12
<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-13
<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 (used in)
provided by 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-14
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 1997, YEARS ENDED DECEMBER 31, 1996 AND 1995 AND
THE
PERIOD OCTOBER 27, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994
(AMOUNTS AND DISCLOSURES AS OF MARCH 31, 1997 AND FOR THE PERIOD THEN ENDED
ARE UNAUDITED)
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
The consolidated financial statements include the accounts of the Company
and its only subsidiary, ARE-QRS. 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 in connection with the Offering ("GSA-QRS") to (i) acquire a limited
liability company formed and owned by certain affiliates of PaineWebber
Incorporated (the "Acquisition LLC") (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
F-15
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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 as of December 31, 1996, 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.
F-16
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Leasing Commissions
Leasing commissions are amortized on a straight-line basis over the term of
the related lease.
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.
Pro forma shares of Common Stock outstanding on a historical net income
basis (3,641,848) include all shares outstanding at the end of the period, but
exclude the shares to be issued in the Offering.
Additional supplemental pro forma net income and per share information is
included below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1997 DECEMBER 31, 1996
-------------------- -------------------
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C>
The following table sets
forth the pro forma
effects of the Offering
and the repayment of the
Company's debt with the
proceeds of the Offering
only for the repayment of
debt:
Historical net income of
the Company............. $ 233 $ 2,175
Pro forma decrease in
interest expense
associated with the
repayment of debt ..... 1,363 2,841
--------- ---------
Pro forma net income of
the Company adjusted
for repayment of debt.. $ 1,596 $ 5,016
========= =========
Pro forma shares of
Common Stock
outstanding, on a
historical basis plus
only the number of
shares issued for
repayment of debt...... 6,954,268 6,954,268
========= =========
Net income per pro forma
share of Common Stock.. $ 0.23 $ 0.72
========= =========
</TABLE>
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.
F-17
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
MARCH 31, -----------------
1997 1996 1995
----------- -------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
Land........................................ $ 28,383 $ 28,383 $10,444
Building and improvements................... 122,725 121,236 45,397
Tenant and other improvements............... 1,365 1,535 413
-------- -------- -------
152,473 151,154 56,254
Less accumulated depreciation............... (5,158) (4,194) (1,901)
-------- -------- -------
$147,315 $146,960 $54,353
======== ======== =======
</TABLE>
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 an annual rate of 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.
F-18
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. SECURED NOTES PAYABLE
Secured notes payable are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ----------------
1997 1996 1995
----------- -------- -------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <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 $ 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...... 66,800 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........................ 365 380 440
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 1,250
-------- -------- -------
$112,815 $113,182 $36,894
======== ======== =======
</TABLE>
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.
F-19
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 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.
F-20
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. PREFERRED STOCK
Series T 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 cumulative convertible preferred stock
Holders of the Series U 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.
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
stockholders.
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.
F-21
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 equal to $90,000 per year for the remainder
of his life and his then living spouse's life. Subsequent to year end, the
executive announced his intention to retire upon completion of the Offering.
In connection therewith, the agreement providing the post retirement benefit
was amended to provide a retirement benefit of $150,000 per year for the first
three years following the consummation of the Offering, at which time the
benefit will be reduced to $90,000 per year, plus an annual cost of living
increase of 2% per year for the remainder of the executive's life and the
executive's then living spouse's life. For the three months ended March 31,
1997 and the year ended December 31, 1996, the Company recorded a post-
retirement benefit expense for past services provided by this executive equal
to $632,000 and $438,000 respectively. As of March 31, 1997, the total accrual
relating to the post-retirement benefit is $1,070,000. The accrual was made
based upon the estimated number of payments to be made discounted at a rate of
8%.
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, 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
F-22
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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") are entitled to
receive 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
will 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. 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.
In connection with the Offering, officers, directors and certain employees
of the Company will be granted an aggregate of 152,615 shares of Common Stock.
Officers, directors and certain employees of the Company will also receive
options to purchase 57,000 shares of Common Stock under the 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 Plan). In
addition to their respective ownership interests in Holdings, upon
consummation of the Offering, 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.
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). The new accounting standards prescribed by
SFAS No. 123 are optional, and the Company has elected to account for its
stock option plan as prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." The effect of applying the SFAS
No. 123 fair value method to the Company's stock based awards for the years
ended December 31, 1996 and 1995 would result in net income and net income per
share that are not materially different from amounts reported. The effect of
applying the SFAS No. 123 fair value method to the Company's stock based
awards for the three months ended March 31, 1997 is anti-dilutive.
F-23
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of Holdings' stock option activity, and related information for
the following periods, are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
FOR THE QUARTER ENDED ---------------------------------------------
MARCH 31, 1997 1996 1995
---------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
------- -------------- ------- -------------- ------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Outstanding--beginning
of year................ 21 $ 967 45 $944 29 $960
Granted................. 11 938 1 941 15 976
Exercised............... -- -- (24) 962 -- --
Forfeited............... -- -- -- -- -- --
--- ------ --- ---- --- ----
Outstanding--end of
year................... 32 $ 957 22 $923 44 $965
=== ====== === ==== === ====
Exercisable at end of
year................... 19 $ 929 8 $915 20 $952
=== ====== === ==== === ====
Weighted-average fair
value of options
granted during the
year................... $1,627 $ 47 $ 71
====== ==== ====
</TABLE>
The weighted-average remaining contractual life at December 31, 1996 and
March 31, 1997 of all options are 9.0 and 8.8 years, respectively.
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
For the three months ended March 31, 1997 and for the years ended December
31, 1996 and 1995, the Company incurred $645,000, $1,708,000 and $369,000,
respectively, for legal services provided by a law firm of which a stockholder
of Holdings is a member.
General and administrative expenses for the three months ended March 31,
1997 and for the years ended December 31, 1996 and 1995 include $18,000,
$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 three months ended March 31, 1997 and for the year ended
December 31, 1996, $61,000 and $162,000 of interest was accrued.
F-24
<PAGE>
ALEXANDRIA REAL ESTATE EQUITIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. SUBSEQUENT EVENTS
Subsequent to December 31, 1996, the following events occurred:
The Company assigned its rights to purchase three properties to the
Acquisition LLC, which is 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 the 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 will equal the original
purchase price of the properties (adjusted for an acquisition fee payable to
PaineWebber and cash flow from the properties) plus a percentage of the excess
of (i) the aggregate fair market value, as defined, over (ii) the adjusted
purchase price. PaineWebber has agreed to amend the purchase agreement to
reduce the purchase price by approximately $766,000. Based upon the above
formula (after giving effect to such reduction), 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. The amount
paid to PaineWebber in excess of the purchase price paid by the Acquisition
LLC will be accounted for as a financing cost and recognized when the
transaction is completed.
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 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>
The assets and liabilities were recorded by the Company based on their
carrying value to Holdings at the date of contribution.
F-25
<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
- -------- ----------- ------- ------------- ------------- ------- ------------- -------- ------------ ------------
(UNAUDITED)
<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-26
<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-27
<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-28
<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-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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-36
<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-37
<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-38
<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-39
<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-40
<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-41
<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 period January 13, 1997
(commencement of operations) to 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 period
January 13, 1997 (commencement of operations) to March 31, 1997, in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Los Angeles, California
April 24, 1997
F-42
<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-43
<PAGE>
PW ACQUISITIONS I, LLC
INCOME STATEMENT AND CHANGES IN MEMBERS' CAPITAL
(IN THOUSANDS)
FOR THE PERIOD JANUARY 13, 1997 (COMMENCEMENT OF OPERATIONS) TO 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-44
<PAGE>
PW ACQUISITIONS I, LLC
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
FOR THE PERIOD JANUARY 13, 1997 (COMMENCEMENT OF OPERATIONS) TO 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)
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-45
<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-46
<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 January 13, 1997, (commencement of operations) 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-47
<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-48
<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
- ------------- ----------- ------ ------------- ------ ------------- ------- ------------ ------------ ----------
(UNAUDITED)
<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-49
<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............................................................. 17
The Company.............................................................. 30
Target Markets........................................................... 36
Distributions............................................................ 39
Use of Proceeds.......................................................... 42
Capitalization........................................................... 43
Dilution................................................................. 44
Selected Financial Data.................................................. 45
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 48
The Properties........................................................... 55
Policies with Respect to Certain Activities.............................. 70
Formation and Structure.................................................. 72
Management............................................................... 77
Certain Transactions..................................................... 85
Share Ownership.......................................................... 87
Description of Capital Stock............................................. 89
Certain Provisions of Maryland Law and of the Company's Charter and
Bylaws.................................................................. 92
Shares Eligible for Future Sale.......................................... 95
Federal Income Tax Considerations........................................ 96
Underwriting............................................................. 105
Legal Matters............................................................ 107
Experts.................................................................. 107
Additional Information................................................... 108
Glossary................................................................. 109
Index to Financial Statements............................................ F-1
</TABLE>
---------------
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURI-
TIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DE-
LIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD AL-
LOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6,750,000 SHARES
[LOGO OF ALEXANDIRA 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................................. $ 109,100
Transfer Agent and Registrar's Fees................................. $ 3,500
Printing and Engraving Expenses..................................... $ 750,000
Legal Fees and Expenses............................................. $ 800,000
Accounting Fees and Expenses........................................ $ 700,000
Structuring and Advisory Fees....................................... $2,100,000
Miscellaneous Expenses.............................................. $ 167,051
----------
Total........................................................... $4,700,000
==========
</TABLE>
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 receive 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 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 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 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
II-2
<PAGE>
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 permits a corporation to
advance reasonable expenses to a director or officer upon the corporation's
receipt of (a) 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 corporation as authorized by the Bylaws and (b) a
written statement by or on his behalf to repay the amount paid or reimbursed by
the corporation 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+ Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding certain
federal income tax matters
10.1 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
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S>
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 First 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+ Form of Amended and Restated Executive Employment Agreement by and
between the Registrant and Joel S. Marcus
10.35+ Form of 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+ Form of 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
10.40+ Form of Letter Agreement between the Registrant and AEW Partners II,
L.P. and AEW Health Science Properties Co-Investment, L.P.
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
99.1+ Scientific Research Facilities Market Analysis: San Diego, San
Francisco, Seattle, and Suburban Washington, D.C., dated May 5, 1997,
prepared for the Registrant by Rosen Consulting Group
</TABLE>
- --------
+ Filed herewith
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 34 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 19TH 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 19, 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+ Opinion of Skadden, Arps, Slate, Meagher & Flom LLP
regarding certain federal income tax matters
10.1 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 First 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+ Form of Amended and Restated Executive Employment
Agreement by and between the Registrant and Joel S.
Marcus
10.35+ Form of 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+ Form of 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
10.40+ Form of Letter Agreement between the Registrant and AEW
Partners II, L.P. and AEW Health Science Properties
Co-Investment, L.P.
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
99.1+ Scientific Research Facilities Market Analysis: San
Diego, San Francisco, Seattle, and Suburban
Washington, D.C., dated May 5, 1997, prepared for the
Registrant by Rosen Consulting Group
</TABLE>
- --------
+ Filed herewith
<PAGE>
EXHIBIT 1.1
6,750,000 Shares
ALEXANDRIA REAL ESTATE EQUITIES, INC.
Common Stock
UNDERWRITING AGREEMENT
----------------------
____________, 1997
PAINEWEBBER INCORPORATED
LEHMAN BROTHERS INC.
SMITH BARNEY INC.
EVEREN SECURITIES, INC.
As Representatives of the
several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
Alexandria Real Estate Equities, Inc., a Maryland corporation (the
"Company"), proposes to sell an aggregate of 6,750,000 shares (the "Firm
Shares") of the Company's common stock, par value $.01 per share (the "Common
Stock"), to you and to the several other underwriters named in Schedule I
(collectively, the "Underwriters"), for whom you are acting as representatives
(the "Representatives") and Lehman Brothers Inc. (the "Independent Underwriter")
is acting as a "qualified independent underwriter" within the meaning of the
Conduct Rules of the National Association of Securities Dealers, Inc. (the
"NASD"), in connection with the offering and sale of the Firm Shares. The
Company has also agreed to grant to you and the several other Underwriters an
option (the "Option") to purchase up to an additional 1,024,500 shares of Common
Stock (the "Option Shares") on the terms and for the purposes set forth in
Section 1(b). The Firm Shares and the Option Shares are hereinafter
collectively referred to as the "Shares."
The initial public offering price per share for the Shares and the purchase
price per share for the Shares to be paid by the several Underwriters shall be
agreed upon by the Company and the Representatives, acting on behalf of the
several Underwriters, and such agreement shall be set forth in a separate
written instrument substantially in the form of Exhibit A hereto (the "Price
---------
Determination Agreement"). The Price Determination Agreement may take the form
of an exchange of any standard form of written telecommunication among the
Company and the Representatives and shall specify such applicable information as
is indicated in Exhibit A hereto. The offering of the Shares will be governed
---------
by this Agreement, as supplemented by the Price Determination Agreement. From
and after the date of the execution and delivery of the Price Determination
Agreement, this Agreement shall be deemed to incorporate, and, unless the
context otherwise indicates, all references contained herein to "this Agreement"
and to the phrase "herein" shall be deemed to include, the Price Determination
Agreement. Unless otherwise defined herein, all capitalized terms used herein
shall have the respective meanings ascribed thereto in the Prospectus (as
defined below).
The Company confirms as follows its agreements with the Representatives and
the several other Underwriters.
1
<PAGE>
A. Agreement to Sell and Purchase.
------------------------------
(a) On the basis of the representations, warranties and agreements of
the Company herein contained and subject to all the terms and conditions of this
Agreement, the Company agrees to sell to each Underwriter named below, and each
Underwriter, severally and not jointly, agrees to purchase from the Company at
the purchase price per share for the Firm Shares to be agreed upon by the
Representatives and the Company in accordance with Section 1(c) or 1(d) hereof
(which purchase price shall not be higher than the maximum price recommended by
the Independent Underwriter acting as a "qualified independent underwriter"
within the meaning of the Conduct Rules of the NASD) and set forth in the Price
Determination Agreement, the number of Firm Shares set forth opposite the name
of such Underwriter in Schedule I, plus such additional number of Firm Shares
----------
which such Underwriter may become obligated to purchase pursuant to Section 8
hereof. If the Company elects to rely on Rule 430A (as hereinafter defined),
Schedule I may be attached to the Price Determination Agreement.
- ----------
(b) Subject to all the terms and conditions of this Agreement, the
Company grants the Option to the several Underwriters to purchase, severally and
not jointly, up to 1,012,500 Option Shares from the Company at the same price
per share as the Underwriters shall pay for the Firm Shares. The Option may be
exercised only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time, and on one or
more occasions, on or before the 30th day after the date of this Agreement (or,
if the Company has elected to rely on Rule 430A, on or before the 30th day after
the date of the Price Determination Agreement), upon written or telegraphic
notice (the "Option Shares Notice") by the Representatives to the Company. Each
Option Shares Notice shall be delivered to the Company no later than 12:00 noon,
New York City time, at least three and no more than five business days before
the date specified for closing in the Option Shares Notice (the "Option Closing
Date") and shall set forth the aggregate number of Option Shares to be purchased
and the time and date for such purchase. On the Option Closing Date, the
Company will issue and sell to the Underwriters the number of Option Shares set
forth in the Option Shares Notice, and each Underwriter will purchase such
percentage of the Option Shares as is equal to the percentage of Firm Shares
that such Underwriter is purchasing, as adjusted by the Representatives in such
manner as they deem advisable to avoid fractional shares.
(c) If the Company has elected not to rely on Rule 430A, the initial
public offering price per share for the Firm Shares and the purchase price per
share for the Firm Shares to be paid by the several Underwriters shall be agreed
upon and set forth in the Price Determination Agreement, which shall be dated
the date hereof, and an amendment to the Registration Statement (as hereinafter
defined) containing such per share price information shall be filed before the
Registration Statement becomes effective.
(d) If the Company has elected to rely on Rule 430A, the initial
public offering price per share for the Firm Shares and the purchase price per
share for the Firm Shares to be paid by the several Underwriters shall be agreed
upon and set forth in the Price Determination Agreement. In the event that the
Price Determination Agreement has not been executed by the close of business on
the fourth business day following the date on which the Registration Statement
becomes effective, this Agreement shall terminate forthwith, without liability
of any party to any other party except that Section 6 shall remain in effect.
1. Delivery and Payment. Delivery of the Firm Shares shall be made to
--------------------
the Representatives for the accounts of the Underwriters against payment of the
purchase price in New York Clearing House (next-day) funds by certified or
official bank check to the order of the Company at the office of PaineWebber
Incorporated, 1285 Avenue of the Americas, New York, New York 10019. Such
payment shall be made at 10:00 a.m., New York City time, on the third business
day (or, if pricing takes place after 4:30 p.m. New York City time, on the
fourth business day) following the date of this Agreement or, if the Company has
elected to rely on Rule 430A, the third business day (or, if pricing takes place
after 4:30 p.m. New York City time, on the fourth business day) after the date
on which the first bona fide offering of the Shares to the public is made by the
Underwriters or at such time on such other date, not later than seven business
days after the date of this Agreement, as may be agreed upon by the Company and
the Representatives (such date is hereinafter referred to as the "Closing
Date").
2
<PAGE>
To the extent the Option is exercised, delivery of the Option Shares
against payment by the Underwriters (in the manner specified above) will take
place at the offices specified above for the Closing Date at the time and date
(which may be the Closing Date) specified in the Option Shares Notice.
Certificates evidencing the Shares shall be in definitive form and shall be
registered in such names and in such denominations as the Representatives shall
request at least two business days prior to the Closing Date or the Option
Closing Date, as the case may be, by written notice to the Company. For the
purpose of expediting the checking and packaging of certificates for the Shares,
the Company agrees to make such certificates available for inspection at least
24 hours prior to the Closing Date or the Option Closing Date, as the case may
be.
The cost of original issue tax stamps, if any, in connection with the
issuance and delivery of the Firm Shares and Option Shares by the Company to the
respective Underwriters shall be borne by the Company. The Company will pay and
save each Underwriter and any subsequent holder of the Shares harmless from any
and all liabilities with respect to or resulting from any failure or delay in
paying Federal and state stamp and other transfer taxes, if any, which may be
payable or determined to be payable in connection with the original issuance or
sale to such Underwriter of the Firm Shares and Option Shares.
2. Representations and Warranties of the Company.
---------------------------------------------
The Company represents and warrants to each Underwriter that:
(a) A registration statement (Registration No. 333-23545) on Form S-
11 relating to the Shares, including a preliminary prospectus and such
amendments to such registration statement as may have been required to the date
of this Agreement, has been prepared by the Company under the provisions of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(collectively referred to as the "Rules and Regulations") of the Securities and
Exchange Commission (the "Commission") thereunder, and has been filed with the
Commission. The term "preliminary prospectus" as used herein means a
preliminary prospectus as contemplated by Rule 430 or Rule 430A ("Rule 430A") of
the Rules and Regulations included at any time as part of such registration
statement. Copies of such registration statement and amendments and each
related preliminary prospectus (including one fully executed copy of the
registration statement and each amendment thereto) have been delivered to each
of the Representatives and their counsel. If such registration statement has
not become effective, a further amendment to such registration statement,
including a form of final prospectus, necessary to permit such registration
statement to become effective, will be filed promptly by the Company with the
Commission. If such registration statement has become effective, a final
prospectus containing information permitted to be omitted at the time of
effectiveness by Rule 430A will be filed by the Company with the Commission in
accordance with Rule 424(b) of the Rules and Regulations promptly after
execution and delivery of the Price Determination Agreement. The term
"Registration Statement" means such registration statement as amended at the
time it becomes or became effective (the "Effective Date"), including financial
statements and all exhibits and any information deemed to be included by Rule
430A. The term "Prospectus" means the prospectus as first filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such
filing is required, the form of final prospectus included in the Registration
Statement at the Effective Date. No stop order suspending the effectiveness of
the Registration Statement has been issued, and no proceeding for that purpose
has been instituted or, to the knowledge of the Company after due inquiry,
threatened by the Commission or by the state securities authority of any
jurisdiction. No order preventing or suspending the use of the Prospectus has
been issued and no proceeding for that purpose has been instituted or, to the
knowledge of the Company, threatened by the Commission or by the state
securities authority of any jurisdiction.
(b) On the Effective Date, the date the Prospectus is first filed
with the Commission pursuant to Rule 424(b) (if required),on the Closing Date
and, if later, the Option Closing Date and when any post-effective amendment to
the Registration Statement becomes effective or any amendment or supplement to
the Prospectus is filed with the Commission, the Registration Statement and the
Prospectus (as amended or as supplemented if the Company shall have filed with
the Commission any amendment or supplement thereto), including the financial
statements included in the Prospectus, did or will comply in all material
respects with all applicable provisions of
3
<PAGE>
the Act and the Rules and Regulations and did or will contain all statements
required to be stated therein in accordance with the Act and the Rules and
Regulations. On the Effective Date and when any post-effective amendment to the
Registration Statement becomes effective, no part of the Registration Statement
or any such amendment did or will contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
in order to make the statements therein not misleading. At the Effective Date,
the date the Prospectus or any amendment or supplement to the Prospectus is
filed with the Commission and at the Closing Date and, if later, the Option
Closing Date, the Prospectus did not and will not contain any untrue statement
of a material fact or omit to state a material fact necessary to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. The foregoing representations and warranties in this
Section 3(b) do not apply to any statements or omissions made in reliance on and
in conformity with information relating to any Underwriter furnished in writing
to the Company by the Representatives specifically for inclusion in the
Registration Statement or Prospectus or any amendment or supplement thereto.
The parties hereto acknowledge that the statements set forth in the second,
seventh and last paragraphs of, and the chart set forth in, the section
captioned "Underwriting" in the Prospectus constitute the only information
furnished in writing to the Company by the Representatives specifically for
inclusion in the Registration Statement. The Company has not distributed any
offering material in connection with the offering or sale of the Shares other
than the Registration Statement, the preliminary prospectus, the Prospectus and
such other materials, if any, permitted by the Act.
(c) At or prior to the Closing Date, the Company together with Health
Science Properties Holding Corporation (the "Parent") and ARE-QRS Corp. ("QRS")
will complete a series of transactions generally described in summary form in
the Prospectus under the heading "Formation and Structure." Such transactions
are referred to herein as the "Formation Transactions" and the agreements,
documents, filings and certificates necessary to consummate the Formation
Transactions are referred to herein as the "Formation Agreements." Upon the
consummation of the Formation Transactions, the only Subsidiaries (as defined in
the Rules and Regulations) of the Company will be PW Acquisitions I, LLC, a
Delaware limited liability company (the "Acquisition LLC"), a newly formed
wholly owned subsidiary of the Company ("GSA-QRS") and QRS. The Company and
each of its Subsidiaries is, and at the Closing Date will be, a corporation or
limited liability company duly organized or formed, as the case may be, validly
existing and in good standing under the laws of its jurisdiction of
incorporation or formation, as the case may be. The Company and each of its
Subsidiaries has, and at the Closing Date and upon consummation of the Formation
Transactions will have, all power and authority to conduct all the activities
conducted by it, to own or lease all the assets owned or leased by it and to
conduct its business as described in the Registration Statement and the
Prospectus. The Company and each of its Subsidiaries is, and at the Closing
Date and upon consummation of the Formation Transactions will be, duly licensed
or qualified to do business and in good standing as a foreign corporation or
limited liability company in all jurisdictions in which it owns or leases real
property or in which the nature of the activities conducted by it makes such
licensing or qualification necessary except where the failure to be so licensed,
qualified or in good standing would not have a materially adverse effect on the
condition (financial or otherwise), business, properties, net worth, results of
operations or prospects of the Company and its Subsidiaries taken as a whole (a
"Material Adverse Effect").
Upon the consummation of the Formation Transactions, except for the stock
of QRS and the membership interests in GSA-QRS and the Acquisition LLC, the
Company will not own, directly or indirectly, any shares of stock or any other
equity or long-term debt securities of any corporation or have any equity
interest in any firm, limited liability company, partnership, joint venture,
association or other entity. Complete and correct copies of the organizational
documents or operating agreement, as the case may be, of the Company, QRS and
the Acquisition LLC and all amendments thereto, have been delivered to the
Representatives, and no changes therein will be made subsequent to the date
hereof and prior to the Closing Date or, if later, the Option Closing Date.
At present, and prior to consummation of the Formation Transactions on the
Closing Date, the only Subsidiaries of the Company are and shall be QRS and GSA-
QRS. All of the issued and outstanding capital stock of QRS is validly issued,
fully paid and non-assessable. The Company owns all of the issued and
outstanding capital stock of QRS and, upon the consummation of the Formation
Transaction, will own directly or indirectly all
4
<PAGE>
of the membership interests in the Acquisition LLC, in each case free and clear
of any security interest, mortgage, pledge, lien, charge, encumbrance, claim,
restriction or equity interest (each of the forgoing a "Lien").
(d) The outstanding shares of Common Stock have been, and the Shares
to be issued and sold by the Company pursuant to the terms of this Agreement and
the shares of Common Stock to be issued in the Formation Transactions (the
"Conversion Shares") upon such issuance will be, duly authorized, validly
issued, fully paid and non-assessable and will not be subject to any preemptive
or similar rights. The description of the Common Stock in the Registration
Statement and the Prospectus is, and at the Closing Date will be, complete and
accurate in all material respects. At the Closing Date, the Company will have
authorized and issued capital stock as set forth in the Registration Statement
and the Prospectus under the caption "Capitalization." Except as set forth in
the Prospectus, the Company does not have outstanding, and at the Closing Date
will not have outstanding, any options to purchase, or any preemptive or other
rights or warrants to subscribe for, or any securities or obligations
convertible into, or any contracts or commitments to issue or sell, any shares
of Common Stock, any shares of capital stock of or membership interests in any
Subsidiary or any such warrants, convertible securities or obligations. The
offer, issuance and sale by the Company of any shares of Common Stock prior to
the date hereof is, and the issuance of the Conversion Shares will be, in
compliance with or exempt from the registration requirements of the Act and have
been, or shall be, made in compliance with applicable state securities, real
estate syndication and blue sky laws.
(e) The financial statements and schedules included in the
Registration Statement and the Prospectus present fairly in all material
respects the financial condition and position of the respective entity or
entities and the respective property or properties presented and reported on
therein as of the respective dates thereof and the results of operations and
cash flows of such entity or entities and such property or properties for the
respective periods covered thereby, all in conformity with generally accepted
accounting principles applied on a consistent basis throughout the entire period
involved, except as otherwise disclosed in the Prospectus. The pro forma
financial statements of the Company included in the Registration Statement and
the Prospectus comply in all material respects with the applicable requirements
of Rule 11-02 of Regulation S-X of the Commission and the pro forma adjustments
have been properly applied to the historical amounts in the compilation of such
statements. No other financial statements or schedules of the Company, any
predecessor or other entity or entities or any property or properties owned or
to be acquired by the Company are required by the Act or the Rules and
Regulations to be included in the Registration Statement or the Prospectus.
Ernst & Young LLP (the "Accountants"), who have reported on such financial
statements and schedules, are independent accountants with respect to the
Company as required by the Act and the Rules and Regulations. The statements
included in the Registration Statement with respect to the Accountants pursuant
to Item 509 of Regulation S-K of the Rules and Regulations are true and correct
in all material respects.
(f) The Company and its Subsidiaries maintain, and upon consummation
of the Formation Transactions will maintain, a system of internal accounting
controls which the Company believes is sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as necessary
to permit the preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets; (iii)
access to assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(g) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as otherwise stated
therein, (A) there has been no change, other than changes affecting the economy
or the industry generally, which, singly or in the aggregate with other changes,
is materially adverse to the condition (financial or otherwise), business,
properties, net worth, results of operations or prospects of the Company and its
Subsidiaries taken as a whole, whether or not arising in the ordinary course of
business, (B) no casualty loss or condemnation or other adverse event has
occurred with respect to any real property currently owned by the Company or any
of its Subsidiaries (the "Initial Properties") or, to the Company's knowledge,
any real property to be owned immediately after the Formation Transactions by
the Company or its then Subsidiaries
5
<PAGE>
(the "Acquired Properties" and together with the Initial Properties, the
"Properties") which singly or in the aggregate will have a Material Adverse
Effect, (C) there have been no acquisitions or other transactions entered into
by the Company or any of its Subsidiaries other than those in the ordinary
course of business, which are, singly or in the aggregate, material with respect
to the Company and its Subsidiaries taken as a whole, (D) there has been no
dividend or distribution of any kind declared, paid or made by the Company or
any of its Subsidiaries on any class of its capital stock, and (E) there has
been no change in the capital stock of the Company or any of its Subsidiaries
and no increase in the indebtedness of the Company or any of its Subsidiaries
that is, singly or in the aggregate, material to the Company and its
Subsidiaries taken as a whole.
(h) Neither the Company nor any of its Subsidiaries is an "investment
company" or an "affiliated person" of, or "promoter" or "principal underwriter"
for, an "investment company," as such terms are defined in the Investment
Company Act of 1940, as amended.
(i) Except as set forth in the Registration Statement and the
Prospectus, there are no actions, suits or proceedings pending or, to the
knowledge of the Company, threatened against or (i) affecting the Company, any
of its Subsidiaries, or, (ii) to the knowledge of the Company, the Acquisition
LLC, or any of their respective shareholders, members, directors or officers in
their capacity as such, or (iii) any of the Initial Properties or, to the
Company's knowledge, any of the Acquired Properties, before or by any Federal or
state court, commission, regulatory body, administrative agency or other
governmental body, domestic or foreign, which could, singly or in the aggregate,
upon consummation of the Formation Transactions or otherwise, have a Material
Adverse Effect.
(j) Each of the Company and its Subsidiaries has, and at the Closing
Date and following consummation of the Formation Transactions the Company and
each of its Subsidiaries at such time will have, (i) all governmental licenses,
permits, consents, orders, approvals and other authorizations necessary to carry
on its business as described in the Prospectus, and has not received notice of
any proceedings relating to the revocation or modification of any such
governmental license, permit, consent, order, approval or other authorization,
(ii) complied in all material respects with all laws, regulations and orders
applicable to it or its business and (iii) performed in all material respects
all its obligations required to be performed by it, and is not, and at the
Closing Date and following consummation of the Formation Transactions will not
be, in default, under any indenture, mortgage, deed of trust, voting trust
agreement, loan agreement, bond, debenture, note agreement, lease, contract,
recorded covenant, land use approval or zoning agreement or other agreement or
instrument (collectively, a "contract or other agreement") to which it is a
party or by which its property is bound or affected (other than contracts or
agreements which the Registration Statement states will be satisfied in full in
connection with the Formation Transactions). To the knowledge of the Company
and each of its Subsidiaries, no other party under any contract or other
agreement to which it is a party is in default in any respect thereunder in a
manner that could have a Material Adverse Effect. Neither the Company, any of
its Subsidiaries, nor, to the knowledge of the Company, the Acquisition LLC is
presently, or at the Closing Date or following the consummation of the Formation
Transactions will be, in violation of any provision of its respective charter,
certificate of incorporation, by-laws or operating agreement, as the case may
be.
(k) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required for the
consummation by the Company and its Subsidiaries of the transactions
contemplated by this Agreement or the Formation Agreements, except such as have
been obtained under the Act, the Rules and Regulations or the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and such as may be
required under state securities or Blue Sky laws or the by-laws and rules of the
NASD in connection with the purchase and distribution by the Underwriters of the
Shares. All consents of any nature whatsoever, including, without limitation,
all consents of stockholders and directors, required for the consummation of the
transactions contemplated hereby and the Formation Transactions have been duly
obtained, have not been revoked and remain in full force and effect; all such
stockholder consents were solicited on the basis of information that did not
include any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading.
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<PAGE>
(l) The Company and its Subsidiaries have full corporate power and
authority to enter into this Agreement and the Formation Agreements. This
Agreement has been, and when executed the Formation Agreements will be, duly
authorized, executed and delivered by the Company and constitutes or will
constitute on the Closing Date valid and binding agreements of the Company and
each of its Subsidiaries that is a party thereto, enforceable against the
Company and each such Subsidiary in accordance with the terms hereof and
thereof. Except as set forth in the Prospectus, the performance of this
Agreement and the Formation Agreements and the consummation of the transactions
contemplated hereby and thereby and the application of the net proceeds from the
offering in the manner set forth in the Prospectus under "Use of Proceeds" will
not result in the creation or imposition of any Lien upon any of the Properties
or any of the other assets of the Company or any of its Subsidiaries pursuant to
the terms or provisions of, or result in a breach or violation of any of the
terms or provisions of, or constitute a default under, or give any other party a
right to terminate any of its obligations under, or result in the acceleration
of any obligation under, the organizational documents of the Company or any of
its Subsidiaries, any contract or other agreement to which the Company, any of
its Subsidiaries, or, to the knowledge of the Company, the Acquisition LLC, is a
party or, upon consummation of the Formation Transactions, will be a party or by
which the Company, any of its Subsidiaries, or, to the knowledge of the Company,
the Acquisition LLC, or any of their respective properties is bound or affected
or, upon consummation of the Formation Transactions, will be bound or affected,
or violate or conflict with any judgment, ruling, decree, order, statute, rule
or regulation of any court or other governmental agency or body applicable to
the business or properties of the Company, any of its Subsidiaries, or, to the
knowledge of the Company, the Acquisition LLC in each case other than any such
creation, imposition, breach, violation or conflict that would have a Material
Adverse Effect.
(m) The Company, its Subsidiaries and, to the knowledge of the
Company, the Acquisition LLC have, and upon the consummation of the Formation
Transactions will have, good and marketable title in fee simple to all of the
Properties, free and clear of all Liens and defects, other than those (i)
referred to in the Prospectus, (ii) identified in the Company's existing title
insurance policies (copies of which have been provided to the Representatives)
or (iii) which will not, singly or in the aggregate, be material in relation to
the business of the Company and its Subsidiaries after consummation of the
Formation Transactions. All Liens or defects on or affecting the Properties
which are required to be disclosed in the Prospectus are disclosed therein. [All
Liens or defects on or affecting the Properties are listed in Schedule 3(m)] and
-------------
to the knowledge of the Company after due inquiry (i) the current use and any
intended use set forth in the Prospectus and occupancy of each of the Properties
complies with all applicable codes and zoning laws and regulations, if any,
except for such failures to comply which would not, upon consummation of the
Formation Transactions, singly or in the aggregate, have a Material Adverse
Effect; and (ii) there is no pending or threatened condemnation, zoning change,
environmental or other governmental proceeding or action that will in any
material respect affect the size of, use of, improvements on, construction on,
or access to the Properties, except such proceedings or actions that would not,
after consummation of the Formation Transactions, singly or in the aggregate
have a Material Adverse Effect. Upon consummation of the Formation
Transactions, except as described in the Prospectus no person (other than the
Company) will have any option or right of first refusal to purchase all or part
of any of the Properties or any interest in any of the Subsidiaries or other
assets of the Company.
(n) There is no document or contract of a character required by the
Act or the Rules and Regulations to be described in the Registration Statement
or the Prospectus or to be filed as an exhibit to the Registration Statement
which is not described or filed as required (collectively, the "Contracts").
All of the Contracts to which any of the Company or its Subsidiaries is a party
have been duly authorized, executed and delivered by such entity, constitute
valid and binding agreements of such entity and are enforceable against such
entity (and, after consummation of the Formation Transactions, will be
enforceable against the Company or the applicable Subsidiary at such time, as
the case may be) in accordance with the terms thereof, or, in the case of any
Contract to be executed on or before the Closing Date, will on the Closing Date
be duly authorized, executed and delivered by the Company and/or a Subsidiary,
and constitute valid and binding agreements of such entity enforceable against
each entity in accordance with the terms thereof.
7
<PAGE>
(o) No statement, representation, warranty or covenant made by the
Company in this Agreement or made (or to be made) in any certificate or document
required by this Agreement to be delivered to the Representatives was when made,
or will be on the Closing Date, inaccurate, untrue or incorrect.
(p) Neither the Company, its Subsidiaries nor, to the knowledge of
the Company, any of their directors, officers or controlling persons has taken,
directly or indirectly, any action intended, or which might reasonably be
expected, to cause or result, under the Act, the Exchange Act or otherwise, in,
or which has constituted, stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the Shares.
(q) No holder of securities of the Company has rights to the
registration of any securities of the Company because of the filing of the
Registration Statement.
(r) The Shares are duly authorized for listing, subject to official
notice of issuance, on the New York Stock Exchange.
(s) No labor dispute with the employees of the Company or any of its
Subsidiaries exists or, to the knowledge of the Company after due inquiry, is
imminent or threatened.
(t) The Company and its Subsidiaries own, or are licensed or
otherwise have the full right to use the material patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information, systems
or procedures), trademarks, services marks and trade names (collectively,
"patent and proprietary rights") presently employed by them or which are
necessary in connection with the conduct of the business now operated by them,
and neither the Company nor any of its Subsidiaries has received any written
notice or otherwise has actual knowledge after due inquiry of any infringement
of or conflict with asserted rights of others or any other claims with respect
to any patent or proprietary rights, or of any basis for rendering any patent
and proprietary rights invalid or inadequate to protect the interest of the
Company or any of its Subsidiaries.
(u) Neither the Company nor any of its Subsidiaries nor, to the
knowledge of the Company, any other employee or agent of the Company or any
Subsidiary, has made any payment of funds of the Company or any Subsidiary or
received or retained any funds in violation of any law, rule or regulation or of
a character required to be disclosed in the Prospectus.
(v) Upon the consummation of the Formation Transactions, title
insurance in favor of the Company will be in force with respect to each of the
Properties in an amount, in the case of the Acquired Properties, not less than
the cost of acquisition of such Acquired Property by the Acquisition LLC and, in
the case of the Initial Properties, at least equal to the cost of acquisition of
such Initial Property.
(w) Upon the consummation of the Formation Transactions, except as
disclosed on Schedule 3(m) or in the Registration Statement or the Prospectus,
-------------
there will be no mortgages or deeds of trust encumbering any of the Properties.
The mortgages encumbering the Properties are not convertible nor, upon the
consummation of the Formation Transactions, will the Company or any of its
Subsidiaries hold a participating interest therein and, except as disclosed in
the Registration Statement or the Prospectus, such mortgages are not cross-
defaulted or cross-collateralized to any other property (whether or not owned by
the Company or any Subsidiary).
(x) Upon consummation of the Formation Transactions, the Company will
have and will maintain property and casualty insurance in favor of the Company
and its Subsidiaries with respect to them and each of the Properties, in an
amount and on such terms as is reasonable and customary for businesses of the
type proposed to be conducted by the Company and its Subsidiaries. Neither the
Company, any of its Subsidiaries, nor, to the knowledge of the Company, the
Acquisition LLC, has received from any insurance company written notice of any
material defects or deficiencies affecting the insurability of any such
Properties.
8
<PAGE>
(y) In each case, except such as would not have a Material Adverse
Effect, each of the Properties and the Company and its Subsidiaries, (i) is and
will be, as of the Closing Date and upon consummation of the Formation
Transactions, in compliance with any and all applicable foreign, Federal, state
and local laws and regulations relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes, pollutants
or contaminants ("Environmental Laws"), (ii) has received, or will have
received, as of the Closing Date and upon consummation of the Formation
Transactions, as the case may be, all permits, licenses and other approvals
required of them under applicable Environmental Laws to conduct their respective
businesses and (iii) is, and will be as of the Closing Date and upon
consummation of the Formation Transactions, in compliance with all terms and
conditions of any such permit, license or approval.
(z) Except as specifically disclosed in the Prospectus or as
disclosed in the "Phase I" environmental reports listed on Schedule 3(z) hereto
-------------
(which are all of the "Phase I" environmental reports that have been conducted):
(i) To the knowledge of the Company, none of the owners of the
Properties has at any time, and, no other party has at any time, released
(as such term is defined in CERCLA (S)101(22)) or otherwise disposed of,
Hazardous Materials (as hereinafter defined) on, to or from the Properties
in violation of applicable Environmental Laws. The Company does not intend
to use the Properties or any subsequently acquired properties for the
handling, generation, treatment, storage or disposal of Hazardous
Materials, except for Hazardous Materials utilized in the ordinary course
of business of a tenant of any Property in compliance with applicable
Environmental Laws;
(ii) To the knowledge of the Company, there has been no release
(as such term is defined in CERCLA (S)101(22)) of Hazardous Materials into
waters on or adjacent to the Properties or onto lands from which such
hazardous or toxic waste of substances might seep, flow or drain into such
waters;
(iii) the Company has received no notice of, and has no
knowledge of, any occurrence or circumstance which, with notice or passage
of time or both, would give rise to, any claim under or pursuant to any
Environmental Law pertaining to hazardous or toxic waste or substances on
or originating from the Properties or arising out of the Company's conduct
in relation to such Environmental Law.
(iv) no environmental engineering firm which prepared "Phase I"
environmental assessment reports (or amendments thereto) or physical
condition (engineering) reports with respect to the Properties was employed
for such purpose on a contingent basis or has any substantial interest in
the Company or any of its Subsidiaries;
(v) neither the Properties nor any other land owned by the
Company or any of its Subsidiaries is included or, to the Company's
knowledge, proposed for inclusion on the National Priorities List issued
pursuant to CERCLA (as hereinafter defined) by the United States
Environmental Protection Agency (the "EPA") or on the inventory of other
potential "Problem" sites issued by the EPA and has not otherwise been
publicly identified by the EPA as a potential CERCLA site or included or,
to the Company's knowledge, proposed for inclusion on any list or inventory
issued pursuant to any other Environmental Law or issued by any other
Governmental Authority (as hereinafter defined); and
(vi) the Company has not entered into or been subject to any
consent decree, compliance order or administrative order with respect to
the environmental conditions at the Properties, any facilities or
improvements or any operations or activities thereon.
As used herein, "Hazardous Material" shall include, without
limitation, any flammable explosives, radioactive materials, oil, petroleum,
petroleum products, hazardous materials, hazardous wastes, hazardous or toxic
substances, asbestos or any material as defined by any Environmental Laws,
including, without limitation, the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et
--
seq.) ("CERCLA"), the Hazardous Materials Transportation Act, as amended (49
- ---
U.S.C. Section
9
<PAGE>
1801, et seq.), the Resource Conservation and Recovery Act, as amended (42
-- ---
U.S.C. Section 9601, et seq.), and in the regulations adopted pursuant to each
-- ---
of the foregoing or by any Federal, state or local governmental authority having
jurisdiction over the Properties as described in the Prospectus (a "Governmental
Authority").
In the ordinary course of its business, each of the Company and its
Subsidiaries conducts a periodic review of the effect of Environmental Laws on
its business, operations and properties in the course of which it identifies and
evaluates associated costs and liabilities (including, without limitation, any
capital or operating expenditures required for investigation, clean-up, closure
of properties or compliance with Environmental Laws or any permit, license or
approval, any related constraints on operating activities and any potential
liabilities to third parties). On the basis of such review and on the basis of
the reviews conducted by the Company in connection with the Acquired Properties,
the Company has reasonably concluded that such associated costs and liabilities
would not, upon consummation of the Formation Transactions, singly or in the
aggregate, have a Material Adverse Effect.
(aa) The Company has not distributed and, prior to the later to occur
of (i) the Closing Date and (ii) completion of the distribution of the Shares,
will not distribute any offering material in connection with the offering and
sale of the Shares other than the Registration Statement, the Prospectus or
other materials, if any, permitted by the Act.
(ab) Neither the assets of the Company nor its Subsidiaries
constitute, nor will such assets, as of the Closing Date, constitute, "plan
assets" under the Employee Retirement Income Security Act of 1974, as amended,
including the regulations and published interpretations thereunder ("ERISA").
The Company and its Subsidiaries are, and as of the Closing Date and upon
consummation of the Formation Transactions will be, in compliance in all
material respects with all presently applicable provisions of ERISA; no
"reportable event" (as defined in ERISA) has occurred with respect to any
"pension plan" (as defined in ERISA) for which the Company or any of its
Subsidiaries would have any liability; neither the Company nor any of its
Subsidiaries has incurred or expects to incur liability under (i) Title IV of
ERISA with respect to termination of, or withdrawal from, any "pension plan" or
(ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended,
including the regulations and published interpretations thereunder (the "Code");
and each "pension plan" for which the Company or any of its Subsidiaries would
have any liability that is intended to be qualified under Section 401(a) of the
Code is so qualified in all material respects and nothing has occurred, whether
by action or by failure to act, which would cause the loss of such
qualification.
(ac) The Company has operated and will continue to operate in a
manner so as to qualify as a "real estate investment trust" ("REIT") under
Sections 856 through 860 of the Code; the Company will elect to be taxed as a
REIT under the Code when it files its Federal income tax return for the year
ending December 31, 1996.
(ad) The Company has filed all material Federal, state and foreign
income and franchise tax returns required to be filed on or prior to the date
hereof and has paid taxes shown as due thereon, other than taxes which are being
contested in good faith and for which adequate reserves have been established in
accordance with generally accepted accounting principles; and the Company has no
knowledge, after due inquiry, of any tax deficiency which has been or might be
asserted or threatened against the Company. To the knowledge for the Company,
there are no tax returns of the Company or any of its Subsidiaries that are
currently being audited by state, local or Federal taxing authorities or
agencies which would have Material Adverse Effect.
(ae) Each entity identified in the Prospectus or in the rent roll for
each Property attached as Schedule 3(ae) (collectively, the "Rent Rolls") as a
--------------
tenant of any Property (each, a "Tenant") is in actual possession of such
Property under a lease to such Tenant (each such lease, a "Lease"). Except as
disclosed in the Prospectus, each Lease is in full force and effect and neither
the Company nor any of its Subsidiaries has notice of any defense to the
obligations of the Tenant thereunder or any claim asserted or threatened by any
person or entity, which claim, if sustained, would have a Material Adverse
Effect. To the knowledge of the Company, no Tenant of any of the Properties is
in default under any of the Leases governing such Properties and there is no
10
<PAGE>
event which, but for the passage of time or the giving of notice, or both, would
constitute a material default under any of such Leases, except for such defaults
that would not, upon consummation of the Formation Transactions, individually or
in the aggregate, have a Material Adverse Effect. The Rent Rolls are accurate
and correct descriptions of the principle terms of the Leases and of the status
of the tenancy of each Tenant as of the date of the Rent Rolls and as summarized
in the Rent Rolls.
(af) All Tenant Leases provide that the Tenant is responsible for
environmental liabilities related to such Tenant's operations, and that such
Tenant must comply with all Environmental Laws [except as set forth on Schedule
--------
(af) attached hereto.]
- ----
(ag) Except as disclosed in the Prospectus or on Schedule (ag)
-------------
attached hereto, no Tenant under any Lease has an option or right of first
refusal or similar right to purchase the premises leased thereunder or any right
to extend such Lease or reduce the rent payable thereunder.
(ah) The Company, a Subsidiary thereof or the applicable Tenant owns
or possesses all material governmental licenses, permits, certificates,
consents, orders, approvals and other authorizations including, without
limitation, all certificates of occupancy and similar certificates and
clearances necessary to conduct the operations as presently permitted to be
conducted by each Tenant at each Property under the applicable Lease
(collectively, the "Authorizations"), and none of the Company, the Company's
Subsidiaries or, to the Company's knowledge, such Tenant has received any notice
of proceedings or administrative action relating to the revocation or
modification of any such Authorization.
(ai) Except as disclosed in the Prospectus, no rent under any Lease
has been paid in advance for more than one month and no "free rent" or other
rental concession to the Tenant thereunder is currently in effect.
(aj) Each Property is served by all utilities necessary for its use
and operation as currently used and fronts on a public road or right of way.
(ak) Except as specifically disclosed in the Prospectus, (i) to the
knowledge of the Company, there is no material defect in the condition of any
Property, the improvements thereon, the structural elements thereof, or the
mechanical systems therein, nor any material damage from casualty or other
cause, nor any soil condition of any such Property that will not support all of
the improvements thereon without the need for unusual or new subsurface
excavations, fill, footings, caissons or other installations, except for any
such defect, damage or condition that has been corrected or will be corrected in
the ordinary course of the business of such Property as part of the Company's
scheduled annual maintenance and improvement program, (ii) to the knowledge of
the Company, there have been no alterations to the exteriors of any of the
buildings or other improvements on any Property, and no excavations landscaping,
manmade or natural alterations to terrain of any Property, since the date of the
surveys provided to the Underwriters and counsel to the Underwriters that would
render any of such surveys inaccurate in any material respect and (iii) there is
no pending or planned substantial renovation, remodeling, construction, or
tenant improvement project relating to any of the Properties.
3. Agreements of the Company.
-------------------------
The Company agrees with the several Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or
thereafter during such period as the Prospectus is required by law to be
delivered in connection with sales of the Shares by an Underwriter or dealer,
file any amendment or supplement to the Registration Statement or the
Prospectus, unless a copy thereof shall first have been submitted to the
Representatives within a reasonable period of time prior to the filing thereof
and the Representatives shall not have objected thereto in good faith.
(b) The Company will use its reasonable best efforts to cause the
Registration Statement to become effective and will notify the Representatives
promptly, and will confirm such advice in writing, (1) when
11
<PAGE>
the Registration Statement has become effective and when any post-effective
amendment thereto becomes effective, (2) of any request by the Commission for
amendments or supplements to the Registration Statement or the Prospectus or for
additional information, (3) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the initiation of
any proceedings for that purpose or the threat thereof, (4) of the happening of
any event during the period mentioned in the second sentence of Section 4(e)
that in the judgment of the Company makes any statement of a material fact made
in the Registration Statement or the Prospectus untrue or that requires the
making of any changes in the Registration Statement or the Prospectus in order
to make the statements therein, in light of the circumstances in which they are
made, not misleading and (5) of receipt by the Company or any representative or
attorney of the Company of any other communication from the Commission relating
to the Company, the Registration Statement, any preliminary prospectus or the
Prospectus. If at any time the Commission shall issue any order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible moment. If the Company has omitted any information from the
Registration Statement pursuant to Rule 430A, the Company will use its
reasonable best efforts to comply with the provisions of and make all requisite
filings with the Commission pursuant to said Rule 430A and to notify the
Representatives promptly of all such filings.
(c) The Company will furnish to each of the Representatives, without
charge, two signed copies of the Registration Statement and of any post-
effective amendment thereto, including financial statements and schedules, and
all exhibits thereto, and will furnish to the Representatives, without charge,
for transmittal to each of the other Underwriters, a copy of the Registration
Statement and any post-effective amendment thereto, including financial
statements and schedules, and all exhibits thereto.
(d) The Company will comply in all material respects with all the
provisions of any undertakings contained in the Registration Statement.
(e) On the Effective Date, and thereafter from time to time, the
Company will deliver to each of the Underwriters, without charge, as many copies
of the Prospectus or any amendment or supplement thereto as the Representatives
may reasonably request. The Company consents to the use of the Prospectus or
any amendment or supplement thereto by the several Underwriters and by all
dealers to whom the Shares may be sold, both in connection with the offering or
sale of the Shares and for any period of time thereafter during which the
Prospectus is required by law to be delivered in connection therewith. If
during such period of time any event shall occur which in the judgment of the
Company or counsel to the Underwriters should be set forth in the Prospectus in
order to make any statement therein, in the light of the circumstances under
which it was made, not misleading, or if it is necessary to supplement or amend
the Prospectus to comply with law, the Company will forthwith prepare and duly
file with the Commission an appropriate supplement or amendment thereto, and
will deliver to each of the Underwriters, without charge, such number of copies
of such supplement or amendment to the Prospectus as the Representatives may
reasonably request.
(f) The Company will cooperate with the Representatives and counsel
to the Underwriters in connection with any required registration or
qualification of the Shares for offer and sale (including any filings required
to obtain an exemption therefrom) and any broker/dealer registration,
qualification or exemption under the securities or Blue Sky laws of such
jurisdictions as the Representatives may request; provided, that in no event
shall the Company be obligated to qualify to do business in any jurisdiction
where it is not now so qualified or to take any action which would subject it to
general service of process in any jurisdiction where it is not now so subject.
(g) During the period of five years commencing on the Effective Date,
the Company will furnish to the Representatives and each other Underwriter who
may so request copies of such financial statements and other periodic and
special reports as the Company may from time to time distribute generally to the
holders of any class of its capital stock, and will furnish to the
Representatives and each other Underwriter who may so request a copy of each
annual or other report it shall be required to file with the Commission.
12
<PAGE>
(h) The Company will make generally available to holders of its
securities as soon as may be practicable but in no event later than the last day
of the fifteenth full calendar month following the calendar quarter in which the
Effective Date falls, an earnings statement (which need not be audited but shall
be in reasonable detail) for a period of at least 12 months commencing after the
Effective Date, and satisfying the provisions of Section 11(a) of the Act
(including Rule 158 of the Rules and Regulations).
(i) Whether or not the transactions contemplated by this Agreement
are consummated or this Agreement is terminated, the Company will pay, or
reimburse if paid by the Representatives, all costs and expenses incident to the
performance of the obligations of the Company under this Agreement, including
but not limited to costs and expenses of or relating to (1) the preparation,
printing and filing of the Registration Statement and exhibits to it, each
preliminary prospectus, the Prospectus and any amendment or supplement to the
Registration Statement or the Prospectus (the "Offering Documents"), (2) the
preparation and delivery of certificates representing the Shares, (3) furnishing
(including costs of shipping and mailing) such copies of the Registration
Statement, the Prospectus and any preliminary prospectus, and all amendments and
supplements thereto, as may be requested for use in connection with the offering
and sale of the Shares by the Underwriters or by dealers to whom Shares may be
sold, (4) the listing of the Shares on the New York Stock Exchange, (5) any
filings to be made by the Underwriters with the NASD, and the fees,
disbursements and other charges of counsel for the Underwriters in connection
therewith, (6) the registration or qualification of the Shares for offer and
sale (including obtaining any exemptions therefrom) and any broker/dealer
registration, qualification or exemption under the securities or Blue Sky laws
of such jurisdictions designated pursuant to Section 4(f), including the
reasonable fees, disbursements and other charges of counsel to the Underwriters
in connection therewith, and the preparation and printing of preliminary,
supplemental and final Blue Sky memoranda, (7) counsel to the Company, (8) the
transfer agent for the Shares, (9) the Accountants and (10) any fees and
disbursements of structural and environmental engineers or third parties
performing market studies which are incurred by PaineWebber Incorporated in
connection with the offering of the Shares.
(j) If this Agreement shall be terminated by the Company pursuant to
any of the provisions hereof (otherwise than pursuant to Section 8) or if for
any reason the Company shall be unable to perform its obligations hereunder, the
Company will reimburse the several Underwriters for all out-of-pocket expenses
(including the reasonable fees and disbursements of one counsel to the
Underwriters) reasonably incurred by them in connection herewith.
(k) The Company will not at any time, directly or indirectly, take
any action intended, or which might reasonably be expected, to cause or result
in, or which will constitute, stabilization of the price of the shares of Common
Stock to facilitate the sale or resale of any of the Shares.
(l) The Company will apply the net proceeds from the offering and
sale of the Shares to be sold by the Company in the manner set forth in the
Prospectus under "Use of Proceeds" and shall file such reports with the
Commission with respect to the sale of the Shares and the application of the
proceeds therefrom as may be required in accordance with Rule 463 under the Act.
(m) Until December 31, 1997, the Company will not, without the prior
written consent of PaineWebber Incorporated, grant options to purchase shares of
Common Stock or any shares of restricted or unrestricted Common Stock under the
1996 Plan, the 1997 Stock Option Plan or any other employee benefit plan, other
than the shares of stock and stock options described in the Prospectus under
"Benefits to Related Parties" which are to be granted on or before the Closing
Date and up to 30,000 options or shares of Common Stock, in the aggregate, which
may be granted or issued under the 1997 Stock Option Plan to new senior
executives or directors retained after the Closing Date.
(n) The Company will cause the Continuing Investors and its executive
officers, including Messrs. Sudarsky, Marcus, Gold, Nelson, Kreitzer, Stone and
Ciruzzi, to enter into agreements with the Representatives in the form set forth
in Exhibit 4(n) hereto to the effect that they will not, for a period of one
------------
year, for the Continuing Investors who are not executive officers, and two
years, for such executive officers,
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after the Effective Date, without the prior written consent of PaineWebber
Incorporated, directly or indirectly, offer, sell, contract to sell, 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) other than transfers by a natural person upon the death
or disability of any such natural person or in connection with bona fide estate
planning by such natural person. Except as permitted pursuant to Section 4(m),
the Company shall not, for a period of one year after the Effective Date,
without the prior written consent of PaineWebber Incorporated, directly or
indirectly, 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).
(o) The Company will use its best efforts to continue to meet the
requirements to qualify as a "real estate investment trust" after the Closing
Date unless the Board of Directors determines in good faith that meeting such
requirements is not in the best interest of the holders of Common Stock.
5. Conditions of the Obligations of the Underwriters.
-------------------------------------------------
In addition to the execution and delivery of the Price Determination
Agreement, the obligations of each Underwriter hereunder are subject to the
following conditions:
(a) The Registration Statement shall have become effective and the
Representatives shall have received notice thereof not later than 5:00 p.m., New
York City time, on the date of this Agreement or at such later date and time as
shall be consented to in writing by the Representatives and all filings required
by Rule 424 of the Rules and Regulations and Rule 430A shall have been made
within the time periods required by Rule 424.
(b) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall be
pending or threatened by the Commission. No order suspending the effectiveness
of the Registration Statement or the qualification or registration of the Shares
under the securities or Blue Sky laws of any jurisdiction shall be in effect and
no proceeding for such purpose shall be pending before or threatened by the
Commission or the authorities of any such jurisdiction. Any request for
additional information on the part of the staff of the Commission or any such
authorities shall have been complied with to the satisfaction of the staff of
the Commission or such authorities and, after the date hereof, no amendment or
supplement to the Registration Statement or the Prospectus shall have been filed
unless a copy thereof was first submitted to the Representatives and the
Representatives did not object thereto in good faith. The Representatives shall
have received certificates, dated the Closing Date and the Option Closing Date
(as the case may be) and signed on behalf of the Company by the Chief Executive
Officer of the Company and the Chief Financial Officer of the Company (who may,
as to proceedings threatened, rely upon the best of their information and
belief), stating that the foregoing conditions in this Section 5(b) have been
and remain satisfied.
(c) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, (i) there shall not have been,
and no development shall have occurred which could reasonably be expected to
result in, a change which, singly or in the aggregate with other changes, would
have a Material Adverse Effect, whether or not arising from transactions in the
ordinary course of business, other than as set forth in or contemplated by the
Registration Statement and the Prospectus and (ii) the Company and its
Subsidiaries (taken as a whole) shall have sustained any loss or interference
which, singly or in the aggregate, is material with respect to its business or
properties from fire, explosion, flood or other casualty, whether or not covered
by insurance, or from any labor dispute or any court or legislative or other
governmental action, order or decree, which is not set forth in the Registration
Statement and the Prospectus, if in the judgment of the Representatives any such
development makes it impracticable or inadvisable to consummate the sale and
delivery of the Shares by the Underwriters at the initial public offering price.
(d) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there shall have been no
litigation or other proceeding instituted against the Company or any of its
Subsidiaries or any of their respective officers or directors in their
capacities as such, before or by any Federal,
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state or local court, commission, regulatory body, administrative agency or
other governmental body, domestic or foreign, in which litigation or proceeding
an unfavorable ruling, decision or finding would, singly or in the aggregate,
have a Material Adverse Effect.
(e) Each of the representations and warranties of the Company
contained herein shall be true and correct in all material respects at the
Closing Date and, with respect to the Option Shares, at the Option Closing Date,
as if made at the Closing Date and, with respect to the Option Shares, at the
Option Closing Date, and all covenants and agreements contained herein to be
performed on the part of the Company and all conditions herein contained to be
fulfilled or complied with by the Company at or prior to the Closing Date and,
with respect to the Option Shares, at or prior to the Option Closing Date, shall
have been duly performed, fulfilled or complied with.
(f) The Representatives shall have received an opinion, dated the
Closing Date and, with respect to the Option Shares, the Option Closing Date,
and satisfactory in form and substance to counsel for the Underwriters, from
Skadden, Arps, Slate, Meagher & Flom LLP, counsel to the Company, in the form
set forth in Exhibit 5(f).
------------
(g) The Representatives shall have received an opinion, dated the
Closing Date and, with respect to the Option Shares, the Option Closing Date,
and satisfactory in form and substance to counsel for the Underwriters from
Ballard Spahr Andrews & Ingersoll, special Maryland counsel to the Company, in
the form set forth in Exhibit 5(g).
------------
(h) The Representatives shall have received an opinion, dated the
Closing Date and the Option Closing Date, from Goodwin, Procter & Hoar LLP,
counsel to the Underwriters, with respect to the Registration Statement, the
Prospectus and this Agreement, which opinion shall be satisfactory in all
respects to the Representatives, and such counsel shall have received such
papers and information as they reasonably may request to enable them to pass
upon such matters.
(i) Concurrently with the execution and delivery of this Agreement
or, if the Company elects to rely on Rule 430A, on the date of the Prospectus,
the Accountants shall have furnished to the Representatives a letter, dated the
date of its delivery, addressed to the Representatives and in form and substance
satisfactory to the Representatives, confirming that they are independent
accountants with respect to the Company as required by the Act and the Rules and
Regulations and that the financial statements comply with the requirements of
the Act and addressing certain financial and other statistical and numerical
information contained in the Registration Statement. At the Closing Date and,
as to the Option Shares, the Option Closing Date, the Accountants shall have
furnished to the Representatives a letter, dated the date of its delivery, which
shall confirm, on the basis of a review in accordance with the procedures set
forth in the letter from the Accountants, that nothing has come to their
attention during the period from the date of the letter referred to in the prior
sentence to a date (specified in the letter) not more than five days prior to
the Closing Date and the Option Closing Date which would require any change in
their letter dated the date hereof if it were required to be dated and delivered
at the Closing Date and the Option Closing Date.
(j) At the Closing Date and, as to the Option Shares, the Option
Closing Date, there shall be furnished to the Representatives an accurate
certificate, dated the date of its delivery, signed on behalf of the Company by
each of the Chief Executive Officer, the President and the Chief Financial
Officer of the Company, in form and substance satisfactory to the
Representatives, with respect to such matters as the Representatives may
reasonably request, including, without limitation certificates to the effect
that:
(i) Each signer of such certificate has carefully examined the
Registration Statement and the Prospectus and (A) as of the date of such
certificate, such documents are true and correct in all material respects
and do not omit to state a material fact required to be stated therein or
necessary in order to make the statements therein not misleading and (B) in
the case of the certificate delivered at the Closing Date and the Option
Closing Date, since the Effective Date no event has occurred as a result of
which it is necessary
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<PAGE>
to amend or supplement the Prospectus in order to make the statements
therein not misleading in any material respect.
(ii) Each of the representations and warranties of the Company
contained in this Agreement were, when originally made, and are, at the
time such certificate is delivered, true and correct in all material
respects.
(iii) Each of the covenants required herein to be performed by
the Company on or prior to the delivery of such certificate has been duly,
timely and fully performed and each condition herein required to be
complied with by the Company on or prior to the date of such certificate
has been duly, timely and fully complied with.
(iv) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, (A) there has not
been, and no development has occurred which could reasonably be expected to
result in, a change which, singly or in the aggregate with other changes,
is materially adverse to the condition (financial or otherwise), business,
properties, net worth, results of operations or prospects of the Company
and its Subsidiaries (taken as a whole), whether or not arising from
transactions in the ordinary course of business, in each case other than as
set forth in or contemplated by the Registration Statement and the
Prospectus and (B) the Company and its Subsidiaries (taken as a whole) have
not sustained any loss or interference which, singly or in the aggregate,
is material with respect to its business or properties from fire,
explosion, flood or other casualty, whether or not covered by insurance, or
from any labor dispute or any court or legislative or other governmental
action, order or decree, which is not set forth in the Registration
Statement and the Prospectus.
(k) On or prior to the Closing Date, the Representatives shall have
received the executed agreements referred to in Section 4(n).
(l) The Shares shall be qualified for sale in such states as the
Representatives may reasonably request, each such qualification shall be in
effect and not subject to any stop order or other proceeding on the Closing Date
and the Option Closing Date.
(m) Prior to the Closing Date, the Shares shall have been duly
authorized for listing by the New York Stock Exchange upon official notice of
issuance.
(n) The NASD shall have approved the underwriting terms and
arrangements and such approval shall not have been withdrawn or limited.
(o) Each of the Formation Transactions shall have been consummated or
shall occur simultaneously with the closing of the purchase and sale of the
Shares hereunder, and you shall have received satisfactory evidence or
certification of such consummation from such persons as you shall reasonably
request.
(p) The Company shall have entered into a Credit Facility of at least
$150 million with Bank of America set forth in the Prospectus.
(q) On or before Closing Date, the Company shall have delivered to
the Representatives with respect to each Property:
(i) a copy of the deed or confirmatory deed therefor, naming
the Company or one of its Subsidiaries as the grantee thereunder;
(ii) a policy of title insurance (or a commitment to issue such
a policy) naming the Company as named insured and insuring (or committing to
insure) that the Company or one of its Subsidiaries owns fee title to the
real property in an amount, in the case of the Acquired Properties, not
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<PAGE>
less than the cost of acquisition of such Acquired Property by the
Acquisition LLC and, in the case of the Initial Properties, at least equal
to the cost of acquisition of such Initial Property, which policy (or
commitment) shall be issued by [_________________] Title Insurance Company
or such other title insurance company reasonably acceptable to the
Representatives (any such person or persons, the "Title Company"), and
contain only such exceptions to title with respect to each Property as
described in Schedule 5(q) (the "Permitted Exceptions");
-------------
(iii) a survey of such Property in form satisfactory to the
Representatives;
(iv) policies or certificates of insurance relating to such
Property evidencing coverages and in amounts customarily obtained by owners
of similar properties in similar locations;
(v) copies of such affidavits, certificates and instruments of
indemnification as shall reasonably be required to induce the Title Company
to issue the policy (or commitment) contemplated in subparagraph (ii)
above;
(vi) copies of checks payable to the appropriate public
officials in payment of all recording costs and transfer taxes (or of
checks or confirmation of wire transfers to the Title Company in respect of
such amounts) due in respect of the recording of any instruments to be
recorded in connection with the Formation Transactions, together with a
check or wire transfer for the Title Company in payment of the Title
Company's premium, search and examination charges, survey costs and any
other amounts due in connection with the issuance of its policy (or
commitment);
(vii) an engineering (structural) report from an engineer or
engineers and in a form reasonably satisfactory to the Representatives;
(viii) if such Property is subject to an existing mortgage, a
letter dated not earlier than 10 days prior to the Closing Date from the
holder of such existing mortgage indicating that the mortgagor or grantor
under such existing mortgage is not then in default, and indicating the
principal amount, accrued interest and all other amounts then secured by
such existing mortgage; and unless such existing mortgage is disclosed in
the Registration Statement and the Prospectus as a mortgage to remain
outstanding after the Closing Date, then such letter should include an
agreement by the holder of such mortgage to repayment on the Closing Date
of the indebtedness relating to such mortgage, and indicating the principal
amount, accrued interest and prepayment penalties (if any) required to
satisfy all amounts then secured by such existing mortgage and the
additional amount required for each day after the date of such letter
necessary to satisfy all obligations secured thereby.
(ix) a copy of each Lease (including all amendments and
supplements thereto);
(x) a copy of each environmental report prepared by or for the
Company, any of its Subsidiaries or the Parent or any of their affiliates;
and
(xi) a certificate signed by an officer of the Company or an
appropriate local official attaching a copy of the certificate of occupancy
for such Property, or other evidence reasonably satisfactory to the
Representatives that the Property may be legally occupied for its current
use.
(r) Between the date hereof and Closing Date, (i) each of the
Properties shall have been operated in the ordinary course of business and in
material compliance with all applicable laws and regulations; (ii) no Lease
shall have been amended or terminated and no material waiver or consent under
any Lease shall have been granted and the lessees thereunder shall have complied
with all their material obligations thereunder; and (iii) all required payments
under any existing mortgages shall have been made.
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<PAGE>
(s) The Company shall have furnished to the Representatives such
certificates, in addition to those specifically mentioned herein, as the
Representatives may have reasonably requested as to the accuracy and
completeness at the Closing Date and the Option Closing Date of any statement in
the Registration Statement or the Prospectus, as to the accuracy at the Closing
Date and the Option Closing Date of the representations and warranties of the
Company herein, as to the performance by the Company of its obligations
hereunder, or as to the fulfillment of the conditions concurrent and precedent
to the obligations hereunder of the Representative. All such opinions,
certificates, letters and other documents will be in compliance with the
provisions hereof only if they are satisfactory in form and substance to you.
The Company will furnish the Representatives with conformed copies of such
opinions, certificates, letters and other documents as the Representatives shall
reasonably request.
(t) Any certificate signed by an officer of the Company and delivered
to the Representatives hereunder shall be deemed a representation and warranty
by the Company to each Underwriter as to the matters covered thereby.
5. Indemnification.
---------------
(a) The Company will indemnify and hold harmless each Underwriter
(including any Underwriter in its role as qualified independent underwriter
pursuant to the rules of the National Association of Securities Dealers, Inc.),
the directors, officers, employees and agents of each Underwriter and each
person, if any, who controls each Underwriter within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, liabilities, expenses and damages (including, but not limited
to, any and all investigative, legal and other expenses reasonably incurred (in
accordance with subsection (c) below) in connection with, and any and all
amounts paid in settlement of, any action, suit or proceeding between any of the
indemnified parties and any indemnifying parties or between any indemnified
party or any third party, or otherwise, or any claim asserted), as and when
incurred, to which any Underwriter, or any such person, may become subject under
the Act, the Exchange Act or other Federal or state statutory law or regulation,
at common law or otherwise, insofar as such losses, claims, liabilities,
expenses or damages arise out of or are based on (i) any untrue statement or
alleged untrue statement of a material fact contained in any preliminary
prospectus, the Registration Statement or the Prospectus or any amendment or
supplement to the Registration Statement or the Prospectus, or in any
application or other document executed by or on behalf of the Company or based
on written information furnished by or on behalf of the Company filed in any
jurisdiction in order to qualify the Shares under the securities laws thereof or
filed with the Commission, (ii) the omission or alleged omission to state in
such document a material fact required to be stated in it or necessary to make
the statements in it not misleading or (iii) any act or failure to act or any
alleged act or failure to act by any Underwriter in connection with, or relating
in any manner to, the Shares or the offering contemplated hereby, and which is
included as part of or referred to in any loss, claim, liability, expense or
damage arising out of or based upon matters covered by clause (i) or (ii) above
(provided that the Company shall not be liable under this clause (iii) to the
extent it is finally judicially determined by a court of competent jurisdiction
that such loss, claim, liability, expense or damage resulted directly from any
such acts or failures to act undertaken or omitted to be taken by such
Underwriter through its gross negligence or willful misconduct); provided that
the Company will not be liable to the extent that (A) such loss, claim,
liability, expense or damage arises from the sale of the Shares in the public
offering to any person by an Underwriter and is based on an untrue statement or
omission or alleged untrue statement or omission made in reliance on and in
conformity with information relating to any Underwriter furnished to the Company
by the Representatives on behalf of any Underwriter expressly for inclusion in
the Registration Statement, any preliminary prospectus or the Prospectus or (B)
results solely from an untrue statement of a material fact contained in, or the
omission of a material fact from, such preliminary prospectus, which untrue
statement or omission was completely corrected in the Prospectus (as then
amended or supplemented) if the Company shall sustain the burden of proving that
the Underwriters sold Shares to the person alleging such loss, claim, liability,
expense or damage without sending or giving, at or prior to the written
confirmation of such sale, a copy of the Prospectus (as then amended or
supplemented) if the Company had previously furnished copies thereof to the
Underwriters within a reasonable amount of time prior to such sale or such
confirmation, and the Underwriters failed to deliver the corrected Prospectus,
if required by law to have so delivered it and if delivered would have been a
complete defense against the person asserting such loss, claim, liability,
expense or damage. The
18
<PAGE>
Company acknowledges that the statements set forth in the second, seventh and
last paragraphs of, and the chart set forth in, the section captioned
"Underwriting" in the Prospectus constitute the only information relating to any
Underwriters furnished in writing to the Company by the Representatives
specifically for inclusion in the Registration Statement. This indemnity
agreement will be in addition to any liability that the Company might otherwise
have.
The Company also will indemnify and hold harmless the Independent
Underwriter, its directors, officers, employees and agents and each person, if
any, who controls the Independent Underwriter within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, from and against any and all
losses, claims, liabilities, expenses and damages (including, but not limited
to, any and all investigative, legal and other expenses reasonably incurred (in
accordance with subsection (c) below) in connection with, and any and all
amounts paid in settlement of, any action, suit or proceeding between any of the
indemnified parties and any indemnifying parties or between any indemnified
party or any third party, or otherwise, or any claim asserted) as and when
incurred, as a result of the Independent Underwriter's participation as a
"qualified independent underwriter" within the meaning of the Conduct Rules of
the NASD in connection with the offering of the Shares, except for any losses,
claims, liabilities, expenses and damages resulting from the Independent
Underwriter's or such controlling person's willful misconduct or gross
negligence.
(b) Each Underwriter will indemnify and hold harmless the Company,
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, each director of the Company and
each officer of the Company who signs the Registration Statement to the same
extent as the foregoing indemnity from the Company to each Underwriter, but only
insofar as losses, claims, liabilities, expenses and damages arise out of or are
based on any untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information relating to any
Underwriter furnished to the Company by the Representatives on behalf of such
Underwriter expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus. This indemnity will be in addition to any
liability that each Underwriter might otherwise have; provided, however, that in
no case shall any Underwriter be liable or responsible for any amount in excess
of the underwriting discounts and commissions received by such Underwriter.
(c) Any party that proposes to assert the right to be indemnified
under this Section 6 will, promptly after receipt of notice of commencement of
any action against such party in respect of which a claim is to be made against
an indemnifying party or parties under this Section 6, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission so to notify such indemnifying party will not
relieve it from any liability that it may have to any indemnified party under
the foregoing provisions of this Section 6 unless, and only to the extent that,
such omission results in the forfeiture of substantive rights or defenses by the
indemnifying party. If any such action is brought against any indemnified party
and it notifies the indemnifying party of its commencement, the indemnifying
party will be entitled to participate in and, to the extent that it elects by
delivering written notice to the indemnified party promptly after receiving
notice of the commencement of the action from the indemnified party, jointly
with any other indemnifying party similarly notified, to assume the defense of
the action, with counsel satisfactory to the indemnified party, and after notice
from the indemnifying party to the indemnified party of its election to assume
the defense, the indemnifying party will not be liable to the indemnified party
for any legal fees or other expenses of counsel in defending such action except
as provided below and except for the reasonable costs of investigation
subsequently incurred by the indemnified party in connection with the defense.
The indemnified party will have the right to employ its own counsel in any such
action, but the fees, expenses and other charges of such counsel will be at the
expense of such indemnified party unless (1) the employment of counsel by the
indemnified party has been authorized in writing by the indemnifying party, (2)
the indemnified party has reasonably concluded (based on advice of counsel) that
there may be legal defenses available to it or other indemnified parties that
are different from or in addition to those available to the indemnifying party,
(3) a conflict or potential conflict exists (based on advice of counsel to the
indemnified party) between the indemnified party and the indemnifying party (in
which case the indemnifying party will not have the right to direct the defense
of such action on behalf of the indemnified party) or (4) the indemnifying party
has not in fact employed counsel to assume the defense of such
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<PAGE>
action within a reasonable time after receiving notice of the commencement of
the action, in each of which cases the reasonable fees, disbursements and other
charges of counsel selected by the indemnified party will be at the expense of
the indemnifying party or parties. It is understood that the indemnifying party
or parties shall not, in connection with any proceeding or related proceedings
in the same jurisdiction, be liable for the reasonable fees, disbursements and
other charges of more than one separate firm admitted to practice in such
jurisdiction at any one time for all such indemnified party or parties;
provided, however, that if indemnity is sought pursuant to the second paragraph
of Section 6(a), then, in addition to such firm for the indemnified parties, the
indemnifying party shall be liable for the reasonable fees and expenses of not
more than one separate counsel (in addition to any necessary local counsel) for
the Independent Underwriter in its capacity as a "qualified independent
underwriter," its directors, officers, employees and agents and all persons, if
any, who control the Independent Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act, if, in the reasonable judgment of the
Independent Underwriter, there may exist a conflict of interest between the
Independent Underwriter and the other indemnified parties. All such fees,
disbursements and other charges will be reimbursed by the indemnifying party
promptly as they are incurred. An indemnifying party will not be liable for any
settlement of any action or claim effected without its written consent (which
consent will not be unreasonably withheld). No indemnifying party shall,
without the prior written consent of each indemnified party, settle or
compromise or consent to the entry of any judgment in any pending or threatened
claim, action or proceeding relating to the matters contemplated by this Section
6 (whether or not any indemnified party is a party thereto), unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising or that may arise out of such
claim, action or proceeding. Notwithstanding any other provision of this
Section 6(c), if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses of
counsel, such indemnifying party agrees that it shall be liable for any
settlement effected without its written consent if (i) such settlement is
entered into more than 45 days after receipt by such indemnifying party of the
aforesaid request, (ii) such indemnifying party shall have received notice of
the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 6 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company on the one hand or the
Underwriters on the other, the Company on the one hand and the Underwriters on
the other will contribute to the total losses, claims, liabilities, expenses and
damages (including any investigative, legal and other expenses reasonably
incurred in connection with, and any amount paid in settlement of, any action,
suit or proceeding or any claim asserted, but after deducting any contribution
received by the Company from persons other than the Underwriters, such as
persons who control the Company within the meaning of the Act, officers of the
Company who signed the Registration Statement and directors of the Company, who
also may be liable for contribution) to which the Company on the one hand and
any one or more of the Underwriters on the other may be subject in such
proportion as shall be appropriate to reflect the relative benefits received by
each. The relative benefits received by the Company on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Company bear to the total underwriting discounts and commissions received by the
Underwriters, in each case as set forth in the table on the cover page of the
Prospectus. If, but only if, the allocation provided by the foregoing sentence
is not permitted by applicable law, the allocation of contribution shall be made
in such proportion as is appropriate to reflect not only the relative benefits
referred to in the foregoing sentence but also the relative fault of the
Company, on the one hand, and the Underwriters, on the other, with respect to
the statements or omissions which resulted in such loss, claim, liability,
expense or damage, or action in respect thereof, as well as any other relevant
equitable considerations with respect to such offering. Such relative fault
shall be determined by reference to whether the untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a material
fact relates to information supplied by the Company or the Representatives on
behalf of the Underwriters, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Underwriters agree that the
Independent Underwriter will not receive any additional benefits hereunder for
serving as a "qualified independent underwriter" in connection with the
offering. The Company and the Underwriters agree that it would not be just and
equitable if contributions pursuant to this
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Section 6(d) were to be determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take into account the equitable considerations
referred to herein. The amount paid or payable by an indemnified party as a
result of the loss, claim, liability, expense or damage, or action in respect
thereof, referred to above in this Section 6(d) shall be deemed to include, for
purpose of this Section 6(d), any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 6(d), no
Underwriter shall be required to contribute any amount in excess of the
underwriting discounts and commissions received by it, and no person found
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) will be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. The Underwriters' obligations to contribute
as provided in this Section 6(d) are several in proportion to their respective
underwriting obligations and not joint. For purposes of this Section 6(d), any
person who controls a party to this Agreement within the meaning of the Act will
have the same rights to contribution as that party, and each officer of the
Company who signed the Registration Statement will have the same rights to
contribution as the Company, subject in each case to the provisions hereof. Any
party entitled to contribution, promptly after receipt of notice of commencement
of any action against such party in respect of which a claim for contribution
may be made under this Section 6(d), will notify any such party or parties from
whom contribution may be sought, but the omission so to notify will not relieve
the party or parties from whom contribution may be sought from any other
obligation it or they may have under this Section 6(d). Except for a settlement
entered into pursuant to the last sentence of Section 6(c) hereof, no party will
be liable for contribution with respect to any action or claim settled without
its written consent (which consent will not be unreasonably withheld).
(e) The indemnity and contribution agreements contained in this
Section 6 and the representations and warranties of the Company contained in
this Agreement shall remain operative and in full force and effect regardless of
(i) any investigation made by or on behalf of the Underwriters, (ii) acceptance
of any of the Shares and payment therefor or (iii) any termination of this
Agreement.
6. Termination.
-----------
The obligations of the several Underwriters under this Agreement may be
terminated at any time on or prior to the Closing Date (or, with respect to the
Option Shares, on or prior to the Option Closing Date), by notice to the Company
from the Representatives, without liability on the part of any Underwriter to
the Company, if, prior to delivery and payment for the Shares (or the Option
Shares, as the case may be), in the sole judgment of the Representatives, (i)
there has been, since the respective dates as of which information is given in
the Registration Statement, any change which, singly or in the aggregate with
other changes, is materially adverse to the condition (financial or otherwise),
business, properties, net worth, results of operations or prospects of the
Company or any of its Subsidiaries, (ii) trading in any of the equity securities
of the Company shall have been suspended by the Commission, the NASD, by an
exchange that lists the Shares or by the National Association of Securities
Dealers Automated Quotation National Market System (the "Nasdaq NMS"), (iii)
trading in securities generally on the New York Stock Exchange or the Nasdaq NMS
shall have been suspended or limited or minimum or maximum prices shall have
been generally established on such exchange or over the counter market, or
additional material governmental restrictions, not in force on the date of this
Agreement, shall have been imposed upon trading in securities generally by such
exchange or over the counter market or by order of the Commission or any court
or other governmental authority, (iv) a general banking moratorium shall have
been declared by either Federal or New York State authorities or (v) any
material adverse change in the financial or securities markets in the United
States or in political, financial or economic conditions in the United States or
any outbreak or material escalation of hostilities or declaration by the United
States of a national emergency or war or other calamity or crisis shall have
occurred the effect of any of which is such as to make it, in the sole judgment
of the Representatives, impracticable or inadvisable to market the Shares on the
terms and in the manner contemplated by the Prospectus.
21
<PAGE>
7. Substitution of Underwriters.
----------------------------
If any one or more of the Underwriters shall fail or refuse to purchase any
of the Firm Shares which it or they have agreed to purchase hereunder, and the
aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of Firm Shares, the other Underwriters shall be
obligated, severally, to purchase the Firm Shares which such defaulting
Underwriter or Underwriters agreed but failed or refused to purchase, in the
proportions which the number of Firm Shares which they have respectively agreed
to purchase pursuant to Section 1 bears to the aggregate number of Firm Shares
which all such non-defaulting Underwriters have so agreed to purchase, or in
such other proportions as the Representatives may specify; provided that in no
event shall the maximum number of Firm Shares which any Underwriter has become
obligated to purchase pursuant to Section 1 be increased pursuant to this
Section 8 by more than one-ninth of the number of Firm Shares agreed to be
purchased by such Underwriter without the prior written consent of such
Underwriter. If any Underwriter or Underwriters shall fail or refuse to
purchase any Firm Shares and the aggregate number of Firm Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to purchase
exceeds one-tenth of the aggregate number of the Firm Shares and arrangements
satisfactory to the Representatives and the Company for the purchase of such
Firm Shares are not made within 48 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company for the purchase or sale of any Shares under this Agreement. In any
such case either the Representatives or the Company shall have the right to
postpone the Closing Date, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement and in the
Prospectus or in any other documents or arrangements may be effected. Any
action taken pursuant to this Section 8 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
8. Miscellaneous.
-------------
Notice given pursuant to any of the provisions of this Agreement shall be
in writing and, unless otherwise specified, shall be mailed or delivered (a) if
to the Company, at the office of the Company, 251 South Lake Avenue, Suite 700,
Pasadena, California 91101, Attention: Chief Executive Officer, or (b) if to the
Underwriters, to the Representatives at the offices of PaineWebber Incorporated,
1285 Avenue of the Americas, New York, New York 10019, Attention: Corporate
Finance Department. Any such notice shall be effective only upon receipt. Any
notice under Section 7 or 8 may be made by telex or telephone, but if so made
shall be subsequently confirmed in writing.
This Agreement has been and is made solely for the benefit of the several
Underwriters and the Company and of the controlling persons, directors and
officers referred to in Section 6, and their respective successors and assigns,
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" as used in this Agreement shall
not include a purchaser, as such purchaser, of Shares from any of the several
Underwriters.
All representations, warranties and agreements of the Company contained
herein or in certificates or other instruments delivered pursuant hereto, shall
remain operative and in full force and effect regardless of any investigation
made by or on behalf of any Underwriter or any of its controlling persons and
shall survive delivery of and payment for the Shares hereunder.
Any action required or permitted to be taken by the Representatives under
this Agreement may be taken by them jointly or by PaineWebber Incorporated.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES
OF SUCH STATE.
22
<PAGE>
This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
The Company and the Underwriters each hereby irrevocably waive any right
they may have to a trial by jury in respect of any claim based upon or arising
out of this Agreement or the transactions contemplated hereby.
This Agreement may not be amended or otherwise modified or any provision
hereof waived except by an instrument in writing signed by the Representatives
and the Company.
[Remainder of Page Intentionally Left Blank]
23
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement among
the Company and the several Underwriters.
Very truly yours,
ALEXANDRIA REAL ESTATE EQUITIES, INC.
By: ___________________________________
Name:
Title:
Confirmed as of the date first
above mentioned:
PAINEWEBBER INCORPORATED
LEHMAN BROTHERS, INC.
SMITH BARNEY INC.
EVEREN SECURITIES, INC.
Acting on behalf of themselves and
as the Representatives of the other
several Underwriters named in
Schedule I hereof.
PAINEWEBBER INCORPORATED
By: ______________________________
Name:
Title:
24
<PAGE>
SCHEDULE I
6,750,000 Shares
ALEXANDRIA REAL ESTATE EQUITIES, INC.
-------------------------------------
Common Stock
Number of
Name of Firm Shares
Underwriters to be Purchased
------------ ---------------
PaineWebber Incorporated
Lehman Brothers Inc.
Smith Barney Inc.
EVEREN Securities, Inc.
25
<PAGE>
SCHEDULE 3(m)
Property Liens and Defects
--------------------------
26
<PAGE>
SCHEDULE 3(z)
Phase I Environmental Reports
-----------------------------
27
<PAGE>
SCHEDULE 3(ae)
Rent Rolls
----------
28
<PAGE>
SCHEDULE 3(af)
Tenant Leases Pursuant to Which the Company is Responsible for Environmental
----------------------------------------------------------------------------
Liabilities
-----------
29
<PAGE>
SCHEDULE 3(ag)
Options or Rights of First Refusal Held by Tenants
--------------------------------------------------
30
<PAGE>
SCHEDULE 5(q)
Permitted Exceptions
--------------------
31
<PAGE>
EXHIBIT A
ALEXANDRIA REAL ESTATE EQUITIES, INC.
_____________________
Price Determination Agreement
-----------------------------
____________, 1997
PAINEWEBBER INCORPORATED
LEHMAN BROTHERS INC.
SMITH BARNEY INC.
EVEREN SECURITIES, INC.
As Representatives of the several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Dear Sirs:
Reference is made to the Underwriting Agreement, dated ____________, 1997
(the "Underwriting Agreement"), between Alexandria Real Estate Equities, Inc., a
Maryland corporation (the "Company"), and the several Underwriters named in
Schedule I thereto or hereto (the "Underwriters"), for whom PaineWebber
- ----------
Incorporated, Lehman Brothers Inc., Smith Barney Inc. and EVEREN Securities,
Inc. are acting as Representatives (the "Representatives") and Lehman Brothers
Inc. is acting as a "qualified independent underwriter" within the meaning of
the Conduct Rules of the National Association of Securities Dealers, Inc. The
Underwriting Agreement provides for the purchase by the Underwriters from the
Company, subject to the terms and conditions set forth therein, of an aggregate
of 6,830,000 shares (the "Firm Shares") of the Company's common stock, par value
$.01 per share. This Agreement is the Price Determination Agreement referred to
in the Underwriting Agreement.
Pursuant to Section 1 of the Underwriting Agreement, the undersigned agree
with the Representatives as follows:
1. The initial public offering price per share for the Firm Shares shall
be $____.
2. The purchase price per share for the Firm Shares to be paid by the
several Underwriters shall be $_____ representing an amount equal to the initial
public offering price set forth above, less $____ per share.
The Company represents and warrants to each of the Underwriters that the
representations and warranties of the Company set forth in Section 3 of the
Underwriting Agreement are accurate as though expressly made at and as of the
date hereof.
As contemplated by the Underwriting Agreement, attached as Schedule I is a
----------
completed list of the several Underwriters, which shall be a part of this
Agreement and the Underwriting Agreement.
THIS AGREEMENT SHALL BE GOVERNED BY THE LAW OF THE STATE OF NEW YORK
WITHOUT REGARD TO THE CONFLICT OF LAWS PRINCIPLES OF SUCH STATE.
A-1
<PAGE>
If the foregoing is in accordance with your understanding of the agreement
among the Underwriters and the Company, please sign and return to the Company a
counterpart hereof, whereupon this instrument along with all counterparts and
together with the Underwriting Agreement shall be a binding agreement among the
Underwriters and the Company in accordance with its terms and the terms of the
Underwriting Agreement.
Very truly yours,
ALEXANDRIA REAL ESTATE EQUITIES, INC.
By: ___________________________________
Name:
Title:
Confirmed as of the date first
above mentioned:
PAINEWEBBER INCORPORATED
LEHMAN BROTHERS INC.
SMITH BARNEY INC.
EVEREN SECURITIES, INC.
Acting on behalf of themselves and
as the Representatives of the other
several Underwriters named in
Schedule I hereof.
PAINEWEBBER INCORPORATED
By: ______________________________
Name:
Title:
A-2
<PAGE>
EXHIBIT 4(n)
Form of Lock up Agreements
--------------------------
May , 1997
PAINEWEBBER INCORPORATED
LEHMAN BROTHERS INC.
SMITH BARNEY INC.
EVEREN SECURITIES, INC.
As Representatives of the
several Underwriters
c/o PaineWebber Incorporated
1285 Avenue of the Americas
New York, New York 10019
Ladies and Gentlemen:
In consideration of the agreement of the several Underwriters, for which
PaineWebber Incorporated, Lehman Brothers Inc., Smith Barney Inc. and EVEREN
Securities, Inc. (the "Representatives") intend to act as Representatives, to
underwrite a proposed public offering (the "Offering") of shares of Common
Stock, $.01 par value per share (the "Common Stock"), of Alexandria Real Estate
Equities, Inc., a Maryland corporation, (the "Company") as contemplated by a
registration statement (the "Registration Statement") with respect to such
shares filed with the Securities and Exchange Commission on Form S-11
(Registration No. 333-23545), the undersigned hereby agrees that the undersigned
will not, without the prior written consent of PaineWebber Incorporated,
directly or indirectly, 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 two years from the effective date of
the Registration Statement.
Notwithstanding the foregoing restrictions, transfers by a natural person
upon the death or disability of any such person or in connection with bona fide
estate planning by such natural person shall not require the prior written
consent of PaineWebber Incorporated.
The undersigned also agrees and consents to the entry of stock transfer
restrictions to the effect of the foregoing with the Company's transfer agent
against the shares of Common Stock issued or issuable to the undersigned.
Very truly yours,
_________________________
NAME:
<PAGE>
EXHIBIT 5(f)
Form of Opinion of
Skadden, Arps, Slate, Meagher & Flom LLP
Counsel to the Company
--------------------------------------
<PAGE>
EXHIBIT 5(g)
Form of Opinion of
Ballard Spahr Andrews & Ingersoll
Special Maryland Counsel to the Company
---------------------------------------
<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
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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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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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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
-16-
<PAGE>
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
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<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
-27-
<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
-33-
<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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<PAGE>
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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<PAGE>
(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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<PAGE>
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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<PAGE>
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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<PAGE>
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.
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<PAGE>
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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<PAGE>
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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<PAGE>
EXHIBIT 4.1
Temporary Certificate - Exchangeable for Definitive Engraved Certificate - When
Ready for Delivery
NUMBER SHARES
$.01 PAR VALUE COMMON STOCK
ALEXANDRIA REAL ESTATE EQUITIES, INC.
INCORPORATED UNDER THE LAWS OF THE STATE OF MARYLAND
THIS CERTIFICATE IS TRANSFERABLE IN CUSIP 015271 10 9
THE CITY OF NEW YORK, NEW YORK SEE REVERSE FOR CERTAIN DEFINITIONS
AND IMPORTANT NOTICE ON TRANSFER
RESTRICTIONS
This certifies that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK OF
________________ _______________
________________ ALEXANDRIA REAL ESTATE EQUITIES, INC._______________
________________ _______________
(the "Corporation") transferable only on the books of the Corporation by the
holder hereof in person or by attorney upon surrender of this Certificate
properly endorsed. This Certificate and the shares represented hereby are
issued and shall be held subject to all of the provisions of the charter of the
Corporation and any amendments thereto. This Certificate is not valid until
countersigned and registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
J.M. Sudarsky [SEAL] Peter J. Nelson
Chairman Secretary
Countersigned and Registered:
AMERICAN STOCK TRANSFER & TRUST COMPANY
New York, New York
Transfer Agent and Registrar
By
AUTHORIZED SIGNATURE
<PAGE>
The Corporation is authorized to issue two classes of capital stock which
are designated as Common Stock and Preferred Stock. The Board of Directors is
authorized to determine the preferences, limitations, and relative rights of the
Preferred Stock before the issuance of any Preferred Stock. The Corporation
will furnish, without charge, to any stockholder making a written request
therefor, a copy of the Corporation's charter and a written statement of the
designations, relative rights, preferences and limitations applicable to each
such class of stock. Requests for such written statement may be directed to the
Secretary of the Corporation, at the Corporation's principal office.
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.
cont'd
ALEXANDRIA REAL ESTATE EQUITIES, INC.
The following abbreviations, when used in the Inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as tenants in
common
UNIF TRAN MIN ACT - _______________Custodian_______________
(Cust) (Minor)
under Uniform Transfers to Minors Act
_______________________________________
(State)
UNIF GIFT MIN ACT - _______________Custodian_______________
(Cust) (Minor)
under Uniform Gifts to Minors Act
_______________________________________
(State)
Additional abbreviations may also be used though not in the above list.
For Value Received _______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR
OTHER IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------
| |
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated: _____________________________
X___________________________________________________
NOTICE: The signature to this assignment must
correspond with the name as written upon the face
of this certificate in every particular, without
alteration or enlargement or any change whatever.
SIGNATURE(S) GUARANTEED:
<PAGE>
EXHIBIT 5.1
FILE NUMBER
833290
May 19, 1997
Alexandria Real Estate Equities, Inc.
251 South Lake Avenue, Suite 700
Pasadena, California 91101
Re: Registration Statement on Form S-11
(No. 333-23545)
-----------------------------------
Ladies and Gentlemen:
We have served as Maryland counsel to Alexandria Real Estate Equities,
Inc., a Maryland corporation (the "Company"), in connection with certain matters
of Maryland law arising out of the registration of up to 7,762,500 shares (the
"Shares") of Common Stock, $.01 par value per share (the "Common Stock"), of the
Company (including 1,012,500 shares of Common Stock which the Underwriters have
the option to purchase solely to cover over-allotments, if any), covered by the
above-referenced Registration Statement (the "Registration Statement"), filed by
the Company with the Securities and Exchange Commission (the "Commission") under
the Securities Act of 1933, as amended (the "1933 Act"). Unless otherwise
defined herein, capitalized terms used herein shall have the meanings assigned
to them in the Registration Statement.
In connection with our representation of the Company, and as a basis
for the opinion hereinafter set forth, we have examined originals, or copies
certified or otherwise identified to our satisfaction, of the following
documents (hereinafter collectively referred to as the "Documents"):
1. The Registration Statement and the related form of prospectus
included therein in the form in which it was transmitted to the Commission under
the 1933 Act;
<PAGE>
Alexandria Real Estate Equities, Inc.
May 19, 1997
Page 2
2. The charter of the Company (the "Charter"), certified as of a
recent date by the State Department of Assessments and Taxation of Maryland (the
"SDAT");
3. The Bylaws of the Company, certified as of a recent date by an
officer of the Company;
4. Resolutions adopted by the Board of Directors of the Company (the
"Board") relating to the sale, issuance and registration of the Shares and the
creation of, and delegation of authority to, a pricing committee thereof (the
"Pricing Committee"), certified as of a recent date by an officer of the Company
(the "Resolutions");
5. The form of certificate representing a share of Common Stock,
certified as of a recent date by an officer of the Company;
6. A certificate of the SDAT as to the good standing of the Company,
dated as of a recent date;
7. A certificate executed by Peter J. Nelson, Chief Financial
Officer, Treasurer and Secretary of the Company, dated as of a recent date; and
8. Such other documents and matters as we have deemed necessary or
appropriate to express the opinion set forth in this letter, subject to the
assumptions, limitations and qualifications stated herein.
In expressing the opinion set forth below, we have assumed and, so far
as is known to us, there are no facts inconsistent with, the following:
1. Each of the parties (other than the Company) executing any of the
Documents has duly and validly executed and delivered each of the Documents to
which such party is a signatory, and such party's obligations set forth therein
are legal, valid and binding.
2. Each individual executing any of the Documents on behalf of a
party (other than the Company) is duly authorized to do so.
<PAGE>
Alexandria Real Estate Equities, Inc.
May 19, 1997
Page 3
3. Each individual executing any of the Documents, whether on behalf
of such individual or another person, is legally competent to do so.
4. All Documents submitted to us as originals are authentic. All
Documents submitted to us as certified or photostatic copies conform to the
original documents. All signatures on all such Documents are genuine. All
public records reviewed or relied upon by us or on our behalf are true and
complete. All statements and information contained in the Documents are true
and complete. There are no modifications of or amendments to the Documents, and
there has been no waiver of any of the provisions of the Documents, by act or
omission of the parties or otherwise.
5. In accordance with the Resolutions, the Board, or the Pricing
Committee or another duly authorized committee of the Board, will duly adopt
resolutions (the "Pricing Resolutions") including all terms and conditions
required by the Maryland General Corporation Law, as amended, prior to the
issuance of the Shares.
6. The Shares will not be issued or transferred in violation of any
restriction or limitation contained in Article VII of the Charter.
The phrase "known to us" is limited to the actual knowledge, without
independent inquiry, of the lawyers at our firm who have performed legal
services in connection with the issuance of this opinion.
Based upon the foregoing, and subject to the assumptions, limitations
and qualifications stated herein, it is our opinion that:
1. The Company is a corporation duly incorporated and existing under
and by virtue of the laws of the State of Maryland and is in good standing with
the SDAT.
2. The Shares have been duly authorized and, when and if delivered
against payment therefor in accordance with the Resolutions, the Pricing
Resolutions and any other resolutions of the Board of Directors, or the Pricing
Committee or any other duly authorized committee of the Board of Directors,
authorizing
<PAGE>
Alexandria Real Estate Equities, Inc.
May 19, 1997
Page 4
their issuance, the Shares will be duly and validly issued, fully paid and
nonassessable.
The foregoing opinion is limited to the laws of the State of Maryland
and we do not express any opinion herein concerning any other law. The opinion
expressed herein is subject to the effect of judicial decisions which may permit
the introduction of parol evidence to modify the terms or the interpretation of
agreements. We express no opinion as to compliance with the securities (or
"blue sky") laws of the State of Maryland or federal securities laws.
We assume no obligation to supplement this opinion if any applicable
law changes after the date hereof or if we become aware of any fact that might
change the opinion expressed herein after the date hereof.
This opinion is being furnished to you solely for submission to the
Commission as an exhibit to the Registration Statement and, accordingly, may not
be relied upon by, quoted in any manner to, or delivered to any other person or
entity without, in each instance, our prior written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of the name of our firm therein. In
giving this consent, we do not admit that we are within the category of persons
whose consent is required by Section 7 of the 1933 Act.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll
<PAGE>
EXHIBIT 8.1
May 19, 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
Certificate") 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>
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 oper-
ated in accordance with the laws of the State of Maryland in the manner de-
scribed 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.
<PAGE>
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.
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
<PAGE>
or relied upon for any other purpose without our prior written consent. We
consent to the filing of this opinion as an exhibit to the Registration
Statement and to the references to Skadden, Arps, Slate, Meagher & Flom LLP in
the Registration Station. In giving this consent, we do not thereby admit that
we are within the category of persons whose consent is required under Section 7
of the Securities Act of 1933, as amended, or the rules or regulations of the
Securities and Exchange Commission thereunder. 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,
/s/ Skadden, Arps, Slate, Meagher & Flom LLP
<PAGE>
EXHIBIT 10.33
FIRST AMENDMENT TO AGREEMENT FOR SALE AND PURCHASE
OF MEMBERSHIP INTERESTS
This FIRST AMENDMENT TO AGREEMENT FOR SALE AND PURCHASE OF MEMBERSHIP
INTERESTS (this "Amendment") is made and entered into as of the __ day of May,
---------
1997 by and between PAINEWEBBER REAL ESTATE HOLDINGS INC., a Delaware
corporation ("Holdings") and PW REALTY PARTNERS, LLC, a Delaware limited
--------
liability company (together with Holdings, collectively, "Seller"), and ARE-QRS
------
CORP. (formerly known as HSP-QRS CORP.), a Maryland corporation ("ARE-QRS"), and
-------
ALEXANDRIA REAL ESTATE EQUITIES, INC. (formerly known as HEALTH SCIENCE
PROPERTIES, INC.), a Maryland corporation ("ARE", and together with ARE-QRS,
---
collectively, "Buyer"). All capitalized terms used and not otherwise defined
-----
herein shall have the meaning ascribed thereto in that certain Agreement for
Sale and Purchase of Membership Interests, dated as of January 13, 1997 (the
"Agreement") between Buyer and Seller.
----------
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, Buyer and Seller (collectively, the "Parties") have entered
-------
into the Agreement wherein Seller desires to sell to Buyer, and Buyer desires to
purchase from Seller, all of Seller's right, title and interest in and to the
Transferred Interest on the terms and conditions set forth therein; and
WHEREAS, the Parties now desire to amend the Agreement as hereinafter
set forth.
NOW THEREFORE, in consideration of the matters described in the
foregoing recitals, and the mutual covenants herein contained and for other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Parties hereto do hereby amend the Agreement and agree as
follows:
1. Amendment to Agreement. Section 3.4 of the Agreement is hereby
----------------------
amended by adding the following immediately following the last paragraph
thereof:
"Notwithstanding anything to the contrary contained in the Agreement, at
the Closing, Buyer shall be entitled to a credit in the amount of $766,000
against and as a reduction to the Purchase Price."
<PAGE>
2. General Provisions
------------------
(a) Effect of Amendment. Except as expressly set forth herein, the
-------------------
terms and conditions of the Agreement shall remain unmodified and in full force
and effect, and the terms, provisions and conditions thereof are hereby ratified
and reaffirmed. All references in the Agreement and this Amendment to the
Agreement shall mean and refer to the Agreement as amended hereby.
(b) Governing Law. This Amendment shall be construed in accordance
-------------
with, and this Amendment and the transactions described herein shall be governed
by, the laws of the State of New York as to all issues, including, without
limitation, issues of validity, interpretation, effect, performance and
remedies.
(c) Amendments. This Amendment and the Agreement may not be further
----------
amended or modified, except in writing signed by the Parties.
(d) Severability. In the event that any provision contained in this
------------
Amendment shall for any reason be held to be illegal or invalid under the laws
of any jurisdiction, such illegality or invalidity shall in no way impair the
effectiveness of any other provision hereof, or of such provision under the laws
of any other jurisdiction; provided, that in the construction and enforcement
--------
of such provision under the laws of the jurisdiction in which such holding of
illegality or invalidity exists, and to the extent only of such illegality or
invalidity, this Amendment shall be construed and enforced as though such
illegal or invalid provision had not been contained herein.
(e) Headings. Section headings used herein are inserted for
--------
convenience only and shall not in any way affect the meaning or construction of
any provision of this Amendment.
(f) Counterparts. This Amendment may be executed in any number of
------------
counterparts, each of which when so executed and delivered shall be an original,
and all of which shall together constitute but one and the same instrument.
2
<PAGE>
IN WITNESS WHEREOF, the Parties have caused this Amendment to be duly
executed and delivered by their respective duly authorized representatives as of
the date first above written.
BUYERS:
ALEXANDRIA REAL ESTATE EQUITIES, INC.,
a Maryland corporation
By:
-----------------------------------
Name:
Title:
ARE-QRS CORP., a Maryland corporation
By:
-----------------------------------
Name:
Title:
SELLERS:
PAINEWEBBER REAL ESTATE HOLDINGS
INC., a Delaware corporation
By:
-----------------------------------
Name:
Title:
PW REALTY PARTNERS, LLC,
a Delaware limited liability company
By: PW ACQUISITIONS CORP., a Delaware
corporation
By:
-----------------------------------
Name:
Title:
3
<PAGE>
EXHIBIT 10.34
- --------------------------------------------------------------------------------
FORM OF
-------
AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT
---------------------------------------------------
by and between
ALEXANDRIA REAL ESTATE EQUITIES, INC.,
a Maryland corporation,
and
JOEL S. MARCUS,
an individual
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
1. Position and Duties; Location......................................... 1
2. Term of Employment.................................................... 1
3. Compensation, Benefits and Reimbursement.............................. 2
3.1 Base Salary...................................................... 2
(a) Minimum Base................................................. 2
(b) Earned Base Salary........................................... 2
3.2 Increases in Base Salary......................................... 2
3.3 Bonus............................................................ 3
(a) Minimum Bonus................................................ 3
(b) Determination of Bonus; Maximum Amount....................... 3
3.4 Additional Benefits.............................................. 3
(a) Officer Benefits............................................. 3
(b) Vacation..................................................... 4
(c) Life Insurance............................................... 4
(d) Disability Insurance......................................... 4
(e) Reimbursement for Expenses................................... 4
(f) Withholding.................................................. 5
(g) Signing Bonus................................................ 5
4. Termination of the Agreement.......................................... 5
4.1 Termination by Corporation Defined............................... 5
(a) Termination Without Cause.................................... 5
(b) Termination For Cause........................................ 5
(c) Termination by Reason of Death or Disability................. 5
4.2 Termination by Officer Defined................................... 6
(a) Termination Other Than For Good Reason....................... 6
(b) Termination For Good Reason.................................. 6
(c) Good Reason Following a Change in Control.................... 6
4.3 Effect of Termination............................................ 8
(a) Termination by Corporation................................... 8
(i) Termination Without Cause, Death or
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
Permanent Disability................................... 8
(ii) Termination For Cause.................................. 8
(b) Termination by Officer...................................... 9
(i) Termination Other Than For Good Reason................. 9
(ii) Termination For Good Reason............................ 9
4.4 Severance Payment............................................... 9
(a) Definition of "Severance Payment"........................... 9
(b) Payment of Severance Payment................................ 10
(c) Other Severance Benefits.................................... 10
(d) Full Settlement of All Obligations.......................... 10
(e) Change in Control........................................... 10
4.5 Gross-Up........................................................ 12
4.6 Offset.......................................................... 12
5. Noncompetition....................................................... 13
6. Miscellaneous........................................................ 13
6.1 Payment Obligations............................................. 13
6.2 Confidentiality................................................. 13
6.3 Waiver.......................................................... 13
6.4 Entire Agreement; Modifications................................. 13
6.5 Notices......................................................... 13
6.6 Headings........................................................ 14
6.7 Governing Law................................................... 14
6.8 Arbitration..................................................... 14
6.9 Severability.................................................... 15
6.10 Survival of Corporation's Obligations........................... 15
6.11 Survival of Certain Rights and Obligations...................... 15
6.12 Counterparts.................................................... 15
6.13 Indemnification................................................. 15
</TABLE>
ii
<PAGE>
FORM OF
-------
AMENDED AND RESTATED
--------------------
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT (this
"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 Joel S.
Marcus, 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
Chairman and Chief Operating Officer, 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 (as defined in Paragraph 2 below) of this Agreement,
Officer agrees to be employed by and to serve Corporation at its Vice Chairman
and Chief Operating Officer; provided that effective as of January 1, 1998,
-------- ----
Officer shall be employed by and serve the Corporation as its Vice Chairman and
Chief Executive Officer. In addition, Officer agrees to serve in such
additional 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
1
<PAGE>
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 Chairman and prior to January 1,
1998, the Chief Executive Officer and at all times during the Term (as defined
in Paragraph 2 below) of this Agreement shall have powers and duties at least
commensurate with his position as senior executive officer. 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 (the "Term") of this Agreement shall be for a period
commencing on January 1, 1997 and ending on December 31, 2000 (the "Termination
Date"), unless terminated earlier pursuant to this Agreement (the "Early
Termination Date"). Commencing on December 31, 2000 and each subsequent
anniversary thereof, the Term shall be automatically extended for one (1)
additional year unless, no later 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. 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 Two Hundred Thirty Five Thousand Dollars
($235,000), or such higher amount as may from time to time be determined by
Corporation. Unless otherwise agreed in writing by Officer and Corporation, the
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 by the Board
2
<PAGE>
(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
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. During the Term of this Agreement Officer is eligible for
-----
the following bonus:
(a) MINIMUM 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.
(b) DETERMINATION OF BONUS. With respect to the period
----------------------
commencing upon consummation of an initial public offering (the "IPO") of the
Corporation's common stock, par value $.01 per share (the "Common Stock"), and
ending on December 31, 1997, and with respect to each calendar year thereafter
during the Term, the bonus payable pursuant to Subparagraph (a), if any, shall
be based upon such factors as the Board (or a committee thereof) deems
appropriate, which may include the enhancement of stockholder value based upon
Funds From Operations (as defined in the White Paper on Funds From Operations
approved by the Board of Governors of the National Association of Real Estate
Investment Trusts in March 1995) as determined in good faith by the Board during
such period, divided by the weighted average number of shares of Common Stock
outstanding during such period.
3
<PAGE>
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"), and (ii) upon expiration of COBRA coverage to maintain substantially
similar health and medical benefits coverage for Officer and his family.
(b) VACATION. Officer shall be entitled to a minimum of five
--------
(5) 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 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 term in the Disability Policy (including the COBRA
Disability Policy) covering Officer at the time of occurrence of such Permanent
Disability.
4
<PAGE>
(e) REIMBURSEMENT FOR EXPENSES. During the Term of this Agree-
--------------------------
ment, 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.
(g) SIGNING BONUS. Upon the Effective Date of this Agreement,
-------------
Corporation shall pay Officer a lump sum cash signing bonus equal to Fifteen
Thousand Dollars ($15,000).
4. TERMINATION OF THIS AGREEMENT.
-----------------------------
4.1 TERMINATION BY CORPORATION DEFINED.
----------------------------------
(a) TERMINATION WITHOUT CAUSE. Subject to the provisions set
-------------------------
forth in Paragraph 4.3 below, "Termination Without Cause" shall constitute any
termination by Corporation other than termination for Cause (as defined in
Paragraph 4.1(b) below).
(b) TERMINATION FOR CAUSE. Subject to the provisions set forth
---------------------
in Paragraph 4.3 below, prior to the Termination Date, Corporation shall have
the right to terminate this Agreement for Cause immediately after written notice
has been delivered to Officer, which notice shall specify the reason for and the
effective date of such Termination (which date shall be the applicable Early
Termination Date). For purposes of this Agreement, "Cause" shall mean the
following:
(i) Officer's use of alcohol or narcotics which
proximately results in the willful material breach 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;
5
<PAGE>
(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 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:
6
<PAGE>
(i) the assignment to Officer of any duties inconsistent
with the position in Corporation that Officer held immediately prior to the
Change in Control, or an adverse alteration in the nature or status of
Officer's responsibilities from those in effect immediately prior to such
change;
(ii) a substantial change in the nature of the business
operations of Corporation;
(iii) 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;
(iv) the relocation of Corporation's principal executive
offices to a location outside the Los Angeles 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 be based anywhere other than the Corporation's principal
executive offices except for required travel on Corporation's business to
an extent substantially consistent with Officer's business travel
obligations immediately prior to the Change in Control;
(v) 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;
(vi) 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;
7
<PAGE>
(vii) 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
(viii) 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:
(a) TERMINATION BY CORPORATION.
--------------------------
(i) TERMINATION WITHOUT CAUSE, DEATH OR PERMANENT
---------------------------------------------
DISABILITY. In the event that Corporation terminates this Agreement without
----------
Cause pursuant to Paragraph 4.1(a) above or by reason of death or Permanent
Disability pursuant to Paragraph 4.1(c) above, Officer shall be entitled to
(i) Earned Base Salary; (ii) earned benefits and reimbursable expenses;
(iii) any
8
<PAGE>
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. In the event that Corporation
---------------------
terminates this Agreement for Cause pursuant to Paragraph 4.1(b) 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.
-----------------
(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
9
<PAGE>
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"), but in no
event shall Average Bonus be less than 50% of such Base Salary; 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;
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 sum of the Base Salary then in effect and the Average Bonus, 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.
(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
10
<PAGE>
other than for Cause. A "Change in Control" shall be deemed to have occurred
if, following Corporation's underwritten initial public offering:
(i) Any Person, as such term is used in section 3(a)(9) of
the Securities Exchange Act of 1934 as amended from time to time (the "Exchange
Act"), as modified and used in sections 13(d) and 14(d) thereof, except that
such term shall not include (A) the Corporation or any of its subsidiaries, (B)
a trustee or other fiduciary holding securities under an employee benefit plan
of the Corporation or any of its affiliates, (C) an underwriter temporarily
holding securities pursuant to an offering of such securities, (D) a corporation
owned, directly or indirectly, by the stockholders of the Corporation in
substantially the same proportions as their ownership of stock of the
Corporation, or (E) a person or group as used in Rule 13d-1(b) under the
Exchange Act, that is or becomes the Beneficial Owner, as such term is defined
in Rule 13d-3 under the Exchange Act, directly or indirectly, of securities of
the Corporation (not including in the securities beneficially owned by such
Person any securities acquired directly from the Corporation or its affiliates
other than in connection with the acquisition by the Corporation or its
affiliates of a business) representing twenty-five percent (25%) or more of the
combined voting power of the Corporation's then outstanding securities; or
(ii) The following individuals cease for any reason to
constitute a majority of the number of directors then serving: individuals who,
on the date hereof, constitute the Board and any new director (other than a
director whose initial assumption of office is in connection with an actual or
threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors of the Corporation) whose
appointment or election by the Board or nomination for election by the
Corporation's stockholders was approved or recommended by a vote of at least
two-thirds (2/3) of the directors then still in office who either were directors
on the date hereof or whose appointment, election or nomination for election
was previously so approved or recommended; or
(iii) There is consummated a merger or consolidation of the
Corporation with any other corporation, other than (A) a merger or consolidation
which would result in the voting securities of the Corporation outstanding
immediately prior to such merger or consolidation continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity or any parent thereof), in combination with the ownership
of any trustee or other fiduciary holding securities under an employee benefit
plan of the Corporation or any subsidiary of the Corporation, at least seventy-
five percent (75%) of the combined voting power of the securities of the
Corporation or such surviving entity or any parent thereof outstanding
immediately after such merger or consolidation, or (B) a merger or
consolidation effected to implement a recapitalization of the Corporation (or
similar transaction) in which no Person is or becomes the Beneficial Owner,
11
<PAGE>
directly or indirectly, of securities of the Corporation (not including in the
securities beneficially owned by such Person any securities acquired directly
from the Corporation or its affiliates other than in connection with the
acquisition by the Corporation or its affiliates of a business) representing
twenty-five percent (25%) or more of the combined voting power of the
Corporation's then outstanding securities; or
(iv) The stockholders of the Corporation approve a plan of
complete liquidation or dissolution of the Corporation or there is consummated
an agreement for the sale or disposition by the Corporation of all or
substantially all of the Corporation's assets, other than a sale or disposition
by the Corporation of all or substantially all of the Corporation's assets to an
entity, at least seventy-five (75%) of the combined voting power of the voting
securities of which are owned by stockholders of the Corporation in
substantially the same proportions as their ownership of the Corporation
immediately prior to such sale.
4.5 GROSS-UP. If any of the Total Payments (as hereinafter defined)
--------
will be subject to the tax (the "Excise Tax") imposed by Section 4999 of the
Code, 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 determined by the Corporation's independent auditors in accordance with the
principles of
12
<PAGE>
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.
13
<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: Joel S. Marcus
3153 Abington Drive
Beverly Hills, California 90210
Phone: (310) 274-8383
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.
14
<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, 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 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
15
<PAGE>
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.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement.
CORPORATION:
ALEXANDRIA REAL ESTATE EQUITIES, INC.,
a Maryland corporation
By:
-------------------------------
Name
Title
Date:
-------------------------------
OFFICER:
------------------------------------
Joel S. Marcus
Date:
-------------------------------
16
<PAGE>
EXHIBIT 10.35
- -------------------------------------------------------------------------------
FORM OF
-------
AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT
---------------------------------------------------
by and between
ALEXANDRIA REAL ESTATE EQUITIES, INC.,
a Maryland corporation,
and
ALAN D. GOLD,
an individual
- -------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
1. Position and Duties; Location....................................... 1
-----------------------------
2. Term of Employment.................................................. 2
------------------
3. Compensation, Benefits and Reimbursement............................ 2
----------------------------------------
3.1 Base Salary............................................. 2
-----------
(a) Minimum Base....................................... 2
------------
(b) Earned Base Salary................................. 2
------------------
3.2 Increases in Base Salary................................ 2
------------------------
3.3 Bonus................................................... 3
-----
(a) Minimum Bonus...................................... 3
-------------
(b) Determination of Bonus............................. 3
----------------------
3.4 Additional Benefits..................................... 4
-------------------
(a) Officer Benefits................................... 4
----------------
(b) Vacation........................................... 4
--------
(c) Life Insurance..................................... 4
--------------
(d) Disability Insurance............................... 4
--------------------
(e) Reimbursement for Expenses......................... 5
--------------------------
(f) Withholding........................................ 5
-----------
4. Termination of the Agreement........................................ 5
----------------------------
4.1 Termination by Corporation Defined...................... 5
----------------------------------
(a) Termination Without Cause.......................... 5
-------------------------
(b) Termination For Cause.............................. 5
---------------------
(c) Termination by Reason of Death or Disability....... 6
--------------------------------------------
4.2 Termination by Officer Defined.......................... 6
------------------------------
(a) Termination Other Than For Good Reason............. 6
--------------------------------------
(b) Termination For Good Reason........................ 6
---------------------------
(c) Good Reason Following a Change in Control.......... 7
-----------------------------------------
4.3 Effect of Termination................................... 8
---------------------
(a) Termination by Corporation......................... 9
--------------------------
(i) Termination Without Cause..................... 9
-------------------------
(ii) Termination For Cause, Death or Permanent
-----------------------------------------
Disability.................................... 9
----------
(b) Termination by Officer............................. 9
----------------------
(i) Termination Other Than For Good Reason........ 9
--------------------------------------
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
(ii) Termination For Good Reason................... 10
---------------------------
4.4 Severance Payment....................................... 10
-----------------
(a) Definition of "Severance Payment."................. 10
----------------------------------
(b) Payment of Severance Payment....................... 10
----------------------------
(c) Other Severance Benefits........................... 11
------------------------
(d) Full Settlement of All Obligations................. 11
----------------------------------
(e) Change in Control.................................. 11
-----------------
4.5 Gross-Up................................................ 12
--------
4.6 Offset.................................................. 13
------
5. Noncompetition...................................................... 14
--------------
6. Miscellaneous....................................................... 14
-------------
6.1 Payment Obligations..................................... 14
-------------------
6.2 Confidentiality......................................... 14
---------------
6.3 Waiver.................................................. 14
-----
6.4 Entire Agreement; Modifications......................... 14
-------------------------------
6.5 Notices................................................. 15
-------
6.6 Headings................................................ 15
--------
6.7 Arbitration............................................. 15
-----------
6.8 Severability............................................ 16
------------
6.9 Survival of Corporation's Obligations................... 16
-------------------------------------
6.10 Survival of Certain Rights and Obligations.............. 16
------------------------------------------
6.11 Counterparts............................................ 17
------------
6.12 Indemnification......................................... 17
---------------
</TABLE>
ii
<PAGE>
FORM OF
-------
AMENDED AND RESTATED
--------------------
EXECUTIVE EMPLOYMENT AGREEMENT
------------------------------
THIS AMENDED AND RESTATED EXECUTIVE EMPLOYMENT AGREEMENT (this
"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 Alan D.
Gold, an individual ("Officer") is hereby amended and restated in its entirety
effective 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
President and Treasurer, 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 (as defined in Paragraph 2 below) of this Agreement
Officer agrees to be employed by and to serve Corporation as its President and
Treasurer or in such other capacity consistent with the Officer's current
position as senior executive officer as may be determined by the Board of
Directors of the Corporation (the "Board"). Corporation agrees to employ and
retain officer
1
<PAGE>
in such capacities. Officer shall devote such of his business time, energy, and
skill to the affairs of Corporation as shall be necessary to perform the duties
of such positions. Officer shall report to the Chief Operating Officer or such
other officer as the Board shall direct, and at all times during the Term (as
defined in Paragraph 2 below) 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.
------------------
The term (the "Term") of this Agreement shall be for a period
commencing on January 1, 1997 and ending on December 31, 1998 (the "Termination
Date"), unless terminated earlier pursuant to this Agreement (the "Early
Termination Date"). Commencing on December 31, 1998 and on each subsequent
anniversary thereof, the Term shall be automatically extended for one (1)
additional year unless, no later than six (6) months before such date, either
party shall have given written notice to the other that it does not wish to
extend the Term of this Agreement. References herein to the Term 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. 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 Ninety Thousand Dollars ($190,000), or
such other higher amount as may from time to time be determined by Corporation.
Unless otherwise agreed in writing by Officer and Corporation, and subject to
Subparagraph (b) below, the salary shall be payable in substantially equal
semimonthly installments in accordance with the standard policies of Corpo-
ration in existence from time to time.
(B) EARNED BASE SALARY. For purposes of any early termination of
------------------
this Agreement as provided in Paragraph 4 below, the term "Earned Base Salary"
shall mean all semimonthly installments of the Base Salary which have become due
and payable to Officer pursuant to this Paragraph 3.1, together
2
<PAGE>
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 re-
------------------------
viewed no less frequently than on each anniversary of the Effective Date during
the Term by the Board (or such committee as may be appointed by the Board for
such purpose). 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 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. During the Term of this Agreement, the Officer is
-----
eligible for the following bonus:
(A) MINIMUM 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.
(B) DETERMINATION OF BONUS. With respect to the period commencing
----------------------
upon consummation of an initial public offering (the "IPO") of the Corporation's
common stock, par value $.01 per share (the "Common Stock"), and ending on
December 31, 1997, and with respect to each calendar year thereafter during the
Term, the bonus payable pursuant to Subparagraph (a), if any, shall be
3
<PAGE>
based upon such factors as the Board (or a committee thereof) deems appropriate,
which may include the enhancement of stockholder value based upon Funds From
Operations (as defined in the White Paper on Funds From Operations approved by
the Board of Governors of the National Association of Real Estate Investment
Trusts in March 1995) as determined in good faith by the Board during such
period, divided by the weighted average number of shares of Common Stock
outstanding during such period.
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.
(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,
4
<PAGE>
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. TERMINATION OF THIS AGREEMENT.
-----------------------------
4.1 TERMINATION BY CORPORATION DEFINED.
----------------------------------
(A) TERMINATION WITHOUT CAUSE. Subject to the provisions set forth
-------------------------
in Paragraph 4.3 below, "Termination Without Cause" shall constitute any
termination by Corporation other than termination for Cause (as defined in
Paragraph 4.1(b) below).
5
<PAGE>
(B) TERMINATION FOR CAUSE. Subject to the provisions set forth in
---------------------
Paragraph 4.3 below, prior to the Termination Date, Corporation shall have the
right to terminate this Agreement for Cause immediately after written notice has
been delivered to Officer, which notice shall specify the reason for and the
effective date of such Termination (which date shall be the applicable Early
Termination Date). For purposes of this Agreement, "Cause" shall mean the
following:
(i) Officer's use of alcohol or narcotics which proximately results
in the willful material breach 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 prior to the effective
date of termination specified in such notice (which date shall be the applicable
Early Termination Date).
6
<PAGE>
(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 Para graph 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:
(i) the assignment to Officer of any duties inconsistent with the
position in Corporation that Officer held immediately prior to the Change
in Control, or an adverse alteration in the nature or status of Officer's
responsibilities from those in effect immediately prior to such change;
(ii) a reduction by Corporation in Officer's annual base salary as
in effect on the date hereof or as the same may be increased from time to
time;
(iii) the relocation of Officer's offices to a location outside the
San 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;
(iv) the failure by Corporation to pay Officer any portion of his
current compensation except pursuant to an across-the-board
7
<PAGE>
compensation deferral similarly affecting all officers of Corporation and
all officers of any person whose actions resulted in a Change in Control or
any person affiliated with Corporation or such person, or to pay Officer
any portion of an installment of deferred compensation under any deferred
compensation program of Corporation, within seven (7) days of the date such
compensation is due;
(v) the failure by Corporation to continue in effect any
compensation plan in which Officer participates immediately prior to the
Change in Control which is material to Officer's total compensation,
unless an equitable arrangement (embodied in an ongoing substitute or
alternative plan) has been made with respect to such plan, or the failure
by Corporation to continue Officer's participation therein (or in such
substitute or alternative plan) on a basis not materially less favorable,
both in terms of the amount of benefits provided and the level of
participation relative to other participants, as existed at the time of the
Change in Control;
(vi) the failure by Corporation to continue to provide Officer with
benefits substantially similar to those under any of Corporation's life
insurance, medical, health and accident, or disability plans in which
Officer was participating at the time of the Change in Control, the taking
of any action by Corporation which would directly or indirectly materially
reduce any of such benefits or deprive Officer of any material fringe
benefit enjoyed by him at the time of the Change in Control, or the failure
by Corporation to provide Officer with the number of paid vacation days to
which he is entitled 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
(vii) the failure of Corporation to obtain a satisfactory agreement
from any successor to assume and agree to perform this Agreement.
Officer's right to terminate Officer's employment for Good Reason
shall not be affected by Officer's incapacity due to physical or mental illness.
Officer's continued employment shall not constitute consent to, or a waiver of
rights with respect to, any circumstance constituting Good Reason hereunder.
8
<PAGE>
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:
(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.
9
<PAGE>
(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.
-----------------
(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; 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
10
<PAGE>
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
partici pation 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.
(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
Securities Exchange Act of 1934, as amended from time to time (the "Exchange
Act"), as modified and used in sections 13(d) and 14(d) thereof, except that
such term shall not include (A) the Corporation or any of its subsidiaries, (B)
a trustee or other fiduciary holding securities under an employee benefit plan
of the
11
<PAGE>
Corporation or any of its affiliates, (C) an underwriter temporarily holding
securities pursuant to an offering of such securities, (D) a corporation owned,
directly or indirectly, by the stockholders of the Corporation in substantially
the same proportions as their ownership of stock of the Corporation, or (E) a
person or group as used in Rule 13d-1(b) under the Exchange Act, that is or
becomes the Beneficial Owner, as such term is defined in Rule 13d-3 under the
Exchange Act, directly or indirectly, of securities of the Corporation (not
including in the securities beneficially owned by such Person any securities
acquired directly from the Corporation or its affiliates other than in
connection with the acquisition by the Corporation or its affiliates of a
business) representing twenty-five percent (25%) or more of the combined voting
power of the Corporation's then outstanding securities; or
(ii) The following individuals cease for any reason to constitute a
majority of the number of directors then serving: individuals who, on the date
hereof, constitute the Board and any new director (other than a director whose
initial assumption of office is in connection with an actual or threatened
election contest, including but not limited to a consent solicitation, relating
to the election of directors of the Corporation) whose appointment or election
by the Board or nomination for election by the Corporation's stockholders was
approved or recommended by a vote of at least two-thirds (2/3) of the directors
then still in office who either were directors on the date hereof or whose
appointment, election or nomination for election was previously so approved or
recommended; or
(iii) There is consummated a merger or consolidation of the
Corporation with any other corporation, other than (A) a merger or consol-
idation which would result in the voting securities of the Corporation
outstanding immediately prior to such merger or consolidation continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity or any parent thereof), in combination with
the ownership of any trustee or other fiduciary holding securities under an
employee benefit plan of the Corporation or any subsidiary of the Corporation,
at least seventy-five percent (75%) of the combined voting power of the
securities of the Corporation or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation, or (B) a merger or
consolidation effected to implement a recapitalization of the Corporation (or
similar transaction) in which no Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Corporation (not including in the
securities beneficially owned by such Person any securities acquired directly
from the Corporation or its affiliates other than in connection with the
acquisition by the Corporation or its affiliates of a business) representing
twen-
12
<PAGE>
ty-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 substan-
tially 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 Pay-
ment") 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 determined by the Corporation's independent auditors
in
13
<PAGE>
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 uncondi-
tional, 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.
0
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
14
<PAGE>
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:
<TABLE>
<S> <C>
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: Alan D. Gold
18269 Sun Maiden Court
San Diego, California 92127
Phone: (619) 487-3764
</TABLE>
Any Party may change such Party's address for notices by notice duly given
pursuant hereto.
15
<PAGE>
6.6 HEADINGS. The Paragraph headings herein are intended for
--------
reference only and shall not by themselves determine the construction or
interpretation of this Agreement.
6.7 ARBITRATION. Any dispute arising out of or relating to this
-----------
Agreement that cannot be settled by good faith negotiation between the parties
shall be submitted to ENDISPUTE for final and binding arbitration pursuant to
ENDISPUTE's Arbitration Rules incorporated herein by reference, which arbitra-
tion 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.
6.8 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.
6.9 SURVIVAL OF CORPORATION'S OBLIGATIONS. Corporation's obligations
-------------------------------------
hereunder shall not be terminated by reason of any liquidation, dissolution,
bankruptcy, cessation of business, or similar event relating to Corporation.
This Agreement shall not be terminated by any merger or consolidation or other
16
<PAGE>
reorganization of Corporation. In the event any such merger, consolidation or
reorganization shall be accomplished by transfer of stock or by transfer of
assets or otherwise, the provisions of this Agreement shall be binding upon and
inure to the benefit of the surviving or resulting corporation or person. This
Agreement shall be binding upon and inure to the benefit of the executors,
administrators, heirs, successors and assigns of the parties; provided, however,
-------- -------
that except as herein expressly provided, this Agreement shall not be assignable
either by Corporation (except to an affiliate of the Corporation, in which event
Corporation shall remain liable if the affiliate fails to meet any obligations
to make payments or provide benefits or otherwise) or by Officer.
6.10 SURVIVAL OF CERTAIN RIGHTS AND OBLIGATIONS. The rights and
------------------------------------------
obligations of the parties hereto pursuant to Paragraphs 4.3, 4.4, 4.5, 4.6, 5
and 6.1, 6.2, 6.10, 6.11 and 6.13 hereof shall survive the termination of this
Agreement.
6.11 COUNTERPARTS. This Agreement may be executed in one or more
------------
counterparts, all of which taken together shall constitute one and the same
Agreement.
6.12 INDEMNIFICATION. In addition to any rights to indemnification
---------------
to which Officer is entitled under the Corporation's 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.
17
<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
OFFICER:
---------------------------------
Alan D. Gold
Date:
----------------------------
18
<PAGE>
EXHIBIT 10.38
SECOND AMENDMENT TO THE EXECUTIVE EMPLOYMENT
AGREEMENT AND GENERAL AND SPECIAL RELEASE
This Second Amendment to the Executive Employment Agreement and
General and Special Release (this "Second Amendment and Release") is entered
into as of this ___ day of May, 1997, by and between ALEXANDRIA REAL ESTATE
EQUITIES, INC., a Maryland corporation (formerly known as Health Science
Properties, Inc.) (the "Corporation"), and JERRY M. SUDARSKY, an individual (the
"Officer") (collectively, the "Parties").
WHEREAS, Officer originally entered into that certain Executive
Employment Agreement (the "Employment Agreement"), dated as of June 9, 1994,
with Health Science Properties Holding Corporation (the "Parent"), and on
November 3, 1994, Parent transferred to the Corporation substantially all of its
property, assets and certain liabilities, including Parent's rights and
obligations under the Employment Agreement;
WHEREAS, on July 30, 1996, the Parties amended the Employment
Agreement by execution of that certain First Amendment to the Employment
Agreement Between Health Science Properties, Inc. And Jerry M. Sudarsky,
pursuant to which the Corporation agreed to employ Officer as its Chairman of
the Board of Directors (the "Chairman") and Chief Executive Officer until
December 31, 2000;
WHEREAS, on March 14, 1997, Officer resigned from the position of
Chief Executive Officer of the Corporation and currently serves as full-time
executive Chairman of the Corporation; and
WHEREAS, upon consummation of an initial public offering by the
Corporation of its common stock (the "IPO"), Officer desires to retire from
employment with the Corporation and thereafter to serve as non-executive Chair
man of the Corporation and perform the duties consistent with such position for
the duration of his term as Chairman, which expires at the next annual election
of officers.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained herein, and for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Parties hereto
agree as follows:
<PAGE>
1. AMENDMENTS TO EMPLOYMENT AGREEMENT.
----------------------------------
A. OFFICER'S RETIREMENT; TERMINATION OF EMPLOYMENT AGREEMENT.
---------------------------------------------------------
Effective upon consummation of the IPO, Officer shall voluntarily retire from
employment with the Corporation. Except as expressly provided herein, all of
the Corporation's duties and obligations under the Employment Agreement shall
terminate effective as of the date of Officer's retirement. Officer
acknowledges and agrees that his voluntary retirement pursuant to this Second
Amendment and Release is not, and shall not be treated as, a Termination for
Good Reason pursuant to Section 4.2 of the Employment Agreement.
B. RETIREMENT BENEFITS. Section 3.5(e) of the Employment Agreement
-------------------
is hereby amended in its entirety to read as follows:
"(e) Retirement Benefit. Commencing on the date of consummation of the
------------------
IPO, the Company shall pay Officer an annual retirement benefit equal to
One Hundred Fifty Thousand Dollars ($150,000) per year for a period of
three (3) years, and, thereafter, shall pay Officer an annual retirement
benefit equal to Ninety Thousand Dollars ($90,000) per year as provided
herein; provided, however, that commencing June 1 of the year following the
-------- -------
year in which the retirement benefit is reduced to Ninety Thousand Dollars
($90,000) per year, the amount of the retirement benefit shall be increased
by 2% per year on June 1 of each year thereafter. The benefit shall be
payable monthly, beginning on the first day of the month following the
month in which consummation of the IPO occurs and shall be payable in the
form of a 100% joint and survivor annuity on the lives of Officer and
Officer's then living spouse, if any; provided, however that in the event
-------- -------
of a Change in Control (as defined in Section 4.4(d) of this Employment
Agreement), the Corporation shall secure the payment of such benefit
through the purchase of an annuity contract that provides Officer with the
benefit described in this Paragraph 3.5(e). In the event of Officer's
death prior to the commencement of the retirement benefit under this
Paragraph 3.5(e), Officer's surviving spouse, if any, shall be entitled to
receive, commencing on the first day of the month next following Officer's
death, the retirement benefit the surviving spouse would have received had
Officer retired and commenced receiving benefits immediately prior to his
death. Amounts payable under this Paragraph 3.5(e) shall be offset by any
amounts paid to Officer under any Disability Policy maintained by the
Corporation."
2
<PAGE>
C. SURVIVAL OF PROVISIONS. Notwithstanding the termination of the
----------------------
Employment Agreement pursuant to Section 1(a), above, the rights and obligations
of the Parties with respect to Sections 3.5(e) (as amended in Section 1(b),
above), 5, 6.1, 6.2, 6.3, 6.8, 6.10, 6.11, and 6.13 of the Employment Agreement
shall survive the termination of that agreement.
2. STATUS AS CHAIRMAN OF THE BOARD OF DIRECTORS. The execution of
--------------------------------------------
this Second Amendment and Release shall not preclude Officer from serving as,
and the Corporation hereby acknowledges that it intends to continue to retain
Officer as, non-executive Chairman performing the duties consistent with such
position at least for the remainder of his term as Chairman, which expires at
the next annual election of officers.
3. RELEASE OF CLAIMS AND OTHER MATTERS.
-----------------------------------
A. OFFICER'S GENERAL AND SPECIAL RELEASE. In consideration of
-------------------------------------
the benefits provided to Officer pursuant to this Second Amendment and Release,
Officer hereby forever releases and discharges the Corporation, its parent,
subsidiary and affiliated corporations, and each of their respective present and
former officers, directors, managers, agents, employees, and attorneys, and
their successors and assigns (collectively, the "Released Parties") from any and
all claims, charges, complaints, liens, demands, causes of action, obligations,
damages and liabilities, known or unknown, suspected or unsuspected, that
---------------- ------------------------
Officer had, now has, or may hereafter claim to have against the Released
Parties, arising out of or relating in any way to Officer's employment with or
his separation from the Corporation, any and all alleged acts or omissions of
any of the Released Parties, and any other claim relating to any of the Released
Parties from the beginning of time through the effective date of Officer's
resignation from the Corporation pursuant to Section 1(a), above. This release
specifically extends to, without limitation, claims or causes of action for
wrongful termination, impairment of ability to compete in the open labor
market, breach of an express or implied contract, breach of the covenant of good
faith and fair dealing, breach of fiduciary duty, fraud, misrepresentation,
defamation, slander, infliction of emotional distress, disability, loss of
future earnings, and claims under the California Constitution, the United States
Constitution, and applicable state and federal fair employment laws, federal
equal employment opportunity laws, and federal and state labor statutes and
regulations, including, but not limited to, the Civil Rights Act of 1964, as
amended, the Fair Labor Standards Act, as amended, the Americans With
Disabilities Act of 1990, the Rehabilitation Act of 1973, as amended, the
Employee Retirement Income Security Act of 1974, as amended,
3
<PAGE>
the Age Discrimination in Employment Act of 1967, as amended, and the California
Fair Employment and Housing Act. Notwithstanding the generality of the
foregoing, nothing contained herein shall release any of the Released Parties
from their obligations under this Second Amendment and Release.
B. OFFICER'S WAIVER OF RIGHTS AFFORDED BY CALIFORNIA CIVIL
-------------------------------------------------------
CODE SECTION 1542. Officer expressly waives all rights afforded by Section 1542
- -----------------
of the Civil Code of the State of California ("Section 1542") with respect to
the Released Parties. Section 1542 states as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES
NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE
RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS
SETTLEMENT WITH THE DEBTOR.
Notwithstanding the provisions of Section 1542, and for the purpose of
implementing a full and complete release, Officer understands and agrees that
this Second Amendment and Release is intended to include all claims, if any,
that Officer may have which he does not now know or suspect to exist in his
favor against the Released Parties and this Second Amendment and Release
extinguishes those claims.
4. REVIEW AND REVOCATION PERIOD. Officer acknowledges that the
----------------------------
Corporation has advised Officer that he may consult with an attorney of his
choosing prior to signing this Second Amendment and Release and that Officer has
twenty-one (21) days during which to consider the provisions of this Second
Amendment and Release, although Officer may sign and return it sooner. Officer
further acknowledges that he has been advised by the Corporation that he has
the right to revoke this Second Amendment and Release for a period of seven (7)
days after signing it and that this Second Amendment and Release shall not
become effective or enforceable until such seven (7)-day revocation period has
expired. Officer acknowledges and agrees that if he wishes to revoke this
Agreement, he must do so in writing, and that such revocation must be signed by
Officer and received by the Corporation no later than 5:00 p.m. Pacific Standard
Time on the seventh (7th) day after Officer has signed this Second Amendment and
Release.
4
<PAGE>
5. VOLUNTARY AGREEMENT. Each Party to this Second Amendment and
-------------------
Release acknowledges and represents that he or it (a) has fully and carefully
read this Second Amendment and Release prior to signing it, (b) has been, or has
had the opportunity to be, advised by independent legal counsel of his or its
own choice as to the legal effect and meaning of each of the terms and
conditions of this Second Amendment and Release, and (c) is signing and entering
into this Second Amendment and Release freely and voluntarily and without duress
or undue pressure or influence of any kind or nature whatsoever and has not
relied on any promises, representations or warranties regarding the subject
matter hereof other than that which is set forth in this Second Amendment and
Release.
6. BINDING EFFECT. This Second Amendment and Release shall be
--------------
binding upon the Parties and their respective heirs, administrators,
representatives, executors, successors and assigns, and shall inure to the
benefit of the Parties and their respective heirs, administrators,
representatives, executors, successors and assigns.
7. GOVERNING LAW. This Second Amendment and Release shall be
-------------
construed and enforced pursuant to the laws of the State of California
applicable to contracts made and entirely to be performed therein.
8. COUNTERPARTS. This Second Amendment and Release may be executed
------------
in counterparts, each of which shall be an original and all of which together
shall constitute one and the same agreement.
9. ENTIRE AGREEMENT; MODIFICATION. This Second Amendment and
------------------------------
Release, together with the Employment Agreement, constitute the entire
understanding of the Parties and neither the Second Amendment and Release, nor
the Employment Agreement, may be modified except in a writing signed by the
Parties. Other than as set forth herein, this Second Amendment and Release
supersedes all prior written and/or oral and all contemporaneous oral
agreements, understandings and negotiations regarding the subject matter hereof.
5
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Second
Amendment and Release on the day and year first above written.
CORPORATION:
ALEXANDRIA REAL ESTATE EQUITIES,
INC., a Maryland corporation
By:
---------------------------------
Joel S. Marcus
Chief Executive Officer
OFFICER:
------------------------------------
Jerry M. Sudarsky
6
<PAGE>
EXHIBIT 10.39
REGISTRATION RIGHTS AGREEMENT
-----------------------------
This REGISTRATION RIGHTS AGREEMENT (the "Agreement") is entered into
this ____ day of _______, 1997, by and among Alexandria Real Estate Equities,
Inc., a Maryland corporation (the "Company"), and Health Science Properties
Holding Corporation (together with its permitted assigns, the "Investor").
NOW, THEREFORE, the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
Section 1.1 Definitions. The following terms shall have the
-----------
meanings ascribed to them below:
"Affiliate," as applied to any Person, shall mean any other Person
---------
directly or indirectly controlling or controlled by or under direct or indirect
common control with such Person.
"Commission" shall mean the United States Securities and Exchange
----------
Commission.
"Common Stock" shall mean the common stock of the Company, par value
------------
$.01 per share, or any other class of Common Stock of the Company.
"control," when used with respect to any Person, shall mean the power
-------
to direct the management and policies of such Person, directly or indirectly,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Controlling Person" shall mean each Person, if any, who controls such
------------------
Selling Holder within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act, together with the partners, officers, directors,
employees and agents of such controlling Person.
<PAGE>
"Damages" shall mean any loss, claim, damage, liability, reasonable
-------
attorneys' fee, cost or expense and costs and expenses of investigating and
defending any such claim.
"Demand Registration" shall mean a registration of Registrable
-------------------
Securities under the Securities Act pursuant to a request made under Section 2.1
hereof.
"Demanding Holder" shall mean any Holder who has initiated a
----------------
registration request in compliance with Section 2.1(a); provided, however, that
-------- -------
(i) "Demanding Holders" shall include each Holder who has requested to have
included in a Demand Registration Registrable Securities pursuant to the notice
provision of Section 2.1(a), and (ii) any action required or permitted to be
taken under this Agreement by any Demanding Holders shall be taken by action of
the holders of a majority of the Registrable Securities held by such Demanding
Holders.
"Effective Date" shall mean the date on which the Initial Public
--------------
Offering is consummated.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, and the rules and regulations thereunder.
"Holder" shall mean the Investor in its capacity as holder of
------
Registrable Securities and any Person who shall hereafter acquire from the
Investor or another Holder.
"Indemnified Party" shall have the meaning set forth in Section 4.3
-----------------
hereof.
"Indemnifying Party" shall have the meaning set forth in Section 4.3
------------------
hereof.
"Initial Public Offering" shall mean the initial Public Offering of
-----------------------
Common Stock by the Company pursuant to a registration statement on Form S-11.
"Inspectors" shall have the meaning set forth in Section 3.1(i)
----------
hereof.
2
<PAGE>
"Investor" shall have the meaning set forth in the preamble hereto.
--------
"Notices" shall have the meaning set forth in Section 5.7 hereof.
-------
"NASD" shall mean the National Association of Securities Dealers, Inc.
----
"Person" shall mean an individual or a corporation, partnership,
------
trust, or any other entity or organization, including a government or political
subdivision or an agency or instrumentality thereof.
"Piggy-Back Holders" shall have the meaning set forth in Section 2.2
------------------
hereof.
"Piggy-Back Registration" shall have the meaning set forth in Section
-----------------------
2.2 hereof.
"Records" shall have the meaning set forth in Section 3.1(i) hereof.
-------
"Registrable Security" shall mean each Share until it (i) has been
--------------------
effectively registered under the Securities Act and disposed of pursuant to an
effective registration statement, (ii) is sold under circumstances in which all
of the applicable conditions of Rule 144 (or any similar provisions then in
force) under the Securities Act are met, including a sale pursuant to the
provisions of Rule 144(k) or (iii) has been otherwise transferred and may be
resold by the person receiving such certificate without registration under the
Securities Act.
"Requisite Share Number" on any date shall mean a number of
----------------------
Registrable Securities representing not less than [25%] of the issued and
outstanding Registrable Securities held in the aggregate on such date by the
Holders.
"Securities Act" shall mean the Securities Act of 1933, as amended,
--------------
and the rules and regulations thereunder.
"Selling Holder" shall mean a Holder who sells or proposes to sell
--------------
Registrable Securities pursuant to a registration statement under the Securities
Act.
"Shares" shall mean the shares of Common Stock initially held by the
------
Investor upon consummation of the Initial Public Offering, or any securities
3
<PAGE>
received as a dividend thereon or with respect thereto (including, without
limitation, by way of merger, consolidation, recapitalization or otherwise).
"Underwriter" shall mean a securities dealer who purchases any
-----------
Registrable Securities as principal in a Public Offering and not as part of such
dealer's market-making activities.
ARTICLE II
REGISTRATION RIGHTS
Section 2.1 Demand Registration. (a) Request for Registration by
------------------- ---------------------------
the Holders. At any time and from time to time during the period commencing on
- -----------
the first anniversary of the Effective Date and ending on the second anniversary
of the Effective Date, Holders owning, individually or in the aggregate, at
least the Requisite Share Number may make a total of two written requests for a
Demand Registration of not less than [25%] of the Registrable Securities held by
all Holders. Such request will specify the number of Registrable Securities
proposed to be sold and the intended method of disposition thereof.
The Company shall give written notice of any registration request by
the Holders, which request complies with this Section 2.1(a), within 10 days
after the receipt thereof, to each Holder who did not initially join in such
request. Within 20 days after receipt of such notice, any such Holder may
request in writing that Registrable Securities owned by it be included in such
registration. Each such request shall specify the number of shares of
Registrable Securities proposed to be sold and the intended method of
disposition thereof.
Subject to Section 2.3, the Company shall use its best efforts to
effect the registration under the Securities Act of the Registrable Securities
of each Holder that the Company has been so requested to register; provided,
--------
however, that: (i) the Company shall not be obligated to file or cause to
- -------
become effective any registration statement during any period in which any other
registration statement (other than a registration statement on Form S-4 or S-8
or any substitute form that may be adopted by the Commission) pursuant to which
shares of Common Stock are to be or were sold has been filed and not withdrawn
or has been declared effective within the prior 180 days; and (ii) the Company
may delay the filing of a registration statement for a period of not more than
90 days after the date of receipt of the request in accordance with Section 2.1
if the
4
<PAGE>
Company reasonably determines that such a filing would adversely affect any
proposed financing or acquisition by the Company and furnishes to the Demanding
Holder a certificate signed by an executive officer of the Company to such
effect. If the Company delays the filing of a Registration Statement, it shall
promptly notify the [Demanding] Holders in writing when the events or
circumstances permitting such postponement have ended.
(b) Effective Registration. A registration will not be deemed to
----------------------
have been effected as a Demand Registration unless it has been declared
effective by the Commission and the Company has complied in all material
respects with its obligations under this Agreement with respect thereto;
provided, that if, after it has become effective, the offering of Registrable
- --------
Securities pursuant to such registration is or becomes the subject of any stop
order, injunction or other order or requirement of the Commission or any other
governmental or administrative agency, or if any court prevents or otherwise
limits the sale of Registrable Securities pursuant to the registration (for any
reason other than the acts or omissions of the Holders), such registration will
be deemed not to have been effected. If (i) a registration requested pursuant
to this Section 2.1 is deemed not to have been effected or (ii) the registration
requested pursuant to this Section 2.1 is requested to be a "shelf" registration
and it does not remain effective until the earlier to occur of 180 days after
the effective date thereof or the consummation of the distribution by the
Selling Holders of the Registrable Securities included in such registration
statement, then such registration statement shall not count as the Demand
Registration that may be requested by the Demanding Holder(s) in question and
the Company shall continue to be obligated to effect a registration pursuant to
this Section 2.1.
The Demanding Holders may withdraw all or any part of the Registrable
Securities from the Demand Registration at any time (whether before or after the
filing or effective date of such Demand Registration), and if all such
Registrable Securities are withdrawn, to withdraw the demand related thereto.
If at any time a registration statement is filed pursuant to the Demand
Registration, and subsequently a sufficient number of Registrable Securities are
withdrawn from the Demand Registration so that such registration statement does
not cover at least the required amounts specified by Section 2.1(a), and an
additional number of Registrable Securities is not so included, the Company may
(or shall, if requested by the Demanding Holders) withdraw the registration
statement; and such registration statement will not count as a Demand
Registration and the Company shall continue to be obligated to effect a
registration pursuant to this Section 2.1.
5
<PAGE>
(c) Selection of Underwriter. If the Demanding Holders so elect, the
------------------------
offering of Registrable Securities pursuant to a Demand Registration shall be in
the form of an underwritten public offering. The Demanding Holders shall select
one or more nationally recognized firms of investment bankers to act as the
bookrunning managing Underwriter or Underwriters in connection with such
offering and shall select any additional investment bankers and managers to be
used in connection with the offering; provided that such investment bankers and
--------
managers must be reasonably satisfactory to the Company.
Section 2.2 Piggy-Back Registration. If at any time the Company
-----------------------
proposes to file a registration statement under the Securities Act with respect
to an offering of equity securities by the Company for its own account or for
the account of any securityholders of any class of its equity securities (other
than (i) a registration statement on Form S-4 or S-8 (or any substitute form
that may be adopted by the Commission) or (ii) a registration statement filed in
connection with an exchange offer or offering of securities solely to the
Company's existing securityholders), including a registration statement relating
to a Demand Registration, then the Company shall give written notice of such
proposed filing to the Holders as soon as practicable (but in no event less than
20 days before the anticipated filing date), and such notice shall offer such
Holders the opportunity to register such number of shares of Registrable
Securities as each such Holder may request (which request shall specify the
Registrable Securities intended to be disposed of by such Holder and the
intended method of distribution thereof) (a "Piggy-Back Registration").
The Company shall use its best efforts to cause the managing
Underwriter or Underwriters of a proposed underwritten public offering to permit
the Registrable Securities requested by the Holders thereof to be included in a
Piggy-Back Registration (the "Piggy-Back Holders") on the same terms and
conditions as any similar securities of the Company or any other securityholder
included therein and to permit the sale or other disposition of such Registrable
Securities in accordance with the intended method of distribution thereof. Any
Holder shall have the right to withdraw its request for inclusion of its
Registrable Securities in any registration statement pursuant to this Section
2.2 by giving written notice to the Company of its request to withdraw. Subject
to the provisions of Section 2.1, the Company may withdraw a Piggy-Back
Registration at any time prior to the time it becomes effective; provided that
--------
the Company shall reimburse the Piggy-Back Holders for all reasonable out-of-
pocket expenses (including counsel fees and expenses) incurred prior to such
withdrawal.
6
<PAGE>
No registration effected under this Section 2.2, and no failure to
effect a registration under this Section 2.2, shall relieve the Company of its
obligations pursuant to Section 2.1, and no failure to effect a registration
under this Section 2.2 and to complete the sale of Shares in connection
therewith shall relieve the Company of any other obligation under this Agreement
(including, without limitation, the Company's obligations under Sections 3.2 and
4.1).
Section 2.3 Reduction of Offering. (a) Demand Registration. The
--------------------- -------------------
Company may include in a Demand Registration shares of Common Stock for the
account of the Company and Registrable Securities for the account of the Piggy-
Back Holders and shares of Common Stock for the account of other holders thereof
exercising contractual piggy-back rights, on the same terms and conditions as
the Registrable Securities to be included therein for the account of the
Demanding Holders; provided, however, that (i) if the managing Underwriter or
-------- -------
Underwriters of any underwritten public offering described in Section 2.1 have
informed the Company in writing that it is their opinion that the total number
of shares which the Demanding Holders, the Company, any Piggy-Back Holders and
any such other holders intend to include in such offering is such as to
materially and adversely affect the success of such offering, then (x) the
number of shares to be offered for the account of the Company (if any) shall be
reduced (to zero, if necessary) and (y) thereafter, if necessary, the number of
shares to be offered for the account of such Piggy-Back Holders and such other
holders shall be reduced (to zero, if necessary), in the case of this clause (y)
pro rata in proportion to the respective number of shares requested to be
- --- ----
registered to the extent necessary to reduce the total number of shares
requested to be included in such offering to the number of shares, if any,
recommended by such managing Underwriters; and if the number of shares to be
offered for the account of each such Person has been reduced to zero, and the
number of Shares requested to be registered by the Demanding Holders exceeds the
number of shares recommended by such managing Underwriters, then the number of
Shares to be offered for the account of the Demanding Holders shall be reduced
pro rata in proportion to the respective number of Shares requested to be
- --- ----
registered by the Demanding Holders and (ii) if the offering is not
underwritten, no other party (other than Piggy-Back Holders), including the
Company, shall be permitted to offer securities under any such Demand
Registration unless a majority of the Shares held by the Demanding Holder or
Holders consent to the inclusion of such shares therein.
(b) Piggy-Back Registration. Notwithstanding anything contained
-----------------------
herein, if the managing Underwriter or Underwriters of any public offering
described in Section 2.2 have informed, in writing, the Piggy-Back Holders that
it
7
<PAGE>
is their opinion that the total number of shares that the Company and Holders of
Registrable Securities and any other Persons desiring to participate in such
registration intend to include in such offering is such as to materially and
adversely affect the success of such offering, then the number of shares to be
offered for the account of the Piggy-Back Holders and all such other Persons
(other than the Company) participating in such registration shall be reduced (to
zero, if necessary) or limited pro rata in proportion to the respective number
--- ----
of shares requested to be registered to the extent necessary to reduce the total
number of shares requested to be included in such offering to the number of
shares, if any, recommended by such managing Underwriters; provided, however,
-------- -------
that (i) if such offering is effected for the account of Demanding Holders
pursuant to Section 2.1, then the number of shares to be offered for the account
of each Person shall be reduced in accordance with Section 2.3(a), and (ii) if
such offering is effected for the account of any other securityholder of the
Company pursuant to the demand registration rights of such securityholder, then
the number of shares to be offered for the account of each Person shall be
reduced in accordance with the instrument granting such demand registration
rights, if any, and, in the absence of such instrument (x) the number of shares
to be offered for the account of the Company, if any, shall be reduced (to zero,
if necessary) and (y) thereafter, if necessary, the number of shares to be
offered for the account of the Piggy-Back Holders and any other Persons that
have requested to include shares in such registration (but not such
securityholders who have exercised their demand registration rights) shall be
reduced (to zero, if necessary), in the case of this clause (y) pro rata in
--- ----
proportion to the respective number of shares requested to be registered, to the
extent necessary to reduce the total number of shares requested to be included
in such offering to the number of shares, if any, recommended by such managing
Underwriters.
ARTICLE III
REGISTRATION PROCEDURES
Section 3.1 Filings: Information. Whenever the Company is required
--------------------
to effect or cause the registration of Registrable Securities pursuant to
Section 2.1, the Company will use its best efforts to effect the registration
and the sale of such Registrable Securities in accordance with the intended
method of disposition thereof as quickly as practicable, and in connection with
any such request:
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<PAGE>
(a) The Company will as expeditiously as possible prepare and file
with the Commission a registration statement on any form for which the Company
then qualifies or which counsel for the Company shall deem appropriate and which
form shall be available for the sale of the Registrable Securities to be
registered thereunder in accordance with the intended method of distribution
thereof, and use its best efforts to cause such filed registration statement to
become and remain effective as provided herein.
(b) The Company will as expeditiously as possible prepare and file
with the Commission such amendments and supplements to such registration
statement and the prospectus used in connection therewith as may be necessary to
keep such registration statement continuously effective (subject to the
penultimate paragraph of this Section 3.1) during the period with respect to the
disposition of all securities covered by such registration statement as provided
herein (but not before the expiration of the 90-day period referred to in
Section 4(3) of the Securities Act and Rule 174 thereunder, if applicable) and
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such registration statement during such period in
accordance with the intended methods of disposition by each Selling Holder
thereof set forth in such registration statement.
(c) The Company will, prior to filing a registration statement or
prospectus or any amendment or supplement thereto, furnish to each Selling
Holder, counsel representing such Selling Holders, and each Underwriter, if any,
of the Registrable Securities covered by such registration statement copies of
such registration statement as proposed to be filed, together with exhibits
thereto if so requested, which documents will be subject to review and comment
by the foregoing within five days after delivery, and thereafter furnish to such
Selling Holder, counsel and Underwriter, if any, for their review and comment
such number of copies of such registration statement, each amendment and
supplement thereto (in each case including all exhibits thereto if so
requested), the prospectus included in such registration statement (including
each preliminary prospectus) and such other documents or information as such
Selling Holder, counsel or Underwriter may reasonably request in order to
facilitate the disposition of the Registrable Securities owned by such Selling
Holder.
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<PAGE>
(d) After the filing of the registration statement, the Company will
promptly notify each Selling Holder of Registrable Securities covered by such
registration statement (i) when a prospectus or any prospectus supplement or
post-effective amendment has been filed and, with respect to a registration
statement or any post-effective amendment, when the same has become effective,
(ii) of any request by the Commission or any other federal or state governmental
authority for amendments or supplements to a registration statement or related
prospectus or for additional information, (iii) of the issuance by the
Commission or any other federal or state governmental authority of any stop
order suspending the effectiveness of a registration statement or the initiation
of any proceedings for that purpose, (iv) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose, (v) of the happening of any event that makes any statement made in such
registration statement or related prospectus or any document incorporated or
deemed to be incorporated therein by reference untrue in any material respect or
that requires the making of any changes in a registration statement, prospectus
or documents incorporated therein by reference so that, in the case of the
registration statement, it will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and that in the case of
the prospectus, it will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which they were
made, not misleading, and (vi) of the Company's reasonable determination that a
post-effective amendment to a registration statement would be necessary.
(e) The Company will use its best efforts to (i) register or qualify
the Registrable Securities under such other securities or blue sky laws of such
jurisdictions in the United States as any Selling Holder reasonably (in light of
such Selling Holder's intended plan of distribution) requests, and (ii) cause
such Registrable Securities to be registered with or approved by such other
governmental agencies or authorities in the United States as may be necessary
by virtue of the business and operations of the Company and do any and all other
acts and things that may be reasonably necessary or advisable to enable such
Selling Holder to consummate the disposition of the Registrable Securities owned
by such Selling Holder; provided that the Company will not be required to (A)
--------
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this paragraph (e), (B) subject itself
to taxation in any
10
<PAGE>
such jurisdiction or (C) consent to general service of process in any such
jurisdiction.
(f) The Company will take all reasonable actions required to prevent
the entry, or obtain the withdrawal, of any order suspending the effectiveness
of a registration statement, or the lifting of any suspension of the
qualification (or exemption from qualification) of any Registrable Securities
for sale in any jurisdiction, at the earliest moment.
(g) Upon the occurrence of any event contemplated by paragraph
3.1(d)(v) or 3.1(d)(vi) above, the Company will (i) prepare a supplement or
post-effective amendment to such registration statement or a supplement to the
related prospectus or any document incorporated therein by reference or file any
other required document so that, as thereafter delivered to the purchasers of
the Registrable Securities being sold thereunder, such prospectus will not
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and (ii)
promptly make available to each Selling Holder any such supplement or amendment.
(h) The Company will enter into customary agreements (including, if
applicable, an underwriting agreement in customary form and reasonably
satisfactory to the Company) and take such other actions as are reasonably
required in order to expedite or facilitate the disposition of such Registrable
Securities (the Selling Holders may, at their option, require that any or all of
the representations, warranties and covenants of the Company to or for the
benefit of such Underwriters also be made to and for the benefit of such Selling
Holders).
(i) The Company will make available to each Selling Holder (and their
counsel) and each Underwriter, if any, subject to restrictions imposed by the
United States federal government or any agency or instrumentality thereof,
copies of all correspondence between the Commission and the Company, its counsel
or auditors and will also make available for inspection by any Selling Holder,
any Underwriter participating in any disposition pursuant to such registration
statement and any attorney, accountant or other professional retained by any
such Selling Holder or Underwriter (collectively, the "Inspectors"), all
financial and other records, pertinent corporate documents and properties of the
Company (collectively, the "Records") as shall be reasonably necessary to enable
them to exercise their due diligence responsibility, and cause the Company's
officers and employees to supply all information reasonably requested by any
Inspectors in
11
<PAGE>
connection with such registration statement. Records that the Company
determines, in good faith, are confidential, and of which determination the
Company so notifies the Inspectors, shall not be disclosed by the Inspectors
unless (i) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in such registration statement or (ii) the disclosure
or release of such Records is requested or required pursuant to oral questions,
interrogatories, requests for information or documents or a subpoena or other
order from a court of competent jurisdiction or other process; provided that
--------
prior to any disclosure or release pursuant to clause (ii), the Inspectors shall
provide the Company with prompt notice of any such request or requirement so
that the Company may seek an appropriate protective order or waive such
Inspectors' obligation not to disclose such Records; and, provided further, that
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if, failing the entry of a protective order or the waiver by the Company
permitting the disclosure or release of such Records, the Inspectors, upon
advice of counsel, are compelled to disclose such Records, the Inspectors may
disclose only that portion of the Records that counsel has advised them that
they are compelled to disclose. Each Selling Holder agrees that information
obtained by it solely as a result of such inspections shall be deemed
confidential and shall not be used by it as the basis for any market
transactions in the securities of the Company or its Affiliates unless and until
such information is made generally available to the public.
(j) The Company will furnish to each Selling Holder and to each
Underwriter, if any, a signed counterpart, addressed to such Selling Holder or
Underwriter, of (i) an opinion or opinions of counsel to the Company, and (ii) a
comfort letter or comfort letters from the Company's independent public
accountants, each in customary form and covering such matters of the type
customarily covered by opinions or comfort letters, as the case may be, as the
Selling Holders or the managing Underwriter therefor reasonably requests.
(k) The Company will otherwise use its best efforts to comply with
all applicable rules and regulations of the Commission, and make available to
its securityholders, as soon as reasonably practicable, an earnings statement
covering a period of 12 months, beginning within three months after the
effective date of the registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act.
(l) The Company will use its best efforts (i) to cause any class of
Registrable Securities to be listed on a national securities exchange (if such
shares are not already so listed) and on each additional national securities
exchange on which similar securities issued by the Company are then listed (if
any), if the
12
<PAGE>
listing of such Registrable Securities is then permitted under the rules of such
exchange or (ii) to secure designation of all such Registrable Securities
covered by such registration statement as a NASDAQ "national market system
security" within the meaning of Rule 11Aa2-1 of the Commission or, failing that,
to secure NASDAQ authorization for such Registrable Securities.
(m) In connection with an underwritten public offering, the Company
will participate, to the extent reasonably requested by the managing Underwriter
for the offering or the Selling Holders, in customary efforts to sell the
securities under the offering, including, without limitation, participating in
"road shows"; provided that the Company shall not be obligated so to participate
--------
in more than one such offering in any 12-month period.
The Company may require each Selling Holder to promptly furnish in
writing to the Company such information regarding the distribution of the
Registrable Securities by such Selling Holder as the Company may from time to
time reasonably request and such other information as may be legally required in
connection with such registration including, without limitation, all such
information as may be requested by the Commission or the NASD. The Company may
exclude from such registration any Holder who fails to provide such information.
Each Selling Holder agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Sections
3.1(d)(iii), (iv), (v) and (vi) hereof, such Selling Holder will forthwith
discontinue disposition of Registrable Securities pursuant to the registration
statement covering such Registrable Securities until such Selling Holder's
receipt of the copies of the supplemented or amended prospectus contemplated by
Section 3.1(g) hereof, and, if so directed by the Company, such Selling Holder
will deliver to the Company all copies, other than permanent file copies, then
in such Selling Holder's possession of the most recent prospectus covering such
Registrable Securities at the time of receipt of such notice. In the event the
Company shall give such notice, the Company shall extend the period during which
such registration statement shall be maintained effective as provided herein by
the number of days during the period from and including the date of the giving
of notice pursuant to Section 3.1(d)(iii), (iv), (v) or (vi) hereof to the date
when the Company shall make available to the Selling Holders a prospectus
supplemented or amended to conform with the requirements of Section 3.1(g)
hereof.
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In connection with any registration of Registrable Securities pursuant
to Section 2.2, the Company will take the actions contemplated by paragraphs
(c), (d), (e), (g), (i), (j), (k) and (l) above.
Section 3.2 Registration Expenses. In connection with the Demand
---------------------
Registration pursuant to Section 2.1 hereof, and any registration statement
filed pursuant to Section 2.2 hereof, the Company shall pay the following
registration expenses incurred in connection with the registration hereunder (i)
all registration and filing fees, (ii) fees and expenses of compliance with
securities or blue sky laws (including reasonable fees and disbursements of
counsel in connection with blue sky qualifications of the Registrable
Securities), (iii) printing expenses, (iv) the Company's internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties) and all fees and expenses
incident to the performance of or compliance with this Agreement by the Company,
(v) the fees and expenses incurred in connection with the listing of the
Registrable Securities, (vi) reasonable fees and disbursements of counsel for
the Company and customary fees and expenses for independent certified public
accountants retained by the Company (including the expenses of any comfort
letters or costs associated with the delivery by independent certified public
accountants of a comfort letter or comfort letters requested pursuant to Section
3.1(j) hereof), (vii) the reasonable fees and expenses of any special experts
retained by the Company in connection with such registration, and (viii)
reasonable fees and expenses of one firm of counsel for the Holders (together
with necessary local counsel fees and expenses), which counsel shall be chosen
by the Demanding Holders or, if none, by the Holders of a majority of the
Registrable Securities being included in such Registration Statement. The
Company shall have no obligation to pay any underwriting fees, discounts or
commissions attributable to the sale of Registrable Securities.
ARTICLE IV
INDEMNIFICATION AND CONTRIBUTION
Section 4.1 Indemnification by the Company. The Company agrees to
------------------------------
indemnify and hold harmless each Selling Holder, its partners, officers,
directors, employees, agents, and Controlling Persons from and against any and
all Damages, joint or several, and any action in respect thereof to which such
Selling Holder, its partners, officers, directors, employees and agents, and any
such Controlling Person may become subject under the Securities Act or other-
14
<PAGE>
wise, insofar as such Damages (or proceedings in respect thereof) arise out of,
or are based upon, any untrue statement or alleged untrue statement of a
material fact contained in any registration statement or prospectus relating to
the Registrable Securities or any preliminary prospectus, or arises out of, or
are based upon, any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, except insofar as the same are based upon information furnished
to the Company by a Selling Holder or Underwriter expressly for use therein, and
shall reimburse each Selling Holder, its partners, officers, directors,
employees and agents, and each such Controlling Person for any legal and other
expenses reasonably incurred by that Selling Holder, its partners, officers,
directors, employees and agents, or any such Controlling Person in investigating
or defending or preparing to defend against any such Damages or proceedings;
provided, that the Company shall not be liable to any Selling Holder to the
- --------
extent that (a) any such Damages arise out of or are based upon an untrue
statement or omission made in any preliminary prospectus if (i) such Selling
Holder failed to send or deliver a copy of the final prospectus with or prior to
the delivery of written confirmation of the sale by such Selling Holder to the
Person asserting the claim from which such Damages arise, and (ii) the final
prospectus would have corrected such untrue statement or such omission; or (b)
any such Damages arise out of or are based upon an untrue statement or omission
in any prospectus if (x) such untrue statement or omission is corrected in an
amendment or supplement to such prospectus, and (y) having previously been
furnished by or on behalf of the Company with copies of such prospectus as so
amended or supplemented, such Selling Holder thereafter fails to deliver such
prospectus as so amended or supplemented prior to or concurrently with the sale
of a Registrable Security to the Person asserting the claim from which such
Damages arise.
Section 4.2 Indemnification by Holders of Registrable Securities.
----------------------------------------------------
Each Selling Holder agrees, severally but not jointly, to indemnify and hold
harmless the Company, its officers, directors, employees and agents and each
Person, if any, who controls the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, together with the partners,
officers, directors, employees and agents of such controlling Person, to the
same extent as the foregoing indemnity from the Company to such Selling Holder,
but only with reference to information related to such Selling Holder or its
plan of distribution, as furnished by such Selling Holder or on such Selling
Holder's behalf expressly for use in any registration statement or prospectus
relating to the Registrable Securities, or any amendment or supplement thereto,
or any preliminary prospectus. In case any action or proceeding shall be
brought against the
15
<PAGE>
Company or its officers, directors, employees or agents or any such controlling
Person or its partners, officers, directors, employees or agents, in respect of
which indemnity may be sought against such Selling Holder, such Selling Holder
shall have the rights and duties given to the Company, and the Company or its
officers, directors, employees or agents, controlling Person, or its partners,
officers, directors, employees or agents, shall have the rights and duties given
to such Selling Holder, under Section 4.1. Each Selling Holder also agrees to
indemnify and hold harmless each other Selling Holder and any Underwriters of
the Registrable Securities, and their respective officers and directors and each
Person who controls each such other Selling Holder or Underwriter on
substantially the same basis as that of the indemnification of the Company
provided in this Section 4.2. The Company shall be entitled to receive
indemnities from Underwriters, selling brokers, dealer managers and similar
securities industry professionals participating in the distribution, to the same
extent as provided above, with respect to information so furnished by such
Persons specifically for inclusion in any prospectus or registration statement.
In no event shall the liability of any Selling Holder be greater in amount than
the dollar amount of the proceeds (net of payment of all expenses) received by
such Selling Holder upon the sale of the Registrable Securities giving rise to
such indemnification obligation.
Section 4.3 Conduct of Indemnification Proceedings. Promptly after
--------------------------------------
receipt by any Person in respect of which indemnity may be sought pursuant to
Section 4.1 or 4.2 (an "Indemnified Party") of notice of any claim or the
commencement of any action, the Indemnified Party shall, if a claim in respect
thereof is to be made against the Person against whom such indemnity may be
sought (an "Indemnifying Party"), notify the Indemnifying Party in writing of
the claim or the commencement of such action, provided that the failure to
--------
notify the Indemnifying Party shall not relieve the Indemnifying Party from any
liability except to the extent of any material prejudice resulting therefrom.
If any such claim or action shall be brought against an Indemnified Party, and
it shall notify the Indemnifying Party thereof, the Indemnifying Party shall be
entitled to participate therein, and, to the extent that it wishes, jointly with
any other similarly notified Indemnifying Party, to assume the defense thereof
with counsel reasonably satisfactory to the Indemnified Party. After notice
from the Indemnifying Party to the Indemnified Party of its election to assume
the defense of such claim or action, the Indemnifying Party shall not be liable
to the Indemnified Party for any legal or other expenses subsequently incurred
by the Indemnified Party in connection with the defense thereof other than
reasonable costs of investigation; provided that the Indemnified Party shall
--------
have the right to employ
16
<PAGE>
separate counsel to represent the Indemnified Party and its controlling Persons
who may be subject to liability arising out of any claim in respect of which
indemnity may be sought by the Indemnified Party against the Indemnifying Party,
but the fees and expenses of such counsel shall be for the account of such
Indemnified Party unless (i) the Indemnifying Party and the Indemnified Party
shall have mutually agreed to the retention of such counsel or (ii) in the
reasonable judgment of the Indemnifying Party and such Indemnified Party,
representation of both parties by the same counsel would be inappropriate due
to actual or potential conflicts of interest between them, it being understood
however, that the Indemnifying Party shall not, in connection with any one such
claim or action or separate but substantially similar or related claims or
actions in the same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one separate
firm of attorneys (together with appropriate local counsel) at any time for all
Indemnified Parties, or for fees and expenses that are not reasonable. No
Indemnifying Party shall, without the prior written consent of the Indemnified
Party, effect any settlement of any claim or pending or threatened proceeding in
respect of which the Indemnified Party is or could have been a party and
indemnity could have been sought hereunder by such Indemnified Party, unless
such settlement includes an unconditional release of such Indemnified Party from
all liability arising out of such claim or proceeding. Whether or not the
defense of any claim or action is assumed by the Indemnifying Party, such
Indemnifying Party will not be subject to any liability for any settlement made
without its consent, which consent will not be unreasonably withheld.
Section 4.4 Contribution. If the indemnification provided for in
------------
this Article IV is unavailable to the Indemnified Parties in respect of any
Damages referred to herein, then each Indemnifying Party, in lieu of
indemnifying such Indemnified Party, shall contribute to the amount paid or
payable by such Indemnified Party as a result of such Damages (i) as between the
Company and the Selling Holders on the one hand and the Underwriters on the
other, in such proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Holders on the one hand and the
Underwriters on the other from the offering of the Registrable Securities, or if
such allocation is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits but also the relative
fault of the Company and the Selling Holders on the one hand and of the
Underwriters on the other in connection with the statements or omissions which
resulted in such Damages, as well as any other relevant equitable
considerations, and (ii) as between the Company on the one hand and each Selling
Holder on the other, in such proportion as is
17
<PAGE>
appropriate to reflect the relative fault of the Company and of each Selling
Holder in connection with such statements or omissions, as well as any other
relevant equitable considerations. The relative benefits received by the
Company and the Selling Holders on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total proceeds from
the offering (net of underwriting discounts and commissions but before deducting
expenses) received by the Company and the Selling Holders bear to the total
underwriting discounts and commissions received by the Underwriters, in each
case as set forth in the table on the cover page of the prospectus. The
relative fault of the Company and the Selling Holders on the one hand and of
the Underwriters on the other shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company and the Selling Holders or by the Underwriters. The
relative fault of the Company on the one hand and of each Selling Holder on the
other shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by such party,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and the Selling Holders agree that it would not be just
and equitable if contribution pursuant to this Section 4.4 were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Party as a result of
the Damages referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such Indemnified Party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 4.4, no Underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the
Registrable Securities underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages which such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission, and no Selling Holder shall be
required to contribute any amount in excess of the amount by which the total
price at which the Registrable Securities of such Selling Holder were offered to
the public (less underwriting discounts and commissions) exceeds the amount of
any damages which such Selling Holder has otherwise been
18
<PAGE>
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission. No Person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any Person who was not guilty of such fraudulent
misrepresentation. Each Selling Holder's obligation to contribute pursuant to
this Section 4.4 is several and not joint.
The indemnity, contribution and expense reimbursement obligations
contained in this Article IV are in addition to any liability any Indemnifying
Party may otherwise have to an Indemnified Party or otherwise. The provisions
of this Article IV shall survive, notwithstanding any transfer of the
Registrable Securities by any Holder or any termination of this Agreement.
ARTICLE V
MISCELLANEOUS
Section 5.1 Participation in Underwritten Registrations. No Person
-------------------------------------------
may participate in any underwritten registration hereunder unless such Person
(a) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Persons entitled hereunder to approve
such arrangements, and (b) completes and executes all questionnaires,
indemnities, underwriting agreements and other documents reasonably required
under the terms of such underwriting arrangements and these registration rights;
provided, that (i) no Selling Holder shall be required to make any
- --------
representations or warranties except those which relate solely to such Holder
and its intended method of distribution, and (ii) the liability of each such
Holder to any Underwriter under such underwriting agreement will be limited to
liability arising from misstatements or omissions regarding such Holder and its
intended method of distribution and any such liability shall not exceed an
amount equal to the amount of net proceeds such Holder derives from such
registration; provided, however, that in an offering by the Company in which
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any Holder requests to be included in a Piggy-Back Registration, the Company
shall use its best efforts to arrange the terms of the offering such that the
provisions set forth in clauses (i) and (ii) of this Section 5.1 are true;
provided further, that if the Company fails in its best efforts to so arrange
- -------- -------
the terms, the Holder may withdraw all or any part of its Registrable Securities
from the Piggy-Back Registration and the Company shall reimburse such Holder for
all reasonable out-of-pocket expenses (including counsel fees and expenses)
incurred prior to such withdrawal.
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Section 5.2 Rule 144. The Company covenants that it will file any
--------
reports required to be filed by it under the Securities Act and the Exchange Act
and that it will take such further action as any Holder may reasonably request,
all to the extent required from time to time to enable Holders to sell
Registrable Securities without registration under the Securities Act within the
limitation of the exemptions provided by (a) Rule 144 under the Securities Act,
as such Rules may be amended from time to time, or (b) any similar rule or
regulation hereafter adopted by the Commission. Upon the request of any Holder,
the Company will deliver to such Holder a written statement as to whether it has
complied with such requirements.
Section 5.3 Amendment and Modification. Any provision of this
--------------------------
Agreement may be waived, provided that such waiver is set forth in a writing
--------
executed by the party against whom the enforcement of such waiver is sought.
This Agreement may not be amended, modified or supplemented other than by a
written instrument signed by (a) the Company and (b) a majority of the Holders
of Registrable Securities. No course of dealing between or among any Persons
having any interest in this Agreement will be deemed effective to modify, amend
or discharge any part of this Agreement or any rights or obligations of any
Person under or by reason of this Agreement.
Section 5.4 Successors and Assigns: Entire Agreement. (a) This
----------------------------------------
Agreement and all of the provisions hereof shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns
and executors, administrators and heirs.
(b) This Agreement sets forth the entire agreement and understanding
between the parties as to the subject matter hereof and merges and supersedes
all prior discussions, agreements and understandings of any and every nature
among them.
Section 5.5 Severability. In the event that any provision of this
------------
Agreement or the application of any provision hereof is declared to be illegal,
invalid or otherwise unenforceable by a court of competent jurisdiction, the
remainder of this Agreement shall not be affected except to the extent necessary
to delete such illegal, invalid or unenforceable provision unless that provision
held invalid shall substantially impair the benefits of the remaining portions
of this Agreement.
20
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Section 5.6 Notices. All notices, demands, requests, consents or
-------
approvals (collectively, "Notices") required or permitted to be given hereunder
or which are given with respect to this Agreement shall be in writing and shall
be personally delivered or delivered by a reputable overnight courier service
with charges prepaid, or transmitted by hand delivery, telegram, telex or
facsimile, addressed as set forth below, or such other address as such party
shall have specified most recently by written notice. Notice shall be deemed
given or delivered on the date of service or transmission if personally served
or transmitted by telegram, telex or facsimile. Notice otherwise sent as
provided herein shall be deemed given or delivered on the next business day
following delivery of such notice to a reputable overnight courier service.
To the Company:
Alexandria Real Estate Equities, Inc.
251 South Lake Avenue
Suite 700
Pasadena, California 91101
Attn: Joel S. Marcus
Fax: (818) 578-0770
with a copy (which shall not constitute notice) to:
Skadden, Arps, Slate, Meagher & Flom LLP
300 South Grand Avenue
34th Floor
Los Angeles, California 90071
Attn: Michael A. Woronoff, Esq.
Fax: (213) 687-5600.
To the Investor:
To the address specified on the signature page of this Agreement.
To any other Holder:
To the address specified in the notice provided to the Company
upon such Person becoming a Holder.
21
<PAGE>
Section 5.7 Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal law of the State of California,
without giving effect to principles of conflicts of law.
Section 5.8 Headings. The headings in this Agreement are for
--------
convenience of reference only and shall not constitute a part of this Agreement,
nor shall they affect their meaning, construction or effect.
Section 5.9 Counterparts. This Agreement may be executed in any
------------
number of counterparts, each of which shall be deemed to be an original
instrument and all of which together shall constitute one and the same
instrument.
Section 5.10 Further Assurances. Each party shall cooperate and take
------------------
such action as may be reasonably requested by another party in order to carry
out the provisions and purposes of this Agreement and the transactions
contemplated hereby.
Section 5.11 Termination. Unless sooner terminated in accordance
-----------
with its terms or as otherwise herein provided, this Agreement shall terminate
upon the earlier to occur of (i) the mutual agreement by the parties hereto,
(ii) with respect to any Holder, such Holder ceasing to own any Registrable
Securities or (iii) the fifth anniversary of the Effective Date.
Section 5.12 Remedies. In the event of a breach or a threatened
--------
breach by any party to this Agreement of its obligations under this Agreement,
any party injured or to be injured by such breach will be entitled to specific
performance of its rights under this Agreement or to injunctive relief, in
addition to being entitled to exercise all rights provided in this Agreement and
granted by law. The parties agree that the provisions of this Agreement shall
be specifically enforceable, it being agreed by the parties that the remedy at
law, including monetary damage, for breach of any such provision will be
inadequate compensation for any loss and that any defense or objection in any
action for specific performance or injunctive relief that a remedy at law would
be adequate is waived.
Section 5.14 Pronouns. Whenever the context may require, any
--------
pronouns used herein shall be deemed also to include the corresponding neuter,
masculine or feminine forms.
22
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
By:______________________________
Name: Joel S. Marcus
Title: Chief Executive Officer
HEALTH SCIENCE PROPERTIES HOLDING
CORPORATION
By:______________________________
Name: Jerry M. Sudarsky
Title: Chairman
23
<PAGE>
EXHIBIT 10.40
May _______, 1997
VIA FEDERAL EXPRESS
- -------------------
AEW Partners II, L.P.
AEW Health Science Properties
Co-Investment, L.P.
225 Franklin Street
Boston, MA 02110
Re: Alexandria Real Estate Equities, Inc.
Initial Public Offering
-------------------------------------
Ladies and Gentlemen:
Reference is made to Article V, Section F.5 of the charter of
Alexandria Real Estate Equities, Inc. (the "Company"), pursuant to which you
have notified the Company that you will convert all of your outstanding shares
of Series V Preferred Stock of the Company into shares of Common Stock of the
Company in connection with the Company's initial public offering.
In addition to the shares of Common Stock that you will receive in
connection with the conversion of your shares of Series V Preferred Stock
pursuant to Article V, Section F.5 of the Company's charter, the Company hereby
agrees to issue to you an additional 40,476 shares of Common Stock in lieu of an
adjustment to the Conversion Share Ratio (as defined in the Company's charter).
Accordingly, the aggregate number of shares of Common Stock to be issued to you
upon such conversion is 1,659,239, assuming an initial public offering price of
$20.00 - $22.00 per share.
<PAGE>
AEW Partners II, L.P.
AEW Health Science Properties
Co-Investment, L.P.
May__, 1997
Page 2
Please acknowledge your acceptance of the terms of this Letter
Agreement by affixing your signature below.
ALEXANDRIA REAL ESTATE
EQUITIES, INC.
By: __________________________
Joel S. Marcus
Chief Executive Officer
Accepted and Agreed:
AEW PARTNERS II, L.P.
By: ___________________________
Name
Title
AEW HEALTH SCIENCE PROPERTIES
CO-INVESTMENT, L.P.
By: ___________________________
Name
Title
<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. 2 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 15, 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), and all amendments thereto (the "Registration
Statement"), including under the caption "Experts," to the incorporation by
reference therein of our report dated May 5, 1997, entitled Scientific
Research Facilities Market Analysis: San Diego, San Francisco Bay Area,
Seattle, and Suburban Washington, D.C. (the "Report"), and to the filing of
the Report as an exhibit to the Registration Statement. 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.
Rosen Consulting Group
May 19, 1997
By: /s/ Kenneth T. Rosen
----------------------------------
Kenneth T. Rosen
<PAGE>
EXHIBIT 99.1
- --------------------------------------------------------------------------------
SCIENTIFIC RESEARCH FACILITIES MARKET ANALYSIS:
SAN DIEGO, SAN FRANCISCO, SEATTLE,
AND SUBURBAN WASHINGTON, D.C.
May 5, 1997
Prepared for
ALEXANDREA REAL ESTATE EQUITIES, INC.
by
Rosen Consulting Group
1950 Addison Street, Suite 101
Berkeley, CA 94704
(510) 549-4510
1997 Rosen Consulting Group
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 99.1
- --------------------------------------------------------------------------------
SCIENTIFIC RESEARCH FACILITIES MARKET ANALYSIS(:) SAN DIEGO, SAN FRANCISCO BAY
AREA, SEATTLE, AND SUBURBAN WASHINGTON, D.C.
- --------------------------------------------------------------------------------
SUMMARY
Our research into the four scientific research facilities markets has found that
these markets have none to minimal available space. Further, the surrounding
office and R&D/flex markets also have low vacancies. As a result, we believe
these markets are poised for rent growth.
For the most part, published statistics are not available on scientific research
space defined as properties containing both office and a significant component
of laboratory space, leased principally to pharmaceutical and biotechnolgy
companies, non-profit research institutions and related government agencies
engaged in scientific research. The 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 owners of scientific research properties varied
by market and included user institutions and companies, local developer/owners
and select other investors. In our research, Alexandria Real Estate Equities,
Inc. (formerly Health Sciences) was the only identified national investor. Given
the lack of published statistics, the estimated inventory may not be inclusive
of all such space in each market. Nonetheless, our research indicates that the
reported occupancy and rents are accurate for the entire inventory in each
market.
OCCUPANCY
The market for existing scientific research facilities is virtually 100%
occupied in each of the markets surveyed. In addition, most of the office and
R&D/Flex markets are 88% or more occupied. Table 1 indicates the estimated
inventory of scientific research space in each market.
TABLE 1
INVENTORY AND OCCUPANCY
<TABLE>
<CAPTION>
Scientific Research
Markets Facilities Office R&D/Flex
- ------- ------ --------
Estimated
Inventory Occupancy Inventory Occupancy Inventory Occupancy
--------- --------- --------- --------- --------- ---------
(SF) (SF) (SF)
<S> <C> <C> <C> <C> <C> <C>
San Diego 4,700,000 98-100% 40,776,000 88% 20,121,000 91%
San Francisco
Bay Area/1/ 15,000,000 98-100 27,041,000 89 Not avail. Not Avail
Seattle 3,000,000 98-100 21,058,000 89 7,178,339 94
Suburban D.C. 3,700,000 98-100 131,347,595 92 21,950,135 90
</TABLE>
Source: Rosen Consulting Group compiled from market interviews and various
broker reports
- ------------
/1/ Includes San Francisco, West Bay (the area from South San Francisco to
Palo Alto), East Bay (the area from Berkeley to Fremont including Alameda)
Rosen Consulting Group 1
<PAGE>
Market participants consistently confirm that all available space with a
combination of generic lab infrastructure and office space is occupied in each
market. We assume a small structural vacancy allowance to account for the small
amount of downtime between leases and in periods of renovation/buildout. For
comparison, the inventory and occupancy of office and R&D/flex space is also
shown. The limited availability of space in these markets is putting upward
pressure on rents across the board.
TENANT TURNOVER
Tenant turnover is low both because there is a limited amount of space available
and because a combination of lab and office space is required for the operations
of the pharmaceutical and biotechnology companies, non-profit research
institutions and related government agencies engaged in scientific research that
lease such space. Market participants in each market consistently reported the
same turnover results: 1) tenants usually renew (either through signing of a new
lease or, where applicable, exercise of an option) unless they have outgrown the
space; 2) space is frequently re-leased before it is placed on the market; and
3) there is minimal downtime between leases. Table 2 provides estimates of the
probability of tenant renewal and downtime between leases based on responses
from interviews with market participants. There were a few market participants
who placed the probability of tenant renewal substantially higher including one
whom placed it at 100% given the lack of available space. The probability that a
tenant will renew is higher for established companies, for tenants that have
invested in the space and where there is room to expand on site. Overall, in
each market, the probabilities for renewal of combined office/lab space are
higher than the probabilities for renewal of pure office space and, thus, tenant
turnover is lower. In addition, today's tight market conditions limit
alternative choices and increase the likelihood that tenants will renew.
TABLE 2
TENANT TURNOVER
----------------------------------------------------------
Probability of Downtime
Markets Tenant Renewal Between Leases
------- -------------- --------------
San Diego 70%+ 4-6 months
San Francisco Bay
Area 80%+ 4-6 months
Seattle 80%+ 4 months
Suburban D.C. 80%+ 4-6 months
Source: Rosen Consulting Group based on market interviews.
----------------------------------------------------------
Rosen Consulting Group 2
<PAGE>
RENT ANALYSIS
We took three approaches to determining market rent: 1) we reviewed lease
comparables; 2) we interviewed active market brokers on rents achievable for a
standard product; and 3) we interviewed active market brokers on the cost of
building the same facility new and calculated economic rent. The low turnover in
these markets limits the number of available comparable leases. In addition,
there is a significant range in recent contract rents due to differences in
building quality, location and the percentage of lab to office space. We
reviewed the lease comparables provided by appraisers and consultants in each
market and concluded in all cases, with the exception of San Diego, that the
lease comparables were misleading. We concluded that the most reliable indicator
of market rents was our survey of brokers. Our interview strategy was to ask
several brokers in each market to quote the current market rent for a scientific
research facility with 50%-70% generic lab infrastructure in place at a cost of
$75-$100 per square foot. While some markets tended to have higher or lower
infrastructure investment, we were able to obtain comparable quotes across the
markets. Table 3 indicates the market rent for each market for the defined
prototype building. For the purpose of the study, market rents are quoted triple
net less estimated leasing commission and tenant improvement allowance. The
market rents are indicative of initial rent levels and, thus, the present value
of future contractual rent escalations is not included. Rents will be higher in
all markets, excluding San Francisco, for properties with a larger percentage of
lab to office space or higher cost generic lab infrastructure in place. The
significant rent differential by geographic submarket in San Diego and San
Francisco are indicated.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
TABLE 3
SCIENTIFIC RESEARCH FACILITIES MARKET RENT ($/SF TRIPLE NET)/2/
EXISTING FACILITY WITH 50%-70% LAB INFRASTRUCTURE
AT $75-$100/SF, FAVORABLE LOCATION
San Diego San Francisco Bay Area
- ---------------------------- ----------------------------
Torrey Pines Other Areas West Bay/3/ East Bay/4/ Seattle Suburban D.C.
- ------------- ------------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
$23.50-$33.50 $20.00-$27.50 $20.00-$34.50 $14.00-$23.00 $21.00-$28.50 $17.00-$23.50
(2) Triple net market rent less estimated leasing commission and tenant
improvement allowance.
(3) West Bay includes the area from South San Francisco to Palo Alto.
(4) East Bay includes the area from Berkeley to Fremont including Alameda.
Source: Rosen Consulting Group based on market interviews
- ----------------------------------------------------------------------------------------------
</TABLE>
We also asked each market participant to compare the scientific research
facilities rents to the rents in a comparable building with a standard office
tenant improvement allowance. In most markets, the comparable building is an
R&D/flex building with office buildout. Table 4 indicates the comparable rents
for suburban office or R&D/flex. For the prototype scientific research building
defined above, there is a $5.00-$20.00 per square foot premium over similar
quality space without lab infrastructure. The Palo
- ---------------------
Rosen Consulting Group 3
<PAGE>
Alto/Stanford University submarket in the San Francisco Bay Area is the
exception where strong demand from biotech and computer companies continues to
push up rents across the board.
- --------------------------------------------------------------------------------
TABLE 4
COMPARABLE OFFICE AND R&D FLEX RENTS ($/SF TRIPLE NET)/2/
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
San Diego San Francisco Bay Area
--------- ----------------------
Torrey Pines Other Areas West Bay/3/ East Bay/4/ Seattle Suburban D.C.
- ------------ ----------- -------- -------- ------- -------------
<S> <C> <C> <C> <C> <C>
$13.50-$17.00 $9.00-$13.50 $16.00-$34.00 $8.00-$12.00 $11.00-$14.00 $11.00-$13.00
</TABLE>
Source: Rosen Consulting Group based on market interviews
- --------------------------------------------------------------------------------
We also surveyed market participants on replacement costs and estimated the rent
required to justify new construction. Our findings show that market rents are
exceeding or approaching the level required to support new construction.
However, we only found build to suit projects planned in San Diego and San
Francisco and did not identify any speculative construction projects. The market
tightness signals that there is upward pressure on rents for existing scientific
research facilities.
- --------------------------------------------------------------------------------
TABLE 5
ESTIMATED ECONOMIC RENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
San Diego San Francisco Bay Area
--------- ----------------------
Torrey Pines Other Areas West Bay/3/ East Bay/4/ Seattle/5/ Suburban D.C.
------------ ----------- ---------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Shell Development
Costs/6/ $100-125 $80 $95-$150 $95 $65-$90 $70-$92
Lab Infrastructure
Cost (50%-70%) $75-$100 $75-$100 $75-$100 $75-$100 $75-$100 $75-$100
Total Development
Cost $175-$225 $155-$185 $170-$250 $170-$195 $140-$190 $145-$192
Triple Net Rent
Necessary to Achieve
12% return $21.00-$27.00 $18.60-22.20 $20.40-$30.00 $20.40-$23.40 $16.80-$22.80 $17.40-$23.00
</TABLE>
(5) The lower estimate is for the Eastside market and the higher estimate is
for Seattle. The Seattle estimate is somewhat unrealistic because a
developer would probably build a larger building on a Seattle site.
(6) Includes land, hard and soft costs, leasing commissions, developer's
profit, and construction debt.
Source: Rosen Consulting Group based on market interviews
- --------------------------------------------------------------------------------
- -------------
Rosen Consulting Group 4
<PAGE>
INDIVIDUAL MARKET DISCUSSION
San Diego
The San Diego market is the most geographically concentrated of the four
markets. The Torrey Pines submarket contains the majority of scientific
research facilities space and achieves the highest rental rates because of the
concentration of companies and research institutions including University of
California San Diego, Scripps Clinic and Research Foundation, Salk Institute
and the Burnham Institute (formerly La Jolla Cancer Research Foundation) and the
limited available space. San Diego facilities typically feature 70%-80% lab
buildout at $75-$100 per square foot. Such space in Torrey Pines rents for
$28.50-$33.50 per square foot triple net. The prototype building rents in the
range of $23.50-$33.50 per square foot triple net. Rental rates in the smaller
submarkets outside of Torrey Pines are $20.00-$27.50 per square foot triple net.
The largest number of comparable leases including build-to-suit transactions is
available in this market. Unlike in the other three markets, there are recent
comparables that are at these levels including a two-year, small space lease at
$33.50 per square foot triple net equivalent. Comparable office/R&D rents are
$13.50-$17.00 per square foot triple net in Torrey Pines and $9.00-$13.50 per
square foot triple net in other areas.
Current build-to-suit scientific research facilities are priced on a 12% fixed
return on cost, including the cost of the lab infrastructure. Some of these
deals charge an additional structural reserve of 1.5% of rent. In some deals,
tenants have contributed equity to reduce rental expense. There are also leases
in which biotech company stock warrants were provided to landlords as additional
compensation.
San Francisco Bay Area
The market for scientific research facilities in the San Francisco Bay Area is
the largest and the most geographically dispersed of the four markets. The
predominant reason is that there are research universities in three locations
that spawn and attract biotech companies. In addition, the topography limits the
availability of land in each of the three locations. Market participants confirm
that there is competition for R&D/flex space between biotech firms and computer
oriented high tech firms. Chipmakers also require clean rooms, frequently at a
higher classification level than biotech companies. In general, they require
more warehouse space than biotech firms do. Both biotech and computer companies
in the Bay Area, typically, put in their own improvements to build the type of
space suitable to their specific needs. Overall, the competition for well-
located space appears to have resulted in less sensitivity to the value of
generic lab infrastructure in place. Demand for space is very high and new deals
frequently achieve new rent levels. Typically, tenants renew if there is room
for expansion and leave if there is not. There is a wide range in rents across
the market for R&D/flex space from a low of $8.00 to a high of $34.00 per square
foot triple net for Class A buildings near Stanford University. The prototype
scientific research facility we defined would rent between $20.00 and $34.50 per
square foot triple net in the West Bay with the rents at the higher
Rosen Consulting Group 5
<PAGE>
end achieved in the Palo Alto submarket. The comparable R&D/office facility
would range from $16.00-$34.00 per square foot triple net. By contrast, a
similar facility in the East Bay would rent for $14.00-$23.00 per square foot
triple net and a comparable R&D/Flex space without lab buildout would rent for
$8.00-$12.00 per square foot triple net.
As in San Diego, current build-to-suit deals in the West Bay are priced on a
fixed return on cost basis. Some biotech firms that are planning to build are
looking in the East Bay. Total development costs in the West and East Bays are
estimated at $170-$250 and $170-$195 respectively. Demand is pushing up land
values.
Seattle
In Seattle, scientific research facilities are predominately housed in R&D/flex
facilities, but are also housed in some downtown office buildings. Market
participants report that there is no identified space with a combination of
office and generic lab infrastructure available in the market today. In
addition, office and R&D/flex space is well occupied throughout the Puget Sound
market. First generation leases are just beginning to turnover. According to all
market sources, tenants are renewing. Typically tenants stay until they outgrow
the available space. Today, tenants are also staying because of a lack of
alternative space. Market participants confirm that space that becomes available
is often re-leased before it comes to market.
Seattle scientific research facilities typically have higher than 70% lab to
office space and higher than $100 per square foot investment. The prototype
building in the market, if it were available, would lease for $21.00-$28.50 per
square foot triple net. Comparable office and R&D/flex rents are $11.00-$14.00
per square foot triple net.
Suburban Washington, D.C.
Tenants generally renew unless they require additional space for expansion. No
first class lab space has been vacated for any period of time and the market is
virtually 100% occupied. Land is available for build to suit projects. Most
historical lease transactions are first generation. In the last 24-36 months,
there has been an increase in second generation leasing. The prototype facility
would rent for $17.00-$23.50 per square foot triple net. The market for R&D/flex
and office space in the Suburban Washington, D.C. market is increasingly tight
and rents are edging up. Standard finish R&D/flex or suburban office space rents
for $11.00-$13.00 per square foot triple net. The total development cost for a
prototype scientific research facility ranges from $145-$192 per square foot
depending on location and degree of finish.
Rosen Consulting Group 6
