P R O S P E C T U S S U P P L E M E N T
(To Prospectus Dated June 30, 1998)
500,000 Shares
Alexandria Real Estate Equities, Inc.
Common Stock
$36.444 per share
---------------
This prospectus supplement and the accompanying prospectus relate to the
sale of 500,000 shares of our common stock, par value $.01 per share, to
institutional investors at a purchase price of $36.444 per share, for an
aggregate purchase price of $18,222,000. Our net proceeds, after deducting a
placement fee of $627,400 ($1.2548 per share) and estimated offering expenses
aggregating $400,000 ($0.80 per share), will be approximately $17,194,600
($34.3892 per share). McDonald Investments Inc. has acted as our placement agent
with respect to the shares of common stock.
Our common stock is listed on the New York Stock Exchange under the symbol
"ARE". The last reported sale price of our common stock on April 3, 2001 was
$37.50 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 2 OF THE ACCOMPANYING PROSPECTUS TO
READ ABOUT FACTORS YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
It is expected that delivery of the shares of our common stock will be
effected on April 6, 2001 through the facilities of The Depository Trust
Company.
------------------------
Prospectus Supplement dated April 3, 2001.
NO DEALER, SALESPERSON OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO REPRESENT ANYTHING NOT CONTAINED IN THIS PROSPECTUS. YOU MUST NOT RELY ON
ANY UNAUTHORIZED INFORMATION OR REPRESENTATIONS. THIS PROSPECTUS IS AN OFFER TO
SELL ONLY THE SHARES OFFERED HEREBY, AND ONLY UNDER CIRCUMSTANCES AND IN
JURISDICTIONS WHERE IT IS LAWFUL TO DO SO. THE INFORMATION CONTAINED IN THIS
PROSPECTUS IS CURRENT ONLY AS OF ITS DATE.
------------------------
TABLE OF CONTENTS
Prospectus Supplement
PAGE
--------
Forward-Looking Statements.................................. S-3
Use of Proceeds............................................. S-4
Taxation.................................................... S-4
Plan of Distribution........................................ S-5
Legal Matters............................................... S-5
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
S-2
FORWARD-LOOKING STATEMENTS
This prospectus supplement and the accompanying prospectus include
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You can
identify some of the forward-looking statements by the use of forward-looking
words, such as "believes," "expects," "may," "will," "should," "seeks,"
"approximately," "intends," "plans," "estimates" or "anticipates," or the
negative of those words or other similar words. Forward-looking statements
involve inherent risks and uncertainties regarding events, conditions and
financial trends that may affect our future plan of operation, business
strategy, results of operations and financial position. A number of important
factors could cause actual results to differ materially from those in the
forward-looking statements, including our lack of industry diversification our
dependence on tenants in the life science industry, our rapid growth, our lack
of geographic diversification and certain other considerations related to real
estate financing, acquisition and renovation. For a discussion of these and
other factors that could cause actual results to differ from those contemplated
in the forward-looking statements, please see the discussion under "Risk
Factors" contained in the accompanying prospectus and in other information
contained in our publicly available SEC filings. We do not take any
responsibility to update any of these factors or to announce publicly any
revisions to forward-looking statements, whether as a result of new information,
future events or otherwise.
S-3
THE FOLLOWING MAY NOT CONTAIN ALL THE INFORMATION THAT MAY BE IMPORTANT TO
YOU. YOU SHOULD READ THIS ENTIRE PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS, AS WELL AS THE DOCUMENTS INCORPORATED BY REFERENCE IN THE
ACCOMPANYING PROSPECTUS, INCLUDING OUR FINANCIAL STATEMENTS AND THE NOTES TO THE
FINANCIAL STATEMENTS, BEFORE YOU CONSIDER BUYING SHARES OF OUR COMMON STOCK.
USE OF PROCEEDS
We intend to use the net proceeds of this offering for general corporate
purposes, including acquisition, development and redevelopment of additional
life science facilities, repayment of outstanding indebtedness and for working
capital and other general corporate purposes.
TAXATION
YOU SHOULD READ THIS SECTION TOGETHER WITH THE MORE COMPLETE DISCUSSION OF
UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS PRESENTED IN THE ACCOMPANYING
PROSPECTUS.
RECENT REIT LEGISLATION
Legislation was enacted on December 17, 1999 that made several changes to
the REIT provisions of the Code effective January 1, 2001. Under these
legislative changes, except in the case of a "taxable REIT subsidiary" as
described below, a REIT's ownership of securities in another corporation that is
not a REIT is subject to the additional percentage limitation that the value of
such securities must not represent more than 10% of the value of all of the
outstanding securities of such corporation (unless the REIT owns all of the
corporation). Certain debt securities issued by individuals, a partnership in
which the REIT owns at least a 20% profits interest and nonconvertible "straight
debt" securities are excluded from such additional percentage limitation.
Also effective January 1, 2001, a REIT may own up to 100% of the securities
of a "taxable REIT subsidiary" subject to the limitations that the securities of
all "taxable REIT subsidiaries" owned by the REIT do not represent an amount in
excess of 20% of the value of the assets of the REIT, and the value of all
securities owned by the REIT (including the securities of all taxable REIT
subsidiaries) do not represent an amount in excess of 25% of the value of the
assets of the REIT. A "taxable REIT subsidiary" is any corporation (other than
another REIT and corporations involved in certain lodging, healthcare and
franchising activities) owned by a REIT with respect to which the REIT and such
corporation jointly elect that such corporation shall be treated as a taxable
REIT subsidiary. The amount of deductions for interest paid by a "taxable REIT
subsidiary" to its affiliated REIT is subject to limitations. In addition, a
100% excise tax will be imposed to the extent that certain transactions between
a "taxable REIT subsidiary" and its affiliated REIT or the tenants of that REIT
are not conducted on an arm's length basis. Under the legislative changes, an
existing corporation may convert tax-free into a "taxable REIT subsidiary" prior
to January 1, 2004. As of the date hereof, Alexandria Real Estate Equities, Inc.
has not filed an election to treat any entity as a "taxable REIT subsidiary",
but may do so in the future if the circumstances warrant.
The legislative changes also modify the income distribution requirement so
that, beginning in 2001, a REIT is required to distribute 90% (rather than 95%)
of its "REIT taxable income" and 90% (rather than 95%) of its net income (after
tax), if any, from foreclosure property. The rules regarding the calculation of
rent attributable to personal property were also modified so that, beginning in
2001, a REIT is required to perform the calculation using the fair market values
of its property rather than its adjusted tax basis in that property.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
The IRS has revised its regulations regarding the withholding and
information reporting rules discussed under "Federal Income Tax
Considerations--Information Reporting and Backup
S-4
Withholding" in the accompanying prospectus. In general, these regulations do
not alter the substantive withholding and information reporting requirements but
unify certification procedures and forms and clarify and modify reliance
standards. These regulations generally are effective for payments made after
December 31, 2000, subject to certain transition rules. A foreign shareholder
should consult its own tax advisor regarding the effect of these regulations.
TAXATION OF TAXABLE DOMESTIC STOCKHOLDERS
As of the date of this prospectus supplement, individuals are no longer
subject to differing rates of tax on various transactions giving rise to
long-term capital gains or losses. Rather, the current capital gains rate for
individuals with respect to gains recognized from the sale of assets held for
more than one year is 20%.
PLAN OF DISTRIBUTION
We will sell the shares of our common stock offered hereby directly to
institutional investors. McDonald Investments Inc. has acted as our placement
agent in connection with the sale of common stock and will receive a fee of
$627,400. We have agreed to indemnify the placement agent against certain
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments that the placement agent may be required to make in
respect thereof.
LEGAL MATTERS
Certain legal matters will be passed upon for us by Mayer, Brown & Platt,
Los Angeles, California, and certain legal matters with respect to Maryland law,
including the validity of the shares of our common stock offered hereby, will be
passed upon for us by Ballard Spahr Andrews & Ingersoll, LLP, Baltimore,
Maryland. Mayer, Brown & Platt will rely on Ballard Spahr Andrews & Ingersoll,
LLP as to certain matters of Maryland law.
S-5
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
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
PAGE
--------
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
ii
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
500,000 Shares
Alexandria Real Estate Equities, Inc.
Common Stock
------------------
PROSPECTUS SUPPLEMENT
---------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------