<PAGE>
The information in this prospectus supplement is not complete and may be
changed. A registration statement relating to these securities has been declared
effective by the Securities and Exchange Commission. This prospectus supplement
is not an offer to sell these securities and we are not soliciting an offer to
buy these securities in any state where such offer, solicitation or sale is not
permitted.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 2, 1999
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 30, 1998)
[LOGO]
1,000,000 SHARES
ALEXANDRIA REAL ESTATE EQUITIES, INC.
% SERIES A CUMULATIVE REDEEMABLE PREFERRED STOCK
----------------
Alexandria Real Estate Equities, Inc. is a real estate investment trust. We
primarily own properties containing both office and laboratory space. Our
properties are leased principally to tenants in the life science industry,
including pharmaceutical, biotechnology, diagnostic, contract research and
personal care products companies, major scientific research organizations and
related government agencies. We are offering to the public shares of %
Series A Cumulative Redeemable Preferred Stock. The terms of the Series A
Preferred Stock include:
- We will pay cumulative dividends on the Series A Preferred Stock, from the
date of original issuance, in the amount of $ per share each year,
which is equivalent to % of the $25.00 liquidation preference per
share.
- We will pay dividends on the Series A Preferred Stock quarterly in
arrears, beginning on July 15, 1999.
- We are not allowed to redeem our Series A Preferred Stock until June ,
2004, except in order to preserve our status as a real estate investment
trust.
- On and after June , 2004, we may, at our option, redeem the Series A
Preferred Stock, in whole or in part, by paying the holder $25.00 per
share, plus any accrued and unpaid dividends through the date of such
redemption.
- The Series A Preferred Stock has no stated maturity, will not be subject
to any sinking fund or mandatory redemption and will not be convertible
into any of our other securities.
- Investors in the Series A Preferred Stock generally have no voting rights,
except if we fail to pay dividends for six or more quarters.
We have applied to list the Series A Preferred Stock on the New York Stock
Exchange under the symbol "ARE PrA." If this application is approved, we expect
that trading of the Series A Preferred Stock on the New York Stock Exchange will
begin within a 30-day period following initial delivery of the Series A
Preferred Stock.
INVESTING IN THE SERIES A PREFERRED STOCK INVOLVES CERTAIN RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 2 OF THE ACCOMPANYING PROSPECTUS.
<TABLE>
<CAPTION>
PER SHARE TOTAL
----------- -------------
<S> <C> <C>
Public Price(1).................................................... $ $
Underwriting Discount(2)........................................... $ $
Proceeds to Alexandria Real Estate Equities, Inc.(3)............... $ $
</TABLE>
(1) Plus accrued dividends, if any, from the date of original issuance.
(2) We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(3) Before deducting expenses payable by us estimated to be $300,000.
We expect that the shares of the Series A Preferred Stock will be ready for
delivery in New York, New York on or about , 1999. We have granted the
underwriters an option to purchase up to 150,000 additional shares of Series A
Preferred Stock as part of the offering. The underwriters may exercise this
option for a period of 30 days after the date of the offering. See
"Underwriting." This offering is being underwritten by the underwriters on a
firm commitment basis, which means that they must purchase all of the shares of
Series A Preferred Stock if any are purchased.
-------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS TRUTHFUL OR COMPLETE.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
-------------------
PAINEWEBBER INCORPORATED
BANC OF AMERICA SECURITIES LLC
BANCBOSTON ROBERTSON STEPHENS
EVEREN SECURITIES, INC.
-------------------
THE DATE OF THIS PROSPECTUS SUPPLEMENT IS , 1999.
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS
SUPPLEMENT. BECAUSE THIS IS A SUMMARY, IT MAY NOT CONTAIN ALL OF THE INFORMATION
THAT IS IMPORTANT TO YOU. YOU SHOULD READ THIS ENTIRE PROSPECTUS SUPPLEMENT, THE
ACCOMPANYING PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE IN THE
ACCOMPANYING PROSPECTUS CAREFULLY BEFORE DECIDING WHETHER TO INVEST IN THE
SERIES A PREFERRED STOCK.
ALEXANDRIA REAL ESTATE EQUITIES, INC.
We are a real estate investment trust ("REIT") formed in October 1994 to
own, operate, manage, acquire, convert, retrofit, expand and selectively develop
high quality, strategically located properties containing both office and
laboratory space. We may refer to such properties in this prospectus supplement
as "life science facilities." We lease our properties principally to tenants in
the life science industry, including pharmaceutical, biotechnology, diagnostic,
contract research and personal care products companies, major scientific
research institutions and related government agencies. Our tenant base is broad
and diverse within the life science industry and reflects our focus on regional,
national and international tenants with substantial financial and operational
resources.
As of March 31, 1999:
- we owned 52 properties, containing approximately 3.7 million rentable
square feet of office and laboratory space;
- our properties were located in leading markets in the United States for
the life science industry, including in the San Diego and San Francisco
Bay areas of California; Seattle, Washington; suburban Washington, D.C.;
eastern Massachusetts (including Boston and Cambridge); the Southeast
(including Georgia and North Carolina) and the New Jersey and suburban
Philadelphia areas;
- our properties, excluding four properties in our renovation program, were
approximately 97% leased at an average annualized net effective rent per
leased square foot of $17.00. Substantially all of the vacant space at our
properties was office or warehouse space; and
- we had 165 leases with 157 tenants, and no single tenant accounted for
more than 7.8% of our annualized net effective rent.
RECENT DEVELOPMENTS
OPERATING RESULTS. Our funds from operations ("FFO") for the first quarter
of 1999 totaled approximately $8.9 million, or 68 cents per share on a diluted
basis. This compares to FFO of approximately $6.4 million, or 55 cents per share
on a diluted basis, for the first quarter of 1998, reflecting an increase of 40%
and 24% in FFO and FFO per share, respectively. We generally consider FFO to be
an appropriate measure of our operating performance because it provides
investors with an understanding of our ability to incur and service debt and to
make capital expenditures.
We compute FFO in accordance with standards established by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") in its March 1995 White Paper (the "White Paper"), which may differ
from the methodology for calculating FFO utilized by other equity REITs, and,
accordingly, may not be comparable to such other REITs. The White Paper defines
FFO as net income (loss) (computed in accordance with generally accepted
accounting principles ("GAAP")), excluding gains (or losses) from debt
restructuring and sales of property, and excluding amounts for extraordinary and
non-recurring items, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures.
FFO should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of our financial performance or to cash
flows from operating activities (determined in accordance with GAAP) as a
measure of our liquidity, nor is it indicative of funds available to fund our
cash needs, including our ability to make distributions. Further, FFO does not
represent amounts available for our discretionary use because of needed capital
replacement or expansion, debt service obligations, or other commitments and
uncertainties.
S-2
<PAGE>
ACQUISITIONS AND DEVELOPMENT. Since January 1, 1999 we have acquired two
properties, aggregating approximately 146,000 square feet of office and
laboratory space, for a total purchase price of $22.9 million. In January 1999,
we completed the acquisition of One Innovation Drive in Worcester, Massachusetts
for $16.5 million, including $5.2 million in cash and $11.3 million of assumed
debt. The property contains approximately 114,000 square feet of office and
laboratory space and was fully leased as of March 31, 1999. In April 1999, we
acquired 2625, 2627 and 2631 Hanover Street in Palo Alto, California for $6.4
million in cash. This property contains an aggregate of approximately 32,000
square feet of office and laboratory space and is currently fully leased.
Additionally, in March 1999 we acquired an 85% tenancy-in-common interest in
a 4.9 acre land parcel in Worcester, Massachusetts for $425,000 in cash. The
seller of the property retained the remaining 15% tenancy-in-common interest. We
are currently developing an approximately 94,000 square foot office and
laboratory building on this site. In connection with our acquisition of an
interest in the land parcel, we entered into a lease with a subsidiary of
AstraZeneca Group plc, an international pharmaceutical company, for
approximately 45,000 square feet of office and laboratory space in the completed
facility. We are in discussions with other prospective tenants for all of the
remaining space.
INTERNAL GROWTH. A significant portion of our portfolio's total square
footage is leased at rental rates that we believe are currently below market. As
a result, we have achieved, and we believe we can continue to achieve, growth
through increases in rental rates as these leases expire. During the three
months ended March 31, 1999, leases for approximately 114,000 square feet of
space in our portfolio expired, of which approximately 96,000 square feet was
renewed or re-leased. Rental rates for the renewed or re-leased space were on
average 24% higher than the rates for expiring leases computed on a cash basis.
Rental rates for the renewed or re-leased space, computed in accordance with
GAAP, which includes an adjustment for the straight-lining of rent over the term
of a lease, were on average 36% higher than the rates for the expiring leases.
We are currently in negotiations to re-lease substantially all of the remaining
space.
FINANCING ACTIVITIES. On February 23, 1999 we completed a public offering
of 1,150,000 shares of our common stock (including shares issued upon exercise
of the underwriter's over-allotment option). The shares were issued at a price
of $28.125 per share, resulting in aggregate net proceeds to us of approximately
$29.8 million. We applied the net proceeds of the offering to reduce the
outstanding balance on our unsecured line of credit.
GROWTH STRATEGIES
We seek to maximize growth in FFO and cash available for distribution to
stockholders through effective ownership, operation, management, acquisition,
conversion, retrofit, expansion and selective development of life science
facilities. In particular, we seek to increase FFO and cash available for
distribution per share by:
- acquiring quality life science facilities at attractive returns in our
target markets;
- realizing contractual rental rate escalations, which are included in a
substantial majority of our leases;
- re-tenanting and re-leasing space within our portfolio at higher rental
rates and with minimal non-revenue enhancing tenant improvement costs;
- expanding our existing properties or converting existing office or
warehouse space to generic laboratory space that can be leased at higher
rental rates;
- selectively developing properties, typically on a retrofit or
build-to-suit basis; and
- continuing to implement effective cost control measures, including
negotiating pass-through provisions in tenant leases for operating
expenses and certain capital expenditures.
S-3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Securities Offered................ 1,000,000 shares of % Series A Cumulative
Redeemable Preferred Stock (1,150,000 shares if the
underwriters exercise their over-allotment option in
full).
Ranking........................... The Series A Preferred Stock will rank senior to our
common stock in the payment of dividends and payments in
the event of our liquidation. Our common stock is our
only other stock outstanding. See "Description of Series
A Preferred Stock-- Rank," "--Dividends" and
"--Liquidation Preference."
Use of Proceeds................... We will use the net proceeds from this offering to
reduce the outstanding balance on our unsecured line of
credit. See "Use of Proceeds."
Dividends......................... Dividends on the Series A Preferred Stock are cumulative
from the date the stock is originally issued. We will
pay dividends quarterly in arrears on or before the
fifteenth day of January, April, July and October. We
will pay dividends at a fixed rate of $ per share
each year (equal to % of the $25.00 liquidation
preference). The first dividend we pay on July 15, 1999
will be for less than a full quarter. Dividends on the
Series A Preferred Stock will continue to accumulate
even if any of our agreements prohibits the current
payment of dividends, we do not have earnings or funds
legally available to pay such dividends or we do not
declare the payment of dividends. See "Description of
Series A Preferred Stock--Dividends."
Liquidation Preference............ You will be entitled to receive $25.00 for each share of
the Series A Preferred Stock, plus an amount equal to
all accrued and unpaid dividends (whether or not
declared) if we liquidate. See "Description of Series A
Preferred Stock--Liquidation Preference."
Redemption........................ We may not redeem the Series A Preferred Stock before
June , 2004 except in order to preserve our status as
a REIT. On and after that date, we may redeem the Series
A Preferred Stock in whole or in part for $25.00 per
share, plus all accrued and unpaid dividends (whether or
not declared) to the date we fix for redemption. We will
pay the redemption price (other than any amount relating
to accrued and unpaid dividends) solely out of proceeds
of a sale of our other capital stock (including other
series of preferred stock).
Voting Rights..................... Holders of the Series A Preferred Stock generally will
have no voting rights. However, when dividends on any
shares of the Series A Preferred Stock are in arrears
for six or more quarterly periods, whether consecutive
or not, the holders of those shares will be entitled to
vote for the election of a total of two additional
directors to serve on our board of directors until all
dividends accumulated on those shares of Series A
Preferred Stock have been fully paid or we declare all
unpaid dividends and set aside a sum sufficient to pay
those dividends.
</TABLE>
S-4
<PAGE>
<TABLE>
<S> <C>
Additionally, we cannot create a class or series of
capital stock ranking senior to the Series A Preferred
Stock or make changes to the terms of the Series A
Preferred Stock that would be materially adverse to the
rights of the holders of the Series A Preferred Stock
without the affirmative vote of two-thirds of the
outstanding shares of the Series A Preferred Stock. See
"Description of Series A Preferred Stock--Voting
Rights."
Conversion........................ The Series A Preferred Stock is not convertible into or
exchangeable for any of our other property or
securities, except that shares of the Series A Preferred
Stock may be converted into excess stock in order to
ensure that we remain a qualified REIT for federal
income tax purposes. See "Description of Series A
Preferred Stock--Restrictions on Ownership and
Transfer."
Restrictions on Ownership......... In order to ensure that we remain a qualified REIT for
federal income tax purposes, no single holder of our
capital stock may own more than 9.8% of the total value
of outstanding shares of our stock. See "Description of
Series A Preferred Stock-- Restrictions on Ownership and
Transfer."
Maturity.......................... The Series A Preferred Stock has no stated maturity and
will not be subject to any sinking fund or mandatory
redemption, except as required by our charter. See
"Description of Series A Preferred Stock--Maturity" and
"--Restrictions on Ownership and Transfer."
Trading........................... We have applied to list the Series A Preferred Stock on
the New York Stock Exchange under the symbol "ARE PrA."
If approved, we expect that trading of the Series A
Preferred Stock will begin within a 30-day period after
the initial delivery of the shares of the Series A
Preferred Stock.
</TABLE>
S-5
<PAGE>
THE COMPANY
GENERAL
We are a REIT formed in October 1994 to own, operate, manage, acquire,
convert, retrofit, expand and selectively develop high quality, strategically
located properties containing both office and laboratory space. Our properties
are designed and improved for lease principally to tenants in the life science
industry, including pharmaceutical, biotechnology, diagnostic, contract research
and personal care products companies, major scientific research institutions and
related government agencies. Our tenant base is broad and diverse within the
life science industry and reflects our focus on regional, national and
international tenants with substantial financial and operational resources.
As of March 31, 1999, we owned 52 properties containing approximately 3.7
million rentable square feet of office and laboratory space in seven target
markets, as follows:
- San Diego, California;
- the San Francisco Bay area of California;
- Seattle, Washington;
- suburban Washington, D.C.;
- eastern Massachusetts (including Boston and Cambridge);
- the Southeast (including Georgia and North Carolina); and
- the New Jersey and suburban Philadelphia areas.
Each of these areas 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, we focus our
operations and acquisition activities principally in a limited number of target
markets where we believe life science industry tenants tend to cluster.
As of March 31, 1999, our properties, excluding four properties under
renovation, were approximately 97% leased, at an average annualized net
effective rent per leased square foot of $17.00. Including properties in our
renovation program, our portfolio was 93% leased as of March 31, 1999.
Substantially all of the vacant space at our properties was office or warehouse
space.
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. We
believe that, as a result of these factors, occupancy levels in life science
facilities within our markets generally have been higher, and tenant turnover
has been lower, than in traditional office properties.
We are led by a senior management team with extensive experience in both the
real estate and life science industries and are supported by a highly
experienced board of directors. Our management team includes Joel S. Marcus, our
Chief Executive Officer, who has over 27 years of experience in the real estate
and life science industries, as well as significant capital markets experience;
James H. Richardson, our President, who has over 17 years of experience in the
real estate industry, and has specialized for much of his career in the
acquisition, management and leasing of life science facilities; Peter J. Nelson,
our Senior Vice President and Chief Financial Officer, who has over 19 years of
experience in finance, accounting and real estate asset management and leasing;
and Vincent R. Ciruzzi, our Vice President of Construction and
S-6
<PAGE>
Development, who has over 11 years of experience in real estate construction,
management, development and analysis.
We believe that we have achieved favorable returns on our properties as a
result of:
- the strong and growing demand by tenants for life science facilities;
- 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;
- the highly fragmented and inefficient market for ownership of life science
facilities;
- our adherence to strict evaluation criteria and due diligence review when
assessing prospective properties and tenants; and
- our knowledge and understanding of life science industry tenants and their
real estate needs.
Additionally, we believe that the personal and business relationships that
our management team and members of our board of directors have developed over
time within the real estate and life science industries have contributed
significantly to our ability to identify and consummate favorable acquisitions
and to lease space to high quality life science industry tenants. We believe
that we are the only publicly traded entity focusing primarily on the ownership,
operation, management, acquisition, conversion, retrofit, expansion and
selective development of life science facilities.
GROWTH STRATEGIES
We seek to maximize growth in FFO and cash available for distribution to
stockholders through effective ownership, operation, management, acquisition,
conversion, retrofit, expansion and selective development of life science
facilities. In particular, we seek to increase FFO and cash available for
distribution per share by:
- acquiring quality life science facilities at attractive returns in our
target markets;
- realizing contractual rental rate escalations, which are included in a
substantial majority of our leases;
- re-tenanting and re-leasing space within our portfolio at higher rental
rates and with minimal non-revenue enhancing tenant improvement costs;
- expanding our existing properties or converting existing office and
warehouse space to generic laboratory space that can be leased at higher
rental rates;
- selectively developing properties, typically on a retrofit or
build-to-suit basis; and
- continuing to implement effective cost control measures, including
negotiating pass-through provisions in tenant leases for operating
expenses and certain capital expenditures.
ACQUISITIONS. We seek to identify and acquire high quality life science
facilities in our target markets. We believe that we are able to maximize
returns on acquisitions as a result of our expertise in understanding the real
estate needs of life science industry tenants, our ability to identify and
acquire properties with generic laboratory infrastructure that appeal to a wide
range of life science industry tenants, and our expertise in identifying and
evaluating life science industry tenants.
We also seek to use the extensive personal and business relationships our
management team and board of directors 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.
We believe that the ownership of life science facilities remains highly
fragmented and that this fragmentation often creates pricing inefficiencies in
the sale of life science facilities. Life science facilities are owned by
various entities, including local developers and institutions, many of whom own
or operate a single facility. Additionally, we believe that many life science
facilities are occupied by owners within the life science industry who desire to
focus their investments on and attention to their respective core businesses,
not on ownership of real estate.
S-7
<PAGE>
Critical evaluation of prospective property acquisitions is an essential
component of our acquisition strategy. When we evaluate acquisition
opportunities, we assess a full range of matters relating to the properties,
including the quality of 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.
We also assess carefully the status of existing leases and consider
opportunities available for leasing vacant space and renewing or retenanting
leased space at higher rental rates.
INTERNAL GROWTH. Our strategy is to achieve internal growth from several
sources. As of March 31, 1999, approximately 82% of the leases in our portfolio
on a square footage basis contain effective annual rent escalations that are
either fixed (2.5% to 4.0% annually) or indexed based on a consumer price or
other index. We seek to include similar escalation provisions in substantially
all of our new leases. Although many of our recent acquisitions have been fully
leased, we also seek to acquire undervalued or underperforming properties and
properties with short-term tenancies where we can improve investment returns
through re-leasing of vacant space and the replacement of existing tenants with
new tenants at higher rental rates. Further, a significant portion of our
portfolio's square footage is leased at rental rates that we believe are
currently below market. As a result, we have achieved, and we believe we can
continue to achieve, significant internal growth through increases in rental
rates as these leases expire. For information regarding our recent leasing
activity, see "Recent Developments--Internal Growth."
We also seek to achieve internal growth through the expansion of existing
life science facilities that are fully leased and through the conversion of
existing office or warehouse space at our properties to higher rent generic
laboratory space.
Our internal growth strategy is enhanced by effective cost control measures,
including expense pass-through provisions which are included in a significant
majority of our leases. As of March 31, 1999, approximately 79% of the leases in
our portfolio on a square footage basis were triple net leases, requiring
tenants to pay substantially all real estate taxes, insurance, common area and
other operating expenses of the properties, including increases thereto.
Further, as of March 31, 1999, approximately 78% of our leases provided for the
recapture of certain capital expenditures, such as roof replacements, parking
lot resurfacing and heating, ventilation and air conditioning maintenance
expenditures, which we believe would typically be borne by the landlord in
traditional office leases.
DEVELOPMENT. We pursue selective development and redevelopment projects,
typically on a retrofit or build-to-suit basis, where we expect to achieve
investment returns that will equal or exceed our returns on acquisitions.
Build-to-suit projects involve the construction of new life science facilities
for specified tenants, and retrofit projects involve the renovation and
conversion of office or warehouse properties for use by life science industry
tenants, generally through the addition of laboratory space and other generic
infrastructure improvements. We seek to develop projects where our investment in
infrastructure will be substantially generic in nature and not tenant specific.
S-8
<PAGE>
RECENT DEVELOPMENTS
OPERATING RESULTS. Our FFO for the first quarter of 1999 totaled
approximately $8.9 million, or 68 cents per share on a diluted basis. This
compares to FFO of approximately $6.4 million, or 55 cents per share on a
diluted basis, for the first quarter of 1998, reflecting an increase of 40% and
24% in FFO and FFO per share, respectively. We generally consider FFO to be an
appropriate measure of our operating performance because it provides investors
with an understanding of our ability to incur and service debt and to make
capital expenditures.
We compute FFO in accordance with standards established by the Board of
Governors of NAREIT in 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 White Paper defines FFO as net income (loss)
(computed in accordance with GAAP), excluding gains or (losses) from debt
restructuring and sales of property, and excluding amounts for extraordinary and
non-recurring items, plus real estate related depreciation and amortization and
after adjustments for unconsolidated partnerships and joint ventures.
FFO should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of our financial performance or to cash
flows from operating activities (determined in accordance with GAAP) as a
measure of our liquidity, nor is it indicative of funds available to fund our
cash needs, including our ability to make distributions. Further, FFO does not
represent amounts available for our discretionary use because of needed capital
replacement or expansion, debt service obligation, or other commitments and
uncertainties.
ACQUISITIONS AND DEVELOPMENT. Since January 1, 1999 we have acquired two
properties, aggregating approximately 146,000 square feet of office and
laboratory space, for a total purchase price of $22.9 million. In January 1999,
we completed the acquisition of One Innovation Drive in Worcester, Massachusetts
for $16.5 million, including $5.2 million in cash and $11.3 million of assumed
debt. The property contains approximately 114,000 square feet of office and
laboratory space and was fully leased as of March 31, 1999. In April 1999, we
acquired 2625, 2627 and 2631 Hanover Street in Palo Alto, California for $6.4
million in cash. This property contains an aggregate of approximately 32,000
square feet of office and laboratory space and is currently fully leased.
Additionally, in March 1999, we acquired an 85% tenancy-in-common interest
in a 4.9 acre land parcel in Worcester, Massachusetts for $425,000 in cash. The
seller of the property retained the remaining 15% tenancy-in-common interest. We
are currently developing an approximately 94,000 square foot office and
laboratory building on this site. In connection with our acquisition of an
interest in the land parcel, we entered into a lease with a subsidiary of
AstraZeneca Group plc, an international pharmaceutical company, for
approximately 45,000 square feet of office and laboratory space in the completed
facility. We are in discussions with other prospective tenants for all of the
remaining space.
INTERNAL GROWTH. A significant portion of our portfolio's total square
footage is leased at rental rates which we believe are currently below market.
As a result, we have achieved, and we believe we can continue to achieve, growth
through increases in rental rates as these leases expire. During the three
months ended March 31, 1999, leases for approximately 114,000 square feet of
space in our portfolio expired, of which approximately 96,000 square feet was
renewed or re-leased. Rental rates for the renewed or re-leased space were on
average 24% higher than the rates for expiring leases computed on a cash basis.
Rental rates for the renewed or re-leased space, computed in accordance with
GAAP, which includes an adjustment for the straight-lining of rent over the term
of a lease, were on average 36% higher than the rates for the expiring leases.
We are currently in negotiations to re-lease substantially all of the remaining
space.
FINANCING ACTIVITIES. On February 23, 1999 we completed a public offering
of 1,150,000 shares of our common stock (including shares issued upon exercise
of the underwriter's over-allotment option). The shares were issued at a price
of $28.125 per share, resulting in aggregate net proceeds to us of approximately
$29.8 million. We applied the net proceeds of the offering to reduce the
outstanding balance on our unsecured line of credit.
S-9
<PAGE>
OUR PROPERTIES
GENERAL
Our properties range in size from approximately 15,000 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 the interior
infrastructure has been improved to accommodate the needs of life science
industry tenants. These improvements typically are generic to life science
industry tenants rather than specific to a particular tenant. As a result, we
believe 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 to our properties typically include:
- reinforced concrete floors;
- upgraded roof loading capacity;
- increased floor to ceiling heights;
- heavy-duty heating, ventilation and air conditioning systems;
- advanced environmental control technology;
- significantly upgraded electrical, gas and plumbing infrastructure; and
- laboratory benches.
We own fee simple title in each of our properties, except with respect to:
1311, 1401 and 1431 Harbor Bay Parkway, in which we own a commercial condominium
interest, together with an undivided interest in the common areas of the project
of which this property is a part; and Buildings 79 & 96, Charlestown Navy Yard,
8000/9000/10000 Virginia Manor Road and 2625/2627/2631 Hanover Street, in which
we own ground leasehold interests.
As of March 31, 1999, we had 165 leases with a total of 157 tenants, and 24
of our properties were leased to single tenants. Leases in our 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. As of March 31, 1999,
the average remaining term of our existing leases was 6.3 years.
Our leases also typically give us the right to review and approve tenant
alterations to the property. Generally, tenant-installed building improvements
remain at our properties after termination of the lease. However, we are
permitted under the terms of most of our leases to require that the tenant
remove the improvements and restore the premises to their original condition.
We currently manage 46 of our properties. The remaining properties are
managed by third-party professional management companies who report directly to
our asset management personnel. We make all material decisions with respect to
all of our properties.
S-10
<PAGE>
The following table sets forth pertinent information with respect to our
properties as of March 31, 1999, and excludes information relating to
2625/2627/2631 Hanover Street in Palo Alto, California, which we acquired in
April 1999.
<TABLE>
<CAPTION>
PERCENTAGE
OF AGGREGATE ANNUALIZED ANNUALIZED NET
ANNUALIZED PORTFOLIO BASE RENT PER EFFECTIVE RENT
YEAR BUILT/ RENTABLE PERCENTAGE BASE ANNUALIZED BASE LEASED SQUARE PER LEASED
PROPERTIES RENOVATED(1) SQUARE FEET LEASED(2) RENT(2)(3) RENT FOOT(3) SQUARE FOOT(4)
- ---------------------------- ------------ ----------- ------------- ---------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
SAN DIEGO
- ----------------------------
10933 North Torrey Pines 1971/1994 107,753 100% $2,311,111 3.6% $ 21.45 $ 15.91
Road
San Diego, CA
11099 North Torrey Pines 1986/1996 86,962 95 2,154,570 3.4 26.13 24.26
Road
San Diego, CA
3535 General Atomics Court 1986/1991 76,084 100 2,639,388 4.1 34.69 33.73
San Diego, CA
3565 General Atomics Court 1991 43,600 100 1,526,949 2.4 35.02 35.02
San Diego, CA
11025 Roselle Street 1983/1998 18,173 100 415,757 0.6 22.88 20.24
San Diego, CA
4757 Nexus Centre Drive 1989 67,050 100 2,107,557 3.3 31.43 24.53
San Diego, CA
6166 Nancy Ridge Drive 1997 29,333 100 638,633 1.0 21.77 15.42
San Diego, CA
10505 Roselle Street late 1970's 16,000 -- -- -- -- --
San Diego, CA
3770 Tansy Street 1978 13,000 -- -- -- -- --
San Diego, CA
SAN FRANCISCO BAY AREA
- ----------------------------
1201 Harbor Bay Parkway 1983 61,015 74 692,660 1.1 15.27 8.42
Alameda, CA
1311 Harbor Bay Parkway 1984 27,745 71 297,612 0.5 15.00 14.54
Alameda, CA
1401 Harbor Pay Parkway 1986/1994 47,777 100 518,593 0.8 10.85 10.54
Alameda, CA
1431 Harbor Bay Parkway 1985/1994 68,711 100 1,413,968 2.2 20.58 16.57
Alameda, CA
819-863 Mitten Rd & 866 1962/1997 150,150 91 2,352,304 3.7 17.31 15.32
Malcolm Road
Burlingame, CA(++)
SEATTLE
- ----------------------------
1102/1124 Columbia Street 1975/1998 210,163 92 5,319,023 8.3 27.54 26.55
Seattle, WA
3000/3018 Western Avenue 1929/1998 47,746 100 1,458,253 2.3 30.54 24.81
Seattle, Washington
3005 First Avenue 1980/1990 70,647 100 1,888,515 3.0 26.73 23.72
Seattle, Washington
<CAPTION>
PROPERTIES MAJOR TENANTS
- ---------------------------- ----------------------------
<S> <C>
SAN DIEGO
- ----------------------------
10933 North Torrey Pines The Scripps Research
Road Institute
San Diego, CA Advanced Tissue Sciences,
Inc.
11099 North Torrey Pines Agouron Pharmaceuticals,
Road Inc.(5)
San Diego, CA Axys Pharmaceuticals, Inc.
3535 General Atomics Court The Scripps Research
San Diego, CA Institute
R.W. Johnson Pharmaceutical
Research Institute(6)
Syntro Corporation(7)
3565 General Atomics Court Agouron Pharmaceuticals,
San Diego, CA Inc.(5)
11025 Roselle Street Collateral Therapeutics,
San Diego, CA Inc.
Ciblex Corporation
4757 Nexus Centre Drive Matrix Pharmaceutical, Inc.
San Diego, CA
6166 Nancy Ridge Drive Arena Pharmaceuticals, Inc.
San Diego, CA
10505 Roselle Street Vacant(8)
San Diego, CA
3770 Tansy Street Vacant(8)
San Diego, CA
SAN FRANCISCO BAY AREA
- ----------------------------
1201 Harbor Bay Parkway Avigen, Inc.
Alameda, CA Ascend Communications, Inc.
1311 Harbor Bay Parkway Chiron Corporation
Alameda, CA Therasense, Inc.
1401 Harbor Pay Parkway Chiron Diagnostics
Alameda, CA
1431 Harbor Bay Parkway U.S. Food & Drug
Alameda, CA Administration
819-863 Mitten Rd & 866 Valentis, Inc.
Malcolm Road Mills Peninsula Medical
Burlingame, CA(++) Group, Inc.
Federal Aviation
Administration
SEATTLE
- ----------------------------
1102/1124 Columbia Street Corixa Corporation
Seattle, WA Fred Hutchinson Cancer
Research Center
Swedish Medical Center
3000/3018 Western Avenue University of Washington
Seattle, Washington
3005 First Avenue Dendreon Corporation
Seattle, Washington
</TABLE>
S-11
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
OF AGGREGATE ANNUALIZED ANNUALIZED NET
ANNUALIZED PORTFOLIO BASE RENT PER EFFECTIVE RENT
YEAR BUILT/ RENTABLE PERCENTAGE BASE ANNUALIZED BASE LEASED SQUARE PER LEASED
PROPERTIES RENOVATED(1) SQUARE FEET LEASED(2) RENT(2)(3) RENT FOOT(3) SQUARE FOOT(4)
- ---------------------------- ------------ ----------- ------------- ---------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
SUBURBAN WASHINGTON, D.C.
- ----------------------------
300 Professional Drive 1989 47,558 51% $ 383,540 0.6% $ 15.87 $ 15.16
Gaithersburg, MD
401 Professional Drive 1987 62,739 100 1,038,585 1.6 16.55 16.55
Gaithersburg, MD
25/35/45 West Watkins Mill 1989/1997 138,938 100 1,984,434 3.1 14.28 14.10
Road
Gaithersburg, MD
708 Quince Orchard Road 1982/1997 49,225 100 1,365,599 2.1 27.74 17.18
Gaithersburg, MD
940 Clopper Road 1989 44,464 84 513,769 0.8 13.69 12.85
Gaithersburg, MD
1401 Research Boulevard 1966 48,800 100 722,904 1.1 14.81 14.05
Rockville, MD
1500 East Gude Drive 1981/1986 45,989 100 624,334 1.0 16.29 16.00
Rockville, MD
3/3 1/2 Taft Court 1981/1986 24,460 15 36,602 0.1 9.68 9.68
Rockville, MD
1413 Research Boulevard 1967/1996 105,000 100 1,563,450 2.4 14.89 13.32
Rockville, MD
1550 East Gude Drive 1981/1995 44,500 100 596,006 0.9 13.39 13.39
Rockville, MD
1330 Piccard Drive 1978/1994 131,511 100 1,903,653 3.0 14.48 14.47
Rockville, MD
14225 Newbrook Drive 1992 248,186 100 4,341,125 6.8 17.49 17.49
Chantilly, VA
8000/9000/10000 Virginia 1990 191,884 99 1,958,441 3.1 10.27 10.25
Manor Road
Beltsville, MD
10150 Old Columbia Road 1983/1997 75,500 100 1,087,343 1.7 14.40 13.48
Columbia, MD
19 Firstfield Road 1974 25,175 100 417,446 0.7 16.58 16.58
Gaithersburg, MD
15020 Shady Grove Road 1987 41,062 100 764,959 1.2 18.63 9.30
Gaithersburg, MD
2001 Aliceanna Street 1950's/1993 179,397 84 863,564 1.4 5.74 5.74
Baltimore, MD
50 West Watkins Mill Road 1988 57,410 100 677,438 1.1 11.80 11.80
Gaithersburg, MD
EASTERN MASSACHUSETTS
- ----------------------------
Buildings 79 & 96 1880/1991 24,940 100 710,000 1.1 28.47 26.35
Charlestown Navy Yard
Boston, MA
280 Pond Street 1960's/1990 24,867 100 401,295 0.6 16.14 16.14
Randolph, MA
60 Westview Street 1975 39,909 100 480,000 0.8 12.03 11.03
Lexington, MA
377 Plantation Street 1993 92,711 100 2,185,284 3.4 23.57 23.57
Worcester, MA
620 Memorial Drive 1920's/1997 96,500 100 3,947,688 6.2 40.91 40.91
Cambridge, MA
<CAPTION>
PROPERTIES MAJOR TENANTS
- ---------------------------- ----------------------------
<S> <C>
SUBURBAN WASHINGTON, D.C.
- ----------------------------
300 Professional Drive Antex Biologics Inc.
Gaithersburg, MD
401 Professional Drive Gillette Capital
Gaithersburg, MD Corporation(9)
25/35/45 West Watkins Mill Genetic Therapy, Inc.(10)
Road MedImmune, Inc.
Gaithersburg, MD
708 Quince Orchard Road Gene Logic, Inc.
Gaithersburg, MD
940 Clopper Road Immunomatrix, Inc.
Gaithersburg, MD
1401 Research Boulevard U.S. Bureau of Alcohol
Rockville, MD Tobacco and Firearms
1500 East Gude Drive bioMerieux Vitek, Inc.
Rockville, MD
3/3 1/2 Taft Court bioMerieux Vitek, Inc.(11)
Rockville, MD
1413 Research Boulevard U.S. Army Corps of Engineers
Rockville, MD
1550 East Gude Drive Shire Pharmaceuticals Group
Rockville, MD plc
1330 Piccard Drive Intracel Corporation
Rockville, MD
14225 Newbrook Drive American Medical
Chantilly, VA Laboratories, Inc.
8000/9000/10000 Virginia Digene Corporation
Manor Road North American Vaccine, Inc.
Beltsville, MD
10150 Old Columbia Road North American Vaccine, Inc.
Columbia, MD
19 Firstfield Road Genetic Therapy, Inc.(10)
Gaithersburg, MD
15020 Shady Grove Road Human Genome Sciences
Gaithersburg, MD
2001 Aliceanna Street Maryland Economic
Baltimore, MD Development Corporation
The National Aquarium of
Baltimore, Inc.
50 West Watkins Mill Road Federal Express Corporation
Gaithersburg, MD
EASTERN MASSACHUSETTS
- ----------------------------
Buildings 79 & 96 Diacrin, Inc.
Charlestown Navy Yard
Boston, MA
280 Pond Street Ares Advanced Technology,
Randolph, MA Inc.
60 Westview Street U.S. Environmental
Lexington, MA Protection Agency
377 Plantation Street University of Massachusetts
Worcester, MA Phytera, Inc.
Athena Diagnostics, Inc.(12)
620 Memorial Drive Pfizer, Inc.
Cambridge, MA
</TABLE>
S-12
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
OF AGGREGATE ANNUALIZED ANNUALIZED NET
ANNUALIZED PORTFOLIO BASE RENT PER EFFECTIVE RENT
YEAR BUILT/ RENTABLE PERCENTAGE BASE ANNUALIZED BASE LEASED SQUARE PER LEASED
PROPERTIES RENOVATED(1) SQUARE FEET LEASED(2) RENT(2)(3) RENT FOOT(3) SQUARE FOOT(4)
- ---------------------------- ------------ ----------- ------------- ---------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
One Innovation Drive 1991 113,961 100% $2,306,691 3.6% $ 20.24 $ 20.24
Worcester, MA
NEW JERSEY/SUBURBAN
PHILADELPHIA
- ----------------------------
215 College Road 1968/1974/ 110,666 100 1,253,463 2.0 11.33 11.05
Paramus, NJ 1984
170 Williams Drive 1982/1994 37,000 100 536,500 0.8 14.50 14.50
Ramsey, NJ
100 Phillips Parkway late 1960's 80,000 -- -- -- -- --
Montvale, NJ
5100/5110 Campus Drive 1989 42,782 100 493,761 0.8 11.54 11.28
Plymouth Meeting, PA
702 Electronic Drive 1983/1998 40,000 100 937,527 1.5 23.44 23.44
Horsham, PA
279 Princeton Parkway 1984/1999 42,600 100 260,320 0.4 6.11 6.11
Princeton, NJ
SOUTHEAST
- ----------------------------
100 Capitola Drive 1986 65,114 99 1,030,288 1.6 15.94 10.35
Durham, NC
800 & 801 Capitola Drive 1985 119,916 100 1,479,246 2.3 12.34 10.62
Durham, NC
150/154 Technology Parkway 1976/1985/ 37,080 100 675,560 1.1 18.22 18.10
Norcross, GA 1993
5 Triangle Drive 1981 32,120 100 486,825 0.8 15.16 14.85
Research Triangle Park, NC
Total/Weighted Average(14): 3,703,873 93.3% $63,762,533 100% $ 18.46 $ 17.00
----------- --- ---------- --- ------ ------
----------- --- ---------- --- ------ ------
<CAPTION>
PROPERTIES MAJOR TENANTS
- ---------------------------- ----------------------------
<S> <C>
One Innovation Drive Astra Arcus USA, Inc.(13)
Worcester, MA Alpha Beta Technology Inc.
NEW JERSEY/SUBURBAN
PHILADELPHIA
- ----------------------------
215 College Road Playtex Products, Inc.
Paramus, NJ Synaptic Pharmaceutical
Corporation
170 Williams Drive Alteon Inc.
Ramsey, NJ
100 Phillips Parkway Vacant(8)
Montvale, NJ
5100/5110 Campus Drive Gen Trak, Inc.
Plymouth Meeting, PA Biomol Research
Laboratories, Inc.
Magainin Pharmaceuticals
Inc.
702 Electronic Drive Cell Pathways, Inc.
Horsham, PA
279 Princeton Parkway Coelacanth Corporation
Princeton, NJ
SOUTHEAST
- ----------------------------
100 Capitola Drive American Social Health
Durham, NC Association, Inc.
Batelle Survey Research,
Inc.
800 & 801 Capitola Drive Triangle Laboratories, Inc.
Durham, NC Ventana Communications
Group, Inc.
150/154 Technology Parkway Oread, Inc.
Norcross, GA CytRx Corporation
5 Triangle Drive Mantech Environmental
Research Triangle Park, NC Technology, Inc.
City Search, Inc.
Total/Weighted Average(14):
</TABLE>
- ----------------------------------
(++) Two properties, 819-849 Mitten Road and 863 Mitten Road/866 Malcolm Road,
have been combined for purposes of presentation in this 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 March 31,
1999.
(3) Annualized base rent means the annualized fixed base rental amount in
effect as of March 31, 1999 (using rental revenue computed on a
straight-line basis in accordance with GAAP) paid by tenants under the
terms of their leases. This amount, divided by the rentable square feet
leased at the property as of March 31, 1999, is the annualized base rent
per leased square foot.
(4) Annualized net effective rent is the annualized base rent in effect as of
March 31, 1999, 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 March 31, 1999, is the
annualized net effective rent per leased square foot.
(5) Agouron Pharmaceuticals, Inc. is a wholly owned subsidiary of
Warner-Lambert Company.
(6) The R.W. Johnson Pharmaceutical Research Institute is a wholly owned
subsidiary of Johnson & Johnson.
(7) Syntro Corporation is a wholly owned subsidiary of Schering-Plough
Corporation.
(8) This property is currently in our renovation program and will be
redeveloped as an office and laboratory property.
(9) Gillette Capital Corporation is a wholly owned subsidiary of The Gillette
Company, the guarantor of the lessee's obligations under the lease.
(10) Genetic Therapy, Inc. is a wholly owned subsidiary of Novartis AG.
(11) This property is in our renovation program and the unleased portion of this
property will be converted to office and laboratory space.
(12) Athena Diagnostics, Inc. is a wholly owned subsidiary of Elan Corporation,
plc.
(13) Astra Arcus USA, Inc. is a wholly owned subsidiary of AstraZeneca
Pharmaceuticals, plc, which is the guarantor of the lessee's obligations
under the lease.
(14) Weighted average based on a percentage of aggregate leased square feet.
S-13
<PAGE>
LOCATION AND TYPE OF SPACE
The following table sets forth, as of March 31, 1999, the gross revenues and
type of space within our properties by rentable square footage in each of our
existing markets.
GROSS REVENUES AND TYPE OF SPACE
<TABLE>
<CAPTION>
TOTAL
RENTABLE PERCENTAGE PERCENTAGE
SQUARE OF TOTAL RENTABLE ANNUALIZED OF ANNUALIZED
GEOGRAPHIC AREA FOOTAGE SQUARE FOOTAGE BASE RENT(1) BASE RENT
- -------------------------------------------------- ------------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C>
San Diego......................................... 457,955 12.4% $ 11,793,966 18.5%
San Francisco Bay Area............................ 355,398 9.6 5,275,136 8.3
Seattle........................................... 328,556 8.9 8,665,791 13.6
Suburban Washington, D.C.......................... 1,561,798 42.2 20,843,192 32.7
Eastern Massachusetts............................. 392,888 10.6 10,030,959 15.7
New Jersey/Suburban Philadelphia.................. 353,048 9.5 3,481,570 5.5
Southeast(2)...................................... 254,230 6.8 3,671,919 5.7
------------- ----- ------------- -----
Total......................................... 3,703,873 100.0% $ 63,762,533 100.0%
------------- ----- ------------- -----
------------- ----- ------------- -----
</TABLE>
- ------------------------
(1) Annualized base rent means the annualized fixed base rental amount in effect
as of March 31, 1999 (using rental revenue computed on a straight-line basis
in accordance with GAAP) paid by tenants under the terms of their leases.
(2) Includes Raleigh/Durham, North Carolina and Atlanta, Georgia markets.
LEASE EXPIRATIONS
The following table sets forth certain information with respect to lease
expirations of our properties as of March 31, 1999:
<TABLE>
<CAPTION>
SQUARE ANNUALIZED BASE
YEAR OF FOOTAGE OF PERCENTAGE OF RENT PER SQUARE
LEASE NUMBER OF EXPIRING TOTAL LEASED FOOT OF
EXPIRATION EXPIRING LEASES LEASES SQUARE FOOTAGE EXPIRING LEASES
- ------------------------------------- --------------- ---------- --------------- ---------------
<S> <C> <C> <C> <C>
1999(1).............................. 45 314,441 9.1% $ 18.78
2000................................. 29 386,570 11.3% $ 17.02
2001................................. 26 479,895 13.9% $ 19.14
2002................................. 13 156,868 4.5% $ 13.21
2003................................. 16 342,803 9.9% $ 15.86
Thereafter........................... 36 1,773,378 51.4% $ 19.50
</TABLE>
- ------------------------
(1) Represents leases expiring between April 1, 1999 to December 31, 1999.
S-14
<PAGE>
TENANTS
Our properties are leased principally to tenants engaged in a variety of
activities in the life science industry. The following table sets forth
information regarding leases with our 20 largest tenants based upon annualized
base rent as of March 31, 1999.
<TABLE>
<CAPTION>
PERCENTAGE OF
APPROXIMATE PERCENTAGE OF AGGREGATE
REMAINING AGGREGATE AGGREGATE ANNUALIZED BASE PORTFOLIO
NUMBER OF INITIAL LEASE RENTABLE LEASED SQUARE RENT (IN ANNUALIZED BASE
TENANT LEASES TERM IN YEARS SQUARE FEET FEET THOUSANDS) (1) RENT
- ------------------------------- ------------- ------------- ------------ --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
American Medical Laboratories,
Inc.......................... 1 17.8 248,186 7.2% $ 4,341 6.8%
Pfizer, Inc.................... 1 13.0 96,500 2.8 3,948 6.2
Corixa Corporation(3).......... 1 5.8 82,302 2.4 3,024 4.7
0.2
Agouron Pharmaceuticals,
Inc.(4)...................... 2 2.5 70,506 2.0 2,309 3.6
1.5
Matrix Pharmaceutical, Inc..... 1 12.0 67,050 1.9 2,108 3.3
Intracel Corporation........... 1 7.8 131,511 3.8 1,904 3.0
Dendreon Corporation........... 1 9.8 70,647 2.0 1,889 3.0
Advanced Tissue Sciences,
Inc.......................... 2 1.5 84,524 2.4 1,723 2.7
U.S. Army Corps of
Engineers(5)................. 1 2.5 105,000 3.0 1,563 2.5
0.2
North American Vaccine, Inc.... 2 9.0 110,531 3.2 1,496 2.3
1.9
R.W. Johnson Pharmaceutical
Research Center(6)........... 1 0.4 44,997 1.3 1,464 2.3
University of Washington....... 1 8.9 47,746 1.4 1,458 2.3
U.S. Food & Drug
Administration............... 1 14.8 68,711 2.0 1,414 2.2
Fred Hutchinson Cancer Research
Center....................... 2 5.7 66,754 1.9 1,395 2.2
Axys Pharmaceuticals, Inc...... 1 2.8 55,548 1.6 1,372 2.2
Gene Logic Inc................. 1 8.7 49,225 1.4 1,366 2.1
The Scripps Research
Institute.................... 2 2.5 41,538 1.2 1,334 2.1
1.2
MedImmune, Inc................. 2 7.7 84,668 2.5 1,325 2.1
Gillette Capital Corporation
(7).......................... 1 7.0 62,739 1.8 1,039 1.6
University of Massachusetts.... 1 4.0 33,244 1.0 997 1.6
--
--- ------------ --- ------- ---
Total/Weighted Average (8)..... 26 7.4 1,621,927 46.8% $ 37,469 58.8%
--
--
------------ --- ------- ---
--- ------------ --- ------- ---
---
<CAPTION>
PERCENTAGE OF
ANNUALIZED NET AGGREGATE
EFFECTIVE RENT PORTFOLIO
(IN THOUSANDS) ANNUALIZED NET
TENANT (2) EFFECTIVE RENT
- ------------------------------- --------------- -----------------
<S> <C> <C>
American Medical Laboratories,
Inc.......................... $ 4,341 7.8%
Pfizer, Inc.................... 3,948 7.1
Corixa Corporation(3).......... 2,838 5.1
Agouron Pharmaceuticals,
Inc.(4)...................... 2,232 4.0
Matrix Pharmaceutical, Inc..... 1,645 3.0
Intracel Corporation........... 1,903 3.4
Dendreon Corporation........... 1,676 3.0
Advanced Tissue Sciences,
Inc.......................... 1,389 2.5
U.S. Army Corps of
Engineers(5)................. 1,399 2.5
North American Vaccine, Inc.... 1,427 2.6
R.W. Johnson Pharmaceutical
Research Center(6)........... 1,391 2.5
University of Washington....... 1,185 2.1
U.S. Food & Drug
Administration............... 1,138 2.0
Fred Hutchinson Cancer Research
Center....................... 1,394 2.5
Axys Pharmaceuticals, Inc...... 1,295 2.3
Gene Logic Inc................. 846 1.5
The Scripps Research
Institute.................... 1,072 1.9
MedImmune, Inc................. 1,315 2.4
Gillette Capital Corporation
(7).......................... 1,039 1.9
University of Massachusetts.... 997 1.8
------- ---
Total/Weighted Average (8)..... $ 34,470 61.9%
------- ---
------- ---
</TABLE>
- ----------------------------------
(1) Annualized base rent means the annualized fixed base rental amount in effect
as of March 31, 1999 (using rental revenue computed on a straight-line basis
in accordance with GAAP) paid by tenants under the terms of their leases.
(2) Annualized net effective rent is the annualized base rent in effect as of
March 31, 1999 (using rental revenue computed on a straight-line basis in
accordance with GAAP), 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.
(3) Of the 83,202 rentable square feet leased to Corixa Corporation, portions of
its lease with respect to 12,305 square feet and 69,997 square feet are
subject to expiration in May 1999 and January 2005, respectively. Corixa
Corporation will not be renewing its lease with respect to the 12,305 square
feet which expired in May 1999. We are currently in negotiations with other
prospective tenants to re-lease this space.
(4) Agouron Pharmaceuticals, Inc. is a wholly owned subsidiary of Warner-Lambert
Company.
(5) Of the 105,000 rentable square feet leased to the U.S. Army Corps of
Engineers, portions of its lease with respect to 30,000 square feet and with
respect to 75,000 square feet are subject to expiration in May 1999 and
September 2001, respectively. The U.S. Army Corps of Engineers has signed a
letter of intent to renew its lease with respect to the 30,000 square feet
that expired in May 1999.
(6) The R.W. Johnson Pharmaceutical Research Institute is a wholly owned
subsidiary of Johnson & Johnson. This tenant has elected not to renew its
lease. We are currently in negotiations to re-lease this space.
(7) Gillette Capital Corporation is a wholly owned subsidiary of The Gillette
Company, the guarantor of the lessee's obligations under the lease.
(8) Weighted average based on percentage of aggregate leased square feet.
S-15
<PAGE>
USE OF PROCEEDS
We expect to receive estimated net proceeds of approximately $23.9 million
from the sale of the Series A Preferred Stock in this offering. We intend to use
all of the net proceeds, including any proceeds from the exercise of the
underwriters' over-allotment option, to reduce the outstanding balance on our
unsecured line of credit from BankBoston, N.A., as managing agent, and other
commercial banks. Our credit line allows us to borrow up to $250 million.
Although we have used our line of credit primarily to finance property
acquisitions, the line of credit is also available to finance our retrofit and
conversion, development and working capital needs. The line of credit bears
interest at a floating rate equal to LIBOR plus 1.35%. At March 31, 1999, $172
million was outstanding under our line of credit, at a weighted average interest
rate of 6.36%. Our line of credit matures in May 2000 and provides for annual
extensions for two additional one-year periods upon notice by us and consent of
the participating banks. Until we use the funds as described above, we intend to
invest the net proceeds in interest-bearing accounts and other short-term,
interest-bearing securities that are consistent with our qualification for
taxation as a REIT.
S-16
<PAGE>
CAPITALIZATION
The following table presents our capitalization as of March 31, 1999 on an
historical and pro forma basis to give effect to this offering and the
application of the net proceeds as described in "Use of Proceeds." We are
presenting this information as if the underwriters do not exercise their
over-allotment option. You should read this table together with our consolidated
financial statements, and the notes to those financial statements, which are
incorporated by reference into the accompanying prospectus. The information
presented does not include 1,359,882 shares that we have reserved for issuance
under our Amended and Restated 1997 Stock Award and Incentive Plan. As of March
31, 1999 options to purchase 804,000 shares of our common stock were
outstanding, and, of those options granted, options to purchase 242,334 shares
were exercisable.
<TABLE>
<CAPTION>
MARCH 31, 1999
-----------------------
HISTORICAL PRO FORMA
---------- -----------
(IN THOUSANDS)
<S> <C> <C>
Debt:
Secured notes payable.................................................................. $ 127,220 $ 127,220
Unsecured line of credit............................................................... 172,000 148,088
Stockholders' Equity:
Series A Preferred Stock, $0.01 par value per share; shares authorized; no
shares issued and outstanding on an historical basis and 1,000,000 shares outstanding
on a pro forma basis................................................................. 0 25,000
Common stock, $0.01 par value per share; 100,000,000 shares authorized; 13,598,822
shares issued and outstanding on an historical and pro forma basis................... 136 136
Additional paid-in capital............................................................. 225,947 224,859
Retained earnings...................................................................... -- --
---------- -----------
Total Capitalization................................................................. $ 525,303 $ 525,303
---------- -----------
---------- -----------
</TABLE>
S-17
<PAGE>
SELECTED FINANCIAL DATA
The following data sets forth some of our financial information on an
historical basis. This information should be read in conjunction with our
consolidated financial statements incorporated by reference in the accompanying
prospectus. Our selected historical financial information as of December 31,
1998 and 1997, and for the years ended December 31, 1998 and 1997, has been
derived from our historical consolidated financial statements audited by Ernst &
Young LLP, independent certified public accountants, whose report with respect
to those financial statements is incorporated by reference in the accompanying
prospectus. The selected financial and operating information for the three
months ended March 31, 1999 has been derived from our unaudited financial
statements incorporated by reference in the accompanying prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH YEAR ENDED DECEMBER 31,
31, 1999 ------------------------------
(HISTORICAL) 1998 1997
UNAUDITED (HISTORICAL) (HISTORICAL)
-------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental....................................................... $ 15,748 $ 48,469 $ 25,622
Tenant recoveries............................................ 3,424 11,313 8,388
Interest and other income.................................... 367 1,234 836
-------------- -------------- --------------
Total revenue.................................................. 19,539 61,016 34,846
Expenses:
Rental operations............................................ 4,383 13,390 8,766
General and administrative................................... 1,301 3,894 2,476
Interest..................................................... 4,963 14,033 7,043
Stock compensation(1)........................................ -- -- 4,239
Post retirement benefit(2)................................... -- -- 632
Special bonus(3)............................................. -- -- 353
Acquisition LLC financing costs(4)........................... -- -- 6,973
Write-off of unamortized loan costs(5)....................... -- -- 2,295
Depreciation and amortization................................ 3,594 10,296 4,866
-------------- -------------- --------------
Total expenses................................................. 14,241 41,613 37,643
-------------- -------------- --------------
Net income (loss).............................................. $ 5,298 $ 19,403 $ (2,797)
-------------- -------------- --------------
-------------- -------------- --------------
DILUTED PER SHARE DATA(6):
Net income (loss).............................................. $ 0.40 $ 1.58 $ (0.35)
Cash dividends declared........................................ $ 1.60 $ 1.60 $ 1.60
Weighted average shares outstanding............................ 13,163,695 12,306,470 8,075,864
BALANCE SHEET DATA:
Rental properties, net of accumulated depreciation............. $ 489,976 $ 471,907 $ 227,076
Total assets................................................... $ 549,883 $ 530,296 $ 248,454
Mortgage loans payable and unsecured line of credit............ $ 299,220 $ 309,829 $ 70,817
Total liabilities.............................................. $ 323,800 $ 330,527 $ 81,537
Stockholders' equity........................................... $ 226,083 $ 199,769 $ 166,917
</TABLE>
S-18
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH YEAR ENDED DECEMBER 31,
31, 1999 ------------------------------
(HISTORICAL) 1998 1997
UNAUDITED (HISTORICAL) (HISTORICAL)
-------------- -------------- --------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
OTHER DATA:
<S> <C> <C> <C>
Funds from operations(7)....................................... $ 8,892 $ 29,699 $ 16,561
Cash flows provided by (used in):
Operating activities......................................... $ 14,003 $ 26,143 $ 3,883
Investing activities......................................... $ (12,862) $ (246,753) $ (87,620)
Financing activities......................................... $ (1,245) $ 220,104 $ 84,101
Number of properties owned at period end....................... 52 51 22
Square footage of properties owned at period end............... 3,703,873 3,589,912 1,739,353
Occupancy of properties owned at period end(8)................. 93% 93% 97%
</TABLE>
- ------------------------
(1) Represents an accrual for $4,239,000 of non-recurring, non-cash compensation
expense in 1997 relating to the issuance of stock options and stock grants.
In connection with our initial public offering in June 1997 (the "IPO"), the
holders of options previously granted by Health Science Properties Holding
Corporation ("Holdings") under its 1994 stock option plan received options
to purchase shares of our common stock in substitution for the Holdings
options. These substitute options were exercised in connection with the IPO.
(2) This adjustment relates solely to the non-cash accrual of a one-time
post-retirement benefit for one of our officers in 1997.
(3) Represents a $353,000 special bonus we paid to one of our officers in 1997
in connection with the IPO.
(4) In connection with the IPO, we acquired the membership interests in the
Acquisition LLC, an entity that owned three life science facilities, for
$58,844,000. The purchase price we paid for the Acquisition LLC exceeded the
cost incurred by the Acquisition LLC to purchase the properties it owned by
$6,973,000. This difference was accounted for as a financing cost.
(5) Of this amount, $2,147,000 represents the write-off of costs associated with
debt we paid off in connection with the IPO, and $148,000 represents the
write-off of costs associated with debt paid off in November 1997.
(6) The per share information for the year ended December 31, 1997 gives
retroactive effect for all shares outstanding after the IPO, weighted for
the period beginning from the date of the IPO, conversion of all series of
preferred stock which were outstanding prior to the IPO and which we
redeemed as part of the IPO, the 1,765.923 to 1 stock split of our common
stock which we effected in connection with the IPO, the issuance of stock
grants and the exercise of substitute stock options.
(7) We compute FFO in accordance with standards established by the Board of
Governors of NAREIT in the White Paper. 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, and excluding amounts
for extraordinary and non-recurring items, plus real estate related
depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures.
(8) Includes properties in our renovation program. Excluding properties in our
renovation program, occupancy was 97%, 96% and 98% as of March 31, 1999,
December 31, 1998 and December 31, 1997, respectively.
S-19
<PAGE>
RATIOS OF EARNINGS TO COMBINED FIXED CHARGES
AND PREFERRED STOCK DIVIDENDS
The following table sets forth our consolidated ratios of earnings to
combined fixed charges and preferred stock dividends for the periods shown on an
historical basis and pro forma for this offering:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
THREE MONTHS 31,
ENDED ----------------------
MARCH 31, 1999 1998 1997(1)
----------------- --------- -----------
<S> <C> <C> <C>
Ratio....................................................... 1.80x 2.06x 0.69x
</TABLE>
- ------------------------
(1) We completed our initial public offering on June 2, 1997. Earnings for the
year ended December 31, 1997 were inadequate to cover fixed charges by
approximately $5.9 million.
We computed the ratios of earnings to combined fixed charges and preferred
stock dividends by dividing earnings by combined fixed charges and preferred
stock dividends. For this purpose, earnings consist of earnings before income
taxes and fixed charges. Fixed charges consist of interest incurred (including
amortization of deferred financing costs and capitalized interest), write-off of
unamortized loan costs, Acquisition LLC financing costs and preferred stock
dividends.
S-20
<PAGE>
DESCRIPTION OF SERIES A PREFERRED STOCK
IN ADDITION TO THE INFORMATION BELOW, YOU SHOULD ALSO READ THE GENERAL TERMS
OF "PREFERRED STOCK" SET FORTH IN THE ACCOMPANYING PROSPECTUS BEFORE DECIDING
WHETHER TO INVEST IN THE SERIES A PREFERRED STOCK. HOWEVER, IF THE TERMS SET
FORTH HEREIN DIFFER FROM THE TERMS SET FORTH IN THE ACCOMPANYING PROSPECTUS, YOU
SHOULD RELY ON THE TERMS SET FORTH BELOW.
GENERAL
We presently are authorized to issue up to 100,000,000 shares of preferred
stock in one or more series, with such terms, preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends or other
distributions, qualifications and terms or conditions of redemption, in each
case, if any, as are permitted by Maryland law and as our board of directors may
determine without any further vote or action by our stockholders.
Prior to the completion of this offering, our board of directors will adopt
articles supplementary determining the number and the terms of a series of
preferred stock, designated % Series A Cumulative Redeemable Preferred Stock.
The following summary of the terms and provisions of the preferred stock does
not purport to be complete and is qualified in its entirety by reference to the
pertinent sections of our charter, including the articles supplementary to be
adopted, each of which you may obtain from us.
As of the date of this prospectus supplement, no shares of Series A
Preferred Stock are outstanding.
Except as described under "--Voting Rights" below, none of the terms of the
Series A Preferred Stock, our charter or any of our debt agreements contain any
provisions affording holders of the Series A Preferred Stock protection in the
event of a highly leveraged or other transaction that might adversely affect
holders of the Series A Preferred Stock.
MATURITY
The Series A Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption except as provided described under
"--Restrictions on Ownership and Transfer" below.
RANK
The Series A Preferred Stock will, with respect to dividend rights and
rights upon our liquidation, dissolution or winding up, rank
- senior to all classes or series of our common stock, and to all equity
securities ranking junior to the Series A Preferred Stock with respect to
dividend rights or rights upon our liquidation, dissolution or winding up;
- on a parity with all equity securities issued by us, the terms of which
specifically provide that such equity securities rank on a parity with the
Series A Preferred Stock with respect to dividend rights or rights upon
our liquidation, dissolution or winding up; and
- junior to all of our existing and future indebtedness.
DIVIDENDS
Subject to the rights of series of preferred stock which may from time to
time come into existence, holders of shares of the Series A Preferred Stock
shall be entitled to receive, when and as declared by our board of directors,
out of funds legally available for the payment of dividends, cumulative
preferential cash dividends at the rate of % per annum of the Liquidation
Preference (as defined below) per share (equivalent to a fixed annual amount of
$ per share).
Dividends on the Series A Preferred Stock shall be cumulative from the date
of original issue and shall be payable quarterly in arrears on or before the
fifteenth day of January, April, July and October of each year, or, if not a
business day, the next succeeding business day. The first dividend will be paid
on or before
S-21
<PAGE>
July 15, 1999 and will be for less than a full quarter. Dividends payable on the
Series A Preferred Stock for any partial dividend period will be computed on the
basis of a 360-day year consisting of twelve 30-day months. Dividends will be
payable to holders of record as they appear in our stock records at the close of
business on the applicable record date, which shall be the last business day of
December, March, June and September, or on such other date designated by our
board of directors that is not more than 30 nor less than ten days prior to the
applicable dividend payment date (each, a "Dividend Record Date"). The first
Dividend Record Date for determination of stockholders entitled to receive
dividends on the Series A Preferred Stock is expected to be June 30, 1999.
No dividends on shares of Series A Preferred Stock shall be declared by our
board of directors or paid or set apart for payment by us at such time as the
terms and provisions of any of our agreements, including any agreement relating
to our indebtedness, prohibits such declaration, payment or setting apart for
payment or provides that such declaration, payment or setting apart for payment
would constitute a breach thereof or a default thereunder, or if such
declaration or payment shall be restricted or prohibited by law.
Notwithstanding the foregoing, dividends on the Series A Preferred Stock
will accrue whether or not we have earnings, whether or not there are funds
legally available for the payment of such dividends and whether or not such
dividends are declared. Accrued but unpaid dividends on the Series A Preferred
Stock will accumulate as of the dividend payment date on which they became
payable.
If for any taxable year, we elect to designate as "capital gain dividends"
(as defined in Section 857 of the Internal Revenue Code of 1986, as amended) any
portion (the "Capital Gains Amount") of the dividends (as determined for federal
income tax purposes) paid or made available for the year to holders of all
classes of stock (the "Total Dividends"), then the portion of the Capital Gains
Amount that shall be allocable to the holders of Series A Preferred Stock shall
be the amount that the Total Dividends (as determined for federal income tax
purposes) paid or made available to the holders of the Series A Preferred Stock
for the year bears to the Total Dividends. We may elect to retain and pay income
tax on our net long-term capital gains. In such a case, the holders of Series A
Preferred Stock would include in income their proportionate share of our
undistributed long-term capital gains, as designated by us.
If any shares of Series A Preferred Stock are outstanding, no dividends will
be declared or paid or set apart for payment on any of our common stock or any
other series of preferred stock ranking, as to dividends, junior to the Series A
Preferred Stock, other than a dividend in shares of our common stock or in
shares of any other class of stock ranking junior to the Series A Preferred
Stock as to dividends and upon liquidation, for any period, unless full
cumulative dividends have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof is set apart for such
payment on the Series A Preferred Stock and all other series of preferred stock
ranking, as to dividends, on a parity with the Series A Preferred Stock for all
past dividend periods and the then current dividend period. When dividends are
not paid in full (or a sum sufficient for such full payment is not so set apart)
upon the Series A Preferred Stock and the shares of any other series of
preferred stock ranking on a parity as to dividends with the Series A Preferred
Stock, all dividends declared upon the Series A Preferred Stock and any other
series of Preferred Stock ranking on a parity as to dividends with the Series A
Preferred Stock shall be declared pro rata so that the amount of dividends
declared per share of Series A Preferred Stock and such other series of
preferred stock shall in all cases bear to each other the same ratio that
accrued dividends per share on the Series A Preferred Stock and such other
series of preferred stock (which shall not include any accrual in respect of
unpaid dividends for prior dividend periods if such preferred stock does not
have a cumulative dividend) bear to each other.
No interest, or sum of money in lieu of interest, shall be payable in
respect of any dividend payment or payments on the Series A Preferred Stock
which may be in arrears.
Except as provided in the immediately preceding paragraph, unless full
cumulative dividends on the Series A Preferred Stock have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof is set apart for payment for all past dividend periods and the
then current dividend period, no dividends (other than in shares of our common
stock or other shares of stock
S-22
<PAGE>
ranking junior to the Series A Preferred Stock as to dividends and upon
liquidation) shall be declared or paid or set aside for payment nor shall any
other distribution be declared or made upon our common stock or any of our other
stock ranking junior to or on a parity with the Series A Preferred Stock as to
dividends or upon liquidation, nor shall any shares of our common stock, or any
other shares of our stock ranking junior to or on a parity with the Series A
Preferred Stock as to dividends or upon liquidation, be redeemed, purchased or
otherwise acquired by us for any consideration or any monies be paid to or made
available for a sinking fund for the redemption of any such shares, except by
conversion into or exchange for our other stock ranking junior to the Series A
Preferred Stock as to dividends and amounts upon liquidation or redemptions for
the purpose of preserving our qualification as a REIT. Holders of shares of the
Series A Preferred Stock shall not be entitled to any dividend, whether payable
in cash, property or stock, in excess of full cumulative dividends on the Series
A Preferred Stock as provided above.
Any dividend payment made on shares of the Series A Preferred Stock shall
first be credited against the earliest accrued but unpaid dividend due with
respect to such shares which remains payable.
LIQUIDATION PREFERENCE
Subject to the rights of series of preferred stock which may from time to
time come into existence, upon any voluntary or involuntary liquidation,
dissolution or winding up of our affairs, the holders of shares of Series A
Preferred Stock are entitled to be paid out of our assets legally available for
distribution to our stockholders the liquidation preference of $25.00 per share
(the "Liquidation Preference"), plus an amount equal to any accrued and unpaid
dividends to the date of payment, before any distribution of assets is made to
holders of our common stock or any of our other classes or series of stock that
ranks junior to the Series A Preferred Stock as to liquidation rights. Holders
of Series A Preferred Stock will be entitled to written notice of any event
triggering the right to receive such Liquidation Preference. After payment of
the full amount of the Liquidation Preference, plus any accrued and unpaid
dividends to which they are entitled, the holders of Series A Preferred Stock
will have no right or claim to any of our remaining assets. For this purpose,
our consolidation or merger with or into any other trust or entity, or the sale,
lease, consolidation, conveyance or disposition of all or substantially all of
our assets, or the effectuation of a transaction or series of related
transactions in which more than 50% of our voting power is disposed of, shall
not be deemed to constitute our liquidation, dissolution or winding up.
In the event that, upon any such voluntary or involuntary liquidation,
dissolution or winding up of our affairs, our available assets are insufficient
to pay the amount of the liquidation distributions on all outstanding shares of
Series A Preferred Stock and the corresponding amounts payable on all shares of
our other classes or series of stock ranking on a parity with Series A Preferred
Stock in the distribution of assets upon any liquidation, dissolution or winding
up of our affairs ("Parity Stock"), then the holders of shares of Series A
Preferred Stock and Parity Stock shall share ratably in any such distribution of
assets in proportion to the full liquidating distributions to which they would
otherwise be respectively entitled.
REDEMPTION
The Series A Preferred Stock is not redeemable prior to June , 2004,
except that, in order to ensure that we will remain qualified as a REIT for
federal tax purposes, the Series A Preferred Stock owned by a stockholder in
excess of the ownership limit, as described herein, will automatically be
exchanged for shares of excess stock and we will have the right to purchase such
excess stock from the holder. See "--Restrictions on Ownership and Transfer." On
and after June , 2004, we, at our option upon not less than 30 nor more than
60 days' written notice, may redeem shares, in whole or in part, at any time or
from time to time, for cash at a redemption price of $25.00 per share, plus all
accrued and unpaid dividends thereon, if any, to the date fixed for redemption
(except as provided below), without interest. The redemption price of the Series
A Preferred Stock (other than the portion thereof consisting of accrued and
unpaid dividends) is payable solely out of the sale proceeds of our other
capital stock, which may include other series of preferred stock, and from no
other source. For purposes of the preceding sentence, "capital stock" means any
equity securities (including common stock and preferred stock), depositary
shares,
S-23
<PAGE>
interests, participation or other ownership interests (however designated) and
any rights (other than debt securities convertible into or exchangeable for
equity securities), options or warrants to purchase any of the foregoing.
PROCEDURES FOR REDEMPTION
Holders of Series A Preferred Stock to be redeemed shall surrender such
Series A Preferred Stock at the place designated in such notice and shall be
entitled to the redemption price and any accrued and unpaid dividends payable
upon such redemption following such surrender. If notice of redemption of any
shares of Series A Preferred Stock has been given and if the funds necessary for
such redemption have been set aside by us in trust for the benefit of the
holders of any shares of Series A Preferred Stock so called for redemption, then
from and after the redemption date dividends will cease to accrue on such shares
of Series A Preferred Stock, such shares of Series A Preferred Stock shall no
longer be deemed outstanding and all rights of the holders of such shares will
terminate, except the right to receive the redemption price. If less than all of
the outstanding Series A Preferred Stock is to be redeemed, the Series A
Preferred Stock to be redeemed shall be selected pro rata (as nearly as may be
practicable without creating fractional shares) or by any other equitable method
determined by us. Our ability to redeem Series A Preferred Stock is subject to
the limitations on distributions in the Maryland General Corporation Law.
Unless full cumulative dividends on all shares of Series A Preferred Stock
shall have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past dividend
periods and the then current dividend period, no shares of Series A Preferred
Stock or Parity Stock shall be redeemed unless all outstanding shares of Series
A Preferred Stock or Parity Stock are simultaneously redeemed and we shall not
purchase or otherwise acquire directly or indirectly any shares of Series A
Preferred Stock (except by exchange for our stock ranking junior to the Series A
Preferred Stock as to dividends and upon liquidation); provided, however, that
the foregoing shall not prevent the purchase by us of shares of excess stock in
order to ensure that we continue to meet the requirements for qualification as a
REIT for federal income tax purposes as described under "--Restrictions on
Ownership and Transfer," or the purchase or acquisition of shares of Series A
Preferred Stock pursuant to a purchase or exchange offer made on the same terms
to holders of all outstanding shares of Series A Preferred Stock.
Notice of redemption will be given by publication in a newspaper of general
circulation in the City of New York, such publication to be made once a week for
two successive weeks commencing not less than 30 nor more than 60 days prior to
the redemption date. A similar notice will be mailed by us not less than 30 nor
more than 60 days prior to the redemption date, addressed to the respective
holders of record of the Series A Preferred Stock to be redeemed at their
respective addresses as they appear on our stock transfer records. No failure to
give such notice or any defect therein or in the mailing thereof shall affect
the validity of the proceedings for the redemption of any shares of Series A
Preferred Stock except as to the holder to whom notice was defective or not
given. Each notice shall state: (i) the redemption date; (ii) the redemption
price; (iii) the number of shares of Series A Preferred Stock to be redeemed;
(iv) the place or places where certificates for shares of the Series A Preferred
Stock are to be surrendered for payment of the redemption price; and (v) that
dividends on the shares to be redeemed will cease to accrue on such redemption
date. If less than all of the Series A Preferred Stock held by any holder is to
be redeemed, the notice mailed to such holder shall also specify the number of
shares of Series A Preferred Stock held by such holder to be redeemed.
Immediately prior to any redemption of Series A Preferred Stock, we shall
pay, in cash, any accumulated and unpaid dividends through the redemption date,
unless a redemption date falls after a Dividend Record Date and prior to the
corresponding dividend payment date, in which case each holder of Series A
Preferred Stock at the close of business on such Dividend Record Date shall be
entitled to the dividend payable on such shares on the corresponding dividend
payment date notwithstanding the redemption of such shares between such Dividend
Record Date and the corresponding dividend payment
S-24
<PAGE>
date or our default in the payment of the dividend due. Except as provided
above, we will make no payment or allowance for unpaid dividends, whether or not
in arrears, on shares of Series A Preferred Stock which may have been called for
redemption.
The Series A Preferred Stock has no stated maturity and will not be subject
to any sinking fund or mandatory redemption. However, in order to ensure that we
continue to meet the requirements for qualification as a REIT for federal income
tax purposes, Series A Preferred Stock acquired by a stockholder in excess of
the 9.8% ownership limitation contained in our charter will automatically be
exchanged for shares of excess stock. See "--Restrictions on Ownership and
Transfer".
VOTING RIGHTS
Holders of the Series A Preferred Stock will not have any voting rights,
except as set forth below.
Whenever dividends on any shares of Series A Preferred Stock or Parity
Preferred (as defined below) shall be in arrears for six or more quarters
(whether consecutive or not) (a "Preferred Dividend Default"), whether or not
earned or declared, the holders of such shares of Series A Preferred Stock
(voting separately as a voting group with all other series of Preferred Stock
ranking on a parity with the Series A Preferred Stock as to dividends ("Parity
Preferred") upon which like voting rights have been conferred and are
exercisable) will be entitled to vote separately as a voting group for the
election of a total of two additional directors to serve on our board of
directors (the "Preferred Stock Directors") at a special meeting called by the
holders of record of at least 20% of the Series A Preferred Stock or the holders
of record of at least 20% of any series of Parity Preferred so in arrears
(unless such request is received less than 90 days before the date fixed for the
next annual or special meeting of stockholders) or at the next annual meeting of
stockholders, and at each subsequent annual meeting until all dividends
accumulated on such shares of Series A Preferred Stock and Parity Preferred for
the past dividend periods and the dividend for the then current dividend period
shall have been fully paid or declared and a sum sufficient for the payment
thereof set aside for payment. A quorum for any such meeting shall exist if at
least a majority of the outstanding shares of Series A Preferred Stock and
shares of Parity Preferred upon which like voting rights have been conferred and
are exercisable are represented in person or by proxy at such meeting. Such
Preferred Stock Directors shall be elected upon the affirmative vote of a
plurality of the shares of Series A Preferred Stock and such Parity Preferred
present and voting in person or by proxy at a duly called and held meeting at
which a quorum is present. If and when all accumulated dividends and the
dividend for the then current dividend period on the Series A Preferred Stock
shall have been paid in full or set aside for payment in full, the holders
thereof shall be divested of the foregoing voting rights (subject to revesting
in the event of each and every Preferred Dividend Default) and, if all
accumulated dividends and the dividend for the then current dividend period have
been paid in full or declared and set aside for payment in full on all series of
Parity Preferred upon which like voting rights have been conferred and are
exercisable, the term of office of each Preferred Stock Director so elected
shall immediately terminate. The Preferred Stock Directors shall each be
entitled to one vote per director on any matter.
So long as any shares of Series A Preferred Stock remain outstanding, we
will not without the affirmative vote or consent of the holders of at least
two-thirds of the shares of the Series A Preferred Stock outstanding at the
time, given in person or by proxy, either in writing or at a meeting (voting
separately as a class):
- authorize or create, or increase the authorized or issued amount of, any
class or series of capital stock ranking senior to the Series A Preferred
Stock with respect to payment of dividends or the distribution of assets
upon liquidation, dissolution or winding up or reclassify any of our
authorized capital stock into such shares, or create, authorize, or issue
any obligation or security convertible into or evidencing the right to
purchase any such shares; or
- amend, alter or repeal the provisions of our charter, including the
articles supplementary, whether by merger, consolidation or otherwise (an
"Event"), so as to materially and adversely affect any right, preference,
privilege or voting power of the Series A Preferred Stock or the holders
thereof;
S-25
<PAGE>
provided, that the occurrence of any Event shall not be deemed to
materially and adversely affect such rights, preferences, privileges or
voting power so long as the Series A Preferred Stock remains outstanding
and the terms thereof are materially unchanged or if we are not the
surviving entity and the successor entity issues to holders of the Series
A Preferred Stock preferred shares with substantially identical rights,
preferences, privileges and voting powers as the Series A Preferred Stock.
Notwithstanding any other provision hereof, the vote of the holders of the
Series A Preferred Stock will not be required to (1) increase the amount of
authorized preferred stock, (2) create or issue any other series of preferred
stock, or (3) increase the authorized number of shares of such series, in any
such case ranking on a parity with or junior to the Series A Preferred Stock
with respect to payment of dividends or the distribution of assets upon
liquidation, dissolution or winding up.
The foregoing voting provisions will not apply if, at or prior to the time
when the act with respect to which such vote would otherwise be required shall
be effected, all outstanding shares of Series A Preferred Stock shall have been
redeemed or called for redemption upon proper notice and sufficient funds shall
have been deposited in trust to effect such redemption.
CONVERSION
The Series A Preferred Stock is not convertible into or exchangeable for any
of our other property or securities, except that the shares of Series A
Preferred Stock may be exchanged for shares of excess stock in order to ensure
that we remain qualified as a REIT for federal income tax purposes.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
For us to qualify as a REIT under the Internal Revenue Code of 1986, as
amended, certain restrictions apply to the ownership of shares of our stock. See
the accompanying Prospectus under "Federal Income Tax
Considerations--Requirements for Qualification." Because our board of directors
believes it is essential for us to continue to qualify as a REIT, our charter
restricts the ownership, acquisition and transfer of our stock, including shares
of Series A Preferred Stock.
Our charter provides that if, at any time when we are qualified as a REIT, a
transfer of any of our capital stock (either common stock or preferred stock)
would result in (1) any person (other than persons excepted by our charter or by
our board of directors) acquiring directly or indirectly beneficial ownership of
more than 9.8% of the total value of our outstanding shares of capital stock
(the "Ownership Limit"); (2) our outstanding capital stock being constructively
or beneficially owned by fewer than 100 persons; or (3) our being "closely held"
within the meaning of Section 856 of the Internal Revenue Code of 1986, as
amended, then:
- any proposed transfer will be void ab initio and will not be recognized by
us; and
- the shares proposed to be transferred will be automatically converted into
and exchanged for shares of a separate class of stock, excess stock, which
will be held by a trustee of a trust for the exclusive benefit of a
charitable beneficiary until such time as the shares are re-transferred to
a person or persons in whose hands the shares would not be excess stock
and certain price-related restrictions are satisfied. The shares of excess
stock held by the trustee will not provide the proposed transferee with
any voting or dividend rights. However, the proposed transferee does have
certain rights in the event of our liquidation, dissolution or winding up.
For a further discussion of restrictions on ownership and transfer of our
stock see "Description of Capital Stock--Restrictions on Ownership and Transfer"
in the accompanying prospectus.
TRANSFER AND DIVIDEND PAYING AGENT
American Stock Transfer & Trust Company will act as the transfer and
dividend payment agent in respect of the Series A Preferred Stock.
S-26
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary of certain federal income tax considerations is based
on current law, is for general information only, and is not tax advice. This
discussion does not purport to address all aspects of taxation that may be
relevant to particular stockholders in light of their personal investment or tax
circumstances, or to certain types of stockholders (including insurance
companies, tax-exempt organizations, financial institutions or broker dealers,
foreign corporations and persons who are not citizens or residents of the United
States) subject to special treatment under the federal income tax laws.
We intend to operate in a manner that will enable us to qualify as a REIT
under the Internal Revenue Code of 1986, as amended (the "Code"). Although we
believe that we are organized and operate in such a manner, we cannot assure you
that we qualify or will remain qualified as a REIT. Qualification as a REIT
involves the application of highly technical and complex Code provisions for
which there are only limited judicial and administrative interpretations. The
determination of various factual matters and circumstances not entirely within
our control may affect our ability to qualify as a REIT. If we fail to qualify
as a REIT, we will be subject to federal income tax (including any applicable
alternative minimum tax) on our taxable income at regular corporate rates. In
addition, unless entitled to relief under certain statutory provisions, we will
be disqualified from treatment as a REIT for the four taxable years following
the year during which qualification is lost. The additional tax would
significantly reduce the cash flow available for distribution to stockholders.
This Prospectus Supplement does not address our taxation or the impact on us of
our election to be taxed as a REIT. The discussion set forth below assumes that
we qualify as a REIT under the Code.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
DIVIDENDS AND OTHER DISTRIBUTIONS. As long as we qualify as a REIT,
distributions made to our taxable domestic stockholders (including holders of
Series A Preferred Stock) 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. For purposes of determining whether distributions on
the Series A Preferred Stock are out of current or accumulated earnings and
profits, our earnings and profits will be allocated first to the outstanding
Series A Preferred Stock and then to the common stock. If for any taxable year,
we elect to designate as "capital gain dividends" (as defined in Section 857 of
the Code) any portion (the "Capital Gains Amount") of the dividends (as
determined for federal income tax purposes) paid or made available for the year
to holders of all classes of capital stock (the "Total Dividends"), then the
portion of the Capital Gains Amount that shall be allocable to the holders of
Series A Preferred Stock will be the amount that the Total Dividends (as
determined for federal income tax purposes) paid or made available to the
holders of the Series A Preferred Stock for the year bears to the Total
Dividends. We may elect to retain and pay income tax on our net long-term
capital gains. In such a case, the holders of Series A Preferred Stock would (i)
include in income their proportionate share of our undistributed long-term
capital gains, as designated by us, (ii) receive a credit for their
proportionate share of the tax paid by us, and (iii) increase the adjusted tax
basis of their Series A Preferred Stock by the difference between the amount of
their capital gain and their share of the tax paid by us.
SALE OR REDEMPTION OF SERIES A PREFERRED STOCK. On the sale of shares of
the Series A Preferred Stock, gain or loss will be recognized by the holder in
an amount equal to the difference between (i) the amount of cash and fair market
value of any property received on such sale, and (ii) the holder's adjusted
basis in the Series A Preferred Stock. Such gain or loss will be capital gain or
loss if the shares of the Series A Preferred Stock are held as capital assets,
and will be long-term gain or loss if such shares have been held for more than
one year at the time of sale. In general, any loss upon a sale or exchange of
shares by a holder who has held such shares for six months or less (after
applying certain holding period rules), will be treated as a long-term capital
loss to the extent of distributions from us required to be treated by such
holder as long-term capital gain.
S-27
<PAGE>
A redemption of the Series A Preferred Stock will be treated under Section
302 of the Code as a distribution that is taxable at ordinary income tax rates
as a dividend (to the extent of our current or accumulated earnings and
profits), unless the redemption satisfies certain tests set forth in Section
302(b) of the Code enabling the redemption to be treated as a sale of the Series
A Preferred Stock. The redemption will satisfy such tests if it (i) is
"substantially disproportionate" with respect to the holder, (ii) results in a
"complete termination" of the holder's stock interest in us, or (iii) is "not
essentially equivalent to a dividend" with respect to the holder, all within the
meaning of Section 302(b) of the Code. In determining whether any of these tests
have been met, shares considered to be owned by the holder by reason of certain
constructive ownership rules set forth in the Code, as well as shares actually
owned, must generally be taken into account. Because the determination as to
whether any of the alternative tests of Section 302(b) of the Code will be
satisfied with respect to any particular holder of Series A Preferred Stock
depends on the facts and circumstances at the time that the determination must
be made, prospective investors are advised to consult their tax advisors to
determine such tax treatment.
If a redemption of the Series A Preferred Stock is treated as a distribution
that is taxable as a dividend, the amount of the distribution will be measured
by the amount of cash and the fair market value of any property received by the
stockholders. The stockholder's adjusted tax basis in such redeemed Series A
Preferred Stock generally will be transferred to the holder's remaining
stockholdings in us.
BACKUP WITHHOLDING
We will report to our domestic stockholders and the Internal Revenue Service
(the "IRS") the amount of dividends paid during each calendar year, and the
amount of tax withheld, if any. Under the backup withholding rules, a
stockholder may be subject to backup withholding at the rate of 31% with respect
to dividends paid and redemptions unless such holder (a) certifies that it is a
corporation or comes within certain other exempt categories or (b) provides a
taxpayer identification number, certifies that the holder is not subject to
backup withholding, and otherwise complies with the backup withholding rules. A
stockholder that does not provide his correct taxpayer identification number may
also be subject to penalties imposed by the IRS. Any amount paid as backup
withholding will be creditable against the stockholder's income tax liability.
OTHER TAX CONSEQUENCES
We and our stockholders may be subject to state or local taxation in various
state and local jurisdictions, including those in which it or they own property,
transact business or reside. The state and local tax treatment of us and our
stockholders may not conform to the federal income tax consequences discussed
above. Consequently, prospective stockholders should consult their tax advisors
regarding the effect of the state and local tax laws with respect an investment
in our stock.
S-28
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
(the "Underwriting Agreement"), between us and the underwriters named below (the
"Underwriters"), we have agreed to sell to the Underwriters, and each of the
Underwriters has severally agreed to purchase from us, the number of shares of
Series A Preferred Stock set forth opposite their respective names. Pursuant to
the terms of the Underwriting Agreement, the Underwriters are obligated to
purchase all such shares of Series A Preferred Stock if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
SHARES TO
BE
UNDERWRITERS PURCHASED
- --------------------------------------------------------------------------------- -----------
<S> <C>
PaineWebber Incorporated.........................................................
Banc of America Securities LLC...................................................
BancBoston Robertson Stephens Inc................................................
EVEREN Securities, Inc...........................................................
-----------
Total.......................................................................... 1,000,000
-----------
-----------
</TABLE>
The Underwriters have advised us that they propose to offer the Series A
Preferred Stock to the public at the offering price set forth on the cover page
of this prospectus supplement and to certain dealers at such price less a
concession not in excess of $ per share of Series A Preferred Stock. The
Underwriters may allow, and such dealers may re-allow, a discount not in excess
of $ per share of Series A Preferred Stock on sales to certain other brokers
and dealers. The public offering price, concession and discount may be changed
by the Underwriters after the Series A Preferred Stock is released for sale to
the public.
We have granted to the Underwriters an option, exercisable for 30 days after
the date of this prospectus supplement, to purchase up to 150,000 additional
shares of Series A Preferred Stock to cover over-allotments, if any, at the
public offering price, less the underwriting discount set forth in the table
below. The company proceeds shown do not reflect estimated expenses of $300,000
payable by us.
<TABLE>
<CAPTION>
TOTAL, ASSUMING
FULL EXERCISE OF
PER SHARE TOTAL OVER-ALLOTMENT OPTION
----------- ------------- ---------------------
<S> <C> <C> <C>
Public Offering Price....................... $ $ $
Underwriting Discount....................... $ $ $
Company Proceeds............................ $ $ $
</TABLE>
In the Underwriting Agreement, we 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 shares of Series A Preferred Stock offered hereby are new securities
with no established trading market. We have applied to list the Series A
Preferred Stock on the New York Stock Exchange under the symbol "ARE PrA." Each
of the Underwriters may advise us that it intends to make a market in the Series
A Preferred Stock prior to the commencement of listing on the New York Stock
Exchange. However, no Underwriter is obligated to do so and may discontinue
market making at any time without notice.
Until the distribution of the Series A Preferred Stock is completed, the
rules of the Securities and Exchange Commission may limit the ability of the
Underwriters to bid for and purchase the Series A Preferred Stock. As an
exception to these rules, the Underwriters may engage in certain transactions
that
S-29
<PAGE>
stabilize the price of the Series A Preferred Stock. Such transactions consist
of bids or purchases for the purpose of pegging, fixing or maintaining the price
of the Series A Preferred Stock.
If the Underwriters create a short position in the Series A Preferred Stock
in connection with the offering (i.e., if the Underwriters sell more shares of
Series A Preferred Stock than are set forth on the cover page of this prospectus
supplement), they may reduce that short position by purchasing shares of Series
A Preferred Stock in the open market. The Underwriters may also elect to reduce
any short position by purchasing all or part of the over-allotment option
described above.
PaineWebber Incorporated, on behalf of the Underwriters, may also impose a
penalty bid on certain of the Underwriters. This means that if PaineWebber
Incorporated, on behalf of the Underwriters, purchases shares of Series A
Preferred Stock in the open market to reduce the Underwriters' short position or
to stabilize the price of the Series A Preferred Stock, it may reclaim the
amount of the selling concession from the Underwriters 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
may also have an effect on the price of a security to the extent that it
discourages resales of the security.
Neither we 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 Series A Preferred Stock. In
addition, neither we nor any of the Underwriters makes any representation that
the Underwriters will engage in such transactions. Such transactions, once
commenced, will not be discontinued without notice.
In the ordinary course of their business, certain of the Underwriters and/or
their affiliates have in the past engaged and may in the future engage in
financial advisory, investment banking and other transactions with us for which
customary compensation has been, and will be, received. In addition, BankBoston,
N.A., an affiliate of BancBoston Robertson Stephens Inc., and Bank of America
National Trust and Savings Association, an affiliate of Banc of America
Securities LLC, are lenders under our unsecured line of credit. We intend to use
the net proceeds from this offering to reduce the outstanding balance on our
line of credit. BankBoston, N.A. and Bank of America National Trust and Savings
Association will each receive its proportionate share of the repayment. See "Use
of Proceeds."
LEGAL MATTERS
Certain legal matters will be passed on for us by Skadden, Arps, Slate,
Meagher & Flom LLP, Los Angeles, California, and certain legal matters with
respect to Maryland law, including the validity of the shares of the Series A
Preferred Stock offered hereby, will be passed upon for us by Ballard Spahr
Andrews & Ingersoll, LLP, Baltimore, Maryland. The validity of the shares of the
Series A Preferred Stock offered hereby will be passed upon for the Underwriters
by Rogers & Wells LLP, New York, New York. Rogers & Wells LLP will rely upon the
opinion of Ballard Spahr Andrews & Ingersoll, LLP as to all matters of Maryland
law. Skadden, Arps, Slate, Meagher & Flom LLP has from time to time represented
certain of the Underwriters in connection with unrelated legal matters. Certain
partners of Skadden, Arps, Slate, Meagher & Flom LLP and their family members
beneficially own, in the aggregate, less than 1% of our outstanding common
stock.
S-30
<PAGE>
PROSPECTUS
$250,000,000
ALEXANDRIA REAL ESTATE EQUITIES, INC.
COMMON STOCK, PREFERRED STOCK AND WARRANTS
Alexandria Real Estate Equities, Inc. (the "Company") may offer, from time
to time, in one or more series or classes (i) shares of its common stock, par
value $.01 per share (the "Common Stock"), (ii) shares or fractional shares of
its preferred stock, par value $.01 per share (the "Preferred Stock"), and (iii)
warrants to purchase shares of Common Stock or Preferred Stock, as shall be
designated by the Company at the time of any such offering (the "Warrants"),
with an aggregate public offering price of up to $250,000,000, in amounts, at
prices and on terms to be determined at the time of offering. The Common Stock,
Preferred Stock and Warrants (collectively, the "Securities") may be offered,
separately or together, in separate series in amounts, at prices and on terms to
be set forth in one or more supplements to this Prospectus (each such
supplement, a "Prospectus Supplement").
The specific terms of the Securities in respect of which this Prospectus is
being delivered will be set forth in the applicable Prospectus Supplement and
will include, where applicable (i) in the case of Common Stock, the specific
title and any initial public offering price; (ii) in the case of Preferred
Stock, the specific title and stated value, and any dividend, liquidation,
redemption, conversion, voting and other rights, and any initial public offering
price; and (iii) in the case of Warrants, the duration, offering price, exercise
price and detachability. In addition, such specific terms may include
limitations on actual or constructive ownership and restrictions on transfer of
the Securities, in each case as may be appropriate to preserve the status of the
Company as a real estate investment trust for federal income tax purposes.
The applicable Prospectus Supplement also will contain information, where
applicable, about certain U.S. federal income tax consequences relating to, and
any listing on a securities exchange of, the Securities covered by such
Prospectus Supplement.
The Securities may be offered directly, through agents designated from time
to time by the Company or to or through underwriters or dealers. If any agents
or underwriters are involved in the sale of any of the Securities, their names,
and any applicable purchase price, fee, commission or discount arrangement with,
between or among them, will be set forth, or will be calculable from the
information set forth, in the applicable Prospectus Supplement. See "Plan of
Distribution." No Securities may be sold without delivery of this Prospectus and
the applicable Prospectus Supplement describing the method and terms of the
offering of such series of Securities.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 2 FOR CERTAIN FACTORS
RELEVANT TO AN INVESTMENT IN THE SECURITIES.
---------------------
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.
The date of this Prospectus is June 30, 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN AN OFFERING OF THE SECURITIES MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE
SECURITIES. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF
SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THOSE ACTIVITIES, SEE "UNDERWRITING" IN THE
ACCOMPANYING PROSPECTUS SUPPLEMENT.
No person has been authorized to give any information or to make any
representations other than those contained or incorporated by reference in this
Prospectus or any Prospectus Supplement, and, if given or made, such other
information and representations must not be relied upon as having been
authorized by the Company or by any underwriter, agent or dealer. Neither the
delivery of this Prospectus and any Prospectus Supplement nor any sale made
thereunder shall, under any circumstances, create an implication that there has
been no change in the affairs of the Company since the date thereof or that the
information contained therein is correct as of any time subsequent to the date
thereof. This Prospectus and any Prospectus Supplement shall 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 and any Prospectus
Supplement shall not constitute an offer to sell or a solicitation of an offer
to buy such securities in any circumstances in which such offer or solicitation
is unlawful.
Unless the context otherwise requires, references herein to the "Company"
mean, collectively, Alexandria Real Estate Equities, Inc. ("Alexandria"), a
Maryland corporation, and its subsidiaries. The Company holds substantially all
of its assets and conducts substantially all of its operations through its
subsidiaries, including property partnerships and limited liability companies.
The Company currently owns, directly or indirectly, all of the interests in such
subsidiaries. The Company may, however, issue operating partnership interests as
consideration for future property acquisitions.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Available Information...................................................................................... iii
Incorporation of Certain Documents by Reference............................................................ iii
The Company................................................................................................ 1
Risk Factors............................................................................................... 2
Use of Proceeds............................................................................................ 14
Ratio of Earnings to Fixed Charges......................................................................... 14
Description of Capital Stock............................................................................... 15
Warrants................................................................................................... 19
Certain Provisions of Maryland Law and of the Company's Charter and Bylaws................................. 20
Federal Income Tax Considerations.......................................................................... 23
Plan of Distribution....................................................................................... 33
Legal Matters.............................................................................................. 34
Experts.................................................................................................... 34
</TABLE>
ii
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The Registration
Statement, the exhibits and schedules forming a part thereof, and the reports,
proxy statements and other information filed by the Company with the Commission
in accordance with the Exchange Act can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the following regional offices of
the Commission: Seven World Trade Center, 13th Floor, New York, New York 10048,
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material can be obtained at prescribed rates from the
Public Reference Room of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. Such material also may be accessed through the Commission's
electronic data gathering, analysis and retrieval system ("EDGAR") via
electronic means, including the Commission"s site on the World Wide Web at
http://www.sec.gov. In addition, certain of the Securities are listed on the New
York Stock Exchange, and similar information regarding the Company may be
inspected and copied at the offices of The New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005.
The Company has filed with the Commission a registration statement (No.
333-56451) on Form S-3 (together with all amendments and exhibits, herein
referred to as the "Registration Statement") (of which this Prospectus forms a
part) under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Securities offered hereby. As permitted by the rules and
regulations of the Commission, this Prospectus does not contain all of the
information set forth in the Registration Statement and the exhibits and
schedules thereto. Such additional information is available for inspection and
copying at the offices of the Commission. Statements contained in this
Prospectus, in any Prospectus Supplement or in any document incorporated by
reference herein or therein as to the contents of any contract or other document
referred to herein or therein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to, or incorporated by reference in, the Registration Statement, each
such statement being qualified in all respects by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The documents listed below previously have been filed by the Company with
the Commission pursuant to the Exchange Act and are incorporated herein by
reference:
(1) The Company's Annual Report on Form 10-K for the year ended December 31,
1997;
(2) The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1998;
(3) Amendment No. 1 to the Company's Current Report on Form 8-K (dated
November 14, 1997), filed with the Commission on January 29, 1998
(4) The Company's Current Report on Form 8-K (dated March 26, 1998), filed
with the Commission on April 9, 1998;
(5) The Company's Current Report on Form 8-K (dated May 27, 1998), filed
with the Commission on May 27, 1998;
(6) The Company's Current Report on Form 8-K (dated May 27, 1998), filed
with the Commission on June 23, 1998; and
(7) The description of the Common Stock contained in the Registration
Statement on Form 8-A filed by the Company on May 14, 1997, including any
amendment or reports filed for the purpose of updating such description.
iii
<PAGE>
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering of the Securities to which this Prospectus
relates shall be deemed to be incorporated by reference into this Prospectus and
to be a part hereof from the date of filing such documents.
Any statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
(or in the applicable Prospectus Supplement) or in any other subsequently filed
document that is or is deemed to be incorporated by reference herein modifies or
supersedes such previous statement. Any statement so modified or superseded
shall not be deemed to constitute a part of this Prospectus, except as so
modified or superseded.
Copies of all documents that are incorporated herein by reference (other
than the exhibits to such documents, unless such exhibits are specifically
incorporated by reference herein), will be provided upon request without charge
to any person to whom this Prospectus and the applicable Prospectus Supplement
are delivered. Requests for such copies should be directed to Alexandria Real
Estate Equities, Inc., 135 North Los Robles Avenue, Suite 250, Pasadena,
California 91101, Attention: Corporate Secretary, telephone number (626)
578-0777.
iv
<PAGE>
THE COMPANY
The Company is a real estate investment trust ("REIT") engaged primarily in
the acquisition, management, expansion and selective development of high
quality, strategically located properties containing office and laboratory space
designed and improved for lease principally to pharmaceutical, biotechnology,
diagnostic, contract research and personal care products companies, major
scientific research institutions and related government agencies (collectively,
the "Life Science Industry"). 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"). As of April 30, 1998, the Company owned 37 Life Science Facilities
(the "Properties"), located in California (in the San Diego and San Francisco
Bay areas); Seattle, Washington; suburban Washington, D.C. (including Maryland
and Virginia); Boston/Cambridge, Massachusetts; Raleigh/Durham, North Carolina;
and the New York/New Jersey and suburban Philadelphia areas.
The Common Stock is listed on the New York Stock Exchange under the symbol
"ARE." The Company's principal executive offices are located at 135 North Los
Robles Avenue, Suite 250, Pasadena, California 91101, and the telephone number
is (626) 578-0777. The Company was formed as a Maryland corporation in October
1994 and completed its initial public offering ("IPO") in June 1997.
1
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE SECURITIES INVOLVES VARIOUS RISKS. PROSPECTIVE
INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING INFORMATION, IN ADDITION TO
THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, THE APPLICABLE PROSPECTUS
SUPPLEMENT AND THE DOCUMENTS INCORPORATED HEREIN AND THEREIN BY REFERENCE,
BEFORE MAKING A DECISION TO PURCHASE THE SECURITIES. WHEN USED IN THIS
PROSPECTUS, THE WORDS "BELIEVES," "EXPECTS," "ANTICIPATES," "INTENDS" AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN
THE MEANING OF SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE
ACT REGARDING EVENTS, CONDITIONS AND FINANCIAL TRENDS THAT MAY AFFECT THE
COMPANY'S FUTURE PLANS OF OPERATIONS, BUSINESS STRATEGY, RESULTS OF OPERATIONS
AND FINANCIAL POSITION. PROSPECTIVE INVESTORS ARE CAUTIONED THAT ANY
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES OF FUTURE PERFORMANCE AND ARE
SUBJECT TO RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM
THOSE INCLUDED WITHIN THE FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS
FACTORS INCLUDING, BUT NOT LIMITED TO, THOSE DESCRIBED BELOW AND ELSEWHERE IN
THIS PROSPECTUS, THE APPLICABLE PROSPECTUS SUPPLEMENT AND THE DOCUMENTS
INCORPORATED HEREIN AND THEREIN BY REFERENCE.
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 and 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 activities of its tenants 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."
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 U.S. Food and Drug Administration (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
2
<PAGE>
continuing regulation. Regulation could result in limitations or restrictions on
a tenant's ability to utilize its technology, thereby adversely affecting such
tenant's ability to generate revenues and to make lease payments to the Company.
Certain of the Company's tenants are also subject to regulation under the
Occupational Safety and Health Act, federal restrictions on technology transfer,
import, export and customs regulations, and other federal, state and local
regulations. In addition, certain of the Company's tenants receive significant
funding from federal, state and local governments. If any of such funding were
decreased or discontinued, the affected tenant may experience difficulty meeting
its obligations under its lease. See "--Dependence on Tenants."
DEPENDENCE ON REIMBURSEMENT. The healthcare industry in the United States
is undergoing significant changes, resulting from political, economic and
regulatory influences. Successful commercial sales of the products of certain of
the Company's tenants may depend in part on the availability of reimbursement to
consumers from third-party payors, such as government and private insurance
plans, that may be affected by changes in the healthcare industry. There can be
no assurance that adequate third-party reimbursement will be available for the
products of the Company's tenants. If adequate reimbursement is not provided by
government and third-party payors for the products or services of the Company's
tenants, such tenants' business and ability to generate revenues and make lease
payments to the Company could be adversely affected. Consequently, the Company's
ability to make distributions to its stockholders could similarly be adversely
affected.
DEPENDENCE ON TENANTS
The Company's revenues are derived primarily from rental payments under its
leases. Therefore, if a significant tenant failed to make rental payments under
its lease, the Company's financial condition and its ability to make
distributions to stockholders could be adversely affected. While the Company
evaluates the creditworthiness of its tenants based upon a due diligence review
of available financial and other pertinent information, there can be no
assurance 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. As of April 30,
1998, leases with U.S. government tenants at the Properties accounted for
approximately 8.0% of the Company's aggregate Annualized Base Rent. "Annualized
Base Rent" means the annualized fixed base rental amount in effect as of April
30, 1998 (using rental revenue calculated on a straight-line basis in accordance
with generally accepted accounting principles). 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. The Company's leases with U.S. government tenants at each of
1431 Harbor Bay Parkway in Alameda, California and 1401 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. As of April 30, 1998, the Company had approximately 139 leases
with a total of approximately 128 tenants. Twenty-two of the Properties were
single-tenant Properties, although the Company believes that all such Properties
are capable of being converted to use by multiple tenants. Three of the
Company's tenants, American Medical Laboratories, Inc., the Fred Hutchinson
Cancer Research Center and Agouron Pharmaceuticals, Inc., accounted for
approximately 20.2% of the Company's aggregate Annualized Base Rent, or
approximately 9.4%, 5.8% and 5.0%, respectively, as of April 30, 1998.
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 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
3
<PAGE>
expiration or termination occurred. Leases at the Properties representing
approximately 10.5%, 12.0% and 11.7% of Annualized Base Rent are scheduled to
expire in the years 1998, 1999 and 2000, respectively. In addition, the Company
may acquire properties that include certain improvements 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; suburban Washington, D.C. (including Maryland
and Virginia); Boston/Cambridge, Massachusetts; Raleigh/Durham, North Carolina;
and the New York/New Jersey and suburban Philadelphia areas. As a result of this
geographic concentration, the Company's performance, its ability to make
distributions to stockholders and the value of its properties are dependent upon
the performance of the Life Science Industry and on economic conditions in these
markets, including local real estate conditions and competition. There can be no
assurance that these markets will continue to grow or will remain favorable to
the Life Science Industry. The performance of the Life Science Industry and the
economy in general in each geographic market in which the Company owns or
acquires properties may affect occupancy, market rental rates and expenses and,
consequently, may affect the Company's performance and the value of its
properties.
RAPID GROWTH
The Company is currently experiencing a period of rapid growth. As the
Company acquires additional properties, it will be subject to risks associated
with managing new properties, including lease-up and tenant retention. In
addition, the Company's ability to manage its growth effectively will require it
to successfully integrate new acquisitions into its existing management
structure. No assurances can be given that the Company will be able to succeed
with such integration or effectively manage additional properties or that newly
acquired properties will perform as expected. Additionally, there can be no
assurance that the Company will be able to maintain its current rate of growth
in the future.
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. As of March 31, 1998
the Company had outstanding mortgage indebtedness of approximately $60.2
million, of which approximately $18 million is secured by 3535 and 3565 General
Atomics Court; approximately $8.5 million is secured by 1431 Harbor Bay Parkway;
approximately $21.1 million is secured by 1102 and 1124 Columbia Street; and
approximately $12.6 million is secured by 100 and 800/801 Capitola Drive. In
addition, in May 1998, the Company obtained a mortgage loan of approximately
$36.5 million, which is secured by 3000/3018 Western Avenue and 14225 Newbrook
Drive. 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 Company's $150 million unsecured revolving credit facility (the "Credit
Facility") contains conditions to borrowing and cross-default provisions. The
conditions to borrowing 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
4
<PAGE>
Credit Facility. As of June 9, 1998, the Company had $101.8 million principal
amount of indebtedness outstanding under the Credit Facility.
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. 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 or interests in subsidiaries 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 of incurring 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. Borrowings outstanding under the Credit Facility
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."
5
<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).
As of April 30, 1998, over 60% of the Company's leases (on a square footage
basis) were 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 assurance 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
6
<PAGE>
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 pursuing certain development opportunities in San Diego and
suburban Washington, D.C. and is evaluating certain other development
opportunities.
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 Internal
Revenue Code of 1986, as amended (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 is the only 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.
LIMITED OPERATING HISTORY
All of the Properties have been under the Company's management for less than
five 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.
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
7
<PAGE>
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.
The Company has received an opinion of Skadden, Arps, Slate, Meagher & 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 has
relied 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 is 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."
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.
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
8
<PAGE>
entities (as defined in the Code). The Company's Articles of Amendment and
Restatement (the "Charter") prohibit, with certain limited exceptions, direct or
constructive ownership of shares of stock representing more than 9.8% of the
combined total value of outstanding shares of the Company's stock by any person
(the "Ownership Limit"). The Board of Directors may also exempt a stockholder
from the Ownership Limit if, prior to such exemption, the Board of Directors
receives such information as it deems necessary to determine or ensure the
Company's status as a REIT. The Board of Directors has exempted certain
stockholders of the Company from the Ownership Limit. The constructive ownership
rules are complex and may cause shares of Common Stock owned directly or
constructively by a group of related individuals or entities to be
constructively owned by one individual or entity. A transfer of shares to a
person who, as a result of the transfer, violates the Ownership Limit may be
void or may be transferred to a trust, for the benefit of one or more qualified
charitable organizations designated by the Company, with the intended transferee
having only a right to share (to the extent of the transferee's original
purchase price for such shares) in proceeds from the trust's sale of such
shares. See "Description of Capital Stock-- Restrictions on Ownership and
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 Ownership and
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, 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. The Board of Directors 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, which,
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
9
<PAGE>
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's existing title insurance policies were originally obtained at
the time the applicable Property was acquired in an amount equal to the initial
purchase price of the Property, and, accordingly, any such policy may be in an
amount less than the current value of the Property. In the event of an
underinsured loss with respect to a Property relating to a title defect, the
Company could lose a portion of its capital invested in, and anticipated profits
from, such Property, which could adversely affect the Company and its ability to
make distributions to stockholders.
POSSIBLE ENVIRONMENTAL LIABILITIES
Under various federal, state and local environmental laws and regulations, a
current or previous owner or operator of real estate, as well as certain other
parties, may be required to investigate and remediate the effects of hazardous
or toxic substances or petroleum product releases on, under, in or from such
property, and may be held liable to a governmental entity or to third parties
for investigation and cleanup costs and certain damages resulting from such
releases. Such laws and regulations typically impose responsibility and
liability without regard to whether such person knew of or caused the releases,
and the liability under such laws and regulations has been interpreted to be
joint and several unless the harm is divisible and there is a reasonable basis
for allocation of responsibility. The cost of investigating and remediating such
contamination may be substantial, and the presence of such contamination, or the
failure to properly remediate it, may adversely affect the owner's ability to
sell or rent such property or to borrow using such property as collateral. In
addition, the owner of a site may be subject to governmental fines and common
law claims by third parties seeking to recover damages and costs resulting from
such contamination.
Certain other federal, state and local laws and regulations govern the
management and disposal of asbestos-containing materials ("ACMs"). Such laws and
regulations may impose liability for the release of ACMs and may provide for
third parties to seek recovery from owners or operators of such property for
personal injury associated with ACMs. In connection with the ownership and
operation of its properties, the Company may be potentially liable for such
costs. ACMs have been detected at certain of the Properties, but are not
expected to result in material environmental costs or liabilities to the
Company.
Federal, state and local laws and regulations also require the removal or
upgrading of certain underground storage tanks and regulate the discharge of
storm water, wastewater and any water pollutants, the emission of air
pollutants, the generation, management and disposal of hazardous or toxic
chemicals, substances or wastes, and workplace health and safety.
The Company's leases generally provide that (i) the tenant is responsible
for all environmental liabilities relating to the tenant's operations, (ii) the
Company is indemnified for such liabilities and (iii) the tenant must comply
with all environmental laws and regulations. Such a contractual arrangement,
however, does not eliminate the Company's statutory liability or preclude claims
against the Company by governmental authorities or persons who are not parties
to such an arrangement. Noncompliance with environmental or health and safety
requirements may also result in the need to cease or alter operations at a
property, which could affect the financial health of a tenant and its ability to
make lease payments. In addition, if there is a violation of such a requirement
in connection with a tenant's operations, it is possible
10
<PAGE>
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.
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
The Properties are 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. To the extent increases in taxes are not passed through to tenants
under leases, such increases may adversely affect the Company and its ability to
make distributions to stockholders.
RELIANCE ON KEY PERSONNEL
The Company depends upon the services of its executive officers. The Company
seeks to utilize the extensive personal and business relationships that members
of management 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
employment agreements with each of its key executive officers, including Messrs.
Marcus, Gold, Richardson, Nelson
11
<PAGE>
and Kreitzer. Such employment agreements provide for terms ending on December
31, 2000 with respect to Mr. Marcus, and on December 31, 1998 with respect to
Messrs. Gold, Richardson, Nelson and Kreitzer, 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. The Company and
Mr. Gold have been negotiating with respect to the possibility that Mr. Gold may
leave full-time employment with the Company and subsequently enter into a
consulting arrangement with the Company. In connection with these negotiations,
Mr. Gold has raised certain issues with respect to the Company's performance
under his employment agreement. As these negotiations are ongoing, there can be
no assurance that the Company and Mr. Gold will resolve these issues or that the
Company and Mr. Gold will enter into any consulting arrangement or any other
arrangement pursuant to which Mr. Gold would continue to provide services to the
Company. In the event that Mr. Gold ceases to be a full-time employee of the
Company, the Company expects that other current executives of the Company will
assume Mr. Gold's responsibilities.
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. 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
Although the Company has adopted a policy to incur debt only if upon such
incurrence the debt to total market capitalization ratio would not exceed 50%,
the Charter does not contain any limitation on the amount of indebtedness the
Company may incur. Accordingly, the Board of Directors could alter or eliminate
this policy. If this policy were changed, the Company could become more highly
leveraged, resulting in an increase in debt service obligations that could
adversely affect the Company's cash flow and, consequently, the amount available
for distribution to stockholders, and could increase the risk of default on the
Company's indebtedness.
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
Future 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. There can be no assurance that the Company will maintain its
current distribution level.
12
<PAGE>
EFFECT OF MARKET INTEREST RATES ON PRICE OF SHARES
One of the factors that may influence the market price of the Common Stock
in public trading markets will be the annual yield on the Common Stock compared
to yields on other financial instruments. Thus, an increase in market interest
rates will result in higher yields on other financial instruments, which may
lead prospective purchasers of the Common Stock to demand a higher annual
distribution rate from the Company. The requirement for a higher distribution
rate may have an adverse effect on the market price of the Common Stock. In
addition, the market for equity securities can be volatile, and the trading
price of the Common Stock could be subject to wide fluctuations in response to
operating results, news announcements, trading volume, general market trends,
governmental regulatory action and changes in tax laws.
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. As of May 31,
1998, 1,980,621 shares of Common Stock were owned in the aggregate by Health
Science Properties Holding Corporation ("Holdings"), the sole stockholder of the
Company prior to the IPO, and the Company's officers, directors and employees.
Certain members of management of the Company, including Messrs. Sudarsky,
Marcus, Gold, Nelson, Kreitzer, Stone and Ciruzzi, have agreed, 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, until May 27, 1999,
without the prior written consent of PaineWebber Incorporated. 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 granted to Holdings the right to make a total of two
written requests for the registration of its shares of Common Stock prior to
June 2, 1999 with respect to the resale of such shares of Common Stock, and has
also granted to Holdings customary "piggyback" registration rights. Holdings'
registration rights are transferrable to its permitted assigns. In addition, the
Company has reserved for issuance to officers, directors and employees of the
Company pursuant to the Company's Amended and Restated 1997 Stock Award and
Incentive Plan (the "1997 Plan") that number of shares of Common Stock equal to
10% of the number of shares of Common Stock outstanding at any time, provided
that in no event may the number of shares available for issuance under the 1997
Plan exceed 3,000,000 shares at any time. As of May 31, 1998, options to
purchase 886,000 shares of Common Stock had been granted under the 1997 Plan, of
which options to purchase 270,000 shares of Common Stock were then exercisable.
The Company has filed a registration statement with respect to the issuance of
shares of Common Stock by the Company pursuant to grants under the 1997 Plan.
Such shares of Common Stock will be available for sale in the public market from
time to time without restriction by persons who are not Affiliates (as defined
in Rule 144 promulgated under the Securities Act) of the Company, and by
Affiliates pursuant to exemptions from the registration requirements or upon
registration.
13
<PAGE>
USE OF PROCEEDS
Unless otherwise indicated in the applicable Prospectus Supplement, the net
proceeds from the sale of the Securities will be used for general corporate
purposes, including, without limitation, the acquisition and development of
additional Life Science Facilities, the repayment of outstanding indebtedness
and for working capital and other general corporate purposes.
RATIO OF EARNINGS TO FIXED CHARGES
The Company's ratio of earnings to combined fixed charges and preferred
stock dividends for the three months ended March 31, 1998, for the years ended
December 31, 1997, 1996, 1995, and for the period October 27, 1994 (inception)
through December 31, 1994, was 2.94x, 0.69x, 1.07x, 1.24x, and 0, respectively.
No preferred stock has been outstanding since completion of the IPO in June,
1997, at which time all of the previously outstanding shares of preferred stock
were redeemed or converted into shares of Common Stock.
For purposes of computing these ratios, earnings have been calculated by
adding fixed charges (excluding capitalized interest and preferred stock
dividend requirements) to income (loss) from operations. Fixed charges consist
of interest costs, whether expensed or capitalized, the write-off of unamortized
loan costs associated with indebtedness retired in connection with the IPO, the
financing costs incurred by the Company to acquire three Life Science Facilities
in connection with the IPO (the "Acquisition LLC Financing Costs") and an amount
necessary to meet the Company's dividend payment requirements on its then
outstanding preferred stock. As a result of the incurrence of the Acquisition
LLC Financing Costs of approximately $7.0 million and the retirement of
indebtedness of approximately $2.3 million, each in connection with the IPO, the
Company's earnings were inadequate to cover fixed charges for the year ended
December 31, 1997 by approximately $5.9 million. In addition, for the period
October 27, 1994 through December 31, 1994, the Company's earnings were
inadequate to cover fixed charges by approximately $0.6 million.
14
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the stock of the Company does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Company's Charter and Bylaws. See "Additional Information."
GENERAL
The Charter provides that the Company may issue up to 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). As of May 31, 1998, 12,554,631 shares of Common
Stock were issued and outstanding and no shares of Preferred Stock were issued
and outstanding. 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 non-assessable. 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 dividends 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 Maryland General Corporation Law (the "MGCL"), a Maryland
corporation generally cannot dissolve, amend its charter, merge, sell all or
substantially all of its assets, engage in a share exchange or engage in similar
transactions outside the ordinary course of business unless approved by the
affirmative vote of stockholders holding at least two thirds of the shares
entitled to vote on the matter unless a lesser percentage (but not less than a
majority of all of the votes entitled to be cast on the matter) is set forth in
the corporation's charter. The Company's Charter provides for approval of such
matters by the affirmative vote of a majority of all of the votes entitled to be
cast thereon.
The Charter authorizes the Board of Directors to reclassify any unissued
shares of Common Stock into other classes or series of classes of stock and to
establish the number of shares in each class or series and to set the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends or other distributions, qualifications or terms or
conditions of redemption for each such class or series.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
15
<PAGE>
PREFERRED STOCK
The Charter authorizes the Board of Directors, without the approval of the
stockholders of the Company, to classify any unissued shares of Preferred Stock
and to reclassify any previously classified but unissued shares of any series,
as authorized by the Board of Directors. Prior to issuance of shares of each
series, the Board of Directors is required by the MGCL and the Charter of the
Company to set, subject to the provisions of the Charter regarding restrictions
on transfer of stock, the terms, preferences, conversion or other rights, voting
powers, restrictions, limitations as to dividends or other distributions,
qualifications and terms or conditions of redemption for each such series. Thus,
the Board of Directors could authorize the issuance of shares of Preferred Stock
with terms and conditions which could have the effect of delaying, deferring or
preventing a transaction or a change in control of the Company that might
involve a premium price for holders of Common Stock or otherwise be in their
best interest. There are no shares of Preferred Stock currently outstanding.
Upon issuance against full payment of the purchase price therefor, shares of
Preferred Stock will be fully paid and nonassessable. The specific terms of a
particular class or series of Preferred Stock to be offered pursuant hereto will
be described in the Prospectus Supplement relating to that class or series,
including a Prospectus Supplement providing that Preferred Stock may be issuable
upon the exercise of Warrants issued by the Company. The description of
Preferred Stock set forth below and the description of the terms of a particular
class or series of Preferred Stock set forth in the applicable Prospectus
Supplement do not purport to be complete and are qualified in their entirety by
reference to the articles supplementary relating to that class or series.
RANK. Unless otherwise specified in the applicable Prospectus Supplement,
the Preferred Stock will, with respect to dividend rights and rights upon
liquidation, dissolution or winding up of the Company, rank (i) senior to all
classes or series of Common Stock of the Company, and to all equity securities
ranking junior to such Preferred Stock with respect to dividend rights and
rights upon liquidation, dissolution or winding up of the Company; (ii) on a
parity with all equity securities issued by the Company, the terms of which
specifically provide that such equity securities rank on a parity with the
Preferred Stock with respect to dividend rights or rights upon liquidation,
dissolution or winding up of the Company; and (iii) junior to all equity
securities issued by the Company, the terms of which specifically provide that
such equity securities rank senior to the Preferred Stock with respect to
dividend rights or rights upon liquidation, dissolution or winding up of the
Company.
CONVERSION RIGHTS. The terms and conditions, if any, upon which any shares
of any class or series of Preferred Stock are convertible into Common Stock will
be set forth in the applicable Prospectus Supplement relating thereto. Such
terms will include the number of shares of Common Stock into which the shares of
Preferred Stock are convertible, the conversion price (or manner of calculation
thereof), the conversion period, provisions as to whether conversion will be at
the option of the holders of such class or series of Preferred Stock or the
Company, the events requiring an adjustment of the conversion price and
provisions affecting conversion in the event of the redemption of such class or
series of Preferred Stock.
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 that may
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
16
<PAGE>
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 OWNERSHIP AND 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 Partners II, L.P. (together with certain of its affiliates,
"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. In addition, the Board of Directors has exempted
certain stockholders from the Ownership Limit. See "Risk Factors--Anti-takeover
Effect of Ownership Limit and Power to Issue Additional Stock."
The Company's Charter further prohibits (a) any person from beneficially or
constructively owning shares of stock of the Company that would result in the
Company being "closely held" under Section 856(h) of the Code and (b) any person
from transferring shares of stock of the Company if such transfer would result
in shares of stock of the Company being owned by fewer than 100 persons. Any
transfer in violation of any of such restrictions is void ab initio. Any person
who acquires or attempts to acquire beneficial or constructive ownership of
shares of stock of the Company in violation of the foregoing restrictions on
transferability and ownership is required to give notice immediately to the
Company and provide the Company with such other information as the Company may
request in order to determine the effect of such transfer on the Company's
status as a REIT. The foregoing restrictions on transferability and ownership
will not apply if the Board of Directors determines that it is no longer in the
best interests of the Company to attempt to qualify, or to continue to qualify,
as a REIT.
If any transfer of shares of stock of the Company or other event occurs
that, if effective, would result in any person beneficially or constructively
owning shares of stock of the Company in excess or in violation of the above
transfer or ownership limitations (a "Prohibited Owner"), then that number of
shares of stock of the Company the beneficial or constructive ownership of which
otherwise would cause such person to violate such limitations (rounded to the
nearest whole share) shall be automatically exchanged for an equal number of
shares of excess stock (the "Excess Stock') and such shares of Excess Stock
shall be automatically transferred to a trust (the "Trust") for the exclusive
benefit of one or more charitable beneficiaries (the "Charitable Beneficiary"),
and the Prohibited Owner shall generally not acquire any rights in such shares.
Such automatic exchange shall be deemed to be effective as of the close of
business on the business
17
<PAGE>
day prior to the date of such violative transfer. Shares of Excess Stock held in
the Trust shall be issued and outstanding shares of stock of the Company. The
Prohibited Owner shall not benefit economically from ownership of any shares of
Excess Stock held in the Trust, shall have no rights to distributions and shall
not possess any rights to vote or other rights attributable to the shares of
Excess Stock held in the Trust. The trustee of the Trust (the "Trustee") shall
have all voting rights and rights to dividends or other distributions with
respect to shares of stock held in the Trust, which rights shall be exercised
for the exclusive benefit of the Charitable Beneficiary. Any dividend or other
distribution paid prior to the discovery by the Company that shares of stock
have been transferred to the Trustee shall be paid by the recipient of such
dividend or distribution to the Company upon demand, or, at the Company's sole
election, shall be offset against any future dividends or distributions payable
to the purported transferee or holder, and any dividend or distribution
authorized but unpaid shall be rescinded as void ab initio with respect to such
shares of stock and promptly thereafter paid over to the Trustee with respect to
such shares of Excess Stock, as trustee of the Trust for the exclusive benefit
of the Charitable Beneficiary. The Prohibited Owner shall have no voting rights
with respect to shares of Excess Stock held in the Trust and, subject to
Maryland law, effective as of the date that such shares of stock have been
transferred to the Trustee, the Trustee shall have the authority (at the
Trustee's sole discretion) (i) to rescind as void any vote cast by a Prohibited
Owner prior to the discovery by the Company that such shares have been
transferred to the Trustee and (ii) to recast such vote in accordance with the
desires of the Trustee acting for the benefit of the Charitable Beneficiary.
However, if the Company has already taken irreversible corporate action, then
the Trustee shall not have the authority to rescind and recast such vote.
Within 180 days after the date of the event that resulted in shares of
Excess Stock of the Company being transferred to the Trust (or as soon as
possible thereafter if the Trustee did not learn of such event within such
period), the Trustee shall sell the shares of stock held in the Trust to a
person, designated by the Trustee, whose ownership of the shares will not
violate the ownership limitations set forth in the Charter. Upon such sale, the
interest of the Charitable Beneficiary in the shares sold shall terminate and
such shares of Excess Stock shall be automatically exchanged for an equal number
of shares of the same class or series of stock that originally were exchanged
for the Excess Stock. The Trustee shall distribute to the Prohibited Owner, as
appropriate (i) the price paid by the Prohibited Owner for the shares, (ii) if
the Prohibited Owner did not give value for the shares in connection with the
event causing the shares to be held in the Trust (e.g., a gift, devise or other
such transaction), the Market Price (as defined in the Charter) of such shares
on the day of the event causing the shares to be held in the Trust, or (iii) if
the exchange for Excess Stock did not arise as a result of a purported transfer,
the Market Price of such shares on the day of the other event causing the shares
to be held in the Trust. If such shares are sold by a Prohibited Owner, then to
the extent that the Prohibited Owner received an amount for such shares that
exceeds the amount that such Prohibited Owner was entitled to receive pursuant
to the aforementioned requirement, such excess shall be paid to the Trustee.
All certificates representing shares of Common Stock and Preferred Stock
will bear a legend referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as required by the
Charter, 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.
18
<PAGE>
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."
WARRANTS
The Company currently has no Warrants outstanding (other than options issued
under the Company's 1997 Plan). The Company may issue Warrants for the purchase
of Preferred Stock or Common Stock. Warrants may be issued independently or
together with any other Securities offered by any Prospectus Supplement and may
be attached to or separate from such Securities. Each series of Warrants will be
issued under a separate warrant agreement (each, a "Warrant Agreement") to be
entered into between the Company and a warrant agent specified in the applicable
Prospectus Supplement (the "Warrant Agent"). The Warrant Agent will act solely
as an agent of the Company in connection with the Warrants of such series and
will not assume any obligation or relationship of agency or trust for or with
any provisions of the Warrants offered hereby. Further terms of the Warrants and
the applicable Warrant Agreements will be set forth in the applicable Prospectus
Supplement.
The applicable Prospectus Supplement will describe the terms of the Warrants
in respect of which this Prospectus is being delivered, including, where
applicable, the following: (1) the title of such Warrants; (2) the aggregate
number of such Warrants; (3) the price or prices at which such Warrants will be
issued; (4) the designation, terms and number of shares of Preferred Stock or
Common Stock purchasable upon exercise of such Warrants; (5) the designation and
terms of the Securities, if any, with which such Warrants are issued and the
number of such Warrants issued with each such Security; (6) the date, if any, on
and after which such Warrants and the related Preferred Stock or Common Stock
will be separately transferable, including any limitations on ownership and
transfer of such Warrants as may be appropriate to preserve the status of the
Company as a REIT; (7) the price at which each share of Preferred Stock or
Common Stock purchasable upon exercise of such Warrants may be purchased; (8)
the date on which the right to exercise such Warrants shall commence and the
date on which such right shall expire; (9) the minimum or maximum amount of such
Warrants which may be exercised at any one time; (10) information with respect
to book-entry procedures, if any; (11) a discussion of certain federal income
tax consequences; and (12) any other terms of such Warrants, including terms,
procedures and limitations relating to the exchange and exercise of such
Warrants.
19
<PAGE>
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. 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.
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 in accordance with the MGCL, the Company has exempted any
business combination between the Company and AEW from the above-described
provisions of the MGCL. Additionally, the Board of Directors has adopted 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 any business combination contemplated by
any agreement entered into, prior to the revocation. As a result of the
foregoing, AEW and any person who becomes an Interested Stockholder 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
business combination 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
20
<PAGE>
are employees of the corporation. "Control Shares" are voting shares of stock
which, if aggregated with all other such shares of stock previously acquired by
the acquiror or in respect of which the acquiror is able to exercise or direct
the exercise of voting power (except solely by virtue of a revocable proxy),
would entitle the acquiror to exercise voting power in electing directors within
one of the following ranges of voting power: (i) one-fifth or more but less than
one-third, (ii) one-third or more but less than a majority, or (iii) a majority
or more of all voting power. Control shares do not include shares the acquiring
person is then entitled to vote as a result of having previously obtained
stockholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
Under Maryland law, a person who has made or proposes to make a control
share acquisition, upon satisfaction of certain conditions (including an
undertaking to pay expenses), may compel the board of directors of the
corporation to call a special meeting of stockholders to be held within 50 days
of demand to consider the voting rights of the shares. If no request for a
meeting is made, the corporation may itself present the question at any meeting
of the stockholders.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to certain conditions and limitations, the corporation may redeem any or
all of the control shares (except those for which voting rights have previously
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a meeting of the stockholders and the
acquiror becomes entitled to vote a majority of the shares entitled to vote, all
other stockholders may exercise appraisal rights. The fair value of the shares
as determined for purposes of such appraisal rights may not be less than the
highest price per share paid by the acquiror in the control share acquisition.
The control share acquisition statute does not apply (i) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (ii) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
The Bylaws contain a provision exempting from the control share acquisition
statute any acquisition by any person of the Company's shares of stock. 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.
21
<PAGE>
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.
22
<PAGE>
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
regarding an investment in the Securities 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 Securities
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 SECURITIES
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 Company has elected to be taxed as a REIT under Sections 856 through 860
of the Code, commencing with its taxable year ended December 31, 1996, and the
Company intends to continue to operate in a manner consistent with such election
and all rules with which a REIT must comply. Skadden, Arps, Slate, Meagher &
Flom LLP has issued an opinion 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 the
opinion, 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 was
based and conditioned upon certain assumptions and representations made by the
Company as to factual matters (including representations of the Company
concerning, among other things, its business and properties, the amount of rents
attributable to personal property and other items regarding the Company's
ability to meet the various requirements for qualification as a REIT). The
opinion is expressed as of its date, and Skadden, Arps, Slate, Meagher & Flom
LLP will have no obligation to advise holders of Securities 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. The REIT provisions of the Code generally allow a
REIT to deduct dividends paid to its stockholders. This deduction for dividends
paid
23
<PAGE>
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. See, however, "Annual
Distribution Requirements" with respect to the Company's ability to elect to
treat as having been distributed to its stockholders certain of its capital
gains upon which the Company has paid taxes, in which event so much of the taxes
as have been paid by the Company with respect to such income would also be
treated as having been distributed to stockholders. 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 (i) net income from the
sale or other disposition of "foreclosure property" which is described in
Section 1221(1) of the Code (generally, property held primarily for sale to
customers in the ordinary course of the Company's trade or business) or (ii)
other nonqualifying income from foreclosure property, the Company will be
subject to tax at the highest corporate rate on such income. Fourth, 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. Fifth, 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. Sixth, 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 (other then capital gain income the Company elects to retain and
pay tax on), and (iii) any undistributed taxable income from prior periods
(other than capital gains from such years which the Company elected to retain
and pay tax on), 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. Seventh, 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. Eighth, 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.
The results described above with respect to the recognition of Built-in Gain
upon the acquisition of assets from a C corporation assume that the Company will
make an election pursuant to IRS Notice 88-19 and that the availability or
nature of such election is not modified as proposed in President Clinton's 1999
Federal Budget Proposal. In addition, the Company could also be subject to tax
in certain situations and on certain transactions not presently contemplated.
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 through the
24
<PAGE>
application of certain attribution rules, by five or fewer individuals (as
defined in the Code to include certain entities); and (7) that meets certain
other tests described below (including with respect to the nature of its income
and assets). The Code provides that conditions (1) through (4) must be met
during the entire taxable year, and that condition (5) must be met during at
least 335 days of a taxable year of 12 months, or during a proportionate part of
a taxable year of less than 12 months.
The Company believes that it has already issued sufficient shares to allow
it to satisfy conditions (5) and (6) above. In order to comply with the share
ownership tests described in conditions (5) and (6) above, the Company's Charter
provides certain restrictions on the transfer of its capital stock to prevent
concentration of stock ownership. These restrictions may not ensure that, in all
cases, the Company will be able to satisfy the share ownership tests set forth
above. If the Company fails to satisfy such requirements, the Company's status
as a REIT will terminate.
To monitor the Company's compliance with such share ownership requirements,
the Company is required to maintain records regarding the actual ownership of
its shares. To do so, the Company must demand written statements each year from
the record holders of certain percentages of its stock in which the record
holders are to disclose the actual owners of the shares (i.e., the persons
required to include in gross income the REIT dividends). A list of those persons
failing or refusing to comply with this demand must be maintained as part of the
Company's records. A stockholder who fails or refuses to comply with the demand
must submit a statement with its tax return disclosing the actual ownership of
the shares and certain other information. See "Description of Capital
Stock--Restrictions on Transfer."
In the case of a REIT that is a partner in a partnership, regulations
provide that the REIT is deemed to own its proportionate share of the
partnership's assets and to earn its proportionate share of the partnership's
income. In addition, the assets and gross income of the partnership retain the
same character in the hands of the REIT for purposes of the gross income and
asset tests applicable to REITs as described below. Thus, the Company's
proportionate share of the assets, liabilities and items of income of any
partnership will be treated as assets, liabilities and items of income of the
Company for purposes of applying the REIT requirements described below. There
can be no assurance, however, that any partnerships will be organized or
operated in a manner that will enable the Company to continue to satisfy the
REIT requirements of the Code.
INCOME TESTS. In order to maintain qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from "prohibited
transactions," i.e., certain sales of property held primarily for sale to
customers in the ordinary course of business) for each taxable year must be
derived directly or indirectly from investments relating to real property or
mortgages on real property (including "rents from real property" and, in certain
circumstances, interest) or from certain types of temporary investments. Second,
at least 95% of the Company's gross income (excluding gross income from
prohibited transactions) for each taxable year must be derived from such real
property investments, and from other dividends, interest and gain from the sale
or disposition of stock or securities (or from any combination of the
foregoing).
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
25
<PAGE>
not assert that the rent attributable to personal property with respect to a
particular lease is greater than 15% of the total rent with respect to such
lease. If the IRS were successful, and the amount of such non-qualifying income,
together with other non-qualifying income, exceeds 5% of the Company's taxable
income, the Company may fail to qualify as a REIT. See "Risk Factors--Adverse
Consequences of Failure to Qualify as a REIT."
In addition, rents received by the Company will not qualify as rents from
real property in satisfying the gross income tests if the Company, or an actual
or constructive owner of 10% or more of the Company, actually or constructively
owns 10% or more of 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. To the extent
that services (other than those customarily furnished or rendered in connection
with the rental of real property) are rendered to the tenants of the property by
an independent contractor, the cost of the services must be borne by the
independent contractor. However, pursuant to recent legislation, the Company (or
its affiliates) may provide non-customary services to tenants of its properties
without disqualifying all of the rent from the property if the payment for such
services does not exceed 1% of the total gross income from the property. For
purposes of this test, the income received from such non-customary services is
deemed to be at least 150% of the direct cost of providing the services. Because
certain properties are managed by third parties, the ability to treat amounts
from such property as "rents from real property" will be dependent on the
actions of others and will not be within the control of the Company. In
addition, the Company generally may not and will not charge rent that is based
in whole or in part on the income or profits of any person (except by reason of
being based on a percentage of the tenant's gross receipts or sales). Finally,
rents derived from tenants that are at least 10% owned, directly or
constructively, by the Company do not qualify as "rents from real property" for
purposes of the gross income requirements. While the Company regularly attempts
to monitor such requirements, no assurance can be given that the Company will
not realize income that does not qualify as "rents from real property," and that
such amounts, when combined with other nonqualifying income, may exceed 5% of
the Company's taxable income and thus disqualify the Company as a REIT.
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 for 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 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.
26
<PAGE>
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's indirect interests in certain of properties are held through
wholly-owned corporate subsidiaries of the Company organized and operated as
"qualified REIT subsidiaries" within the meaning of the Code. Qualified REIT
subsidiaries are not treated as separate entities from their parent REIT for
Federal income tax purposes. Instead, all assets, liabilities and items of
income, deduction and credit of each qualified REIT subsidiary are treated as
assets, liabilities and items of the Company. Each 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 (i) stock of each qualified REIT
subsidiary and its interest in its operating partnership subsidiary do not
violate either the 5% value restriction or the restriction against ownership of
more than 10% of the voting securities of any issuer. Similarly, the ownership
by the Company of any other REIT will not violate these restrictions.
If the Company should fail to satisfy the asset test at the end of a
calendar quarter, such a failure would not cause it to lose its REIT status if
(i) it satisfied the asset tests at the close of the preceding calendar quarter
and (ii) the discrepancy between the value of the Company's assets and the asset
test requirements arose from changes in the market value of its assets and was
not wholly or partly caused by the acquisition of one or more non-qualifying
assets. If the condition described in clause (ii) of the preceding sentence were
not satisfied, the Company still could avoid disqualification by eliminating any
discrepancy within 30 days after the close of the calendar quarter in which it
arose.
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.
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 (or is
treated as having distributed) 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 (other than capital gain income which the Company
elects to retain and pay tax on as provided for below), and (3) any
undistributed taxable income from prior periods (other than capital gains from
such years which the Company elected to retain and pay tax on) the Company would
be subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed. The
27
<PAGE>
Company believes that it has made, and intends to make, timely distributions
sufficient to satisfy this annual distribution requirement. Pursuant to recently
enacted legislation, the Company may elect to retain rather than distribute its
net long-term capital gains. The effect of such an election is that (i) the
Company is required to pay the tax on such gains at regular corporate tax rates,
(ii) its shareholders, while required to include their proportionate share of
the undistributed long-term capital gain in income, will receive a credit or
refund for their share of the tax paid by the Company, and (iii) the basis of a
shareholder's stock would be increased by the amount of the undistributed
long-term capital gains (minus the amount of capital gains tax paid by the
Company) included in income by such shareholder. In addition, if the Company
disposes of any Built-in Gain asset during the applicable Recognition Period,
the Company will be required, pursuant to guidance issued by the Service, to
distribute at least 95% of the Built-In Gain (after tax), if any, recognized on
the disposition of such asset.
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 (on terms that may not be favorable to the
Company) or to pay dividends in the form of taxable distributions of property.
Under certain circumstances, the Company may be able to rectify a failure to
meet the distribution requirement for a year by paying "deficiency dividends" to
stockholders in a later year, which may be included in the Company's deduction
for dividends paid for the earlier year. Thus, the Company may be able to avoid
being taxed on amounts distributed as deficiency dividends; however, the Company
will be required to pay interest based on the amount of any deduction taken for
deficiency dividends.
ABSENCE OF EARNINGS AND PROFITS. The Company, in order to qualify as a
REIT, must not have accumulated earnings and profits attributable to any
non-REIT years. A REIT has until the close of its first taxable year in which it
has non-REIT earnings and profits to distribute any such accumulated earnings
and profits. Unless the "deficiency dividend" procedures described above apply
and the Company complies with those procedures, failure to distribute such
accumulated earnings and profits would result in the disqualification of the
Company as a REIT. The Company believes that the Company had no accumulated
earnings and profits as of December 31, 1995. The determination of accumulated
earnings and profits, however, depends upon a number of factual matters related
to the activities and operations of the Company during its entire corporate
existence and is subject to review and challenge by the IRS. There can be no
assurance that the IRS will not examine the tax returns of the Company for prior
years and propose adjustments to increase its taxable income. In this regard,
the IRS can consider all taxable years of the Company as open for review for
purposes of determining the amount of such earnings and profits.
FAILURE TO QUALIFY. If the Company fails to qualify for taxation as a REIT
in any taxable year, and certain relief provisions do not apply, the Company
will be subject to tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to stockholders in any
year in which the Company fails to qualify will not be deductible by the Company
nor will they be required to be made under the Code. In such event, to the
extent of current and accumulated earnings and profits, all distributions to
stockholders will be taxable as ordinary income, and, subject to certain
limitations of the Code, corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific statutory
provisions, the Company will also be disqualified from taxation as a REIT for
the four taxable years following the year during which qualification was lost.
It is not possible to state whether in all circumstances the Company would be
entitled to such statutory relief. In addition, a recent federal budget proposal
contains language which, if enacted in its present form, would result in the
immediate taxation of all gain inherent in a C corporation's assets upon an
election by the corporation to become a REIT, and thus could effectively
preclude the Company from re-electing REIT status following a termination of its
REIT qualification.
28
<PAGE>
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. Stockholders that are corporations may, however, be required to treat
up to 20% of certain capital gain dividends as ordinary income pursuant to
Section 291(d) of the Code. Individuals are generally subject to differing rates
of tax on various transactions giving rise to long- term capital gains or
losses. In general, the long-term capital gains rate is (i) 28% on capital gain
from the sale or exchange of assets held more than one year but not more than 18
months, (ii) 20% on capital gain from the sale or exchange of assets held for
more than 18 months, and (iii) 25% on capital gain from the sale or exchange of
certain depreciable real estate otherwise eligible for the 20% rate, up to the
amount of depreciation deductions previously taken with respect to such real
estate. Subject to certain limitations concerning the classification of the
Company's long-term capital gains, the Company may designate a capital gain
dividend as a 28% rate distribution, a 25% rate distribution or a 20% rate
distribution.
If the Company elects to retain capital gains rather than distribute them, a
U.S. Stockholder will be deemed to receive a capital gain dividend equal to the
amount of such retained capital gains. Such gains are subject to apportionment
among the three rate groups set forth above. In such a case, a stockholder will
receive certain tax credits and basis adjustments reflecting the deemed
distribution and deemed payment of taxes by the stockholder. To the extent that
the Company makes distributions in excess of its current and accumulated
earnings and profits, such distributions will be treated first as a tax-free
return of capital to each stockholder, reducing the adjusted basis which such
stockholder has in its shares for tax purposes by the amount of such
distribution (but not below zero), with distributions in excess of a
stockholder's adjusted basis in its shares taxable as capital gains (provided
that the shares have been held as a capital asset). Dividends 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 on or before
January 31 of the following calendar year. Stockholders may not include in their
own income tax returns any net operating losses or capital losses of the
Company.
Distributions made by the Company and gain arising from the sale or exchange
by a stockholder of shares will not be treated as passive activity income, and,
as a result, stockholders generally will not be able to apply any "passive
losses" against such income or gain. Dividends from the Company (to the extent
they do not constitute a capital gain dividend or a return of capital) will
generally be treated as investment income for purposes of the investment
interest limitation. Net capital gain from the sale or other disposition of
shares and capital gain dividends will generally not be considered investment
income for purposes of the investment interest limitation.
Upon a sale or other disposition of shares, 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 shares 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-
29
<PAGE>
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 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) an entity which is a
corporation or partnership for United States federal income tax purposes and
which is created or organized un the United States or under the laws of the
United States or any political subdivision thereof (although certain
partnerships so created or organized may be treated, under treasury regulations
not yet published, as not a United States person); (iii) any estate whose income
is includible in gross income for United States federal income tax purposes
regardless of its source; or (iv) a "Domestic Trust." A Domestic Trust is any
trust with respect to which a court within the United States is able to exercise
primary supervision over the administration of such trust, and as to which one
or more United States fiduciaries have the authority to control all substantial
decisions of such trust (although certain trusts classified for United States
federal income tax purposes as a United States person prior to August 20, 1996
may, under treasury regulations not yet published, elect to retain their
classification as a Domestic 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
30
<PAGE>
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 is listed) and (ii)
the selling Non- U.S. Holder held 5% or less of the Company's outstanding stock
at all times during a specified testing period.
If gain on the sale of stock of the Company were subject to taxation under
FIRPTA, the Non-U.S. Holder would be subject to the same treatment as a U.S.
stockholder with respect to such gain (subject to applicable alternative minimum
tax and a special alternative minimum tax in the case of nonresident alien
individuals) and the purchaser of the stock could be required to withhold 10% of
the purchase price and remit such amount to the IRS.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Holder in two cases: (i) if the Non-U.S. Holder's
investment in the stock of the Company is effectively connected with a U.S.
trade or business conducted by such Non-U.S. Holder, the Non-U.S. Holder will be
subject to the same treatment as a U.S. stockholder with respect to such gain,
or (ii) if the Non-U.S. Holder is a nonresident alien individual who was present
in the U.S. for 183 days or more during the taxable year and has a "tax home" in
the United States, the nonresident alien individual will be subject to a 30% tax
on the individual's capital gain.
ESTATE TAX. Stock of the Company owned or treated as owned by an individual
who is not a citizen or resident (as specially defined for U.S. federal estate
tax purposes) of the United States at the time of death will be includible 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 includible in the estate for
U.S. federal estate tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING
U.S. SHAREHOLDERS. The Company will report to the U.S. stockholders and the
IRS the amount of distributions paid during each calendar year and the amount of
tax withheld, if any. Under the backup withholding rules, a U.S. stockholder may
be subject to backup withholding at the rate of 31% with respect to
distributions paid unless such holder (i) is a corporation or comes within
certain other exempt categories and, when required, demonstrates this fact, or
(ii) provides a taxpayer identification number, certifies as to no loss of
exemption from backup withholding, and otherwise complies with applicable
requirements of the backup withholding rules. A U.S. stockholder that does not
provide the Company with his correct taxpayer identification number may also be
subject to penalties imposed by the IRS. Any amount paid as backup withholding
will be creditable against the U.S. stockholder's income tax liability. In
addition, the Company may be required to withhold a portion of capital gain
distributions to any U.S. stockholders who fail to
31
<PAGE>
certify their non-foreign status to the Company. See "Federal Income Tax
Considerations--Taxation of Foreign Shareholders."
NON-U.S. HOLDERS. 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, such 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 generally
will 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.
The IRS has issued final Treasury Regulations regarding the backup
withholding rules as applied to Non-U.S. Holders. Those final Treasury
Regulations alter the current system of backup withholding compliance and will
be effective for payments made after December 31, 1999. Prospective purchasers
should consult their tax advisors regarding the application of the final
Treasury Regulations and the potential effect on their ownership of shares.
OTHER TAX CONSEQUENCES
POSSIBLE LEGISLATIVE OR OTHER ACTIONS AFFECTING TAX
CONSEQUENCES. Prospective investors should recognize that the present federal
income tax treatment of an investment in the Company may be modified by
legislative, judicial or administrative action at any time, and that any such
action may affect investments and commitments previously made. The rules dealing
with federal income taxation are constantly under review by persons involved in
the legislative process and by the IRS and the U.S. Treasury Department,
resulting in revisions of regulations and revised interpretations of established
concepts as well as statutory changes. For example, a recent federal budget
proposal contains language which, if enacted in its present form, would result
in the immediate taxation of all gain inherent in a C corporation's assets upon
an election by the corporation to become a REIT, and thus could effectively
preclude the Company from re-electing REIT status following a termination of its
REIT qualification. Revisions in federal tax laws and interpretations thereof
could adversely affect the tax consequences of an investment in the Company.
STATE AND LOCAL TAXES. The Company and its stockholders may be subject to
state or local taxation in various state or local jurisdictions, including those
in which it or they transact business or reside. The state and local tax
treatment of the Company and its stockholders may not conform to the federal
income tax consequences discussed above. Consequently, prospective stockholders
should consult their tax advisors regarding the effect of state and local tax
laws on an investment in the Company.
32
<PAGE>
PLAN OF DISTRIBUTION
The Company may sell the Securities to one or more underwriters for public
offering and sale by them or may sell the Securities to investors directly or
through agents, which agents may be affiliated with the Company. Any such
underwriter or agent involved in the offer and sale of the Securities will be
named in the applicable Prospectus Supplement.
Sales of Securities offered pursuant to any applicable Prospectus Supplement
may be effected from time to time in one or more transactions at a fixed price
or prices that may be changed, at prices related to the prevailing market prices
at the time of sale, or at negotiated prices. The Company also may, from time to
time, authorize underwriters acting as the Company's agents to offer and sell
the Securities upon the terms and conditions as set forth in the applicable
Prospectus Supplement. In connection with the sale of Securities, underwriters
may be deemed to have received compensation from the Company in the form of
underwriting discounts or commissions and may also receive commissions from
purchasers of Securities for whom they may act as agent. Underwriters may sell
Securities to or through dealers, and such dealers may receive compensation in
the form of discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agent.
Any underwriting compensation paid by the Company to underwriters or agents
in connection with the offering of Securities, and any discounts, concessions or
commissions allowed by underwriters to participating dealers, will be set forth
in the applicable Prospectus Supplement. Underwriters, dealers and agents
participating in the distribution of the Securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of the Securities may be deemed to be underwriting
discounts and commissions under the Securities Act. Underwriters, dealers and
agents may be entitled, under agreements entered into with the Company, to
indemnification against and contribution toward certain civil liabilities,
including liabilities under the Securities Act. Any such indemnification
agreements will be described in the applicable Prospectus Supplement.
Unless otherwise specified in the applicable Prospectus Supplement, each
series of Securities will be a new issue with no established trading market,
other than the Common Stock which is listed on the New York Stock Exchange. Any
shares of Common Stock sold pursuant to a Prospectus Supplement will be listed
on such exchange, subject to official notice of issuance. The Company may elect
to list any other series of Preferred Stock and any Depository Shares or
Warrants on any exchange, but is not obligated to do so. It is possible that one
or more underwriters may make a market in a series of Securities, but will not
be obligated to do so and may discontinue any market making at any time without
notice. Therefore, no assurance can be given as to the liquidity of the trading
market for the Securities.
If so indicated in the applicable Prospectus Supplement, the Company may
authorize dealers acting as the Company's agents to solicit offers by certain
institutions to purchase Securities from the Company at the public offering
price set forth in such Prospectus Supplement pursuant to Delayed Delivery
Contracts ("Contracts") providing for payment and delivery on the date or dates
stated in such Prospectus Supplement. Each Contract will be for an amount not
less than, and the aggregate principal amount of Securities sold pursuant to
Contracts shall be not less nor more than, the respective amounts stated in the
applicable Prospectus Supplement. Institutions with whom Contracts, when
authorized, may be made include commercial and savings banks, insurance
companies, pension funds, investment companies, educational and charitable
institutions, and other institutions but will in all cases be subject to the
approval of the Company. Contracts will not be subject to any conditions except
(i) the purchase by an institution of the Securities covered by its Contracts
shall not at the time of delivery be prohibited under the laws of any
jurisdiction in the United States to which such institution is subject, and (ii)
if the Securities are being sold to underwriters, the Company shall have sold to
such underwriters the total principal amount of the Securities less the
principal amount thereof covered by Contracts.
Certain of the underwriters and their affiliates may be customers of, engage
in transactions with and perform services for, the Company in the ordinary
course of business.
33
<PAGE>
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Skadden, Arps,
Slate, Meagher & Flom LLP, Los Angeles, California. The validity of the
Securities will be passed on for the Company by Ballard Spahr Andrews &
Ingersoll, LLP, Baltimore, Maryland.
EXPERTS
The consolidated balance sheets of the Company as of December 31, 1997 and
1996 and the related consolidated statements of operations, stockholders' equity
and cash flows for the years ended December 31, 1997, 1996 and 1995, and the
consolidated financial statement schedule III, rental properties and accumulated
depreciation appearing in the Company's Annual Report on Form 10-K dated March
30, 1998; the statements of revenue and certain expenses for the year ended
December 31, 1996, of 940 Clopper Road, 1500 East Gude Drive and 3/3-1/2 Taft
Court, and 1401 Research Blvd. appearing in the Company's Form 8- K/A dated
November 14, 1997; the statement of revenue and certain expenses for the year
ended December 31, 1996 of 1201 Harbor Bay Parkway appearing in the Company's
Form 8-K dated and filed on May 27, 1998; the statements of revenue and certain
expenses for the year ended December 31, 1997, of Buildings 79 and 96
Charlestown Navy Yard, 215 College Road, 8000/9000/10000 Virginia Manor Road,
100 and 800/801 Capitola Drive, 10150 Old Columbia Road, 819-849 Mitten Road and
863 Mitten Road/866 Malcolm Road, 5100/5110 Campus Drive, 19 Firstfield Road,
280 Pond Street, and 170 Williams Drive appearing in the Company's Form 8-K
dated and filed on May 27, 1998, all incorporated by reference in this
Registration Statement, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon incorporated by reference in
this Registration Statement and are incorporated herein by reference in reliance
upon such reports given upon the authority of such firm as experts in accounting
and auditing.
34
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION INCORPORATED BY REFERENCE OR
CONTAINED IN THIS PROSPECTUS OR ANY SUPPLEMENT. WE HAVE NOT AUTHORIZED ANYONE
ELSE TO PROVIDE YOU WITH DIFFERENT OR ADDITIONAL INFORMATION. WE ARE NOT MAKING
AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT PERMITTED. YOU
SHOULD NOT ASSUME THAT THE INFORMATION IN THIS PROSPECTUS OR ANY SUPPLEMENT IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary.................. S-2
The Company.................................... S-6
Recent Developments............................ S-9
Our Properties................................. S-10
Use of Proceeds................................ S-16
Capitalization................................. S-17
Selected Financial Data........................ S-18
Ratios of Earnings to Combined Fixed Charges
and Preferred Stock Dividends................ S-20
Description of Series A Preferred Stock........ S-21
Certain Federal Income Tax Considerations...... S-27
Underwriting................................... S-29
Legal Matters.................................. S-30
PROSPECTUS
Available Information.......................... iii
Incorporation of Certain Documents by
Reference.................................... iii
The Company.................................... 1
Risk Factors................................... 2
Use of Proceeds................................ 14
Ratio of Earnings to Fixed Charges............. 14
Description of Capital Stock................... 15
Warrants....................................... 19
Certain Provisions of Maryland Law and of the
Company's Charter and Bylaws................. 20
Federal Income Tax Considerations.............. 23
Plan of Distribution........................... 33
Legal Matters.................................. 34
Experts........................................ 34
</TABLE>
[LOGO]
1,000,000 SHARES
ALEXANDRIA REAL ESTATE
EQUITIES, INC.
% SERIES A CUMULATIVE
REDEEMABLE PREFERRED STOCK
--------------------------------
PROSPECTUS SUPPLEMENT
--------------------------------
PAINEWEBBER INCORPORATED
BANC OF AMERICA SECURITIES LLC
BANCBOSTON ROBERTSON STEPHENS
EVEREN SECURITIES, INC.
--------------
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
