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PROXY STATEMENT/PROSPECTUS
MISSION WEST PROPERTIES
MISSION WEST PROPERTIES, INC.
102,197,299 Shares of Common Stock
This proxy statement/prospectus (the "Proxy Statement/Prospectus") is the
proxy statement of Mission West Properties, a California corporation (the
"Company"). This proxy statement is being furnished to holders of common stock,
no par value (the "Common Stock"), of the Company in connection with the
solicitation of proxies by the board of directors of the Company for use at a
special meeting of shareholders to be held at 4:00 p.m., on December 28, 1998,
at the Company's corporate offices, 10050 Bandley Drive, Cupertino, California
95014, including any adjournments ("Special Meeting").
In December 1996, shareholders approved the sale of substantially all of
the Company's assets and the distribution of the net proceeds on a pro rata
basis. Subsequent to the sale of the assets, a group of investors led by Carl E.
Berg approached the Company with a proposal to recapitalize the Company and,
rather than dissolve the Company, continue the business of the Company under the
control of Mr. Berg with a portfolio of new investment properties. Following the
initial investment in the Company by the Berg-led investment group and the final
distribution of the proceeds of the asset sales to shareholders, the American
Stock Exchange ("AMEX") halted trading of the Company's Common Stock.
Thereafter, Mr. Berg proposed that the Company undertake several
transactions intended to provide the Company with additional capital and control
of substantial real estate holdings of Mr. Berg, members of his immediate family
and certain entities which they control (the "Berg Group"). In July 1998, the
Company acquired the sole general partner interest in each of four limited
partnerships holding properties previously controlled by the Berg Group and
certain other persons. The board of directors believes that the proposals and
related transactions are in the best interests of the Company, and has approved
the transactions described below. At the Special Meeting, shareholders will be
asked to consider and vote on the following proposals:
1. Pursuant to rules of the AMEX, the shareholders of the Company will be
asked to approve the sale and issuance by the Company at $4.50 per share of
6,495,058 shares of Common Stock to accredited investors pursuant to binding
subscription agreements, which are subject to such shareholder approval (the
"Private Placement").
2. The Company will apply the proceeds from the Private Placement, existing
cash and other working capital sources to fund the payment of $33.9 million owed
under 7.25% interest demand notes ("Demand Notes") issued by the Company for the
acquisition of the sole general partner interests representing approximately
12.11% of the total partnership interests in each of four existing limited
partnerships (collectively the "Operating Partnerships") owning approximately
4.34 million square feet of leased buildings used for offices, research and
development, light manufacturing, and assembly ("R&D Property") under the terms
of an agreement among the Company, the Berg Group and certain other persons (the
"Acquisition Agreement"). The Acquisition Agreement also provides for the
Company to acquire, through the Operating Partnerships, approximately 1.02
million rentable square feet of R&D Property to be constructed and leased prior
to acquisition by the Operating Partnerships (the "Pending Development
Projects") from certain members of the Berg Group, and an option to acquire
future building developments on land currently held by certain members of the
Berg Group. Collectively, these transactions (the "Berg Acquisition") allow the
Company to acquire control of approximately 5.4 million rentable square feet of
R&D Property previously controlled principally by the Berg Group. To enable the
Company to begin reporting financial data for the Operating Partnerships with
the Company's consolidated financial statements as of July 1, 1998, the Company,
the Berg Group and the other parties to the Acquisition Agreement executed an
amendment providing for the Company's acquisition of its general partner
interest in each of the Operating Partnerships, and the contribution of certain
properties to one of the Operating Partnerships, effective as of that date (the
"Partnership Closing"). At the Special Meeting, the Company's shareholders will
be asked to ratify the Partnership Closing and to approve the other transactions
comprising the Berg Acquisition and related matters.
3. Pursuant to AMEX rules, the Company also seeks shareholder approval of
the issuance of up to 93,398,705 shares of Common Stock upon the future
redemption or exchange of 100,825,478 units of limited partnership interest in
the Operating Partnerships ("L.P. Units"), including 33,919,072 L.P. Units
issuable upon the Operating Partnerships' acquisition of the Pending Development
Projects from members of the Berg Group pursuant to the terms of an Exchange
Rights Agreement among the company, the Operating Partnerships and the Limited
Partners (the "Exchange Rights Agreement").
4. Shareholders are asked also to approve a proposal to reincorporate the
Company under the laws of the State of Maryland through a merger (the
"Reincorporation Merger") with and into Mission West Properties, Inc., a
Maryland corporation ("Mission West-Maryland"), a newly formed wholly owned
subsidiary of the Company. Mission West-Maryland will be the surviving
corporation with articles of incorporation (the "Charter") and bylaws (the
"Maryland Bylaws") which differ materially from those of the Company. Mission
West-Maryland was formed for the purpose of redomiciling the Company as a
Maryland corporation and acquiring, recapitalizing and continuing the business
and operations of the Company. In the Reincorporation Merger, shares of the
Company's Common Stock outstanding at the effective time of the merger will be
converted into shares of common stock, $0.001 par value per share of Mission
West-Maryland ("New Common Stock") on a one-for-one basis (the "Exchange
Ratio"). Unexercised employee and consultant stock options to purchase 605,000
shares of Common Stock will be exchanged for new stock options to purchase the
same number of shares of New Common Stock at the Exchange Ratio. Following the
Reincorporation Merger, Mission West-Maryland expects to qualify as a Real
Estate Investment Trust ("REIT") for federal income tax purposes and conduct its
business on a self-administered, self-managed, and fully integrated basis going
forward. The Charter and Maryland Bylaws will include provisions related to the
preservation of Mission West-Maryland's status as a REIT. As used in this Proxy
Statement/Prospectus the term "Company" may refer to both the Company and
Mission West-Maryland unless the discussion concerns the Reincorporation Merger,
the Charter, or the Mission West-Maryland bylaws.
If the shareholders approve the Private Placement, the acquisition of the
Pending Development Projects and other future Berg Developments and the Exchange
Rights Agreement, and authorize all shares of Common Stock to be issued pursuant
to any of these transactions, an additional closing will occur on the last
business day of the month in which the Special Meeting is held (referred to in
this Proxy Statement/Prospectus as "the final closing date for the Berg
Acquisition").
This Proxy Statement/Prospectus is also the prospectus of the Company's
successor, Mission West-Maryland, to be delivered to the shareholders of the
Company in connection with the Reincorporation Merger and the exchange with
existing equity holders of (i) 1,698,536 shares of Common Stock for shares of
New Common Stock, (ii) the exchange of outstanding employee stock options issued
by the Company for identical employee stock options of Mission West-Maryland,
and (iii) the reservation of 93,398,705 shares of New Common Stock for issuance
upon any future exchange of L.P. Units as a result of the Reincorporation
Merger. This Proxy Statement/Prospectus is also the prospectus of Mission
West-Maryland for the reoffer and resale of up to 6,495,058 shares of New Common
Stock to be delivered in exchange for shares of Common Stock acquired in the
Private Placement by the purchasers of such shares.
The Company has filed a Registration Statement on Form S-4 with the
Securities and Exchange Commission pursuant to the Securities Act of 1933, as
amended with respect securities to be issued in connection with the
Reincorporation Merger.
The Common Stock is listed on the AMEX and the Pacific Exchange, Inc.
("PCX") under the symbol "MSW." The Common Stock was last traded on the AMEX on
October 17, 1997, prior to a 1-for-30 reverse stock split in November 1997.
Since then the Company has sold or offered shares of Common Stock for sale at a
price of $4.50 per share. See "INFORMATION WITH RESPECT TO THE COMPANY -- Price
Range of the Shares and Distribution History" and "BACKGROUND OF THE UPREIT
TRANSACTIONS -- Valuation of Interests." Based on that price and assuming
approval of all proposals and the consummation of the contemplated transactions,
the total market value of the Company and the Operating Partnerships would be
approximately $305 million. The price of $4.50 per share has not been
established by public trading of the Common Stock and upon the resumption of
trading the per share price of the Common Stock and the total market value of
the Company and the Operating Partnerships could be materially different.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF MATERIAL
RISKS THAT SHOULD BE CONSIDERED IN EVALUATING THE PROPOSALS.
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE 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 November 23, 1998
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FORWARD-LOOKING INFORMATION...............................................................................................1
AVAILABLE INFORMATION.....................................................................................................1
INFORMATION INCORPORATED BY REFERENCE.....................................................................................2
SUMMARY OF THE UPREIT TRANSACTIONS AND PURPOSE OF THE SPECIAL MEETING....................................................3
Background.......................................................................................................3
Parties to and Terms of the Berg Acquisition.....................................................................3
Private Placement/Recapitalization...............................................................................3
Reincorporation Merger...........................................................................................4
Structure of the UPREIT Transactions.............................................................................4
Reasons for the Berg Acquisition.................................................................................4
Description of the Properties....................................................................................4
Business Objectives and Strategy.................................................................................5
Operations of the Company after the Berg Acquisition, Reincorporation Merger and the REIT Election...............5
Distributions....................................................................................................5
Reasons for the Reincorporation Merger...........................................................................5
Conditions to Consummation.......................................................................................5
Board of Directors; Management...................................................................................5
Conflicts of Interest............................................................................................5
Required Approval................................................................................................6
Dissenters' Rights...............................................................................................6
Accounting Treatment.............................................................................................6
Tax Consequences of the UPREIT Transactions......................................................................6
New Common Stock.................................................................................................6
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA................................................................................7
SUMMARY SELECTED FINANCIAL DATA...........................................................................................8
RISK FACTORS..............................................................................................................9
No Independent Appraisal; No Arm's Length Negotiations with Affiliates...........................................9
Dependence on Mr. Berg...........................................................................................9
Control of the Company and the Operating Partnerships by the Berg Group..........................................9
Potential Conflicts of Interest with the Berg Group.............................................................10
Changes in Policies Without Shareholder Approval................................................................12
Anti-Takeover Provisions........................................................................................12
Real Estate Investment Considerations...........................................................................12
Federal Income Tax Risks........................................................................................15
Uncertainties Regarding Distributions to Shareholders...........................................................16
Potential Property Tax Reassessments............................................................................17
Market for Common Stock.........................................................................................17
The Company's Obligation to Purchase Tendered L.P. Units........................................................17
Shares Eligible for Future Sale.................................................................................17
THE SPECIAL MEETING......................................................................................................19
Parties to the Berg Acquisition.................................................................................19
Parties to the Reincorporation Merger...........................................................................19
General Information Concerning Solicitation and Voting..........................................................19
Record Date, Voting Rights and Outstanding Shares...............................................................20
Revocability of Proxies.........................................................................................20
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Solicitation....................................................................................................20
Votes Required..................................................................................................20
Consequences if the Proposals Are Not Approved..................................................................20
Dissenters' Rights..............................................................................................21
Recommendation of the Board of Directors........................................................................21
BACKGROUND OF THE UPREIT TRANSACTIONS....................................................................................22
Introduction....................................................................................................22
Background......................................................................................................22
Reasons for the Private Placement and the Berg Acquisition......................................................24
Summary of the Transactions.....................................................................................24
Consequences of the Berg Acquisition and the Private Placement..................................................25
Benefits to the Berg Group......................................................................................26
Valuation of Interests..........................................................................................26
Pro Forma Capitalization........................................................................................27
Included Information............................................................................................28
Price Range of the Common Stock and Distribution History........................................................28
THE COMPANY'S PRO FORMA DATA.............................................................................................29
THE BUSINESS OF BERG & BERG..............................................................................................30
History Of Berg & Berg..........................................................................................30
Regional Economic Profile.......................................................................................31
The Silicon Valley R&D Property Market..........................................................................32
The Silicon Valley..............................................................................................32
Unemployment Rate...............................................................................................33
Silicon Valley R&D Property Market..............................................................................33
Berg & Berg Business Strategy...................................................................................34
BERG PROPERTIES SUMMARY SELECTED FINANCIAL DATA..........................................................................36
SELECTED COMBINED HISTORICAL FINANCIAL DATA FOR THE ACQUIRED PROPERTIES..................................................37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION FOR THE PROPERTIES..................38
Overview........................................................................................................38
Results of Operations...........................................................................................39
Pro Forma Liquidity and Capital Resources.......................................................................42
Historical Cash Flows...........................................................................................43
Inflation.......................................................................................................44
DESCRIPTION OF THE PROPERTIES............................................................................................45
General.........................................................................................................45
Overview of the Berg Properties.................................................................................45
Average Occupancy and Rental Rates..............................................................................45
Leasing Activity................................................................................................46
Lease Expirations...............................................................................................46
Significant Properties and Tenants..............................................................................47
Other Major Tenants.............................................................................................49
The Berg Properties.............................................................................................50
Standard Berg & Berg Lease Terms................................................................................53
Overview of the Acquired Properties.............................................................................53
Average Occupancy and Rental Rates..............................................................................53
Lease Expirations...............................................................................................54
Acquired Properties.............................................................................................55
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The Pending Development Projects................................................................................55
Land Holding and Development Arrangements.......................................................................57
Mortgage Debt and Credit Lines..................................................................................59
Property Tax Information........................................................................................60
Environmental Matters...........................................................................................60
Legal Proceedings...............................................................................................61
Employees.......................................................................................................61
FUTURE OPERATIONS OF THE COMPANY.........................................................................................61
Overview........................................................................................................61
Operating and Growth Strategy...................................................................................61
Operations and Management.......................................................................................62
Acquisitions....................................................................................................62
Line of Credit..................................................................................................63
Mortgage Indebtedness Outstanding after Berg Acquisition........................................................63
Overview........................................................................................................64
Distribution Table..............................................................................................64
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES..............................................................................67
Investment Policies.............................................................................................67
Financing Policies..............................................................................................67
Disposition Policy..............................................................................................69
Conflict of Interest Policies...................................................................................69
Policies with Respect to Other Activities.......................................................................69
THE ACQUISITION AGREEMENT................................................................................................71
General.........................................................................................................71
The Closing.....................................................................................................71
Representations and Warranties..................................................................................71
Conditions to Consummation of the Contemplated Transactions.....................................................71
Covenants.......................................................................................................72
Conflicts of Interest Provisions................................................................................72
Termination.....................................................................................................73
Survival and Indemnification Matters............................................................................73
OPERATING PARTNERSHIP AGREEMENT..........................................................................................74
Management......................................................................................................74
Transferability of L.P. Units...................................................................................74
Additional Capital Contributions and Loans......................................................................75
Exchange Rights, Put Rights and Registration Rights.............................................................75
Other Matters...................................................................................................76
Term 76
MANAGEMENT OF THE COMPANY................................................................................................77
Directors and Executive Officers................................................................................77
Number, Terms and Election of Directors.........................................................................78
Contractual Arrangements........................................................................................78
Committees of the Board of Directors............................................................................78
Compensation of Directors.......................................................................................78
Executive Compensation..........................................................................................79
Summary Compensation Table......................................................................................79
Benefit Plans...................................................................................................80
1997 Stock Option Plan..........................................................................................80
Compensation Committee Interlocks and Insider Participation.....................................................80
Limitation of Liability and Indemnification.....................................................................80
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CERTAIN TRANSACTIONS.....................................................................................................82
Private Placement Transactions--1997............................................................................82
Private Placement Transactions--1998............................................................................82
UPREIT Transactions.............................................................................................83
Purchase by Michael Anderson....................................................................................83
PRINCIPAL SHAREHOLDERS...................................................................................................84
THE REINCORPORATION MERGER...............................................................................................86
Introduction....................................................................................................86
Exchange of Securities..........................................................................................86
Approval and Effectiveness of Merger............................................................................86
Possible Disadvantages..........................................................................................87
No Change in the Name, Business, Management, Location of Principal Office or Employee Plans of the
Company....................................................................................................87
Comparison Of Rights of Shareholders of the Company and Stockholders of Mission West-Maryland...................87
DESCRIPTION OF MISSION WEST - MARYLAND STOCK............................................................................100
General........................................................................................................100
New Common Stock...............................................................................................100
New Classes or Series of Stock.................................................................................100
Power to Issue Additional Shares of New Common Stock and New Preferred Stock...................................101
Restrictions on Transfer.......................................................................................101
Reinvestment and Share Purchase Plan...........................................................................103
CERTAIN PROVISIONS OF MARYLAND LAW AND OF MISSION WEST-MARYLAND'S CHARTER AND BYLAWS...................................104
The Board of Directors.........................................................................................104
Removal of Directors...........................................................................................104
Business Combinations..........................................................................................104
Control Share Acquisitions.....................................................................................104
Board Quorum and Special Voting Requirements...................................................................105
Amendment to the Charter.......................................................................................105
Dissolution of the Company.....................................................................................105
Advance Notice of Director Nominations and New Business........................................................106
Conflict of Interest...........................................................................................106
Anti-takeover Effect of Certain Provisions of Maryland Law and of the Charter and bylaws.......................106
ACCOUNTING TREATMENT OF THE BERG ACQUISITION AND THE REINCORPORATION MERGER.............................................107
FEDERAL INCOME TAX CONSIDERATIONS.......................................................................................107
Taxation of the Company........................................................................................107
Taxation of United States Shareholders.........................................................................112
Taxation of Tax-Exempt Shareholders............................................................................113
Taxation of Foreign Shareholders...............................................................................114
Information Reporting Requirements and Backup Withholding Tax..................................................115
Tax Aspects of the Operating Partnerships......................................................................116
Federal Income Tax Consequences of the Reincorporation Merger..................................................118
Other Tax Consequences.........................................................................................118
ERISA CONSIDERATIONS....................................................................................................119
General........................................................................................................119
Plan Assets Regulations........................................................................................119
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General ERISA Requirements.....................................................................................119
Prohibited Transactions........................................................................................120
Reporting and Disclosure.......................................................................................120
THE SELLING SHAREHOLDERS................................................................................................121
PLAN OF DISTRIBUTION....................................................................................................123
LEGAL MATTERS...........................................................................................................124
EXPERTS.................................................................................................................124
OTHER MATTERS...........................................................................................................124
SHAREHOLDER PROPOSALS...................................................................................................124
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FORWARD-LOOKING INFORMATION
Statements contained in or delivered in connection with this Proxy
Statement/Prospectus may constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements involve a number of risks and uncertainties. Set forth under "RISK
FACTORS," below, and elsewhere in this Proxy Statement/Prospectus are cautionary
statements that accompany those forward-looking statements. Those cautionary
statements identify important factors that could cause actual results to differ
materially from those in the forward-looking statements and from historical
trends. Such factors include general economic conditions, stock market
fluctuations, changes in yields of fixed income securities, risks associated
with the ownership of industrial and office buildings and with real estate,
generally, conditions in the local real estate market where the properties are
located, and the substantial control rights of the Berg Group with respect to
the Company.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and files all required
reports, proxy statements and other information with the Securities and Exchange
Commission ("Commission"). Reports, proxy statements and other information filed
by the Company may be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the Commission's regional offices located at 7 World Trade
Center, 13th floor, New York, New York 10048, and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661; and copies of such material
may be obtained from the Public Reference Section of the Commission, Washington,
D.C. 20549, at prescribed rates. In addition, the Commission maintains a web
site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
on EDGAR. The Commission's web site address is http:\\www.sec.gov. These
documents may also be inspected at the office of the American Stock Exchange, 86
Trinity Place, New York, New York, and the Pacific Exchange, Inc., 115 Sansome
Street, 8th Floor, San Francisco, California.
This Proxy Statement/Prospectus is part of a registration statement on Form
S-4 (together with all amendments and exhibits, the "Registration Statement")
filed by Mission West-Maryland with the Commission pursuant to the Securities
Act of 1933, as amended (the "Securities Act"). This Proxy Statement/Prospectus
does not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules of the
Commission. For further information, reference is made to the Registration
Statement.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THE OFFER
CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES,
NOR DOES IT CONSTITUTE AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY
JURISDICTION TO WHOM IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION.
THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT
THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
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INFORMATION INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated by reference in this Proxy Statement/Prospectus:
1. The Company's Annual Report on Form 10-K for the fiscal year and
one-month transition period ended December 31, 1997.
2. All other reports filed pursuant to Section 13(a) or 15(d) of the
Exchange Act since December 31, 1997, including all such reports filed
after the date of the initial Registration Statement and prior to the
effectiveness of the Registration Statement.
3. The description of the Company's Common Stock contained in the
Company's registration statement on Form S-8 filed with the Commission
on May 17, 1991 (Registration #33-40664).
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 Proxy Statement/Prospectus to the extent that a statement
contained herein, or in any subsequently filed document which also is or is
deemed to be incorporated by reference herein, modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this Proxy
Statement/Prospectus.
Documents (except for certain exhibits to such documents, unless exhibits
are specifically incorporated by reference herein) incorporated by reference in
this Proxy Statement/Prospectus are available on oral or written request from
the Secretary of the Company at: Mission West Properties, 10050 Bandley Drive,
Cupertino, California 95014; telephone: (408) 725-0700.
This Proxy Statement/Prospectus is accompanied by a form of proxy for use
at the Special Meeting, a copy of the Company's latest Annual Report on Form
10-K, and a copy of Part I of the Company's latest Quarterly Report on Form-10Q.
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SUMMARY OF THE UPREIT TRANSACTIONS AND PURPOSE OF THE
SPECIAL MEETING
THE FOLLOWING BRIEFLY SUMMARIZES THE PROPOSALS TO BE VOTED UPON.
BACKGROUND
Shareholders previously approved the sale of substantially all of the
assets of the Company and the distribution of the net proceeds of sale on a pro
rata basis. Subsequent to the distribution, Carl E. Berg approached the Company
with a proposal to recapitalize the Company, and, rather than dissolve the
Company, continue the business of the Company under the control of the Berg
Group with a portfolio of new investment properties. After the purchase of
shares representing a controlling interest in the Company by certain members of
the Berg Group and other accredited investors and the final distribution to all
previous shareholders in October 1997, the AMEX halted trading of the Company's
Common Stock because the Company no longer met AMEX minimum listing
requirements.
PARTIES TO AND TERMS OF THE BERG ACQUISITION
In May 1998, the Company, the Berg Group and certain other persons entered
into an agreement (the "Acquisition Agreement") providing, among other things,
for the Company's acquisition of interests as the sole general partner in the
four existing limited partnerships (referred to collectively as the "Operating
Partnerships"), which hold approximately 4.34 million rentable square feet of
office/research and development/manufacturing space ("R&D Property") located in
the portion of the San Francisco Bay Area known as "Silicon Valley," as well as
rights to acquire additional R&D Properties, and related transactions, as
described below. In July 1998, the Company and all parties to the Acquisition
Agreement signed an Amendment to Acquisition Agreement under which they agreed
to consummate the Company's acquisition of the general partner interests in the
Operating Partnerships (the "Partnership Closing") effective for financial and
income tax accounting and reporting purposes as of July 1, 1998 to enable the
Company to include results of operations, assets and other financial data for
the Operating Partnerships with the Company's consolidated financial statements
for the second half of 1998. The Company effected the Partnership Closing by
issuing to the Operating Partnerships separate Demand Notes bearing interest at
7.25% per annum equal to the purchase price of the Company's general partner
interest in each such partnership. Each Demand Note is payable no later than
July 1, 2000. The total principal amount of the Demand Notes issued in
connection with the Partnership Closing was $35.2 million, of which $33.9
million is presently outstanding.
As a consequence of the Partnership Closing, the Company now controls the
Operating Partnerships, which are governed by the Delaware Revised Uniform
Limited Partnership Act ("DRULPA"). The individual Operating Partnerships are
named Mission West Properties, L.P. ("MWP"), Mission West Properties, L.P. I
("MWP I"), Mission West Properties, L.P. II ("MWP II") and Mission West
Properties, L.P. III ("MWP III"). MWP was organized under the DRULPA in 1995;
MWP I and MWP II were general partnerships formed more than 15 years ago which
converted to limited partnerships under the DRULPA in December 1997; and MWP III
was formed in 1983 as a California limited partnership and converted to a
Delaware limited partnership under the DRULPA at the Partnership Closing. No new
entity has been created in connection with the Partnership Closing, and the
Company does not intend to create a new entity to conclude any aspect of the
Berg Acquisition. All limited partnership interests in the Operating
Partnerships were converted into 59,479,633 units of limited partnership
interest ("L.P. Units") in connection with the Partnership Closing. In the
aggregate those L.P. Units represent ownership of approximately 87.89% of the
Operating Partnerships. Under the Acquisition Agreement, all L.P. Units in the
Operating Partnerships may be exchanged for shares of Common Stock of the
Company pursuant to the terms of an Exchange Rights Agreement (the "Exchange
Rights Agreement"), which is subject to approval by the Company's shareholders.
Prior to the Partnership Closing, MWP, MWP I and MWP II were controlled by
Carl E. Berg and his brother Clyde J. Berg, who have been engaged in developing,
owning, operating, acquiring and selling Silicon Valley R&D Properties under the
name "Berg & Berg Developers" ("Berg & Berg") for nearly 30 years. Another
Silicon Valley developer, John T. Kontrabecki ("Kontrabecki") controlled MWP III
as its sole general partner prior to the Partnership Closing, and Carl and Clyde
Berg owned 50% of that partnership as limited partners. Prior to the Partnership
Closing, certain members of the Berg Group held R&D Properties outside of MWP,
MWP I and MWP II, and Mr. Kontrabecki was a general partner in two other
partnerships (in which members of the Berg Group held substantial limited
partner interests). To consolidate title to those R&D Properties in a single
entity, the parties agreed pursuant to the Acquisition Agreement to contribute
their respective R&D Properties to MWP in exchange for L.P. Units. Under the
Amendment to Acquisition Agreement, all the proposed transfers to MWP occurred
at the Partnership Closing, except for the conveyance of certain R&D Properties
representing approximately 0.144 million rentable square feet (the "Fremont
Properties"), which was consummated on September 17, 1998. All of the
individuals and entities transferring R&D Properties to MWP pursuant to their
obligations under the Acquisition Agreement are accredited investors within the
meaning of the federal securities laws, and all such entities are privately
owned.
Of the total R&D Property rentable square footage owned and operated by the
Operating Partnerships following the Partnership Closing, properties
representing approximately 3.78 million rentable square feet were owned or
controlled by members of the Berg Group and constitute the historical properties
managed by Berg & Berg (the "Berg Properties"). Other R&D Properties, consisting
of approximately 0.56 million rentable square feet, (the "Acquired Properties")
represent the Fremont Properties, and certain R&D Properties (the "Kontrabecki
Properties") held by the three limited partnerships (the "Kontrabecki
Partnerships") previously controlled by John Kontrabecki.
Under the terms of the Acquisition Agreement, the Operating Partnerships
and the Company also agreed, subject to shareholder approval, to enter into a
Pending Projects Acquisition Agreement (the "Pending Projects Acquisition
Agreement"), which permits the acquisition by the Operating Partnerships of
approximately one million additional rentable square feet upon the completion
and leasing of a number of the Pending Development Projects owned by certain
members of the Berg Group and under current development by Berg & Berg
Enterprises, Inc. ("BBE"). The owners of the Pending Development Projects may
obtain cash, or at their option, L.P. Units. A total of 33,919,072 L.P. Units
may be issued in exchange for the Pending Development Projects. Subject to
shareholder approval of the Pending Projects Acquisition Agreement, those units
may be exchanged for 33,919,072 shares of Common Stock pursuant to the Exchange
Rights Agreement. On August 6, 1998, Berg & Berg and Microsoft Corporation
("Microsoft") signed a lease with respect to an approximate 515,000 square foot
property to be constructed by Microsoft on L'Avenida in Mountain View,
California, one of the sites comprising the Pending Development Projects.
Microsoft controls the construction of this facility, which is scheduled to be
completed in phases between March and May 1999. The Company will acquire the R&D
Properties to be built on the L'Avenida site when and if construction has been
completed and the buildings have been fully leased. Upon any acquisition by the
Company of the Pending Development Projects, their owners may elect to receive
cash or L.P. Units from the Operating Partnerships. The Acquisition Agreement
also gives the Company an option to acquire, through the Operating Partnerships,
any future R&D Property developments on approximately 162 net acres of Silicon
Valley land owned by certain members of the Berg Group (the "Berg Land
Holdings") under the terms of the Berg Land Holdings Option Agreement (the
"Option Agreement"). The owners of the Berg Land Holdings may elect to receive
cash or L.P. Units. The Company will not acquire any properties directly. The
Company will enter into the Pending Projections Acquisition Agreement and the
Option Agreement only following shareholder approval at the Special Meeting. See
"Background of the UPREIT transactions," and "THE ACQUISITION AGREEMENT."
PRIVATE PLACEMENT
The Company also has entered into binding agreements, subject to certain
conditions, to sell 6,495,058 shares of Common Stock at $4.50 per share to
accredited investors in the Private Placement, following shareholder approval
required by the AMEX. Of the total number of shares to be sold in the Private
Placement, 5,800,000 shares were offered in a placement managed by Ingalls &
Snyder LLC ("Ingalls & Snyder"). The
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<PAGE>
purchasers of such shares have agreed to pay a placement fee of $0.05 per share
to Ingalls & Snyder, for which the company has no liability.
CAPITALIZATION
Taking into account the shares issued in the Private Placement and L.P.
Units to be outstanding immediately after the closing of the Berg Acquisition,
the total number of L.P. Units and shares of Common Stock entitled to receive
distributions of cash flow from the Operating Partnerships directly, or
indirectly through dividends paid by the Company, (collectively the "Outstanding
Shares") will be 67,673,227. See "BACKGROUND OF THE UPREIT TRANSACTIONS --
Summary of the Transactions" and "-- Pro Forma Capitalization."
REINCORPORATION MERGER
Pursuant to a merger agreement ("Merger Agreement") between the Company and
its wholly owned subsidiary, Mission West-Maryland, the Company will merge into
Mission West-Maryland following shareholder approval and the consummation of the
Berg Acquisition and the Private Placement. Following these transactions
(collectively the "UPREIT Transactions"), Mission West-Maryland intends to elect
to become a REIT. Upon approval of the Reincorporation Merger and the Merger
Agreement by the shareholders, Mission West-Maryland, as the surviving
corporation, will be governed by the Charter and the Maryland Bylaws. See "THE
REINCORPORATION MERGER."
STRUCTURE OF THE UPREIT TRANSACTIONS
The Limited Partners' ownership of interest prior to the UPREIT Transactions and
their respective L.P. Unit allocations are as follows:
[GRAPHIC]
The UPREIT Transactions are illustrated as follows:
[GRAPHIC]
REASONS FOR THE BERG ACQUISITION
The board of directors of the Company believes that the Berg Acquisition
and the Private Placement will provide the Company with substantial working
capital, a strong real property portfolio and an effective real estate
operation. The board of directors further believes that these transactions
provide an opportunity for the Company to significantly enhance shareholder
value. See "BACKGROUND OF THE UPREIT TRANSACTIONS--Reasons for the Berg
Acquisition and Private Placement."
DESCRIPTION OF THE PROPERTIES
All of the Berg Properties are located in Silicon Valley. All together the
Operating Partnerships will own 69 R&D Properties located on 61 separate sites.
As of September 30, 1998, the Berg Properties were 100% occupied, with a total
of 73 tenants principally engaged in the technology business, and the Acquired
Properties were 100% occupied by a total of 10 tenants. On September 23, 1998,
the Company obtained $130 million of new secured debt financing from The
Prudential Insurance Company of America ("Prudential") (the "Prudential Secured
Loan") at a rate of 6.56% per annum, which is secured by 18 Properties
consisting of 24 buildings and six of the Acquired Properties. The proceeds of
the Prudential Secured Loan were used to repay existing debt secured by the Berg
Properties and the Acquired Properties, incurred prior to the Partnership
Closing, including debt incurred to fund substantially all of a distribution of
approximately $138.7 million to members of the Berg Group. Effective September
30, 1998, the Company and Operating Partnerships assumed a $100 million line of
credit with Wells Fargo Bank N.A. (the "Wells Fargo Line") provided to the Berg
Group members and secured by certain of the Berg Properties. Approximately $39
million of debt was outstanding as of September 30, 1998 under the Wells Fargo
Line, which is secured by 14 properties. See "BACKGROUND OF THE UPREIT
TRANSACTIONS--Consequences of the Berg Acquisition and the Private Placement"
and "DESCRIPTION OF THE PROPERTIES--Mortgage Debt and Credit Lines."
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<PAGE>
BUSINESS OBJECTIVES AND STRATEGY
After completing the UPREIT Transactions, the Company will operate as a
self-managed, self-administered and fully integrated REIT. The Company will
operate the Berg Properties and may acquire additional R&D Properties from the
Berg Group under the terms of the Pending Projects Acquisition Agreement and the
"Option Agreement." The Company may also seek to acquire other R&D properties
and other real estate assets in Silicon Valley and parts of the West Coast. See
"FUTURE OPERATIONS."
OPERATIONS OF THE COMPANY AFTER THE BERG ACQUISITION, REINCORPORATION MERGER AND
THE REIT ELECTION
Following the completion of the UPREIT Transactions, the Company will
occupy the same offices as BBE in a building owned by Berg & Berg. BBE is a
member of the Berg Group and currently provides real estate development services
for the Berg Group and their affiliates, as well as the Berg Properties. Several
current employees of BBE, including Carl E. Berg, will be employees of the
Company. The Company will lease space from Berg & Berg and will reimburse BBE
for a portion of the office overhead. See "FUTURE OPERATIONS--Operations and
Management."
DISTRIBUTIONS
As a REIT, the Company will pay distributions based upon an estimate of
cash available for distribution to shareholders ("Cash Available for
Distribution") with total annual dividends expected to equal at least 95% of the
Company's annual taxable income in accordance with applicable REIT requirements.
The Company expects to pay a quarterly distribution of approximately $0.085 per
share of Common Stock to shareholders of record prior to the ex-dividend date
with respect to the fourth quarter of 1998. See "DISTRIBUTION POLICY."
REASONS FOR THE REINCORPORATION MERGER
The board of directors believes that the Maryland General Corporation Law
("MGCL") contains provisions conducive to the operation of a REIT. Many REITs
have incorporated in the State of Maryland, and the board of directors believes
that this has provided state regulatory authorities and courts in Maryland with
substantial experience in the administration and governance of REITs. See
"REINCORPORATION MERGER."
CONDITIONS TO CONSUMMATION
The Berg Acquisition (other than the Partnership Closing) and the Private
Placement are subject to shareholder approval and such customary closing
conditions as the accuracy of representations and warranties, the absence of
material adverse changes, and the absence of litigation to enjoin the
consummation of any of the UPREIT Transactions. The Reincorporation Merger is
subject to similar closing conditions and the effectiveness of the Registration
Statement. See "THE ACQUISITION AGREEMENT," and "THE REINCORPORATION MERGER."
BOARD OF DIRECTORS; MANAGEMENT
In general, the board of directors and management of the Company will
remain the same after the Reincorporation Merger. The Company expects to add one
or two additional directors before the end of 1998. See "MANAGEMENT OF THE
COMPANY UPON CONSUMMATION OF THE BERG ACQUISITION".
CONFLICTS OF INTEREST
The UPREIT Transactions entail a number of conflicts of interest. The
Operating Partnerships and the Company currently are controlled by Carl E. Berg
and other Berg Group members. After the UPREIT Transactions, the Berg Group
members will have two representatives on the board of directors (the "Berg Group
Board Representatives"), at least one of whom will be required to approve
certain material transactions involving the Company (the "Required Directors
Approval"). In addition, Berg Group members, in the aggregate, will own, or have
the right under certain circumstances to acquire, shares of Common Stock
representing 82.73% of the total number of the Outstanding Shares (assuming the
exchange of all outstanding L.P. Units for Common Stock), subject to an
aggregate ownership limit of 20% (the "Berg Group Ownership Limit"), as provided
in the Aquisition Agreement. Consent of the Limited Partners holding a majority
of outstanding L.P. Units (the "L.P. Unit Majority"), principally the Berg Group
members, will be required for certain major transactions involving the Operating
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<PAGE>
Partnerships. Furthermore, the Company and the Operating Partnerships will, or
may, acquire certain additional R&D Properties from members of the Berg Group
under the terms of the Pending Projects Acquisition Agreement and the Option
Agreement. Although Mr. Berg will be the Company's President and Chief Executive
Officer, he will remain involved in many other real estate and venture capital
activities. Transactions between the Company or the Operating Partnerships and
members of the Berg Group, or their affiliates, will be subject to approval by a
committee of directors who are independent of the Berg Group (the "Independent
Directors Committee"). Additionally, Mr. Berg and certain other members of the
Berg Group could cause the Operating Partnerships to call the notes issued by
the Company at the Partnership Closing if they have not been repaid prior to the
second anniversary of their issuance. See "RISK FACTORS--Control of the Company
and the Operating Partnerships by the Berg Group and Mr. Berg--Potential
Conflicts of Interest with the Berg Group" and "DELAY IN CLOSING PRIVATE
PLACEMENT."
REQUIRED APPROVAL
Only holders of Common Stock of record on November 16, 1998 will be
entitled to vote at the Special Meeting. The affirmative vote of the holders of
a majority of the outstanding shares of record is needed to approve the
Reincorporation Merger. The remaining Proposals may be ratified or approved by
the affirmative vote of a majority of the shares represented and voting at the
Special Meeting. Broker non-votes and abstentions will be counted as votes
against the Proposals.
DISSENTERS' RIGHTS
Statutory dissenters' rights under the California General Corporation Law
(the "CGCL") are not available with respect to any of the Proposals to be voted
upon at the Special Meeting.
ACCOUNTING TREATMENT
The UPREIT Transactions have been accounted for as a purchase. Accordingly,
the costs of the acquisition were allocated to the assets and liabilities
purchased based upon their respective fair values at the effective date of the
acquisition. See "ACCOUNTING TREATMENT OF THE BERG ACQUISITION AND THE
REINCORPORATION MERGER."
TAX CONSEQUENCES OF THE UPREIT TRANSACTIONS
The Berg Acquisition and the Private Placement will not result in the
recognition of gain or loss by the Company or its shareholders for federal
income tax purposes.
The Reincorporation Merger is expected to be a tax-free reincorporation
transaction within the meaning of Section 368(a)(1)(F) of the Internal Revenue
Code of 1986, as amended (the "Code"). Accordingly, it will not result in
taxable income or result in the recognition of gain or loss by the Company, its
shareholders, or the holders of options to purchase Common Stock.
Once the Company elects REIT status following the Reincorporation Merger,
the Company generally may avoid income tax with respect to its income, and the
shareholders will be subject to income taxation with respect to certain
distributions from the Company. Graham & James LLP will provide a federal income
tax opinion to the Company in connection with the Reincorporation Merger to the
effect, that for the Company's taxable year ending December 31, 1998, it will be
organized and able to operate in conformity with the REIT qualification
requirements under the Code. See "FEDERAL INCOME TAX CONSIDERATIONS--Taxation of
the Company."
NEW COMMON STOCK
In connection with the Reincorporation Merger, the Company is exchanging
previously issued and outstanding securities of the Company for new securities
of Mission West-Maryland. The New Common Stock exchanged for Old Common Stock in
connection with the Reincorporation Merger will continue to be listed on the
AMEX. Shares of New Common Stock acquired by affiliates of the Company will be
subject to manner of sale, volume restrictions, and other requirements (aside
from holding period) imposed by Rule 144 and Rule 145(d) promulgated by the
Commission. See "DESCRIPTION OF MISSION WEST-MARYLAND STOCK--Restrictions on
Transfer." Shares of New Common Stock acquired by the purchasers in exchange for
their shares of Common Stock acquired in the Private Placement may be sold
pursuant to Rule 144 after one year or pursuant to the Registration Statement,
as amended, at the option of the Company, to permit continued resales by the
holders thereof, subject to certain limitations. See "RISK FACTORS--Shares
Eligible for Future Sale" and "THE SELLING SHAREHOLDERS." The Company intends to
file with the Commission a registration statement on Form S-8 to register shares
of Common Stock which have been reserved for issuance for future option grants
under the Company's employee benefit plans and resales of any Common Stock
issued under such employee benefit plans.
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<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
Set forth below are summary unaudited pro forma combined financial
information and other data for the Company as of and for the periods indicated.
The historical balance sheet of the Company at September 30, 1998 reflects the
consummation of the Berg Acquisition. The pro forma balance sheet, and property
and other data have been prepared on the assumption that the Reincorporation
Merger had occurred at September 30, 1998 for balance sheet data and property
and other data. The pro forma operating data further assumes that the Berg
Acquisition and Reincorporation Merger had occurred as of January 1, 1997. This
data should be read in conjunction with the Selected Financial Data and the
historical and pro forma financial statements included elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
------------------ -------------------
(in thousands)
<S> <C> <C>
OPERATING DATA:
Revenue:
Rent $39,558 $48,992
Tenant reimbursements 6,357 6,769
Other income 178 359
================== ===================
Total revenue 46,093 56,120
------------------ -------------------
Expenses:
Operating expenses 3,403 4,036
Real estate taxes 3,696 4,475
General and administrative 2,100 2,750
Interest (related parties) 1,022 1,362
Interest 12,201 16,693
Depreciation and amortization 7,936 10,842
------------------ -------------------
Total Expenses 30,358 40,158
------------------ -------------------
Income before minority interest 15,735 15,962
Minority Interest 15,325 16,021
------------------ -------------------
Income before gain on sale of real estate 410 (59)
Gain on sale of real estate - 4,736
------------------ -------------------
Net income 410 4,677
================== ===================
Basic and Diluted Earnings Per Share (1) $0.24 $2.75
================== ===================
Weighted average number of common shares outstanding 1,698,536 1,698,536
================== ===================
PROPERTY AND OTHER DATA:
Total properties, end of period 69 69
Total square feet, end of period 4,340,569 4,340,569
Average monthly rental revenue per square foot(2) $1.01 $0.87
Average occupancy - stabilized 100% 97%
FUNDS FROM OPERATIONS: (3) $23,671 $26,804
BALANCE SHEET DATA:
Real estate assets, net of accumulated depreciation $506,120
Total assets 543,477
Debt 232,535
Debt (related parties) 18,780
Total liabilities 262,793
Minority Interest 273,740
Shareholders' equity 6,944
</TABLE>
- -------------------
(1) Per share calculations do not consider the dilutive effect of (i) 6,495,058
shares of Common Stock issuable in the Private Placement; (ii) 59,479,633
L.P. Units that may become exchangeable for shares of Common Stock; and
(iii) 605,000 shares of Common Stock issuable in connection with options
outstanding under the 1997 Stock Option Plan. For purposes of the pro forma
per share calculation, these securities if converted or exercised, would
have no effect on per share calculations.
(2) Average monthly rental revenue per square foot has been determined by
taking the base rent for the period, divided by the number of months in the
period, and then divided by the total square feet of occupied space.
(3) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), FFO represents net income (loss) before minority interest of
unitholders (computed in accordance with GAAP), excluding gains (or losses)
from debt restructuring and sales of property, plus real estate related
depreciation and amortization (excluding amortization of deferred financing
costs and depreciation of non-real estate assets) and after adjustments for
unconsolidated partnerships and joint ventures. Management considers FFO an
appropriate measure of performance of an equity REIT because, along with
cash flows from operating activities, financing activities and investing
activities, it provides investors with an understanding of the Company's
ability to incur and service debt and make capital expenditures. FFO should
not be considered as an alternative for net income as a measure of
profitability nor is it comparable to cash flows provided by operating
activities determined in accordance with GAAP. FFO is not comparable to
similarly entitled items reported by other REITs that do not define them
exactly as the Company defines FFO. See "Distribution Policy."
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<PAGE>
SUMMARY SELECTED FINANCIAL DATA
Set forth below are Summary Combined Financial Data for the Berg Properties
as of and for the periods indicated on an historical basis. This data should be
read in conjunction with the Selected Financial Data and the historical
financial statements included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
-------------------------- -------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------ ------------ ----------- ---------- ---------- ---------- ----------
($ in thousands)
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rent $21,962 $18,848 $40,163 $28,934 $23,064 $25,186 $25,620
Tenant reimbursements 4,038 3,094 6,519 3,902 4,193 3,190 3,486
------------ ------------ ----------- ---------- ---------- ---------- ----------
Total revenue 26,000 21,942 46,682 32,836 27,257 28,376 29,106
------------ ------------ ----------- ---------- ---------- ---------- ----------
Expenses:
Operating expenses 2,088 2,150 $ 3,741 $ 1,906 $ 2,032 $ 1,355 1,129
Real estate taxes 2,126 2,006 4,229 3,750 3,595 2,716 3,116
Management fee (related parties) 645 498 1,050 827 654 739 994
Interest (related parties) 61 135 248 293 357 329 45
Interest 3,044 3,338 5,919 6,090 6,190 8,222 9,054
Depreciation and amortization 3,862 3,351 7,717 6,739 6,323 6,851 7,156
------------ ------------ ----------- ---------- ---------- ---------- ----------
11,826 11,478 22,904 19,605 19,151 20,212 21,494
------------ ------------ ----------- ---------- ---------- ---------- ----------
Income before gain on sale of
real estate and extraordinary
item 14,174 10,464 23,778 13,231 8,106 8,164 7,612
Gain on sale - - - - 20,779 - -
------------ ------------ ----------- ---------- ---------- ---------- ----------
Income before extraordinary item 14,174 10,464 23,778 13,231 28,885 8,164 7,612
Extraordinary item - - - 610 3,206 - 1,766
------------ ------------ ----------- ---------- ---------- ---------- ----------
------------ ------------ ----------- ---------- ---------- ---------- ----------
Net income $14,174 $10,464 $23,778 $13,841 $32,091 $ 8,164 $ 9,378
------------ ------------ ----------- ---------- ---------- ---------- ----------
------------ ------------ ----------- ---------- ---------- ---------- ----------
PROPERTY AND OTHER DATA:
Total properties, end of period 58 56 58 53 50 41 40
Total square feet, end of period 3,779 3,593 3,779 3,392 3,195 2,856 2,796
Average monthly rental revenue
per square foot(1) $ 0.95 $ 0.85 $ 0.86 $0.78 $0.71 $ 0.96 $0.84
Occupancy at end of period 100% 96.9% 97.7% 91.9% 87.4% 80.3% 89.6%
FUNDS FROM OPERATIONS(2)(3) $18,036 $13,815 $31,495 $19,970 $14,429 $15,015 $14,768
Cash flow from operations $17,356 $13,709 $29,909 $20,248 $16,392 $16,518 $18,480
Cash flow from investing 690 (9,831) (17,251) (29,275) (6,353) (5,003) (3,248)
Cash flow from financing (23,765) 5 (8,432) 9,433 (10,013) (12,093) (13,599)
June 30, December 31,
-------------------------- -------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------ ------------ ----------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA: ($ in thousands)
(Unaudited) (Unaudited)
Real estate assets, net of
accumulated depreciation $95,600 $97,190 $100,15 $90,710 $72,319 $62,450 $61,610
Total assets 104,280 109,525 113,950 97,651 73,730 59,957 64,516
Debt 37,868 78,353 76,507 73,416 69,543 79,594 100,126
Debt - related parties 156,632 2,252 1,975 2,546 3,051 2,889 1,433
Total liabilities 200,238 86,874 84,299 80,826 76,199 83,720 104,117
Partners' (deficit)/ equity (95,958) 22,651 29,651 16,825 (2,469) (23,763) (39,601)
</TABLE>
- -------------------
(1) Average monthly rental revenue per square foot has been determined by
taking the base rent for the period, divided by the number of months in the
period, and then divided by the total square feet of occupied space.
(2) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), FFO represents net income (loss) before minority interest of
unitholders (computed in accordance with GAAP), excluding gains (or losses)
from debt restructuring and sales of property, plus real estate related
depreciation and amortization (excluding amortization of deferred financing
costs and depreciation of non-real estate assets) and after adjustments for
unconsolidated partnerships and joint ventures. Management considers FFO an
appropriate measure of performance of an equity REIT because, along with
cash flows from operating activities, financing activities and investing
activities, it provides investors with an understanding of the Company's
ability to incur and service debt and make capital expenditures. FFO should
not be considered as an alternative for net income as a measure of
profitability nor is it comparable to cash flows provided by operating
activities determined in accordance with GAAP. FFO is not comparable to
similarly entitled items reported by other REITs that do not define them
exactly as the Company defines FFO. See "Distribution Policy."
(3) Non-cash adjustments to FFO were as follows: in all periods, depreciation
and amortization; in 1996, 1995 and 1993, gains on extinguishment of debt;
and in 1995, gain on sale of property.
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<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS IN
EVALUATING THE PROPOSALS. THIS PROXY STATEMENT/PROSPECTUS CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, BELIEFS AND
INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROXY STATEMENT/PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROXY STATEMENT/PROSPECTUS. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS PROXY
STATEMENT/PROSPECTUS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE THOSE DISCUSSED BELOW AND IN OTHER PLACES INCLUDING "THE BUSINESS OF
BERG & BERG," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION FOR THE PROPERTIES," AND "DISTRIBUTION POLICY."
NO INDEPENDENT APPRAISAL; NO ARM'S LENGTH NEGOTIATIONS WITH AFFILIATES
There has been no independent valuation of the Company, nor have there been
any discussions or negotiations between the Berg Group and independent
representatives of the Company concerning obtaining an independent valuation. In
October 1997, the board of directors of the Company determined that future
transactions involving equity securities of the Company would be priced at $4.50
per share, or the equivalent thereof, until the Company had acquired assets and
generated revenues and FFO. That price was not determined by independent
valuation and no third party appraisals of the Properties were obtained for
purposes of the Private Placement, or the Berg Acquisition, nor has a fairness
opinion been obtained. The valuation of the Company implied by the Company's
purchase of the 12.11% general partner interests in the Operating Partnerships
for $35.2 million ( approximately $4.30 per share), and the value of the L.P.
Units to be held by the Limited Partners, may not accurately reflect the value
of the Properties in the Operating Partnerships prior to the consummation of the
Berg Acquisition. See "BACKGROUND OF THE UPREIT TRANSACTIONS--Valuation of
Interests."
SUBSTANTIAL BENEFITS TO MR. BERG AND OTHER BERG GROUP MEMBERS
As a result of the Berg Acquisition, the Company has acquired control of
the Berg Properties, which had a total fair value of $439 million and book value
of $178 million at the date of the acquisition. Prior to the effective date of
the Partnership Closing, the Operating Partnerships had $186.8 million of debt
owed to members of the Berg Group, including debt incurred by the Operating
Partnerships to fund substantially all of a $138.7 million distribution to
members of the Berg Group. Mr. Berg and other members of the Berg Group have to
date received benefits aggregating $419.3 million consisting of (i) 55,845,938
L.P. units, valued at approximately $251.3 million (at $4.50 per L.P. unit),
(ii) $129.0 million of cash (including $118.6 million from proceeds of the
Prudential Secured Loan used to retire debt owed directly to members of the Berg
Group, and (iii) the Company's assumption of the Wells Fargo Line with $39.0
million of debt outstanding, effective September 30, 1998. In addition, as of
September 30, 1998, $18.8 million of debt owed by the Operating Partnerships to
members of the Berg Group remains outstanding.
DEPENDENCE ON MR. BERG
The Company is substantially dependent upon the leadership of Mr. Berg, its
Chairman and Chief Executive Officer. See "THE BUSINESS OF BERG & BERG--History
of Berg & Berg." Mr. Berg will be managing the day-to-day operations of the
Company as Chairman and Chief Executive Officer and will devote a significant
portion of his time to the affairs of the Company, including the formulation and
execution of the Company's growth and business development strategies. Mr. Berg
has a number of other business interests to which he devotes a portion of his
time, however. See "POTENTIAL CONFLICTS OF INTEREST." In particular, Mr. Berg is
an investor in a number of technology companies in the Silicon Valley, including
tenants of a few of the Berg Properties, and serves on the board of directors of
six such technology companies. The Company believes that his active involvement
in the technology industry provides the Company with valuable information
regarding the business and operations of its tenants and their present and
future space requirements, as well as valuable industry contacts and tenant
referral sources. The Company believes that the loss of these benefits, through
the loss of Mr. Berg's knowledge and abilities and their benefits, could have a
material adverse effect on the Company.
CONTROL OF THE COMPANY AND THE OPERATING PARTNERSHIPS BY THE BERG GROUP
Following the completion of the UPREIT Transactions, the Berg Group, and
Mr. Berg who controls the Berg Group, will exercise significant control over the
operations and affairs of the Company, and therefore, indirectly, the Operating
Partnerships.
OWNERSHIP INTEREST. Following the completion of the UPREIT Transactions,
members of the Berg Group will hold L.P. Units representing an aggregate 82.52%
limited partnership interest in the Operating Partnerships, and an aggregate of
82.73% of the Outstanding Shares, (without regard to the Berg Group Ownership
Limit) taking into account their existing share ownership and their right to
exchange L.P. Units for Common Stock under certain circumstances.
Notwithstanding the Berg Group Ownership Limit, these exchange rights will give
the members of the Berg Group substantial influence over the management and
direction of the Company. Moreover, the Berg Group members also will possess the
following material rights with respect to the governance of the Company and the
Operating Partnerships. See "PRINCIPAL SHAREHOLDERS" and " -- Shares Eligible
for Future Sale."
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<PAGE>
BOARD OF DIRECTORS REPRESENTATION. Pursuant to the UPREIT Transactions the
Berg Group will acquire the right to nominate two directors for election to the
board of directors (the "Berg Group Board Representatives") so long as the
members of the Berg Group together with their Affiliates (other than the Company
and the Operating Partnerships) own at least 15% of the total number of shares
of voting stock of the Company taking into account the conversion, exchange or
exercise of all outstanding warrants, options, convertible securities and other
rights to acquire voting stock of the Company and all L.P. Units exchangeable or
redeemable for Common Stock or other voting stock of the Company (without regard
to any Ownership Limit) (the "Fully-Diluted" number of shares). In the event
such ownership falls below 15% but is at least 10%, the Berg Group will have the
right to nominate one person for election to the board of directors. Mr. Berg
and Michael Anderson, Vice President and Chief Operating Officer of the Company,
will constitute the initial Berg Group Board Representatives. The other two
directors on the current four-person board of directors will be unaffiliated
with the Berg Group (the "Independent Directors") and, together, will constitute
the Independent Directors Committee of the board of directors. See "MANAGEMENT
OF THE COMPANY UPON CONSUMMATION OF THE BERG ACQUISITION--Directors and
Executive Officers," "OPERATING PARTNERSHIP AGREEMENT--Management," and "CERTAIN
PROVISIONS OF MARYLAND LAW AND OF MISSION WEST-MARYLAND'S CHARTER AND
BYLAWS--The Board of Directors."
SPECIAL BOARD VOTING PROVISIONS. The Charter will provide that, until such
time as the Berg Group and their Affiliates (other than the Company and the
Operating Partnerships) own less than 15% of the Fully-Diluted number of shares
of Common Stock (the "Protective Provisions Expiration Date"), the vote of a
majority of the directors including Mr. Berg or someone he has designated to
replace him as a director (the "Required Directors") shall be required to
approve certain fundamental corporate actions, including amendments to the
Charter or bylaws, and any merger, consolidation or sale of all or substantially
all of the assets of the Company or the Operating Partnerships. In addition, the
Mission West-Maryland bylaws will provide that a quorum must include the
Required Directors for any action at a meeting. Also, the approval of more than
75% of the entire board of directors will be required to approve other
significant transactions such as certain borrowings in excess of 50% of the sum
of (i) the total number of Outstanding Shares multiplied by the market price
(the "Market Price") of the Common Stock plus (ii) the Company's total debt
("Total Market Capitalization"); and the conduct of business by the Company
other than through the Operating Partnerships. Accordingly, under certain
circumstances the Berg Group or Mr. Berg could prevent the Company or the
Operating Partnerships from taking any of such actions. See "CERTAIN PROVISIONS
OF MARYLAND LAW AND OF MISSION WEST-MARYLAND'S CHARTER AND BYLAWS--Board Quorum
and Special Voting Requirements."
LIMITED PARTNER APPROVAL RIGHTS. Under the Operating Partnership Agreement,
the consent of holders of the L.P. Unit Majority also is required with respect
to a number of significant actions, including amendments to the Operating
Partnership Agreement and the issuance of limited partnership interests having
senior rights with respect to the L.P. Units. In addition, until the Protective
Provisions Expiration Date, the consent of the L.P. Unit Majority will be
required with respect to other matters, including actions and transactions
similar to those requiring the approval of the Required Directors. See
"OPERATING PARTNERSHIP AGREEMENT--Management." Taxable sales of certain
Properties are subject to the consent, under certain circumstances, of Mr. Berg
and Clyde J. Berg, or Kontrabecki, as well. See "--Tax Consequences of Sale of
Properties."
POTENTIAL CONFLICTS OF INTEREST WITH THE BERG GROUP
Mr. Berg and other members of the Berg Group, who will possess significant
rights in the Company and the Operating Partnerships, have a variety of
interests which may not be consistent with the interests of the other
shareholders of the Company. One such conflict arises because the Company has
agreed to pay overhead reimbursements and rent to BBE and Berg & Berg totaling
approximately $15,000 per month. The Acquisition Agreement specifies that any
increase in rent and overhead allocations and all other transactions between the
Company and Mr. Berg or other members of the Berg Group, or between the Company
and any entity in which Berg Group members own directly or indirectly 5% or more
of the equity interests including the Operating Partnerships, must be approved
by the Independent Directors Committee, and provides additional restrictions
summarized below relating to specific matters where conflicts may arise. Mr.
Berg also has agreed to refer all his prospective R&D Property development and
acquisition activities in Washington, Oregon and California to the Company for
initial consideration. There can be no assurance that these restrictions will be
successful in eliminating the influence of such conflicts. If these restrictions
are not successful, decisions could be made that might fail to protect fully the
interests of all shareholders of the Company. Aside from these restrictions, Mr.
Berg and the other members of the Berg Group are entitled to freedom of action
under the terms of the Acquisition Agreement.
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EXCLUDED PROPERTIES. Although the Company is succeeding to most of the R&D
Properties in which the Berg Group holds interests, certain properties that are
not managed by any member of the Berg Group or are not material to the Company
(the "Excluded Properties") are not being contributed to the Operating
Partnerships. Members of the Berg Group will continue to hold ownership
interests in the Excluded Properties that are not contributed to the Operating
Partnerships. One such Excluded Property is the Company's headquarters at 10050
Bandley Drive, Cupertino, California, which is owned by Berg & Berg, and used by
Mr. Berg as his principal office and the principal office of other Affiliates
besides the Company. The other Excluded Properties (representing an aggregate of
approximately 270,000 rentable square feet) are located in the Silicon Valley
and cannot be made available to the Company by any of the Berg Group members as
part of the Berg Acquisition because no Berg Group member has the power to
include such property in the Berg Acquisition, or because the property is
subject to obligations that render transfer to the Operating Partnerships
impractical. The Company does not expect that these Excluded Properties will
compete with any of the Properties, and none of them involve any common tenants
or common financing arrangements with the Properties.
PENDING DEVELOPMENT PROJECTS. There are four Pending Development Projects
which represent a potential total of 12 R&D Properties agregating approximately
one million rentable square feet. Under the Acquisition Agreement, the Company
and the owners of these Projects have agreed that the Company or the Operating
Partnerships will acquire each developed R&D Property as it is completed and
leased. Under the terms of the Pending Projects Acquisition Agreement the
sellers of these Properties may elect to receive cash or L.P. Units at a value
of $4.50 per unit. The purchase price for each Property will be adjusted at the
time of transfer based upon the ratio of the actual monthly rental rate per
square foot to the projected rental rate per square foot set forth in the
Pending Projects Acquisition Agreement. The Berg Group members who own the
Pending Development Projects, including Carl E. Berg, will determine the terms
of the leases for each Property prior to its transfer to the Company. Berg &
Berg has signed a lease with Microsoft for an approximately 515,000 square feet
facility to be constructed by Microsoft at L'Avenida with a triple net rental
rate of $2.95 per square foot if and when the lease takes effect. In each case
the sellers' determination of acceptable terms may differ materially from those
sought by an independent party. See "DESCRIPTION OF THE PROPERTIES -- The
Pending Development Projects.
BERG LAND HOLDINGS. The Berg Land Holdings will not be contributed to the
Operating Partnerships. The Company and the Operating Partnerships have an
option to purchase properties developed on the Berg Land Holdings, as well a
right of first offer relating thereto, pursuant to the terms of the Option
Agreement. See "DESCRIPTION OF PROPERTIES--Land Holding and Development
Arrangements." If the Independent Directors Committee does not elect to exercise
its rights with respect to some or all of the Berg Land Holdings and the Berg
Group subsequently determines to develop such Holdings, Carl E. Berg and other
members of the Berg Group may devote a substantial amount of their time to such
development activities, and the developed Berg Land Holdings may compete for
available tenants with certain of the Properties.
TAX CONSEQUENCES OF SALE OF PROPERTIES. Since most of the Properties have
unrealized gain attributable to the difference between fair market value and
adjusted tax basis in such Properties prior to the Company's purchase of its
general partner's interest, the sale of any of such Properties may cause adverse
tax consequences to the Limited Partners. As a result, the Limited Partners
might not favor a sale of a Property even though such a sale could be beneficial
to other shareholders of the Company. Furthermore, until the Protective
Provisions Expiration Date, the Operating Partnership Agreement provides that
for a period of ten years following the closing of the Berg Acquisition, the
Operating Partnerships may not sell or otherwise transfer any Property
designated by Mr. Berg or Clyde J. Berg in a taxable transaction. In addition,
Mr. Kontrabecki may designate that the Kontrabecki Properties may not be sold or
transferred in a taxable transaction. See "FEDERAL INCOME TAX CONSIDERATIONS--
Tax Aspects of the Operating Partnerships," "CERTAIN PROVISIONS OF MARYLAND LAW
AND MISSION WEST-MARYLAND'S CHARTER AND BYLAWS" and "OPERATING PARTNERSHIP
AGREEMENT--Management."
TERMS OF TRANSFERS; ENFORCEMENT OF PARTNERSHIP AGREEMENT. Neither the terms
of transfers of the Berg Properties to the Operating Partnerships by the Limited
Partners nor the terms of the Operating Partnership Agreement were determined
through arm's-length negotiation. Some Berg Group members in their capacity as
beneficial owners of the Acquired Properties also had a substantial interest in
determining the terms and conditions of the transfers of the Acquired Properties
and the Pending Development Projects to the Operating Partnerships. The Berg
Group Board Representatives also may be subject to a conflict of interest with
respect to their obligations as directors of the Company to enforce the terms of
the Operating Partnership Agreement.
RELATED PARTY DEBT. The Company is liable under loans payable to Berg Group
members or that may be otherwise declared in default by Carl E. Berg or other
Berg Group members in the event the loans are not paid when due. These loans
include the Demand Notes and a loan of approximately $19 million payable to BBE,
which is secured by three properties and matures in March 1999. See
"DESCRIPTIONS OF THE PROPERTIES -- Mortgage Debt and Credit Lines." The Company
believes that it will be able to repay all such loans with proceeds from the
Wells Fargo Line, the Private Placement or other sources of working capital.
There can be no assurance that such proceeds will be available when the related
party debt is due, however, and Mr. Berg or other Berg Group members could take
action to enforce the Company's repayment obligations.
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DELAY IN CLOSING PRIVATE PLACEMENT
The purchasers in the Private Placement agreed to purchase shares of Common
Stock in early May 1998. The Company cannot close the purchase transactions
until it has received shareholder authorization for the issuance of the shares
at the Special Meeting in December 1998, however. Due to the substantial delay
in closing the transactions, the Company believes that some purchasers may be
unwilling to pay for their shares at the scheduled closing date because they may
no longer have adequate available funds, may not consider the purchase of the
shares to be a desirable investment at that time, or for some other reason. In
September 1998, the trustees of a trust which had agreed to purchase 1,000,000
shares of Common Stock sent a letter to the Company stating that because the
trust had not received a copy of the signed stock purchase agreement the
trustees were withdrawing their "offer" to purchase the 1,000,000 shares. The
Company has a signed stock purchase agreement with the trust that the Company
considers to be a binding agreement and not a revocable offer subject to
withdrawal. Nevertheless, the Company's management views the trust's letter as
an indication that recent broad-based declines in stock values, including most
publicly-traded REIT shares, may have caused investors to re-evaluate previous
investment decisions. Although the Company believes it can enforce all of the
stock purchase agreements executed by the purchasers in the Private Placement,
the Company's management may decide not to pursue claims against defaulting
purchasers.
In that event, the Company would need to find additional sources of capital
to pay the Demand Notes. Currently, the Company's management intends to use
proceeds of the Wells Fargo Line, if available, to pay the balance of the Demand
Notes remaining after the final closing date for the Berg Acquisition. Mr. Berg
and members of the Berg Group who control an L.P. Unit Majority in three of the
Operating Partnerships may call the Demand Notes to the extent not retired at
the date. However, if funds from the Wells Fargo Line are not available for this
purpose, Carl E. Berg and the other Berg Group members who have agreed not to
demand payment in excess of the Company's available funds at the closing of the
Private Placement, notwithstanding provisions of the Demand Note to the
contrary. As of September 30, 1998, the Company could to borrow up to $61
million under the Wells Fargo Line, and the Company expects to pay the entire
balance due under the demand Notes at the closing of the Private placement.
CHANGES IN POLICIES WITHOUT SHAREHOLDER APPROVAL
The Company's board of directors will determine the investment and
financing policies of the Operating Partnerships and its policies with respect
to certain other activities, including its growth, debt capitalization,
distribution and operating policies. See "POLICIES WITH RESPECT TO CERTAIN
INVESTMENT ACTIVITIES." The board of directors has no present intention to amend
or revise these policies. However, the board of directors may do so at any time
without a vote of the Company's shareholders. A change in these policies could
adversely affect the Company's financial condition or results of operations.
ANTI-TAKEOVER PROVISIONS
Provisions of the Charter and bylaws of Mission West-Maryland could delay,
defer or prevent a transaction or a change in control of Mission West-Maryland
(or other transaction) that might involve a premium price for holders of Common
Stock or otherwise be in their best interest. See "CERTAIN PROVISIONS OF
MARYLAND LAW AND OF MISSION WEST-MARYLAND'S CHARTER AND BYLAWS."
REAL ESTATE INVESTMENT CONSIDERATIONS
GENERAL. Real property investments are subject to varying degrees of risk.
The investment returns available from equity investments in real estate depend
in large part on the amount of income earned and capital appreciation generated
by the Properties as well as the related expenses incurred. If the Properties do
not generate revenue sufficient to meet operating expenses, debt service and
capital expenditures, the Company's income and ability to make distributions to
its shareholders will be adversely affected. Income from the Properties may also
be adversely affected by general economic conditions, local economic conditions
such as oversupply of commercial real estate, the attractiveness of the
Properties to tenants, competition from other available rental property, the
ability of the Company to provide adequate maintenance and insurance, the costs
of tenant improvements, leasing commissions and tenant inducements and the
potential of increased operating costs (including real estate taxes). Various
significant expenditures associated with an investment in real estate (such as
mortgage payments, real estate taxes and maintenance expenses) generally are not
reduced when circumstances cause a reduction in revenue from the investment.
Income from properties and real estate values also are affected by a variety of
other factors, such as governmental regulations and applicable laws (including
real estate, zoning and tax laws), interest rate levels and the availability of
financing.
ILLIQUIDITY OF REAL ESTATE INVESTMENTS. Real estate investments are
relatively illiquid, which limits the ability of the Operating Partnerships
(and, therefore, the Company) to restructure its portfolio in response to
changes in economic or other conditions. See "OPERATING PARTNERSHIP AGREEMENT--
Management." In addition, the Properties are subject to fixed expenditures, such
as debt service, real estate taxes, and expenses for repairs, maintenance, and
operations that do not decline with reductions in income. Such illiquidity and
fixed expenditures, together with other factors might impede the Company's
ability to respond to adverse conditions. The Company's ability to make expected
distributions to shareholders also could be adversely affected as a result.
GEOGRAPHIC AND INDUSTRY CONCENTRATION; DEPENDENCE UPON SILICON VALLEY
ECONOMY AND THE ELECTRONICS INDUSTRY. All of the Properties are located in the
southern portion of the San Francisco Bay Area commonly referred to as "Silicon
Valley." Following a recessionary period which ended in 1993, the Silicon Valley
economy has grown robustly and the reported unemployment rate for Santa Clara
County was 3.1% as of December 31, 1997. See "THE BUSINESS OF BERG & BERG--
Regional Economic Profile." As a result of the strong Silicon Valley economy,
values for the Properties and rents payable under new leases have increased
substantially since 1995. Future increases in values and rents for the
Properties depend to a significant extent on the health of the Silicon Valley
economy. All of the Properties are subject to existing leases with fixed rental
rates, and a material downturn in the Silicon Valley economy, or in the
commercial real estate market in Silicon Valley, will not immediately reduce
revenues but could have a material adverse impact on the value of the Company's
Common Stock and on the Company's financial condition. Following the completion
of UPREIT Transactions, the Company will consider expansion into other regions
of the West Coast with concentrations of technology companies if R&D Properties
of good quality can be obtained on reasonable terms. See "FUTURE OPERATIONS OF
THE COMPANY--Acquisitions."
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RISK OF LOSS OF KEY TENANTS. Most of the Properties are occupied by single
tenants, many of whom are large, publicly-traded electronics companies. The
Company's three largest tenants, Apple Computer Inc. ("Apple"), Amdahl
Corporation ("Amdahl"), and Cisco Systems, Inc. ("Cisco") accounted for
approximately 16.25%, 8.67%, and 7.17%, respectively, of the aggregate Annual
Base Rent from the Berg Properties for the year ended December 31, 1997. The
Operating Partnerships' 12 largest tenants for the Berg Properties represent at
least 56.8% of such Annual Base Rent. Eight of these tenants have occupied their
respective Properties for periods ranging from five to 22 years and have renewed
one or more leases. The Company believes that Berg & Berg's practice of
emphasizing the development of single-tenant, rather than multi-tenant,
Properties has contributed to its relatively high occupancy rates. Apple has
announced operating losses, internal reorganizations, and layoffs in each of its
last two fiscal years. To date, Apple has not defaulted in the payment of rent
under any of its three leases with the Operating Partnerships, nor has Apple,
Amdahl or Cisco notified the Operating Partnerships of an intention to vacate,
reduce its occupancy at, or relocate from any of their respective properties.
However, there can be no assurance that Apple, Amdahl, Cisco or other key
tenants will renew their leases. The Company believes that it would be able to
relet Properties of its other key tenants should they be vacated and that some
of such Properties are currently leased at below market rental rates. However,
if the Company is unable to relet properties as leases terminate or if Apple,
Amdahl, Cisco or another key tenant were to terminate their tenancy, and the
Company were unable to relet such Properties within a reasonable period of time
and at comparable rental rates, the Company's operating results and its ability
to make distributions could be adversely affected. See "DESCRIPTION OF THE
PROPERTIES--the Berg Properties."
RISK OF BANKRUPTCY OF KEY TENANTS. At any time, a tenant of the Properties
may seek the protection of the bankruptcy laws which could result in the
rejection and termination of such tenant's lease and thereby cause a reduction
in the Company's income. Although the Operating Partnerships' predecessors have
experienced losses from tenant bankruptcies of less than $25,000 since 1987, no
assurance can be given that tenants will not file for bankruptcy protection in
the future or, if a tenant makes such a filing, that it will affirm its lease
and continue to make rental payments in a timely manner. In addition, from time
to time a tenant may experience a downturn in its business which may weaken its
financial condition and result in its failure to make rental payments when due.
If a tenant's lease is not affirmed following a bankruptcy filing, or if a
tenant's financial condition weakens, the Company's income may be adversely
affected. The bankruptcy of one or more of the Company's key tenants could have
a material adverse effect on the Company's operating results and its ability to
make distributions.
ADDITIONAL RISKS OF REAL ESTATE ACQUISITION AND DEVELOPMENT. A focus of the
Company will be the acquisition of additional properties in selected
geographical areas and the renovation and reletting of such properties. The
Company may also undertake the development of new buildings on sites acquired
from the Berg Group or from third parties. See "DESCRIPTION OF THE PROPERTIES
- -Land Holding and Development Arrangements." Real estate acquisition and
development involves significant risks in addition to those relating to the
ownership and operation of existing, fully-leased properties, including the
risks that required approvals may not be obtained or may take more time and
resources to obtain than expected, that construction may not be completed on
schedule or on budget and that the properties may not achieve anticipated rent
or occupancy levels. In addition, if permanent debt or equity financing is not
available on acceptable terms to refinance new development activities or
acquisitions undertaken without permanent financing, further development
activities or acquisitions could be curtailed and the Company's operating
results and its ability to make distribution could be adversely affected.
DEBT FINANCING; RISK OF INABILITY TO SERVICE DEBT. On September 30, 1998,
the Company had approximately $220 million of debt secured by 45 of the
Properties, and the Company expects to have outstanding approximately $223
million of debt secured by such Properties assuming completion of the Private
Placement and receipt of all proceeds of the Private Placement. If the Operating
Partnerships were unable to meet their mortgage payments, a loss could be
sustained as a result of foreclosure on its Property by the mortgagee. Such a
loss could reduce the value of the Company's investment in the Operating
Partnerships. See "DESCRIPTION OF THE PROPERTIES -- Mortgage Debt and Wells
Fargo Line" for information regarding the terms of the mortgages encumbering the
Properties.
As part of its current business strategy, the Company has adopted a policy
of maintaining a consolidated ratio of Debt to Total Market Capitalization of
less than 50%, which may not be exceeded without the approval of more than 75%
of the entire board of directors. The Company's ratio of Debt to Total Market
Capitalization would have been approximately 42% at September 30, 1998, assuming
the occurrence of the UPREIT Transactions, a Market Price of $4.50 price per
share, and 67,673,227 Outstanding Shares issued and outstanding on that date.
Within the prescribed limit, the board of directors of the Company may, from
time to time, modify its debt policy and may increase or decrease its ratio of
Debt to Total Market Capitalization. If the Company were to change its debt
policy, the Company could become more highly leveraged, resulting in an
increased risk of default on its obligations and an increase in debt service
requirements that could adversely affect the Company's financial condition, its
operating results and its ability to make distributions.
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POTENTIAL ENVIRONMENTAL LIABILITY. Under various federal, state and local
laws, ordinances and regulations, an owner or operator of real property may be
held liable for the costs of removal or remediation of certain hazardous or
toxic substances located on or in the property. Such laws often impose liability
and expose the owner to governmental proceedings without regard to whether the
owner knew of, or was responsible for, the presence of the hazardous or toxic
substances. The cost of any required remediation or removal of such substances
may be substantial. In addition, the owner's liability as to any specific
property is generally not limited and could exceed the value of the property
and/or the aggregate assets of the owner. The presence of such substances, or
the failure to properly remove or remediate such substances, may also adversely
affect the owner's ability to sell or rent the property or to borrow using the
property as collateral. Persons who arrange for treatment or the disposal of
hazardous or toxic substances may also be liable for the costs of any required
remediation or removal of the hazardous or toxic substances at a disposal
facility, regardless of whether the facility is owned or operated by such owner
or entity. In connection with the ownership of the Properties or the treatment
or disposal of hazardous or toxic substances, the Company may be liable for such
costs.
Other federal, state and local laws impose liability for the release of
asbestos-containing materials ("ACMs") into the air and require the removal of
damaged ACMs in the event of remodeling or renovation. The Company is aware that
there are ACMs present at several of the Properties, primarily in floor
coverings. The Company believes that the ACMs present at these Properties are
generally in good condition and that no ACMs are present at the remaining
Properties. The Company believes it is in compliance in all material respects
with all present federal, state and local laws relating to ACMs and that if it
were given limited time to remove all ACMs present at the Properties, the cost
of such removal would not have a material adverse effect on its financial
condition, operating results or ability to make distributions.
The Company is not aware of any environmental liability relating to the
Properties that it believes would have a material adverse effect on its
financial condition, its operating results or its ability to make distributions
and has not been notified by any governmental authority or any other person of
any material noncompliance, liability or other claim in connection with any of
the Properties. Groundwater contaminated by chemicals used in various
manufacturing processes, including semiconductor fabrication, underlies a
significant portion of northeastern Santa Clara County, where many of the
Properties are located, however. Environmental assessments have not been
conducted for most of the Properties and none since 1995. Phase I environmental
assessments and some soil and water sampling as recommended by the environmental
consultant have been obtained on each of the Pending Development Projects. No
assurance can be given that future uses and conditions (including changes in
applicable environmental laws and regulations, the uses and conditions of
properties in the vicinity of the Properties, such as leaking underground
storage tanks and the current and future activities of tenants) will not result
in the imposition of environmental liability and the costs attendant thereto.
GENERAL UNINSURED LOSSES. The Operating Partnerships will carry
comprehensive liability, fire, extended coverage and rental loss insurance
covering all of the Properties, with policy specifications and insured limits
which the Company believes are adequate and appropriate under the circumstances.
There are, however, certain types of extraordinary losses that are not generally
insured because they are either uninsurable or not economically insurable.
Should an uninsured loss or a loss in excess of insured limits occur, the
Operating Partnerships could lose their capital invested in a Property, as well
as the anticipated future revenues from the Property, and, in the case of debt
which is recourse to the Operating Partnerships, would remain obligated for any
mortgage debt or other financial obligations related to the Property. The
Company does not intend to obtain owner's title insurance policies for any of
the Properties, but pursuant to the Acquisition Agreement certain members of the
Berg Group and other Limited Partners have agreed to indemnify the Company for
any losses attributable to defects in title existing prior to the closing of the
Berg Acquisition. If a loss occurs resulting from a title defect with respect to
a Property in excess of insured limits, or the Company cannot obtain full
recovery though the Berg Group's indemnification where applicable, the Company
could lose all or part of its investment in, and anticipated profits and cash
flows from, such Property.
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POTENTIAL UNINSURED LOSSES FROM SEISMIC ACTIVITY. All the Properties are
located in areas that are subject to earthquake activity. In light of such
earthquake risk, since the early 1970's, California building codes have
established construction standards for all newly built and renovated buildings,
the current and most strict construction standards having been adopted in 1994.
Most of the Properties were completed prior to the adoption of more stringent
building codes in 1994. The Company believes that all Properties were
constructed in full compliance with applicable laws and construction standards
existing at the time of construction. The Operating Partnerships' insurance
policies for the Berg Properties do not cover damage caused by seismic activity,
although they do cover losses from fires after an earthquake. The Operating
Partnership have not obtained earthquake insurance for the Properties, and the
Company believes that such insurance coverage is generally not economical.
Following the October 17, 1989 Loma Prieta earthquake in the San Francisco Bay
Area, which had a magnitude of approximately 7.1 on the Richter scale, Berg &
Berg observed, and its tenants reported, only minimal damage to the Properties.
Should an earthquake occur that results in substantial damage to the existing
Properties, or properties subsequently acquired by the Company, the Company
could lose its investment in such properties and its financial condition,
operating results and ability to make distributions could be adversely affected.
FEDERAL INCOME TAX RISKS
FAILURE TO QUALIFY AS A REIT. The Company intends to elect to be taxed as a
REIT under the Code for its taxable year ending December 31, 1998, and to
operate in a manner designed to achieve and maintain qualification as a REIT.
Although the Company expects that it will be organized and will operate in
conformity with the requirements for qualification as a REIT, no assurance can
be given that the Company will so qualify or that it will continue to qualify in
the future. Qualification as a REIT involves the application of highly technical
and complex Code provisions for which there are only limited judicial and
administrative interpretations. The Company's ability to qualify and maintain
its status as a REIT will depend on the Company's ability to meet various
requirements. For example, at least 95% of the Company's gross income in any
year must be derived from dividends, interest, rents from real property, certain
capital gains and other qualified sources, and the Company must make annual
distributions to shareholders totaling at least 95% of its REIT taxable income
(excluding net capital gains). See "FEDERAL INCOME TAX CONSIDERATIONS." These
and various other factual matters and circumstances not entirely within the
Company's control may affect its ability to qualify or maintain its status as a
REIT. In addition, no assurance can be given that new legislation, regulations,
administrative interpretations or court decisions will not significantly change
the tax laws with respect to qualification as a REIT or the federal income tax
consequences of such qualification. See "FEDERAL INCOME TAX
CONSIDERATIONS--Requirements for Qualification."
If the Company were to fail to qualify as a REIT in any taxable year, it
would not be allowed a deduction for distributions to its shareholders in
computing its taxable income, and it would be subject to federal income tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Unless entitled to relief under certain Code
provisions, the Company would also be disqualified from treatment as a REIT for
the four taxable years following the year during which REIT qualification was
lost. As a result of the loss of REIT status, funds available for distribution
to the Company's shareholders would be reduced for each of the years involved
and, in addition, the Company would no longer be required to make distributions
to its shareholders. Although the Company currently intends to operate in a
manner designed to enable it to qualify and maintain its status as a REIT, it is
possible that economic, market, legal, tax or other considerations may cause the
Company to fail to qualify as a REIT or may cause the Company's board of
directors either to refrain from making the REIT election or to revoke the REIT
election once made.
REIT DISTRIBUTION REQUIREMENTS. To obtain and maintain favorable tax
treatment as a REIT, the Company generally will be required each year to
distribute as a dividend to its shareholders at least 95% of its otherwise
taxable income (after certain adjustments). In addition, the Company will be
subject to a 4% nondeductible excise tax on the amount, if any, by which certain
distributions paid by it with respect to any calendar year are less than the sum
of 85% of its ordinary income for the calendar year, 95% of its capital gain
income for the calendar year and any undistributed taxable income from prior
periods. Failure to comply with these requirements would result in the Company's
income being subject to tax at regular corporate rates.
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OWNERSHIP LIMIT NECESSARY TO MAINTAIN REIT QUALIFICATION. In order for the
Company to maintain its qualification as a REIT, not more than 50% in value of
its outstanding stock may be owned, directly or indirectly, by five or fewer
individuals, as defined in the Code (the "Five or Fewer Test"). The Charter
generally prohibits ownership (the "Ownership Limit") of more than 9% of the
Common Stock by any shareholder (other than limits set by agreements with the
Berg Group, for which the aggregate Ownership Limit is 20% (the "Berg Group
Ownership Limit")). The Charter mandates the aggregation of stock owned by
affiliated owners for purposes of the Ownership Limit. Individuals owning a
percentage of the Common Stock outstanding that exceeds the Ownership Limit at
the time of the Reincorporation Merger will not be required to reduce their
stock holdings but will be subject to the Ownership Limit with respect to the
acquisition of additional shares of Common Stock (other than shares acquired
pursuant to board-approved stock option and other compensation plans). Following
consummation of the UPREIT Transactions, the Berg Group initially will own less
than two percent of the issued and outstanding Common Stock. One current
legislative proposal of the Clinton administration would amend the "closely
held" requirement for REIT qualification. See "FEDERAL INCOME TAX
CONSIDERATIONS--Requirements for Qualification."
The constructive ownership rules of the Code are complex and may cause
Common Stock owned, directly or indirectly, by a group of related individuals
and/or entities to be deemed to be constructively owned by one individual or
entity. As a result, the acquisition of less than 9% of the Common Stock (or the
acquisition of an interest in an entity which owns Common Stock) by an
individual or entity could cause that individual or entity (or another
individual or entity) to own constructively in excess of 9% of the Common Stock,
and thus subject such stock to the Ownership Limit.
The Charter provides that any transfer of shares by members of the Berg
Group or other shareholders that would result in direct or constructive
ownership in excess of the applicable Ownership Limit would be void, and the
intended transferee of such shares, including any pledgee, will be deemed never
to have had an interest in such shares. Further, if, in the opinion of the board
of directors (i) a transfer or repurchase of shares would result in any
shareholder or group of shareholders acting together owning in excess of the
Ownership Limit, or (ii) a proposed transfer or repurchase of shares may
jeopardize the qualification of the Company as a REIT under the Code, under the
Charter the board of directors may, in its sole discretion, refuse to allow the
shares to be transferred to the proposed transferee. If any transfer or
repurchase of shares of Common Stock occurs which, 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 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 not acquire any rights in such shares. The Prohibited Owner shall
not benefit economically from ownership of any shares of stock held in the
Trust, shall have no rights to dividends and shall not possess any rights to
vote or other rights attributable to the shares of 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. The shares or L.P. Units held by the Berg Group members
are not subject to automatic transfer to the Trust, however, as their shares
will be subject to the prohibitions associated with the applicable Berg Group
Ownership Limit, as well as restrictions on any exchanges of L.P. Units and
share purchases, repurchases and transfers of any kind that would result in a
violation of the Five or Fewer Test. See "FEDERAL INCOME TAX
CONSIDERATIONS--Requirements for Qualification."
UNCERTAINTIES REGARDING DISTRIBUTIONS TO SHAREHOLDERS
The Company's income will consist primarily of the Company's share of the
income of the Operating Partnerships, and the Company's cash flow will consist
primarily of its share of distributions from the Operating Partnerships.
Differences in timing between the receipt of income and the payment of expenses
in arriving at taxable income (of the Company or the Operating Partnerships) and
the effect of required debt amortization payments could require the Company
directly, or through the Operating Partnerships, to borrow funds on a short-term
basis to meet its intended distribution policy. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE
PROPERTIES--Liquidity and Capital Resources" and "DISTRIBUTION POLICY" for
information concerning the Company's expected cash flow.
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The amount and timing of distributions by the Operating Partnerships will
be determined by the board of directors of the Company as the sole general
partner of the Operating Partnerships and will be dependent on a number of
factors, including the amount of cash available for distribution, the Operating
Partnerships' financial condition, any decision by the Board of Directors to
reinvest funds rather than to distribute such funds, the Operating Partnerships'
capital expenditures, the annual distribution requirements under the REIT
provisions of the Code and such other factors as the Company's Board of
Directors deems relevant. See "FEDERAL INCOME TAX CONSIDERATIONS--Taxation of
the Company--Requirements for Qualification" and "--Annual Distribution
Requirements." Accordingly, there is no assurance that the Company will be able
to meet or maintain its intended distribution policy.
POTENTIAL PROPERTY TAX REASSESSMENTS
The Company does not believe that its acquisition of interests in the
Operating Partnerships will result in a statutory change in ownership giving
rise to a reassessment of any of the Properties for California property tax
purposes. There can be no assurance, however, that county assessors or other tax
administrative agencies in California will not attempt to assert that such a
change occurred as a result of the transactions related to the Berg Acquisition.
Although the Company believes that such a challenge would not be successful
ultimately, there can be no assurance regarding the outcome of any such dispute
or proceeding. Such a reassessment could result in increased real estate taxes
on the Properties. Substantially all of the leases for the Properties contain
provisions requiring the tenants to pay their proportionate share of any
property tax increases. As a practical matter, the Company may be unable to pass
through to its tenants the full amount of the increased taxes resulting from a
reassessment, however, the Company believes that any amount not passed through
to tenants will not have a material effect on the Company's operating results.
See "THE COMPANY'S PRO FORMA DATA."
MARKET FOR COMMON STOCK
The AMEX halted trading of the Common Stock at the opening of trading on
October 20,1997. The last day of trading prior to the halt was October 17, 1997.
The closing price of the Common Stock on October 17, 1997 was $3.38, before
adjustment for the 1-for-30 reverse stock split of the Common Stock in November
1997. See "BACKGROUND OF THE UPREIT TRANSACTIONS -- Background" and INFORMATION
WITH RESPECT TO THE COMPANY -- Price Range of the Common Stock and Distribution
History." AMEX has advised the Company that trading of the Common Stock may
resume upon request by the Company at any time after the effectiveness of the
Registration Statement. The Company intends to submit such request to AMEX and
expects trading of the Common Stock to resume prior to December 31, 1998.
THE COMPANY'S OBLIGATION TO PURCHASE TENDERED L.P. UNITS
Each of the Limited Partners (other than Carl E. Berg and Clyde J. Berg)
will have the annual right to exercise their Put Rights and cause the Operating
Partnerships to purchase a portion of their L.P. Units at a purchase price based
on the average market value of the Common Stock for the 10-trading day period
immediately preceding the date of tender. Upon the exercise of this put right by
a Limited Partner the Company will have the option to purchase the tendered L.P.
Units with available cash, borrowed funds, or the proceeds of an offering of
newly issued shares of Common Stock. The Limited Partners' Put Rights generally
commence one year after the completion of the Berg Acquisition, and are
available once a year for a maximum of one-third of the Limited Partner's L.P.
Units. If the total purchase price of the L.P. Units tendered by all Limited
Partners in one year exceeds $1 million, the Operating Partnerships or the
Company shall be entitled to reduce proportionally the number of L.P. Units to
be acquired from each tendering Limited Partner so that the total purchase price
is not more than $1 million. The exercise by Limited Partners of their Put
Rights may reduce the amount of Cash Available for Distribution to shareholders
of the Company. See "OPERATING PARTNERSHIP AGREEMENT--Exchange Rights, Put
Rights and Registration Rights."
RISK OF POTENTIAL SECURITIES LAW VIOLATIONS
The offer and sale of L.P. Units by the Operating Partnerships has not been
registered under the Securities Act, in reliance upon the exemption from
registration provided by Section 4(2) of the Securities Act for "transactions by
an issuer not involving any public offering." Although the Acquisition Agreement
contemplating the issuance of the L.P. Units and Common Stock of the Company
issuable on conversion of the L.P. Units after one year pursuant to the
Acquisition Agreement was entered into by the Company, the Operating
Partnerships and the Limited Partners prior to the filing of the Registration
Statement with the Commission, the closing of the transactions comprising the
Berg Acquisition had not occurred prior to such filing. Accordingly, an issue
may arise under the federal securities laws as to whether the offer and sale of
L.P. Units to the Limited Partners should be integrated with the offering
contemplated in connection with the Reincorporation Merger with the effect that
the exemption afforded by Section 4(2) of the Securities Act would be
unavailable, and the offer and sale of L.P. Units to the Limited Partners should
have been registered under the Securities Act. If it were ultimately determined
that the offer and sale of L.P. Units to the Limited Partners should have been
registered under the Securities Act, the holders of L.P. Units might have the
right under the federal securities laws to rescind the sales of these securities
and contributions of certain R&D Properties by such Limited Partners or,
theoretically, even to seek rescission of the Company's acquisition of its
general partner interests in the Operating Partnerships. As Carl E. Berg has
agreed with the Company that neither he nor any other Berg Group member will
take any such action against the Operating Partnerships or the Company, the
Company believes that any claim of non-compliance with the registration
provisions of the Securities Act with respect to the offer and sale of the L.P.
Units is unlikely and does not believe that any such potential securities laws
violations will materially adversely affect the Company's financial position,
results of operations or ability to make distributions to stockholders. In
addition, the Company has received the opinion of counsel to the Company that
such offers and sales were exempt from the registration provisions of the
Securities Act.
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SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales of
shares, or the availability of shares for future sale, will have on the market
price of the Common Stock. Sales of substantial amounts of Common Stock
(including shares issued in connection with the Exchange Rights) or the
perception that such sales could occur, could adversely affect prevailing market
prices for the Common Stock. Additional shares of Common Stock may be issued to
the Limited Partners (subject to the Ownership Limit) if they exchange their
L.P. Units for shares of Common Stock pursuant to the Exchange Rights or may be
sold by the Company to raise funds to acquire such L.P. Units if the Limited
Partners elect to tender L.P. Units to the Company pursuant to the Put Rights.
Such Exchange Rights and Put Rights, however, generally are not available during
the first 12 months following the Berg Acquisition. During that period, the
Limited Partners will be allowed to seek one registration of not more than
500,000 shares of Common Stock for resale (on SEC Form S-3 or the equivalent)
and will have "piggyback registration" rights for not more than 25% of the total
number of shares proposed for a public offering of Common Stock by the Company.
Following the first anniversary of the Berg Acquisition, the exercise of the
Exchange Rights generally is limited to the exchange or sale once during any
12-month period by each Limited Partner of up to one-third of the aggregate
number of L.P. Units owned by such Limited Partner. The Company has granted
certain "demand," "resale" and "piggyback" registration rights with respect to
shares of Common Stock acquired by the Limited Partners and their Affiliates
pursuant to the Exchange Rights. All registrations of Berg Group shares are
subject to underwriters' requirements for offering size reduction, and the right
of the board of directors to restrict or delay registrations for limited
periods. Purchasers of 6,495,058 shares of Common Stock in the Private Placement
will be permitted to sell from time to time the shares of New Common Stock
issued in exchange for those shares in the Reincorporation Merger pursuant to
the Registration Statement and any post-effective amendment to the Registration
Statement, which the Company will try to keep effective for one year, until
those shares become eligible for sale pursuant to Rule 144. Their ability to
sell those shares pursuant to the Registration Statement will be subject to
certain restrictions, including the Company's right to require the holders of
the shares to halt further offers and sales during periods when the Company has
determined that the continued offer and sale of those shares pursuant to the
Registration Statement would be detrimental to the Company or its stockholders.
The Company may decide not to maintain the effectiveness of the Registration
Statement during the first year following the final closing date for the Berg
Acquisition. See "BACKGROUND OF THE UPREIT TRANSACTIONS -- Background" and "THE
SELLING STOCKHOLDERS." Sales of shares acquired by members of the Berg Group and
other Limited Partners through the exercise of their Exchange Rights and
registration rights and fluctuations in resales pursuant to the Registration
Statement may adversely impact the price and trading volume of the Common Stock
from time to time to the detriment of other stockholders.
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THE SPECIAL MEETING
At the Special Meeting, the board of directors seeks shareholder approval
or ratification of the following six proposals pertaining to the UPREIT
Transactions. Each of the transactions is subject to distinct terms and
conditions. The parties to the Berg Acquisition have completed the Partnership
Closing portion of the transaction, and the Company seeks shareholder
ratification of the Company's acquisition in that transaction of its controlling
interest in each of the Operating Partnerships as the sole general partner. The
Company also seeks shareholder approval of the Private Placement and each of the
other pending Berg Acquisition transactions as a closing condition of those
transactions.. None of such transactions is subject to the occurrence of the
Reincorporation Merger. The board of directors intends for the shareholders to
consider all six proposals at once, and this Proxy Statement/Prospectus
describes the UPREIT Transactions and their material consequences based on the
assumption that all of the UPREIT Transactions will be approved by the
shareholders and consummated by the parties to each transaction.
PROPOSAL 1
APPROVAL OF SALE OF 6,495,058 SHARES OF COMMON STOCK AT $4.50 PER SHARE
PROPOSAL 2
RATIFICATION OF THE COMPANY'S ACQUISITION OF THE SOLE GENERAL PARTNER
INTEREST IN EACH OF THE OPERATING PARTNERSHIPS
PROPOSAL 3
APPROVAL OF THE COMPANY'S ACQUISITION OF THE PENDING DEVELOPMENT PROJECTS
FROM CARL E. BERG AND CERTAIN OTHER MEMBERS OF THE BERG GROUP
PROPOSAL 4
APPROVAL OF THE COMPANY'S ACQUISITION OF AN OPTION TO ACQUIRE FUTURE R&D
PROPERTIES BUILT ON LAND OWNED BY CARL E. BERG AND CERTAIN OTHER MEMBERS OF
THE BERG GROUP
PROPOSAL 5
APPROVAL OF THE ISSUANCE OF UP TO 93,398,705 SHARES OF
COMMON STOCK IN EXCHANGE FOR LIMITED PARTNERSHIP INTERESTS HELD BY OR ISSUABLE
TO CARL E.BERG AND CERTAIN OTHER MEMBERS OF THE BERG GROUP AND OTHER LIMITED
PARTNERS
PROPOSAL 6
REINCORPORATION OF THE COMPANY AS A MARYLAND REIT
PROPOSALS 1, 2, 3, 4 AND 5 PERTAIN TO THE BERG ACQUISITION AND THE COMPANY'S
FORMATION OF AN UPREIT. PROPOSAL 6 CONCERNS THE MERGER OF THE COMPANY INTO
MISSION WEST-MARYLAND, WHICH THE COMPANY ANTICIPATES WILL ELECT REIT STATUS IN
1998.
PARTIES TO THE BERG ACQUISITION
The Berg Group consists of Carl E. Berg and his wife, Clyde J. Berg,
certain trusts for their respective children, BBE, and certain other entities
which they control. See "PRINCIPAL SHAREHOLDERS." The members of the Berg Group
currently own 55,845,938 L.P. Units, or approximately 82.52% of the Operating
Partnerships. The remaining 3,633,695 L.P. Units are owned directly, or
indirectly, by Mr. Kontrabecki and other non-Affiliates of the Berg Group. All
the individuals and entities actually holding or acquiring record ownership of
the L.P. Units pursuant to the Acquisition Agreement have represented to the
Company that they are accredited investors within the meaning of Rule 501(a) of
Regulation D promulgated by the Commission under the Securities Act. The Berg
Acquisition will provide material benefits to the members of the Berg Group. See
"BACKGROUND OF THE UPREIT TRANSACTIONS--Benefits to the Berg Group," and
"Description of the Properties -- Overview of the Acquired Properties."
PARTIES TO THE REINCORPORATION MERGER
The Reincorporation Merger will be effected through the merger of the
Company with and into Mission West-Maryland pursuant to Section 1110 of the
California General Corporation Law (the "CGCL") and Sections 3-101 et seq. of
the Maryland General Corporation Law (the "MGCL"). Mission West-Maryland was
incorporated in Maryland on March 20, 1998. See "THE REINCORPORATION MERGER."
GENERAL INFORMATION CONCERNING SOLICITATION AND VOTING
The enclosed proxy is solicited on behalf of the board of directors of the
Company for use at the Special Meeting to be held on, or at any adjournment or
postponement thereof, for the purposes set forth herein and in the
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accompanying Notice of Special Meeting of Shareholders. The Special Meeting will
be held at 10050 Bandley Drive, Cupertino, California 95014. The mailing of this
Prospectus/Proxy Statement and the accompanying form of proxy to shareholders of
the Company entitled to vote at the Special Meeting is expected to commence on
or about November 25, 1998.
RECORD DATE, VOTING RIGHTS AND OUTSTANDING SHARES
The outstanding securities of the Company at November 13, 1998 consisted of
1,698,536 shares of Common Stock. Each shareholder of record at the close of
business on November 16, 1998 is entitled to one vote for each share of Common
Stock then held. The shares represented by any proxy in the enclosed form will
be voted in accordance with the instructions given on the proxy if the proxy is
properly executed and is received by the Company prior to the close of voting at
the meeting or any adjournment or postponement thereof.
REVOCABILITY OF PROXIES
A shareholder giving a proxy has the power to revoke it at any time before
it is exercised. A proxy may be revoked by filing with the Secretary of the
Company at the Company's principal executive office at 10050 Bandley Drive,
Cupertino, California 95014, a written notice or revocation or a duly executed
proxy bearing a later date, or it may be revoked by attending the meeting and
voting in person.
SOLICITATION
The cost of soliciting proxies in the enclosed form will be borne by the
Company. Solicitation will be made primarily by mail but shareholders may be
solicited by telephone, telegraph, or personal contact. The board of directors
may retain the services of a proxy-soliciting firm for soliciting proxies from
those entities holding shares in street name.
VOTES REQUIRED
The affirmative vote of the holders of a majority of the outstanding shares
of the Common Stock, either voting in person or by proxy, is necessary to
approve Proposal 6, the Reincorporation Merger. The remaining proposals require
only approval of the shareholders, which is defined under California law to mean
the affirmative vote of a majority of the shares represented and voting at the
Special Meeting.
Section 310(a) of the CGCL provides that a contract or transaction between
a director or directors of the corporation and the corporation, or between the
corporation and another organization in which the director has a material
financial interest, is not void or voidable if (1) the facts relating to the
interests of a director or directors are fully disclosed or known to
shareholders and the contract or agreement is approved or ratified by a majority
of the shareholders with the shares owned by the interested director not being
entitled to vote on the matter, or (2) the facts are fully disclosed or known to
the board of directors, and the board of directors authorizes, approves or
ratifies the contract or transaction in good faith without counting the vote of
the interested director or directors and the contract or transaction is just and
reasonable as to the corporation at the time it is authorized, approved or
ratified. The Berg Acquisition, which is subject to approval or ratification
pursuant to Proposals 2, 3 4 and 5 involves contracts between the Company and
Carl E. Berg, members of his Immediate Family and his Affiliates. Upon
shareholder approval of the Reincorporation Merger and the Merger Agreement, the
surviving corporation will be governed by the Charter and the Maryland Bylaws
which include provisions that benefit Mr. Berg, members of his Immediate Family
and his Affiliates. The Company believes that the approval by the Company's
board of directors of the Berg Acquisition and the Reincorporation Merger in May
1998 satisfied the requirements of Section 310(a). The Company also seeks
ratification of the Berg Acquisition and the Reincorporation Merger, however, by
the holders of a majority of the outstanding shares of Common Stock exclusive of
the 48,133 shares held in the aggregate by members of the Berg Group.
CONSEQUENCES IF THE PROPOSALS ARE NOT APPROVED
The board of directors adopted resolutions approving the contracts and
transactions comprising the Berg Acquisition and the Reincorporation Merger on
May 14, 1998, subject to shareholder approval or ratification, as the case may
be. AMEX rules or the CGCL require shareholder approval only of Proposals 1, 5
and 6, but the board of directors has determined to seek shareholder approval of
all the UPREIT Transactions due to the materiality of such transactions and the
potential conflicts of interests between the Company and the Berg Group.
Management and the board of directors of the Company believe that such contracts
and transactions are and have been carried out in the best interests of the
Company. As the Company and other parties to the Acquisition Agreement did
complete the Partnership Closing in July 1998, the failure of the shareholders
to approve the transaction would not render it ineffective between the parties.
Similarly, the Company already has entered into binding agreements to sell
6,495,058 shares of Common Stock in the Private Placement. Within two years from
the date of the Partnership Closing the holders of a majority of the L.P. Units
in each Operating Partnership may call the Demand Notes issued at the
Partnership Closing and upon acquisition of the Fremont Properties, which
currently total approximately $33.9 million and which the Company will need to
finance by July 2000. If the shareholders do not approve the Private Placement
at the Special Meeting, the Company will seek to obtain the amount of funds to
be provided by the Private Placement in the same or another manner, including
through borrowings under the Wells Fargo Line.
The failure of the shareholders to approve Proposals 3 and 4 would deprive
the Company of the right to acquire the Pending Development Projects and
developments constructed on the Berg Land Holdings. The Company believes this
would materially diminish its ability to increase revenues and expand its real
estate holdings within the next two years.
If the shareholders do not approve Proposal 5, the limited partners will
not be able to exchange L.P. Units for Common Stock, and the Company's Total
Market Capitalization would be much lower. Additionally, the Company would be
unable to meet its obligations to the sellers under the Pending Projects
Acquisition Agreement, and thus, unable to enter into that agreement.
The Company and all other parties are obligated under the terms of the
Acquisition Agreement as amended to use their ultimate best efforts to obtain
shareholder approval of the UPREIT Transactions. Therefore, if the shareholders
fail to ratify the Partnership Closing transactions and/or the other
transactions comprising the Berg Acquisition by failing to approve Proposals 2,
3 and 4, the Company intends to call another special meeting of shareholders at
which the Company again would seek such ratification and approval.
In any event, the Company's management does not intend to recommend the
dissolution and liquidation of the Company even though the shareholders fail to
approve any or all of the Proposals. Under the CGCL, however, the holders of at
least one-half of the Company's voting shares could vote in favor of
dissolution, or the holders of at least one-third of the voting shares could
initiate an action in Superior Court for involuntary dissolution of the Company.
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The Berg Acquisition and the Private Placement may be consummated upon
shareholder approval irrespective of whether the shareholders approve the
Reincorporation Merger. If the shareholders fail to adopt Proposal 6, the
Company nevertheless intends to elect to become a REIT in 1998, but it will
remain subject to the CGCL, and will not be subject to the Charter or the
proposed Maryland Bylaws. The Company's articles of incorporation and bylaws do
not contain share ownership limits and other restrictions contained in the
Charter or proposed bylaws that are intended to help maintain REIT
qualification, however. Therefore the Company would face a greater risk of
ceasing to qualify as a REIT if the shareholders do not approve the
Reincorporation Merger.See "COMPARISON OF SHAREHOLDERS RIGHTS" and "FEDERAL
INCOME TAX CONSIDERATIONS -- Taxation of the Company -- Requirements for
Qualification."
DISSENTERS' RIGHTS
Under California law, none of the shareholders of the Company will be
entitled to exercise dissenters' rights with respect to any of the Proposals.
See "THE REINCORPORATION MERGER--Approval and Effectiveness of Merger."
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board of directors of the Company unanimously recommends votes "FOR"
Proposals 1 through 6.
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BACKGROUND OF THE UPREIT TRANSACTIONS
INTRODUCTION
Following the sale of all of its properties in the first half of 1997, the
Company considered several strategic alternatives and decided in May 1997 to
enter into a Stock Purchase Agreement for the sale of 200,000 shares of newly
issued Common Stock for $900,000, or $4.50 per share, to BBE and other investors
designated by BBE. At that time, BBE and the Company contemplated that the
Company would become a vehicle to acquire office/R&D real estate, or interests
in entities owning such real estate, from Carl E. Berg and his affiliates. Since
then, the Company has been engaged in raising capital through private placements
of Common Stock, and Mr. Berg and his affiliates have been reorganizing the
Operating Partnerships' predecessors, making arrangements to acquire additional
R&D Properties and refinancing indebtedness secured by some of the Properties to
obtain more favorable loan terms.
Pursuant to the Acquisition Agreement signed in May 1998 and amended in
July 1998, the Company acquired an approximate 12.11% interest as the sole
general partner in each of the Operating Partnerships. The Operating
Partnerships now own all of the Berg Properties and the Acquired Properties,
representing a total of approximately 4.34 million rentable square feet of R&D
Properties. In addition, the Company has agreed to acquire the approximately
1.02 million rentable square feet of Pending Development Projects, after they
have been constructed and leased, including an approximate 0.5 million square
foot project expected to be occupied by Microsoft. The Berg Group owns L.P.
Units representing approximately 82.52% and non-Berg Group parties own
approximately 5.37% of the interests in the Operating Partnerships prior to the
acquisition of any Pending Development Projects by the Operating Partnerships.
In November 1997, the Company effected a 1-for-30 reverse stock split of
the Common Stock (the "Reverse Split"). All share and per share figures stated
in this Proxy Statement/Prospectus give effect to the Reverse Split.
BACKGROUND
THE COMPANY. Until recently, the Company was engaged in developing, owning,
operating, and selling income-producing commercial real estate. Since completing
its most recent development projects in 1991, the Company has been involved
principally in owning and operating real estate projects. In January and May
1997, the Company completed the sale of its entire real estate portfolio held
prior to the Company's purchase of a 12.11% general partnership interest in the
Operating Partnerships.
The Company was formed in 1969 as Palomar Mortgage Investors, a California
business trust. It operated as a REIT, investing primarily in short and
intermediate-term construction and development loans secured by first trust
deeds on real property. In 1974, the Company terminated new loan activity except
to facilitate the sale of property acquired from borrowers through foreclosure
or by deed in lieu of foreclosure and, in 1975, changed its name to Mission
Investment Trust. In 1979, the Company terminated its status as a REIT and began
to develop and market the properties it owned. In 1982, the Company incorporated
under its present name. The Company has two wholly owned subsidiaries, MIT
Realty, Inc. and Mission West Executive Aircraft Center, Inc. ("MWEAC"). MIT
Realty, Inc. and MWEAC are both inactive.
In July 1996, the Company entered into an agreement to sell all of its real
estate assets. That agreement was subsequently terminated and replaced, as was a
subsequent agreement. On December 6, 1996, the Company entered into an agreement
to sell all of its real estate assets to Spieker Properties, L.P. for $50.5
million in cash. Upon completion of the sale of eight properties and one parcel
of land, the Company received $47.5 million in cash, from which it repaid all
debt encumbering the properties and paid a majority of the related transaction
and closing costs, including $3 million in "break-up" fees from the terminated
sales transactions.
On February 4, 1997, the Company declared a special dividend of $9.00 per
share payable on February 27, 1997 to all shareholders of record as of February
19, 1997. After the sale of assets and the payment of the dividend to
shareholders, only nominal assets remained in the Company. The board of
directors and management considered available strategic alternatives for the
remaining corporate entity. Those alternatives included possible business or
asset acquisitions or combinations, a sale of the corporate entity, and outright
liquidation.
On May 27, 1997, the Company entered into the Stock Purchase Agreement with
BBE, which transferred most of its share purchase rights to unaffiliated
accredited investors as of August 4, 1997. All such investors signed a Voting
Rights Agreement requiring them to vote their shares as recommended by Carl E.
Berg on behalf of BBE. A special meeting of shareholders was on held August 5,
1997, at which the shareholders of the Company approved the transaction. The
transaction was completed on September 2, 1997, at which time all officers and
directors of the Company resigned, and BBE and the other investors acquired a
79.6% controlling ownership position in the Company as a group.
On October 20, 1997, the Company paid a further distribution of $3.30 per
share to shareholders of record as of August 28, 1997, from available cash
including $900,000 received in the September 1997 transaction. No portion of the
distribution was paid on shares acquired by BBE and its co-investors. In
connection with that distribution, the AMEX halted trading of the Common Stock
at the opening of trading on October 20, 1997.
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To increase the price per share of the Common Stock, raise funds and
increase assets and shareholders' equity, at a special meeting of shareholders
held on November 10, 1997, the shareholders of the Company approved the Reverse
Split, and the sale of 1,250,000 newly issued shares of Common Stock at $4.50
per share in a private placement offering. The Company completed that
transaction as of November 12, 1997. Certain purchasers of Common Stock in the
November transaction also signed a Voting Rights Agreement requiring them to
vote their shares as recommended by Carl E. Berg on behalf of BBE. Including
such purchasers, holders of more than 60% of the outstanding shares of Common
Stock were subject to one of the Voting Rights Agreements. Also in November
1997, the Company changed its fiscal year to December 31.
The August and November 1997 private placements and the Reverse Stock Split
were intended to increase the likelihood of the resumption of AMEX trading.
However, neither the Company nor the AMEX set a deadline for the resumption of
trading, nor did AMEX provide guidance beyond declaring its desire that there be
a firm commitment for the Company to acquire a controlling general partner
interest in the partnerships holding the Berg Properties and to raise additional
capital. In addition, the Company did not want trading to resume until (i)
audited financial statements were available, (ii) the Company had adequately
disclosed the contemplated UPREIT Transactions, (iii) the terms of all the
transactions had been settled, and (iv) the Registration Statement had been
declared effective by the Commission, or it became apparent that such
declaration was imminent.
In September 1998, BBE elected to relinquish the potential voting control
of the Company represented by the Voting Rights Agreements and unilaterally
terminated them with notice to affected parties. As a result, neither Carl E.
Berg nor any other member of the Berg Group has any right to cause a majority of
the shares of Common Stock to be voted in favor of proposals desired by him or
others in the Berg Group, including Proposals 1 through 6.
THE OPERATING PARTNERSHIPS. The Company has acquired control of the four
Operating Partnerships by becoming the sole general partner in each one
effective as of July 1, 1998 for financial statement, income tax and reporting
purposes by purchasing an approximate 12.11% interest in each of the Operating
Partnerships through the issuance of Demand Notes of approximately $8.9 million,
$6.9 million, $18.3 million, and $1.1 million to MWP, MWP I, MWP II and MWP III,
respectively. Interest on the Demand Notes is computed at the rate of 7.25% per
annum. Payment demands under each Demand Note may be made by action of the
holders of a majority of the outstanding L.P. Units in the Operating Partnership
only upon the earlier of the closing of the Private Placement, or two years from
the issuance date of the Demand Note. Mr. Berg and other members of the Berg
Group control such a majority in each Operating Partnership other than MWP III
and would be able to place the Company in default upon a timely demand that the
Company cannot honor. The Company believes that all of the Demand Notes will be
repaid within two years after their original issuance date. If the proceeds of
the Private Placement and other funds of the Company are insufficient to retire
the Demand Notes in full at the closing of the Private Placement, the Company
intends to borrow funds under the Wells Fargo Line to repay the balance of the
demand Notes.
The Operating Partnerships hold R&D Properties with an aggregate book value
as of September 30, 1998, of $506 million (including accumulated depreciation of
$2.6 million), subject to total debt of $220 million. The total amount of
collateralized indebtedness of the Operating Partnerships is $220 million.
In connection with the Partnership Closing, each of the Operating
Partnerships and their limited partners entered into an Agreement for Assumption
and Allocation of Liabilities, under which the Limited Partners agreed to assume
personal liability for a certain percentage of recourse indebtedness under the
Wells Fargo Line, in the event of payment default by the Operating Partnerships,
as well as other indebtedness of such partnerships in order to preserve basis
for federal income tax purposes. Effective September 30, 1998, the Company and
the Operating Partnerships became parties to the Wells Fargo Line and some
Limited Partners have guaranteed similar amounts of indebtedness under that line
of credit. In addition, certain Limited Partners have guaranteed a portion of
the Prudential Secured Loan to preserve tax basis. The Acquisition Agreement
provides that Limited Partners are entitled to assume or guaranty indebtedness
of the Operating Partnerships in such proportions as they request.
The Operating Partnerships have been maintained as separate entities to
avoid unnecessary transfers of real estate interests and maintain favorable tax
depreciation methods and periods for the benefit of the current Limited
Partners. At present, the Company has no intention of merging or combining any
of the Operating Partnerships. The Acquisition Agreement does provide, however,
that the Company may operate the four limited partnerships for some purposes as
if they were a single enterprise. The Company may commingle the funds and cash
flow of the partnerships, and, generally, will make them joint obligors for all
recourse indebtedness of the Partnership and secure mortgage debt in proportion
to the Properties held by the respective partnerships. Operating cash flow shall
be distributed based upon the total partnership interests in the Operating
Partnerships, and the Company's total share of distributions from the Operating
Partnerships will be equal to its overall percentage interest in the Operating
Partnerships from time to time. The Acquisition Agreement contemplates that all
financing, investing, property acquisitions and dispositions, and all business
expansion activities of the Company and the Operating Partnerships will be
undertaken through the Operating Partnerships in a manner intended to maintain a
ratio of net equity value for each of the four limited partnerships to the total
net equity value of the Operating Partnerships as a whole that is similar to
such ratio as of the July 1, 1998 effective date of the Partnership Closing. See
"THE ACQUISITION AGREEMENT."
The Acquisition Agreement provides for reallocations of interests and
adjustments in the amounts payable by the Company to each Operating Partnership
in exchange for its general partnership interest based upon differences between
the amount of debt encumbering the Properties of an Operating Partnership as of
the effective date of the Partnership Closing and the amount of such debt on
May, 14, 1998. In conjunction with the Partnership Closing and the Prudential
Secured Loan refinancing, final closing accounting entries and adjustments as of
June 30, 1998 were made on the books of the predecessors of the four Operating
Partnerships. Due to higher than estimated closing debt balances, the total
number of L.P. Units was reduced by 7,426,773 from 66,906,406 L.P. Units to
59,479,633 L.P. Units to reflect the number of L.P. Units properly outstanding
as of July 1, 1998, computed with reference to the agreed upon valuation of
$4.50 per Outstanding Share and the net equity value of $267,658,348 determined
for the predecessors of the Operating Partnerships as of June 30, 1998. Due to
the reduction in total L.P. Units, the Company's recomputed interest in the
Operating Partnerships increased automatically to 12.11%.
The Operating Partnerships now have an aggregate of 59,479,633 L.P. Units
outstanding, of which 55,845,938 L.P. Units are held by Carl E. Berg and other
members of the Berg Group. All of the Operating Partnerships are governed by the
terms of the Operating Partnership Agreement. Upon the final closing date for
the Berg Acquisition and shareholder approval at the Special Meeting, the
Operating Partnerships also will be subject to the terms of the Exchange Rights
Agreement, the Pending Projects Acquisition Agreement and the Option Agreement.
All holders of L.P. Units (other than Carl Berg and Clyde Berg) may put
their L.P. Units for redemption by the Operating Partnerships not more than once
each year, subject to the Company's right to purchase such units with funds
raised through an offering of new shares of Common Stock, and subject to an
aggregate annual limitation of $1 million for the total purchase price, unless
the Company otherwise elects. Upon the exercise of such put rights, the holder
of the L.P. Units will receive cash. In addition, the holders of the L.P. Units
may exchange their L.P. Units for shares of Common Stock under certain
circumstances. See "OPERATING PARTNERSHIP AGREEMENT--Exchange Rights, Put Rights
and Registration Rights."
THE PRIVATE PLACEMENT. To partially finance its acquisition of the general
partner interests in the Operating Partnerships, the Company has agreed to sell
6,495,058 shares of Common Stock at a price of $4.50 per share to a number of
accredited investors in two separate private placements. In one of the
transactions, Ingalls & Snyder has acted as the placement agent for the sale of
5,800,000 shares of Common Stock for a total cash purchase price of $26,100,000.
Ingalls & Snyder is entitled to receive a commission of $0.05 per share from
each of the purchasers payable at the closing for the purchase of the shares.
The Company is not obligated to pay these commissions. The Ingalls & Snyder
private placement was offered through a Private Placement Memorandum dated as of
April 27, 1998 and was fully subscribed on May 4, 1998. At the same time, the
Company effected an additional private placement for the offer and sale of
695,058 shares of Common Stock at a price of $4.50 per share to a separate group
of investors, including Mr. Berg and consisting primarily of friends and
relatives of the Company's senior management. In the transaction, John Moran, a
principal of Ingalls & Snyder, will receive 200,000 shares of Common Stock at
the closing in payment for services rendered related to the Company's recent
capital formation efforts in assisting the Company to obtain its financing. The
other 495,058 shares will be sold for cash. The Private Placement is expected to
close on the final closing date for the Berg Acquisition but only upon
shareholder approval at the Special Meeting. All of the purchasers in both
transactions have signed a stock purchase agreement which constitutes their
irrevocable commitment to purchase the shares of Common Stock, subject only to
customary closing conditions such as the accuracy of the Company's
representations and warranties, in addition to the approval of the Private
Placement by the shareholders at the Special Meeting. All of the purchasers have
represented to the Company that they are accredited investors. The Company
believes that some of the investors who have agreed to purchase shares in the
Private Placement may fail to close because they will not have available funds
that they possessed in May 1998, may no longer view the purchase of shares of
Common Stock as a desirable investment, or for some other reason may refuse to
perform their obligations under the stock purchase agreement. If this occurs,
the Company will seek to enforce those agreements, or, if management decides not
to sue defaulting investors, the Company intends to replace lost purchase
proceeds by selling the authorized shares of Common Stock authorized at the
Special Meeting to other investors at $4.50 per share or other available price,
or by borrowing the funds under the Wells Fargo Line.
The shares of New Common Stock to be issued in the Reincorporation Merger
in exchange for the shares of Common Stock purchased in the Private Placement
will be not subject to resale under Rule 145(d). The Company has registered
under the Registration Statement the reoffer and resale by the holders of such
shares of New Common Stock during periods that the Registration Statement
remains effective under the Securities Act. The Company presently intends to
maintain the effectiveness of the Registration Statement, or a successor
registration statement, for this purpose for a period of one year after the
closing date for the Private Placement, but is not obligated to do so.
Furthermore, the Company has reserved the right to require the selling
stockholders to refrain from making offers and sales pursuant to such
Registration Statement for any period in which the Company has determined that
it would be detrimental to the Company or its stockholders to continue offering
or selling shares under the Registration Statement. Principally, this would
occur at times when the Company had declined to disclose material nonpublic
information and had no duty to disclose such information. See "THE SELLING
STOCKHOLDERS."
-23-
<PAGE>
REASONS FOR THE PRIVATE PLACEMENT AND THE BERG ACQUISITION
The board of directors believes that the Private Placement and the Berg
Acquisition represent effective means for rapidly acquiring (i) a substantial
portfolio of Silicon Valley R&D Properties, (ii) a strong and effective real
estate management operation, and (iii) a substantial presence in the REIT
industry for future acquisitions and raising capital to finance the Company's
operations. Except for the Excluded Properties, the Properties in the Company's
initial portfolio include all of the Silicon Valley R&D Properties owned by any
of the Berg Group members prior to the Partnership Closing. Moreover, the
acquisition of a controlling interest in the Operating Partnerships rather than
the direct acquisition of any of the Properties enhances the Company's
acquisition and development strategy by providing several alternatives (e.g.,
cash, Common Stock or L.P. Units) for acquiring the Pending Development Projects
and one or more of the Berg Land Holdings from the Berg Group or acquiring
additional properties from third parties. The Company believes that these
alternative currencies will enable it to acquire desirable buildings or sites
from sellers (including the Berg Group) who seek the liquidity provided by
shares of Common Stock, or to offer L.P. Units to sellers (including the Berg
Group) interested in deferring potential taxable gain. Furthermore, it will
allow the Company the flexibility to acquire significant properties without
using cash or issuing Common Stock to sellers whose ownership thereof would
cause them to exceed the Ownership Limit. By completing the Partnership Closing
effective as of July 1, 1998 and in advance of the Special Meeting, the Company
is able to consolidate the balance sheets and operating results of the Operating
Partnerships with its own financial statements for the entire second half of the
current fiscal year. The Company believes that this has simplified the
accounting procedures associated with recording the associated transactions, has
permitted clearer financial statement presentation, reduced the risk that the
Company might fail to meet the 75% gross income test for REIT qualification in
1998, and will help the Company to avoid regulation under the Investment Company
Act of 1940.
SUMMARY OF THE TRANSACTIONS
The Berg Acquisition and Private Placement transactions include the
following events:
- - The Company will sell 6,495,058 shares of Common Stock for net proceeds of
$28.3 million, including 200,000 shares of Common Stock valued at $4.50 per
share to John Moran as consideration for consulting services related to the
Company's recent capital formation efforts.
- - The former general partners in each of the four limited partnerships
comprising the Operating Partnerships have resigned. BBE and Kontrabecki
have become limited partners in MWP and MWP III, respectively. Berg & Berg
Developers LLC and Berg Family Partners LLC were owned by the limited
partners in MWP I and MWP II in identical proportions to their respective
interests in such partnerships and were dissolved simultaneously with the
Partnership Closing.
- - The Company has become the sole general partner of the Operating
Partnerships by acquiring an approximate 12.11% interest in the capital and
profits of the Operating Partnerships for $35.2 million.
- - Existing Limited Partnership interests have been converted into 46,832,260
L.P. Units and a total of 12,647,373 L.P. Units have been issued in
exchange for R&D Properties contributed to MWP by Carl E. Berg, certain
other Berg Group members, and two of the Kontrabecki Partnerships.
-24-
<PAGE>
- - The Limited Partners will obtain the right to exchange each of their L.P.
Units for one share of Common Stock upon certain circumstances.
- - Certain Limited Partners have the right to put their L.P. Units to the
Operating Partnerships once each year for cash at a price equal to the
10-day average trading price for the Common Stock, and by agreement with
the Company, it will have the option to purchase the tendered units for
cash or shares of Common Stock at the same price. The total annual purchase
price of the tendered L.P. Units may not exceed $1 million without the
Company's consent.
- - Certain Berg Group members have agreed with the Company that the Operating
Partnerships will have the right to acquire each of the Pending Development
Projects in exchange for a specified number of L.P. Units (estimated to be
a total of 33,919,072 L.P. Units) when each such Project has been completed
and leased. The number of L.P. Units to be issued will be adjusted if the
Property's first-year monthly rental rate per square foot differs from the
amount projected under the Pending Project Acquisition Agreement.
- - The Berg Group will grant to the Company and the Operating Partnerships the
right to purchase the Berg Land Holdings at a fixed formula pursuant to the
Option Agreement as long as the Berg Group holds, or has the right to
acquire, shares representing 65% of the Common Stock on a Fully-Diluted
basis. In addition, the Berg Group will provide certain rights of first
offer to the Company and the Operating Partnerships in the event the Berg
Group exercises any reserved rights to develop the Berg Land Holdings.
- - Berg & Berg has transferred its property management business to the Company
and has leased a portion of its Bandley Drive headquarters to the Company
pursuant to the Office Lease.
- For income tax reasons certain Limited Partners have assumed secondary
personal liability of some existing debt, and some of those Limited Partners
have guarantied a portion of the Prudential Secured Loan and the Wells Fargo
Line. The liability assumption and allocation agreements and guaranties obligate
those Limited Partners to repay the debt to the extent the lender is unable to
receive payment through recourse to the Operating Partnerships and their assets.
CONSEQUENCES OF THE BERG ACQUISITION AND THE PRIVATE PLACEMENT
The Berg Acquisition and the Private Placement have or will have the
following consequences:
- - The existing shareholders of the Company will own approximately 20.73% of
the outstanding Common Stock of the Company, and after this transaction,
the purchasers of Common Stock in the Private Placement will own
approximately 79.27% of the outstanding voting securities of the Company.
- - The Company is the sole general partner of, and owns an approximate 12.11%
interest in, the Operating Partnerships.
- - The members of the Berg Group beneficially own 55,845,938 L.P. Units
representing in the aggregate an approximate 82.52% limited partnership
interest in the Operating Partnerships.
- - Individuals and entities, other than members of the Berg Group, directly
and indirectly own 3,633,695 L.P. Units representing in the aggregate an
approximate 5.37% limited partnership interest in the Operating
Partnerships.
- - The Operating Partnerships will own the fee interest in all of the
Properties.
-25-
<PAGE>
- - The proceeds of the Prudential Secured Loan along with the proceeds of the
Company's purchase of its interest in the Operating Partnerships and cash
on hand prior to the Partnership Closing of the Berg Acquisition have been
used to repay existing debt secured by the Properties, including debt
effectively incurred prior to the effective date of the Partnership Closing
to fund substantially all of a distribution of $138.7 million to Carl E.
Berg and Clyde J. Berg.
BENEFITS TO THE BERG GROUP
The members of the Berg Group, and to a lesser extent the non-affiliated
Limited Partners in the Operating Partnerships, will realize benefits from the
Berg Acquisition. These benefits include:
- - All of the L.P. Units in the Operating Partnerships will be exchangeable
for shares of Common Stock pursuant to the Exchange Rights Agreement
(subject to the Ownership Limit). L.P. Units held by other than Carl E.
Berg and Clyde J. Berg may be tendered to the Operating Partnerships
pursuant to the Put Rights. Under certain circumstances, the holders of the
L.P. Units also may require the Company to register the shares of Common
Stock received upon conversion of the L.P. Units. Accordingly, after the
expiration of certain restrictions upon the exercise of these liquidity
rights, the Berg Group's ownership interest in the Operating Partnerships
will be more liquid than its ownership interest in the Berg Properties, and
the partnership interests beneficially owned by the partners in the
Operating Partnerships will be more liquid than their current ownership
interests in each of the four limited partnerships that will comprise the
Operating Partnerships.
- - Carl E. Berg and Clyde J. Berg received distributions totaling $138.7
million from MWP I and MWP II prior to the effective date of the
Partnership Closing.
- - Certain debt relating to the Properties was refinanced, including debt owed
under the Wells Fargo Line for which members of the Berg Group are
personally liable. However, members of the Berg Group and other Limited
Partners in the Operating Partnerships have provided personal guaranties
with respect to all or some portion of the debt for income tax reasons.
- - Carl E. Berg will receive an annual salary of approximately $100,000 plus
additional benefits as the Chief Executive Officer of the Company. See
"MANAGEMENT--Executive Compensation."
VALUATION OF INTERESTS
BERG ACQUISITION. Pursuant to the Berg Acquisition, the Company has
succeeded to the Silicon Valley R&D Property ownership and management business
of the Berg Group through the Company's general partnership interest in the
Operating Partnerships. In October 1997, the board of directors of the Company
determined that, until such time as the Company had acquired operating
properties or other assets which would generate reportable income and funds from
operations, all issuances of Common Stock and transactions involving the actual
or contingent issuance of equity securities of the Company would be effected at
a price of $4.50 per share, or the equivalent thereof. The Company sold shares
of Common Stock at that price in a private placement in September 1997 and in
another private placement in November 1997. The closing price of the Common
Stock, as quoted on the AMEX, was $3.38 on October 17, 1997, the last trading
date prior to the halt in trading declared by the AMEX effective as of October
20, 1997. On October 21, 1997, a special distribution of $3.30 per share of
Common Stock was paid to shareholders of record as of August 28, 1997. Upon
approval of the shareholders and filing an amendment to the articles of
incorporation of the Company on November 10, 1997, the Company effected the
Reverse Split, which the board of directors expected to result in each
outstanding share of Common Stock having a value approximately equal to the
$4.50 price which investors had paid in the private placement transaction on
November 12, 1997. In May 1998, the Company agreed to sell shares of Common
Stock to the purchasers in the Private Placement at $4.50 per share. Pursuant to
the Acquisition Agreement, the Company agreed to acquire its approximately
12.11% general partner interest in the Operating Partnerships for $35.2 million,
which (assuming 67,673,227 Outstanding Shares) equates to a price of
approximately $4.30 per share of Common Stock. The Company and the Berg Group
have used a price of $4.50 to determine the value of each L.P. Unit as well as
the number of L.P. Units issuable in connection with the Operating Partnerships'
acquisition of the Pending Development Projects. See "DESCRIPTION OF THE
PROPERTIES--The Pending Development Projects." The price of $4.50 per share
selected by the board of directors may not be representative of the trading
price of a share of Common Stock, and it is likely that the Common Stock will
trade at a different price.
-26-
<PAGE>
Independent appraisals were not obtained to determine the fair market value
of the Berg Properties for purposes of the Berg Acquisition. The total
historical cost of the Berg Properties was approximately $178 million at June
30, 1998 immediately prior to the effective date of the Partnership Closing. The
Company believes, however, that the most appropriate valuation is one that
reflects the value of the Silicon Valley R&D Property ownership and management
business of the Operating Partnerships, taken as a whole.
The acquisition for all Properties was accounted for as a purchase. The
fair value of real estate assets acquired was determined by multiplying the
annualized base rentals under the leases for the Properties using the rental
rates in effect on January 1, 1998 by a multiple of 10 for the Berg Properties
and 11.4 for the properties previously controlled by John Kontrabecki. Both
multiples were selected with reference to multiples used for purchases and sales
of similar properties within the Silicon Valley known to Berg & Berg Developers
at the time, all of which exceeded the two multiples used by the Company and the
Bergs to value the Properties at July 1, 1998 (such multiples are the
reciprocals of the capitalization rates used in the transactions). The higher
multiple of 11.4 times annualized rents used to value the Kontrabecki Properties
resulted from negotiations between the Company and Mr. Kontrabecki. Both
valuation multiples also were reviewed and agreed upon by the investors'
representative for the offer of 5,800,000 shares in the Company's May 1998
private placement transactions.
PRO FORMA CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1998 and as adjusted to reflect the consummation of the UPREIT
Transactions. The information set forth in the following table should be read in
conjunction with the combined historical financial statements and notes thereto
and the (unaudited) pro forma financial information and notes thereto included
elsewhere in this Proxy Statement/Prospectus and the discussion set forth in
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Liquidity and Capital Resources."
<TABLE>
<CAPTION>
September 30, 1998
-----------------------------------
Company Company Pro
Historical Forma(2)
--------------- ---------------
(in thousands)
<S> <C> <C>
Debt:
Wells Fargo Line $39,044 $46,610
Mortgage notes payable (related parties) 18,780 18,780
Mortgage notes payable 162,222 157,597
--------------- ---------------
Total debt(1) 220,046 222,987
Minority Interest 273,740 273,740
Shareholders' equity:
Preferred Stock, $0.001 par value, 20,000,000
authorized, none issued and outstanding on
a pro forma basis - -
Common Stock, $0.001 par value, 200,000,000
authorized, 8,193,594 issued and outstanding
on a pro forma basis - 8
Receivable from issuance of Common Stock (941) (941)
Additional paid in capital 27,596 55,961
Accumulated deficit in excess of dividends paid (19,711) (19,711)
--------------- ---------------
Total shareholders' equity 6,944 35,272
--------------- ---------------
Total Capitalization $500,730 $531,999
--------------- ---------------
--------------- ---------------
</TABLE>
- -----------
(1) For a description of the Company's debt, see Note 5 of Notes to Combined
Financial Statements for the Berg Properties and "DESCRIPTION OF THE
PROPERTIES--Mortgage Debt."
(2) Excludes any effect of exercise or conversion of potentially dilutive
securities.
-27-
<PAGE>
INFORMATION WITH RESPECT TO THE COMPANY
INCLUDED INFORMATION
This Proxy Statement/Prospectus is accompanied by (i) a copy of the
Company's Form 10-K for the one-month transition period and fiscal year ended
December 31, 1997; (ii) Part I of the Company's Form 10-Q for the quarter ended
September 30, 1998; and (iii) combined historical financial statements of the
Operating Partnerships' predecessor as of and for the periods or years ended
June 30, 1998 and 1997, and December 31, 1997, 1996 and 1995.
PRICE RANGE OF THE COMMON STOCK AND DISTRIBUTION HISTORY
The following are the high and low sales prices, by quarter, of the
Company's common stock for the two most recent fiscal years as adjusted to give
retroactive effect to the 1 for 30 reverse stock split which was effective as of
November 10, 1997:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ------------------------------
High Low High Low
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
First Quarter(1) 397 1/2 56 1/4(2) 161 1/4 138 3/4
Second Quarter 112 1/2 52 1/2 210 138 3/4
Third Quarter 153 3/4 93 3/4 247 1/2 187 1/2
Fourth Quarter 136 7/8 93 3/4(3) 292 1/2 213 3/4
</TABLE>
- ----------
(1) In 1997, the Company changed its fiscal year end from November 30 to
December 31. Thus, the first quarter of 1997 includes the month of December
1996.
(2) During the first fiscal quarter in 1997 (on February 27, 1997), the Company
paid a $9.00 special dividend ($270 adjusted to give retroactive effect to
the 1 for 30 reverse stock split).
(3) During the fourth fiscal quarter in 1997 (on October 21, 1997), the Company
paid a $3.30 special dividend ($99 adjusted to give retroactive effect to
the 1 for 30 reverse stock split).
As of September 30, 1998, the approximate number of holders of record of
the Company's common stock was approximately 360. The Company paid no dividends
during fiscal 1996. The Company declared and paid a special dividend of $9.00
per share ($270 per share, post-split) on February 27, 1997. A special dividend
of $3.30 per share was paid on October 21, 1997 ($99 per share, post-split).
The Company intends to qualify as a REIT for tax purposes in the fiscal
year ending December 31, 1998. In order to so qualify, the Company intends to
declare and pay regular quarterly dividends in the future. See "DISTRIBUTION
POLICY."
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<PAGE>
THE COMPANY'S PRO FORMA DATA
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
Set forth below are summary unaudited pro forma combined financial
information and other data for the Company as of and for the periods indicated.
The historical balance sheet of the Company at September 30, 1998 reflects the
consummation of the Berg Acquisition. The pro forma balance sheet, and property
and other data have been prepared on the assumption that the Reincorporation
Merger had occurred at September 30, 1998 for balance sheet data and property
and other data. The pro forma operating data further assumes that the Berg
Acquisition and Reincorporation Merger had occurred as of January 1, 1997. This
data should be read in conjunction with the Selected Financial Data and the
historical and pro forma financial statements included elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Nine Months Ended Year Ended
September 30, 1998 December 31, 1997
------------------ -------------------
(in thousands)
<S> <C> <C>
OPERATING DATA:
Revenue:
Rent $39,558 $48,992
Tenant reimbursements 6,357 6,769
Other income 178 359
================== ===================
Total revenue 46,093 56,120
------------------ -------------------
Expenses:
Operating expenses 3,403 4,036
Real estate taxes 3,696 4,475
General and administrative 2,100 2,750
Interest (related parties) 1,022 1,362
Interest 12,201 16,693
Depreciation and amortization 7,936 10,842
------------------ -------------------
Total Expenses 30,358 40,158
------------------ -------------------
Income before minority interest 15,735 15,962
Minority Interest 15,325 16,021
------------------ -------------------
Income before gain on sale of real estate 410 (59)
Gain on sale of real estate - 4,736
------------------ -------------------
Net income 410 4,677
================== ===================
Basic and Diluted Earnings Per Share (1) $0.24 $2.75
================== ===================
Weighted average number of common shares outstanding 1,698,536 1,698,536
================== ===================
PROPERTY AND OTHER DATA:
Total properties, end of period 69 69
Total square feet, end of period 4,340,569 4,340,569
Average monthly rental revenue per square foot(2) $1.01 $0.87
Average occupancy - stabilized 100% 97%
FUNDS FROM OPERATIONS: (3) $23,671 $26,804
BALANCE SHEET DATA:
Real estate assets, net of accumulated depreciation $506,120
Total assets 543,477
Debt 232,535
Debt (related parties) 18,780
Total liabilities 262,793
Minority Interest 273,740
Shareholders' equity 6,944
</TABLE>
- -------------------
(1) Per share calculations do not consider the dilutive effect of (i) 6,495,058
shares of Common Stock issuable in the Private Placement; (ii) 59,479,633
L.P. Units that may become exchangeable for shares of Common Stock; and
(iii) 605,000 shares of Common Stock issuable in connection with options
outstanding under the 1997 Stock Option Plan. For purposes of the pro forma
per share calculation, these securities if converted or exercised, would
have no effect on per share calculations.
(2) Average monthly rental revenue per square foot has been determined by
taking the base rent for the period, divided by the number of months in the
period, and then divided by the total square feet of occupied space.
(3) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), FFO represents net income (loss) before minority interest of
unitholders (computed in accordance with GAAP), excluding gains (or losses)
from debt restructuring and sales of property, plus real estate related
depreciation and amortization (excluding amortization of deferred financing
costs and depreciation of non-real estate assets) and after adjustments for
unconsolidated partnerships and joint ventures. Management considers FFO an
appropriate measure of performance of an equity REIT because, along with
cash flows from operating activities, financing activities and investing
activities, it provides investors with an understanding of the Company's
ability to incur and service debt and make capital expenditures. FFO should
not be considered as an alternative for net income as a measure of
profitability nor is it comparable to cash flows provided by operating
activities determined in accordance with GAAP. FFO is not comparable to
similarly entitled items reported by other REITs that do not define them
exactly as the Company defines FFO. See "Distribution Policy."
-29-
<PAGE>
THE BUSINESS OF BERG & BERG
HISTORY OF BERG & BERG
Carl E. Berg, the Company's President and Chief Executive Officer and the
controlling member of the Berg Group, has been engaged in the development and
long-term ownership of Silicon Valley real estate for more than 25 years. In
1969, Mr. Berg foresaw the rising demand for efficient, multi-purpose facilities
for the rapidly growing electronics industry in the area of Santa Clara County
that has come to be known as "Silicon Valley" (a term that now encompasses much
of the southern portion of the San Francisco Bay Area). See "--The Silicon
Valley R&D Property Market". He formed a general partnership, Sobrato-Berg
Properties, with John Sobrato to focus on the development of R&D Properties,
that is, mixed-use facilities providing space for offices, development and
research, light manufacturing and assembly. Between 1969 and 1980, Sobrato-Berg
Properties acquired and developed approximately 45 R&D Properties, totaling
approximately 3.5 million rentable square feet. In 1980, Messrs. Berg and
Sobrato terminated their partnership and, as a result of the subsequent division
of its assets, 20 properties totaling approximately 1.2 million rentable square
feet were transferred to Berg Family Partnership, owned by Mr. Berg and other
members of the Berg Group.
In 1980, Mr. Berg and his brother, Clyde J. Berg, organized Berg & Berg to
continue the business of acquiring and developing R&D Properties. Between 1980
and 1983, Berg & Berg acquired and developed 18 additional R&D Properties,
totaling approximately 1.4 million rentable square feet.
In 1983, Berg & Berg's assessment of the Silicon Valley commercial real
estate market suggested a significant decline in demand for rental property,
particularly in the R&D Property segment of the market. Based on this
assessment, in 1983 Berg & Berg focused its attention on enhancing investment
returns from its existing portfolio of properties and constructing facilities
for identified tenants on a build-to-suit basis. From 1983 until 1995, Berg &
Berg was engaged primarily in build-to-suit development activities on a limited
basis in selected locations where experience with its portfolio properties
indicated that new buildings could be rented at rates adequate to justify
anticipated development costs and provide an acceptable return on its
investment.
In late 1994, Berg & Berg perceived a change in the market for R&D
Properties in Silicon Valley and in 1995 acquired over 60 acres of land in
Milpitas, Fremont and Mountain View, California and over 450,000 square feet of
R&D Properties with short-term leases at below-market rents. During the past two
years, Berg & Berg has purchased land or options on land totaling more than 55
acres in south San Jose. In 1995 and 1996, Berg & Berg began construction of
eight buildings comprising over 700,000 square feet and was one of the two most
active developers leasing and building R&D Properties in Silicon Valley.
Since 1972, Mr. Berg also has been actively involved in venture capital
investments in technology companies in the Silicon Valley. Directly and through
various venture capital partnerships, he has made early-round equity investments
in more than 100 technology companies, including such companies as Amdahl
Corporation, Sun Microsystems, Inc., Integrated Device Technologies, Inc.,
Valence Technology, Inc., Iwerks Entertainment, Inc., On-Command Video, Inc. and
Videonics, Inc. Mr. Berg has served on the boards of directors of numerous
technology companies and currently serves on six such boards. These activities
have helped Berg & Berg to develop a detailed understanding of the real estate
requirements of technology companies, to acquire valuable market information, to
increase its name recognition within the venture capital and entrepreneurial
communities, and to manifest its commitment to the growth and success of Silicon
Valley companies. The Company believes that Mr. Berg's substantial knowledge of
and contacts in the information technology industry have provided a significant
benefit to Berg & Berg in the operation of its commercial real estate business,
and will continue to benefit the Company after the Berg Acquisition.
-30-
<PAGE>
REGIONAL ECONOMIC PROFILE
The San Francisco Bay Area comprises nine counties, including Santa Clara,
Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, Solano and Sonoma
Counties, covering approximately 7,200 square miles. The San Francisco Bay Area
is the second largest metropolitan area in California with over 6.5 million
people, and the fourth largest metropolitan area in the United States after New
York, Los Angeles, and Chicago.
The economy of the San Francisco Bay Area is one of the strongest and most
diverse in the nation. The growth of the computer, biotechnology, and
engineering industries propels the region's economy forward as new technologies
draw strength from a broad base of industries, services, venture capital
financing, banking, universities, and research institutions. The San Francisco
Bay Area's long term relationship with Pacific Rim countries has made it one of
the major gateways for Asia and Far East trade. Moreover, the San Francisco Bay
Area has a reputation as one of the most desirable areas in the United States to
visit, which has made tourism a major growth industry. The San Francisco Bay
Area is a center of all resources necessary to create, develop and expand new
businesses.
Factors contributing to the region's economic strength include the
following:
- TECHNOLOGY CENTER. The Silicon Valley economy has an expansive
employment base of technology, semiconductor, electronics,
telecommunications, software, and computer related companies
unsurpassed in the nation and the world. The Silicon Valley is host to
over 4,000 technology companies employing in excess of 250,000 people.
Santa Clara County ranks fourth in the State of California in terms of
employment and population and is headquarters to many Fortune 500
companies, including Applied Materials, Inc., Apple Computer, Inc.,
Intel Corporation, Sun Microsystems, U.S. Robotics, Inc., National
Semiconductor Corporation, Cisco Systems, Inc., and Hewlett-Packard.
- FINANCIAL SERVICES CENTER. The San Francisco Bay Area is the home of
the nation's highest density of venture capital firms, the
headquarters for Bank of America, Wells Fargo Bank, and numerous
investment banking firms specializing in technology industries.
According to the Price Waterhouse LLP National Venture Capital Survey,
during 1997, venture capital firms invested approximately $3.66
billion in Silicon Valley companies.
- TRANSPORTATION AND FREEWAYS. Silicon Valley has an elaborate regional
freeway system, the San Jose International Airport, close access to
the San Francisco International Airport, and a modern light rail
system that is expected to cover major portions of the Silicon
Valley's R&D areas by the year 2000. The major freeways are
Interstates 280, 680, and 880, U.S. 101, and Highway 85. U.S. 101 and
Interstate 280 converge in San Jose and connect to San Francisco,
while Interstate 880 connects the Oakland area. Interstate 680
provides access to the East Bay and Pleasanton areas. Highway 85 forms
a semi-circle around San Jose and connects the main residential areas
to the heart of Silicon Valley.
- HIGHLY EDUCATED WORK FORCE. The San Francisco Bay Area has the highest
percentage of college-educated adults in the nation and its
pre-eminent educational institutions, such as Stanford University and
the University of California at Berkeley, have played a major role in
making it one of the world's leading technology centers. The presence
of these major research institutions and the highly educated work
force has fueled the region's economic engine and will enable the
region to build on its strong technology base in the future.
- CENTER FOR INTERNATIONAL TRADE. The San Francisco Bay Area is
currently the fourth largest trade district behind Los Angeles, New
York and Detroit serving primarily the Pacific Rim countries.
-31-
<PAGE>
THE SILICON VALLEY R&D PROPERTY MARKET
Santa Clara County, which incorporates much of Silicon Valley, including
the San Jose metropolitan area, has grown in population from 659,000 in 1960 to
1,653,100 on January 1, 1997, according to census data. San Jose, with a
population of more than 850,000, is the third largest city in California and the
eleventh largest in the United States. Santa Clara County is the largest county
in the San Francisco Bay Area encompassing an area of 1,312 square miles, and
includes many communities of diverse size and nature.
Much of Santa Clara County's economic growth has been driven by the
development and expansion of high technology industries. In recent years, space
requirements and higher rents for R&D Properties in Santa Clara County have led
technology companies to seek facilities elsewhere at office parks located in
southwestern Alameda County and southwestern San Mateo County. As a result, the
Company believes that the term "Silicon Valley" now refers to the more or less
contiguous areas of industrial development in all three counties where a
substantial number of technology companies can be found.
THE SILICON VALLEY
[MAP]
-32-
<PAGE>
Supported by major educational and research institutions and by a strong
venture capital community, Silicon Valley has been instrumental in the
development and commercialization of technology in virtually every major field.
Over the past 40 years the Silicon Valley economy has grown and diversified
through an evolutionary process as successive generations of technology emerge,
mature and are eventually replaced. In recent years, the continuous emergence of
new generations of technology companies has kept unemployment rates in Santa
Clara County consistently lower than California rates overall, and generally
lower than national rates, as shown by the following table:
UNEMPLOYMENT RATE
<TABLE>
<CAPTION>
United States (1) California (2) Santa Clara County (2)
----------------- -------------- ----------------------
<S> <C> <C> <C>
1993 6.8% 9.4% 6.8%
1994 6.1% 8.6% 6.2%
1995 5.6% 7.8% 4.9%
1996 5.4% 7.2% 3.6%
1997 4.9% 6.1% 3.1%
</TABLE>
- ----------------
(1) Source: U.S. Bureau of Labor Statistics.
(2) Source: State of California Employment Development Department. The overall
1997 unemployment rates for the area referred to as Silicon Valley in this
Proxy Statement/Prospectus are lower than the rates for Santa Clara County.
While Silicon Valley companies often establish manufacturing plants in
other locations where they can benefit from lower facilities and labor costs,
the headquarters, marketing and research and development functions associated
with running the company and developing new products often remain in Silicon
Valley. This occurs because of the availability of a well-trained and
experienced workforce, an established infrastructure of vendors and
service-providers and the proximity to major universities engaged in advanced
science and technology research. Consequently, the principal space requirement
for entrepreneurial technology companies in Silicon Valley is for R&D
Properties. According to regular quarterly reports on R&D Properties prepared by
BT Commercial Real Estate ("BT Commercial"), Silicon Valley R&D Properties
currently represent over 120 million rentable square feet, more than 50% of all
commercial industrial space in Silicon Valley. At the end of the fourth quarter
of 1997, the vacancy rate for Silicon Valley R&D Properties stood at 4.5%, an
approximate 10% decrease from the fourth quarter of 1996. Currently, the
occupancy rate is approximately 95% for properties in good condition at
desirable locations.
SILICON VALLEY R&D PROPERTY MARKET
The following table sets forth data regarding the Silicon Valley R&D
Property market:
<TABLE>
<CAPTION>
Increase in Aggregate Increase in Aggregate Average Asking
Space Available(1) Leased Space(1) Vacancy Rate Rental Rates($)(2)
--------------------- --------------------- ------------ ------------------
<S> <C> <C> <C> <C>
1993 12.1 1.5 14.1% 0.76
1994 15.2 3.0 12.2% 0.76
1995 22.5 8.5 7.0% 0.75 - 0.80
1996 17.2 5.2 5.1% 0.80 - 1.08
1997 16.7 5.5 4.5% 1.19 - 1.39
</TABLE>
- -------------
(1) Millions of square feet.
(2) Per square foot per month.
As indicated by the table, since 1995, the Silicon Valley R&D Property
market has seen a significant reduction in the excess of gross absorption over
net absorption, while witnessing declining vacancy rates and significantly
increasing rental rates. The Company does not anticipate a significant increase
in gross absorption in this market because there are few large blocks of
contiguous space and suitable development sites. For example, in the fourth
quarter of 1997, only five blocks of contiguous R&D Property space of at least
100,000 square feet were available in the entire market, according to BT
Commercial.
The Company believes that average asking rental rates during 1998 will
exceed 1997 average asking rental rates and will remain level in 1999. According
to BT Commercial, between the fourth quarter of 1996 and the fourth quarter of
1997, average asking rental rates in the Silicon Valley R&D Property market rose
from $1.11 to $1.39 per square foot per month. On the other hand, tenant
improvement allowances offered by landlords have declined substantially, and in
desirable locations, like Cupertino, Mountain View, Sunnyvale, San Jose, Fremont
and Milpitas, now can be as much as 50% lower than they were in the past few
years. Since January 1995, over 1.4 million rentable square feet of the Berg
Properties have been leased to approximately 45 tenants with rents at least
equal to the average asking rental rate in the Silicon Valley R&D Properties
market.
-33-
<PAGE>
BERG & BERG BUSINESS STRATEGY
Berg & Berg's development business and its portfolio of Silicon Valley R&D
Properties have been built on a business strategy incorporating the following
elements:
- STRONG GEOGRAPHIC AND INDUSTRY FOCUS. Berg & Berg has focused its
activities on addressing the facility requirements of
technology-oriented companies in the Silicon Valley. The Company
believes that this focus has enabled Berg & Berg to gain a
thorough understanding of the Silicon Valley real estate market,
to anticipate trends in the market, to identify and concentrate
its efforts on the most favorably located sub-regions of the
market and to take advantage of its experience and its extensive
contacts and relationships with local government agencies, real
estate brokers and subcontractors, as well as with tenants and
prospective tenants.
- LEAN, EXPERIENCED MANAGEMENT TEAM. In part because of its primary
focus on Silicon Valley and the special real estate requirements
of technology tenants, Berg & Berg has been able to conduct and
expand its business with a small management team comprised of
highly-qualified and experienced professionals working within a
relatively flat organizational structure. These managers share a
common approach to property development and management. The
Company believes that the leanness, experience and continuity of
this management team have enabled Berg & Berg to rapidly assess
and respond to market opportunities and tenant needs, minimize
development and construction risks, control operating expenses
and develop and maintain excellent relationships with its
tenants. The Company further believes that these advantages
translate into significantly lower costs for operations and
construction which give the Company the ability to compete
favorably with other R&D Property developers in Silicon Valley,
especially for build-to-suit projects subject to competitive
bidding. Furthermore, its lower cost structure should allow the
Company to generate better returns from properties whose value
can be increased through appropriate remodeling and efficient
property management.
- MARKET AWARENESS AND SENSITIVITY. Berg & Berg has consistently
followed a demand-driven approach to the R&D Property business in
which it has used its in-depth experience and extensive industry
contacts to identify the facility requirements of tenants and
potential tenants in the Silicon Valley and its various
sub-regions.
- EMPHASIS ON GENERAL PURPOSE FACILITIES, SINGLE TENANT PROJECTS
AND LONG-TERM TENANT RELATIONSHIPS. Most of the Properties are
general purpose R&D Properties, located in desirable sub-regions
of the Silicon Valley. Such Properties have been developed for,
or leased to, single-tenants, many of whom are large,
publicly-traded electronics companies. Most of the Company's
major tenants have occupied their Properties for many years
pursuant to fully net leases under which the tenant pays all
operating costs. The Company believes that Berg & Berg's practice
of emphasizing the development of
-34-
<PAGE>
single-tenant rather than multi-tenant properties has contributed
to its relatively low turnover and high occupancy rates and that
the relatively small number of tenants occupying the Properties
allows it to efficiently manage the Properties and serve the
needs of its tenants without the need for an extensive in-house
staff or the assistance of a third-party management organization.
In addition, this emphasis allows the Company to pay less for
tenant improvements and leasing commissions than multi-tenant,
high turnover property owners, and also reduces the time and
expense associated with obtaining building permits and other
government approvals. The Company believes that the relatively
stable, extended relationships which Berg & Berg has developed
with its key tenants have been a valuable factor in the expansion
of its business.
- SOUND PROPERTY MANAGEMENT PRACTICES. Berg & Berg makes extensive
use of its experienced in-house architectural, design and
construction management personnel in all phases of its
acquisition, development and property management businesses, and
focuses on similar types of development projects to more
effectively utilize these skills and experience. For each
property, the Berg & Berg staff develops a specific development,
marketing and property management program. It selects vendors and
subcontractors on a competitive bidding basis from a select group
of highly qualified firms with whom it maintains ongoing
relationships and carefully supervises their work. The Company
believes that, as a result of these sound operating practices,
Berg & Berg has acquired a reputation for completing its projects
on time and within budget.
-35-
<PAGE>
BERG PROPERTIES SUMMARY SELECTED FINANCIAL DATA
Set forth below are Summary Combined Financial Data for the Berg Properties
as of and for the periods indicated on an historical basis. This data should be
read in conjunction with the Selected Financial Data and the historical
financial statements included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
-------------------------- -------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------ ------------ ----------- ---------- ---------- ---------- ----------
($ in thousands)
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rent $21,962 $18,848 $40,163 $28,934 $23,064 $25,186 $25,620
Tenant reimbursements 4,038 3,094 6,519 3,902 4,193 3,190 3,486
------------ ------------ ----------- ---------- ---------- ---------- ----------
Total revenue 26,000 21,942 46,682 32,836 27,257 28,376 29,106
------------ ------------ ----------- ---------- ---------- ---------- ----------
Expenses:
Operating expenses 2,088 2,150 $ 3,741 $ 1,906 $ 2,032 $ 1,355 1,129
Real estate taxes 2,126 2,006 4,229 3,750 3,595 2,716 3,116
Management fee (related parties) 645 498 1,050 827 654 739 994
Interest (related parties) 61 135 248 293 357 329 45
Interest 3,044 3,338 5,919 6,090 6,190 8,222 9,054
Depreciation and amortization 3,862 3,351 7,717 6,739 6,323 6,851 7,156
------------ ------------ ----------- ---------- ---------- ---------- ----------
11,826 11,478 22,904 19,605 19,151 20,212 21,494
------------ ------------ ----------- ---------- ---------- ---------- ----------
Income before gain on sale of
real estate and extraordinary
item 14,174 10,464 23,778 13,231 8,106 8,164 7,612
Gain on sale - - - - 20,779 - -
------------ ------------ ----------- ---------- ---------- ---------- ----------
Income before extraordinary item 14,174 10,464 23,778 13,231 28,885 8,164 7,612
Extraordinary item - - - 610 3,206 - 1,766
------------ ------------ ----------- ---------- ---------- ---------- ----------
------------ ------------ ----------- ---------- ---------- ---------- ----------
Net income $14,174 $10,464 $23,778 $13,841 $32,091 $ 8,164 $ 9,378
------------ ------------ ----------- ---------- ---------- ---------- ----------
------------ ------------ ----------- ---------- ---------- ---------- ----------
PROPERTY AND OTHER DATA:
Total properties, end of period 58 56 58 53 50 41 40
Total square feet, end of period 3,779 3,593 3,779 3,392 3,195 2,856 2,796
Average monthly rental revenue
per square foot(1) $ 0.95 $ 0.85 $ 0.86 $0.78 $0.71 $ 0.96 $0.84
Occupancy at end of period 100% 96.9% 97.7% 91.9% 87.4% 80.3% 89.6%
FUNDS FROM OPERATIONS(2)(3) $18,036 $13,815 $31,495 $19,970 $14,429 $15,015 $14,768
Cash flow from operations $17,356 $13,709 $29,909 $20,248 $16,392 $16,518 $18,480
Cash flow from investing 690 (9,831) (17,251) (29,275) (6,353) (5,003) (3,248)
Cash flow from financing (23,765) 5 (8,432) 9,433 (10,013) (12,093) (13,599)
June 30, December 31,
-------------------------- -------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------ ------------ ----------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA: ($ in thousands)
(Unaudited) (Unaudited)
Real estate assets, net of
accumulated depreciation $95,600 $97,190 $100,15 $90,710 $72,319 $62,450 $61,610
Total assets 104,280 109,525 113,950 97,651 73,730 59,957 64,516
Debt 37,868 78,353 76,507 73,416 69,543 79,594 100,126
Debt - related parties 156,632 2,252 1,975 2,546 3,051 2,889 1,433
Total liabilities 200,238 86,874 84,299 80,826 76,199 83,720 104,117
Partners' (deficit)/ equity (95,958) 22,651 29,651 16,825 (2,469) (23,763) (39,601)
</TABLE>
- --------------
(1) Average monthly rental revenue per square foot has been determined by taking
the base rent for the period, divided by the number of months in the period,
and then divided by the total square feet of occupied space.
(2) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), FFO represents net income (loss) before minority interest of
unitholders (computed in accordance with GAAP), excluding gains (or losses)
from debt restructuring and sales of property, plus real estate related
depreciation and amortization (excluding amortization of deferred financing
costs and depreciation of non-real estate assets) and after adjustments for
unconsolidated partnerships and joint ventures. Management considers FFO an
appropriate measure of performance of an equity REIT because, along with
cash flows from operating activities, financing activities and investing
activities, it provides investors with an understanding of the Company's
ability to incur and service debt and make capital expenditures. FFO should
not be considered as an alternative for net income as a measure of
profitability nor is it comparable to cash flows provided by operating
activities determined in accordance with GAAP. FFO is not comparable to
similarly entitled items reported by other REITs that do not define them
exactly as the Company defines FFO. See "Distribution Policy."
(3) Non-cash adjustments to FFO were as follows: in all periods, depreciation
and amortization; in 1996, 1995 and 1993, gains on extinguishment of debt;
and in 1995, gain on sale of property.
-36-
<PAGE>
SELECTED COMBINED HISTORICAL FINANCIAL DATA FOR THE ACQUIRED PROPERTIES
Set forth below are Summary Combined Financial Data for the Acquired
Properties as of and for the periods indicated on an historical basis. This data
should be read in conjunction with the historical financial statements included
elsewhere in this Proxy Statement / Prospectus.
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
------------------------------- ----------------------------------------------------------------
1998 1997(1) 1997(1) 1996 1995 1994
-------------- ------------- ------------- ------------- -------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Revenue
Base rent $3,301 $2,420 $5,409 $3,388 $3,136 $2,956
Other income 218 58 250 61 58 60
-------------- ------------- ------------- ------------- -------------- ------------
Total Revenue 3,519 2,488 5,659 3,449 3,194 3,016
Expenses
Property operating 19 25 49 170 417 725
Real estate taxes 197 116 246 48 11 128
-------------- ------------- ------------- ------------- -------------- ------------
Total Expenses 216 141 295 218 428 853
-------------- ------------- ------------- ------------- -------------- ------------
Revenue in excess of
certain expenses $3,303 $2,347 $5,364 $3,231 $2,766 2,163
-------------- ------------- ------------- ------------- -------------- ------------
-------------- ------------- ------------- ------------- -------------- ------------
</TABLE>
- -----------
(1) The Fremont Properties commenced operations during the first quarter of
1997.
-37-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION FOR THE PROPERTIES
The following discussion should be read in conjunction with the Selected
Financial Data and the Combined Financial Statements for the Properties and
notes thereto appearing elsewhere in this Proxy Statement/Prospectus. The
Combined Financial Statements of the Berg Properties are comprised of the
operations, assets and liabilities of the Berg Properties other than the
Acquired Properties and the Pending Development Projects. The Kontrabecki
Properties and the Fremont Properties became part of the real estate holdings of
the Operating Partnerships at the Partnership Closing. The Company is the sole
general partner and the beneficial owner of an approximately 12.11% interest in
the Operating Partnerships with control of the operations and activities of the
Operating Partnerships and all of the Properties from July 1, 1998.
OVERVIEW
The Berg Properties are a combination of Silicon Valley R&D Properties
controlled historically by the Berg Group. Since the beginning of 1995, the
aggregate R&D Property square footage represented by the Berg Properties has
increased significantly from approximately 2.9 million square feet at December
31, 1994 to approximately 3.8 million square feet at June 30, 1998, primarily
from the development of new buildings. Such increase combined with a substantial
increase in the overall occupancy rate of the Berg Properties have contributed
to a dramatic increase in the revenues earned by the Berg Group from the Berg
Properties.
The table below details the size of the Berg Properties portfolio and the
total occupancy rate as of each of the dates presented:
<TABLE>
<CAPTION>
June 30, December 31,
-------------------- ---------------------------------------------
1998 1997 1997 1996 1995 1994
-------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Square feet (millions) 3.8 3.6 3.8 3.4 3.2 2.9
Occupancy percentage 100% 96.9% 97.7% 91.9% 87.4% 80.3%
</TABLE>
Historically, entities within the Berg Group have developed and managed the
Berg Properties, drawing on funds provided by operations, lines of credit from
Wells Fargo (including the Wells Fargo Line), direct property loans provided by
other lending institutions, and contributions of capital from time to time by
members of the Berg Group, principally to repay indebtedness outstanding under
the Wells Fargo lines of credit. In addition, certain affiliates of the Berg
Group have used the Wells Fargo lines of credit for other ventures on a demand
basis, including loans used primarily to finance the construction of
improvements on certain of the Berg Properties. Those loans and all other
lending arrangements with affiliates will be terminated upon the closing of the
Berg Acquisition.
The table below details the borrowings and repayments by the Berg Group
during the periods indicated:
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
----------------------------- --------------------------------------------
1998 1997 1997 1996 1995
------------- -------------- -------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Borrowing of Wells Fargo lines - $ 2,134 $3,750 $6,999 $ 1,034
Repayment of Wells Fargo lines $(1,277) - (1,335) (952) (5,978)
Borrowing on Notes (related parties) 119,956 - - - 637
Repayment on Notes (related parties) (1,975) (294) (571) (504) (474)
Borrowing on Mortgages - 3,105 3,105 - -
Repayment of Mortgages (686) (302) (2,429) (1,563) (1,210)
--------------- -------------- -------------- ------------- -------------
Borrowed/(Repaid) Total: $(116,018) $(4,643) $2,520 $3,980 $(5,991)
--------------- -------------- -------------- ------------- -------------
--------------- -------------- -------------- ------------- -------------
</TABLE>
-38-
<PAGE>
Most of the Berg Properties were developed by members of the Berg Group or
their Affiliates who have held such Properties continuously since their initial
construction. Occasionally, the Berg Group has acquired and sold developed
properties, as well. In 1995, the Berg Group sold two buildings totaling
approximately 315,000 rentable square feet: one building was sold directly to
the tenant, Xilinx Corporation; the other building was distributed by Berg &
Berg Developers to its partners and then sold to Xilinx Corporation
(collectively, the "Xilinx Sales"). Immediately after the Xilinx Sales, Berg &
Berg acquired McCandless Technology Park in Milpitas, California, which
comprised approximately 345,000 rentable square feet. Later in 1995, members of
the Berg Group acquired several additional R&D Properties consisting of
approximately 110,000 rentable square feet.
The table below summarizes dispositions, new development, and acquisitions
of R&D Properties by the Berg Group since January 1, 1995, in rentable square
footage:
<TABLE>
<CAPTION>
Six Months Ended June 30, Years Ended December 31,
---------------------------- ---------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Constructed - 201,157 387,729 196,348 200,484
Purchased - - - - 454,591
Sold - - - - (315,460)
------------- ------------- ------------ ------------ -----------
Total Net - 201,157 387,729 196,348 339,615
------------- ------------- ------------ ------------ -----------
------------- ------------- ------------ ------------ -----------
</TABLE>
Since 1991, BBE has operated as a management company providing services to
the Berg Group members and their Affiliates owning the Berg Properties, who have
paid BBE a management fee of approximately 3% of gross base rental revenue
determined on a cash basis. All management fee arrangements with BBE were
terminated as of July 1, 1998.
Beginning in 1995, new leases established for approximately 44 of the Berg
Properties (including leases acquired in the purchase of McCandless Technology
Park) obligated the tenants to pay approximately 3% of the base rent as
additional monthly common area charges. Berg & Berg views these charges as a
means for tenants to fund their liability for future repairs of a non-structural
nature ratably over the term of the lease. In the Combined Financial Statements
of the Berg Properties these payments have been characterized as rent under GAAP
accounting, and no reserve has been established for any future repairs.
As of July 1, 1998, the Company acquired its general partnership interest
in the Operating Partnerships at the Partnership Closing. The Company's results
of operations, cash flows, and liquidity therefore include the Berg Properties
and the Acquired Properties from July 1, 1998.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997
THE BERG PROPERTIES
RENTAL REVENUES AND TENANT REIMBURSEMENTS. Rental revenue increased by $3.1
million or 16.4%, to $22.0 million for the six months ended June 30, 1998
compared to $18.9 million for the six months ended June 30, 1997. The primary
reasons for the increase in rental revenues were the increase in the overall
occupancy rate for the Berg Properties, from 96.9% at June 30, 1997 to 100% at
June 30, 1998, the addition of approximately 187,000 rentable square feet of
leased space during the third quarter of 1997 and higher rents associated with
new leases and renewals. Tenant reimbursements increased by $0.9 million or
29.0%, to $4.0 million for the six months ended June 30, 1998 as compared to
$3.1 million for the six months ended June 30, 1997. The increase in tenant
reimbursements was due primarily to the higher occupancy level and the increase
in total rentable square feet of leased space.
EXPENSES. Total expenses for the Berg Properties increased by $0.3 million,
or 2.6%, to $11.8 million for the six months ended June 30, 1998 compared to
$11.5 million for the six months ended June 30, 1997. Property operating
expenses were $2.1 million for the six months ended June 30, 1998 and 1997. Real
estate taxes were $2.1 million for the six months ended June 30, 1998 compared
to $2.0 million for the six months ended June 30, 1997. Management fees (related
party) increased by $0.1 million, or 20%, to $0.6 million for the six months
ended June 30, 1998 in comparison to $0.5 million for the six months ended June
30, 1997. The increase in management fees is a direct result of the increase in
rental revenues. Interest expense, including amounts owed to related parties
decreased by $0.4 million, or 11.4%, to $3.1 million for the six months ended
June 30, 1998 compared to $3.5 million for the six months ended June 30, 1997.
The decrease in interest expense resulted from a decrease in debt balances due
to normal recurring principal payments, as well as the repayment of $2.0 million
of related party debt. Depreciation and amortization expense increased by $0.5
million, or 14.7%, to $3.9 million for the six months ended June 30, 1998 as
compared to $3.4 million for the six months ended June 30, 1997. The increase in
depreciation and amortization expense resulted primarily from new improvements
and new construction since June 30, 1997.
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<PAGE>
NET INCOME. Net income increased by approximately $3.7 million to $14.2
million for the six months ended June 30, 1998, an increase of 35.2% over the
net income of $10.5 million for the six months ended June 30, 1997. The
substantial rise in net income resulted primarily from the generation of
additional revenues from new leases at higher rental rates and from the addition
of approximately 187,000 rental square feet of leased space, while incurring
minimal increases in expenses.
THE ACQUIRED PROPERTIES
RENTAL REVENUES AND TENANT REIMBURSEMENTS. Rental revenue for the six
months ended June 30, 1998 was $3.3 million for the Acquired Properties, with
$2.3 million coming from the Kontrabecki Properties and $1.0 million coming from
the Fremont Properties. Tenant reimbursements and other income were a combined
$0.2 million.
EXPENSES. Total expenses for the Acquired Properties were $0.2 million, all
of which were attributable to the Fremont Properties. The Kontrabecki Properties
have minimal expenses and tenant reimbursements as the tenants paid most of
their expenses directly to the service providers.
REVENUE IN EXCESS OF CERTAIN EXPENSES. The combined revenue in excess of
certain expenses of the Acquired Properties was $3.3 million, of which $2.3
million was derived from the Kontrabecki Properties and $1.0 million from the
Fremont Properties.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
THE BERG PROPERTIES
RENTAL REVENUES AND TENANT REIMBURSEMENTS. Rental revenue increased by
$11.3 million, or 39.1%, to $40.2 million for the year ended December 31, 1997
compared to $28.9 million for the year ended December 31, 1996. The principal
reasons for the increase in rental revenue were the increase in the overall
occupancy rate for the Berg Properties, from 91.9% at December 31, 1996 to 97.7%
at December 31, 1997, the addition of approximately 388,000 rentable square feet
of leased space, and scheduled rental rate increases. Tenant reimbursements
increased by $2.6 million, or approximately 66.7%, to $6.5 million for the year
ended December 31, 1997 from $3.9 million for the year ended December 31, 1996.
The increase in tenant reimbursements was due primarily to the higher occupancy
level, an increase of 388,000 rentable square feet of leased space, and an
increase in the number of tenants reimbursing the Berg Properties for operating
expenses rather than paying them directly to the service provider.
EXPENSES. Total expenses for the Berg Properties increased by approximately
$3.3 million, or 16.8%, to $22.9 million for the year ended December 31, 1997,
compared to $19.6 million for the year ended December 31, 1996. Property
operating expenses increased by $1.8 million, or 94.7%, to $3.7 million for the
year ended December 31, 1997 from $1.9 million for the year ended December 31,
1996. The increase in operating expenses was offset by an increase of $2.6
million in tenant reimbursements and was due primarily to the increased
occupancy of the Berg Properties and the substantial increase in leased square
footage. Depreciation expense increased by $1.0 million, or 14.9%, to $7.7
million for the year ended December 31, 1997 as compared to $6.7 million for the
year ended December 31, 1996. The increase in depreciation expense resulted
primarily from new improvements and new construction. Real estate taxes
increased slightly by $0.4 million, or approximately 10.5%, to $4.2 million for
the year ended December 31, 1997 from $3.8 million for the year ended December
31, 1996. Interest expense (including amounts associated with related parties)
for the year ended December 31, 1997 was virtually unchanged from the year ended
December 31, 1996, as debt principal balances and interest rates remained
substantially the same.
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<PAGE>
NET INCOME. Income before extraordinary item increased by $10.6 million, or
approximately 80.3%, to $23.8 million for the year ended December 31, 1997, from
$ 13.2 million for the year ended December 31, 1996, as rental revenue increased
substantially due to increased occupancy of the Berg Properties, scheduled
rental rate increases, and the addition of leased space without a comparable
increase in total expenses. For the year ended December 31, 1996, net income
included an extraordinary gain of $0.6 million related to the forgiveness of
debt by Great West Life & Annuity Insurance Company.
THE ACQUIRED PROPERTIES
RENTAL REVENUES AND TENANT REIMBURSEMENTS. Rental revenue for the year
ended December 31, 1997 was $5.4 million for the Acquired Properties, with $4.1
million coming from the Kontrabecki Properties and $1.3 million coming from the
Fremont Properties, which were completed during the first quarter of 1997.
Tenant reimbursements and other income were a combined $0.3 million, with $0.1
million attributable to the Kontrabecki Properties and $0.2 million attributable
to the Fremont Properties.
EXPENSES. Total expenses for the Acquired Properties were $0.29 million, of
which $0.02 million applied to the Kontrabecki Properties and $0.27 million
applied to the Fremont Properties.
REVENUE IN EXCESS OF CERTAIN EXPENSES. The combined revenue in excess of
certain expenses of the Acquired Properties was $5.4 million, of which $4.2
million were generated by the Kontrabecki Properties and $1.2 million by the
Fremont Properties.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Berg Properties
RENTAL REVENUE AND TENANT REIMBURSEMENTS. Rental revenue increased by $5.8
million, or 25.1%, to $28.9 million for the year ended December 31, 1996 from
$23.1 million for the year ended December 31, 1995, as the overall occupancy
rate increased to 91.9% at December 31, 1996 from 87.4% at December 31, 1995. In
addition, rental rates rose for new and renewal leases, and the Berg Group added
approximately 196,000 square feet of new leased R&D Properties to the Berg
Properties. Tenant reimbursements decreased by $0.3 million, or 7.1%, to $3.9
million for the year ended December 31, 1996 from $4.2 million for the year
ended December 31, 1995, as the additional tenant reimbursements attributable to
increased occupancy of the Berg Properties and the acquisition of additional
leased space were more than offset by the decline in tenant reimbursements as a
result of new tenants paying operating expenses directly to the service
providers.
EXPENSES. Total expenses increased by 2.1% to $19.6 million for the year
ended December 31, 1996, from $19.2 million for the year ended December 31,
1995. Operating expenses decreased by $0.1 million, or 5%. Interest expense
decreased by $0.2 million, or 3.0% to $6.4 million for the year ended December
31, 1996 from $6.6 million for the year ended December 31, 1995 due to
construction activities and related borrowings. Depreciation and amortization
expense increased by $0.4 million, or 6.3% for the year ended December 31, 1996,
to $6.7 million from $6.3 million for the year ended December 31, 1995, due to
the addition of new R&D Properties and leased space acquired by the Berg Group
during 1995 and 1996. Real estate taxes increased by $0.2 million, or 5.6% to
$3.8 million for the year ended December 31, 1996 from $3.6 million for the year
ended December 31, 1995, as a result of minor reassessments as values rose on
certain Berg Properties while the real estate tax increases attributable to the
increase in net rentable square footage were offset by the disposition of two
R&D Properties in the Xilinx Sales. For the year ended December 31, 1996,
general and administrative expenses, as reflected by the management fee paid to
BBE, increased with rental revenues.
NET INCOME. Income before gain on sale of real estate and extraordinary
items increased by $5.1 million to $13.2 million for the year ended December 31,
1996, from $8.1 million for the year ended December 31, 1995, as growth in
revenues far exceeded the increase in expenses. Income decreased for the year
ended December 31, 1996, however, due to the effect of two extraordinary items
for the year ended December 31, 1995: The $20.8 million gain on the Xilinx
Sales, and a $3.2 million gain which resulted from the forgiveness of debt by
Great West Life & Annuity Insurance Company. For the year ended December 31,
1996, $0.6 million of extraordinary gain also resulted from debt forgiveness by
the same lender.
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<PAGE>
THE KONTRABECKI PROPERTIES
RENTAL REVENUE AND TENANT REIMBURSEMENTS. Rental revenue increased by
approximately $0.3 million, or 9.7%, to $3.4 million for the year ended December
31, 1996 from $3.1 million for the year ended December 31, 1995. The increase
was primarily due to an increase in occupancy to 86.9% at December 31, 1996 from
81.8% at December 31, 1995, and rising rental rates for new and renewal leases.
Tenant reimbursements and other income were level for the period.
EXPENSES. Total expenses decreased substantially by 48.8%, to $0.22 million
for the year ended December 31, 1996, compared to $0.43 million for the year
ended December 31, 1995. For the year ended December 31, 1996, operating and
maintenance expenses decreased by $0.25 million, or 59.5%, to $0.17 million from
$0.42 million for the year ended December 31, 1995. These substantial reductions
resulted primarily from the lease of vacant space to tenants who paid the
expenses directly to the service provider.
REVENUE IN EXCESS OF CERTAIN EXPENSES. The Kontrabecki Properties produced
revenue in excess of certain expenses of $3.23 million for the year ended
December 31, 1996, an approximately 16.8% increase over the same period for the
year ended December 31, 1995.
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES
The Company expects its FFO to be the principal source of liquidity for
distributions, debt service, leasing commissions and recurring capital
expenditures. The Company has not operated previously as a REIT and has no FFO
operating history. The Company also has not previously paid regular dividends
and other distributions to its shareholders and can make no assurances that it
will be able to do so in the future. Based solely upon past operating results
for the Properties and the results of operations for the nine months ended
September 30, 1998, on a pro forma basis, the Company expects its FFO for 1998
to be adequate to meet projected distributions to shareholders and other
presently anticipated liquidity requirements in 1998. See "DISTRIBUTION POLICY."
After closing the Private Placement at the final closing date for the Berg
Acquisition, the Company expects to have total indebtedness remaining on the
Properties on a pro forma basis of approximately $223 million, comprised of
mortgage debt secured by certain of the Properties under the Prudential Secured
Loan and existing secured loan arrangements of $93 million. The Prudential
Secured Loan totals $130 million, bearing an interest rate of 6.56% per annum,
maturing October 15, 2008, and is payable in monthly installments of principal
(based upon a 30 year amortization) and interest of approximately $0.8 million.
The Company has paid total fees of approximately $0.9 million in connection with
this loan. The Company also has assumed responsibility for a $100 million Wells
Fargo Line which had an outstanding balance of approximately $39 million as of
September 30, 1998. Interest rates on the Wells Fargo Line are variable and
ranged from approximately 7.0% to 8.20% over the past three fiscal years. The
average rate for the three months ended September 30, 1998 was 7.25%. The Wells
Fargo Line expires in October 1999 and will need to be replaced. There can be no
assurance that the Company will be able to obtain a similar line of credit with
similar terms and the Company's cost of borrowing funds could increase
substantially. The Company's Debt to Total Market Capitalization ratio, assuming
no additional draws on the Wells Fargo Line, will be approximately 42% based
upon an estimated Total Market Capitalization of approximately $525 million.
The Company expects to meet its short-term liquidity requirements generally
through its initial working capital, the Wells Fargo Line, and net cash provided
by operations. The Properties require periodic investments of capital for
tenant-related capital expenditures and for general capital improvements. For
the years ended December 31, 1993 through December 31, 1997, the recurring
tenant improvement costs and leasing commissions incurred with respect to new
leases and lease renewals of the Berg Properties averaged approximately $1.5
million annually. Of the Acquired Properties, only 83,902 square feet of space
is subject to leases that expire between January 1, 1998 and December 31, 2001.
The Company will therefore have approximately 416,000 square feet under expiring
leases annually from January 1, 1998 through December 31, 2000. The Company
expects that the average annual cost of recurring tenant improvements and
leasing commissions, related to the properties, will be approximately $1.5
million from January 1, 1998 through December 31, 2000. It expects to recover
substantially all of these costs from the tenants under the new or renewed
leases through increases in rental rates. The Company expects to meet its
long-term liquidity requirements for the funding of property development,
property acquisitions and other material non-recurring capital improvements, as
well as annual tenders of L.P. Units by certain Limited Partners, through
long-term secured and unsecured indebtedness and the issuance of additional
equity securities by the Company. See "POLICIES WITH RESPECT TO CERTAIN
ACTIVITIES--Financing Policies."
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<PAGE>
HISTORICAL CASH FLOWS
BERG PROPERTIES
CASH PROVIDED FROM OPERATIONS. The amount of net cash provided by
operations has consistently increased since 1995. The Berg Properties had net
cash provided by operating activities of approximately $17.4 million and $13.7
million for the six months ended June 30, 1998 and 1997, respectively, and
approximately $29.9 million, $20.2 million and $16.4 million for the years ended
December 31, 1997, 1996 and 1995, respectively. The $3.7 million increase in net
cash provided by operating activities for the six months ended June 30, 1998
compared to the same period in 1997 was primarily due to an increase in net
income. The approximately $9.7 million increase in net cash provided by
operating activities for the year ended December 31, 1997 over the year ended
December 31, 1996 was primarily due to an increase in net income, partially
offset by an increase in other assets, and deferred rent receivable. The $3.8
million increase in net cash provided by operating activities for the year ended
December 31, 1996 over the same period in 1995 was due primarily to an increase
in income before gain on sale of real estate and extraordinary item.
INVESTING ACTIVITIES. Net cash provided (used) in investing activities with
respect to the Berg Properties was approximately $0.7 million and $(9.9) million
for the six months ended June 30, 1998 and 1997, respectively, and approximately
$(17.3) million, $(29.3) million and $(6.4) million for the years ended December
31, 1997, 1996, and 1995, respectively. The $10.6 million increase in net cash
provided by investing activities for the six months ended June 30, 1998 compared
to the same period in 1997 was primarily due to a decrease in construction
activities. The approximately $12 million decrease in net cash used in investing
activities for the year ended December 31, 1997 compared to the year ended
December 31, 1996 was also due to a decrease in construction activities.
Correspondingly, the approximately $22.9 million increase in net cash used in
investing activities for the year ended December 31, 1996 compared to the year
ended December 31, 1995, was primarily due to an increase in construction and
development expenditures for a number of the R&D Properties, including several
projects in McCandless Technology Park in Milpitas. The volume and cost of
construction and development activities for new projects and tenant improvements
in connection with new leases varies from year to year. The Company has
estimated such expenditures in connection with its estimation of pro forma cash
available for distribution during 1998, and in determining effective annual
rents for the Berg Properties. There can be no assurance that such estimates
will reflect actual results, however, and capital expenditures in prior periods
should not be viewed as indicative of expenditures in future periods.
FINANCING ACTIVITIES. Net cash (used) provided in financing activities with
respect to the Berg Properties was $(23.8) million and $(0.005) million for the
six months ended June 30, 1998 and 1997, respectively, and $(8.4) million, $9.4
million, and $(10.0) million for the years ended December 31, 1997, 1996 and
1995, respectively. Changes in financing activities generally were directly
related to the level of new construction and development of R&D Properties. For
the six months ending June 30, 1998, total debt increased by $118,735 as a
result of the Company making distributions to certain partners in the amount of
$142.5 million compared to an increase in total debt of $4.6 million for the six
months ended June 30, 1997. Capital distributions were $142.5 million and $5.0
million and capital contributions were nil and $0.4 million for the six months
ended June 30, 1998 and 1997, respectively. For the year ended December 31,
1997, the increase in total debt on the Berg Properties was $1.5 million less
than the increase in debt during the same period in 1996, contributions by
partners were reduced by $11.5 million, and distributions to partners increased
by approximately $4.9 million. Comparing the year ended December 31, 1996 to the
year ended December 31, 1995, total debt on the Berg Properties increased by
$4.0 million, capital contributions increased by $9.3 million, and capital
distributions decreased by $0.1 million.
NON-CASH FINANCING ACTIVITIES. Non-cash investing and financing activities
for the Berg Properties consisted of debt forgiveness gains of approximately
$0.6 million and $3.2 million for the years ended December 31, 1996 and 1995,
respectively, attributable to the debt forgiveness by Great West Life & Annuity
Insurance Company. Transfers of construction in progress, reflecting the
difference in the amount of construction in progress at the beginning and end of
each period, were none and $3.1 million for the six months ended June 30, 1998
and 1997, respectively, and $6.8 million and $0.08 million and none for the
years ended December 31, 1997, 1996 and 1995, respectively.
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<PAGE>
YEAR 2000 ISSUE
The Company utilizes computer software for its corporate and real property
accounting records and to prepare its financial statements. The vendor of the
Companys current principal software accounting system has advised the Company
that it will provide, at no charge, a Year 2000 compliance software upgrade to
the Company in early 1999. If necessary, the Company could prepare all required
accounting entries manually without incurring material additional operating
expenses.
Conceivably, tenants of the Properties could experience delays in
processing their accounting records and making required lease payments, if they
encounter Year 2000 compliance problems. The Company does not believe that any
such delays would have a material adverse effect on the Company.
INFLATION
Most of the leases with the tenants of the Properties require the tenants
to pay all operating expenses, including real estate taxes and insurance, and
increases in common area maintenance expenses, either directly or by
reimbursements paid to the landlord. Such lease provisions substantially reduce
the Company's exposure to increases in costs and operating expenses resulting
from inflation.
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<PAGE>
DESCRIPTION OF THE PROPERTIES
GENERAL
Prior to the Partnership Closing, the members of the Berg Group and certain
of their Affiliates owned all of the Berg Properties, which consist of 50 sites,
including 58 separate buildings aggregating approximately 3,780,000 rentable
square feet, and all of which are located in Silicon Valley. As the sole general
partner of all of the Operating Partnerships, the Company has acquired control
of the Berg Properties. The Acquired Properties, which consist of 11 sites,
including 11 separate buildings aggregating approximately 561,000 rentable
square feet, also located in Silicon Valley, are owned by the Operating
Partnerships and controlled by the Company. All of the Properties will be held
by the Operating Partnerships after the Berg Acquisition.
OVERVIEW OF THE BERG PROPERTIES
All of the Berg Properties are R&D Properties, designed for research and
development, office and, in some cases, include space for light manufacturing
operations with loading docks. The Company considers all of the Berg Properties
to be "Silicon Valley R&D Properties." Generally, the Berg Properties are one to
four story buildings of tilt-up concrete construction, have parking of 3.5
spaces per thousand square feet, or greater, clear ceiling heights less than 18
feet, and range in size from 18,000 to 211,000 rentable square feet. Most of the
office space is open and suitable for configuration to meet the tenants'
requirements with the use of movable dividers. Approximately 40 of the 58 R&D
Properties are single tenant facilities, although most have been designed to be
divisible and to be usable by multiple tenants.
The current leases for the Berg Properties typically have terms ranging
from three to ten years. Most of the leases provide for fixed periodic rental
increases. Substantially all of the leases are "triple net" leases pursuant to
which the tenant is required to pay substantially all of the operating expenses
of the Property, including all maintenance and repairs (excluding only certain
structural repairs to the building shell), property taxes and insurance. Most of
the leases contain renewal options which allow the tenant to extend the lease
based on fixed rental adjustments (which may be below market ratio) or
adjustment to then prevailing market rates.
AVERAGE OCCUPANCY AND RENTAL RATES
The following table sets forth the aggregate average percent of square
footage leased and the average Annual Base Rent per leased square foot for the
Berg Properties for the periods specified:
<TABLE>
<CAPTION>
Total Rentable Average Occupancy Average Monthly Base Rent Total Annual Base Rent
Square Footage at Period End Per Leased Square Foot (1) (in thousands) (2)
----------------- -------------------- ---------------------------- -------------------------
<S> <C> <C> <C> <C>
1992 2.8 million 87.55% $0.85 $24,893
1993 2.8 million 89.58% 0.84 25,316
1994 2.9 million 80.27% 0.96 26,389
1995 3.2 million 87.38% 0.71 23,745
1996 3.4 million 91.86% 0.78 29,119
1997 3.8 million 97.68% (3) 0.86 38,295
</TABLE>
- ---------------------
(1) Calculated as total Annual Base Rent divided by the average total leased
square footage at period end divided by 12.
(2) Excludes annual base rent under leases entered into wherein the first date
of occupancy is after December 31, 1997 for Berg Properties consisting of
53,494, 26,150, and 8,206 square feet, respectively.
(3) As of September 30, 1998 the Berg Properties were 100% occupied.
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<PAGE>
LEASING ACTIVITY
The following table sets forth certain information (on a per rentable
square foot basis) about leasing activity for the Berg Properties owned as of
December 31, 1997 for the years indicated:
<TABLE>
<CAPTION>
Number of Square Footage Base Rent Tenant Improvements Effective
Leases(1) Leased Under Leases and Commissions(2) Annual Rent
-------------- ----------------- --------------- ------------------------ -------------
<S> <C> <C> <C> <C> <C>
1992 10 717,673 $9.97 $ - $9.97
1993 10 531,313 $10.26 $0.49 $9.77
1994 10 454,576 $7.01 $0.83 $6.18
1995 17 569,740 $9.58 $0.18 $9.40
1996 24 705,971 $11.31 $0.77 $10.54
1997 18 811,903 $14.57 $0.71 $13.86
</TABLE>
- ---------------------
(1) Excludes leases with a term of less than 12 months and leases related to new
buildings or substantially renovated buildings.
(2) Amounts represent the annual amortization expense associated with leasing
commissions and tenant improvements related to leases executed during the
period. Costs related to new buildings or substantially renovated buildings
have been excluded.
LEASE EXPIRATIONS
The following table shows expirations of leases for the Berg Properties in
place as of December 31, 1997 for each of the next ten years beginning with
1998, assuming none of the tenants exercises renewal options or termination
rights that have not been exercised as of the date hereof:
<TABLE>
<CAPTION>
Percentage of
Annual Base Rent Total Annual Base
Number of Rentable Square Footage Under Expiring Rent Represented By
Leases Expiring Subject to Expiring Leases (in Expiring
Leases thousands)(1) Leases(2)
----------------- ------------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
1998 4 94,409 $644 1.50%
1999 9 426,466 $3,471 8.07%
2000 18 642,497 $7,463 17.35%
2001 18 457,758 $4,713 10.95%
2002 11 808,652 $11,250 26.15%
2003 7 338,093 $3,500 8.14%
2004 10 578,853 $7,771 18.06%
2005 - - - -
2006 1 93,984 $1,015 2.36%
2007 and
thereafter 4 339,272 $3,194 7.42%
----------------- ------------------------- ---------------------- ---------------------
82 3,779,984 $43,021 100.00%
</TABLE>
- ---------------------
(1) Actual Base Rent for 1998. Includes additional 26,150 square feet leased to
Sasco, 53,494 leased to Avnet and 8,206 leased to Breakthrough Software.
(2) Based on actual 1998 Rents under existing leases.
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<PAGE>
SIGNIFICANT PROPERTIES AND TENANTS
The Berg Properties are occupied by a total of 73 tenants. Most of the Berg
Properties are occupied by single tenants, and most of the largest tenants are
publicly-held companies in the electronics industry. The following table sets
forth information concerning the 12 largest tenants for the Berg Properties,
representing 56.8% of the total Annual Base Rent and 50.8% of the total leased
square footage for the Berg Properties as of December 31, 1997. See "BERG
PROPERTIES HISTORICAL FINANCIAL DATA."
<TABLE>
<CAPTION>
Number Number Annual Base Rent Percent of Total Annual
Tenant of Leases of Buildings (in thousands) Base Rent from all Leases
----------------------- ----------- ------------- ------------------ -------------------------
<S> <C> <C> <C> <C>
1 Apple Computer, Inc. 3 4 $6,223 16.25%
2 Amdahl Corporation 4 7 3,320 8.67%
3 Cisco Systems, Inc. 2 2 2,745 7.17%
4 ESL (TRW) 1 1 1,273 3.32%
5 Motorola, Inc. 1 1 1,254 3.27%
6 On Command Video 1 2 1,155 3.02%
7 Arrow Electronics 2 2 1,114 2.91%
8 Condor Systems, Inc. 1 2 1,073 2.80%
9 Comerica Bank 1 1 996 2.60%
10 Behring Pharmaceutical 1 1 945 2.47%
11 Santa Clara County 2 1 873 2.28%
12 NEC Electronics 1 1 784 2.05%
----------- ------------- ------------------ -------------------------
Total 20 25 $21,755 56.81%
</TABLE>
Set forth below is additional information concerning certain Berg
Properties:
APPLE PROPERTIES
The Apple Properties consist of four buildings located at three locations
in Cupertino, California totaling 376,400 square feet occupied by Apple
Computer, Inc. ("Apple") for more than five years. The Apple Properties
represent approximately 8.67% of the total rentable square footage in the
Operating Partnerships. The largest building is a four-story 211,000 square foot
building located across the street from Apple's 850,000 square foot corporate
headquarters. Apple spent approximately $14 million in 1992 to renovate and
upgrade this building, which is currently used for software development
activities. Apple also leases a three-building "campus" complex, totaling
142,000 square feet, located one-half block from Apple's headquarters building.
Apple spent approximately $10 million to renovate and upgrade this facility in
1991 and currently uses this building for engineering activities. Apple also
leases a 23,400 square foot building in Cupertino, California approximately two
miles from Apple's corporate headquarters. This facility is currently used for
prototype manufacturing. None of the Apple Properties is sublet or unoccupied.
The effective annual rent per square foot for the Apple Properties was
$11.42, $12.98, $13.12, $13.23 and $15.79 for 1993 through 1997, respectively.
The total income tax basis in the Apple Properties was $3,787,722 as of December
31, 1997. Depreciation has been recorded for tax purposes using the
straight-line method over the useful lives of the respective assets from the
dates they were placed in service, which have ranged from 5 to 45 years. The
annual property taxes, including assessments, for the Apple Properties
aggregated approximately $418,000 for the year ended December 31, 1997, based on
a tax rate of approximately 1.08% plus assessments.
DESCRIPTION OF TENANT. Apple is a Fortune 500 company and one of the
largest computer firms in the world. As of March 31, 1998, Apple employed
approximately 10,000 people, and its total annual revenues for 1997 were
approximately $7 billion. Apple's Cupertino headquarters building was completed
in 1993 at an estimated cost of $200 million, and the two largest Apple
Properties are the buildings located closest to Apple's headquarters.
LEASE TERMS. The lease for the four-story building expires on May 31, 2002.
The lease currently provides for rental payments of $4,338,840 per year ($1.71
per square foot per month). Apple has the option to extend the term of this
lease for two successive five-year periods, subject to fixed rent adjustments.
The lease for the three-building campus expires on December 31, 2002. This lease
currently provides for rental payments of
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<PAGE>
$1,975,382 per year ($1.16 per square foot per month). Apple has the option to
extend the term of this lease for five years, subject to an adjustment of the
rental to market rates. The lease for the 23,400 square feet building expires on
November 30, 1998. This lease currently provides for rental payments of $351,702
per year ($1.25 per square foot per month). There are no termination, relocation
or buy-out rights in favor of Apple under any of these leases.
AMDAHL PROPERTIES
The Amdahl Properties comprise a 260,000 square foot office complex of five
buildings located in the Oakmead Business Park in Sunnyvale, California and two
buildings of 125,000 square feet and 75,000 square feet, respectively, located
in Santa Clara, California about two miles from the Sunnyvale complex. These
properties are occupied by Amdahl Corporation ("Amdahl"). The Amdahl Properties
represent approximately 10.6% of the total rentable square footage in the
Operating Partnerships. Amdahl utilizes the Sunnyvale facility for its corporate
headquarters and the Santa Clara facility for research and development
activities. These buildings were built between 1972 and 1983 under build-to-suit
arrangements with Amdahl. Amdahl has sublet approximately 23,000 square feet of
one of the Santa Clara buildings.
The effective annual rent per square foot for the Amdahl Properties was
$6.63, $6.86, $7.16, $7.16 and $7.20 for 1993 through 1997, respectively. The
total income tax basis in the Amdahl Properties was $7,192,570 as of December
31, 1997. Depreciation has been recorded for tax purposes using the
straight-line method over the useful lives of the respective assets from the
dates the assets were placed in service, which range from 5 to 45 years. The
annual property taxes, including assessments, for the Amdahl Properties
aggregated approximately $402,000 for the year ended December 31, 1997, based on
an average tax rate of approximately 1.04% plus assessments.
DESCRIPTION OF TENANT. Amdahl is a major international computer company,
and a wholly owned subsidiary of Fujitsu Limited. As of December 31, 1997,
Amdahl employed approximately 9,900 people and its total revenues for the year
were approximately $1.6 billion.
LEASE TERMS. The leases for five of the buildings, totaling 260,000 square
feet, expire in the first half of 1999. These leases currently provide for
aggregate annual rent of $1,061,592 ($0.34 per square foot per month). The lease
for the 125,000 square foot building in Santa Clara expires on November 30,
2008. Currently, annual rental for this building totals approximately $1,104,698
during 1998 and increases by 5% every seven years ($0.74 per square foot per
month before adjustments). The lease for the remaining 75,000 square foot
building expires on April 14, 2004. Currently, annual rental for this facility
is $1,157,085 ($1.29 per square foot per month). The leases contain 14 five-year
options remaining with rental rates increasing at pre-negotiated increments for
each option period. The Company believes that the rental rates for all of the
Amdahl Properties are significantly below present market rates, and the
pre-negotiated rate adjustments will not necessarily bear any relationship to
present or future market rates. There are no termination, relocation or buy-out
rights in favor of Amdahl under any of the leases.
CISCO PROPERTIES
The Cisco Properties consist of two buildings presently occupied by Cisco
Systems, Inc. ("Cisco"). One of the buildings is a 200,484 square foot
build-to-suit building located in south San Jose completed in January 1996. The
other building, which is located in Santa Clara, totals 65,780 square feet and
was acquired in 1996 and leased to Cisco effective February 1, 1997. The larger
facility is used by Cisco as a major manufacturing and research and development
site. The Cisco Properties represent approximately 6.13% of the total rentable
square footage in the Operating Partnerships.
The effective annual rent per square foot for the Cisco Properties was
$10.20 for 1997. The total income tax basis in the Cisco Properties was
$14,299,768 as of December 31, 1997. Depreciation has been recorded for tax
purposes using the straight-line method over the useful lives of the respective
assets from the dates the assets were placed in service, which approximate 40
years for these improvements. The annual property taxes, including assessments,
for the Cisco Properties aggregate approximately $259,185 based on the 1997-98
real property tax bills, with tax rates ranging from 1.09% to 1.14% plus
assessments. Cisco is in the process of completing certain improvements
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<PAGE>
at the smaller facility which will likely result in a real property tax
reassessment of this property. Any increase in taxes associated with these
improvements during the lease term is Cisco's responsibility.
DESCRIPTION OF TENANT. Cisco is a publicly traded computer network products
manufacturer. As of July 31, 1997, Cisco employed over 11,000 people. Its
revenues grew by 57.2% over the prior year and its total revenues for its 1997
fiscal year were approximately $6.44 billion.
LEASE TERMS. The lease for the 200,484 square foot building expires on
December 31, 2002. The current annual rental is $2,033,580 ($0.85 per square
foot per month) with fixed periodic increases. Cisco has an option to purchase
this property and has the first right of option to lease or purchase additional
buildings to be constructed, if any, on property adjacent to the location of
this building. The purchase option must be exercised during defined periods
during the lease term at fixed prices. Cisco has two five-year options to extend
the term of its existing lease at fixed annual rent increases.
The lease for the 65,780 square foot building expires on January 31, 2000.
The current rent for this property is $907,764 ($1.15 per square foot per month)
with no rental increases over the initial term of the lease. Cisco has one
option to extend the term of this lease for a period of one year at a fixed
rental increase.
OTHER MAJOR TENANTS
The other nine of the twelve major tenants for the Berg Properties
currently lease R&D Properties under 11 separate leases which comprise
approximately 21.63% of the Operating Partnerships' total rentable square
footage. None of the nine tenants accounts for more than 3.3% of Annual Base
Rent for the Berg Properties or more than 3.47% of the total rentable square
footage of all Properties. The Company believes that all nine tenants currently
are in good financial condition. The Company is unaware of any material defaults
under any of their leases. Each of such tenants has signed a form of the Berg &
Berg standard lease agreement. If any of these tenants were to vacate the Berg
Properties that they currently lease or otherwise terminated their tenancies,
the Company believes that it could obtain new tenants at comparable or higher
rents within three months, in light of the current market for Silicon Valley R&D
Properties. See "THE BUSINESS OF BERG & BERG--The Silicon Valley R&D Property
Market."
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<PAGE>
THE BERG PROPERTIES
The following table provides certain additional information concerning all
of the Berg Properties:
<TABLE>
<CAPTION>
Annualized
1997 Effective
Year Developed Annualized 1997 Net Rent Per
Address of Leased ("D") or Rentable Actual Annual Net Rent Per Sq. Sq. Ft. Per
Premises Acquired ("A") Square Feet Tenant Base Rent for 1997 Ft. Per Month Month
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
10401 Bubb Road 1972(D) 9,708 LBE Technology $145,814 $1.25 $1.23
Cupertino
1600/10 McCandless 1995(A) 40,970 Panasonic $270,402 $0.55 $0.55
Milpitas Industrial
1745 McCandless 1995(A) 20,331 EIP Microwave $178,104 $0.73 $0.69
Milpitas
10300 Bubb Road 1972(D) 23,400 Apple $351,702 $1.25 $1.25
Cupertino
1657 McCandless 1995(A) 8,184 Wedge Tech. $70,704 $0.72 $0.72
Milpitas
1230 E. Arques Ave. 1977(D) 60,000 Amdahl $302,337 $0.42 $0.42
Sunnyvale
2001 Logic Drive 1992(D) 72,426 Motorola $1,254,418 $1.44 $1.39
San Jose
1250 E. Arques Ave. 1974(D) 200,000 Amdahl $755,923 $0.31 $0.31
Sunnyvale
2039 Samaritan Drive 1984(D) 14,205 Holonet $251,983 $1.48 $1.41
San Jose
1575 McCandless 1995(A) 11,056 Acropolis $92,870 $0.70 $0.67
Milpitas
2610 No. First Street 1981(D) 6,794 SC Juv. Prob. $103,860 $1.27 $1.21
San Jose
6850 Santa Teresa 1979(D) 30,000 Magnex $210,045 $0.58 $0.58
San Jose
2243 Samaritan Drive 1984(D) 23,801 State Farm $362,727 $1.27 $1.23
San Jose
6385 San Ignacio 1980(D) 17,400 Alcatel $138,330 $0.66 $0.66
San Jose
1135 Kern Avenue 1973(D) 18,300 Davicom $192,150 $0.88 $0.82
Sunnyvale
4750 Patrick Henry 1996(A) 65,780 Siemens/Cisco (1) $898,784 $1.14 $1.08
Santa Clara
10411 Bubb Road 1972(D) 10,622 Enatec/Celerity $166,499 $1.31 $1.25
Cupertino Systems (1)
1212 Bordeaux 1984(D) 71,800 ESL $1,273,344 $1.48 $1.07
Sunnyvale
2239 Samaritan Drive 1984(D) 25,633 Lynx $250,326 $0.81 $0.77
San Jose
1810 McCandless 1995(A) 39,800 Kent Electronics $298,500 $0.63 $0.63
Milpitas
2610-B No. First Street 1981(D) 6,031 Mycom(Nyden) $55,728 $0.77 $0.73
San Jose
1500/20 McCandless 1995(A) 42,700 Adaptec $363,804 $0.71 $0.68
Milpitas
450-460 National Avenue 1973(D) 36,100 Savi Technology $345,756 $0.80 $0.80
Mt. View
140 Great Oaks 1982(D) 30,459 GSS/Array $201,024 $0.55 $0.52
San Jose
2033 Samaritan Drive 1984(D) 12,286 Good Samaritan $179,868 $1.22 $1.22
San Jose
6387 San Ignacio 1980(D) 17,400 Modutek Corporation $127,368 $0.61 $0.61
San Jose
2133-2233 Samaritan Dr. 1984(D) 110,490 Condor $1,072,860 $0.81 $0.81
San Jose
1645 McCandless 1995(A) 6,432 APS Computer/ $65,123 $0.84 $0.72
Milpitas Swinerton Inc. (1)
6540 Via Del Oro 1980(D) 20,076 Exsil $189,672 $0.79 $0.79
San Jose
2600 No. First Street 1981(D) 56,516 SC Cnty(Adult) $769,344 $1.13 $1.13
San Jose
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<PAGE>
<CAPTION>
Annualized
1997 Effective
Year Developed Annualized 1997 Net Rent Per
Address of Leased ("D") or Rentable Actual Annual Net Rent Per Sq. Sq. Ft. Per
Premises Acquired ("A") Square Feet Tenant Base Rent for 1997 Ft. Per Month Month
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3236 Scott Blvd. 1981(D) 54,672 Celeritek $698,472 $1.06 $0.88
Santa Clara
6320 San Ignacio 1982(D) 45,000 Symantec $368,468 $0.68 $0.65
San Jose
6781 Via Del Oro 1982(D) 21,800 Datum $195,192 $0.75 $0.75
San Jose
6330 San Ignacio 1982(D) 19,600 Tech. Elite $218,344 $0.93 $0.69
San Jose
6351 San Ignacio 1982(D) 15,920 Alteon $176,425 $0.92 $0.88
San Jose
6540 Via Del Oro 1980(D) 5,862 X-Cyte, Inc. $15,300 $0.87 $0.87
San Jose
6540 Via Del Oro 1980(D) 5,862 SVCC/Thinking $39,119 $0.56 $0.53
San Jose Tools, Inc. (1)
6350 San Ignacio 1982(D) 63,638 Bell Sports $595,656 $0.78 $0.54
San Jose
1635 McCandless 1995(A) 7,922 Preston-Holmes $66,705 $0.70 $0.70
Milpitas
6360 San Ignacio 1982(D) 19,104 Silicon Vly Resch $190,330 $0.83 $0.63
San Jose
1625 McCandless 1995(A) 11,087 Rorze Autom. $128,292 $0.96 $0.92
Milpitas
2043 Samaritan Drive 1984(D) 48,677 Amati $709,706 $1.21 $1.09
San Jose
150-160 Great Oaks 1982(D) 52,000 Atcor $396,000 $0.63 $0.63
San Jose
6325 San Ignacio 1981(D) 50,400 Photon Dynamics $547,934 $0.91 $0.69
San Jose
1555 McCandless 1995(A) 14,436 A&D Engineering $144,503 $0.83 $0.83
Milpitas
1450 McCandless 1997(D) 45,312 Chartered $450,998 $0.83 $0.79
Milpitas Semiconductor
1435 McCandless 1995(A) 8,713 SVT Technologies $88,872 $0.85 $0.85
Milpitas
1525-35 McCandless 1995(A) 14,219 TTI West/ADE Tech. $164,232 $0.96 $0.92
Milpitas (1)
1455 McCandless Dr 1995(A) 13,129 CNET $137,203 $0.87 $0.84
Milpitas
3301 Olcott Street 1977(D) 64,500 NEC Electronics $783,675 $1.22 $0.91
Santa Clara
1690 McCandless 1997(D) 14,919 Taxan $167,997 $1.41 $1.33
Milpitas
10500 N. De Anza Blvd 1981(D) 211,000 Apple $4,145,140 $1.64 $1.56
Cupertino
6311 San Ignacio 1981(D) 30,000 Teledex $210,000 $0.58 $0.58
San Jose
6340 San Ignacio 1982(D) 9,750 Aureflam $52,065 $0.89 $0.67
San Jose Corporation
405 Tasman/1190 Morse 1976(D) 28,350 Pacific Pay $286,618 $0.84 $0.83
Sunnyvale Video/Coptec (1)
6341 San Ignacio 1980(D) 79,120 Nelms-Donham $645,198 $0.68 $0.65
San Jose
1725 McCandless Dr 1995(A) 15,400 Spec. Mat. Supply $147,243 $0.80 $0.77
Milpitas
4949 Hellyer Avenue 1995(D) 200,484 Cisco $1,913,292 $0.80 $0.77
San Jose
20605-705 Valley Green 1975(D) 142,000 Apple $1,726,622 $1.01 $0.94
Cupertino
1425 McCandless 1995(A) 16,737 Optical Assoc. $164,469 $0.82 $0.82
Milpitas
20400 Mariani 1978(D) 105,000 Syva $945,000 $0.75 $0.75
Cupertino
2800 Bayview 1994(A) 59,736 Concept $599,568 $0.84 $0.81
Fremont
10440 Bubb Road 1979(D) 19,500 Linotext Digital $245,700 $1.05 $1.00
Cupertino Color
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<PAGE>
<CAPTION>
Annualized
1997 Effective
Year Developed Annualized 1997 Net Rent Per
Address of Leased ("D") or Rentable Actual Annual Net Rent Per Sq. Sq. Ft. Per
Premises Acquired ("A") Square Feet Tenant Base Rent for 1997 Ft. Per Month Month
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1170 Morse Ave. 1980(D) 34,750 CA Parkinson $365,864 $0.88 $0.66
Sunnyvale
1740 McCandless 1995(A) 51,602 Mektec $498,475 $0.81 $0.81
Milpitas
1325 McCandless 1996(D) 50,768 Sherpa $574,084 $0.94 $0.91
Milpitas
1375 McCandless 1996(D) 26,800 Digital DJ $373,109 $1.27 $1.24
Milpitas
6321 San Ignacio 1981(D) 53,494 Avnet(2) -- $0.00 $0.00
San Jose
10460 Bubb Road 1976(D) 30,460 Silicon Video/GSI $433,760 $1.58 $1.55
Cupertino (1)
3120 Scott Blvd. 1983(D) 75,000 Amdahl $1,157,085 $1.29 $1.29
Santa Clara
6331 San Ignacio 1980/1997(D) 131,320(3) On Command Video $1,155,267 $0.73 $0.73
San Jose
1587 & 1595 McCandless 1995(A) 22,207 Spin Tech./Medical $239,313 $0.90 $0.89
Milpitas Innovations
1765 McCandless 1997(D) 118,708 Larscom $614,313 $1.15 $1.12
Milpitas
3501 W. Warren Blvd 1997(D) 51,864 Comptech $267,620 $1.29 $1.24
Fremont
46600 Fremont Blvd. 1997(D) 16,000 A-Trend Technology $95,040 $1.32 $1.29
Fremont
48800 Milmont Drive 1996(D) 53,000 Premisys $563,178 $0.89 $0.85
Fremont
75/85 E. Trimble 1981(D) 93,984 Comerica $996,232 $0.88 $0.86
San Jose
1350 McCandless 1997(D) 46,272 Arrow Electronics, $569,129 $1.12 $1.09
Milpitas Inc.
1600 Memorex Drive 1995(A) 83,516 Sasco $438,460 $0.53 $0.44
Santa Clara
1680 McCandless 1997(D) 58,334 Arrow Electronics, $545,247 $1.04 $1.01
Milpitas Inc.
2251 Lawson Lane 1979(D) 125,000 Amdahl $1,104,698 $0.74 $0.74
Santa Clara
2610-C North First St 1981(D) 8,206 Breakthrough (4) $0 $0.00 $0.00
San Jose
1600 Memorex 1995(A) 26,150 Sasco(2) $0 $0.00 $0.00
Santa Clara
------------ --------------
Totals 3,779,984 $38,294,581
</TABLE>
- -----------------
(1) Space that has been vacated during 1997 by first tenant named and re-let to
second tenant named.
(2) Lease signed prior to December 31, 1997, and Property occupied as of January
1998. Not considered occupied for occupancy calculations.
(3) 36,320 rentable square feet completed during 1997.
(4) Additional space leased to Breakthrough Software with rent commencing in
February 1998.
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<PAGE>
STANDARD BERG & BERG LEASE TERMS
The standard lease agreement used by Berg & Berg is a triple net lease. The
term of the standard lease ranges from three to ten years with one to three
five-year options for the tenant to extend the lease at market rental rates, but
not less than the rent in the last month of the original term. Most of the
leases contain provisions similar to the following:
- Except to the extent caused by the sole negligence or willful misconduct
of the lessor, the tenant is required to fully indemnify Berg & Berg for
property related actions, suits, proceedings or the like, including any actions,
suits or proceedings relating to hazardous materials. The indemnification
provisions survive the termination of the lease.
- The tenant may not assign the lease or sublet the premises without the
prior written consent of Berg & Berg, except to a bona fide affiliate or
subsidiary of the tenant. In recent leases, Berg & Berg has reserved the right
to withhold consent to any proposed assignment or sublease if the proposed
assignee or sublessee is a generator of hazardous materials. Regardless of an
assignment or sublet permitted, the tenant remains primarily liable for the
performance of all conditions, covenants and obligations under the lease.
- Berg & Berg generally does not require the tenant to obtain earthquake
insurance.
OVERVIEW OF THE ACQUIRED PROPERTIES
All of the Acquired Properties are R&D Properties. They are occupied by a
total of 10 tenants under leases with terms ranging from 4 to 13 years. Most of
the leases provide for fixed periodic rental increases. All of the leases are
triple net leases. Most of the leases contain renewal options which allow the
tenant to extend the lease based on fixed rental adjustments (which may be below
market ratio) or adjustment to then prevailing market rates.
AVERAGE OCCUPANCY AND RENTAL RATES
The following table sets forth the aggregate average percent of square
footage leased and the average Annual Base Rent per leased square foot for the
Acquired Properties for the periods specified:
<TABLE>
<CAPTION>
Total Annual
Total Rentable Average Occupancy Average Annual Base Rent Effective Rent Per Base Rent
Square Footage at Period End Per Leased Square Foot (1) Square Foot(3) (in thousands)
-------------- ----------------- -------------------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
1992 416,527 84.30% $0.87 $0.87 $3,672,036
1993 416,527 74.23% 0.88 0.70 3,259,777
1994 416,527 66.05% 0.89 0.64 2,879,135
1995 416,527 81.76% 0.72 0.72 2,953,399
1996 416,527 86.84% 0.76 0.76 3,313,067
1997 560,585 90.63% 0.86 0.81 5,000,488
</TABLE>
- -----------
(1) Calculated as total Annual Base Rent divided by the average total leased
square footage at period end divided by 12.
(2) Includes the Fremont Properties, which were completed and occupied during
1997.
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<PAGE>
LEASE EXPIRATIONS
The following table shows expirations of leases for the Acquired Properties
in place as of December 31, 1997 for each of the next ten years beginning with
1998, assuming none of the tenants exercises renewal options or termination
rights that have not been exercised as of the date hereof:
<TABLE>
<CAPTION>
Annual Base Rent Percentage of Total Annual
Number of Rentable Square Footage Under Expiring Leases Base Rent Represented by
Leases Expiring Subject to Expiring Leases (in thousands)(1) Expiring Leases(2)
--------------- -------------------------- --------------------- --------------------------
<S> <C> <C> <C> <C>
1998 1 18,304 $ 64 1.02%
1999 3 65,598 751 11.95%
2000 - - - -
2001 - - - -
2002 7 332,625 3,527 56.16%
2003 - - -
2004 2 99,802 1,422 22.64%
2005 - - - -
2006 - - - -
2007 and
thereafter 1 44,256 517 8.23%
--------------- -------------------------- --------------------- --------------------------
Total 14 560,585 $6,281 100.00%
</TABLE>
- -----------
(1) Based on actual base rent under existing leases for 1998.
(2) Calculated by dividing the Annual Base Rent for 1998 by total 1998 Annual
Base Rents for all Acquired Properties.
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<PAGE>
ACQUIRED PROPERTIES
The following table provides certain additional information concerning
the Acquired Properties:
<TABLE>
<CAPTION>
Year Annualized Annualized
Developed Actual 1997 Net 1997 Effective
("D") or Rentable Annual Base Rent Per Net Rent Per
Address of Acquired Square Rent for Sq. Ft. Sq. Ft. Per
Leased Premises ("A") Feet Tenant 1997 Per Month Month
- ---------------------- ----------- --------- ----------------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
FREMONT PROPERTIES
4050 Starboard Drive 1997(D) 52,232 Flash - - -
Fremont, California(1) Electronics,
Inc.
45700 Northport 1997(D) 47,570 Phillips $669,960 $1.17 $1.14
Fremont, California Electronics
45738 Northport Loop 1997(D) 44,256 EIC $432,902 $0.82 $0.80
Fremont, California
--------- -----------
Totals 144,058 $1,102,862
KONTRABECKI PROPERTIES
3510 Bassett Street 1983(D) 18,304 Sigma Circuits $153,756 $0.70 $0.55
Santa Clara, California
3540 Bassett Street 1984(D) 19,600 IXYS $180,198 $0.77 $0.70
Santa Clara, California Technologies, Inc.
3542 Bassett Street 1984(D) 20,648 Sigma Circuits $182,872 $0.74 $0.59
Santa Clara, California
3506 Bassett Street 1983(D) 25,350 Crystallume / $261,013 $0.86 $0.74
Santa Clara, California A.R.T.
3530 Bassett Street 1983(D) 50,070 SDL, Inc. $476,974 $0.79 $0.79
Santa Clara, California
3520 Bassett Street 1988(D) 52,080 KLA Instruments $624,674 $1.00 $1.00
Santa Clara, California / SDL, Inc.
3550 Bassett Street 1986(D) 49,080 Intevac $421,950 $0.72 $0.72
Santa Clara, California
3560 Bassett Street 1986(D) 73,093 Intevac $647,018 $0.74 $0.74
Santa Clara, California
3570 Bassett Street 1986(D) 23,372 Intevac $252,418 $0.90 $0.90
Santa Clara, California
3580 Bassett Street 1986(D) 21,118 Intevac $181,557 $0.72 $0.72
Santa Clara, California
3544 Bassett Street 1984(D) 63,812 Maxell Corp. $515,196 $0.67 $0.67
Santa Clara, California
--------- -----------
Totals 416,527 $3,897,626
</TABLE>
- ------------
(1) Lease signed prior to December 31, 1997, rent and occupancy commenced on
January 1, 1998.
(2) Lease for 3560 Bassett commenced on April 1, 1997. Rent for the first two
months was payable at a 50% discount.
THE PENDING DEVELOPMENT PROJECTS
GREAT OAKS/SANTA TERESA This proposed project located on Berg & Berg land
in south San Jose will be a contemporary two-story concrete tilt-up R&D Property
of approximately 54,240 square feet situated on a three-acre site. BBE expects
this project to be completed and leased in late 1998 to mid-1999.
MEMOREX AND RICHARD. This proposed complex located in Santa Clara will
consist of two single story R&D Properties, with limited parking, intended for
single tenant occupancy. The building located on Memorex Drive will have 52,800
rentable square feet, and the building on Richard Ave. will have 58,740 square
feet. BBE expects to complete and lease both buildings by mid-1998.
AUTOMATION PARK. This project is being built on two adjoining parcels
totaling 22 acres in north San Jose. BBE will construct four single story
Spanish-style R&D Properties with approximate rentable areas of 114,028, 80,640,
80,640 and 61,056 square feet, respectively, with 4 per 1,000 square feet
parking areas. BBE expects to complete and lease the four buildings between late
1998 and mid-1999.
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<PAGE>
L'AVENIDA. This Mountain View, California project will be a five-building
complex totaling approximately 513,000 square feet on nearly 30 acres. The
buildings will be high-quality contemporary tilt-up R&D Properties with
reflective glass and concrete exteriors designed primarily as headquarters or
research and development facilities for software or biotechnology firms. The
site is a prime location near U.S. Highway 101, and neighboring tenants include
Alza Corporation, Sun Microsystems, Inc. and Silicon Graphics, Inc. BBE expects
to complete and lease all of the buildings in mid-1999. On August 6, 1998, Berg
& Berg and Microsoft signed a lease with respect to an approximate 515,000
square foot property to be constructed by Microsoft on L'Avenida in Mountain
View, California, one of the sites comprising the Pending Development Projects.
This is a triple net lease with base rent in the first year of $2.95 per square
foot. Microsoft controls the construction of this facility, which is scheduled
to be completed in phases between March and May 1999.
THE PENDING PROJECTS ACQUISITION AGREEMENT. The Acquisition Agreement, as
amended, provides for the Company, the Operating Partnerships and the members of
the Berg Group holding interests in the Pending Development Projects to enter
into the Pending Projects Acquisition Agreement for the acquisition of the
Pending Development Projects by the Operating Partnerships at the final closing
date for the Berg Acquisition. Currently, there are no tenants for any of the
Projects. Following are the principal terms of that agreement:
- The selling Berg Group members and BBE will build and deliver
each R&D Property in the Pending Development Projects to the
Operating Partnerships at the acquisition value set forth in the
following table, subject to adjustment if the actual average
monthly rental rate per square foot differs from the projected
rental rate set forth in the table. The actual acquisition value
will be equal to the actual Annual Base Rent divided by the
capitalization rate, minus the amount of debt encumbering the
property.
<TABLE>
<CAPTION>
Projected Triple Projected Average
Approximate Net Annual Base Monthly Rental Rate Acquisition Capitalization
Pending Project Building Size Rent Per Square Foot Value Rate(1)
- ------------------ ------------- ------------------ -------------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Great Oaks 54,240 $ 715,968 $1.10 $ 5,226,043 0.137
Memorex Drive 52,800 $ 535,560 $0.85 $ 3,347,250 0.160
Richard (Ave.) 58,740 $ 599,148 $0.85 $ 3,744,675 0.160
Automation Park 114,028 $1,778,836 $1.30 $12,705,971 0.140
80,640 $1,257,984 $1.30 $ 8,985,600 0.140
80,640 $1,257,984 $1.30 $ 8,985,600 0.140
61,056 $ 952,474 $1.30 $ 6,803,386 0.140
L'Avenida(2) 94,134 $3,219,382 $2.85 $18,937,541 0.170
101,622 $3,475,724 $2.85 $20,445,435 0.170
93,314 $3,191,339 $2.85 $18,772,582 0.170
126,236 $4,317,271 $2.85 $25,395,717 0.170
98,166 $3,357,277 $2.85 $19,748,688 0.170
</TABLE>
- -----------------
(1) Calculated as 100 divided by the quotient of the Purchase Price and the
Projected Triple Net Annual Base Rent. Management believes the current
capitalization rate for good quality Silicon Valley R&D Properties is
approximately 0.085 to 0.095.
(2) This project provides an unusually high rate of return and is not
representative of returns or projects that the Company may be able to
obtain or acquire in the future.
- The acquisition value will be payable by the Company or the
Operating Partnerships in L.P. Units at $4.50 per L.P. Unit or
cash, at the option of the Sellers.
- The closing for the acquisition of an individual R&D Property
within the Project will occur only when the building has been
completed and fully leased. The Company and the Operating
Partnerships are not otherwise required to acquire any of the
Pending Development Projects.
- The sellers will make customary representations and warranties to
the Operating Partnerships as of the closing date.
- Leases will be on commercially reasonable terms and conditions.
See "Standard Berg & Berg Lease Terms."
The Company will acquire the R&D Properties to be built by Microsoft on the
L'Avenida site when and if construction has been completed and the buildings
have been fully leased, and provided that the shareholders of the Company have
approved the Pending Projects Acquisition Agreement at the Special Meeting.
There can be no assurance that Microsoft will complete this facility, and unless
all of the foregoing events occur, the Company will have no right to acquire the
L'Avenida Pending Development Project, or any interest therein.
-56-
<PAGE>
LAND HOLDING AND DEVELOPMENT ARRANGEMENTS
BERG LAND HOLDINGS. Certain members of the Berg Group, including Carl E.
Berg, own the Berg Land Holdings, which consist of several parcels of
undeveloped real estate in the Silicon Valley which have been made available to
the Company for future development, subject to stockholder approval at the
special meeting, under the terms of the Option Agreement. Mr. Berg and such
other Berg Group members have not undertaken any obligation to the Company or
the Operating Partnerships to exercise any of their options or rights to acquire
or develop the Berg Land Holdings and may not exercise them prior to their
current expiration dates. The following table describes the Berg Land Holdings:
<TABLE>
<CAPTION>
Estimated Remaining
Development Potential
Acres(1) in Rentable Square Feet(2)
------------- -------------------------
<S> <C> <C>
King Ranch Business Park, South San Jose 123 1,900,000
Hellyer and Piercy, South San Jose 7 105,000
Fremont & Cushing, Fremont 32 450,000
</TABLE>
- ------------
(1) Net acres
(2) Assumed coverage ratio of 32-35% of the buildable portion of the parcel.
All three parcels have industrial or industrial business park zoning,
permitting the development of R&D Properties. All discretionary approvals for
the King Ranch, and Hellyer and Piercy properties have been obtained, with the
exception of discretionary architectural reviews. Development of each of the
parcels also requires various administrative and ministerial permits and
approvals prior to the commencement of construction.
The King Ranch site is adjacent to U.S. Highway 101. To date, designs have
been prepared for two buildings of approximately 110,000 square feet and 70,000
square feet, respectively.
Certain members of the Berg Group hold an option to purchase the site at
Fremont Avenue and Cushing Boulevard in Fremont, California, exercisable,
including all extensions, prior to January 2000. Acquisition of the land is
subject to receipt of building permits and the resolution of issues concerning
the set aside of wetlands. The Berg Group intends to propose offsite mitigation
to the Army Corps of Engineers. If this mitigation cannot be obtained, the
buildable site would be reduced to approximately 22 acres and 335,000 rentable
square feet. The optionholders may decide not to exercise their option to
acquire this land, in which case it will no longer be subject to the Berg Land
Holdings Option Agreement.
Certain members of the Berg Group hold an option to purchase the parcel
located at Hellyer Avenue and Piercy Road in south San Jose during 1998. The
acquisition of the land is subject to receipt of building permits and the
resolution of street improvement costs with the City of San Jose. The
optionholders may decide not to exercise their right to acquire this property,
in which case it will no longer be subject to the Berg Land Holdings Option
Agreement.
THE OPTION AGREEMENT. The Acquisition Agreement, as amended, provides for
the Company, the Operating Partnerships and the members of the Berg Group
holding interests in the Berg Land Holdings to enter into the Option Agreement
containing the following principal terms at the final closing date for the Berg
Acquisition:
- After the effective date of the Option Agreement and for as long as
the Berg Group members and their Affiliates own or have the right to
acquire shares representing 65% of the Common Stock on a Fully-Diluted
basis, the Company will have the option (the "Option") to acquire any
building developed by any member of the Berg Group on the Berg Land
Holdings at such time as the building has been leased. Upon the
Company's exercise of the Option the option price will equal the sum
of (i) the full construction cost of the building, plus (ii) 10% of
(i), plus (iii) the acquisition value of the parcel on which the
improvements were constructed as set forth in the schedule below, and
interest on that amount at LIBOR from January 1, 1998 until the close
of escrow, plus (iv) taxes and assessments prorated from January 1,
1998, plus (v) interest at LIBOR on the amounts described in clauses
(i) and (iv) from the date paid by the developer and ending at the
close of escrow, minus the aggregate principal amount of all debt
encumbering the acquired property. The acquisition value of each
parcel under the Option Agreement follows:
-57-
<PAGE>
<TABLE>
<CAPTION>
Parcel Acquisition Value
----------------------------------
Per Acre Per Square Foot
------------- -----------------
<S> <C> <C>
King Ranch $435,600 $10.00
Hillyer & Piercy $370,260 $8.50
Fremont & Cushing $871,200 $20.00
</TABLE>
- The purchase price will be payable in cash, unless otherwise agreed by
the Berg Group representatives, and the Company may contribute such
building to the Operating Partnerships, subject to any debt incurred
in connection with the acquisition, in exchange for additional general
partner interests in the Operating Partnerships based up the market
value of the Common Stock over the 30-trading day period preceding the
Company's exercise of the Option.
- The Company also must assume all assessments.
- If the Company elects not to exercise the Option with respect to any
building, the Berg Group may hold and lease the building for its own
account, or may sell it to a third party.
- All action by the Company under the Option Agreement must be approved
by a majority of the members of the Independent Directors Committee.
NON-COMPETITION ARRANGEMENTS. Mr. Berg has advised the Company of his
intention to conduct all of his material R&D Property investment and development
activities through the Company, except with respect to the Berg Land Holdings,
which are subject to the Option Agreement, and the Pending Development Projects,
which are subject to the Pending Projects Acquisition Agreement. Accordingly,
under the Acquisition Agreement, he has agreed not to directly or indirectly
acquire or develop, or acquire an equity ownership interest in any entity that
has or intends to acquire an ownership interest in any real estate (with the
exception of minor investments not to exceed 10% of the outstanding voting
securities in publicly-traded companies) intended for R&D Property development
or similar industrial use in California, Oregon or Washington without first
disclosing such investment opportunity to the Company and making such
opportunity available to the Company at the option of the Independent Directors
Committee. Generally, Mr. Berg and the other Berg Group Members are free to
pursue other types of real estate activities and other business opportunities,
however. See "THE ACQUISITION AGREEMENT--Conflicts of Interest Provisions."
-58-
<PAGE>
MORTGAGE DEBT AND CREDIT LINES
MORTGAGE DEBT. The following table sets forth certain information regarding
the mortgages encumbering the Berg Properties upon the consummation of the Berg
Acquisition, assuming the application of the proceeds therefrom as set forth in
"Use of Proceeds" and that such proceeds were applied effective as of September
30, 1998. All mortgage debt is nonrecourse to the Company, although certain of
the mortgages are cross-defaulted and cross-collateralized with other mortgaged
Properties.
On September 23, 1998, the Company, in its capacity as the general partner
of the Operating Partnerships, obtained a 130 million loan from Prudential
Insurance Company of America. This loan is cross-collateralized and secured by a
single deed of trust encumbering 18 properties improved with 24 buildings and
consisting of approximately 1.7 million square feet of space, all of which are
owned by the Operating Partnerships. The interest rate on the loan is fixed at
6.56% per annum, the amortization period is 30 years, and the term of the loan
is 10 years. There is a significant prepayment penalty if the loan is paid prior
to the maturity date. The loan is nonrecourse to the Operating Partnerships and
the Company, except with respect to certain matters such as environmental
liability relating to the encumbered properties, the payment of taxes and
assessments with respect to the encumbered properties, the responsibility to
return security deposits to the tenants of the encumbered properties, insurance
or condemnation proceeds that are not properly applied under the terms of the
loan, damages that result from early termination or amendment to specified major
leases, waste of the subject properties, bankruptcy or insolvency of any of the
Operating Partnerships or the Company, and any fraud or misrepresentations by
the Company or the Operating Partnerships in connection with the loan. In
addition, portions of the loan are guaranteed by certain Limited Partners.
<TABLE>
<CAPTION>
Actual Pro Forma
September Pro Forma Annual Pro September 30,
30, 1998 Debt Paid off September 30, Forma Debt Maturity 1998
Debt Description Collateral Properties Balance at Offering 1998 Balance Service Date (1) Interest Rate
- ----------------- ----------------------------- ------------ ------------- ------------ ------------ ----------- -------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
LINES OF CREDIT:
Wells 1810 McCandless Drive,Milpitas, CA $39,044 $7,566 $46,610 $3,379 10/99 (2)
Fargo
1740 McCandless Drive, Milpitas, CA
1680 McCandless Drive, Milpitas, CA
1600 McCandless Drive, Milpitas, CA
1500 McCandless Drive, Milpitas, CA
1450 McCandless Drive, Milpitas, CA
1350 McCandless Drive, Milpitas, CA
1325 McCandless Drive, Milpitas, CA
1425 McCandless Drive, Milpitas, CA
1526 McCandless Drive, Milpitas, CA
1575 McCandless Drive, Milpitas, CA
1625 McCandless Drive, Milpitas, CA
1745 McCandless Drive, Milpitas, CA
1765 McCandless Drive, Milpitas, CA
MORTGAGE LOANS (RELATED PARTIES):
2033-2042 Samritan, San Jose CA 18,780 - 18,780 1,362 3/99 7.25%
2133 Samritan, San Jose CA
2233-2242 Samritan, San Jose CA
MORTGAGE LOANS:
Great
West Life
& Annuity
Insurance
Company 6320 San Ignacio Ave, San Jose, CA 7,769 - 7,768 544 2/04 7.0%
Great
West Life
& Annuity
Insurance
Company 6320 San Ignacio Ave, San Jose, CA 3,707 - 3,707 259 5/04 7.0%
National
Electrical
Contractors
Association
Pension
Benefit
Trust Fund 2251 Lawson Lane, Santa Clara, CA 4,625 (4,625) - - 1/09 -
Prudential
Capital
Group 20400 Mariani, Cupertino, CA 2,065 - 2,065 181 3/09 8.75%
New York
Life
Insurance
Company 10440 Bubb Road, Cupertino, CA 436 - 436 42 8/09 9.625%
Home
Savings &
Loan
Association 10460 Bubb Road, Cupertino, CA 536 - 536 51 1/07 9.5%
Amdahl
Corporation 3120 Scott,Santa Clara, CA 6,993 - 6,993 664 3/14 9.5%
Citicorp
U.S.A.
Inc. 280 Bayview Drive Fremont, CA 3,105 - 3,105 233 4/00 (3)
Mellon
Mortgage
Company 3530 Bassett, Santa Clara, CA 2,986 - 2,986 243 6/01 8.125%
Prudential
Secured
Loan 10300 Bubb, Cupertino, CA 130,000(4) - 130,000 8,528 10/08 6.56%
10500 N. DeAnza, Cupertino, CA
4050 Starboard, Fremont, CA
45700 Northpoint Loop, Fremont, CA
45738 Northpoint Loop, Fremont, CA
450-460 National, Mountain View, CA
4949 Hellyer, San Jose, CA
6311 San Ignacio, San Jose, CA
6321 San Ignacio, San Jose, CA
6325 San Ignacio, San Jose, CA
6331 San Ignacio, San Jose, CA
6341 San Ignacio, San Jose, CA
6351 San Ignacio, San Jose, CA
3236 Scott, Santa Clara, CA
3560 Bassett, Santa Clara, CA
3570 Bassett, Santa Clara, CA
3580 Bassett, Santa Clara, CA
1135 Kern, Sunnyvale, CA
1212 Bordeaux, Sunnyvale, CA
1230 E. Arques, Sunnyvale, CA
1250 E. Arques, Sunnyvale, CA
1170 Morse, Sunnyvale, CA
3540 Bassett, Santa Clara, CA
3542 Bassett, Santa Clara, CA
3544 Bassett, Santa Clara, CA
3550 Bassett, Santa Clara, CA
------------- ------------ ----------
Mortgage Loans Sub-total 162,222 157,597 10,745
------------- ------------ ----------
Total $220,046 $222,987 $15,486
</TABLE>
- -------------
(1) All principal due at maturity date.
(2) The lesser of Wells Fargo prime rate in effect on the first day of each
calendar month, or the LIBOR or the Wells Fargo Purchased Funds Rate quoted
on the first day of each calendar month plus 1.65%. Average rates for the
six months ended June 30, 1998 and the years ended December 31, 1997, 1996
and 1995 were 7.26%, 7.25%, 7.04% and 8.20%, respectively.
(3) One month LIBOR plus 1.625% adjusted monthly.
(4) In September 1998, the Company entered into a new secured loan with
Prudential of $130,000,000. The loan bears interest at a fixed rate of
6.56% and due in monthly payments of principal (based on a 30 year
amortization) and interest of approximately $827,000.
-59-
<PAGE>
CREDIT LINES. Historically, some of the Berg Properties have been pledged
as collateral under a line of credit provided by Wells Fargo, which has been
guaranteed by the Berg Group members. As of September 30, 1998, approximately
$39 million was outstanding under the Wells Fargo Line, which is secured by 14
Properties. The Berg Group members remain parties to the Wells Fargo Line, but
have assigned to the Company and Operating Partnerships all of their borrowing
rights under the Wells Fargo Line. See "FUTURE OPERATIONS OF THE COMPANY -- Line
of Credit."
PROPERTY TAX INFORMATION
The aggregate real estate property tax obligations paid by the Company
(with or without tenant reimbursement) for the Berg Properties during calendar
1997 were approximately $4.2 million. This amount does not include real estate
property taxes paid directly by tenants. Of the four Operating Partnerships,
only MWP had any Properties transferred to it as part of the Berg Acquisition;
the other three limited partnerships have retained their historical Properties.
The Property transfers to MWP resulted in a statutory change in ownership giving
rise to a reassessment for California real property tax purposes, which is not
expected to have a material adverse impact on the operations or financial
condition of the Company.
Except as noted with respect to transfers of Properties to MWP, the Company
does not believe that any other aspects of the UPREIT Transactions effect a
statutory change in ownership. Nevertheless, there can be no assurance that a
local assessor will not assert that the UPREIT Transactions also have resulted
in a statutory change in ownership with respect to the Berg Properties held by
MWP I, MWP II and MWP III, as county assessors in California occasionally
challenge complex transactions in which new investors acquire interests in
existing real property holding entities. Substantially all of the leases for the
Properties contain provisions requiring the tenants to pay as additional rent
their proportionate shares of any property tax increases over specified base
amounts. The Company may not be able to pass through to its tenants the full
amount of any increased taxes resulting from a reassessment, however. The
Company believes that any amount that cannot be passed through to tenants will
not have a material adverse effect on the Company.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real property may be held liable for the costs of removal
or remediation of certain hazardous or toxic substances located on or in the
property. Such laws often impose liability and expose the owner to governmental
proceedings, without regard to whether the owner knew of, or was responsible
for, the presence of the hazardous or toxic substances. The costs of any
required remediation or removal of such substances may be substantial. In
addition, the owner's liability as to any specific property is generally not
limited and could exceed the value of the property and/or the aggregate assets
of the owner. The presence of such substances, or the failure to properly remove
or remediate such substances, may also adversely affect the owner's ability to
sell or rent the property or to borrow using the property as collateral. Persons
who arrange for the treatment or disposal of hazardous or toxic substances, such
as asbestos, at a disposal facility may also be liable for the costs of any
required remediation or removal of the hazardous or toxic substances at the
facility, regardless of whether the facility is owned or operated by such owner
or entity. In connection with the ownership of the Properties or the treatment
or disposal of hazardous or toxic substances, the Company may be liable for such
costs.
Other federal, state and local laws impose liability for the release of
ACMs into the air and require the removal of damaged ACMs in the event of
remodeling or renovation. The Company is aware that there are ACMs present at
several of the Properties, primarily in floor coverings. The Company believes
that the ACMs present at these Properties are generally in good condition and
that no ACMs are present in the remaining Properties. The Company believes it is
in compliance in all material respects with all federal, state and local laws
relating to ACMs and that if it were required to remove all ACMs present at the
Properties over a short period of time, the cost of such removal would not have
a material adverse effect on its financial condition, operating results, or
ability to make distributions.
The Company is not aware of any environmental liability relating to the
Properties that it believes would have a material adverse effect on its
financial condition, its operating results or its ability to make distributions
and has not been notified by any governmental authority or any other person of
any material noncompliance, liability or other claim in connection with any of
the Properties. No assurance can be given that future laws, ordinances or
regulations will not impose material environmental liabilities, or that the
current environmental condition of the Properties will not be affected by
tenants and occupants of the Properties, by the uses or condition of properties
in the vicinity of the Properties, such as leaking underground storage tanks, or
by third parties unrelated to the
-60-
<PAGE>
Company. If the Company is required to remove or remediate any toxic wastes
or hazardous substances present on any of the Properties, the cost to the
Company could be material.
LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings arising in
the ordinary course of its business, none of which is believed to be material.
The Company is not aware of any material litigation affecting any of the
Properties, the Pending Development Projects, the Berg Land Holdings, or the
Operating Partnerships, except for anticipated litigation concerning the Fremont
Properties. See "SUMMARY OF THE UPREIT TRANSACTIONS AND PURPOSE OF THE SPECIAL
MEETING -- Parties to and Terms of the Berg Acquisition." Berg & Berg is a
plaintiff in BERG & BERG v. CHERYL AND GILBERT CHAVEZ in the Santa Clara County
Superior Court. The court has entered a default judgment against the defendants
in that action to recover funds embezzled by a former employee of Berg & Berg
and BBE. Neither the Company nor the Operating Partnerships are entitled to any
funds that may be recovered pursuant to the judgment.
EMPLOYEES
The Company initially expects to employ five persons. The Operating
Partnerships will not have any employees. Prior to the consummation of the
UPREIT Transactions, three of the Company's employees were employed by BBE.
FUTURE OPERATIONS OF THE COMPANY
OVERVIEW
Upon consummation of the UPREIT Transactions, the Company will be a
fully-integrated, self-administered and self-managed REIT organized to continue
and expand the business of acquiring, developing, owning and managing Silicon
Valley R&D Properties currently conducted by the Berg Group. Through its general
partnership interests in the Operating Partnerships, the Company owns and
operates 69 Silicon Valley R&D Properties. As of September 30, 1998, the
occupancy rate of the Properties was approximately 100%. The Company also may
acquire the 12 Silicon Valley R&D Properties comprising the Pending Development
Projects if they are built and fully leased, and has the Option to acquire
additional Berg Group Silicon Valley R&D Properties pursuant to the Option
Agreement.
Consequently, the Company's principal focus upon consummation of the UPREIT
Transactions will be the management of its Silicon Valley R&D Properties. With
Silicon Valley's highly educated and skilled work force, recent history of
numerous successful start-up companies, and large contingent of venture capital
firms, the Company believes that this region will continue to spawn successful
new high-growth industries and entrepreneurial businesses to an extent matched
nowhere else in the United States.
In 1996, according to the National Venture Capital Survey, venture capital
investment in the Silicon Valley reached $2.3 billion, representing 24.1% of the
total of $9.5 billion invested nationally. Most of the investments were in
technology-based companies, particularly in communications and software. In
1997, total venture capital investment in Silicon Valley exceeded $3.3 billion.
Successful, venture capital-backed technology companies typically seek further
capital from the public capital markets. Initial public offerings ("IPOs") by
companies in the San Francisco Bay Area raised over $2.2 billion, $2.1 billion,
and $1.7 billion in 1995, 1996, and 1997, respectively. The IPO proceeds
frequently are used to fund growth and expansion, with a resulting need on the
part of the issuer for additional space. Although equity valuations and the
availability of private and public capital fluctuate considerably, the Company
believes that this investment cycle will continue to create favorable R&D
Property development and rental opportunities in the Silicon Valley.
OPERATING AND GROWTH STRATEGY
The Company intends to employ Berg & Berg's historical business strategy
and the Company's substantial resources to achieve growth in FFO. The Company's
operating and growth strategy contains the following principal elements:
- Continued emphasis on general purpose, single-tenant Silicon
Valley R&D Properties for technology-based companies to
capitalize on the Company's extensive contacts in these
companies and its extensive knowledge of their real estate
needs.
-61-
<PAGE>
- Acquiring R&D Properties built by the Berg Group on the Berg
Land Holdings, which now represent one of the largest
aggregations of land available for future construction of R&D
Properties in Silicon Valley.
- Demand-driven development activities, emphasizing
build-to-suit projects for existing and emerging technology
companies experiencing growth in the Silicon Valley.
- Opportunistic acquisitions of high quality, well-located
Silicon Valley R&D Properties in situations where illiquidity
or inadequate management permit their acquisition at favorable
prices, and where the Company's management skills will
facilitate increases in cash flow and asset value.
- Maintenance of a lean, experienced and responsive management
team comprised of highly qualified and experienced
professionals working within a relatively flat organizational
structure.
- Prudent financial management emphasizing current cash flow, as
well as long-term value in the Company's acquisition and
financing policies, the pre-leasing of buildings prior to
acquisition or development to reduce the risks of owning them
and the maintenance of sufficient liquidity to acquire and
finance properties on desirable terms.
- Geographic expansion into other technology-based areas of the
West Coast if good R&D Properties become available there.
OPERATIONS AND MANAGEMENT
The Company will operate as a self-administered, self-managed REIT with its
own employees. It will sublease office space from Berg & Berg at 10050 Bandley
Drive and will share clerical staff and other overhead on what the Company
considers to be very favorable terms. The total monthly rent payable by the
Company to Berg & Berg will be $5,625, and the Company's contribution to BBE
overhead when added to the rent payable to Berg & Berg will not exceed $15,000
per month. Carl E. Berg will work for the Company, as well as BBE, and will
provide services to other enterprises. The other employees of the Company,
except Bradley A. Perkins, will work for the Company full-time. The Company may
add two additional employees, as required, but does not anticipate growth in
employment except as acquisitions of new properties, particularly in other
geographic regions, require additional personnel.
Construction and repair work at the Company's Properties for building
maintenance and tenant improvements may be provided by BBE. The Company will bid
all major work competitively to subcontractors, however.
The Company generally will market the Properties and negotiate leases with
tenants by itself. Occasionally, the Company expects to retain real estate
brokers, and its policy is to pay fixed commissions to tenants' brokers.
ACQUISITIONS
The Company's principal acquisition opportunities are the Pending
Development Projects and the acquisition of R&D Properties that may be
constructed by the Berg Group on the Berg Land Holdings. The Berg Group has
acquired approximately 580,000 square feet of buildings in the last four years.
The Company believes its acquisitions experience and the network of real estate
professionals it has done business with will continue to provide opportunities
for external growth. Furthermore, the Company's use of the Operating
Partnerships structure gives prospective sellers the opportunity to contribute
properties to the Company (through the Operating Partnerships) on a tax-deferred
basis in exchange for L.P. Units. This capacity to complete tax-deferred
transactions with sellers of real property will further enhance the Company's
ability to acquire additional properties. Management also intends to monitor
available, well-located, industrial properties on the West Coast of the United
States.
-62-
<PAGE>
MORTGAGE INDEBTEDNESS OUTSTANDING AFTER BERG ACQUISITION
In addition to the $130 million Prudential Secured Loan which matures on
October 15, 2008, the Company had other secured loans totaling approximately $90
million outstanding at September 30, 1998, including $39 million under the Wells
Fargo Line. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS FOR THE PROPERTIES -- Pro Forma Liquidity and Capital
Resources" and "DESCRIPTION OF THE PROPERTIES--Mortgage Debt and Credit Lines."
-63-
<PAGE>
DISTRIBUTION POLICY
OVERVIEW
The Company intends to make regular quarterly distributions to holders of
its Common Stock based on its Cash Available for Distribution. The Company's
ability to make such distributions will be affected by numerous factors
including, most importantly, the receipt of distributions from the Operating
Partnerships. The first distribution for the period ending on December 31, 1998
is expected to be in an amount equivalent to a quarterly distribution of $0.085
per share (which, if annualized, would equal $0.34 per share, or an annual yield
of 8%, based on the last trading price set forth on the cover page of this
Prospectus/Proxy Statement).
In general, the Company expects that Cash Available for Distribution will
exceed its initial planned distributions. Expected distributions for the 12
months following the final closing date for the Berg Acquisition will be
approximately 61% of the estimated Cash Available for Distribution of the
Company and are expected to exceed 95% of the Company's taxable income, as
determined under federal tax laws applicable to REITs. The amount of estimated
Cash Available for Distribution is based on the net amount of cash
provided/(used) by operating, investing and financing activities of the Company
for all of the Properties for the twelve months ending September 30, 1999, which
includes adjustments for certain known events occurring after September 30, 1998
that are not reflected in the Company's historical or pro forma financial
statements.
DISTRIBUTION TABLE
The following table illustrates the Company's pro forma cash
provided/(used) by operating, investing and financing activities assuming
completion of the Berg Acquisition for the twelve months ended September 30,
1998, as adjusted, in estimating its initial dividend:
<TABLE>
<CAPTION>
(in
thousands,
except
expected
initial
dividend
per share)
-------------
<S> <C>
OPERATING ACTIVITIES:
Pro forma income before minority interest and gain on sale $15,962
of real estate for the year ended December 31, 1997
Less: Pro forma income before minority interest for the (10,540)
nine months ended September 30, 1997
Plus: Pro forma income before minority interest for the 15,735
nine months ended September 30, 1998
-------------
Pro forma income before minority interest for the twelve 21,157
months ended September 30, 1998
Adjustments:
Pro forma real estate depreciation and amortization for 10,842
the twelve months ended September 30, 1998
Net increase in contractual rental income (1) 601
Net effect of straight-line rents (2) (3,095)
Estimated annual provision for leasing commissions (3) (1,100)
-------------
Cash provided by operating activities 28,405
=============
INVESTING ACTIVITIES:
Estimated annual provision for capital expenditures (4) (525)
-------------
Cash provided by investing activities (525)
-------------
FINANCING ACTIVITIES:
Scheduled mortgage loan principal payments (5) (22,410)
Proceeds from lines of credit 18,780
Cash provided by financing activities (6) (3,630)
-------------
Estimated Cash Available for Distribution for the $24,250
twelve months ended September 30, 1998
=============
Minority interests' share of estimated Cash $23,306
Available for Distribution (7)
=============
The Company's share of estimated Cash Available $944
for Distribution available for holders Common Stock (8)
=============
Estimated initial annual distribution per share (9) $0.34
=============
Payout ratio based on estimated Cash Available 61.2%
for Distribution (10)
=============
</TABLE>
(1) Represents the net increases in contractual rental income, net of expenses,
from new leases and renewals that were not in effect for the entire twelve
month period ended September 30, 1998 and new leases and renewals that went
into effect between September 30, 1998 and October 20, 1998. Rental Income
has not been included for any properties for the periods prior to their
construction completion and availability for occupancy.
(2) Effect of adjusting straight-line rental income included in pro forma
income before minority interest for the twelve months ended September 30,
1998 to a cash basis.
(3) Anticipated leasing commissions to be incurred based on the historical
weighted average of such commissions paid in connection with lease renewals
and re-leasing at the Properties multiplied by the average annual square
feet of space for which leases expire during the period from July 1, 1998
through December 31, 2000.
(4) The estimated cost of recurring building improvements and equipment
replacements (excluding tenant improvements) at the Properties for the
twelve months ending September 30, 1999. Generally, the Properties and
their associated tenant leases are such that non-revenue producing tenant
improvements are immaterial.
(5) Represents scheduled payments of debt principal due during the 12 months
ending September 30, 1999. Includes amounts due BBE which mature March
1999, in the amount of $18,780.
(6) Represents amounts incurred for new debt obtained in order to refinance
certain debt maturities.
(7) Minority interest share of estimated Cash Available for Distribution is
calculated as follows:
<TABLE>
<S> <C>
Estimated Cash Available for Distribution
for the twelve months ended September 30, 1998 $24,250
Add back interest expense for which the
Company is 100% responsible 2,267
-------------
26,517
x 87.89%
-------------
$23,306
</TABLE>
In order to effect the closing of the Company's acquisition of the sole
general partnership interests in the Operating Partnerships, the Company
issued to each of the partnerships a demand note bearing interest at a rate
of 7.25% per annum aggregating $35,200 in principal. At September 30, 1998,
the outstanding balance on these notes was $33,869. Upon the closing of the
new Private Placement, the Company will utilize those proceeds along with
available cash and a draw of $31,269 on the line of credit to repay these
notes in their entirety.
The portion of the outstanding balance on the line of credit in the amount
of $31,269 will be the sole responsibility of the Company until such time
as the balance is paid in full. Additionally, the full amount of interest
on any outstanding balance associated with this amount will be absorbed
100% by the Company. On a pro forma basis, interest expense on this amount
is $2,267 for the twelve months ended September 30, 1999.
Until such time that the Company completes the Private Placement, the
Company's share of Cash Available for Distribution will be less than the
amount calculated in this table. Any outstanding balances owed to the
Operating Partnerships in excess of $31,269 will increase the minority
interests' share of cash available for distribution by an amount equal to
87.89% of the interest income associated with such balances, thereby
decreasing the Company's share of such amounts.
(8) The Company has entered into agreements with certain accredited investors
to sell 6,295,058 shares of common stock at $4.50 per share for net
proceeds of $28,328. In connection with this sale of common stock, a fee
will be paid to an individual in the form of 200,000 shares of the
Company's common stock. The distribution table does not give effect to the
receipt and application of any part of the proceeds from the sale of such
shares as this sale is occurring through a private placement rather than
through an offering by underwriters.
The Company has received a letter from a purchaser of 1,000,000 of the
6,295,058 shares stating that such purchaser has withdrawn its offer to
purchase the shares. The Company does not consider that to be a legally
effective withdrawal. Assuming the sale of 5,295,058 shares of common
stock, however, the Company will use the proceeds to pay down amounts
outstanding under its lines of credit resulting in total debt outstanding
of $227,487. Assuming such application of these proceeds, interest expense
for the twelve months ended September 30, 1998 will be reduced by $1,727,
resulting in pro forma income before minority interest and cash provided by
operating activities of $22,884 and $30,132 for that same period,
respectively. The Company's share of estimated Cash Available for
Distribution available for holders of Common Stock would be $2,671,
resulting in a payout ratio based on estimated Cash Available for
Distribution of 91.6% (based upon 7,193,594 shares outstanding). See "RISK
FACTORS -- Delay in Private Placement."
(9) The estimated annual distribution per share is based on a total of
1,698,536 shares outstanding after the UPREIT Transactions assuming no
dilution from the exchange of L.P. Units, or exercise of options pursuant
to the terms of the 1997 Stock Option Plan.
(10) The payout ratio on estimated Cash Available for Distribution is calculated
as the estimated initial annual distribution per share divided by the
Company's share of Cash Available for Distribution per share for the 12
months ending September 30, 1999.
The Company believes that its estimate of Cash Available for Distribution
constitutes a reasonable basis for setting the amount of the Company's initial
distribution and expects to maintain its initial distribution rate for the 12
months following the closing of the Berg Acquisition, unless actual results of
operations, economic conditions or other factors differ materially from the
assumptions used in the estimate. Cash Available for Distribution does not
represent cash generated from operating activities in accordance with GAAP and
is not necessarily indicative of cash available to fund cash needs. The actual
return that the Company will realize and the amount available for distributions
to shareholders will be affected by a number of factors, including the revenues
received from the Properties, the operating expenses of the Company, the
interest expense incurred on borrowings and unanticipated capital expenditures.
The estimate of Cash Available for Distribution is provided in this Proxy
Statement/Prospectus solely for the purpose of setting the initial distribution
amount and is not intended to be a forecast by the Company of its future results
of operations, FFO or Cash Available for Distribution. No assurance can be given
that the Company's estimate will prove accurate.
The Company anticipates that Cash Available for Distribution will exceed
earnings and profits for federal income tax purposes as the latter figure takes
into account non-cash expenses, such as depreciation and amortization, to be
incurred by the Company. Distributions by the Company to the extent of its
current and accumulated earnings and profits for federal income tax purposes
will be taxable to shareholders as ordinary dividend income unless a shareholder
is a tax-exempt entity. See "FEDERAL INCOME TAX CONSIDERATIONS--Taxation of
United States Shareholders". Distributions in excess of earnings and profits
generally will be treated as a non-taxable reduction of the shareholder's basis
in the Common Stock to the extent thereof, and thereafter as taxable gain. The
percentage of such distributions constituting a non-taxable return of capital,
if any, may vary from period to period. The Company anticipates that a
substantial percentage of the distributions to shareholders for the 12 months
following the consummation of the Offering will constitute ordinary income.
In order to maintain its qualification as a REIT, the Company must make
annual distributions to shareholders of at least 95% of its taxable income
(which does not include net capital gains). See "FEDERAL INCOME TAX
CONSIDERATIONS--Taxation of the Company--Annual Distribution Requirements."
Under certain circumstances, the Company may be required to make distributions
in excess of Cash Available for Distribution in order to meet such distribution
requirements.
Any inability on the part of the Operating Partnerships to secure financing
as required to fund capital expenditures and net changes in working capital,
including development activities and expansions, would require the utilization
of distributable cash flow to satisfy such obligations, thereby possibly
reducing distributions to partners, including the Company, and funds available
for the Company to pay dividends. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources."
Cash Available for Distribution is based on FFO. The Company computes FFO
in accordance with standards established by the Board of Governors of NAREIT in
its March 1995 White Paper, which may differ from the methodology for
calculating Funds from Operations utilized by other equity REITs, and
accordingly, may not be comparable to such other REITs. NAREIT currently defines
FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or
losses) from debt restructuring and sales of property, plus real estate related
depreciation and amortization (excluding amortization of deferred financing
costs and depreciation of non-real estate assets) and after adjustments for
unconsolidated partnerships and joint ventures. Extraordinary or unusual items,
along with significant non-recurring events that materially distort the
comparative measure of FFO are disregarded in this calculation. Management
believes that its computation of FFO is helpful to investors as a measure of the
performance of an equity REIT because, along with cash flows from operating
activities, financing activities and investing activities, it provides investors
with an understanding of the Company's ability to incur and service debt and
make capital expenditures. The Company's definition of FFO also assumes
conversion at the beginning of the period of all convertible securities,
including minority interests that might be exchanged for Common Stock. The
Company's FFO does not represent the amount available for management's
discretionary use as such funds may be needed for capital replacement or
expansion, debt service obligations, or other commitments and uncertainties. FFO
should not be considered as an alternative to net income (determined in
accordance with GAAP) as an indication of the Company's financial performance or
to cash flows from operating activities (determined in accordance with GAAP) as
a measure of the Company's liquidity, nor is FFO necessarily indicative of funds
available to fund the Company's cash needs, including its ability to make
distributions. The Company believes that to facilitate a clear understanding of
the combined historical operating results of the Berg Properties and the
Company, FFO should be examined in conjunction with net income as presented in
the combined financial statements.
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<PAGE>
Distributions by the Company will be determined by the board of directors
and will depend on actual Cash Available for Distribution of the Company, its
financial condition, capital requirements, the annual distribution requirements
under the REIT provisions of the Code and such other factors as the Board of
Directors deems relevant. For a discussion of the tax treatment of distributions
to holders of shares of Common Stock, see "FEDERAL INCOME TAX
CONSIDERATIONS--Taxation of United States Shareholders" and "Taxation of Foreign
Shareholders."
THE ESTIMATES OF PRO FORMA CASH FLOWS FROM OPERATING ACTIVITIES AND CASH
AVAILABLE FOR DISTRIBUTION ARE MADE SOLELY FOR THE PURPOSE OF SETTING THE
INITIAL DISTRIBUTION RATE AND ARE NOT INTENDED TO BE A PROJECTION OR FORECAST OF
THE COMPANY'S RESULTS OF OPERATIONS OR OF ITS LIQUIDITY. FUNDS FROM OPERATIONS
DOES NOT REPRESENT CASH FLOW FROM OPERATIONS AS DEFINED BY GAAP, IS NOT
NECESSARILY INDICATIVE OF CASH AVAILABLE TO FUND ALL OF THE COMPANY'S CASH
NEEDS, AND SHOULD NOT BE CONSIDERED AS AN ALTERNATIVE TO NET INCOME FOR PURPOSES
OF EVALUATING THE COMPANY'S OPERATING PERFORMANCE. SEE "FORWARD LOOKING
INFORMATION" and "RISK FACTORS--Uncertainties Regarding Distributions to
Shareholders."
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<PAGE>
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's policies with respect to
investment, financing, conflicts of interest and other activities of the
Company. These policies have been formulated by the board of directors of the
Company and generally may be amended or revised from time to time at the
discretion of the board of directors without a vote of the shareholders of the
Company. Upon the effective date of the Reincorporation Merger, however, the
Charter will provide that (i) until the Protective Provisions Expiration Date,
the approval of the Required Directors as provided in the Charter and the
consent of the L.P. Unit Majority are required for the Company to take title to
assets (other than temporarily in connection with an acquisition prior to
contributing such assets to the Operating Partnerships) or to conduct business
other than through the Operating Partnerships, or for the Company or the
Operating Partnerships to engage in any business other than the ownership,
construction, development and operation of real estate properties, (ii) changes
in certain policies with respect to conflicts of interest must be consistent
with legal requirements, (iii) certain policies with respect to competition by
Carl E. Berg and the Berg Group are imposed pursuant to provisions of the
Acquisition Agreement that cannot be amended or waived without the approval of
the Independent Directors Committee, and (iv) the Company cannot take any action
intended to terminate its qualification as a REIT without the approval of more
than 75% of the entire board of directors. In addition, until the Protective
Provisions Expiration Date, the approval of the Required Directors will be
required for certain fundamental corporate actions, including amendments to the
Charter or bylaws, amendments to the Operating Partnership Agreement, and any
merger, consolidation or sale of all or substantially all of the assets of the
Company or the Operating Partnerships. Certain specific transactions, including
the issuance of securities and borrowings in excess of specified limits, and
amendments of the Charter and bylaws are subject to approval by more than 75% of
the directors. See "DESCRIPTION OF CAPITAL STOCK--Board Quorum and Special
Voting Requirements."
INVESTMENT POLICIES
The Company's business will be focused solely on the ownership,
construction, development and operation of real estate properties, principally
R&D Properties, and the Company intends to conduct all of its activities through
the Operating Partnerships. The Company's investment objective is to provide
stable cash flow available for quarterly cash distributions and achieve
long-term appreciation through increases in cash flows and the value of its
properties. The Company intends to pursue these objectives by (i) investing
capital to enhance investment returns on its existing Properties, and (ii)
acquiring or developing additional properties where the Company believes that
opportunities exist for attractive investment returns. Such additional
properties may include some or all of the Berg Land Holdings, which are subject
to options held by the Company. See "DESCRIPTION OF THE PROPERTIES--Land Holding
and Development Arrangements." The Company may expand or improve its properties
or, subject to the approval of the Required Directors, sell such properties in
whole or in part as determined by the Board. See "FUTURE OPERATIONS--Strategy."
The Company expects to pursue its investment objectives principally through
the direct ownership by the Operating Partnerships of the Properties and future
developed properties. Future development or investment activities will not be
limited to any specified percentage of the Company's assets. The Company may
also participate with other entities in property ownership, through joint
ventures or other types of co-ownership. Equity investments may be subject to
existing mortgage financing and other indebtedness which have priority over the
equity interest of the Company.
While the Company will emphasize equity real estate investments, it may, in
its discretion and subject to the percentage ownership limitations and gross
income tests necessary for REIT qualification, invest in mortgage and other real
estate interests including securities of other real estate investment trusts.
The Company has not previously invested in mortgages or securities of other real
estate investment trusts and does not have any present intention to make such
investments.
FINANCING POLICIES
The Company intends to maintain a ratio of debt to Total Market
Capitalization of no more than 50%. The Company's ratio of debt to Total Market
Capitalization would have been approximately 42% at September 30, 1998, on a pro
forma basis after giving effect to the UPREIT Transactions. See "PRO FORMA
CAPITALIZATION." The Company, however, may from time to time reevaluate its debt
policy in light of then current economic conditions, relative costs of debt and
equity capital, the market values of its properties, growth and acquisition
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<PAGE>
opportunities and other factors. Subject to the need for more than 75% of the
directors to approve debt increases above 50% of Total Market Capitalization,
the Company may modify its debt policy and may increase or decrease its ratio of
debt to Total Market Capitalization.
The Company has established its debt policy relative to Total Market
Capitalization, because the Company believes that the book value of its assets
(which to a large extent consists of the depreciated value of real property, the
Company's primary tangible asset) does not accurately reflect its ability to
borrow and to meet debt service requirements. However, Total Market
Capitalization is more variable than book value and does not necessarily reflect
the fair market value of the Company's underlying assets. Although the Company
will consider factors other than market capitalization in making decisions
regarding the incurrence of debt (such as the estimated market value of such
properties upon refinancing, and the ability of particular properties and the
Company as a whole to generate cash flow to cover expected debt services), there
can be no assurance that the Company will maintain the ratio of debt to Total
Market Capitalization (or to any other measure of asset value) described above.
To the extent that the board of directors of the Company determines to seek
additional capital, the Company may raise such capital through additional equity
offerings, debt financing or retention of cash flow (after consideration of
provisions of the Code requiring the distribution by a REIT of a certain
percentage of its taxable income and taking into account taxes that would be
imposed on undistributed taxable income), or through a combination of these
sources. It is the Company's present intention that any additional borrowings
will be made through the Operating Partnerships, although the Company may incur
borrowings that would be reloaned to the Operating Partnerships. See "OPERATING
PARTNERSHIP AGREEMENT." Borrowings may be unsecured or may be secured by any or
all assets of the Company, the Operating Partnerships, or any existing or new
property and may have full or limited recourse to all or any portion of the
assets of the Company, the Operating Partnerships, or any existing or new
property.
The Company has not established any limit on the number or amount of
mortgages that may be placed on any single property or on its portfolio as a
whole. Of the Company's 69 R&D Properties, currently 18 Properties secure the
Prudential Secured Loan and 14 Properties secure the Wells Fargo Line. Until
October 1999, the Wells Fargo Line with a remaining balance of approximately $61
million would be available to fund property acquisitions, development
activities, and for general corporate purposes. The Company may determine to
issue securities senior to the Common Stock, including shares of new series of
Preferred Stock and debt securities (either of which may be convertible into
Common Stock or accompanied by warrants to purchase capital stock). The Company
may also determine to finance acquisitions through the exchange of properties or
the issuance of additional L.P. Units in the Operating Partnerships, shares of
Common Stock or other securities.
In the event that the board of directors determines to raise additional
equity capital, it has the authority, without shareholder approval, to issue
additional shares of Common Stock, Preferred Stock other capital stock
(including securities senior to the Common Stock) of the Company in any manner
(and on such terms and for such consideration) it deems appropriate, including
in exchange for property. In the event that the Company issues (whether for cash
or property) any shares of Common Stock or securities convertible into, or
exchangeable or exercisable for, shares of Common Stock, subject to certain
limited exceptions, including the issuance of Common Stock pursuant to any stock
incentive plan adopted by the Company or pursuant to Limited Partners' exercise
of the Exchange Rights or the Put Rights, the Limited Partners will have the
right to purchase Common Stock or such securities in order to maintain their
respective percentage interests in the Company and the Operating Partnerships on
a consolidated basis. If the board of directors determines that the Company will
raise additional equity capital to fund investments by the Operating
Partnerships, the Company will contribute such funds to the Operating
Partnerships as a contribution to capital and purchase of additional general
partnership interest; however, holders of L.P. Units will have the right to
participate in such funding on a pro rata basis. In the event that holders of
L.P. Units sell their L.P. Units to the Company pursuant to their Put Rights,
the Company is authorized to raise the funds for such purchase by issuing
additional shares of Common Stock. In addition, the Company may issue additional
shares of Common Stock in connection with the exchange of L.P. Units for shares
of Common Stock pursuant to the exercise of the Exchange Rights.
The Company's Board of Directors also has the authority to cause the
Operating Partnerships to issue additional L.P. Units in any manner (and on such
terms and for such consideration) as it deems appropriate, including in exchange
for property. In the event that the Operating Partnerships issue new L.P. Units
for cash (but not property), the Limited Partners will have the right to
purchase L.P. Units in order, and to the extent necessary, to maintain their
respective percentage interests in the Operating Partnerships. Any such new L.P.
Units will be
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<PAGE>
exchangeable for Common Stock pursuant to the Exchange Rights or may be tendered
to the Company pursuant to the Put Rights. See "OPERATING PARTNERSHIP
AGREEMENT--Exchange Rights, Put Rights and Registration Rights."
DISPOSITION POLICY
The Company has no current intention to dispose of any of the Properties,
although it reserves the right to do so. The tax basis of the Limited Partners
in the Properties in the Operating Partnerships is substantially less than
current fair market value. Accordingly, prior to the disposition of their L.P.
Units in the Operating Partnerships, upon a disposition of any of the
Properties, a disproportionately large share of the gain for federal income tax
purposes would be allocated to the Limited Partners. See "FEDERAL INCOME TAX
CONSIDERATIONS--Income Taxation of the Partnership." Consequently, it may be in
the interests of the Limited Partners that the Company continue to hold the
Properties in order to defer such taxable gain. In light of this, the Operating
Partnership Agreement provides that for a period of ten years after the closing
or until the Protective Provisions Expiration Date, if earlier, Carl Berg and
Clyde Berg may prohibit the Operating Partnerships from disposing of Properties
which they designate in a taxable transaction. Kontrabecki has a similar right
with respect to the Kontrabecki Properties which will lapse before the end of
the ten-year period, if his beneficial ownership interest in the Operating
Partnerships falls below 750,000 L.P. Units. The Limited Partners may seek to
cause the Company to retain the Properties even when such action may not be in
the interests of some, or a majority, of the shareholders of the Company. The
approval of the Required Directors will be required if the Company sells in any
transaction, or series of related transactions or aggregate sales, all or
substantially all of the assets of the Company. The consent of the holders of a
majority of the L.P. Units will be required to effect a sale or sales of all, or
substantially all, of the assets of the Operating Partnerships. For a
description of certain tax consequences arising from the disposition of a
property controlled by the Company, see "FEDERAL INCOME TAX CONSIDERATIONS--The
Aspects of The Operating Partnerships."
CONFLICT OF INTEREST POLICIES
The Company has adopted certain policies and entered into certain
agreements with the Berg Group designed to eliminate or minimize potential
conflicts of interest. There can be no assurance that these policies will be
successful in eliminating the influence of such conflicts. If they are not
successful, decisions affecting the Company could be made that might fail to
reflect fully the interests of all shareholders.
In recognition of these potential conflicts of interest, the Company and
the Berg Group have agreed that any transaction between the Company and Mr. Berg
or other members of the Berg Group must be approved by the Independent Directors
Committee. The members of the Berg Group also have agreed that all future
transactions between the Company and their Affiliates or any other entities in
which they hold 5% or greater ownership interests shall be subject to review and
approval by the Independent Directors Committee. See "THE ACQUISITION
AGREEMENT--Conflict of Interest Provisions."
In addition, the Berg Group and the Company have entered into agreements
concerning the lease of office space to the Company, the acquisition of Berg
Land Holdings and of Pending Development Projects, and the use of BBE for
construction and repair work. The exercise of the Company's rights or the waiver
of any benefits to the Company under these agreements will be subject to the
approval of the Independent Directors Committee. See "DESCRIPTION OF THE
PROPERTIES--Land Holding and Development Arrangements" and "FUTURE OPERATIONS OF
THE COMPANY--Operation and Management."
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company has authority to offer shares of its capital stock or other
securities and to repurchase or otherwise reacquire its shares or any other
securities and may engage in such activities in the future. The Company has no
outstanding loans to other entities or persons, including its officers and
directors. The Company may in the future make loans to joint ventures in which
it participates in order to meet working capital needs.
The Company has not engaged in trading, underwriting or agency distribution
or sale of securities of other issuers, nor has the Company invested in the
securities of other issuers other than the Operating Partnerships for the
purpose of exercising control, and does not intend to do so. The Company intends
to make investments in such a way that it will not be treated as an investment
company under the Investment Company Act of 1940.
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<PAGE>
At all times, the Company intends to make investments in such a manner as
to be consistent with the requirements of the Code for the Company to qualify as
a REIT unless, because of changing circumstances or changes in the Code (or in
Treasury Regulations), directors representing more than 75% of the entire board
of directors determine that it is no longer in the best interests of the Company
to qualify as a REIT.
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<PAGE>
THE ACQUISITION AGREEMENT
THE FOLLOWING SUMMARY OF THE ACQUISITION AGREEMENT, INCLUDING THE
DESCRIPTIONS OF CERTAIN PROVISIONS SET FORTH ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS, IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
ACQUISITION AGREEMENT, WHICH IS FILED AS AN EXHIBIT TO THE REGISTRATION
STATEMENT OF WHICH THIS PROXY STATEMENT/PROSPECTUS IS A PART. A COPY OF THE
AGREEMENT IS AVAILABLE FROM THE COMPANY UPON REQUEST. SEE "AVAILABLE
INFORMATION."
GENERAL
The parties to the Acquisition Agreement are MWP, MWP I, MWP II, all
members of the Berg Group, and all of the Kontrabecki Partnerships, including
MWP III. Under the terms of the Acquisition Agreement, as amended as of July 1,
1998, the parties have agreed to operate MWP, MWP I, MWP II and MWP III as the
Operating Partnerships subject to the terms of the Operating Partnership
Agreement, the Operating Partnerships acquired the Berg Properties and the
Acquired Properties in the Partnership Closing, and agreed to consummate the
remaining transactions comprising the Berg Acquisition after the shareholders
have approved Proposals 1, 3, 4 and 5 at the Special Meeting. Pursuant to the
Acquisition Agreement, the Company is entitled to conduct the operations of all
four limited partnerships in a consolidated manner under the name "Mission West
Properties, L.P." The Acquisition Agreement was signed by all parties effective
as of May 14, 1998, and amended as of July 1, 1998.
THE CLOSING
At the Partnership Closing, the existing general partners in MWP, MWP I,
MWP II and MWP III resigned, the Company acquired its interest as sole general
partner in each of the Operating Partnerships, MWP acquired certain Berg
Properties and the Kontrabecki Properties in exchange for L.P. Units, and the
Company and all limited partners in each of the Operating Partnerships signed
and delivered an Operating Partnership Agreement. In addition, MWP III converted
to a Delaware limited partnership as of the date of the Partnership Closing. The
final closing of the transactions contemplated by the Acquisition Agreement will
occur on the last business day of the month in which the shareholders approve
the UPREIT Transactions at the Special Meeting. At such closing, the parties
will sign and deliver the Operating Partnership Agreement, the Exchange Rights
Agreement, the Berg Land Holdings Option Agreement, the Pending Projects
Acquisition Agreement, and subject to shareholder approval of the
Reincorporation Merger, the Merger Agreement. The Company expects Mr. Berg to
acquire the Fremont Properties and contribute them to MWP at or before the final
closing date.
REPRESENTATIONS AND WARRANTIES
The Acquisition Agreement provides for each of the parties to make
representations and warranties customary for transactions of this nature, which
generally relate to the parties lawful organization, good standing,
authorization to enter into the agreement and effect the transactions required
under the Acquisition Agreement, title to the Properties, condition of the
Properties, effectiveness of the leases for the Properties, the accuracy of
financial information exchanged by the parties, the accredited investor status
of all limited partners, and similar matters. Representations and warranties
concerning the Properties were made in connection with the Partnership Closing,
and will be made at the time of the final closing date for the Berg Acquisition,
as well.
CONDITIONS TO CONSUMMATION OF THE CONTEMPLATED TRANSACTIONS
To permit the Partnership Closing to occur in advance of the Special
Meeting, the parties waived general conditions to closing contained in the
Acquisition Agreement and satisfied closing conditions regarding the
effectiveness of the offering of L.P. Units to the Limited Partners in an exempt
private placement, the resignation of the existing general partners of MWP, MWP
I, MWP II and MWP III, and the accuracy of representations and warranties
concerning the parties to the Acquisition Agreement and the Properties.
The closing of the remaining transactions constituting the Berg Acquisition
and the Private Placement is subject to the satisfaction of certain conditions.
The conditions applicable to the obligations of all parties include shareholder
approval of such transactions as set forth in Proposals 1, 3, 4 and 5 at the
Special Meeting, the absence of any injunction or restraining order against
completing any of the UPREIT Transactions, the receipt of all required third
party consents, the consummation of the Private Placement, and the execution and
delivery of all related agreements. The obligations of the Company to close the
transactions will be subject to, in addition to the preceding conditions, the
accuracy of the representations and warranties of the other parties to the
agreement. Any of the closing conditions may be waived by the party or parties
entitled to require performance of the condition.
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COVENANTS
The Acquisition Agreement includes covenants pertaining to the provision of
timely and accurate financial statements as necessary in connection with the
Company's preparation of the Registration Statement and this Proxy
Statement/Prospectus, the continued conduct of each party's business with
respect to the Properties in the ordinary course, and each party's agreement to
take actions required and reasonably requested to comply with the terms of the
Acquisition Agreement and consummate the transactions subject to that agreement.
Under the July 1, 1998 amendment to the Acquisition Agreement the Company and
all other parties have agreed to use their respective ultimate best efforts to
obtain shareholder approval of all UPREIT Transactions.
The Acquisition Agreement requires the Company to provide Exchange Rights
to the Limited Partners with respect to their L.P. Units and to give them
certain rights to register the shares of Common Stock acquired under the terms
of the Exchange Rights Agreement. Also, the Company must take steps necessary to
preserve and list on the AMEX the shares of Common Stock issuable in exchange
for L.P. Units under the Exchange Rights Agreement. Furthermore, the Company has
agreed that each of the Limited Partners may purchase his, her or its pro rata
share of new equity securities offered by the Company subsequent to the closing
date. Each Limited Partner's pro rata share will be determined based on the
proportion which the Limited Partner's number of L.P. Units bears to the total
number of Outstanding Shares at the time of the Company's proposed offering of
new equity securities. The Limited Partners will have 10 days in which to
respond to the Company's offer of such securities. Thereafter, the Company will
have a period of 60 days to conclude the sale and issuance of the new securities
upon the same terms offered to the Limited Partners. A Limited Partner may
assign the right of first refusal to any assignee of at least 500,000 L.P.
Units. The right of first refusal will terminate upon the earlier of May 14,
2003, or the written agreement of the Company and holders of a majority of the
L.P. Units.
Under the Acquisition Agreement, the Company has agreed to provide
indemnity to its officers, directors, employees, agents and certain other
parties with respect to claims brought against indemnified parties as a result
of his, her or its service to or relationship with the Company, whether before
or after the closing of the UPREIT Transactions. This indemnification is
consistent with the provisions of the articles of incorporation of the Company
and the Charter. See "THE REINCORPORATION MERGER--Comparison of Rights of
Shareholders." The Company also has agreed to take the action necessary to
effect the Reincorporation Merger, subject to shareholder approval at the
Special Meeting, and to cause Mission West-Maryland to adopt the Charter and
bylaws described below. The members of the Berg Group will have the right to
nominate for election to the Board of Directors the Berg Group Board
Representatives so long as the Berg Group and its Affiliates beneficially own an
aggregate of at least 15% of the Fully-Diluted number of shares of Common Stock.
In the event that their ownership falls below 15% but is at least 10%, the
members of the Berg Group will have the right to nominate one person for
election to the board of directors. See "CERTAIN PROVISIONS OF MARYLAND LAW AND
MISSION WEST-MARYLAND'S CHARTER AND BYLAWS."
CONFLICTS OF INTEREST PROVISIONS
The Acquisition Agreement includes the undertaking of Carl E. Berg not to
directly or indirectly acquire or develop, or acquire any equity ownership
interest in any entity that has an ownership interest in any real estate zoned
or intended for use as R&D Properties or similar industrial facilities or
intends to engage in similar real estate activities (with the exception of
investments in securities of publicly traded companies, which securities do not
represent more than 10% of the outstanding voting securities of such companies)
in California, Oregon or Washington without first disclosing such investment
opportunity to the Company and making such opportunity available to the Company
subject to the approval of the Independent Directors Committee. This restriction
does not apply to any acquisition, development or investment with respect to the
Berg Land Holdings and the Pending Development Projects. This restriction
remains in effect until the date on which both of the following conditions are
satisfied: (i) no nominee of the Berg Group is a member of the Company's board
of directors and (ii) the Berg Group and its Affiliates (other than the Company
and the Operating Partnerships) beneficially own less than 25% of the
outstanding Common Stock of the Company (including for these purposes shares
issuable upon exercise of the Exchange Rights subject to the Ownership Limit).
In addition, transactions between the Company and any Berg Group member, or
entity in which a Berg Group member holds at least 5% of the equity interests
are subject to review and approval by the Independent Directors Committee. Aside
from those restrictions, Mr. Berg and other members of the Berg Group will
generally have freedom of action with respect to the conduct of their business
activities and will not be required to seek the approval of such activities or
refer business opportunities to the Company, nor will they be subject to
liability for failure to do so.
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TERMINATION
The Acquisition Agreement is terminable prior to the final closing date for
the Berg Acquisition only by the Company or Mr. Berg in the event there exists a
non-appealable final order, decree or judgment preventing the occurrence of any
aspect of the UPREIT Transactions.
SURVIVAL AND INDEMNIFICATION MATTERS
All representations and warranties of the parties to the Acquisition
Agreement will survive the closing for a period of one year. Each party to the
Acquisition Agreement is obligated to indemnify the other parties and their
Affiliates with respect to losses and liability resulting from inaccuracies in
the representations and warranties of such party, failure by a party to perform
its obligations under the Acquisition Agreement, failure to satisfy liabilities
not assumed by the Operating Partnerships or the Company, and any claim for
brokers' commissions or finder's fees.
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OPERATING PARTNERSHIP AGREEMENT
THE FOLLOWING SUMMARY OF THE OPERATING PARTNERSHIP AGREEMENT, INCLUDING THE
DESCRIPTIONS OF CERTAIN PROVISIONS SET FORTH ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS, IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE OPERATING
PARTNERSHIP AGREEMENT, WHICH IS FILED AS AN EXHIBIT TO THE REGISTRATION
STATEMENT OF WHICH THIS PROXY STATEMENT/PROSPECTUS IS A PART.
MANAGEMENT
As of the Partnership Closing effective date, the Operating Partnerships
consists of four separate Delaware limited partnerships engaged in the combined
operation and ownership of the Properties pursuant to the terms of the
Acquisition Agreement, as amended, and the Operating Partnership Agreement,
which is identical in all material respects for all four of the limited
partnerships. Generally, pursuant to the Operating Partnership Agreement, the
Company as the sole general partner of the Operating Partnerships has exclusive
control of the business and assets of the Operating Partnerships and has full
and complete authority, discretion and responsibility with respect to the
Operating Partnerships' operations and transactions, including, without
limitation, acquisitions of additional properties, borrowing funds, raising new
capital, leasing buildings, as well as selecting and supervising all employees
and agents of the Operating Partnerships. Through its authority to manage the
business and affairs of the Company, the board of directors of the Company will
direct the business of the Operating Partnerships. The Berg Group has the right
to nominate two individuals for election to the board of directors so long as
the members of the Berg Group and their Affiliates (other than the Company and
the Operating Partnerships) beneficially own in the aggregate at least 15% of
the outstanding shares of Common Stock on a Fully-Diluted basis. If the members
of the Berg Group and such Affiliates beneficially own, in the aggregate, less
than 15% but at least 10% of the Common Stock, on a Fully-Diluted basis, the
Berg Group will have the right to nominate one individual for election to the
board of directors.
Notwithstanding the Company's effective control of the Operating
Partnerships, the consent of the Limited Partners holding an L.P. Unit Majority
is required with respect to certain extraordinary actions involving the
Operating Partnerships including (i) the amendment, modification or termination
of the Operating Partnership Agreement, (ii) a general assignment for the
benefit of creditors or the appointment of a custodian, receiver or trustee for
any of the assets of the Operating Partnerships, (iii) the institution of any
proceeding for bankruptcy of the Operating Partnerships, (iv) the transfer of
any general partnership interests in the Operating Partnerships, including (with
certain exceptions) transfers attendant to any merger, consolidation or
liquidation of the Company, (v) the admission of any additional or substitute
general partner in the Operating Partnerships; and (vi) a Change of Control of
the Operating Partnerships. In addition, until the Protective Provisions
Expiration Date, the consent of the Limited Partners holding the L.P. Unit
Majority is also required with respect to (i) the liquidation of the Operating
Partnerships, (ii) the sale or other transfer of all or substantially all of the
assets of the Operating Partnerships and certain mergers and business
combinations resulting in the complete disposition of all L.P. Units; and (iii)
the issuance of limited partnership interests having seniority as to
distributions, assets and voting over the L.P. Units.
Carl Berg and Clyde Berg have the right for a period of ten years, or if
sooner, until the Protective Provisions Expiration Date, to prohibit taxable
transfers of designated Properties by the Operating Partnerships without their
prior written consent. John Kontrabecki has similar rights with respect to the
former Kontrabecki Properties, which expire after he owns fewer than 750,000
L.P. Units. The Operating Partnerships will be able to effect "tax-free" like
kind exchanges under Section 1031 of the Code, or in connection with other
non-taxable transactions, such as a contribution of property to a new
partnership, without obtaining the prior written consent of these individuals.
See "POLICIES WITH RESPECT TO CERTAIN ACTIVITIES Disposition Policy."
TRANSFERABILITY OF L.P. UNITS
The Operating Partnership Agreement provides that the Limited Partners may
transfer their L.P. Units subject to certain limitations. Except for certain
transfers by the Limited Partners to or from certain of their affiliates,
however, all transfers may be made only with the prior written consent of the
Company as the sole general partner of the Operating Partnerships.
In addition, no transfer of L.P. Units by the Limited Partners may be made
in violation of certain regulatory and other restrictions set forth in the
Operating Partnership Agreement. Except in the case of certain permitted
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transfers to or from certain Affiliates of the Limited Partners, the Exchange
Rights, the Put Rights, the New Equity Financing Rights and the Protective
Provisions will no longer be applicable to L.P. Units so transferred, and the
transferee will not have any rights to nominate persons to the board of
directors of the Company.
ADDITIONAL CAPITAL CONTRIBUTIONS AND LOANS
The Operating Partnership Agreement provides that if the Operating
Partnerships requires additional funds to pursue its investment objectives, the
Company may fund such investments by raising additional equity capital and
making a capital contribution to the Operating Partnerships or by borrowing such
funds and lending the net proceeds thereof to the Operating Partnerships. If the
Company intends to provide additional funds through a contribution to capital
and purchase of units of general partnership interest, the Limited Partners will
have the right to participate in such funding on a pro rata, pari passu basis
and to acquire additional L.P. Units (the "New Equity Financing Rights"). If the
Limited Partners do not participate in such financing, the Company will acquire
additional units of general partnership interest. In either case, the number of
additional units of partnership interest will be increased based upon the amount
of the additional capital contributions and the value of the Operating
Partnerships as of the date such contributions are made.
In addition, as general partner of the Operating Partnerships, the Company
has the ability to cause the Operating Partnerships to issue additional L.P.
Units. In the event that the Operating Partnerships issue new L.P. Units (for
cash but not property), the Limited Partners will have the right to purchase new
L.P. Units at the price offered by the Company in the transaction giving rise to
such participation right in order, and to the extent necessary, to maintain
their respective percentage interests in the Operating Partnerships. See
"POLICIES WITH RESPECT TO CERTAIN ACTIVITIES-- Financing."
EXCHANGE RIGHTS, PUT RIGHTS AND REGISTRATION RIGHTS
Subject to shareholder approval of Proposal 5, the Limited Partners will
have the Exchange Rights, which generally become exercisable on the first
anniversary of the final closing date for the Berg Acquisition. However, the
Limited Partners may, in the aggregate, tender L.P. Units for exchange prior to
the first anniversary solely in connection with (i) the registration of 500,000
shares of Common Stock acquired upon exercise of the Exchange Rights for resale
on a Form S-3 (or any equivalent form) and (ii) a registered public offering of
Common Stock initiated by the Company to the extent of 25% of the total shares
in the offering subject to the underwriters' unlimited right to reduce the
participation of all selling shareholders. In addition, once in each 12-month
period beginning on the first anniversary of the date the Exchange Rights
Agreement is signed and delivered by the parties, the Limited Partners (other
than Carl Berg and Clyde Berg) will have the right to exchange a portion of
their L.P. Units for shares of Common Stock (subject to the Ownership Limit) and
to exercise the Put Rights to sell a portion of their L.P. Units to the
Operating Partnerships at a price equal to the average Market Price of the
Common Stock for the 10-trading day period immediately preceding the date of
tender (the "Tender Price"). Upon any exercise of the Put Rights, the Company
will have the opportunity for a period of 15 days to elect to fund the purchase
of the L.P. Units and purchase additional general partner interests in the
Operating Partnerships for cash, unless the purchase price exceeds $1 million in
the aggregate for all tendering Limited Partners, in which case, the Operating
Partnerships or the Company shall be entitled to reduce proportionally the
number of L.P. Units to be acquired from each tendering Limited Partner so that
the total purchase price is not more than $1 million.
The Exchange Rights Agreement will permit every Limited Partner to tender
L.P. Units to the Company, and at the Company's election, to receive cash,
Common Stock, or a combination of cash and Common Stock in exchange for the L.P.
Units tendered, subject to the Ownership Limit, or the Berg Group Ownership
Limit, as the case may be. Pursuant to the Exchange Rights Agreement, the
holders of L.P. Units will have the right to participate in any registered
public offering of the Common Stock initiated by the Company to the extent of
25% of the total shares sold in the offering upon converting L.P. Units to
shares of Common Stock, but subject to the underwriters' unlimited right to
reduce the participation of all selling shareholders. The holders of L.P. Units
will be able to request resale registrations of shares of Common Stock acquired
on exchange of L.P. Units on a Form S-3, or any equivalent form of registration
statement, and after the first year following the closing of the Berg
Acquisition, the Company will be obligated to effect no more than two such
registrations in any 12-month period. The Company is obligated to assist the
L.P. Unit holders in obtaining a firm commitment underwriting agreement for such
resale from a qualified investment banking firm. If registration on Form S-3, or
an equivalent form, is not available for any reason, the Company will be
obligated to effect a registration of the shares to be acquired on exercise of
the Exchange Rights on Form S-11, or an equivalent form, in an underwritten
public offering, upon demand by the holders of no fewer than 500,000 L.P. Units.
All holders of L.P. Units will be entitled to participate
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in such registration. The Company will bear all costs of such registrations
other than selling expenses, including commissions and separate counsels' fees
of the L.P. Unit holders. The Company will not be required to effect any
registration for resale on Form S-3, or equivalent form of Common Stock shares
issuable to the holder of L.P. Units if the request is for less than 250,000
shares.
OTHER MATTERS
The Operating Partnership Agreement requires that the Operating
Partnerships be operated in a manner that will enable the Company to satisfy the
requirements for being classified as a REIT and to avoid any federal income or
excise tax liability.
The Operating Partnership Agreement provides that the net operating cash
flow of the Operating Partnerships, as well as net sales and refinancing
proceeds, will be distributed from time to time as determined by the board of
directors of the Company (but not less frequently than quarterly) pro rata in
accordance with the partners' percentage interests in the Operating
Partnerships. See "Distribution Policy."
Pursuant to the Operating Partnership Agreement, the Operating Partnerships
will also assume and pay when due, or reimburse the Company for payment of,
certain costs and expenses relating to the continuity of existence and
operations of the Company. In addition, the Operating Partnership Agreement
obligates the Operating Partnerships to reimburse all organization costs and
expenses of the UPREIT Transactions paid or incurred by the Berg Group.
The Operating Partnership Agreement provides that upon the exercise of an
outstanding option under the Company's 1997 Option Plan, the Company may
purchase additional general partner interests in the Operating Partnerships by
contributing the exercise proceeds to the Operating Partnerships. The increased
interest of the Company shall be equal to the percentage of Outstanding Shares
represented by the shares acquired upon exercise of the option.
TERM
The Operating Partnerships will continue in full force and effect until
December 31, 2048 or until sooner dissolved pursuant to the terms of the
Operating Partnership Agreement.
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MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company as of May 15, 1998 are
as follows:
<TABLE>
<CAPTION>
Age Position
------ ---------------------------------------------------------------
<S> <C> <C>
Carl E. Berg(1)(3) 60 Chairman of the Board, Chief Executive Officer, President and
Director
Michael J. Anderson(1) 38 Vice President, Chief Operating Officer and Director
Bradley A. Perkins 41 Vice President, General Counsel and Secretary
Marianne K. Aguiar 31 Vice President of Finance and Controller
John Bolger(2)(3) 51 Director
Roger Kirk(2) 45 Director
</TABLE>
- ----------
(1) Berg Group Board Representative
(2) Member of the Independent Director's Committee and Member of the
Compensation Committee
(3) Member of the Audit Committee
The following is a biographical summary of the experience of the executive
officers and directors of the Company:
Mr. Berg has served as Chief Executive officer, President and Director of
the Company since September of 1997. From 1979 to the present, Mr. Berg has been
a general partner of Berg & Berg Developers and a director and officer of BBE,
Inc. since its inception. Mr. Berg is also a director of Integrated Device
Technologies, Inc., Videonics, Valence Technology and System Integrated
Research.
Mr. Anderson joined the Company on January 1, 1998. On March 30, 1998, Mr.
Anderson was appointed Chief Operating Officer, Vice President and a Director.
After seven years as a real estate attorney and partner at Ware & Freidenrich,
Palo Alto, California, Mr. Anderson has spent the past six years in private real
estate development with Sandhill Homes, LP and Sandhill Property Company.
Mr. Perkins joined the Company on February 2, 1998. On March 30, 1998, Mr.
Perkins was appointed Vice President, General Counsel, and Secretary. Mr.
Perkins will devote a portion of his time to the Company, a portion to various
Berg companies, and a portion of his time to Teledex Corporation (a telephone
supplier). From November 1991 to January 1998, Mr. Perkins was with Valence
Technology, Inc., where he was Vice President, General Counsel and Secretary for
the past five years. From August 1988 to November 1991, Mr. Perkins was
Assistant General Counsel and Intellectual Property Counsel with VLSI
Technology, Inc., a semiconductor manufacturer.
Ms. Aguiar joined the Company on March 29, 1998. On March 30, 1998, Ms.
Aguiar was appointed Vice President of Finance and Controller. From June 1996 to
March 1998, Ms. Aguiar was with Oasis Residential, Inc. where she served as Vice
President, Controller and Treasurer from July 1996 to March 1998. From November
1995 to May 1996, Ms. Aguiar was employed by SBT Accounting Systems where from
April 1996 to May 1996, she served as Acting Vice President of Finance and
Controller and from November 1995 to April 1996 she served as Assistant
Controller. From November 1992 to November 1995, Ms. Aguiar was employed by
Coopers & Lybrand LLP where she served as Audit Manager.
Mr. Bolger became a director of the Company on March 30, 1998. Mr. Bolger
is a private investor. He was Vice President of Finance and Administration of
Cisco Systems, Inc., a networking company, from May 1989 through December 1992.
Mr. Bolger is a director of Integrated Device Technology, Inc., Integrated
Systems Inc., McAfee Associates, Inc., Sanmina Corporation, and TCSI
Corporation.
Mr. Kirk initially became a director of the Company in September 1997. In
May 1998, Mr. Kirk rejoined the board. Mr. Kirk has been President of
Hydrodynamics, Inc., since he formed the company in 1982. Since 1988, Mr. Kirk
has been the project manager and a general partner in Isabella Partners for
Isabella Hydroelectric Project. Certain members of the Berg Group are also
general partners in Isabella Partners.
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NUMBER, TERMS AND ELECTION OF DIRECTORS
Following the Reincorporation Merger, the number of directors will
initially be set at five. However, the bylaws of Mission West-Maryland provide
that the number of directors may be changed from time to time by the board of
directors, provided that the number will never be less than the minimum required
by Maryland law or more than 15. The board of directors may determine the exact
number. Generally, each director will serve for a term of one year or until the
next annual meeting at which directors are elected.
CONTRACTUAL ARRANGEMENTS
In January 1998, the Company entered into an employment agreement with Mr.
Anderson, Vice President, Chief Operating Officer and Director, providing that
in the case of voluntary termination for good cause (as defined in the
agreement) or involuntary termination other than for cause, Mr. Anderson will be
entitled to a severance payment of $100,000 and a continuation of medical and
other group insurance benefits for six months. In the event such a termination
occurs more than 12 months from his hire date, the vesting of Mr. Anderson's
stock options will accelerate and options which would have vested in the six
month period following the termination date will be vested as of the termination
date. Additionally, Mr. Anderson acquired 200,000 shares of Common Stock on
March 30, 1998 pursuant to the exercise of an option. Mr. Anderson's shares are
subject to repurchase by the Company. The Company loaned Mr. Anderson $900,000
to purchase the shares.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Company has established an Audit Committee that will
consist of at least two Independent Directors following the consummation of the
UPREIT Transactions contemplated in this Prospectus/Proxy Statement. The Audit
Committee was established to make recommendations concerning the engagement of
independent public accountants, review with the independent public accountants
the plans and results of the audit engagement, approve professional services
provided by the independent public accountants, review the independence of the
independent public accountants, consider the range of audit and non-audit fees
and review the adequacy of the Company's internal accounting controls.
COMPENSATION COMMITTEE. The Company has established a Compensation
Committee to determine compensation for the Company's executive officers and to
implement the Company's 1997 Stock Option Plan. The Compensation Committee
currently consists of two Independent Directors and will not include any officer
of the Company.
INDEPENDENT DIRECTORS COMMITTEE. Following the consummation of the
transactions contemplated herein, the Board of Directors will establish the
Independent Directors Committee consisting of at least two Independent Directors
to approve transactions between the Company and members of the Berg Group and
their affiliates and any entity in which any of them directly or indirectly owns
at least 5% of the equity interests. In addition, the Independent Directors
Committee will determine whether to exercise the Company's rights under the Berg
Land Holdings Option Agreement.
COMPENSATION OF DIRECTORS
The Company intends to pay its directors who are not officers of the
Company fees for their services as directors. Directors will receive annual
compensation of $15,000, plus a fee of $1,000 for attendance (in person or by
telephone) at each meeting of the board of directors, but not for committee
meetings. Officers of the Company who are also directors will not be paid any
director fees.
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Each member of the Board of Directors who is not an employee of the Company
or any of its subsidiaries or affiliates (a "Non-Employee Director") and who
becomes a member of the Board of Directors after November 10, 1997, the date on
which the 1997 Stock Option Plan was approved by the shareholders of the
Company, will automatically receive a grant of an option to purchase 50,000
shares of Common Stock at an exercise price equal to 100% of the fair market
value of the Common Stock at the date of grant of such option upon joining the
Board of Directors. Such options will become exercisable cumulatively with
respect to 1/48th of the underlying shares on the first day of each month
following the date of grant. Generally, the options must be exercised while the
optionee is a director of the Company.
EXECUTIVE COMPENSATION
Upon the acquisition of control of the Company by the Berg Voting Group on
September 2, 1997 all former officers and directors resigned as of the same
date. The officers and directors appointed to replace them, including Mr. Berg
and Mr. Kirk, received no compensation during the 1997 fiscal year. Therefore,
no officer or director who received compensation during the fiscal year ended
December 31, 1997 will receive compensation during the fiscal year ending
December 31, 1998. The following table sets forth the annual base salary of the
former chief executive officer and the annual base salary which the Company
expects to pay in 1998 to the Company's president and four other most highly
compensated executive officers whose annualized base salary is expected to
exceed $100,000 (collectively, the "Named Executives"). The Company also may
pay, subject to approval of the board of directors, a cash bonus to each Named
Executive in an amount not to exceed such executive's base salary.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Summary Compensation(1) Long-Term Compensation
----------------------------------------- ----------------------------
Other Annual Securities Underlying
Salary Bonus Compensation Options (shares)
---------- ---------- -------------- -------------------------
<S> <C> <C> <C> <C>
Michael M. Earley(2) $ 49,640 - $25,750 -
President and CEO
Carl E. Berg 100,000 - - -
Chairman, CEO and President
Michael J. Anderson 150,000 $50,000 - 600,000(3)
Vice President and COO
Bradley A. Perkins 160,000 - - 80,000(4)
Vice President and General Counsel
Marianne K. Aguiar 105,000 - - 75,000(4)
Vice President of Finance and
Controller
</TABLE>
- ----------------
(1) Compensation for Mr. Berg, Mr. Anderson, Mr. Perkins and Ms. Aguiar is
prospective. No current Executive Officer received any compensation from
the Company in 1997.
(2) Michael M. Earley served as Chief Executive Officer, President and Director
of the Company from March 7, 1997 through August 1997. Mr. Earley received
compensation for such services through the payment by the Company to Triton
Group Ltd. (of which Mr. Earley was concurrently the Chief Executive
Officer and President) in the total amount of $75,390 ($49,640 paid to the
Triton Group Management for general management services, including Mr.
Earley's services, and $25,750 paid directly to Mr. Earley as Director's
fees).
(3) Mr. Anderson received a stock option to purchase 400,000 shares of stock,
which vests over four years as follows: 6.25% on the first six-month
anniversary of Mr. Anderson's date of hire, an additional 12.5% on his
one-year anniversary, and the remainder in equal amounts on a monthly basis
over the remaining three years. Mr. Anderson received a second stock option
to purchase an additional 200,000 shares which was immediately exercisable,
subject to the Company's right to repurchase (which right decreases over
time) such shares in the event Mr. Anderson leaves the employ of the
Company. Mr. Anderson exercised his option for such shares. The Company
loaned Mr. Anderson the purchase price for this stock.
(4) Stock options vest over four years as follows: 6.25% on the first six-month
anniversary of date of hire, an additional 12.5% on the one-year
anniversary, and the remainder in equal amounts on a monthly basis over the
remaining three years.
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BENEFIT PLANS
1997 STOCK OPTION PLAN. The Company's 1997 Stock Option Plan (the "Option
Plan") was approved by the Company's shareholders on November 10, 1997. The
Option Plan was adopted so that the Company may attract and retain the high
quality employees, consultants and directors necessary to build the Company's
infrastructure and to provide ongoing incentives to the Company's employees in
the form of options to purchase the Company's Common Stock by enabling them to
participate in the Company's success. The following summary is qualified in it
entirety by reference to the full text of the Option Plan, a copy of which was
filed as an exhibit to the Company's Proxy Statement, dated October 20, 1997,
filed with the Commission on October 20, 1997.
The Option Plan provides for the granting to employees (including officers
and directors who are employees) of "incentive stock options" within the meaning
of Section 422 of the Code, and for the granting of nonstatutory options to
employees, consultants and directors, including directors who are neither
employees of, nor consultants to, the Company ("Non-Employee Directors").
Options to purchase a maximum of 5,500,000 shares of Common Stock may be granted
under the Option Plan, subject to equitable adjustments to reflect certain
corporate events. The Option Plan will be administered by the Compensation
Committee. The interpretation and construction of any provision of the Option
Plan is within the sole discretion of the Compensation Committee, whose
determination is final and conclusive. Members of the Board or committee receive
no additional compensation for their services in connection with the
administration of the Option Plan.
The Compensation Committee selects the optionees and determines the number
of shares to be subject to each option and the time or times at which shares
become exercisable under the option, except for options granted to Non-Employee
Directors pursuant to automatic grants.
Each option granted under the Option Plan is evidenced by a written stock
option agreement between the Company and the optionee. The Option Plan provides
that options must vest and, unless otherwise decided by the Committee become
exercisable cumulatively as to 20% of the underlying shares on each anniversary
of the date of grant for so long as the optionee is employed by or providing
service to the Company.
The price per share exercise price of options granted under the Option Plan
may not be less than 100% of the fair market value on the date of grant, except
in certain specific circumstances, in which case the exercise price may not be
less than 110%. Each option may be exercised only to the extent that it is
vested. Options must generally be exercised during the optionee's employment or
within 30 days following the optionee's termination of status as an employee,
consultant or director, unless termination is due to the death or disability of
an optionee. If termination of status is due to death or disability of the
optionee, an option may be exercised within six months.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the last completed fiscal year, no current members of the
Compensation Committee were officers of the Company. The current officers and
directors of the Company were elected or appointed during the current fiscal
year, except for Carl E. Berg. Mr. Berg became an officer and director in
September 1997, but did not serve on the Compensation Committee during the last
completed fiscal year. No officer who received compensation in the last
completed fiscal year is now an officer. The current members of the Company's
Compensation Committee were elected by the board of directors effective during
the current fiscal year and are not officers or employees of the Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services; or (b) active and deliberate dishonesty established by a
final judgment as being material to the cause of action. The Charter contains
such a provision which eliminates such liability to the maximum extent permitted
by the MGCL.
The Charter also authorizes Mission West-Maryland to the maximum extent
permitted by Maryland law, to obligate itself to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
any present or former director or officer, or any individual who, while a
director of Mission
-80-
<PAGE>
West-Maryland and at the request of Mission West-Maryland, serves or has served
another corporation, real estate investment trust, partnership, joint venture,
trust, employee benefit plan or any other enterprise as a director, officer,
partner or trustee of such corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or other enterprise
from and against any claim or liability to which such person may become subject
or which such person may incur by reason of his status as a present or former
director or officer of Mission West-Maryland. The Maryland Bylaws obligate
Mission West-Maryland, to the maximum extent permitted by Maryland law, to
indemnify and to pay or reimburse reasonable expenses in advance of final
disposition of a proceeding to (i) any present or former director or officer who
is made a party to the proceeding by reason of his service in that capacity or
(ii) any individual who, while a director of Mission West-Maryland and at the
request of Mission West-Maryland, serves or has served another corporation, real
estate investment trust, partnership, joint venture, trust, employee benefit
plan or any other enterprise as a director, officer, partner or trustee of such
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. The Charter and the
Maryland Bylaws also permit Mission West-Maryland to indemnify and advance
expenses to any person who served a predecessor of Mission West-Maryland in any
of the capacities described above and any employee or agent of Mission
West-Maryland or a predecessor of Mission West-Marylad.
The MGCL requires a corporation (unless its charter provides otherwise,
which the Charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (a) the act or omission of the director
or officer was material to the matter giving rise to the proceeding and (i) was
committed in bad faith or (ii) was the result of active and deliberate
dishonesty, (b) the director or officer actually received an improper personal
benefit in money, property or services or (c) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the act
or omission was unlawful. However, under the MGCL, a Maryland corporation may
not indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that personal benefit
was improperly received, unless in either case a court orders indemnification
and then only for expenses. In addition, the MGCL permits a corporation to
advance reasonable expenses to a director or officer upon the corporation's
receipt of (a) a written affirmation by the director or officer of his good
faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking by him or on
his behalf to repay the amount paid or reimbursed by the corporation if it shall
ultimately be determined that the standard of conduct was not met.
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<PAGE>
CERTAIN TRANSACTIONS
PRIVATE PLACEMENT TRANSACTIONS--1997
In September and November of 1997, the Company sold Common Stock in two
private placement transactions. On September 2, 1997, the Company sold 200,000
shares of Common Stock at $4.50 per share prior to the Reverse Split. In
connection with that transaction the Company received an opinion from Slusser
Associates, Inc. that the transaction was fair to the Company's shareholders
from a financial point of view. Slusser Associates, Inc. received a fee of
$150,000. On November 12, 1997, the Company sold 1,250,000 shares of Common
Stock at $4.50 per share after giving effect to the Reverse Split. The price
paid for the Common Stock in the November transaction was the same as the price
paid in the September private placement, and the Company did not retain a
financial advisor to render a fairness opinion. There can be no assurance that
the terms of the November private placement were as favorable to the Company as
would have been obtained with unrelated third parties. The purchasers of record
of the Common Stock in the two transactions included, among others, the
following 5% shareholders, executive officers, directors, and affiliates of 5%
shareholders, executive officers and directors:
<TABLE>
<CAPTION>
September Private November Private
Placement(1) Placement
------------------- -------------------
<S> <C> <C>
Berg & Berg Enterprises, 27,333 -
Inc.(2)
Thelmer Aalgaard(3) 12,333 70,640
Carl E. Warden(4) 12,333 105,000
John C. Bolger 12,333 9,889
Robert L. and Sharon K. Yoerg - 111,111
</TABLE>
- ---------------
(1) Reflects Reverse Split.
(2) Carl E. Berg, President, Chief Executive Officer and Director of the
Company, is also an officer and director of BBE. Clyde Berg is a director
of BBE. Carl E. Berg, Clyde J. Berg and members of their immediate families
are, directly and indirectly, the beneficial owners of all shares of the
capital stock of BBE.
(3) Mr. Aalgard is a director of BBE.
(4) As a result of the UPREIT Transactions, Mr. Warden and the Yoergs will no
longer be Affiliates of the Company.
In addition, members of Mr. Aalgaard's immediate family purchased or
received as a gift from Mr. Aalgaard an aggregate of 17,772 shares of Common
Stock in connection with the November Private Placement.
In connection with the September and November private placements, certain
purchasers of Common Stock, including Mr. Aalgaard, Mr. Warden, Mr. Bolger and
the Yoergs entered into the Voting Rights Agreement. The Voting Rights
Agreements terminate at the earliest of the following dates: (i) upon any sale
of the purchaser's shares of Common Stock pursuant to a registration statement
declared effective under the Securities Act, but only as to the purchaser's
shares of Common Stock so sold; (ii) upon the sale of the purchaser's shares of
Common Stock pursuant to Rule 144 promulgated under the Securities Act, but only
as to the purchaser's shares of Common Stock so sold; or (iii) two years after
the effective date of the Voting Rights Agreements. See "THE SPECIAL MEETING --
Votes Required."
PRIVATE PLACEMENT TRANSACTIONS--1998
On May 4, 1998, the Company entered into agreements with prospective
purchasers to sell and issue 6,495,058 shares of Common Stock in the Private
Placement, the terms of which are described elsewhere in this Proxy
Statement/Prospectus. See "BACKGROUND OF THE UPREIT
TRANSACTIONS--Background--The Private Placement." The Company has not obtained a
"fairness opinion" or other independent financial advice with respect to the
terms, including price, of the Private Placement, although Ingalls & Snyder LLC
has acted as placement agent and advisor for the purchasers of 5,800,000 shares
of Common Stock. The purchasers of record of the Common Stock will include,
among others, the following officers, directors, 5% shareholders and purchasers,
who by reason of the purchase of Common Stock in the Private Placement, will
become 5% shareholders:
<TABLE>
<CAPTION>
Non-Placement Agent Ingalls & Snyder
Private Placement Private Placement
--------------------- ------------------
<S> <C> <C>
Carl E. Berg 50,000 -
Thelmer Aalgaard 70,000 -
Carl E. Warden 39,609 -
Leo Helzel - 457,000
Meyer Family Trust - 1,000,000
I&S Value Partners - 1,125,067
Prism Partners I, L.P. - 450,000
</TABLE>
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<PAGE>
UPREIT TRANSACTIONS
The UPREIT Transactions include transactions between the Company, certain
officers and directors of the Company and their affiliates. See "SUMMARY OF THE
UPREIT TRANSACTIONS AND PURPOSE OF THE SPECIAL MEETING--Private
Placement/Recapitalization," "RISK FACTORS--Control of the Company and the
Operating Partnerships by the Berg Group," and "--Potential Conflicts of
Interest with the Berg Group," "BACKGROUND OF THE UPREIT TRANSACTIONS--Benefits
to the Berg Group." The Company has consummated the Partnership Closing portion
of the Berg Acquisition. The Company has not obtained a "fairness" opinion or
other independent financial advice with respect to the UPREIT Transactions.
There can be no assurance that the terms of any of the UPREIT Transactions are
as favorable as could have been obtained with unrelated third parties.
PURCHASE BY MICHAEL ANDERSON
Michael J. Anderson, Vice President and Chief Operating Officer of the
Company, acquired 200,000 shares of Common Stock on March 30, 1998 pursuant to
the exercise of an option. Mr. Anderson's shares are subject to repurchase by
the Company. The Company loaned Mr. Anderson $900,000 to purchase the shares.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock as of October 15, 1998 by (i) each
person who is a shareholder of the Company holding more than a 5% interest in
the Company, (ii) directors and Named Executives of the Company, and (iii) the
directors and officers of the Company as a group. Unless otherwise indicated in
the footnotes to the table, all of such interests are owned directly, and the
person or entity has sole or shared voting and investment power. The following
table also indicates information with respect to beneficial ownership of
Outstanding Shares after completion of the UPREIT Transactions. For a
description of the terms of the Exchange Rights and the Put Rights of the
Limited Partners, see "OPERATING PARTNERSHIP AGREEMENT -- Exchange Rights, Put
Rights, and Registration Rights." For a description of the right of members of
the Berg Group to nominate persons to the board of directors of the Company, see
"MANAGEMENT--Directors and Executive Officers."
<TABLE>
<CAPTION>
Common Stock
-------------------------------------------------------------------------------------------------
Number of Number of
Shares Shares
Beneficially Beneficially
Owned(1) Owned(1) Number of
Prior to After Outstanding
UPREIT Percent UPREIT Percent Shares Percent
Transactions Ownership Transactions Ownership Owned(1) Ownership
-------------- ------------- -------------- ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael J. Anderson 225,000(2) 13.1% 225,000 2.7% 225,000 *
Vice President, Chief
Operating Officer and
Director
Carl E. Warden 117,333(3) 6.9% 156,942(3) 1.9% 156,942 *
1516 Country Club Drive
Los Altos, CA 94024
Robert L. & Sharon K. Yoerg(4) 111,111 6.5% 111,111 1.4% 111,111 *
98 Melanie Lane
Atherton, CA 94027
Thelmer Aalgaard 82,973(5) 4.9% 152,973 1.9% 2,002,598(6) 2.96%
c/o Berg & Berg Enterprises, Inc.
10050 Bandley Drive
Cupertino, CA 95014
Roger S. Kirk, Director 34,556 2.1% 34,556 * 34,556 *
521 E. Peach #28
Bozeman, Montana 59771
John C. Bolger, Director 25,348(7) 1.5% 25,348 * 25,348 *
96 Sutherland Drive
Atherton, CA 94027
Carl E. Berg(8) 27,333 * 77,333(9) 1.0% 34,239,333(10) 50.40%
President, Chief Executive
Officer and Director
Clyde J. Berg(8) 27,333 * 27,333 * 25,667,707(11) 37.93%
c/o Berg & Berg Enterprises, Inc.
10050 Bandley Drive
Cupertino, CA 95014
Berg & Berg Enterprises, Inc. 27,333(8) * 27,333 * 5,065,590(12) 7.49%
10050 Bandley Drive
Cupertino, CA 95014
Bradley A. Perkins 5,000(13) * 0 * 5,000 *
Vice President, General
Counsel and Secretary
Marianne K. Aguiar 4,688(14) * 0 * 4,688 *
Vice President of
Finance and Controller
Ingalls & Snyder Value 0 * 1,125,067 13.7% 1,125,067 1.66%
Partners, L.P.(15)
61 Broadway
New York, NY 10006
Meyer Family Trust 0 * 1,000,000 12.2% 1,000,000 1.48%
c/o Bay Apartment Communities, Inc.
4340 Stevens Creek Blvd., Suite 275
San Jose, CA 95129
Prism Partners I, L.P.(16) 0 * 450,000 5.5% 450,000 *
909 Montgomery Street, Suite 400
San Francisco, CA 94133
Leo Helzel(17) 0 * 437,000 5.3% 437,000 *
5550 Redwood Road, Suite 4
Oakland, CA 94619
Paul McCarthy(18) 0 * 430,000 5.2% 430,000 *
c/o Marquette National Corporation
6316 South Western Avenue
Chicago, IL 60636
All Directors and executive 314,321 18.2% 362,237(20) 4.4% 34,533,925 51.02%
officers as a group (6 persons)(19)
</TABLE>
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<PAGE>
- -------------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power
and/or investment power with respect to those securities and includes
securities which such person has the right to acquire beneficial ownership
within 60 days of October 15, 1998. Unless otherwise indicated, the persons
or entities identified in this table have sole voting and investment power
with respect to all shares shown as beneficially owned by them. Percentage
ownership calculations are based on 1,698,536 shares outstanding as of
October 15, 1998. "Number of Outstanding Shares Owned" reflects the number
of shares of Common Stock and the number of L.P. Units which may be
exchanged for Common Stock following the completion of the UPREIT
Transactions, whether or not the beneficial owner of such Outstanding
Shares has the right to acquire common stock upon the exchange of L.P.
Units within 60 days. Percentage Ownership calculations are based on
67,673,227 Outstanding Shares.
(2) Mr. Anderson received a stock option to purchase 400,000 shares of stock,
which vests over 4 years as follows: 6.25% on the first six-month
anniversary of Mr. Anderson's date of hire, an additional 12.5% on his
one-year anniversary, and the remainder in equal amounts on a monthly basis
over the remaining 3 years. Mr. Anderson received a second stock option to
purchase an additional 200,000 which was immediately exercisable subject to
repurchase, which Mr. Anderson exercised. The Company loaned Mr. Anderson
the purchase price for this stock.
(3) Includes (i) 9,333 shares held of record by Carl E. Warden and (ii) 39,609
held of record by Marlin Concepts, Inc. to be purchased in the Private
Placement.
(4) Includes (i) 55,556 shares held of record by Robert L. Yoerg M.D. Trustee,
Robert L. Yoerg Professional Corporation Pension Plan and (ii) 11,111
shares held of record by Sharon K. Yoerg, Custodian, Elizabeth A. Yoerg,
under the Uniform Gifts to Minors Act.
(5) Mr. Aalgaard is a director of BBE. Includes (i) 33,400 shares held of
record by Carl E. Berg, Trustee, Berg & Berg Profit Sharing Plan FBO
Thelmer G. Aalgaard Dated 1/1/84, (ii) 4,160 shares held of record by Carl
E. Berg, Trustee, Berg & Berg Profit Sharing Plan FBO Thelmer G. Aalgaard
Dated 1/1/84, 1997 Contribution, and (iii) 2,220 shares held of record by
Thelmer G. Aalgaard, Custodian, Rachel Michaels, Under the California
Uniform Gifts to Minor Act.
(6) Includes 1,325,522 shares of Common Stock issuable on exchange of L.P.
Units in which Mr. Aalgaard has a pecuniary interest as a result of his
status as a partner or member of the following entities: Baccarat Cambrian,
a California general partnership and a limited partner in MWP; MWP;
Baccarat Fremont Developers, LLC, a California limited liability company
and a limited partner of MWP; Berg Venture I, a California general
partnership and general partner of Triangle Development Company which is a
limited partner of MWP; and Berg Venture II, a California limited
partnership and limited partner of MWP. Also includes 1,109,156 shares of
Common Stock issuable on exchange of L.P. Units held by Mr. Aalgaard as
trustee of the Sonya L. Berg Trust and the Sherri L. Berg Trust for which
Mr. Aalgaard possesses no pecuniary interest.
(7) Includes 3,126 shares of Common Stock issuable on exercise of options.
(8) Carl E. Berg is an executive officer, director and Clyde J. Berg is a
director of BBE. With members of their immediate families, the Messrs. Berg
beneficially own, directly and indirectly, all of the shares of capital
stock of BBE.
(9) Carl E. Berg disclaims beneficial ownership of 53,071 shares of Common
Stock held by him as a trustee under various pension and profit sharing
plans, some of which are subject to the Voting Rights Agreements. Mr. Berg
has no investment control over such shares.
(10) Includes 29,096,410 shares of Common Stock issuable on exchange of L.P.
Units in which Mr. Berg has a pecuniary interest as a result of his status
as a partner or member of the following entities: MWP; MWP I; MWP II; MWP
III; DeAnza Office Partners, a California general partnership and limited
partner of MWP; Berg Venture I, a California general partnership and
general partner of Triangle Development Company which is a limited partner
of MWP; and Berg Venture II, a California limited partnership and limited
partner of MWP. Also includes an additional 5,065,590 shares of Common
Stock held by or issuable on exchange of L.P. Units beneficially owned by
BBE. This does not include any share deemed beneficially owned by Kara Ann
Berg, his daughter, as to which he disclaims beneficial ownership.
(11) Includes 17,494,386 shares of Common Stock issuable on exchange of L.P.
Units in which Mr. Berg has a pecuniary interest as a result of his status
as partner or member of the following entities: MWP I; MWP II; MWP III;
DeAnza Office Partners, a California general partnership and limited
partner of MWP; Berg Venture I, a California general partnership and
general partner of Triangle Development Company which is a limited partner
of MWP; and Berg Venture II, a California limited partnership and limited
partner of MWP. Also includes 833,372 shares of Common Stock issuable on
exchange of L.P. Units held by Mr. Berg as trustee of the Carl Berg Child's
Trust UTA dated June 2, 1978; 2,197,026 shares of Common Stock issuable on
exchange of L.P. Units held by Mr. Berg as trustee of the 1981 Kara Ann
Berg Trust, and an additional 5,065,590 shares of Common Stock held by or
issuable on exchange of L.P. Units beneficially owned by BBE. This does not
include any share deemed beneficially owned by Sonya L Berg and Sherri L.
Berg, his daughters, as to which he disclaims beneficial ownership.
(12) Includes 2,711,974 shares of Common Stock issuable on exchange of L.P.
Units held by BBE, and 2,330,698 L.P. Units held by or issuable to Baccarat
Cambrian, which are beneficially owned by BBE.
(13) Mr. Perkins received a stock option to purchase 80,000 shares of stock,
which vests over 4 years as follows: 6.25% on the first six-month
anniversary of Mr. Perkins' date of hire, an additional 12.5% on his
one-year anniversary, and the remainder in equal amounts on a monthly basis
over the remaining 3 years.
(14) Ms. Aguiar received a stock option to purchase 75,000 shares of stock,
which vests over 4 years as follows: 6.25% on the first six-month
anniversary of Ms. Aguiar's date of hire, an additional 12.5% on her
one-year anniversary, and the remainder in equal amounts on a monthly basis
over the remaining 3 years.
(15) Thomas Boucher and Robert L. Cipson, general partners of Ingalls & Snyder
Value Partners, L.P. ("Value Partners"), have the power to vote and the
power to direct the investment of Value Partners with respect to the Common
Stock.
(16) Jerald Weintraub, managing general partner of Prism Partners I, L.P.
("Prism"), has the power to vote and the power to direct the investment of
Prism with respect to the Common Stock. Includes 31,500 shares to be held
of record by Legion Fund Limited, for which Mr. Weintraub also has the
power to vote and the power to direct the investment.
(17) Mr. Helzel may be deemed to be the beneficial owner of (i) 22,000 shares to
be held of record by Helzel Family Foundation and (ii) 415,000 shares to be
held of record by the Leo B. and Florence Helzel Living Trust because Mr.
Helzel is a director of the foundation, and trustee and beneficiary of the
trust. Mr. Helzel disclaims beneficial ownership of these shares except to
the extent of his pecuniary interest therein.
(18) Mr. McCarthy may be deemed to be the beneficial owner of (i) 215,000 shares
to be held of record by John F. McCarthy Charitable Lead Annuity Trust and
(ii) 215,000 shares to be held of record by Marquette National Corporation,
because Mr. McCarthy is the trustee of the Trust and the Chairman, Chief
Executive Officer and beneficial owner of the Marquette National
Corporation. Mr. McCarthy disclaims beneficial ownership of these shares
except to the extent of his pecuniary interest therein.
(19) Current officers and directors include Carl E. Berg, Michael J. Anderson,
Bradley A. Perkins, Marianne K. Aguiar, John C. Bolger and Roger S. Kirk.
(20) Assuming all Common Stock issuable on exchange of L.P. is outstanding,
directors and executive officers of the Company would hold 34,533,925
shares of Common Stock, or 47.42%.
-85-
<PAGE>
THE REINCORPORATION MERGER
INTRODUCTION
The Company's board of directors believes that the best interests of the
Company and its shareholders will be served by changing the state of
incorporation of the Company from California to Maryland by means of the
Reincorporation Merger. The principal reason for the Reincorporation Merger is
that the MGCL contains provisions conducive to the operation of a REIT. Many
REITs have incorporated in the State of Maryland, and the board of directors
believes that this has provided state regulatory authorities and courts with a
defined body of administrative and case law concerning the governance of REITs.
The Reincorporation Merger will be effected by merging the Company into
Mission West-Maryland, a newly formed wholly-owned subsidiary of the Company,
which was incorporated for the purpose of redomiciling the Company as a Maryland
corporation and acquiring, recapitalizing and continuing the business and
operations of the Company. Upon completion of the Reincorporation Merger, the
Company will cease to exist and Mission West-Maryland will continue to operate
the business of the Company under the name Mission West Properties, Inc.
EXCHANGE OF SECURITIES
Pursuant to the Agreement and Plan of Merger, which will be in
substantially the form attached hereto as Exhibit A (the "Merger Agreement"),
each outstanding share of Common Stock will automatically be converted into one
share of New Common Stock at the effective time of the merger and outstanding
options and warrants for the purchase of Common Stock will be exchanged for
options and warrants for the purchase of the equivalent number of shares of New
Common Stock. Each stock certificate representing issued and outstanding shares
of Common Stock will continue to represent the same number of shares of New
Common Stock. Options and warrants issued and outstanding will continue to
represent the right to purchase the same number of shares of New Common Stock.
IT WILL NOT BE NECESSARY FOR SECURITYHOLDERS TO EXCHANGE THEIR EXISTING
SECURITIES FOR SECURITIES OF MISSION WEST-MARYLAND. Securityholders of the
Company may exchange their securities if they so choose, however. The Common
Stock is listed for trading on the AMEX and the PCX, and after the
Reincorporation Merger, the New Common Stock will continue to be listed on the
AMEX and the PCX without interruption under the same symbol ("MSW").
APPROVAL AND EFFECTIVENESS OF MERGER
Under California law, the affirmative vote of a majority of the outstanding
shares of Common Stock of the Company is required for approval of the Merger
Agreement and the other terms of the Reincorporation Merger. See "THE SPECIAL
MEETING - Votes Required." The Reincorporation Merger has been approved by the
Company's board of directors, which unanimously recommends a vote in favor of
the proposal. If approved by the shareholders, it is anticipated that the merger
will become effective as soon as practicable following the Meeting (the
"Effective Date"). However, pursuant to the Merger Agreement, the merger may be
abandoned or the Merger Agreement may be amended by the board of directors
(except that the principal terms may not be amended without shareholder
approval) either before or after shareholder approval has been obtained and
prior to the Effective Date of the Reincorporation Merger if, in the opinion of
the board of directors of either company, circumstances arise which make either
action advisable.
Shareholders of the Company will not have dissenters' rights of appraisal
with respect to the Reincorporation Merger.
The discussion set forth below is qualified in its entirety by reference to
the Merger Agreement, the Charter and the Maryland Bylaws, which will be
substantially in the forms attached to this Proxy Statement/Prospectus as
Exhibits A, B and C, respectively.
APPROVAL BY SHAREHOLDERS OF THE REINCORPORATION MERGER WILL CONSTITUTE
APPROVAL OF THE MERGER AGREEMENT INCLUDING THE CHARTER AND THE MARYLAND BYLAWS,
WHICH WILL BE SUBSTANTIALLY IN THE FORMS SET FORTH AS EXHIBITS A, B AND C TO
THIS PROXY STATEMENT/PROSPECTUS.
-86-
<PAGE>
POSSIBLE DISADVANTAGES
Despite the unanimous belief of the board of directors that the
Reincorporation Merger is in the best interests of the Company and its
shareholders, it should be noted that California and Maryland law differ in
certain respects. Maryland law may not afford stockholders the same substantive
rights as California law. For a comparison of shareholders' rights and the
powers of management under Maryland and California law, see "--Comparison of
Rights of Shareholders of the Company and Stockholders Mission West-Maryland."
NO CHANGE IN THE NAME, BUSINESS, MANAGEMENT, LOCATION OF PRINCIPAL OFFICE OR
EMPLOYEE PLANS OF THE COMPANY
The Reincorporation Merger will effect a change in the legal domicile of
the Company and other changes of a legal nature, certain of which are described
in this Proxy Statement/Prospectus. The Reincorporation Merger will not result
in a change in the name of the Company, except to include "Inc." at the end. The
business, management, fiscal year, location of the principal office, assets and
liabilities of the Company will not change as a result of the Reincorporation
Merger, although the business, management assets and liabilities may change as a
result of certain other proposals contained in the Proxy Statement/Prospectus.
See "BACKGROUND OF THE BERG ACQUISITION," "THE BUSINESS OF BERG & BERG," "FUTURE
OPERATIONS OF COMPANY," AND "MANAGEMENT OF THE COMPANY UPON CONSUMMATION OF THE
BERG ACQUISITION." The individuals listed under "MANAGEMENT OF THE COMPANY UPON
CONSUMMATION OF THE BERG ACQUISITION will become the directors of Mission
West-Maryland. In addition, the Company expects to add one or two individuals to
the board of directors before the end of 1998. All employee benefit, stock
option and stock purchase plans of the Company will be continued by Mission
West-Maryland, and each option or right issued pursuant to any such plan will
automatically be converted into an option or right to purchase the same number
of shares of New Common Stock, at the same price per share, upon the same terms,
and subject to the same conditions, as set forth in such plan. Shareholders
should note that approval of the Reincorporation Merger will also constitute
approval of the assumption of these plans by Mission West-Maryland.
COMPARISON OF RIGHTS OF SHAREHOLDERS OF THE COMPANY AND STOCKHOLDERS OF MISSION
WEST-MARYLAND
The Company is organized as a corporation under the laws of the State of
California and Mission West-Maryland is organized as a corporation under the
laws of the State of Maryland. As a California corporation, the Company is
subject to the California General Corporation Law (the "CGCL"), a general
corporation statute dealing with a wide variety of matters, including election,
tenure, duties and liabilities of directors and officers; dividends and other
distributions; rights of shareholders; and extraordinary actions, such as
amendments to the articles of incorporation, mergers, sales of all or
substantially all of the Company's assets and dissolution. The Company also is
governed by its Articles of Incorporation (the "California Articles") and its
Bylaws (the "California Bylaws"), which have been adopted pursuant to the CGCL.
As a Maryland corporation, Mission West-Maryland is governed by the Maryland
General Corporation Law (the "MGCL"), a general corporation statute covering
substantially the same matters as are covered by the CGCL, and by the Charter
and Maryland Bylaws
The material differences between the CGCL and the MGCL and among these
various documents are summarized below. The CGCL refers to "shareholders" and
the MGCL refers to "stockholders." The use of either term refers to the holders
of stock of the Company or Mission West-Maryland, as the case may be.
The comparison of certain rights of the shareholders of the Company and the
stockholders of Mission West-Maryland set forth below does not purport to be
complete and is subject to and qualified in its entirety by reference to the
CGCL and the MGCL and also to the California Articles, the California Bylaws,
the Charter and the Maryland Bylaws, copies of which are available from the
Company as described under "AVAILABLE INFORMATION".
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<PAGE>
CALIFORNIA
SHAREHOLDER VOTING RIGHTS
California law provides for cumulative voting in the election of directors
(which permits holders of less than a majority of the voting securities of a
corporation to cumulate their votes and elect a director or directors in certain
situations) but permits the elimination thereof in the case of a listed
corporation (which is defined as a corporation that has shares listed on the
AMEX or other national securities exchanges). The California Bylaws specifically
provide for cumulative voting.
With certain exceptions, the CGCL requires that mergers, reorganizations,
dissolution, certain sales of assets and similar transactions be approved by the
holders of a majority of each class of shares outstanding.
Under the CGCL, the articles of incorporation and bylaws may include
supermajority voting provisions. These provisions, however, must be renewed
every two years and may not require a vote in excess of two-thirds of the
outstanding shares.
MARYLAND
SHAREHOLDER VOTING RIGHTS
Under the MGCL, cumulative voting is not available unless so provided in the
corporation's charter. The Charter does not provide for cumulative voting. As a
result, holders of a majority of the shares of Maryland Common Stock generally
would be entitled to elect all of the directors of Mission West-Maryland.
Pursuant to agreement, however, the Company and the Berg Group have agreed to
take action necessary to elect the two Berg Group Board Representatives to the
board of directors.
The MGCL requires, with certain exceptions, that the holders of two-thirds of
all shares entitled to vote on the matter must approve mergers, consolidations,
share exchanges, transfers of all or substantially all of the assets of the
corporation and dissolution unless the charter provides for a different number
not less than a majority. The Charter provides that such matters may be approved
by the holders of a majority of shares entitled to vote on the matter.
Under the MGCL, the charter of a Maryland corporation may include
supermajority voting provisions without restrictions. The Charter currently
does not contain any supermajority voting provisions.
DENIAL OF VOTING RIGHTS
Under the MGCL, holders of the outstanding shares of any class of stock may be
denied all voting rights.
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CALIFORNIA
DIVIDENDS AND OTHER DISTRIBUTIONS
Under the CGCL, the Company may only make a distribution to shareholders if (a)
its retained earnings immediately prior to payment of the distribution are at
least equal to the amount of the distribution, or (b) generally, its total
assets (determined on the basis of their depreciated historical cost in
accordance with GAAP and exclusive of certain intangible assets and certain
other charges and expenses) are equal to at least 1 1/4 times its total
liabilities (excluding certain deferred items) immediately after giving effect
to the distribution. The CGCL also prohibits a California corporation from
making any distribution to shareholders if the corporation is or, as a result
thereof, would be likely to be unable to meet its liabilities as they mature.
The CGCL also imposes certain further limitations on distributions on common
stock if capital stock with a preference on distributions of assets upon
liquidation is outstanding.
DISSENTING SHAREHOLDER'S APPRAISAL RIGHTS
Under California law, shareholders of a California corporation whose shares are
listed on a national securities exchange (as are the shares of the Company)
generally do not have dissenters' rights unless the holders of 5% or more of the
class of outstanding shares claim the right or unless the corporation or any law
restricts the transfer of such shares.
STANDARD OF CONDUCT FOR DIRECTORS
Section 309 of the CGCL requires that a director perform the duties of a
director in good faith in the manner such director believes to be in the best
interests of the corporation and its shareholders and with such care, including
reasonable inquiry, as an ordinarily prudent person in a like position would use
under similar circumstances.
MARYLAND
DIVIDENDS AND OTHER DISTRIBUTIONS
The MGCL allows the payment of dividends and other distributions unless, after
giving effect to the distribution, (a) the corporation would not be able to pay
its debts as they become due in the usual course of business or (b) the
corporation's total assets would be less than the sum of the corporation's
liabilities plus, unless the charter provides otherwise, the amount that would
be needed upon dissolution to satisfy the preferential rights of those
stockholders whose preferential rights upon dissolution are superior to those
receiving the distribution.
DISSENTING SHAREHOLDER'S APPRAISAL RIGHTS
The MGCL does not provide appraisal rights to stockholders of a corporation if
the corporation's shares are listed on a national securities exchange, such as
the AMEX, on the record date for determining those stockholders of the
corporation entitled to vote on the merger.
STANDARD OF CONDUCT FOR DIRECTORS
Section 2-405.1 of the MGCL requires that a director of a Maryland corporation
perform his duties in good faith with a reasonable belief that his actions are
in the best interests of the corporation and with the care of an ordinarily
prudent person in a like position ... under similar circumstances.
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CALIFORNIA
REMOVAL OF DIRECTORS
Under the CGCL and the California Bylaws, the entire board of directors or any
individual director may be removed from office by a vote of shareholders holding
a majority of the outstanding shares entitled to vote at an election of
directors; provided, however, that unless the entire board is removed, an
individual director shall not be removed, unless (a) the number of shares voted
against removal, or not consenting to such removal, in the case of a written
consent, would be insufficient to elect such director if voted cumulatively at
an election at which the same total number of votes were cast and the entire
number of directors authorized at the time of such director's most recent
election were then being elected or (b) holders of the shares of any class or
series entitled to elect one or more directors shall vote to remove a director
so elected by said class or series.
The CGCL also provides that the superior court of the proper county may, at the
request of shareholders holding at least 10% of the number of outstanding shares
of any class, remove any director in case of fraudulent or dishonest acts or
gross abuse of authority or discretion with reference to the corporation and may
bar from reelection any director so removed for a period prescribed by the
court.
MARYLAND
REMOVAL OF DIRECTORS
Under the MGCL, the stockholders of a corporation may remove any director, with
or without cause, by the affirmative vote of a majority of all the votes
entitled to be cast for the election of directors, unless the charter of the
corporation provides otherwise. The MGCL further states that if the stockholders
of any class or series are entitled separately to elect one or more directors, a
director elected by a class or series may not be removed without cause except by
the affirmative vote of a majority of all votes of that class or series, unless
the charter of the corporation provides otherwise (which the Charter does not).
The Charter provides that directors may be removed only for cause (defined in
the Charter to be with respect to any particular director, conviction of a
felony or a final judgment of a court of competent jurisdiction holding that
such director caused demonstrable, material harm to Mission West-Maryland
through bad faith or active and deliberate dishonesty) and only by the
affirmative vote of at least a majority of the votes entitled to be cast in the
election of directors. The MGCL does not provide for the removal of directors by
a court upon petition of shareholders.
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CALIFORNIA
VACANCIES ON THE BOARD OF DIRECTORS
The California Bylaws provide that vacancies on the board of directors, except
for a vacancy created by the removal of a director, may be filled by a majority
of the remaining directors, though less than a quorum, or by a sole remaining
director. Each director so elected shall hold office until his successor is
elected at an annual or a special meeting of the shareholders. A vacancy
occurring on the board of directors of the Company created by the removal of a
director may only be filled by the vote of a majority of the shares entitled to
vote represented at a duly held meeting at which a quorum is present, or by the
unanimous written consent of the shareholders.
The California Bylaws also provide that the shareholders may elect a director or
directors at any time to fill any vacancy or vacancies not filled by the
directors. Any such election by written consent (other than to fill a vacancy
created by the removal of a director) shall require the consent of holders a
majority of the outstanding shares entitled to vote.
MARYLAND
VACANCIES ON THE BOARD OF DIRECTORS
As permitted by the MGCL, the Maryland Bylaws provide that (a) a vacancy on the
Mission West-Maryland board of directors may be filled, if caused by any reason
other than an increase in the number of directors, by a majority of the
remaining directors, even if such number is less than a quorum and (b) any
vacancy in the Mission West-Maryland board of directors caused by an increase in
the number of directors may be filled by a majority vote of the entire Mission
West-Maryland board of directors; provided that a vacancy created by the
departure of a Berg Group Representative must be filled by another Berg Group
Board Representative until the time that the right of the Berg Group to name
directors has been terminated. A director elected by the Mission West-Maryland
board of directors will hold office until the next annual meeting of
stockholders and until his or her successor is elected and qualifies.
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CALIFORNIA
COMMITTEES OF BOARD OF DIRECTORS
The California Bylaws provide that the board of directors may designate
committees consisting of two or more directors. Such committees may have all the
authority of the board of directors except with respect to: (a) the approval of
any action for which the CGCL also requires shareholders' approval or approval
of the issuance of outstanding shares, (b) the filling of vacancies on the board
of directors or on any committee, (c) the fixing of compensation of the
directors for serving on the board of directors or on any committee, (d) the
amendment or repeal of bylaws or the adoption of new bylaws, (e) the amendment
or repeal of any resolution of the board of directors which by its express terms
is not so amendable or repealable, (f) a distribution to the shareholders of the
corporation (as defined in Section 166 of the CGCL), except at a rate or in the
periodic amount or within a price range determined by the board of directors and
(g) the appointment of other committees of the board of directors or the members
thereof.
SPECIAL MEETINGS OF SHAREHOLDERS
The CGCL and the California Bylaws provide that a special meeting of
shareholders may be called by the board of directors, the chairman of the board,
the president, or by the holders of shares entitled to cast not less than 10% of
the votes at the meeting.
MARYLAND
COMMITTEES OF BOARD OF DIRECTORS
The Maryland Bylaws provide that the board of directors may appoint committees
composed of one or more directors and may delegate to such committees any of the
powers of the board of directors, except as prohibited by law. The MGCL provides
that the board of directors may delegate to committees any of the powers of the
board of directors, except the power to: (a) authorize dividends on stock, (b)
issue stock (subject to certain exceptions), (c) recommend to the stockholders
any action which requires stockholder approval, (d) amend the bylaws or (e)
approve any merger or share exchange which does not require stockholder
approval.
SPECIAL MEETINGS OF SHAREHOLDERS
As permitted by the MGCL, the Maryland Bylaws provide that, a special meeting of
stockholders may be called by the chief executive officer, the president or a
majority of the board of directors and must be called by the secretary of
Mission West-Maryland at the request in writing of shareholders entitled to cast
a majority of all the votes entitled to be cast at the meeting.
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<PAGE>
CALIFORNIA
ACTIONS BY WRITTEN CONSENT OF SHAREHOLDERS
The California Bylaws provide that, subject to certain notice requirements, any
action which, under any provision of the CGCL, may be taken at a meeting of
shareholders, may be taken without a meeting if a consent in writing, setting
forth the action so taken, is signed by the holders of outstanding shares having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted.
AMENDMENTS TO ARTICLES, CHARTER AND BYLAWS
Under the CGCL, the articles of incorporation may be amended only if such
amendment is approved by the board of directors and by the holders of a majority
of the outstanding shares of stock entitled to vote on the matter. Under the
CGCL, a corporation's bylaws may be adopted, amended or repealed by approval of
the shareholders or by the board of directors; however, the shareholders may
never be divested of the power to adopt, amend or repeal the bylaws. In
addition, the CGCL provides that a bylaw changing a fixed number of directors or
the maximum or minimum number of directors may only be adopted by the holders of
a majority of the shares entitled to vote. The California Bylaws provide that,
subject to any exception, new bylaws may be adopted or the California Bylaws may
be amended or repealed by the affirmative vote of a majority of the outstanding
shares entitled to vote, or by the written consent of shareholders entitled to
vote such shares, and the California Bylaws also provide that, subject to the
rights of shareholders set forth above and any other exceptions, bylaws other
than a bylaw or amendment thereof changing the authorized number of directors
may be adopted, amended or repealed by the California Board.
MARYLAND
ACTIONS BY WRITTEN CONSENT OF SHAREHOLDERS
The MGCL provides that any action that may be taken at a stockholder meeting may
be taken without a meeting only if (a) a unanimous written consent setting forth
the matter is signed by each stockholder entitled to vote on the matter and (b)
a written waiver of any right to dissent is signed by each stockholder entitled
to notice of the meeting but not entitled to vote at it.
AMENDMENTS TO ARTICLES, CHARTER AND BYLAWS
Under the MGCL, an amendment to the charter of a corporation must be approved by
the board of directors and the holders of two-thirds of the shares entitled to
vote on such matter unless such charter provides for a different vote not less
than a majority of such shares so entitled to vote. The Charter provides that
amendments to the Charter must be approved by a majority of the directors,
including, so long as the Berg Group (as defined in the Charter) owns at least
15% of the voting stock, Carl E. Berg or someone he has designated to replace
him as a director, and by the affirmative vote of the holders of a majority of
the shares entitled to vote on the matter.
As permitted by the MGCL, the Maryland Bylaws provide that the Maryland board of
directors has the exclusive power to adopt, amend or repeal any provision of the
Maryland Bylaws and to make new bylaws. The Charter further provides that any
amendment must be approved by a majority of directors including Carl E. Berg or
the director that he has designated as his successor on the board of directors.
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CALIFORNIA
LIMIT ON SHARE OWNERSHIP
The California Articles contain no limitations or restrictions on ownership of
shares of the Company.
CERTAIN BUSINESS COMBINATIONS
The CGCL contains no business combination statute. However, the CGCL requires
delivery of a fairness opinion in connection with (i) a tender offer, including
a share exchange tender offer, (ii) a merger (other than a short-form merger
such as the Reincorporation Merger), (iii) the acquisition of control of the
outstanding shares or of all or substantially all of the assets of the
corporation in exchange for stock or other securities, or (iv) a sale of all or
substantially all of the corporation's assets proposed by an interested party
(an "Interested Party") to the corporation or some or all of its shareholders.
The CGCL defines "Interested Party" to include a person who (a) directly or
indirectly controls the corporation that is the subject of the proposed
combination, (b) is directly or indirectly controlled by an officer or director
of the subject corporation or (c) is an entity in which a material financial
interest is held by any director or executive officer of the subject
corporation.
MARYLAND
LIMIT ON SHARE OWNERSHIP
As permitted by the MGCL, the Charter contains provisions limiting the ownership
and transfer of shares of stock of Mission West-Maryland which are intended to
ensure that Mission West-Maryland meets the requirements of the Code for
qualification as a REIT. See "DESCRIPTION OF MISSION WEST-MARYLAND
STOCK--Restrictions on Transfer", and "CERTAIN PROVISIONS OF MARYLAND LAW AND
MISSION WEST-MARYLAND'S CHARTER AND BYLAWS."
CERTAIN BUSINESS COMBINATIONS
The MGCL restricts 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 an "Interested Stockholder" or an affiliate thereof. These
provisions of Maryland law 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."
See "CERTAIN PROVISIONS OF MARYLAND LAW AND MISSION WEST-MARYLAND'S CHARTER AND
BYLAWS."
Pursuant to the authority granted under the MGCL, the board of directors has
adopted a resolution providing that the "business combination" provisions of the
MGCL shall not apply to any business combination involving the Berg Group
members or any purchaser in the Private Placement.
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CALIFORNIA
CONTROL SHARE ACQUISITIONS
The CGCL contains no provisions governing acquisitions of control shares.
MARYLAND
CONTROL SHARE ACQUISITIONS
The MGCL eliminates the voting rights of control shares in certain
circumstances. "Control Shares" are defined in the MGCL as 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: (a) one-fifth or
more but less than one-third, (b) one-third or more but less than a majority, or
(c) 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. See "CERTAIN PROVISIONS OF MARYLAND LAW AND
MISSION WEST-MARYLAND'S CHARTER AND BYLAWS."
The MGCL permits a Maryland corporation to opt out of the control share
acquisition statute by provision in its charter or bylaws. Mission West-Maryland
has included such a provision in the Maryland Bylaws. However, the Mission
West-Maryland board of directors may, at any time, without stockholder approval,
vote to amend the Maryland Bylaws to eliminate this provision, which would
result in Mission West-Maryland being governed by the control share acquisition
statute.
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<PAGE>
CALIFORNIA
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY
Pursuant to the CGCL and the California Articles, the liability of directors of
the Company to the Company or to any shareholder of the Company for money
damages for breach of fiduciary duty has been eliminated, except for (a) acts or
omissions that involve intentional misconduct or a knowing and culpable
violation of the law, (b) acts or omissions that a director believes to be
contrary to the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, (c) any
transaction from which a director derived an improper personal benefit, (d) acts
or omissions that show a reckless disregard for the director's duty to the
Company or its shareholders in circumstances in which the director was aware, or
should have been aware, in the ordinary course of performing a director's
duties, of a risk of serious injury to the Company or its shareholders, (e) acts
or omissions that constitute an unexcused pattern of inattention that amounts to
an abdication of the director's duty to the Company or its shareholders, (f)
violations of the CGCL requirements governing Company contracts in which the
director has a material interest, or (g) corporate actions for which the
director and the Company are jointly and severally liable. In general, the
liability of officers may not be eliminated or limited under California law.
MARYLAND
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY
Pursuant to the MGCL and the Charter, the liability of directors and officers to
Mission West-Maryland or to any stockholder of Mission West-Maryland for money
damages has been eliminated, except for (a) actual receipt of an improper
benefit or profit in money, property or services or (b) active and deliberate
dishonesty established by a final judgment as being material to the cause of
action. Thus, the directors and officers of Mission West-Maryland may not be
liable for certain actions for which they might have otherwise been liable under
California law.
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CALIFORNIA
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The CGCL contains provisions authorizing corporations to indemnify an officer or
director if the officer or director acted in good faith and in a manner he or
she reasonably believed to be in the best interest of the corporation. The CGCL
also permits the corporation to advance expenses to a director or officer, if
the corporation receives an undertaking, usually in the form of a bond, by or on
behalf of the director or officer to repay any amounts advanced if it is
determined ultimately that the director or officer is not entitled to be
indemnified under the CGCL. Under the CGCL, the termination of any proceeding by
conviction or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that such person failed to meet the standard of
conduct necessary to allow indemnification.
In addition, the CGCL permits indemnification for judgments of liability and
settlements in derivative actions except that (a) indemnification may only be
made with court approval when a person is adjudged liable to the corporation in
the performance of that person's duty to the corporation and its shareholders
and (b) indemnification of amounts paid to settle and/or expenses incurred to
defend a threatened or pending action shall not be made when such threatened or
pending action is settled or otherwise disposed of without court approval. No
indemnification is permitted under the CGCL for the actions for which liability
for money damages may not be limited.
The California Bylaws provide that the agents of the Company are indemnified and
held harmless from all liability arising from or related to a breach of duty to
the Company or its stockholders. The California Bylaws further provide that such
indemnification is not exclusive of any other rights the agents of the
corporation may have, including other rights pursuant to the laws of California.
MARYLAND
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The MGCL permits indemnification of officers and directors against
judgments, penalties, fines and amounts paid in settlement of a proceeding,
unless it is established that the act of the director or officer was material
and was committed in bad faith or was the result of active and deliberate
dishonesty, or the director or officer received an improper personal benefit in
money, property or services, or in a criminal proceeding had reasonable cause to
believe the act or omission was unlawful. Indemnification is prohibited if the
person seeking indemnification has been found liable to the corporation in a
proceeding brought by or in the right of the corporation or was adjudged liable
on the basis that personal benefit was improperly received, unless otherwise
ordered by a court and then only for expenses. In contrast to California law,
under Maryland law a termination of a proceeding by conviction or upon a plea of
nolo contendere or its equivalent creates a rebuttable presumption that such
person did not meet the requisite standard of conduct to allow indemnification.
The Maryland Bylaws require Mission West-Maryland to indemnify, and advance
expenses to, present and former directors and officers to the maximum extent
permitted by Maryland law. For a complete description of the indemnification of
directors and officers of Mission West-Maryland required by or permitted under
the MGCL, the Charter and the Maryland Bylaws, see "MANAGEMENT OF THE COMPANY --
Limitation of Liability and Indemnification."
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CALIFORNIA
INDEMNIFICATION OF DIRECTORS AND OFFICERS (Continued)
As used in the indemnification provisions of the California Bylaws, "agents" of
the Company include any person who is or was a director, officer, employee or
other agent of the Company, or is or was serving at the request of the Company
as a director, officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise, or was a
director, officer, employee or agent of a foreign or domestic corporation which
was a predecessor corporation of the Company or of another enterprise at the
request of such predecessor corporation.
INSPECTION OF BOOKS AND RECORDS
Under the CGCL, upon written demand for any purpose reasonably related to the
shareholder's interest as a shareholder, any shareholder of the Company may
inspect and copy the record of shareholders and inspect any other corporate
books and records. A shareholder or shareholders (a) who hold at least 5% of the
outstanding voting shares of the corporation or (b) who hold at least 1% of
those voting shares and have filed a Schedule 14A with the Securities and
Exchange Commission shall have an absolute right to inspect and copy the record
of shareholders. These rights apply both to any California corporation and any
foreign corporation that keeps such records in California or has its principal
executive office in California. Thus, the inspection rights provided by the CGCL
will be applicable to Mission West-Maryland after the Reincorporation.
MARYLAND
INSPECTION OF BOOKS AND RECORDS
The MGCL provides a right to inspect and copy the corporation's books of
account and stock ledger and receive a verified list of stockholders to persons
who, individually or together, have been stockholders for more than six months
and own at least 5% of any class of a Maryland corporation's outstanding shares.
In addition, any stockholder of a Maryland corporation has the right to inspect
the bylaws, minutes of stockholders meetings, annual statements of affairs and
voting trust agreements and to request that the corporation provide a sworn
statement showing all stock and securities issued and all consideration per
share received therefor by the corporation within the preceding 12 months.
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CALIFORNIA
INTERESTED DIRECTOR TRANSACTIONS
Under California law, certain contracts or transactions in which one or more of
a corporation's directors has an interest are not void or voidable solely
because of such interest if certain conditions are met. Under California law (a)
either the shareholders or the board of directors must approve any contract or
transaction after full disclosure of the material facts (and in the case of
board approval, the contract or transaction must also be "just and reasonable")
or (b) the contract or transaction must have been just and reasonable at the
time it was authorized or approved. California law has a more stringent
requirement than Maryland law in circumstances where board approval is sought
with respect to an interested director transaction. The contract or transaction
must be just and reasonable and must be approved by a majority vote of a quorum
of the directors, without counting the vote of any interested directors (except
that interested directors may be counted for purposes of establishing a quorum).
The CGCL also provides that any loan or guarantee to or for the benefit of a
director or officer of the corporation or its parent requires the approval of
the shareholders unless such loan or guaranty is pursuant to a plan that has
been approved by the holders of a majority of the outstanding shares. However,
under the CGCL, the bylaws of a corporation with more than 100 shareholders may
authorize the board of directors alone to approve loans or guaranties to
directors and officers. The California Bylaws do not currently contain such a
provision allowing the directors to approve such loans or guaranties.
MARYLAND
INTERESTED DIRECTOR TRANSACTIONS
Under the MGCL, certain contracts or transactions between the corporation
and a director or between the corporation and any other corporation, firm or
other entity in which one or more of a corporation's directors is a director or
has a material financial interest are not void or voidable solely because of
such interest if the contract or transaction (a) is approved by a majority of
the disinterested directors or by a majority of votes cast by the disinterested
stockholders, in either case after full disclosure of the material facts, or (b)
is fair and reasonable to the corporation.
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DESCRIPTION OF MISSION WEST-MARYLAND STOCK
THE FOLLOWING SUMMARY OF THE TERMS OF THE CAPITAL STOCK OF MISSION
WEST-MARYLAND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MGCL AND TO THE
CHARTER AND MARYLAND BYLAWS. COPIES OF THE CHARTER AND THE MARYLAND BYLAWS ARE
ATTACHED AS EXHIBITS TO THIS PROXY STATEMENT/PROSPECTUS.
GENERAL
The Charter provides that Mission West-Maryland may issue up to 200,000,000
shares of New Common Stock and 20,000,000 shares of New Preferred Stock. Upon
completion of the Reincorporation Merger 8,193,594 shares of New Common Stock
will be issued and outstanding and no shares of New Preferred Stock will be
designated into series or be issued and outstanding.
NEW COMMON STOCK
All shares of New Common Stock offered hereby will be duly authorized,
fully paid and nonassessable. Subject to the preferential rights of any other
class or series of stock and to the provisions of the Charter regarding the
restrictions on transfer of stock, holders of shares of New Common Stock are
entitled to receive dividends on such stock 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 Mission West-Maryland 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 Mission West-Maryland.
Subject to the provisions of the Charter regarding the restrictions on
transfer of stock, each outstanding share of New Common Stock entitles the
holder to one vote on all matters submitted to a vote of stockholders, including
the election of directors and, except as provided with respect to any other
class or series of stock, the holders of such shares will possess the exclusive
voting power. There is no cumulative voting in the election of directors, which
means that the holders of a majority of the outstanding shares of New 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 New Common Stock have no preference, conversion,
exchange, sinking fund, redemption or appraisal rights and have no preemptive
rights to subscribe for any securities of Mission West-Maryland. Subject to the
provisions of the Charter regarding the restrictions on transfer of stock,
shares of New Common Stock will have equal dividend, liquidation and other
rights.
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
Charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two-thirds of the shares entitled to vote on the matter unless a lesser
percentage (but not less than a majority of all of the votes entitled to be cast
on the matter) is set forth in the corporation's Charter. The Charter provides
that the affirmative vote of a majority of all votes entitled to be cast may
approve such matters.
The Charter provides that, to the extent permitted by Maryland law from
time to time, the board of directors of Mission West-Maryland, without any
action by the stockholders of Mission West-Maryland, may amend the Charter from
time to time to increase or decrease the aggregate number of shares of stock or
the number of shares of stock of any class or series that Mission West-Maryland
has authority to issue. Such action is not presently permitted under Maryland
law, but may be permitted in the future.
NEW CLASSES OR SERIES OF STOCK
The Charter authorizes the board of directors to classify or reclassify any
unissued shares of New Preferred 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 without any action by the
stockholders of Mission West-Maryland.
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<PAGE>
POWER TO ISSUE ADDITIONAL SHARES OF NEW COMMON STOCK AND NEW PREFERRED STOCK
Mission West-Maryland believes that the power of the Board of Directors to
issue additional authorized but unissued shares of New Common Stock and New
Preferred and to classify or reclassify unissued shares of New New Preferred
Stock and thereafter to cause Mission West-Maryland to issue such classified or
reclassified shares of stock will provide Mission West-Maryland with increased
flexibility in structuring possible future financings and acquisitions and in
meeting other needs which might arise. The additional classes or series, as well
as the New Common Stock and New Preferred Stock, will be available for issuance
without further action by Mission West-Maryland's stockholders, unless such
action is required by applicable law or the rules of any stock exchange or
automated quotation system on which Mission West-Maryland's securities may be
listed or traded. Although the Board of Directors has no intention at the
present time of doing so, it could authorize Mission West-Maryland to issue a
class or series that could, depending upon the terms of such class or series,
delay, defer or prevent a transaction or a change in control of Mission
West-Maryland that might involve a premium price for holders of New Common Stock
or otherwise be in their best interest.
RESTRICTIONS ON TRANSFER
REIT RESTRICTIONS. For Mission West-Maryland to qualify as a REIT under the
Code, its shares of stock must be beneficially owned by 100 or more persons
during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year, and the REIT may not violate the
Five or Fewer Test during the last half of a taxable year.
The Charter, subject to certain exceptions, contains certain restrictions
on the number of shares of stock of Mission West-Maryland that a person may own.
The Charter prohibits any person from acquiring or holding, directly or
indirectly, shares of New Common Stock in excess of 9% in value of the aggregate
of the outstanding shares of stock of Mission West-Maryland except for members
of the Berg Group and their Affiliates (other than the Company and the Operating
Partnerships) who, by agreement, are subject to the Berg Group Ownership Limit,
which is 20%. The Charter prohibits ownership of New Common Stock by any members
of the Berg Group or any other shareholders or their pledgees or assignees,
which would cause Mission West-Maryland to violate any of the REIT Requirements.
Mission West-Maryland's board of directors, in its sole discretion, may
exempt a person other than the Berg Group from the Ownership Limit (an "Excepted
Holder"), provided that no person may own shares of stock, directly or
indirectly, which represent 9% or more of the value of the outstanding shares of
stock of Mission West-Maryland if that would result in Mission West-Maryland
being "closely held" within the meaning of Section 856(h) of the Code or
otherwise would result in Mission West-Maryland failing to qualify as a REIT. In
order to be considered by the board of directors as an Excepted Holder, a person
also must not own, directly or indirectly, an interest in a tenant of Mission
West-Maryland (or a tenant of any entity owned or controlled by Mission
West-Maryland) that would cause Mission West-Maryland to own, directly or
indirectly, more than a 10% interest in such a tenant. The person seeking an
exemption must represent to the satisfaction of the board of directors that it
will not violate the two aforementioned restrictions. The person also must agree
that any violation or attempted violation of any of the foregoing restrictions
will result in the automatic transfer of the shares of stock causing such
violation to the Trust. The board of directors may require a ruling from the IRS
or an opinion of counsel, in either case in form and substance satisfactory to
the board of directors in its sole discretion, in order to determine or ensure
Mission West-Maryland's status as a REIT. The management of the Company intends
to request the board of directors of Mission West-Maryland to designate as an
Excepted Holder any purchasers of shares in the Private Placement whose share
ownership as of the effective date of the Reincorporation Merger exceeds the
Ownership Limit. The designation shall not apply, however, to subsequent
purchases of shares of stock of Mission West-Maryland by such an Excepted Holder
except for shares acquired pursuant to a grant or award under the Stock Option
Plan or another written compensation plan approved by the board of directors.
The Charter further prohibits (a) any person from beneficially or
constructively owning shares of stock of Mission West-Maryland that would result
in Mission West-Maryland being "closely held" under Section 856(h) of the Code
or otherwise cause Mission West-Maryland to fail to qualify as a REIT and (b)
any person from transferring shares of stock of Mission West-Maryland if such
transfer would result in shares of stock of Mission West-Maryland being owned by
fewer than 100 persons. Any person who acquires or attempts or intends to
acquire beneficial or constructive ownership of shares of stock of Mission
West-Maryland that will or may violate
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any of the foregoing restrictions on transferability and ownership, or any
person who would have owned shares of the stock of Mission West-Maryland that
resulted in a transfer of shares to the Trust, is required to give notice
immediately to Mission West-Maryland and provide Mission West-Maryland with such
other information as Mission West-Maryland may request in order to determine the
effect of such transfer on Mission West-Maryland's status as a REIT. The
foregoing restrictions on transferability and ownership will not apply if the
board of directors, by affirmative vote of 75% of all directors, determines that
it is no longer in the best interests of Mission West-Maryland to attempt to
qualify, or to continue to qualify, as a REIT.
If any transfer of shares of stock of Mission West-Maryland occurs which,
if effective, would result in any person beneficially or constructively owning
shares of stock of Mission West-Maryland in excess or in violation of the above
transfer or ownership limitations, then that number of shares of stock of
Mission West-Maryland 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 transferred to a trust for the
exclusive benefit of one or more charitable beneficiaries, and the Prohibited
Owner shall not acquire any rights in such shares. Such automatic transfer shall
be deemed to be effective as of the close of business on the Business Day prior
to the date of such violative transfer. Shares of stock held in the Trust shall
be issued and outstanding shares of stock of Mission West-Maryland. The
Prohibited Owner shall not benefit economically from ownership of any shares of
stock held in the Trust, shall have no rights to dividends and shall not possess
any rights to vote or other rights attributable to the shares of stock held in
the Trust. The trustee of the Trust 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 Mission West-Maryland that shares of stock have been transferred to
the Trustee shall be paid by the recipient of such dividend or distribution to
the Trustee upon demand, and any dividend or other distribution authorized but
unpaid shall be paid when due to the Trustee. Any dividend or distribution so
paid to the Trustee shall be held in trust for the Charitable Beneficiary. The
Prohibited Owner shall have no voting rights with respect to shares of stock
held in the Trust and, subject to Maryland law, effective as of the date that
such shares of stock hve been transferred to the Trust, 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 Mission West-Maryland that
such shares have been transferred to the Trust and (ii) to recast such vote in
accordance with the desires of the Trustee acting for the benefit of the
Charitable Beneficiary. However, if Mission West-Maryland has already taken
irreversible corporate action, then the Trustee shall not have the authority to
rescind and recast such vote.
Within 20 days of receiving notice from Mission West-Maryland that shares
of stock of Mission West-Maryland have been transferred to the Trust, 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 the Trustee shall
distribute the net proceeds of the sale to the Prohibited Owner and to the
Charitable Beneficiary as follows. The Prohibited Owner shall receive the lesser
of (i) the price paid by the Prohibited Owner for the shares or, 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 of such shares on the day of the event causing
the shares to be held in the Trust and (ii) the price per share received by the
Trustee from the sale or other disposition of the shares held in the Trust. Any
net sale proceeds in excess of the amount payable to the Prohibited Owner shall
be paid immediately to the Charitable Beneficiary. If, prior to the discovery by
Mission West-Maryland that shares of stock have been transferred to the Trust,
such shares are sold by a Prohibited Owner, (i) such shares shall be deemed to
have been sold on behalf of the Trust and (ii) 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 upon demand.
In addition, shares of stock of Mission West-Maryland held in the Trust
shall be deemed to have been offered for sale to Mission West-Maryland, or its
designee, at a price per share equal to the lesser of (i) the price per share in
the transaction that resulted in such transfer to the Trust (or, in the case of
a devise or gift, the Market Price at the time of such devise or gift) and (ii)
the Market Price on the date Mission West-Maryland, or its designee, accepts
such offer. Mission West-Maryland shall have the right to accept such offer
until the Trustee has sold the shares of stock held in the Trust. Upon such a
sale to Mission West-Maryland, the interest of the Charitable Beneficiary in the
shares sold shall terminate and the Trustee shall distribute the net proceeds of
the sale to the Prohibited Owner.
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The foregoing restrictions do not apply to shares acquired in original
issuance by members of the Berg Group. All certificates representing shares of
New Common Stock other than such shares will bear a legend referring to the
restrictions described above.
Every owner of more than 5% (or such lower percentage as required by the
Code or the regulations promulgated thereunder) of all classes or series of
Mission West-Maryland's stock, including shares of New Common Stock, within 30
days after the end of each taxable year, is required to give written notice to
Mission West-Maryland stating the name and address of such owner, the number of
shares of each class and series of stock of Mission West-Maryland which the
owner beneficially owns and a description of the manner in which such shares are
held. Each such owner shall provide to Mission West-Maryland such additional
information as Mission West-Maryland may request in order to determine the
effect, if any, of such beneficial ownership on Mission West-Maryland's status
as a REIT and to ensure compliance with the Stock Ownership Limit. In addition,
each shareholder shall upon demand be required to provide to Mission
West-Maryland such information as Mission West-Maryland may request, in good
faith, in order to determine Mission West-Maryland's status as a REIT and to
comply with the requirements of any taxing authority or governmental authority
or to determine such compliance.
These ownership limits could delay, defer or prevent a transaction or a
change in control of Mission West-Maryland that might involve a premium price
for the New Common Stock or otherwise be in the best interest of the
stockholders.
SECURITIES RESTRICTIONS. Subject to the restrictions set forth above in
"--Restrictions on Transfer" and following the consummation of the transactions
contemplated herein, Mission West-Maryland will have outstanding 8,193,594
shares of New Common Stock; 1,698,536 of which will be freely transferable in
the public market without restriction or further registration under the
Securities Act, unless held by Affiliates of Mission West-Maryland, whose shares
will be subject to the resale limitations of Rule 144 and Rule 145(d). The
6,495,058 shares of New Common Stock issued to the purchasers of Common Stock of
the Company in the Private Placement in exchange for such shares, will be
eligible for resale pursuant to the Registration Statement for as long as the
Company maintains its effectiveness.
In general, under Rule 144, an Affiliate of Mission West-Maryland is
subject to restrictions on the manner of resale of such Affiliate's shares.
Further, the number of shares sold by an Affiliate in any three-month period may
not exceed the greater of 1% of the shares of New Common Stock then outstanding
or the reported average weekly trading volume of the New Common Stock during the
four calendar weeks immediately preceding the date on which notice of the sale
is sent to the Commission. Any sale by an Affiliate of Mission West-Maryland
will also be subject to certain notice requirements and availability of current
public information concerning Mission West-Maryland.
REINVESTMENT AND SHARE PURCHASE PLAN
Mission West-Maryland may adopt a Distribution Reinvestment and Share
Purchase Plan that would allow stockholders to automatically reinvest cash
distributions on their outstanding shares of Common Stock and/or L.P. Units to
purchase additional shares of Common Stock at a discounted price and without the
payment of any brokerage commission or service charge. Stockholders and Limited
Partners would also have the option of investing limited additional amounts by
making cash payments. No decision has been made yet by the Company whether or
not to adopt such a plan, and there can be no assurance that such a plan will
ever be adopted by Mission West-Maryland.
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CERTAIN PROVISIONS OF MARYLAND LAW AND
OF MISSION WEST-MARYLAND'S CHARTER AND BYLAWS
THE FOLLOWING SUMMARY OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE
CHARTER AND MARYLAND BYLAWS DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO
AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO MARYLAND LAW AND TO THE CHARTER
AND MARYLAND BYLAWS, COPIES OF WHICH ARE EXHIBITS TO THIS PROXY
STATEMENT/PROSPECTUS. SEE "ADDITIONAL INFORMATION."
THE BOARD OF DIRECTORS
The Charter provides that the number of directors of the Company shall be
five and that number may be increased or decreased pursuant to the bylaws. As
long as the Berg Group members and their Affiliates (other than the Company and
the Operating Partnerships) own at least 15% of the voting shares on a
Fully-Diluted basis, at least two directors must satisfy the qualification of
being nominated by the Berg Group members. At least one director must satisfy
such qualification if Berg Group's aggregate percentage ownership of voting
shares on a Fully-Diluted basis is at least 10%, although less than 15%. The
Maryland Bylaws provide that the board of directors may establish, increase or
decrease the number of directors, provided that the number of directors shall
never be less than the minimum number required by Maryland law, nor more than
15. In general, 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. A
vacancy created by the departure of a Berg Group Board Representative, however,
must be filled by another Berg Group Board Representative until the date that
the right of the Berg Group to name the Berg Group Board Representatives has
expired.
REMOVAL OF DIRECTORS
The Charter provides that a director may be removed only for cause (as
defined in the Charter) and only by the affirmative vote of at least a majority
of the votes entitled to be cast in the election of directors. This provision,
when coupled with the provision in the Maryland Bylaws authorizing the board of
directors to fill vacant directorships, precludes stockholders from removing
incumbent directors without cause and filling the vacancies created by such
removal with their own nominees.
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 or associate 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 (a) 80% of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation and (b) 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, or by an Affiliate or associate of
the Interested Shareholder, voting together as a single voting group, 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. After the Reincorporation Merger the Berg Group will
beneficially own more than 10% of the Company's voting shares, as will one of
the purchasers in the Private Placement. They would, therefore, be subject to
the business combination provision of the MGCL. However, pursuant to the
statute, the board of directors of the Company has exempted any business
combinations involving the Berg Group and any purchaser in the Private
Placement. Consequently, the five-year prohibition and the super-majority vote
requirements will not apply to business combinations between any of them and the
Company. As a result, the Berg Group and such purchaser may be able to enter
into business combinations with the Company that may not be in the best interest
of its stockholders without compliance by the Company with the super-majority
vote requirements and the other provisions of the statute.
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
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cast on the matter, excluding shares of stock owned by the acquiror, by officers
or by directors who are employees of the corporation. "Control Shares" are
voting shares of stock which, if aggregated with all other such shares of stock
previously acquired by the acquiror or in respect of which the acquiror is able
to exercise or direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquiror to exercise voting power in
electing directors within one of the following ranges of voting power: (i)
one-fifth or more but less than one-third, (ii) one-third or more but less than
a majority, or (iii) a majority or more of all voting power. Control shares do
not include shares the acquiring person is then entitled to vote as a result of
having previously obtained stockholder approval. A "control share acquisition"
means the acquisition of control shares, subject to certain exceptions.
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 stockholders meeting.
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 stockholders meeting 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 (a) to shares acquired
in a merger, consolidation or share exchange if the corporation is a party to
the transaction or (b) to acquisitions approved or exempted by the charter or
bylaws of the corporation.
The Maryland Bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of the Company's
shares of stock. There can be no assurance that such provision will not be
amended or eliminated at any time in the future.
BOARD QUORUM AND SPECIAL VOTING REQUIREMENTS
Generally, a majority of the total number of directors constitutes a quorum
for the transaction of business under the MGCL. However, the Maryland Bylaws
provide that a quorum for any meeting of the board of directors must include the
Required Directors.
The Maryland Bylaws include special voting requirements for the board of
directors, such that until the Protective Provisions Expiration Date, the
Company will not take or permit to be taken any of the following actions without
the approval of the Required Directors: (i) establishing a quorum for a meeting
which is not attended by Mr. Berg or his designee; (ii) amending the Charter or
the Maryland Bylaws; (iii) merging with or into another entity; and (iv) any
sale of all or substantially all of the Company's assets. The Maryland Bylaws
also provide that the approval of more than 75% of the entire board of directors
will be required for (i) the Company's taking title to assets or conducting
business other than through the Operating Partnerships, (ii) the termination of
the Company's status as a REIT, and (iii) incurring indebtedness in excess of
50% of the Company's Total Market Capitalization.
AMENDMENT TO THE CHARTER
The Charter, including its provisions regarding removal of directors, may
be amended only by the affirmative vote of the holders of a majority of all of
the votes entitled to be cast on the matter. In addition, the Charter and
Maryland Bylaws require the approval by a majority of the directors including
Carl E. Berg, or the director that he has designated as his successor on the
board of directors, of all amendments to the Charter, so long as the Berg Group
owns at least 15% of the Fully-Diluted Shares.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be advised by a majority of the entire
board of directors and approved by the stockholders by the affirmative vote of
the holders of a majority of all of the votes entitled to be cast on the matter.
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ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Maryland Bylaws provide that (a) 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 (i)
pursuant to Mission West-Maryland's notice of the meeting, (ii) by or at the
direction of the board of directors or (iii) 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 (b) with respect to special meetings of stockholders,
only the business specified in Mission West-Maryland'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 (i) pursuant to Mission
West-Maryland's notice of the meeting, (ii) by or at the direction of the board
of directors or (iii) provided that the board of directors has determined that
directors shall be elected at such meeting, by a stockholder who is entitled to
vote at the meeting and has complied with the advance notice provisions set
forth in the Maryland Bylaws.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER
AND BYLAWS
The control share acquisition provisions of the MGCL, and the provisions of
the Charter on removal of directors and the advance notice provisions of the
Maryland Bylaws could delay, defer or prevent a transaction or a change in
control of Mission West-Maryland that might involve a premium price for holders
of New Common Stock or otherwise be in their best interest.
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ACCOUNTING TREATMENT OF THE BERG ACQUISITION AND THE REINCORPORATION MERGER
The UPREIT Transactions and the Acquired Properties will be accounted for
as a purchase. Accordingly, the costs of the acquisition were allocated to the
assets and liabilities assumed based upon their respective fair values at the
effective date of the acquisition.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
concerning Mission West-Maryland (referred to also as the "Company" in this
discussion) after the Reincorporation Merger and the election to become a REIT
is based on current law, is for general information only and is not tax advice.
This discussion is for general purposes only and does not purport to deal with
all aspects of taxation that may be relevant to particular shareholders in light
of their personal investment or tax circumstances, or to certain types of
shareholders (including insurance companies, tax-exempt organizations, financial
institutions or broker-dealers, foreign corporations, persons who are not
citizens or residents of the United States, and persons who hold stock as part
of a conversion transaction, as part of a hedging transaction or as a position
in a straddle for tax purposes) subject to special treatment under the federal
income tax laws.
This summary does not provide a detailed discussion of any state, local, or
foreign tax considerations. This summary is qualified in its entirety by the
applicable provisions of the Code, rules and regulations promulgated thereunder,
and administrative and judicial interpretations thereof, all as of the date
hereof and all of which are subject to change (which change may apply
retroactively). The Taxpayer Relief Act of 1997 (the "1997 Act") was enacted on
August 5, 1997. The 1997 Act contains many provisions which generally make it
easier to operate and to continue to qualify as a REIT for taxable years
beginning after the date of enactment (which, for the Company, would be
applicable commencing with its taxable year beginning January 1, 1998). The IRS
Restructuring and Reform Bill of 1998, which has been passed by Congress and is
awaiting signature by the President, changes certain aspects of the federal
income tax law applicable to REITs (the "1998 Act"), and their shareholders.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE COMPANY'S ELECTION TO BE
TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
GENERAL. The Company plans to elect to be taxed as a REIT under Sections
856 through 860 of the Code and the applicable Treasury Regulations (the "REIT
Provisions") commencing with its taxable year ending December 31, 1998. The
Company believes that it is organized and will be operated in such a manner as
to qualify for taxation as a REIT under the REIT Provisions and the Company
intends to continue to operate in such a manner. No assurance can be given,
however, that the Company will operate in a manner so as to qualify or remain
qualified as a REIT.
The REIT Provisions are highly technical and complex. The material aspects
of the REIT Provisions are summarized below.
In the opinion of Graham & James LLP, commencing with the Company's taxable
year ending on December 31, 1998, the Company will be organized in conformity
with the requirements for qualification and taxation as a REIT, and its method
of operation will enable it to meet the requirements for continued qualification
and taxation as a REIT. This opinion is based on various assumptions relating to
the organization and operation of the Company and the Operating Partnerships,
however, and is conditioned upon certain representations made by the Company
about factual matters relating to the organization and expected operation of the
Company and the Operating Partnerships. In addition, this opinion is based upon
the factual representations of the Company concerning its business and
properties as set forth in this Proxy Statement/Prospectus and assumes that the
actions described in this Proxy Statement/Prospectus are completed as described.
Moreover, qualification and taxation as a REIT depends upon the Company's
ability to meet, through actual annual operating results, the various income,
asset, distribution, stock ownership, and other qualification tests imposed by
the REIT Provisions
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discussed below, the results of which will not be reviewed by nor be under the
control of Graham & James LLP. Accordingly, no assurance can be given that the
actual results of the Company's operation for any particular taxable year will
satisfy such requirements. See "Loss of REIT Qualification".
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate incom e taxes on the portion of its net income that
is currently distributed to its shareholders. This treatment substantially
eliminates the "double taxation" (at the corporate and shareholder levels) that
generally results from investment in a corporation. The Company may be subject
to federal income and excise tax, however, as follows:
(i) The Company will be taxed at regular corporate rates on any
undistributed REIT taxable income, including undistributed net capital
gains.
(ii) Under certain circumstances, the Company may be subject to the
"corporate alternative minimum tax" on its items of tax preference.
(iii) If the Company has (A) net income from the sale or other disposition
of "foreclosure property" which is held primarily for sale to customers in
the ordinary course of business or (B) other nonqualifying net income from
foreclosure property, it will be subject to tax on such income at the
highest corporate rate.
(iv) 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.
(v) If the Company fails to satisfy the 75% gross income test or the 95%
gross income test (as discussed below), but preserves its qualification as
a REIT because certain other requirements have been met, it will be subject
to a 100% tax on the net income attributable to the greater of the amount
by which the Company fails the 75% or 95% test, multiplied by a fraction
intended to reflect the Company's profitability.
(vi) If the Company should fail to distribute during each calendar year at
least the sum of (A) 85% of its REIT ordinary income for such year, (B) 95%
of its REIT capital gain net income for such year, and (C) any
undistributed taxable income from prior periods, the Company would be
subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed. The 1998 Act provides that all
distributions by the REIT shall be deemed to come first from earnings from
non-REIT years.
(vii) If during the ten-year period (the "Recognition Period") beginning on
the first day of the first taxable year for which the Company qualifies as
a REIT, the Company recognizes gain in 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
rate. The Company will not acquire any assets until the closing of the Berg
Acquisition, and they will hold no such assets at the beginning of the
Recognition Period.
(viii) If the Company subsequently 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. The result described above with respect to the
recognition of Built-in Gain during the Recognition Period assumes the
Company will make an election in accordance with Notice 88-19 issued by the
Internal Revenue Service (the "IRS"). See "--Tax Aspects of the Operating
Partnerships--Partnership Allocations" and " Tax Allocations with Respect
to Contributed Properties" below.
REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a corporation,
trust or association: (1) which 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) which would be taxable as
a domestic corporation, but for Code sections 856 though 859; (4) which 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 (determined without reference to any rules of attribution); (6)
during the last half of each taxable year not
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more than 50% in value of the outstanding stock of which is owned, directly or
constructively, by "five or fewer" individuals (as defined in the Code to
include certain entities) (the "Five or Fewer Test"); (7) that makes an election
to be a REIT (or has made such election for a previous taxable year which has
not been revoked or terminated) and satisfies all relevant filing and other
administrative requirements established by the IRS that must be met in order to
elect and maintain REIT status; (8) that uses a calendar year for federal income
tax purposes and complies with the recordkeeping requirements of the Code and
Treasury Regulations promulgated thereunder; and (9) which meets certain income
and asset tests, described below. The Code provides that conditions (1) to (4),
inclusive, must be met during the entire taxable year, 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 and that condition
(6) must be met for the last six months of each taxable year. As of the date of
this Proxy Statement/Prospectus the Company believes that it will satisfy
conditions (5) and (6). The Charter contains restrictions regarding transfers of
shares, which are intended to assist the Company in continuing to satisfy the
share ownership requirements described in (5) and (6). In particular,although
the Berg Group may own as much as 20% of the outstanding stock under the Berg
Group Ownership Limit, which likely represents ownership by two individuals,
Carl E. Berg and Clyde J. Berg, for Five or Fewer Test purposes, the members of
the Berg Group may not acquire any additional shares if it would result in the
Company's failure to satisfy the Test. Such transfer restrictions are described
in "DESCRIPTION OF MISSION WEST-MARYLAND STOCK--Restrictions on Transfer."
In its proposed budget for the 1999 fiscal year, the Clinton Administration
has proposed to impose an ownership requirement for REIT qualification in
addition to the Five or Fewer Test. The proposal would create a limit of 50% of
the combined voting power of all classes of voting stock or the total value of
all classes of stock any one person or entity could own. Unlike the current Five
or Fewer Test, which permits a "look through" for certain entities to determine
the number of owners, the Clinton proposal would apply to any person (including
a partnership, corporation or trust). In addition, the proposal calls for
attribution of ownership between a partnership and its partners and a
corporation and its shareholders (with a 10% threshold for attribution). This
proposal has not been included in the 1998 Act.
Pursuant to the 1997 Act, for the Company's taxable years commencing on or
after January 1, 1998, if the Company complies with regulatory rules pursuant to
which it is required to send annual letters to certain of its shareholders
requesting information regarding the actual ownership of its stock, but does not
know, or exercising reasonable diligence would not have known, whether it failed
to meet the requirement that it not be closely held, the Company will be treated
as having met the Five or Fewer Test. If the Company were to fail to comply with
these regulatory rules for any year, it would be subject to a $25,000 penalty.
If the Company's failure to comply was due to intentional disregard of the
requirements, the penalty would be increased to $50,000. However, if the
Company's failure to comply was due to reasonable cause and not willful neglect,
no penalty would be imposed.
Section 856(i) of the Code provides that a corporation that is a "qualified
REIT subsidiary" shall not be treated as a separate corporation, and all assets,
liabilities and items of income, deduction and credit of a "qualified REIT
subsidiary" shall be treated as assets, liabilities and items of income,
deduction and credit of the REIT. Pursuant to the 1997 Act, for the Company's
taxable years beginning on or after January 1, 1998, a "qualified REIT
subsidiary" is a corporation all of the capital stock of which is owned by the
REIT. Pursuant to this amendment, the Company will have the ability, if it so
chooses, to acquire an existing corporation that will qualify as a "qualified
REIT subsidiary", as opposed to having to form such a subsidiary. The Company
may form or acquire "qualified REIT subsidiaries" in the future. In applying the
income and asset tests described below, a "qualified REIT subsidiary" will be
ignored and all assets, liabilities and items of income, deduction and credit of
such "qualified REIT subsidiary" will be treated as assets, liabilities and
items of income, deduction and credit of the Company. A "qualified REIT
subsidiary" of the Company will not be subject to federal corporate income
taxation, although it may be subject to state and local taxation in certain
states.
In the case of a REIT such as the Company which is a partner in a
partnership, Treasury Regulations provide that the REIT will be deemed to own
its proportionate share of the assets of the partnership and will be deemed to
be entitled to the income of the partnership attributable to such share. In
addition, the character of the assets and gross income of the partnership retain
the same character in the hands of the REIT for purposes of Section 856 of the
Code, including satisfying the gross income tests and the asset tests. Thus, the
Company's proportionate share of the assets, liabilities and items of income of
the Operating Partnerships will be treated as assets, liabilities and items of
income of the Company for purposes of applying the requirements described below.
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GROSS INCOME TESTS. In order to maintain qualification as a REIT, the
Company annually must satisfy two gross income requirements, as follows:
(i) At least 75% of the Company's gross income (excluding gross income from
prohibited transactions) 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.
(ii) 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 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 requirements for a REIT described above only if
several conditions are met, including the following:
(i) The amount of rent must not be based in whole or in part on the income
or profits of any person from the property. However, an amount received or
accrued generally will not be excluded from the term "rents from real
property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales.
(ii) Rents received from a tenant will not qualify as "rents from real
property" in satisfying the gross income tests if the Company, or an owner
of 10% or more of the Company, directly or constructively owns 10% or more
of such tenant (a "Related Party Tenant"). Constructive ownership is
determined under the attribution rules of Section 318 of the Code, as
modified by Section 856(d)(5) of the Code.
(iii) If rent attributable to personal property, leased in connection with
a lease of real property, is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to such personal
property will not qualify as "rents from real property."
(iv) Rents received will not qualify as "rents from real property", unless
the Company generally does not operate or manage the property or furnish or
render services to the tenants of such property, other than through an
independent contractor from whom the REIT derives no revenue. The Company
may, however, directly perform certain 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. In addition, for its 1998 taxable year and thereafter, the
Company is permitted to receive up to 1% of its gross income from the
provision of non-customary services and still treat all other amounts
received from such property as "rents from real property."
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. An amount received or
accrued generally will not be excluded from the term "interest," however, solely
by reason of being based on a fixed percentage or percentages of receipts or
sales.
The Company intends for all of its income to be derived from its interest
in the Operating Partnerships, and expects that the Operating Partnerships'
ownership of the Properties will give rise to income which will enable the
Company to satisfy all of the income tests described above. All of the "rents
from real property" that the Company expects to receive or expects the
Partnership to receive will satisfy the foregoing conditions. Certain Properties
or portions thereof have been leased to corporations in which members of the
Berg Group own in excess of 10% of the total number of outstanding shares.
Initially, the Berg Group will own less than 2% of the Common Stock, and the
Company is not aware of any other shareholders owning interests in such tenants
which would result in such entities being deemed Related Party Tenants. However,
the future acquisition of 10% or more of the Company's Common Stock by the Berg
Group, upon exercise of their Exchange Rights or otherwise, could cause such
entities to be treated as Related Party Tenants. The members of the Berg Group
have agreed not to acquire shares of the Company's Common Stock if, in the sole
judgment of the Independent Directors Committee, their ownership of Common Stock
would result in the loss of the Company's status as a REIT.
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RELIEF PROVISIONS. Should the Company fail 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 by obtaining relief under certain provisions of Section
856 of the Code. Such provisions would allow the Company to preserve its REIT
qualifications if (i) the failure to meet such tests was due to reasonable cause
and not due to willful neglect, (ii) the Company attaches a schedule of the
sources of its income to its tax return, and (iii) any incorrect information on
the schedule was not due to fraud with intent to evade tax. There can be no
assurance, however, that the Company would be entitled to the benefit of these
relief provisions in all circumstances. As discussed above in "Taxation of the
Company--General", even if these relief provisions apply, a tax would be imposed
with respect to the excess net income.
ASSET TESTS. To maintain its status as a REIT the Company, at the close of
each quarter of its taxable year, also must satisfy the following three
asset-related tests:
(i) At least 75% of the value of the Company's total assets must be
represented by interests in real estate assets, shares in cash, cash items
and government securities (as well as certain temporary investments in
stock or debt instruments purchased with the proceeds of new capital issued
by the Company).
(ii) No more than 25% of the Company's total assets may be represented by
securities other than those in the class described in (i), above.
(iii) With respect to the investments described in (ii) above, 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 Clinton
Administration's 1999 budget proposal would prohibit a REIT from holding
more than 10% of the outstanding stock of any one issuer, determined by
either vote or value. This proposal is not part of the 1998 Act.
In applying these asset-related tests the Company will be deemed to own its
proportionate share of all of the assets of the Operating Partnerships. Upon the
consummation of the Berg Acquisition, more than 75% of the value of the
Operating Partnerships' assets will qualify as "real estate assets."
Having met the asset tests at the close of any quarter, the Company will
not forfeit its REIT status by failing to satisfy these tests at the end of a
later quarter solely due to fluctuations in asset values. Furthermore, should
the Company fail to satisfy the asset tests because of its acquisition of
securities or other property during a quarter, the Company can be cured of such
failure by disposing of a sufficient amount of nonqualifying assets within 30
days after the close of that quarter. The Company intends to maintain adequate
records of the value of its assets to ensure compliance with the asset-related
tests, and to take such other action within 30-days after the close of any
quarter as may be required to cure any noncompliance.
ANNUAL DISTRIBUTION REQUIREMENTS. In order to qualify as a REIT, the
Company must distribute dividends (other than capital gains dividends) to its
shareholders in an amount at least equal to: (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to deduction for the
dividends paid and by excluding any net capital gain), and (ii) 95% of the
excess of the net income, if any, from foreclosure property (in excess of the
special tax imposed on income from foreclosure property); minus (B) the sum of
certain items of "noncash income". Such dividends 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 on or before
the first regular dividend payment after such declaration. To the extent that
the Company does not distribute all of its net capital gain or distributes at
least 95%, but less than 100%, of its REIT taxable income, as adjusted, it will
be subject to tax on the undistributed amount of its REIT taxable income at
regular ordinary and capital gains corporate tax rates. For the Company's
taxable year beginning on January 1, 1998 and for all taxable years thereafter,
undistributed capital gains may be so designated by the Company and in such
event will be includible in the income of the holders of shares of Common Stock.
If the Company makes that election, shareholders will be treated as having paid
the capital gains tax imposed on the Company on the designated amounts including
in their income as long-term capital gains. Such shareholders would get an
increase in the basis for income recognized and a decrease in their basis for
taxes paid by the Company. Additionally, if the Company fails to distribute at
least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of
its REIT capital gain income for such year, and (iii) any undistributed taxable
income from prior periods, during each calendar year the Company would be
subject to a 4% excise tax on the excess of such requied distribution over the
amounts actually distributed.
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The Company's REIT taxable income will consist almost entirely of the
Company's distributive share of the income of the Operating Partnerships. The
Company expects generally to have adequate cash and cash equivalents to allow
liquid assets to satisfy such distribution requirements. The Company intends to
make timely distributions sufficient to satisfy the REIT annual distribution
requirements.
Nevertheless, on occasion the Company may lack sufficient cash or cash
equivalents to make timely dividend distributions in the required amounts either
because its share of the Operating Partnerships' cash flow for a particular year
is inadequate or because of timing differences between the Company's receipt of
income and payment of deductible expenses, and the inclusion of such income and
the deduction of such expenses in determining the Company's REIT taxable income.
Upon the occurrence of these events, in order to meet the 95% distribution
requirements, the Company may find it necessary to arrange for short-term, or
possibly long-term, borrowings or to pay dividends in the form of taxable stock
dividends.
Certain provisions of the Code may permit the Company to remedy its failure
to meet the distribution requirements for a taxable year by paying "deficiency
dividends" to shareholders in a later year, which may be included in the
Company's deduction for dividends paid for the earlier year. The Company then
could avoid being subjected to tax on the amounts so distributed, although the
Company would be required to pay interest on the amount of the deduction taken
for the deficiency dividends.
LOSS OF REIT QUALIFICATION. If the Company fails to qualify for taxation as
a REIT in any taxable year, and the relief provisions do not apply, the Company
will be subject to tax (including any applicable corporate alternative minimum
tax) on its taxable income at regular corporate rates. Distributions to
shareholders in any year in which the Company fails to qualify will not be
deductible by the Company and need not be made. Upon such failure to qualify,
all distributions to shareholders will, to the extent of the Company's current
and accumulated earnings and profits, be taxable as ordinary income. In
addition, subject to certain limitations of the Code, such distributions to
corporate distributees may be eligible for the dividends received deduction.
Unless entitled to relief under specific statutory provisions, the Company also
will 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.
TAXATION OF UNITED STATES SHAREHOLDERS
GENERALLY. As used herein, the term "United States Shareholder" means a
holder of shares who is an individual who is a citizen or resident of the United
States; a corporation, partnership or other entity created or organized in, or
under the laws of, the United States or any state; an estate the income of which
from sources without the United States is includible in gross income for United
States federal income tax purposes regardless of whether such income is
effectively connected with the conduct of a trade or business in the United
States; a trust the primary supervision over the administration of which is
exercisable by a court within the United States and having one or more United
States fiduciaries with authority to control all substantial decisions of such
trust; and any other person whose income or gain in respect of the stock is
effectively connected with the conduct of a United States trade or business.
As long as the Company qualifies as a REIT, distributions made to the
Company's United States Shareholders out of current or accumulated earnings and
profits (and not designated as capital gains dividends) will be treated by them
as ordinary income and will not be eligible for the dividends received deduction
for corporations. Distributions designated as capital gains dividends will be
taxed as long-term capital gains (to the extent they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which the United States Shareholder has held its stock. Pursuant to Section
291(d) of the Code corporate shareholders may be required to treat up to 20% of
certain capital gain dividends as ordinary income.
On November 10, 1997, the IRS issued Notice 97-64, which provides generally
that a REIT may classify portions of its designated capital gain dividend as (i)
a 20% rate gain distribution (which would be taxed as long-term capital gain in
the 20% group), (ii) an unrecaptured Section 1250 gain distribution (which would
be taxed as long-term capital gain in the 25% group), or (iii) a 28% rate gain
distribution (which would be taxed as long-term capital gain in the 28% group).
(If no designation is made, the entire designated capital gain divided will be
treated as a 28% rate gain distribution. For a discussion of the 20%, 25% and
28% tax rates applicable to individuals, see "1997 Act Changes to Capital Gain
Taxation" below). IRS Notice 97-64 also provides that a REIT must determine the
maximum amounts that it may designate as 20% and 25% rate capital gain dividends
by performing the
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computation required by the Code as if the REIT were an individual whose
ordinary income were subject to a marginal tax rate of at least 28%. The Notice
further provides that designations made by the REIT will be effective only to
the extent that they comply with Revenue Ruling 89-91, which requires that
distributions made to different classes of shares be composed proportionately of
dividends of a particular type.
Distributions that exceed current and accumulated earnings and profits will
not be taxable to a United States Shareholder to the extent that they do not
exceed the adjusted basis of the shareholder's shares, but rather will reduce
the shareholder's adjusted basis in the shares. To the extent that such
distributions exceed a shareholder's adjusted basis in its shares they will be
included in income as gain realized from the sale of the shares, assuming the
shares are a capital asset in the hands of the shareholder. In addition, any
dividend declared by the Company in October, November or December of any year
payable to a United States Shareholder of record on a specified date in any such
month shall be treated as both paid by the Company and received by the
shareholder on December 31 of such year, provided that the dividend is actually
paid by the Company during January of the following calendar year. United States
Shareholders may not include in their individual income tax returns any net
operating losses or capital losses of the Company.
The Company will be treated as having sufficient earnings and profits to
treat as a dividend any distribution by the Company up to the amount required to
be distributed in order to avoid imposition of the 4% excise tax discussed under
"Taxation of the Company--General" and "Annual Distribution Requirements" above.
As a result, shareholders may be required to treat as taxable dividends certain
distributions which would otherwise result in a tax-free return of capital.
Furthermore, any "deficiency dividend" will be treated as a "dividend" (an
ordinary dividend or a capital gain dividend, as the case may be), regardless of
the Company's earnings and profits.
United States Shareholders may not include in their individual income tax
returns any net operating losses or capital losses of the Company. Instead, such
losses would be carried over by the Company for potential offset against future
income (subject to certain limitations). Distributions made by the Company and
gain arising from the sale or exchange by a United States Shareholder of shares
will not be treated as passive activity income, and, as a result, United States
Shareholders generally will not be able to apply any "passive losses" against
such income or gain. In addition, taxable distributions from the Company
generally will be treated as investment income for purposes of the investment
interest limitations. Capital gain dividends and capital gains from the
disposition of shares (including distributions treated as such), however, will
be treated as investment income only if the United States Shareholder so elects,
in which case such capital gains will be taxed at ordinary income rates. The
Company will notify United States Shareholders after the close of the Company's
taxable year as to the portions of distributions attributable to that year that
constitute ordinary income, return of capital and capital gain.
In general, any loss realized upon a sale or exchange of shares by a United
States Shareholder who has held such shares for six months or less will be
treated as a long-term or mid-term capital loss to the extent of capital gains
dividends received by such shareholder from the Company with respect to such
shares which were classified as long-term or mid-term capital gains.
RECENT CHANGES TO CAPITAL GAIN TAXATION. The 1997 Act altered the taxation
of capital gain income. Under the 1997 Act, individuals, trusts and estates that
hold certain investments for more than eighteen months may be taxed at a maximum
long-term capital gain rate of 20% on the sale or exchange of those investments.
Individuals, trusts and estates that hold certain assets for more than one year
but not more than eighteen months may be taxed at a maximum mid-term capital
gain rate of 28% on the sale or exchange of those investments. The 1997 Act also
established a maximum rate of 25% for "unrecaptured Section 1250 gain" for
individuals, trusts and estates, special rules for "qualified five-year gain",
and other changes to prior law. The 1997 Act allowed the IRS to prescribe
regulations on how the 1997 Act's new capital gain rates will apply to sales of
capital assets by "pass-through entities", which include REITs, and to sales of
interests in "pass-through entities". Under the 1998 Act, the long-term capital
gain rates apply to capital assets held more than one year, and the mid-term
holding period has been eliminated for sales or exchanges after December 31,
1997. Shareholders are urged to consult with their own tax advisors with respect
to the new rules contained in the 1997 Act and the 1998 Act.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Distributions from the Company to certain tax-exempt employees' pension
trusts or other domestic tax-exempt Shareholders will not constitute "unrelated
business taxable income" unless such a shareholder has borrowed to acquire or
carry its stock of the Company or the shares are used by such shareholder in an
unrelated trade or business. For taxable years beginning after December 31,
1993, qualified trusts that hold more than 10%
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of the shares of the Common Stock may under certain circumstances be required to
treat a certain percentage of dividends as unrelated business taxable income if
the Company is "predominantly held" by qualified trusts. For these purposes, a
qualified trust is any trust defined under Section 401(a) of the Code and exempt
from tax under Section 501(a) of the Code. The Company would be "predominantly
held" if one or more qualified trusts, each owning more than 10% of the shares
of Common Stock were to hold more than 50% of the shares of Common Stock in the
aggregate. In such a circumstance, any qualified trust that owned more than 10%
of the shares of Common Stock might be required to treat a certain portion of
the dividends paid as unrelated business taxable income.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States federal income taxation of nonresident
alien individuals, foreign corporations, foreign partnerships and other foreign
shareholders (collectively, "Foreign Shareholders") are complex, and no attempt
will be made herein to provide more than a summary of such rules. PROSPECTIVE
FOREIGN SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE
IMPACT OF FEDERAL, STATE AND LOCAL INCOME TAX LAWS WITH REGARD TO AN INVESTMENT
IN THE COMPANY, INCLUDING ANY REPORTING REQUIREMENTS.
Distributions by the Company that are not attributable to gain from sales
or exchanges by the Company of United States real property interests and not
designated by the Company as capital gains dividends will be treated as
dividends of ordinary income to the extent that they are made out of current or
accumulated earnings and profits of the Company. Such distributions ordinarily
will be subject to a withholding tax equal to 30% of the gross amount of the
distribution, unless an applicable tax treaty reduces or eliminates that tax. If
income from the investment in the shares is treated as effectively connected
with the conduct by the Foreign Shareholder of a United States trade or
business, however, the Foreign Shareholder generally will be subject to a tax at
graduated rates in the same manner as United States Shareholders are taxed with
respect to such dividends (and the income may also be subject to the 30% branch
profits tax in the case of a Foreign Shareholder that is a foreign corporation).
The Company will withhold United States income tax at the rate of 30% on the
gross amount of any such dividends made to a Foreign Shareholder unless (i) a
lower treaty rate applies, or (ii) the Foreign Shareholder files an IRS Form
4224 with the Company certifying that the investment to which the distribution
relates is effectively connected with a United States trade or business of such
Foreign Shareholder. Lower treaty rates applicable to dividend income may not
necessarily apply to dividends from a REIT such as the Company, however.
Distributions in excess of current or accumulated earnings and profits of
the Company will not be taxable to a Foreign Shareholder to the extent that they
do not exceed the adjusted basis of the Foreign Shareholder's shares, but rather
will reduce the adjusted basis of a Foreign Shareholder's shares. To the extent
that such distributions exceed the adjusted basis of a Foreign Shareholder's
shares, they will give rise to gain from the sale or exchange of its stock, the
tax treatment of which is described below. As a result of a legislative change
made by the Small Business Job Protection Act of 1996, it appears that the
Company will be required to withhold 10% of any distribution in excess of the
Company's current and accumulated earnings and profits. Consequently, although
the Company intends to withhold at a rate of 30% on the entire amount of any
distribution (or a lower applicable treaty rate), to the extent that the Company
does not do so, any portion of a distribution not subject to withholding at a
rate of 30% (or a lower applicable treaty rate) will be subject to withholding
at a rate of 10%. However, the Foreign Shareholder 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 or accumulated earnings and profits of the
Company, and the amount withheld exceeded the Foreign Shareholder's United
States tax liability, if any, with respect to the distribution.
Distributions that are designated by the Company at the time of
distribution as capital gains dividends (other than those arising from the
disposition of a United States real property interest) generally will not be
subject to taxation, unless (i) investment in the shares is effectively
connected with the Foreign Shareholder's United States trade or business, in
which case the Foreign Shareholder will be subject to the same treatment as
United States Shareholders with respect to such gain (except that a Foreign
Shareholder that is a foreign corporation may also be subject to the 30% branch
profits tax), or (ii) the Foreign Shareholder is a nonresident alien individual
who was present in the United States for 183 days or more during the taxable
year and has a tax home in the United States, in which case the nonresident
alien individual will be subject to a 30% tax on the capital gains.
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For any year in which the Company qualifies as a REIT, distributions that
are attributable to gain from the sale or exchange by the Company of a United
States real property interest will be taxed to a Foreign Shareholder under the
provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, these distributions are taxed to a Foreign Shareholder
as if such gain were effectively connected with a United States trade or
business conducted by the Foreign Shareholder. Foreign Shareholders would thus
be taxed at the same capital gain rates applicable to United States Shareholders
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals). Also, distributions subject
to FIRPTA may be subject to a 30% branch profits tax in the hands of a foreign
corporate shareholder not entitled to treaty exemption. The Company is required
by applicable IRS regulations to withhold 35% of any distribution that could be
designated by the Company as a capital gain dividend. This amount is creditable
against the Foreign Shareholder's FIRPTA tax liability.
If the Company is a "domestically-controlled REIT," a sale of Common Stock
by a Foreign Shareholder generally will not be subject to United States
taxation. A "domestically-controlled REIT" is a REIT in which, at all times
during a particular testing period (generally five years preceding the sale in
issue), less than 50% of the value of the REIT's shares are held directly or
indirectly (taking into consideration attribution rules) by Foreign
Shareholders. Because the Common Stock will be publicly traded, no assurance can
be given that the Company will constitute a domestically-controlled REIT.
Notwithstanding the foregoing, capital gain from the sale of stock of a
domestically-controlled REIT not subject to FIRPTA will be taxable to a Foreign
Shareholder (under rules generally applicable to United States Shareholders) if
such person is in the United States for 183 days or more during the taxable year
of disposition and certain other conditions apply.
If the Company is not a domestically-controlled REIT, whether a sale of
Common Stock would be subject to tax under FIRPTA as a sale of a United States
real property interest would depend on whether the Common Stock is "regularly
traded" (as defined by applicable Treasury Regulations) on an established
securities market (e.g., the AMEX and the PCX, on which the Common Stock is
listed) and whether the selling shareholder held, directly or indirectly, more
than 5% of the Common Stock during the five-year period ending on the date of
disposition. Arguably, the applicable Treasury Regulations defining "regularly
traded" for this purpose provide that the shares of Common Stock will not be
"regularly traded" for any calendar quarter during which 100 or fewer persons
(treating related persons as one person) in the aggregate own 50% or more of the
shares of Common Stock. If this interpretation is correct, and the Company did
not at the time constitute a domestically-controlled REIT, a Foreign Shareholder
(without regard to its ownership percentage of Common Stock) will be subject to
federal income tax with respect to gain realized on any sale or other
disposition of Common Stock that occurs within a calendar quarter during which
50% or more of the Common Stock is so owned. If the gain on the sale of the
Common Stock is subject to taxation under FIRPTA, the Foreign Shareholder will
be subject to the same treatment as a United States Shareholder with respect to
such gain (subject to applicable alternative minimum tax and a special
alternative minimum tax in the case of nonresident alien individuals). In any
event, a purchaser of Common Stock from a Foreign Shareholder will not be
required under FIRPTA to withhold on the purchase price if the purchased Common
Stock is "regularly traded" on an established securities market or if the
Company is a domestically-controlled REIT. Otherwise, under FIRPTA the purchaser
of Common Stock may be required to withhold 10% of the purchase price and remit
such amount to the IRS.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its shareholders and the IRS the amount of
dividends paid or deemed paid during each calendar year, and the amount of tax
withheld, if any.
UNITED STATES SHAREHOLDERS. Under certain circumstances, United States
Shareholders owning Common Stock may be subject to backup withholding at a rate
of 31% on payments made with respect to, or cash proceeds of a sale or exchange
of, Common Stock. Backup withholding will apply only if the shareholder (i)
fails to furnish the Company with its Taxpayer Identification Number ("TIN")
which, for an individual, would be his Social Security Number, (ii) furnishes
the Company with an incorrect TIN, (iii) is notified by the IRS that it has
failed properly to report payments of interest and dividends, or (iv) under
certain circumstances, fails to certify, under penalty of perjury, that it has
furnished a correct TIN and has not been notified by the IRS that it is subject
to backup withholding for failure to report interest and dividend payments.
Backup withholding will not apply with respect to payments made to certain
exempt recipients, such as tax-exempt organizations. United States Shareholders
should consult their own tax advisors regarding their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption. Backup withholding is not an additional tax. Rather, the amount of
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any backup withholding with respect to a payment to a United States Shareholder
will be allowed as a credit against such United States Shareholder's United
States federal income tax liability and may entitle such United States
Shareholder to a refund, provided that the required information is furnished to
the IRS.
FOREIGN SHAREHOLDERS. Additional issues may arise pertaining to information
reporting and backup withholding with respect to Foreign Shareholders, and
Foreign Shareholders should consult their tax advisors with respect to any such
information reporting and backup withholding requirements. Backup withholding
with respect to Foreign Shareholders is not an additional tax. Rather, the
amount of any backup withholding with respect to a payment to a Foreign
Shareholder will be allowed as a credit against any United States federal income
tax liability of such Foreign Shareholder. If withholding results in an
overpayment of taxes, a refund may be obtained provided that the required
information is furnished to the IRS.
The United States Treasury has recently finalized regulations regarding the
withholding and information reporting rules discussed above. 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, 1999, subject to certain transition rules.
Valid withholding certificates that are held on December 31, 1999, will remain
valid until the earlier of December 31, 2000, or the date of expiration of the
certificate under rules currently in effect (unless otherwise invalidated due to
changes in the circumstances of the person whose name is on such certificate). A
Foreign Shareholder should consult its own advisor regarding the effect of the
new Treasury Regulations.
TAX ASPECTS OF THE OPERATING PARTNERSHIPS
GENERAL. Substantially all of the Company's investments will be held
indirectly through the Operating Partnerships, which in turn will own the
Properties. In general, partnerships are "pass-through" entities that are not
subject to federal income tax. Instead, partners receive an allocation of the
items of income, gain, loss, deduction and credit of a partnership, and are
potentially subject to tax on their distributive shares thereof, without regard
to whether the partners actually receive a cash distribution from the
partnership. The Company will include in its income its share of the foregoing
partnership items for purposes of the various REIT income tests and in the
computation of its REIT taxable income. See: "Partnership Allocations" below.
Moreover, for purposes of the REIT asset tests, the Company will include its
proportionate share of assets held directly or indirectly by the Operating
Partnerships. See "Taxation of the Company".
ENTITY CLASSIFICATION. If the Operating Partnerships were treated as an
association taxable as a corporation instead of as a partnership, it would be
taxable as a corporation and therefore subject to an entity-level tax on its
income. In this event, the character of the Company's assets and items of gross
income would change and would preclude the Company from satisfying the
asset-related tests and the income tests (see "FEDERAL INCOME TAX
CONSIDERATIONS" --"Taxation of the Company--Asset Tests" and " Income Tests"),
which in turn would prevent the Company from qualifying as a REIT. See "Failure
to Qualify" above for a discussion of the effect of the Company's failure to
meet such tests for a taxable year.
The Operating Partnerships has not requested, nor does it intend to
request, a ruling from the IRS that it will be treated as a partnership for
federal income tax purposes. Instead, at the closing of the Reincorporation
Merger, Graham & James LLP will deliver an opinion to the effect that, based on
the provisions of the Operating Partnership Agreement, and certain factual
assumptions and representations described in the opinion, the Operating
Partnerships will be treated as a partnership for federal income tax purposes.
Unlike a private letter ruling, an opinion of counsel is not binding on the IRS,
and no assurance can be given that the IRS will not challenge the status of the
Operating Partnerships as a partnership for federal income tax purposes. If such
challenges were sustained by a court, the Partnership would be treated as a
corporation for federal income tax purposes.
PARTNERSHIP ALLOCATIONS. Although the provisions of a partnership agreement
generally determine the partners' respective allocations of income and loss,
such allocations will be disregarded for tax purposes if they do not have
"substantial economic effect" under the requirements of Section 704(b) of the
Code and the Treasury Regulations promulgated thereunder. If an allocation is
not recognized for federal income tax purposes, the item subject to the
allocation will be reallocated in accordance with the partners' interests in the
partnership, which will be determined by taking into account all of the facts
and circumstances relating to the economic arrangement of the partners with
respect to such item. The allocations of taxable income and loss by the
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Operating Partnerships are intended to comply with the requirements of Section
704(b) of the Code and the Treasury Regulations promulgated thereunder.
TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTIES. Section 704(c) of
the Code requires all income, gain, loss and deduction attributable to
appreciated or depreciated property that is contributed to a partnership in
exchange for an interest in the partnership to be allocated for federal income
tax purposes in a manner such that the contributor is charged with or benefits
from the unrealized gain or unrealized loss inherent in the property at the time
of the contribution. The amount of such unrealized gain or unrealized loss is
generally equal to the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution (a "Book-Tax Difference"). Such
allocations are made solely for federal income tax purposes and do not affect
the book capital accounts or other economic arrangements among the partners. The
Partnership Agreement generally requires such allocations to be made in a manner
consistent with the provisions of Section 704(c) of the Code.
Treasury Regulations under Section 704(c) of the Code provide partnerships
with a choice of several methods of accounting for a Book-Tax Difference,
including retention of the "traditional method" or the election of certain
alternative methods which would permit any distortions caused by a Book-Tax
Difference to be entirely rectified on an annual basis or with respect to a
specific taxable transaction such as a sale. Based on the foregoing, in general,
if any asset contributed to or revalued by the Operating Partnerships is
determined to have a fair market value which is greater than its adjusted tax
basis, certain partners of the Operating Partnerships will be allocated lower
amounts of depreciation deductions for tax purposes by the Operating
Partnerships and increased taxable income and gain on sale. Such allocations
will tend to eliminate the Book-Tax Difference over the life of the Operating
Partnerships. However, the special allocation rules of Section 704(c) of the
Code do not always entirely rectify the Book-Tax Difference on an annual basis
or with respect to a specific transaction such as a sale. Thus, the Company may
be allocated lower depreciation and other deductions, and possibly greater
amounts of taxable income in the event of a sale of contributed assets, and such
amounts may be in excess of the economic or book income allocated to it as a
result of such sale. Such an allocation might cause the Company to recognize
taxable income in excess of cash proceeds, which might adversely affect the
Company's ability to comply with the REIT distribution requirements. See
"--Requirements for Qualification--Annual Distribution Requirements".
Any property purchased or constructed by the Operating Partnerships
subsequent to the Berg Acquisition will initially have a tax basis equal to its
cost, and Section 704(c) of the Code will not apply. Depreciation with respect
to such property will be allocated for book and tax purposes pro rata to each
partner.
Upon the disposition of any Properties with a Book-Tax Difference for an
amount greater than the adjusted tax basis, book gain will be allocated to the
Limited Partners and the Company to the extent of any prior special allocations
of depreciation with respect to such Properties, then pro rata to each Partner.
In addition, tax gain with respect to such Properties will be allocated to the
Limited Partners to the extent of the remaining Book-Tax Difference, then
pro-rata to each partner. On any subsequently purchased property, gain for tax
and book purposes will be allocated pro rata to each Partner.
BASIS IN PARTNERSHIP INTEREST. The Company's adjusted tax basis in its
interest in the Operating Partnerships generally (i) will be equal to the amount
of cash and the basis of any other property contributed to the Operating
Partnerships by the Company, (ii) will be increased by its allocable share of
(a) the Operating Partnerships' income, and (b) the indebtedness of the
Operating Partnerships, and (iii) will be reduced, but not below zero, by the
Company's allocable share of (a) the Operating Partnerships' losses and (b) the
amount of cash distributed to the Company by the Operating Partnerships, and by
constructive distributions resulting from a reduction in the Company's share of
indebtedness of the Operating Partnerships.
If the allocation of the Company's distributive share of the Operating
Partnerships' loss will reduce the adjusted tax basis of the Company's
partnership interest in the Operating Partnerships below zero, the recognition
of such loss will be deferred until such time as the recognition of such loss
would not reduce the Company's adjusted tax basis below zero. To the extent that
the Operating Partnerships' distributions, or any decrease in the Company's
share of the nonrecourse indebtedness of the Operating Partnerships (such
decreases being considered a constructive cash distribution to the partners)
exceeds the Company's adjusted tax basis, such distributions will constitute
taxable income to the Company. Such taxable income will normally be
characterized as a capital gain, and if the Company's partnership interest in
the Operating Partnerships has been held for longer than the long-term capital
gain holding period, the distribution will constitute a long-term capital gain.
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SALE OF THE OPERATING PARTNERSHIPS' PROPERTY. Any gain realized by the
Operating Partnerships on the sale of property held for more than one year will
generally be long-term capital gain or unrecaptured Section 1250 gain, except
for any portion of such gain that is treated as depreciation or cost recovery
recapture, in accordance with the rules described above. See "--Taxation of
United States Shareholders--Recent Changes to Capital Gain Taxation." The
Operating Partnerships intends to hold the Properties for investment with a view
to long-term appreciation, to engage in the business of acquiring, developing,
owning, and operating the Properties and additional properties, and to sell a
Property when such sale is consistent with the Operating Partnerships'
investment objectives. See "POLICIES WITH RESPECT TO CERTAIN ACTIVITIES".
FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION MERGER.
The Company has been advised by Graham & James LLP that, for federal income
tax purposes, no gain or loss will be recognized by the holders of Common Stock
or options to purchase Common Stock as a result of the consummation of the
Reincorporation Merger. Each holder of Common Stock will have the same basis in
the New Common Stock received pursuant to the Reincorporation Merger as he had
in the Common Stock held immediately prior to the Reincorporation Merger, and
his holding period with respect to the New Common Stock will include the period
during which he held the corresponding Common Stock, so long as the Common Stock
was held as a capital asset at the time of consummation of the Reincorporation
Merger.
The Company has also been advised by Graham & James LLP that the Company
will not recognize gain or loss for federal income tax purposes as a result of
the Reincorporation Merger, and that Mission West-Maryland will succeed without
adjustment to the tax attributes of the Company. The Company is currently
subject to state income taxation in California. If the Reincorporation Merger is
approved, Mission West-Maryland may be subject to California state income tax.
OTHER TAX CONSEQUENCES
The Company and its shareholders 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 shareholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective shareholders should consult their own
tax advisors regarding the effect of state and local tax laws on an investment
in the Company.
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ERISA CONSIDERATIONS
GENERAL
In evaluating the effect of the UPREIT Transactions, a fiduciary of a
qualified profit-sharing, pension or stock bonus plan, including a plan for
self-employed individuals and their employees or any other employee benefit plan
(a "Plan") subject to the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), should consider (a) whether the ownership of Common Stock is
in accordance with the documents and instruments governing such Plan; (b)
whether the ownership of Common Stock is consistent with the fiduciary's
responsibilities and satisfies the requirements of Part 4 of Title I of ERISA
(where applicable) and, in particular, the diversification, prudence and
liquidity requirements of Section 404 of ERISA; (c) the effect in the unlikely
event that the Company's assets are treated as assets of the Plan; and (d) the
need to value the assets of the Plan annually.
The fiduciary investment considerations summarized below provide a general
discussion that does not include all the fiduciary investment considerations
relevant to a Plan. This summary is based on the current provisions of ERISA and
the Code and regulations and rulings thereunder and both of which may be changed
(perhaps adversely and with retroactive effect) by future legislative,
administrative or judicial actions. This discussion should not be construed as
legal advice and prospective purchasers of Common Stock should consult with and
rely upon their own advisors in evaluating these matters in light of their own
personal circumstances.
PLAN ASSETS REGULATIONS
Under Department of Labor ("DOL") regulations determining the assets of a
Plan for purposes of ERISA and the related prohibited transaction excise tax
provisions of the Code (the "Plan Asset Regulation"), when a Plan makes an
equity investment in another entity, the underlying assets of that entity will
not be considered assets of the Plan if the equity interest is a
"publicly-offered security."
For purposes of the Plan Asset Regulation, a "publicly-offered security" is
a security that is (a) "freely transferable," (b) part of a class of securities
that is "widely held," and (C) part of a class of securities that is registered
under section 12(b) or 12(g) of the Securities Exchange Act of 1934 (the
"Exchange Act"). The Common Stock has been registered under the Securities Act
and the Exchange Act of 1934.
The Plan Asset Regulation provides that a security is "widely held" only if
it is a part of the class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the offering as a result of events beyond the control of the
issuer. The Company expects the Common Stock to remain "widely held" upon the
completion of the UPREIT Transactions.
The Plan Asset Regulation provides that whether a security is "freely
transferable" is a factual question to be determined on the basis of all the
relevant facts and circumstances. The Plan Asset Regulation further provides
that when a security is part of an offering in which the minimum investment is
$10,000 or less, as is the case with the offering of the Common Stock, certain
restrictions ordinarily will not, alone or in combination, affect the finding
that such securities are "freely transferable." The Company believes that the
restrictions imposed under the Charter on the transfer of the New Common Stock
are limited to the restrictions on transfer generally permitted under the Plan
Asset Regulation and are not likely to result in the failure of the New Common
Stock to be "freely transferable." However, no assurance can be given that the
DOL will not reach a contrary conclusion.
Therefore, the Company believes that the Common Stock and the New Common
Stock should be treated as "publicly-offered securities", under the Plan Asset
Regulation and, accordingly, that the underlying assets of the Company should
not be considered to be assets of any Plan investing in the Common Stock.
GENERAL ERISA REQUIREMENTS
ERISA generally requires that the assets of a Plan be held in trust and
that the trustee, or an investment manager (within the meaning of Section 3(38)
of ERISA), have exclusive authority and discretion to manage and control the
assets of the Plan. As discussed above, under current law the assets of the
Company do not appear likely to be assets of Plans receiving shares of Common
Stock or New Common Stock as a result of the UPREIT Transactions. However, if
the assets of the Company were deemed to be assets of Plans under ERISA, the
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directors of the Company would likely be fiduciaries with respect to the Plans
that invest in the Company and the prudence and other fiduciary standards set
forth in ERISA would apply to the directors and to all investments made by the
Company. Plan fiduciaries who make the decision to invest in the Common Stock
could, under certain circumstances, be liable as co-fiduciaries for actions
taken by the Company or the directors that do not conform to the ERISA standards
for investments under Part 4 of Title I of ERISA.
PROHIBITED TRANSACTIONS
Section 406 of ERISA provides that Plan fiduciaries are prohibited from
causing a Plan to engage in certain types of transactions. Section 406(a)
prohibits a fiduciary from knowingly causing a Plan to engage directly or
indirectly in, among other things: (a) a sale or exchange, or leasing, of
property with a party in interest; (b) a loan or other extension of credit with
a party in interest; (c) a transaction involving the furnishing of goods,
services or facilities with a party in interest; or (d) a transaction involving
the transfer of Plan assets to, or use of Plan assets by or for the benefit of,
a party in interest. Additionally, Section 406 prohibits a Plan fiduciary from
dealing with Plan assets in his own interest or for his own account, from acting
in any capacity in any transaction involving the Plan on behalf of a party (or
representing a party) whose interests are adverse to the interest of the Plan,
and from receiving any consideration for his own account from any party dealing
with the Plan in connection with a transaction involving Plan assets. Similar
provisions in Section 4975 of the Code apply to qualified Plans, and to certain
other plans and individual retirement arrangements not subject to ERISA.
If the assets of the Company were deemed to be assets of a Plan, a director
could be characterized as a fiduciary of the Plan under ERISA or the Code. A
director's characterization as a fiduciary would cause him to be deemed as a
"party in interest" under ERISA and a "disqualified person" under the Code with
respect to a Plan (or other plan or individual retirement arrangement) receiving
Common Stock, which could cause various transactions between the director and
the Company to constitute prohibited transactions under ERISA and the Code.
Moreover, if the assets of the Company were deemed to be assets of the Plans,
transactions between the Company and parties in interest or disqualified persons
with respect to any Plan (or other plan or individual retirement arrangement)
that has invested in the Company could be prohibited transactions with respect
to the Plan, unless a statutory or administrative exemption is available.
If a prohibited transaction has occurred, certain of the parties involved
in the transaction could be required to (a) undo the transaction, (b) restore to
the Plan any profit realized on the transaction, (c) make good to the Plan any
loss suffered by it as a result of the transaction and (d) pay an excise tax
equal to fifteen percent of the "amount involved" in the transaction for each
year in which the transaction remains uncorrected. If such transaction is not
corrected within the "taxable period," as defined in Section 4975(f)(2) of the
Code, the parties involved in the transaction could be required to pay an excise
tax equal to 100% of the "amount involved."
If the investment constituted a prohibited transaction under Section
408(e)(2) of the Code by reason of the Company engaging in a prohibited
transaction with the individual who established an individual retirement
arrangement ("IRA") or his beneficiary, the IRA would lose its tax-exempt
status. The other penalties for prohibited transactions would not apply.
REPORTING AND DISCLOSURE
As part of the reporting and disclosure requirements applicable to Plans
under ERISA and the Code, fiduciaries of a Plan are required to determine
annually the fair market value of the assets of such Plan as of the close of
such Plan's fiscal year and to file annual reports valuing such assets. Since
the Common Stock and New Common Stock are or will be listed on the AMEX (and
that the assets of the Company will not be deemed to be assets of the Plans) and
are expected to be trading on the AMEX following consummation of the UPREIT
Transactions, the requirements for valuation should be complied with by such
listing and trading.
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THE SELLING STOCKHOLDERS
The following table sets forth the name and the number of shares of New
Common Stock beneficially owned by the Stockholders listed below (the "Selling
Stockholders") as of October 31, 1998, the number of shares of New Common Stock
that may be offered by Selling Stockholders and the number and percentage of
shares to be owned beneficially by the Selling Stockholders if the Selling
Stockholders acquire all of the shares of Common Stock of the Company they have
agreed to purchase in the Private Placement, all of those shares are exchanged
in the Reincorporation Merger, and all of the shares of New Common Stock of the
Selling Stockholders identified below are offered and sold as described herein.
As a condition to receiving the Company's permission to offer and sell shares of
New Common Stock hereby, each Selling Stockholder must agree not to offer or
sell any of such shares upon three days' notice from the Company that it would
be detrimental to the Company or its stockholders for any Selling Stockholder to
offer or sell any such shares during the period set forth in the notice. As used
herein "Selling Stockholders" includes donees and pledgees selling shares
received from a named stockholder after the date of this prospectus.
Except as otherwise described below, none of the Selling Stockholders has
held any office with, been employed by, or otherwise had a material relationship
with, the Company or its affiliates since October 31, 1995.
<TABLE>
<CAPTION>
Percentage
Shares of Number of of
Common Stock Shares of Outstanding
Name of Selling Beneficially Common Shares of
Shareholder Owned Before Stock Common
Offering (1) Offered Stock
Hereby After
Offering (2)
- ----------------------- --------------- ------------ ------------
<S> <C> <C> <C>
Thelmer Aalgaard (3) 152,973 70,000 4.9%
Thomas and Karen Akin 111,111 111,111 *
James H. and Edna J. 40,000 40,000 *
Anderson
Joseph Antizzo 15,000 15,000 *
Ron Bender 16,668 5,556 *
Carl and Mary Ann 77,333 50,000 *
Berg (4)
Howard Clowes 20,000 20,000 *
Morty Cohen 55,556 55,556 *
Miriana Cotton 55,000 55,000 *
John J. Dougherty 25,000 25,000 *
Draeger Trust A 55,000 55,000 *
Draeger Trust C 65,000 65,000 *
Bancorp Equities 20,000 20,000 *
John B. Estill, 8,892 8,892 *
Co-Trustee of
The John and Teresa
Estill 1977 Trust
Harry L. Fox 10,000 10,000 *
Richard S. Frary 110,000 110,000 *
Hugh Fraser 12,000 12,000 *
Ian Fraser 5,000 5,000 *
William S. Friedman 80,000 80,000 *
Tom Furlong 5,000 5,000 *
Thomas Gipson 200,000 200,000 *
James Greenleaf 11,000 11,000 *
Jennifer Greenleaf 11,000 11,000 *
Lewis Greenleaf 142,500 142,500 *
Victoria Greenleaf 11,000 11,000 *
Richard and Catherine 10,000 10,000 *
Guerin
Jeff Harris 45,000 45,000 *
Leo Helzel (5) 437,000 437,000 *
Lawrence B. Helzel 180,000 80,000 *
Michael H. Weed and 25,000 25,000 *
Patricia A. Hurley
Ingalls & Snyder 1,125,067 1,125,067 *
Value Partners, L.P.
(6)
Investors Forum 25,000 25,000 *
Klaus Jander 20,000 20,000 *
Scott Katzmann 11,100 11,100 *
Helzel Kirshman 100,000 100,000 *
Joseph A. Klein 15,000 15,000 *
Michael Knapp (7) 94,733 60,000 *
Joe Kos 11,000 11,000 *
Aaron Kozak Rev. Trust 50,000 50,000 *
Lawton Lamb 11,000 11,000 *
Legion Fund #2 31,500 31,500 *
Donald M. Liddell, Jr. 100,000 100,000 *
Marlin Concepts, Inc. 156,942 39,609 *
(8)
Paul McCarthy (9) 430,000 430,000 *
Dan McCarthy 100,000 100,000 *
Meyer Family Trust 1,000,000 1,000,000 *
(10)
John B. and Beverly 9,000 9,000 *
J. Miles
John S. Moran 200,000 200,000 *
William M. Moran 5,000 5,000 *
MSR Capital Partners 200,000 200,000 *
Michael O'Rosky (11) 43,300 22,000 *
Ivan Poutiatine 111,000 111,000 *
Lochiel Poutiatine 11,000 11,000 *
Michael Pouiatine 55,000 55,000 *
Prism Partners I, LP 418,500 418,500 *
(12)
Katherine Ray 100,000 100,000 *
Antonio Rigoni 18,445 18,445 *
Katharine P. Simmons 39,000 16,000 *
Reed Simmons 39,000 39,000 *
Evelyn Slavin 11,000 11,000 *
Talkot Crossover Fund 22,222 222,222 *
LP
Arnie Toren 10,000 10,000 *
Dean Witter, Cust. 15,000 15,000 *
FBO Lindell Van Dyke
IRA 112-122618-054
Lindell and Lynn Van 25,000 25,000 *
Dyke
Jeffrey Warmoth 25,000 25,000 *
David Wollersheim 4,000 4,000 *
Rev. Tr.
Marlene Zielinski 25,000 25,000 *
Ray Zielinski 33,000 33,000 *
</TABLE>
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(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting power
and/or investment power with respect to those securities which such person
has the right to acquire beneficial ownership within 60 days of October 15,
1998. Unless otherwise indicated, the persons or entities identified in the
table have sole voting and investment power with respect to all shares
shown beneficially owned by them. The numbers do not include shares of
Common Stock which may be acquired by exchange of L.P. Units, which
generally cannot occur within 60 days.
(2) Less than one percent of outstanding shares of Common Stock indicated by
"*". The number of shares indicated for certain selling Stockholders
includes the number of shares which they have agreed to purchase in a
private placement of 6,495,058 shares of the Common Stock at $4.50 per
share (the "Private Placement") which is subject to shareholder approval.
Such Stockholders percentage ownership reflects such shares as outstanding.
(3) Mr. Aalgaard is a director and employee of Berg & Berg Enterprises, Inc.,
an affiliate of Carl E. Berg. Includes (i) 33,400 shares held of record by
Carl E. Berg, Trustee, Berg & Berg Profit Sharing Plan FBO Thelmer G.
Aalgaard Dated 1/1/84, (ii) 4,160 shares held of record by Carl E. Berg,
Trustee, Berg & Berg Profit Sharing Plan FBO Thelmer G. Aalgaard Dated
1/1/84, 1997 Contribution, (iii) 2,220 shares held of record by Thelmer G.
Aalgaard, Custodian, Rachel Michaels, Under the California Uniform Gifts to
Minor Act, and (iv) 70,000 shares which Mr. Aalgaard has agreed to purchase
in the Private Placement.
(4) Mr. Berg is an officer and director of the Company and of Berg & Berg
Enterprises, Inc. Includes 27,333 shares of Common Stock held of record by
Berg & Berg Enterprises, Inc., of which Mr. Berg disclaims beneficial
ownership except as to his pecuniary interest therein. Mr. Berg is a
principal shareholder of the Company. See "Principal Stockholders,"
footnotes 8, 9 and 10.
(5) Mr. Helzel will become a principal shareholder of the Company upon the
closing of the Private Placement. See "Principal Stockholders," footnote
17.
(6) Ingalls & Snyder Value Partners, L.P. will become a principal shareholder
of the Company upon the closing of the Private Placement. See "Principal
Stockholders," footnote 15.
(7) Mr. Knapp was formerly an officer and director of the Company. Mr. Knapp is
currently an officer of Berg & Berg Enterprises, Inc., an affiliate of Carl
E. Berg. Includes (i) 3,333 shares held of record by Carl E. Berg, Trustee,
Berg & Berg Enterprises, Inc. 401K FBO Michael L. Knapp Dated 1/1/84, (ii)
2,000 shares held of record by Michael L. Knapp, Custodian, Ryan Michael
Knapp Under the California Uniform Gifts to Minor Act, (iii) 2,000 shares
held of record by Michael L. Knapp, Custodian, Kayla Marie Knapp Under the
California Uniform Gifts to Minor Act and (iv) 60,000 shares which Mr.
Knapp has agreed to purchase in the Private Placement of the Company.
(8) Includes (i) 9,333 shares held of record by Carl E. Warden SEP/IRA and (ii)
39,609 shares held of record by Marlin Concepts, Inc. which Mr. Warden has
agreed to purchase in the Private Placement. Mr. Warden is a principal
shareholder of the Company. See "Prinicpal Stockholders."
(9) Mr. McCarthy will become a principal shareholder of the Company upon the
closing of the Private Placement. See "Principal Stockholders," footnote 18
(10) The Meyer Family Trust will become a principal shareholder of the Company
upon the closing of the Private Placement. See "Principal Stockholders."
(11) Mr. O'Rosky is an employee of Berg & Berg Enterprises, Inc., an affiliate
of Carl E. Berg. Mr. O'Rosky is also the son-in-law of Clyde J. Berg, who
is a director of Berg & Berg Enterprises, Inc. and brother of Carl E. Berg.
Includes (i) 4,000 shares held of record by Michael J. O'Rosky, Custodian,
Mason Michael O'Rosky, Under the California Uniform Gifts to Minor Act;
(ii) 4,000 shares held of record by Michael J. O'Rosky, Custodian, Hannah
Rae O'Rosky, Under the California Uniform Gifts to Minor Act; and (iii)
22,000 shares which Mr. O'Rosky has agreed to purchase in the Private
Placement.
(12) Prism Partners I, L.P. will become a principal shareholder of the Company
upon the closing of the Private Placement. See "Principal Stockholders,"
footnote 16.
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PLAN OF DISTRIBUTION
The Selling Stockholders may offer their shares of Common Stock at various
times on any of the United States securities exchanges where the Common Stock is
listed and traded, including the AMEX and the PCX; in transactions other than on
such exchanges; in connection with short sales of the shares of Common Stock; by
pledge to secure debts and other obligations; or in a combination of any of the
foregoing transactions.
The Selling Stockholders may sell their shares of Common Stock at market
prices prevailing at the time of sale, at prices related to such prevailing
market prices, at negotiated prices or at fixed prices. The Selling Stockholders
may use broker-dealers to sell the shares of Common Stock. If this happens,
broker-dealers will either receive discounts or commissions from the Selling
Stockholders, or they will receive commissions from purchasers for whom they
acted as agents.
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LEGAL MATTERS
The validity of the shares of New Common Stock offered hereby, as well as
certain tax matters described under "Federal Income Tax Considerations", will be
passed upon for the Company by Graham & James LLP. A partner of Graham & James
LLP, who is rendering services with respect to the UPREIT Transactions, owns
12,333 shares of Common Stock. Graham & James LLP will rely on the opinion of
Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland, as to certain
matters of Maryland law.
EXPERTS
The consolidated financial statements of the Company incorporated in the
Proxy Statement / Prospectus by reference to the Annual Report on Form 10-K for
the period ended December 31, 1997 and the Combined Financial Statements for the
Berg Properties as of December 31, 1997 and 1996, and for the three years in the
period ended December 31, 1997, the Combined Statement of Revenue and Certain
Expenses of Fremont Properties for the year ended December 31, 1997 and the
Statements of Revenue and Certain Expenses for the Kontrabecki Properties for
the years ended December 31, 1997, 1996 and 1995 included in this Proxy
Statement / Prospectus have been audited by PricewaterhouseCoopers LLP,
independent accountants. Such financial statements have been included in
reliance upon the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
The financial statements as of November 30, 1996 and for each of the two
years then ended incorporated in this Prospectus by reference to Mission West
Properties' Annual Report on Form 10-K for the year ended December 31, 1997,
have been so incorporated in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
In addition, certain statistical and other information under the captions
"THE BUSINESS OF BERG & BERG--Regional Economic Profile and The Silicon Valley
R&D Property Market" has been prepared by BT Commercial Real Estate, and is
included herein in reliance upon the authority of such firm as an expert in,
among other things, real estate consulting and economics.
OTHER MATTERS
No other matters will be presented for action at the Special Meeting.
SHAREHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, the Company shareholders may
present proper proposals for inclusion in the Company's proxy statement and for
consideration at the next annual meeting of its shareholders by submitting such
proposals to the Company in a timely manner. In order to be so included for the
1998 annual meeting, shareholder proposals must be received by the Company at a
reasonable time (which the Company considers to be at least 30 days) before the
Company mails the proxy statement to shareholders.
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GLOSSARY
"ACMs" means asbestos-containing materials.
"Acquired Properties" means the approximately .56 million rentable square feet
of R&D Properties, consisting of the Kontrabecki Properties and the Fremont
Properties, to be acquired by the Operating Partnerships at the closing of the
Berg Acquisition.
"Acquisition Agreement" means the agreement dated as of May 14, 1998, among
the Partnership, the other partnerships comprising the Operating Partnerships,
all of the partners therein, and the Company concerning the acquisition of the
Berg Properties, the Acquired Properties and the Pending Development Projects by
the Operating Partnerships, the Company's investment in and admission to the
Operating Partnerships as sole general partner, the rights and options of the
limited partners in the Operating Partnerships to tender L.P. Units or acquire
shares of Common Stock under certain circumstances, and the rights of the Berg
Group to appoint the Berg Group Board Representatives and receive other board of
directors approval rights.
"Adjusted Pro Forma Funds from Operations" means FFO as of the date of the Pro
Forma financial statements adjusted for net increases in rental income and
tenant reimbursements from new leases and renewals that went into effect between
October 1, 1997 and March 15, 1998.
"Affiliate" means a person or entity that directly, or indirectly through one or
more intermediaries, controls, or is controlled by, or is under common control
with, another person or entity.
"Amdahl Properties" means an office complex of five buildings located in the
Oakmead Business Park in Sunnyvale, California and two additional buildings
located in Santa Clara, California leased by the Operating Partnerships to
Amdahl Corporation.
"AMEX" means the American Stock Exchange.
"Annual Base Rent" means gross rent for the calendar year excluding payments by
tenants on account of real estate taxes, operating expenses and utility
expenses.
"Apple Properties" means four buildings at three locations in Cupertino,
California leased by the Operating Partnerships to Apple Computer, Inc.
"Audit Committee" means the audit committee of the Board of Directors.
"BBE" means Berg & Berg Enterprises, Inc., an affiliate of Carl E. Berg and
Clyde J. Berg.
"Berg & Berg" means Berg & Berg Developers, a general partnership consisting of
Carl E. Berg and Clyde J. Berg.
"Berg Acquisition" means the series of transactions in which MWP L.P., MWP L.P.
I, MWP L.P. II, and MWP L.P. III will become the Operating Partnerships, the
Operating Partnerships will acquire the Acquired Properties, and the Company
will become the sole general partner of the Operating Partnerships.
"Berg Group" means Carl E. Berg, Clyde J. Berg, the members of their respective
Immediate Families, and certain entities controlled by Carl E. Berg and/or Clyde
J. Berg which are BBE, Baccarat Cambrian Partnership, Baccarat Fremont
Developers LLC, and DeAnza Office Partners.
"Berg Group Board Representative(s)" means one or both of the two members of the
Company's board of directors appointed by the Berg Group pursuant to rights
acquired in connection with the Berg Acquisition.
"Berg Land Holdings" means the parcels of undeveloped land known as "King
Ranch," "Hillyer & Piercy," and "Fremont & Cushing," which certain members of
the Berg Group own or have rights to acquire.
"Berg Land Holdings Option Agreement" means the agreement pursuant to which the
Berg Group members that own or hold options to acquire the Berg Land Holdings
have granted the Company and the Operating Partnerships an option to acquire
completed and leased buildings constructed on the Berg Land Holdings.
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<PAGE>
"Berg Properties" means complexes, including 59 separate buildings aggregating
approximately 3.78 million rentable square feet located in the Silicon Valley
and owned by the Berg Group prior to the Berg Acquisition.
"Book-Tax Difference" means the difference between the fair market value of the
contributed property at the time of contribution and the adjusted tax basis of
such property at the time of contribution.
"BT Commercial" means BT Commercial Real Estate.
"Built-in Gain" means the excess of the fair market value of assets as of the
beginning of the Recognition Period over the Company's adjusted basis in assets
as of the beginning of the Recognition Period.
"Cash Available for Distribution" means Funds from Operations (FFO) less
scheduled mortgage loan principal payments, leasing commissions paid and capital
expenditures.
"CGCL" means the California General Corporation Law.
"Change of Control Transaction" shall mean (A) any transaction or series of
transactions, in which all Limited Partners in the Operating Partnerships are
legally entitled to participate and pursuant to which L.P. Units representing
more than 50% of the total outstanding L.P. Units of the Operating Partnerships
are purchased by a person not controlled by, in control of or under common
control with the Company, any Affiliate of the Company or any Affiliate of a
Limited Partner, (B) the merger or consolidation of the Partnership with another
entity (other than a merger or consolidation in which the holders of L.P. Units
of the Partnership immediately before the merger or consolidation own
immediately after the merger or consolidation, voting securities of the
surviving or acquiring entity or a parent party of such surviving or acquiring
entity, possessing more than 50% of the voting power of the surviving or
acquiring entity or parent party) resulting in the exchange of the outstanding
L.P. Units of the Partnership for cash, securities or other property, or (C) any
merger, sale, lease, license, exchange or other disposition (whether in one
transaction or a series of related transactions) of more than 50% of the assets
of the Partnership.
"Charitable Beneficiary" means the beneficiary of the Trust.
"Charter" means the charter of Mission West-Maryland.
"Cisco Properties" means two buildings, one in San Jose and one in Santa Clara,
California, leased to Cisco Systems, Inc.
"Code" means the Internal Revenue Code of 1986, as amended and in effect from
time to time, as interpreted by the applicable regulations thereunder. Any
reference herein to a specific section or sections of the Code shall be deemed
to include a reference to any corresponding provision of future law.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means common stock, no par value per share, of the Company, and
also may refer to the New Common Stock issued by Mission West-Maryland pursuant
to the Reincorporation.
"Company" means Mission West Properties, a California corporation, and any
successor to such corporation.
"Compensation Committee" means the compensation committee of the board of
directors.
"Demand Note" means a 7.25% note issued by the Company to each of the Operating
Partnerships in exchange for the Company's 12.11% general partnership interest
in each of the Operating Partnerships in connection with the Partnership
Closing.
"DRULPA" means the Delaware Revised Uniform Limited Partnership Act.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"Excepted Holder" means any person exempted from the Ownership Limit by the
board of directors, in its sole discretion, as provided in the Charter.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
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<PAGE>
"Exchange Ratio" means the one-for-one basis for which shares of Common Stock
will be exchanged for shares of New Common Stock.
"Exchange Right" has the meaning set forth in the Exchange Rights Agreement.
"Exchange Rights Agreement" means the Exchange Rights Agreement among the
Company, the partnerships comprising the Operating Partnerships and each of the
limited partners therein, as provided in the Acquisition Agreement.
"Excluded Properties" means certain R&D Properties that are not managed by any
member of the Berg Group or are not material to the Company which are not being
contributed to the Operating Partnerships, including the Company's headquarters
located at 10050 Bandley Drive, Cupertino, California.
"FFO" means Funds from Operations defined in accordance with the resolution
adopted by the Board of Governors of NAREIT in its March 1995 White Paper, net
income (loss) computed in accordance with GAAP, excluding gains (or losses) from
debt restructuring and sales of property, plus real estate related depreciation
and amortization (excluding amortization of deferred financing costs), and after
adjustments for unconsolidated partnerships and joint ventures.
"Five-or-Fewer Test" means the test set out in the Code which requires that not
more than 50% in value of a REIT's outstanding stock may be owned, directly or
indirectly, by five or fewer individuals in order to qualify as a REIT.
"Foreign Stockholders" means foreign corporations, foreign partnerships and
other foreign stockholders of Mission West-Maryland.
"Fully-Diluted" means the fully diluted shares of voting stock of the Company
(including without limitation upon the exercise of all outstanding warrants,
options, convertible securities and other rights to acquire voting stock of the
Company, and all L.P. Units exchangeable or redeemable for Common Stock or other
voting stock of the Company (without regard to any Ownership Limit).
"GAAP" means United States generally accepted accounting principles, as in
effect from time to time.
"Immediate Family" means, with respect to any individual, such individual's
spouse, parents, parents-in-law, children, nephews, nieces, brothers, sisters,
brothers-in-law, sisters-in-law, stepchildren, sons-in-law and daughters-in-law
or any trust solely for the benefit of any of the foregoing family members whose
sole beneficiaries include the foregoing family members.
"Independent Director" means a director of the Company who is not an employee,
officer or affiliate of the Company or a subsidiary or division thereof, or a
relative of a principal executive officer, and who is not an individual member
of an organization acting as advisor, consultant or legal counsel, receiving
compensation on a continuing basis from the Company in addition to directors'
fees.
"Independent Directors Committee" means the committee of the Company's board of
directors comprised of the Independent Directors.
"Ingalls & Snyder" means Ingalls & Snyder, LLC, a registered broker-dealer.
"Interested Stockholder" means under the MGCL, any person who beneficially owns
ten percent 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 ten percent or more of the
voting power of the then-outstanding voting stock of the corporation.
"IRS" means the Internal Revenue Service.
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<PAGE>
"Kontrabecki" means John Kontrabecki, the general partner of the Kontrabecki
Partnerships.
"Kontrabecki Partnerships" means the three limited partnerships that own the
Kontrabecki Properties.
"Kontrabecki Properties" means the Acquired Properties to be contributed by
the Kontrabecki Partnerships.
"Limited Partner(s)" means the limited partners of the three limited
partnerships, Mission West Properties, L.P., MWP L.P. I and MWP L.P. II.
"L.P. Unit Majority" means the Limited Partners holding the right to vote, in
the aggregate, a majority of the total number of L.P. Units outstanding.
"L.P. Units" means a fractional, undivided share of the partnership interests
of all Limited Partners in the Partnership.
"Look-Through Rule" means the ERISA rule providing that in certain circumstances
where a Plan holds an interest in an entity, the assets of the entity are deemed
to be the Plan's assets.
"Market Price" means the closing price of a share of Common Stock (or other
equity security of the Company) on the AMEX or any other principal exchange on
which the Common Stock or other equity security is listed and traded.
"Maryland Bylaws" means the proposed bylaws of Mission West-Maryland to be
adopted by the stockholders pursuant to the Reincorporation Merger.
"MGCL" means the Maryland General Corporation Law.
"Merger Agreement" means the merger agreement between the Company and Mission
West-Maryland to effect the Reincorporation Merger.
"Mission West-Maryland" means the corporation formed under the laws of the State
of Maryland to facilitate the Reincorporation Merger.
"MWEAC" means Mission West Executive Aircraft Center, Inc., a wholly-owned
subsidiary of the Company which is inactive.
"MWP" means Mission West Properties, L.P., formerly known as Berg Properties,
L.P.
"MWP I" means Mission West Properties, L.P. I, formerly known as Berg & Berg
Developers, L.P.
"MWP II" means Mission West Properties, L.P. II, formerly known as Berg Family
Partners, L.P.
"Named Executives" means the Company's president and four other most highly
compensated executive officers whose annual salary is expected to exceed
$100,000.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"Net Absorption" means, with respect to a specified market area, the net
increase in occupied rentable space.
"New Common Stock" means the common stock, par value $0.001 per share, of
Mission West-Maryland.
"New Equity Financing Rights" has the meaning set forth in Section 8.8 of the
Operating Partnership Agreement.
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"Office Lease" means the lease from the Berg Group to the Operating Partnerships
relating to the Berg Group's headquarters located at 10050 Bandley Drive,
Cupertino, California.
"Operating Partnerships" means, collectively, Mission West Properties, L.P.,
Mission West Properties, L.P. I and Mission West Properties, L.P. II, and
Mission West Properties, L.P. III with offices at 10050 Bandley Drive,
Cupertino, CA 95014, through which all of the Company's interests in the
Properties will be held and real estate activities will be conducted.
"Operating Partnership Agreement" means the limited partnership agreement of
each of the limited partnerships comprising the Operating Partnerships, as
amended from time to time, which is identical in all material respects for each
limited partnership.
"Option" means the option that the Company has to purchase any building
developed by the Berg Group on the Berg Land Holdings for so long as the Berg
Group owns or has the right to acquire shares representing 65% of the Common
Stock on a Fully-Diluted basis.
"Option Agreement" means the agreement pursuant to which the Company and the
Operating Partnerships have an option to purchase the Berg Land Holdings, as
well as rights of first refusal and rights of first offer relating thereto.
"Option Plan" means the Company's 1997 Stock Option Plan approved by the
Company's shareholders at a special meeting held on November 10, 1997.
"Outstanding Shares" means only the total number of issued and outstanding
shares of capital stock of the Company and plus the total number of L.P. Units
of the Operating Partnerships outstanding from time to time.
"Ownership Limit" means the restriction contained in the Charter of Mission
West-Maryland providing that, subject to certain exceptions, no holder may own,
or be deemed to own by virtue of the constructive ownership provisions of the
Code, more than 9% of the outstanding shares of new Common Stock.
"PCX" means the Pacific Exchange, Inc.
"Pending Development Projects" means four Berg Group-owned R&D Property
development projects which the Operating Partnerships has agreed to acquire upon
their completion pursuant to the terms of the Acquisition Agreement and the
related Pending Projects Option Agreement.
"Pending Projects Acquisition Agreement" means an agreement pursuant to which
the Company and the Operating Partnerships have an option to purchase each of
the buildings in the Pending Development Projects once completed and fully
leased.
"Plan" means employee benefit plans and IRAs.
"Plan Asset Regulations" means regulations issued by the United States
Department of Labor defining "plan assets" and the related prohibited
transaction excise tax provisions of the code.
"Private Placement" means the offer and sale of 6,295,058 shares of Common Stock
to accredited investors to be approved by shareholders at the Special Meeting.
"Prohibited Owner" means a person, who by reason of a transfer of shares of
stock of the Company, will beneficially or constructively own shares of stock of
the Company in excess or in violation of the transfer and ownership restrictions
contained in Charter provisions of Mission West-Maryland.
"Properties" means the Berg Properties and the Acquired Properties,
collectively.
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"Protective Provisions Expiration Date" means the date on which the Berg Group
and their Affiliates own less than 15% of the shares of Common Stock on a
Fully-Diluted Basis.
"Prudential" means The Prudential Insurance Company of America.
"Prudential Secured Loan" means a $130 million mortgage loan obtained from The
Prudential Insurance Company of America by the Operating Partnerships after the
final closing of the Berg Group acquisition, which is secured by certain of the
Properties and used to refinance existing obligations.
"Proxy Statement/Prospectus" means this prospectus and proxy statement relating
to the approval by the shareholders of the Company of the Berg Acquisition, the
Private Placement, and the Reincorporation Merger.
"Put Rights" means the right of certain Limited Partners to cause the Operating
Partnerships to purchase a portion of a Limited Partner's L.P. Units at a
purchase price based on the market value of the Common Stock.
"R&D Property" or "R&D Properties" means property used primarily for office,
research and development, light manufacturing, and assembly.
"Reform Act" means the Private Securities Litigation Reform Act of 1995.
"Registration Statement" means the Form S-4 Registration Statement to be filed
with the Commission of which the Proxy Statement/Prospectus forms a part.
"Regulations" means the final, temporary or proposed Income Tax Regulations
promulgated under the Code, as such regulations may be amended from time to time
(including corresponding provisions of succeeding regulations).
"Reincorporation Merger" means the merger by the Company with and into Mission
West-Maryland to effectuate a change in the Company's state of incorporation.
"REIT" means a real estate investment trust as defined in Section 856 of the
Code which meets the requirements for qualification as a REIT described in
Sections 856 through 860 of the Code.
"REIT Provisions" means Sections 856 through 860 of the code and the applicable
Treasury Regulations.
"REIT Requirements" means all of the requirements imposed under the Code on any
entity seeking to qualify and remain qualified as a REIT.
"REIT taxable income" means taxable income of a REIT.
"Related Party Tenant" means a tenant of a REIT in which the REIT, or an owner
of 10% or more of the REIT, actually or constructively owns a 10% or greater
ownership interest.
"Rentable square feet" means a building's usable area plus common areas and
penetrations, expressed collectively in square feet which are allocated pro rata
to tenants.
"Required Directors" means a majority of the directors of the Company
including Carl E. Berg or a director designated by Mr. Berg to replace him as
a director.
"Reverse Split" means the 1-for-30 reverse split on the Common Stock effective
as of November 10, 1997.
"Rule 144" means Rule 144 promulgated under the Securities Act, and "Rule
145(d)" refers to certain resale restrictions applicable to affiliates under
Rule 145.
"San Francisco Bay Area" means nine counties, including Santa Clara, Alameda,
Contra Costa, Marin, Napa, San Francisco, San Mateo, Solano and Sonoma
Counties, covering approximately 7,200 square miles.
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"Securities Act" means the Securities Act of 1933, as amended.
"Silicon Valley" means the southern portion of the San Francisco Bay Area,
including portions of southeastern San Mateo County, southwestern Alameda County
and Santa Clara County.
"Silicon Valley R&D Properties" means R&D properties located in the Silicon
Valley.
"Special Meeting" means the Company's special meeting of shareholders to be held
December 28, 1998, at Cupertino, California, including any adjournments.
"Stock Option Plan" means the Company's 1997 Stock Option Plan and any other
plan adopted from time to time by the Company pursuant to which shares of Common
Stock are issued, or options to acquire shares of Common Stock are granted, to
consultant, employees or directors of the Company, the Operating Partnerships or
their respective Affiliates in consideration for services or future services.
"Subsidiary" means, with respect to any Person, any corporation, partnership or
other entity of which a majority of (i) the voting power of the Voting
Securities; or (ii) the outstanding equity interests, is owned, directly or
indirectly, by such Person.
"Tender Price" means the price per share of Common Stock at which L.P. Units
have been tendered by a Limited Partner upon the exercise of its Put Rights.
"Total Market Capitalization" means the market value of the outstanding Common
Stock determined as if all outstanding L.P. Units had been converted into Common
Stock, plus the market value of all other publicly traded securities of the
Company outstanding from time to time, plus the total debt of the Company and
the Operating Partnerships.
"Treasury Regulations" means regulations of the U.S. Department of Treasury
under the Code.
"Triple net basis lease" means a lease pursuant to which a tenant is responsible
for the base rent in addition to the costs and expenses in connection with and
related to property taxes, insurance and repairs and maintenance applicable to
the leased space.
"Trust" means a charitable trust which Mission West-Maryland may create to
obtain excess shares not transferable to the Prohibited Owner.
"Trustee" means the trustee of the Trust.
"United States Shareholder" means a holder of shares who is an individual who is
a citizen or resident of the United States; a corporation, partnership or other
entity created or organized in, or under the laws of, the United States or any
State; an estate the income of which from sources without the United States is
includable in gross income for United States federal income tax purposes; a
trust the primary supervision of which is exercisable by a court within the
United States and having one or more United States fiduciaries with authority to
control all substantial decisions of such trust; and any person whose income or
gain in respect of the stock is effectively connected with the conduct of a
United States trade or business.
"UPREIT Transactions" means the Berg Acquisition and the Reincorporation Merger.
"Voting Rights Agreements" means the agreements covering all shares of Common
Stock acquired in the September Private Placement and certain shares of Common
Stock acquired in the November Private Placement pursuant to which the holders
agreed to vote their shares of Common Stock as directed by Carl E. Berg on
behalf of BBE, on all matters submitted to a vote of the shareholders of the
Company for up to two years.
"Wells Fargo Line" means a line of credit provided to the Berg Group members by
Wells Fargo Bank N.A., which has been assumed by the Company and the Operating
Partnerships.
"Xilinx Sales" means sales of two R&D Properties by Berg & Berg to Xilinx
Corporation in 1995.
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MISSION WEST PROPERTIES
INDEX TO FINANCIAL STATEMENTS
----------
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
I. UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Pro Forma Balance Sheet as of September 30, 1998 FS-2
Pro Forma Statement of Operations for the nine months FS-3
ended September 30, 1998
Pro Forma Statement of Operations for the year ended FS-4
December 31, 1997
Notes and Management's Assumptions to Unaudited Pro Forma FS-5
Financial Statements
II. COMBINED FINANCIAL STATEMENTS FOR THE BERG PROPERTIES
Report of Independent Accountants FS-9
Combined Balance Sheets as of June 30, 1998 and 1997 and as of FS-10
December 31, 1997 and 1996
Combined Statements of Operations for the six month periods ended FS-11
June 30, 1998 and 1997 and for the years ended December
1996, and 1995
Combined Statements of Net Equity for the six month period ended FS-12
June 30, 1998 and for the years ended December 31, 1997,
1996 and 1995
Combined Statements of Cash Flows for the six month periods FS-13
ended June 30, 1998 and 1997 and for the years ended
December 31, 1997, 1996 and 1995
Notes to Combined Financial Statements FS-14
III. FREMONT PROPERTIES
Report of Independent Accountants FS-23
Combined Statement of Revenue and Certain Expenses for FS-24
the six month periods ended June 30, 1998 and 1997,
and for the year ended December 31, 1997
Notes to Combined Statement of Revenue and Certain Expenses FS-25
IV. KONTRABECKI PROPERTIES
Report of Independent Accountants FS-26
Combined Statements of Revenue and Certain Expenses for FS-27
the six month periods ended June 30, 1998 and 1997, and
for the years ended December 31, 1997, 1996 and 1995
Notes to Combined Statement of Revenue and Certain Expenses FS-28
</TABLE>
FS-1
<PAGE>
<TABLE>
<CAPTION>
MISSION WEST PROPERTIES
PRO FORMA BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
----------
Mission Pro Forma Pro Forma
West Adjustments September
Properties (Note 4) 30, 1998
September
30, 1998
------------ ---------- ----------
<S> <C> <C> <C>
ASSETS:
Real Estate:
Land $86,715 - $86,715
Building and improvements 422,043 - 422,043
------------ ---------- ----------
508,758 - 508,758
Less, accumulated depreciation (2,638) - (2,638)
------------ ---------- ----------
506,120 - 506,120
Cash and cash equivalents 2,777 $31,269 34,046
Deferred rent receivable 752 - 752
Other assets, net 2,559 - 2,559
============ ========== ==========
TOTAL ASSETS 512,208 31,269 543,477
============ ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Lines of credit 39,044 35,894 74,938
Mortgage notes payable 162,222 (4,625) 157,597
Mortgage notes payable (related
parties) 18,780 - 18,780
Interest payable (related
parties) 3,183 - 3,183
Security deposits 1,793 - 1,793
Prepaid rental income 3,127 - 3,127
Accounts payable and accrued
expenses 3,375 - 3,375
------------ ---------- ----------
TOTAL LIABILITIES 231,524 31,269 262,793
------------ ---------- ----------
MINORITY INTEREST 273,740 - 273,740
SHAREHOLDERS' EQUITY:
Preferred Stock, $0.001 par
value, 20,000,000 authorized,
none issued and outstanding
on a pro forma basis - - -
Common Stock, $0.001 par value,
200,000,000 authorized,
1,698,534 issued and
outstanding on a pro
forma basis - 2 2
Receivable from issuance of (941) - (941)
Common Stock
Additional paid in capital 27,596 (2) 27,594
Accumulated deficit in excess of
dividends paid (19,711) - (19,711)
------------ ---------- ----------
TOTAL SHAREHOLDERS' EQUITY 6,944 - 6,944
------------ ---------- ----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $512,208 $31,269 $543,477
============ ========== ==========
</TABLE>
The accompanying notes and management's assumptions
are an integral part of this statement.
FS-2
<PAGE>
<TABLE>
MISSION WEST PROPERTIES
PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
----------
<CAPTION>
Mission West The Berg The Acquired
Properties Properties Properties Pro Forma Pro Forma
September 30, June 30, 1998 June 30,1998 Adjustments September 30,
1998 (Note 3B) (Note 3A) (Note 4) 1998
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
REVENUE:
Rent $13,317 $21,962 $3,301 $978 $39,558
Tenant reimbursements 2,101 4,038 218 - 6,357
Other 178 - - - 178
--------------- --------------- --------------- --------------- ---------------
TOTAL REVENUE 15,596 26,000 3,519 978 46,093
--------------- --------------- --------------- --------------- ---------------
EXPENSES:
Operating expenses 1,296 2,088 19 - 3,403
Real estate taxes 1,373 2,126 197 - 3,696
General and administrative 846 - - $1,254 2,100
Management fees (related parties) - 645 - (645) -
Interest (related parties) 3,183 61 - (2,222) 1,022
Interest 1,167 3,044 - 7,990 12,201
Depreciation and amortization 2,638 3,862 - 1,436 7,936
--------------- --------------- --------------- --------------- ---------------
TOTAL EXPENSES 10,503 11,826 216 7,813 30,358
--------------- --------------- --------------- --------------- ---------------
Income before minority interest 5,093 14,174 3,303 (6,835) 15,735
interest
Minority interest 5,389 - - 9,936 15,325
--------------- --------------- --------------- --------------- ---------------
Net (loss) income $(296) $14,174 $3,303 $(16,771) $410
=============== =============== =============== =============== ===============
Basic and diluted earnings
(loss) per share $(0.18) $0.24
=============== ===============
Weighted average number of
common shares outstanding 1,634,220 1,698,536
=============== ===============
</TABLE>
The accompanying notes and management's assumptions
are an integral part of this statement.
FS-3
<PAGE>
<TABLE>
MISSION WEST PROPERTIES
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
----------
<CAPTION>
Mission West The Berg The Acquired
Properties Properties Properties Pro Forma Pro Forma
November 30, December 31, December 31, 1997 Adjustments December 31,
1998 1997 (Note 3A) (Note 4) 1997
--------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
REVENUE:
Rent $1,376 $40,163 $5,409 $2,044 $48,992
Tenant reimbursements - 6,519 250 - 6,769
Other 359 - - - 359
--------------- --------------- --------------- --------------- ---------------
TOTAL REVENUE 1,735 46,682 5,659 2,044 56,120
--------------- --------------- --------------- --------------- ---------------
EXPENSES:
Operating expenses 246 3,741 49 - 4,036
Real estate taxes - 4,229 246 - 4,475
General and administrative 1,467 - - 1,283 2,750
Management fees (related - 1,050 - (1,050) -
parties)
Interest (related parties) - 248 - 1,114 1,362
Interest 425 5,919 - 10,349 16,693
Depreciation and amortization 246 7,717 - 2,879 10,842
--------------- --------------- --------------- --------------- ---------------
TOTAL EXPENSES 2,384 22,904 295 14,575 40,158
--------------- --------------- --------------- --------------- ---------------
Income (loss) before minority
interest, gain on sale of real
estate, income taxes (649) 23,778 5,364 (12,531) 15,962
Minority interest - - - 16,021 16,021
--------------- --------------- --------------- --------------- ---------------
Income before gain on sale of
real estate and income taxes (649) 23,778 5,364 (28,552) (59)
Gain on sale for real estate 4,736 - - - 4,736
(Provision) for income taxes (1,043) - - 1,043 -
=============== =============== =============== =============== ===============
Net income $3,044 $23,778 $5,364 $(27,509) $4,677
=============== =============== =============== =============== ===============
Basic and diluted earnings per share $18.48 $2.75
=============== ===============
Weighted average number of
common shares outstanding 164,692 1,698,536
=============== ===============
</TABLE>
The accompanying notes and management's assumptions
are an integral part of this statement.
FS-4
<PAGE>
MISSION WEST PROPERTIES
Notes and Management's Assumptions to the Pro Forma Financial Statements for the
nine months ended September 30, 1998 and for the year ended December 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION:
The pro forma consolidated financial statements of Mission West Properties
(the "Company") have been prepared based on the historical financial
statements of the Company, the Berg Properties and the Acquired Properties
considering the effects of the Berg Acquisition and Reincorporation Merger.
The Company and all parties to the Acquisition Agreement agreed to
consummate the Berg Acquisition wherein the Company acquired the general
partner interests in the Operating Partnerships, effective for financial
and income tax accounting and reporting purposes as of July 1, 1998.
Accordingly, the historical consolidated balance sheet of the Company at
September 30, 1998 reflects the consummation of the Berg Acquisition. The
pro forma balance sheet of the Company at September 30, 1998 has been
prepared as if the Reincorporation Merger had been consummated at September
30, 1998. The pro forma statements of operations for the nine months ended
September 30, 1998 and for the year ended December 31, 1997 have been
prepared as if the Berg Acquisition and Reincorporation Merger had been
consummated on January 1, 1997. In management's opinion, all adjustments
necessary to reflect the effects of the Berg Acquisition and
Reincorporation Merger have been made. The pro forma financial statements
should be read in conjunction with the historical financial statements.
The unaudited pro forma financial statements are not necessarily indicative
of what the actual financial position would have been at September 30, 1998
had the Reincorporation Merger occurred on September 30, 1998, nor the
actual results of operations for the nine months ended September 30, 1998
or for the year ended December 31, 1997 had the Berg Acquisition and
Reincorporation Merger occurred on January 1, 1997, nor do they purport to
present the future financial position of the Company.
The Company has entered into agreements with certain accredited investors
to sell 6,295,058 shares of common stock at $4.50 per share for net
proceeds of $28,328. In connection with this sale of common stock, a fee
will be paid to an individual in the form of 200,000 shares of the
Company's common stock. The pro forma financial statements do not give
effect to the receipt and application of any part of the proceeds from the
sale of such shares as this sale is occurring through a private placement
rather than through an offering by underwriters.
The Company has received a letter from a purchaser of 1,000,000 of the
6,295,058 shares stating that such purchaser has withdrawn its offer to
purchase the shares. The Company does not consider that to be a legally
effective withdrawal. Assuming the sale of 5,295,058 shares of common
stock, however, the Company will use the proceeds to pay down amounts
outstanding under its lines of credit resulting in total debt outstanding
of $227,487. Assuming such application of these proceeds, pro forma
interest expense for the nine months ended September 30, 1998 and the year
ended December 31, 1997 will be reduced by $1,296 and $1,727, respectively,
resulting in net income of $1,706 and $6,404 for those same periods,
respectively. Basic and diluted earnings per share would be $0.24 and $0.89
for the nine months ended September 30, 1998 and the year ended December
31, 1997, respectively.
In November 1997, the Board of Directors approved a change in the Company's
fiscal year end from November 30 to December 31, effective with the
calendar year beginning January 1, 1998.
All share and per share amounts have been adjusted to reflect the 1 for 30
reverse stock split.
2. ASSUMPTIONS:
Certain assumptions regarding the operations of the Company have been made
in connection with the preparation of the pro forma financial statements.
Those assumptions are as follows:
a. The pro forma financial statements assume that the Company has elected
to be and qualified as a real estate investment trust ("REIT") for
income tax reporting purposes and has distributed sufficient taxable
income to meet the requirements of the Internal Revenue Code and,
therefore, incurred no income tax liabilities.
b. Rent has been recognized on a straight-line method of accounting in
accordance with generally accepted accounting principles.
c. General and administrative expenses historically incurred by the
properties and the predecessor entities have been reclassifed to
reflect the self-administered structure of the Company and the
additional expenses of being a public company.
FS-5
<PAGE>
MISSION WEST PROPERTIES
Notes and Management's Assumptions to the Pro Forma Financial Statements for the
nine months ended September 30, 1998 and for the year ended December 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
d. Pro forma net income per share information is calculated using
1,698,536 shares as the average number of shares outstanding during
the pro forma periods. For the pro forma periods, no other securities
which, if converted or exercised, would have a dilutive effect on
earnings per share calculations.
3. THE ACQUIRED AND BERG PROPERTIES:
The Berg Acquisition was accounted for as a purchase with the results of
operations of the Operating Partnerships included from July 1, 1998.
Accordingly, the historical consolidated statement of operations of the
Company includes the results of operations for the Berg Properties and
Acquired Properties for the three months ended September 30, 1998. In order
to reflect the consummation of the Berg Acquisition as of January 1, 1997
for pro forma financial statement purposes, the results of operations of
the Berg Properties and the Acquired Properties for the six months ended
June 30, 1998 have been included.
Straight-lined rents and depreciation and amortization have been adjusted
to reflect the purchases as of the beginning of the period.
A. The Acquired Properties include approximately 144,000 rentable square
feet previously owned by a third party (the "Fremont Properties"), as
well as approximately 416,000 rentable square feet consisting of
properties held by limited partnerships previously controlled by John
Kontrabecki as general partner (the "Kontrabecki Properties"). Certain
entities related to the Berg Group owned non-controlling interests in
the Kontrabecki Properties. Operating Partnership units aggregating
6,694,027 have been exchanged in connection with these acquisitions
and $39,138 of debt collateralized by the underlying properties was
assumed. Subsequent to the closing of the $130,000 Prudential Secured
Loan, $36,152 of such assumed debt has been repaid.
B. The acquired Berg Properties include approximately 3,780,000 rentable
square feet currently owned by entities previously controlled by the
Berg Group. Operating Partnership units aggregating 52,785,606 have
been exchanged in connection with these acquisitions and $194,500 of
debt collateralized by the underlying properties was assumed.
Subsequent to the closing of the $130,000 Prudential Secured Loan,
$107,440 of such assumed debt has been repaid.
4. PRO FORMA ADJUSTMENTS:
(1) As a result of the Reincorporation Merger, the Company's common stock
will have a par value of $0.001 per share for a total of $2 (1,698,536
shares at $0.001 per share).
(2) Upon the closing of the new Private Placement, the Company will
utilize those proceeds along with available cash and a draw of $31,269
on the lines of credit to repay the Demand Notes issued in connection
with the closing of the Company's acquisition of the sole general
partnership interests in the Operating Partnerships.
The portion of the outstanding balance on the lines of credit in the
amount of $31,269 and any interest accrued thereon, will effect the
calculation of minority interest. On a pro forma basis, interest
expense on this amount is $1,701 and $2,267 for the nine months ended
September 30, 1998, and the twelve months ended December 31, 1997,
respectively.
FS-6
<PAGE>
MISSION WEST PROPERTIES
Notes and Management's Assumptions to the Pro Forma Financial Statements for the
nine months ended September 30, 1998 and for the year ended December 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Cash received by the Operating Partnerships from the Company will be
maintained in order to pay future distributions.
(3) In October 1998, the Company utilized funds of $4,625 drawn on the
lines of credit to repay debt previously collateralized by one of the
properties owned by the Operating Partnerships. Such debt was included
in Mortgage Notes Payable as of September 30, 1998.
(4) Adjustments have been made to the pro forma statements of operations
for the nine months ended September 30, 1998 and the year ended
December 31, 1997 in order to reflect the new capital structure of the
Company. A reconciliation of interest expense on a pro forma basis for
the nine months ended September 30, 1998 and the year ended December
31, 1997 is as follows:
<TABLE>
<CAPTION>
Pro Forma Pro Forma Interest Pro Forma Interest
Balance at Expense for the Nine Expense for the
September Interest Months Ended Year Ended
30, 1998 Rate September 30, 1998 December 31, 1997
--------------- --------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Interest expense (related parties)
Mortgage notes payable (related party) $18,780 7.25% $1,022 $1,362
Historical expense (related party)
prior to pro forma adjustment 3,244 248
-------------------- --------------------
Pro forma adjustment to interest
expense (related party) $(2,222) $1,114
==================== ====================
Interest expense
Wells Fargo line of credit $74,938 7.25% $4,075 $5,433
Great West Life and Annuity Company 7,769 7.00% 408 544
Great West Life and Annuity Company 3,707 7.00% 195 259
Prudential Capital Group 2,065 8.75% 136 181
New York Life Insurance Company 436 9.625% 31 42
Home Savings and Loan Association 536 9.50% 38 51
Amdahl Corporation 6,993 9.50% 498 664
Citicorp U.S.A. Inc. 3,105 7.5% 175 233
Mellon Mortgage Company 2,986 8.125% 182 243
Prudential Insurance Company of America 130,000 6.56% 6,396 8,528
-------------------- --------------------
12,134 16,178
Amortization of loan fees 67 90
-------------------- --------------------
12,201 16,268
Historical interest expense prior
to pro forma adjustment 4,211 6,344
-------------------- --------------------
Gross pro forma adjustment to interest expense 7,990 9,924
Add back historical interest expense related to
historical debt on previously held real estate - 425
Less amounts reflected in pro forma adjustment (2) above (1,701) (2,267)
==================== ====================
Net pro forma adjustment to interest expense $6,289 $8,082
==================== ====================
</TABLE>
(5) Pro forma adjustments have been made in order to reflect
straight-lined rents as if the Company acquired the Berg Properties
and Acquired Properties on January 1, 1997 for the nine months ended
September 30, 1998 and the year ended December 31, 1997.
(6) Upon the effective date of the Company's acquisition of the general
partnership interests in the Operating Partnerships, real estate
assets were recorded at their estimated fair values. Adjustments have
been made to historical depreciation expense in order to reflect the
higher cost basis to the Company. Depreciation is computed using the
straight-line method over estimated useful lives of 40 years for
buildings and improvements.
(7) In connection with the UPREIT Transactions, the Company will own an
approximate 12.11% interest in the Operating Partnerships and become
their sole general partner. Minority interest, on a pro forma basis,
is reconciled as follows:
FS-7
<PAGE>
MISSION WEST PROPERTIES
Notes and Management's Assumptions to the Pro Forma Financial Statements for the
nine months ended September 30, 1998 and for the year ended December 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine Months
Ended Year
September Ended
30, 1998 December
31, 1997
------------- -------------
<S> <C> <C>
Pro forma
Income before minority
interest $15,735 $15,962
Add back interest on lines
of credit absorbed 100%
by the Company (refer
to footnote 4(2)) 1,701 2,267
------------- -------------
17,436 18,229
Operating Partnerships
minority interest
percentage 87.89% 87.89%
------------- -------------
$15,325 $16,021
============= =============
</TABLE>
(8) The Company will be self-managed and will no longer pay management
fees. Therefore, the costs of managing the operations of the Company
have been included in the pro forma statement of operations and
historical management fees have been reclassified to reflect the
Company as a self managed REIT. The Company expects to incur
additional costs in excess of historical general and administrative
expenses for such items as shareholder relations, director fees and
other such costs of operating as an active public company.
(9) The Company intends to qualify and elect to be taxed as a real estate
investment trust under the Internal Revenue Code of 1986, as amended,
commencing with the taxable year ending December 31, 1998. Therefore,
the provision for income tax expense has been eliminated in the pro
forma statement of operations.
4. PRO FORMA ADJUSTMENTS (continued):
PRO FORMA ADJUSTMENT SUMMARY:
Balance Sheet - September 30, 1998:
<TABLE>
<CAPTION>
Pro Cash Mortgage Common
Forma and Lines of Notes Stock Additional
Adjustment Cash Credit Payable Paid In
Equivalents Captial
- ----------- ----------- --------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
1 $(2) $2
2 $31,269 $(31,269)
3 (4,625) $4,625
----------- --------- ----------- ---------- ---------------
$31,269 $(35,894) $4,625 $(2) $2
=========== ========= =========== ========== ===============
</TABLE>
Statement of Operations - for the nine months ended September 30, 1998:
<TABLE>
<CAPTION>
Pro General Management Fee Interest Depreciation Minority
Forma Rent and (Related Parties) (Related Interest and Interest
Adjustment Administrative Party) Amortization
- ------------ -------- ---------------- ----------------- ----------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
2 $(1,701)
4 $2,222 (6,289)
5 $978
6 $(1,436)
7 $(9,936)
8 $(1,254) $645
-------- ---------------- ----------------- ----------- ---------- -------------- ----------
$978 $(1,254) $645 $2,222 $(7,990) $(1,436) $(9,936)
======== ================ ================= =========== ========== ============== ==========
</TABLE>
Statement of Operations - for the year ended December 31, 1997:
<TABLE>
<CAPTION>
Pro General Management Fee Interest Depreciation Minority Provision
Forma Rent and (Related Parties) (Related Interest and Interest For
Adjustment Administrative Party) Amortization Income Taxes
- ------------ -------- ---------------- ----------------- ----------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2 $(2,267)
4 $(1,114) (8,082)
5 $2,044
6 $(2,879)
7 $(16,021)
8 $(1,283) $1,050
9 $1,043
-------- ---------------- ----------------- ----------- ---------- -------------- ---------- --------------
$2,044 $(1,283) $1,050 $(1,114) $(10,349) $(2,879) $(16,021) $1,043
======== ================ ================= =========== ========== ============== ========== ==============
</TABLE>
FS-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Berg Group:
We have audited the combined balance sheets and the financial statement schedule
of the Berg Properties as described in Note 1 as of December 31, 1997 and 1996,
and the related combined statements of operations, net equity and cash flows for
each of the three years in the period ended December 31, 1997. These financial
statements and the financial statement schedule are the responsibility of the
management of the Berg Properties. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Berg
Properties as of December 31, 1997 and 1996, and the combined results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule referred to above,
when considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
San Francisco, California
April 17, 1998 Coopers & Lybrand L.L.P.
FS-9
<PAGE>
THE BERG PROPERTIES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
-------
<TABLE>
<CAPTION>
June 30, December 31,
--------------------------------------- ----------------------------------
1998 1997 1997 1996
------------------- ---------------- --------------- ---------------
ASSETS (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Real Estate, at cost:
Land $ 30,426 $ 30,426 $ 30,426 $ 30,426
Buildings and improvements 61,323 57,691 61,262 51,410
Tenant improvements 85,790 79,763 86,541 73,163
------------------- ---------------- --------------- ---------------
177,539 167,880 178,229 154,999
Less, accumulated depreciation (81,939) (74,415) (78,077) (71,064)
------------------- ---------------- --------------- ---------------
95,600 93,465 100,152 83,935
Construction-in-progress - 3,725 - 6,775
------------------- ---------------- --------------- ---------------
95,600 97,190 100,152 90,710
------------------- ---------------- --------------- ---------------
Cash and cash equivalents - 5,376 5,719 1,493
Deferred rent receivable 4,586 3,496 4,144 2,843
Other assets, net 4,094 3,463 3,935 2,605
------------------- ---------------- --------------- ---------------
$104,280 $109,525 $113,950 $ 97,651
------------------- ---------------- --------------- ---------------
------------------- ---------------- --------------- ---------------
LIABILITIES AND NET EQUITY
Lines of credit - $ 37,672 $ 37,953 $ 35,538
Notes payable (related parties) $156,632 2,252 1,975 2,546
Mortgage notes payable 37,868 40,681 38,554 37,878
Accounts payable and accrued expenses 1,691 2,900 2,102 2,262
Other liabilities 4,047 3,369 3,715 2,602
------------------- ---------------- --------------- ---------------
200,238 86,874 84,299 80,826
Net (deficit) equity (95,958) 22,651 29,651 16,825
------------------- ---------------- --------------- ---------------
$104,280 $109,525 $113,950 $ 97,651
------------------- ---------------- --------------- ---------------
------------------- ---------------- --------------- ---------------
</TABLE>
The accompanying notes are an integral part of these
financial statements.
FS-10
<PAGE>
THE BERG PROPERTIES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
----------
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
------------------------------ -------------------------------------------------
1998 1997 1997 1996 1995
-------------- ------------- -------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Rent $21,962 $18,848 $40,163 $28,934 $23,064
Tenant reimbursements 4,038 3,094 6,519 3,902 4,193
-------------- ------------- -------------- ------------- -------------
Total revenue 26,000 21,942 46,682 32,836 27,257
-------------- ------------- -------------- ------------- -------------
Expenses:
Operating expenses 2,088 2,150 3,741 1,906 2,032
Real estate taxes 2,126 2,006 4,229 3,750 3,595
Management fee (related parties) 645 498 1,050 827 654
Interest (related parties) 61 135 248 293 357
Interest 3,044 3,338 5,919 6,090 6,190
Depreciation and amortization 3,862 3,351 7,717 6,739 6,323
-------------- ------------- -------------- ------------- -------------
11,826 11,478 22,904 19,605 19,151
-------------- ------------- -------------- ------------- -------------
Income before gain on
sale of real estate
and extraordinary item 14,174 10,464 23,778 13,231 8,106
Gain on sale - - - - 20,779
-------------- ------------- -------------- ------------- -------------
Income before extraordinary item 14,174 10,464 23,778 13,231 28,885
Extraordinary item - - - 610 3,206
-------------- ------------- -------------- ------------- -------------
Net income $14,174 $10,464 $23,778 $13,841 $32,091
-------------- ------------- -------------- ------------- -------------
-------------- ------------- -------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these
financial statements.
FS-11
<PAGE>
THE BERG PROPERTIES
COMBINED STATEMENTS OF NET EQUITY
(IN THOUSANDS)
----------
<TABLE>
<S> <C>
Balance (deficit), January 1, 1995 $(23,763)
Contributions 2,953
Distributions (13,750)
Net income 32,091
-------------
Balance (deficit), December 31, 1995 $ (2,469)
Contributions 12,299
Distributions (6,846)
Net income 13,841
-------------
Balance, December 31, 1996 $ 16,825
Contributions 755
Distributions (11,707)
Net income 23,778
-------------
Balance, December 31, 1997 29,651
Distributions (139,783)
Net income 14,174
-------------
Balance, June 30, 1998 (unaudited) $(95,958)
-------------
-------------
</TABLE>
The accompanying notes are an integral part of these
financial statements.
FS-12
<PAGE>
THE BERG PROPERTIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
--------------
<TABLE>
<CAPTION>
Six Months Ended June 30, Year Ended December 31,
---------------------------- ------------------------------------
1998 1997 1997 1996 1995
----------- ----------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income 14,174 10,464 $ 23,778 $ 13,841 $ 32,091
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation and amortization 3,862 3,351 7,717 6,739 6,323
Loan fee amortization 6 18 12 10 10
Gain on sale of property - - - - (20,779)
Extraordinary gain on extinguishment of debt - - - (610) (3,206)
Changes in assets and liabilities:
Deferred rent receivable (442) (653) (1,330) (586) (77)
Other assets (165) (876) (1,221) (406) 354
Accrued expenses (411) 638 (160) 353 1,841
Other liabilities 332 767 1,113 907 (165)
----------- ----------- -------- -------- --------
Net cash provided by operating activities 17,356 13,709 29,909 20,248 16,392
----------- ----------- -------- -------- --------
Investing activities:
Purchase and improvements to real estate (132) (9,831) (17,251) (29,275) (35,910)
Proceeds from sale of property - - - - 29,557
Tenant reimbursements for improvements 822 - - - -
----------- ----------- -------- -------- --------
Net cash (used in) investing activities 690 (9,831) (17,251) (29,275) (6,353)
----------- ----------- -------- -------- --------
Financing activities:
Borrowings on lines of credit (1,277) 2,134 3,750 6,999 1,034
Repayments on lines of credit 119,956 - (1,335) (952) (5,978)
Borrowings on notes payable (related parties) - - - - 637
Repayments on notes payable (related parties) (1,975) (294) (571) (504) (474)
Borrowings on mortgage notes payable - 3,105 3,105 - -
Repayments on mortgage notes payable (686) (302) (2,429) (1,563) (1,210)
Capital contributions - 355 755 12,299 2,953
Capital distributions (139,783) (4,993) (11,707) (6,846) (6,975)
----------- ----------- -------- -------- --------
Net cash (used in) provided by financing
activities (23,765) 5 (8,432) 9,433 (10,013)
----------- ----------- -------- -------- --------
Increase in cash and cash equivalents (5,719) 3,883 4,226 406 26
Cash and cash equivalents at the beginning of
the period 5,719 1,493 1,493 1,087 1,061
----------- ----------- -------- -------- --------
Cash and cash equivalents at the end of the
period - $ 5,376 $ 5,719 $ 1,493 $ 1,087
----------- ----------- -------- -------- --------
----------- ----------- -------- -------- --------
Noncash investing and financing activities:
Noncash transfers of construction-in-progress - $ 3,050 $ 6,775 $ 75 -
----------- ----------- -------- -------- --------
----------- ----------- -------- -------- --------
Noncash property distribution - - - - $ 6,775
----------- ----------- -------- -------- --------
----------- ----------- -------- -------- --------
Supplemental information:
Cash paid for interest, net of amounts
capitalized $ 3,044 $ 3,132 $ 6,272 $ 6,278 $ 6,243
----------- ----------- -------- -------- --------
----------- ----------- -------- -------- --------
Assumption of line of credit by Berg $36,676 - - - -
----------- ----------- -------- -------- --------
----------- ----------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-13
<PAGE>
THE BERG PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
--------------
1. ORGANIZATION AND BUSINESS:
ORGANIZATION:
The Berg Properties do not constitute a legal entity, but rather are a
combination of various research and development properties held by
entities controlled by the Carl E. Berg, Clyde J. Berg, members of
their immediate families and certain entities which they control
(collective, the "Berg Group", as defined). The Berg Group has
historically been engaged in developing, owning, operating and selling
income-producing real estate primarily in the region surrounding San
Jose, California. In addition to its real estate operations, the
controlled Berg Group has been involved with other business pursuits
including technology venture capital funding, strategic investment and
business development. The accompanying financial statements reflect
only the assets, liabilities and results of operations of Berg
Properties, which will be controlled by the Company following the
consummation of the UPREIT Transactions.
BUSINESS:
On September 2, 1997, the Berg Group purchased 6,000,000 (200,000
giving effect to a 1 for 30 reverse stock split in November 1997)
newly issued shares of common stock of Mission West Properties (the
"Company"), an American Stock Exchange listed real estate company that
completed the sale of all of its real estate holdings earlier in 1997
(the "Initial Investment"). Upon consummation of the Initial
Investment, the Berg Group beneficially owned 79.6% of the voting
securities of the Company. Subsequent to the Initial Investment a
series of transactions were approved by the Company's shareholders
that included a 1 for 30 reverse stock split, a private placement of
1,250,000 shares of the Company's common stock at $4.50 per share and
the adoption of the Company's stock option plan, and a change in the
Company's year end from November 30 to December 31. The Company also
hired a new management team and issued options under the stock plan to
key employees for the purchase of 755,000 shares at $4.50 per share.
In March 1997, one officer exercised an option to 200,000 shares of
common stock at $4.50 per pursuant to a restricted stock purchase
agreement.
Pursuant to the UPREIT Transactions (as defined in the Registration
Statement on Form S-4), the Berg Group will transfer its development
and property management business to an operating partnership of which
the Company will be the sole general partner and own a percentage of
the operating partnership, will purchase approximately $69,300 of
income producing real estate, certain outstanding indebtedness of the
Berg Properties will be repaid, a third-party investment approximating
$28,300 (net of offering costs) will be received by the Company, and
the Company will elect to be taxed as a real estate investment trust
for its fiscal year-end beginning January 1, 1998. Therefore,
effective with the transactions related to the UPREIT Transactions,
the management of the historic Berg Properties and the acquisition
properties will be performed by the Company and its consolidated
operating partnership, and the Company will operate under a new
capital structure.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES:
PRINCIPLES OF COMBINATION:
The financial statements have been presented on a combined basis, at
historical cost, because the Berg Properties has been under the common
control of the Berg Group. All significant intergroup transactions and
balances have been eliminated in combination.
INTERIM UNAUDITED FINANCIAL INFORMATION:
The accompanying interim unaudited financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance
with generally accepted accounting
(Continued)
FS-14
<PAGE>
THE BERG PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
--------------
principles may have been condensed or omitted pursuant to such rules
and regulations, although management believes that the disclosures are
adequate to make the information presented not misleading. In the
opinion of management, all adjustments and eliminations, consisting
only of normal, recurring adjustments, necessary to present fairly the
financial position of the Berg Properties as of June 30, 1998 and
1997, and the results of their operations and cash flows for the three
months ended June 30, 1998 and 1997, have been included. The results
of operations for such interim periods are not necessarily indicative
of the results of the full year.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that may affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimates.
REVENUE RECOGNITION:
Rental income is recognized on a straight-line method of accounting
under which contractual rent payment increases are recognized evenly
over the lease term. Certain lease agreements contain terms which
provide for additional rents based on reimbursement of certain costs.
These additional rents are reflected on the accrual basis.
PROPERTY:
Property and equipment is stated at the lower of cost or fair value.
Cost includes expenditures for improvements or replacements and the
net amount of interest cost associated with capital additions.
Capitalized interest was $257 in 1997 and $459 in 1996. Maintenance
and repairs are charged to expense as incurred. Gains and losses from
sales are included in income in accordance with Financial Accounting
Standards No. 66, ACCOUNTING FOR SALES OF REAL ESTATE.
Losses in carrying values of investment assets are provided by
management when the losses become apparent and the investment asset is
considered impaired. Management evaluates is investment assets on a
periodic basis, to assess whether any impairment indications are
present. If an investment asset is considered to be impaired, a loss
is provided to reduce the carrying value of the investment asset to
its estimated fair value. No such losses have been required or
provided in the accompanying financial statements.
DEPRECIATION:
Depreciation is computed using the straight-line method over estimated
useful lives of 40 years for buildings, over the life of lease terms
which average 10 years for tenant improvements, and 10 years for
furniture and equipment.
STATEMENTS OF CASH FLOWS:
Cash and cash equivalents include all cash and liquid investments with
an original maturity date from date of purchase of three months or
less.
EXTERNAL LEASE ACQUISITION COSTS:
External lease acquisition costs are capitalized and amortized over
the lives of the related leases.
LOAN FEES:
Loan fees are stated at cost and are being amortized under a method of
accounting which approximates the effective interest method over the
terms of the related notes. Upon refinancing, property disposition or
loan termination, such fees are directly written-off.
(Continued)
FS-15
<PAGE>
THE BERG PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
--------------
INCOME TAXES:
No federal or state income taxes are payable by the entities which own
the Berg Properties and none have been provided for in the
accompanying financial statements, as such properties are owned by
partnerships whose partners are required to include their respective
share of profits and losses in their individual tax returns.
CONCENTRATION OF CREDIT RISK:
Management of the Berg Properties performs ongoing credit evaluations
of their tenants. The Berg Properties are not geographically diverse,
and their tenants operate primarily in the technology industry.
Additionally, because the Berg Properties are leased to 71 tenants,
default by any major tenant could significantly impact the results of
the combined total. The largest of such tenants, calculated as a
percentage of aggregate base rent, are Apple Computers, Inc., 16.3%;
Amdahl Corporation, 8.7%; Cisco Systems, Inc., 7.2%; and nine other
tenants, approximating 24.6%. However, management believes the risk of
such a default is reduced because of the critical nature of these
properties for ongoing tenant operations.
COMMITMENTS AND CONTINGENCIES:
Members of the Berg Group and the entities which hold the Berg
Properties are party to litigation arising out of the normal course of
business. While the ultimate results of any such lawsuits or other
proceedings cannot be predicted with certainty, management does not
expect that these matters will have a material adverse effect on the
combined financial position or results of operations of the Berg
Properties.
Insurance policies currently maintained by the Berg Properties do not
cover damage caused by seismic activity, although they do cover losses
from fires after an earthquake.
3. EXTERNAL LEASE ACQUISITION COSTS:
Included in other assets are external lease acquisition costs.
Accumulated amortization related to these costs aggregated $1,353 and
$661 as of December 31, 1997 and 1996, respectively.
4. LOAN FEES:
Included in other assets are loan fees. Accumulated amortization
related to these fees aggregated $198 and $186 as of December 31, 1997
and 1996, respectively.
5. NOTES PAYABLE:
Historically, the Berg Properties have had access to credit facilities
entered into by members of the Berg Group. Balances under such
facilities have been allocated to entities within the Berg Group
generally based on approximate use of the credit facilities.
Borrowings under these credit facilities have been used to finance
various ventures including commercial real estate development and
acquisition, including assets that are included in the Berg
Properties, technology venture capital investments and other assets
unrelated to real estate not included in these financial statements.
Included in the accompanying financial statements is an allocation of
certain lines of credit with an aggregate borrowing limit of $130,000.
These lines of credit facilities are collateralized by certain Berg
Properties and other assets of the Berg Group. Among other
requirements, the credit facilities have covenants requiring the
owners to maintain certain levels of personal net worth and carry
interest rates based on the prime rate in effect on the first day of
each calendar month, less the Purchased Funds Rate quoted on the first
day of each calendar month less 1.65%, which was 7.24% at December 31,
1997. Aggregate borrowings outstanding under the lines of credit
facilities at December 31, 1997 totaled $99,192 with $37,953 allocated
to the Berg
(Continued)
FS-16
<PAGE>
THE BERG PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
--------------
Properties and included in these financial statements. Included in the
aggregate borrowing under the line of credit facilities is
approximately $12,000 related to an embezzlement by a former employee.
Amounts allocated to the Berg Properties do not include any amounts
related to the theft as such amounts have been allocated to certain
Berg Group Members.
Pursuant to the UPREIT Transactions, it is anticipated that the notes
payable of the Berg Properties will be restructured and/or retired
through a combination of new debt and equity.
Principal payments on outstanding borrowings as of December 31, 1997
are due as follows:
<TABLE>
<CAPTION>
Notes Payable Mortgage Notes
Lines of Credit (Related Parties) Payable
--------------- ----------------- --------------
<S> <C> <C> <C>
1998 - $ 639 $ 4,464
1999 $37,953 607 1,325
2000 - 262 4,552
2001 - 139 1,580
2002 - 72 1,726
Thereafter - 256 24,907
------- ------ -------
$37,953 $1,975 $38,554
------- ------ -------
------- ------ -------
</TABLE>
(Continued)
FS-17
<PAGE>
THE BERG PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
-----------
<TABLE>
<CAPTION>
5. NOTES PAYABLE:
--------------
Balance Balance
Dec. 31, Dec. 31,
Description Berg Group Collateral Properties Start Date 1997 1996 Matures Rate
- ------------------ -------------------------------------- ---------- ------------- ------------- ------------ ----
<S> <C> <C> <C> <C> <C> <C>
LINES OF CREDIT:
Wells Fargo Bank 2251 Lawson Lane, Santa Clara, CA Various $37,953,115 $35,537,833 October 1999 (1)
Clara, CA, 3301 Olcott, ------------- -------------
Santa Clara, CA, 1230 & ------------- -------------
1250 Arques, Sunnyvale, CA,
1135 Kern, Sunnyvale, CA,
405 Tasman, Sunnyvale,
CA 1190 Morse Avenue,
Sunnyvale, CA,
450 National Avenue,
Mountain View, CA,
10300 Bubb Road, Cupertino,
CA, 10440 Bubb Road,
Cupertino, CA, 10460 Bubb
Road, Cupertino, CA,
20605 - 20705 Valley Green
Drive, Cupertino, CA,
20400 Mariana, Cupertino, CA,
2033 - 2243 Samaritan Drive,
San Jose, CA, 10500 de Anza
Boulevard, Cupertino, CA
MORTGAGE NOTES:
Great West Life & 6320 San Ignacio Ave, San Jose, CA January 1984 7,871,793 7,999,883 February 2004 7%
Annuity Insurance
Company
Great West Life & 6385 San Ignacio Ave, San Jose, CA April 1984 1,986,001 2,018,561 May 2004 7%
Annuity Insurance
Company 6540 Via del Oro, San Jose, CA
Great West Life & 1170 Morse Avenue, Sunnyvale, CA April 1984 3,755,444 3,817,019 May 2004 7%
Annuity Insurance
Company
National Electrical
Contractors 2251 Lawson Lane, Santa Clara, CA January 1980 4,820,216 5,058,865 January 2009 9.75%
Association
Pension Benefit
Trust Fund
Prudential Capital
Group 1230 E. Arques, Sunnyvale, CA October 1977 1,147,269 1,216,466 November 2007 9%
Prudential Capital
Group 450 National Avenue, Mountain View, CA July 1973 0 0 9.25%
Prudential Capital
Group 3301 Olcott, Santa Clara, CA July 1977 0 1,113,702 8.75%
Prudential Capital
Group 20605 - 20705 Valley Green Drive, September 1978 3,250,320 3,422,564 October 1998 8.5%
Cupertino, CA
Prudential Capital
Group 20400 Mariani, Cupertino, CA March 1979 2,153,993 2,264,142 March 2009 8.75%
Prudential Capital
Group 1250 E. Arques, Sunnyvale, CA November 1973 2,311,583 2,551,126 November 1999 9.5%
Prudential Capital
Group 10300 Bubb Road, Cupertino, CA May 1972 0 0 8.75%
New York Life 10440 Bubb Road, Cupertino, CA January 1979 452,335 472,625 August 2009 9.5/8%
Insurance Company
Home Savings & Loan 10460 Bubb Road, Cupertino, CA January 1977 568,721 608,564 January 2007 9.5%
Association
Bank of America 1135 & 1137 Kern, Sunnyvale, CA June 1973 0 0 8.5%
Amdahl Corporation 3120 Scott, Santa Clara, CA April 1984 7,131,711 7,301,659 March 31, 9.5%
2014
Great Western Bank 10401 Bubb Road, Cupertino, CA February 1973 0 33,132 8.5%
Citicorp U.S.A. Inc. 2800 Bayview Drive, Fremont, CA April 1997 3,105,000 0 April 2000 (2)
----------- --------------
Mortgage Notes total 38,554,386 37,878,308
----------- --------------
----------- --------------
</TABLE>
- ------------------------------
(1) The lesser of Wells Fargo prime rate in effect on the first day of each
calendar month, or the LIBOR or the Wells Fargo Purchased Funds Rate quoted
on the first day of each calendar month plus 1.65%. Average rates for the
six months ended June 30, 1998 and the years ended December 31, 1997, 1996
and 1995 were 7.26%, 7.25%, 7.04% and 8.20%, respectively.
(2) One month LIBOR +1.625% adjusted monthly .
(Continued)
FS-18
<PAGE>
THE BERG PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
-------------
6. FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of fair value information about financial
instruments, whether or not recognized in the statement of financial
condition, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based
upon estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used,
including the discount rate and the estimated future cash flows. In
that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instrument. SFAS No. 107
excludes certain financial instruments and all non-financial
instruments from its disclosure requirements.
The following summarizes the financial instruments and the estimate of
the fair value of each class of financial instruments for which it is
practicable to estimate that value:
CASH AND CASH EQUIVALENTS:
The carrying amount of cash and cash equivalents is considered
to be a reasonable estimate of fair value.
MORTGAGE NOTES PAYABLE:
In accordance with the requirements of Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," management has estimated that mortgage
notes payable with an aggregate carrying value of $38,554 have
on estimated aggregate fair value of $38,211 at December 31,
1997.
7. RELATED PARTY TRANSACTIONS:
The Berg Properties are held by partnerships that have received certain
management services and financing from members of the Berg Group to the
benefit of the partnerships and the properties. Such services have
included general operating expenses, office space, and administrative
and technical assistance. The partnerships have reimbursed the Berg
Group members for the cost of providing such services and property
management services on a fee basis. Expenses related to the properties
for general and property-specific services paid to related parties
aggregated $1,050, $827, and $654 for the years ended December 31,
1997, 1996, and 1995, respectively.
Included in the financing described in Note 5, certain affiliated
entities have extended funds to the partnerships which own the
properties. These amounts are included in notes payable (related
parties) on the combined balance sheet. Such amounts are due upon
demand and accrue interest at a rate equal to that charged on the lines
of credit facilities and interest incurred on such advances is included
in interest expense (related parties) in the combined statements of
operations.
8. OPERATING LEASES:
The Berg Properties are leased to tenants under net operating leases
with initial term expiration dates extending to the year 2008. Future
minimum rentals under noncancelable operating leases, excluding tenant
reimbursements of expenses as of December 31, 1997, are approximately
as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $41,320
1999 39,300
2000 34,379
2001 29,645
2002 22,870
Thereafter 32,940
--------
$200,454
--------
--------
</TABLE>
(Continued)
FS-19
<PAGE>
THE BERG PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
----------
Minimum rental revenues, as presented for the years ended December 31,
1997, 1996 and 1995, contain straight-line adjustments for rental
revenue increases in accordance with generally accepted accounting
principles. The aggregate rental revenue increases resulting from the
straight-line adjustments for the years ended December 31, 1997, 1996
and 1995 were $1,301, $586, and $77, respectively.
9. EXTRAORDINARY ITEMS:
In 1996 and 1995, net gains of $610 and $3,206, respectively, were
realized as a result of early extinguishment of certain debt
obligations.
FS-19
<PAGE>
THE BERG PROPERTIES
SCHEDULE III
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------------------------
Cost
Initial Cost Capitalization
---------------------------------------------- Subsequent to
Shell Tenant Acquisition/
Building Sq. Ft. Encumbrance Land Improvements Improvements Improvement
- ------------------------------ --------- ----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
6850 Santa Teresa 30,000 $ 105,060 $ 317,106 $ 188,211 0
6331 San Ignacio 131,250 122,928 1,127,074 705,238 $ 3,964,830
6341 San Ignacio 95,040 122,928 1,127,074 705,238 (117,704)
75 E. Trimble 93,984 960,000 1,150,928 955,299 2,168,521
1170 Morse 34,750 3,755,444 48,685 909,965 793,345 800,000
6540 Via Del Oro 31,800 993,000 80,772 334,458 303,990 0
6385-6387 San Ignacio 34,800 993,001 88,923 365,741 332,669 0
1212 Bordeaux 71,800 4,000,000 1,102,092 46,500 180,950 5,079,735
150-160 Great Oaks 52,000 187,425 572,879 912,960 75,439
140 Great Oaks 52,259 187,425 572,879 543,286 445,113
6311 San Ignacio 30,000 60,461 289,440 274,346 2,559
6321 San Ignacio 103,894 191,461 916,560 868,761 2,233,199
6320 San Ignacio 157,092 7,871,793 178,414 1,920,012 1,062,547 1,355,351
2610 N. First St. 77,547 639,999 1,435,464 985,593 879,605
2033-43 Samaritan 75,168 409,321 912,880 2,792,320 236,712
2133 Samaritan 80,000 435,634 971,583 2,971,817 2,887
2233 - 43 Samaritan 79,924 435,220 970,640 2,968,994 2,884
3236 Scott 54,672 7,504,850 1,457,273 724,086 1,388,005 700,000
1810 McCandless Dr. 39,800 564,762 784,519 784,519 7,716
1740 McCandless Dr. 51,602 732,232 1,017,155 1,017,155 5,951
1680 McCandless Dr. 73,253 990,398 0 0 3,562,232
1600 McCandless Dr. 40,970 581,364 807,582 807,582 6,126
1500 McCandless Dr. 42,700 605,913 841,683 841,683 6,565
1450 McCandless Dr. 45,312 606,086 0 0 2,136,034
1350 McCandless Dr. 46,272 593,511 0 0 2,206,705
1325 McCandless Dr. 77,568 1,027,019 0 0 3,574,201
1425 McCandless Dr. 38,579 549,423 763,211 763,211 5,790
1525 McCandless Dr. 28,655 406,614 564,834 564,834 4,285
1575 McCandless Dr. 33,263 472,002 655,665 655,665 4,974
1625 McCandless Dr. 33,625 477,139 662,801 662,801 5,027
1745 McCandless Dr. 35,731 507,023 704,313 704,313 5,342
1765 McCandless Dr. 118,708 1,532,956 0 0 5,018,826
1600 Memorex Drive 109,666 1,000,000 875,000 875,000 559
4949 Hellyer Avenue 200,484 1,986,336 4,585,362 4,735,026 (10,000
2001 Logic 72,426 1,007,959 1,440,000 1,277,443 0
2251 Lawson 125,000 4,820,216 998,430 2,163,118 2,369,128 8,000
1230 Arques 60,000 1,147,269 49,867 721,721 624,669 156,112
450-460 National 36,100 29,161 219,655 234,550 85,347
1135 Kern Avenue 18,300 65,306 126,199 151,631 69,584
10300 Bubb 23,400 94,336 152,665 153,488 185,899
20400 Mariani 105,000 2,153,993 596,259 956,846 1,139,174 0
3301 Olcott 64,500 576,082 643,859 586,689 838,046
1250 Arques 200,000 2,311,583 413,831 1,432,307 2,359,186 366,506
10500 De Anza 211,000 16,000,000 1,498,500 5,086,027 7,200,447 0
20605-705 Valley Green 142,000 3,250,320 532,821 1,644,011 2,178,848 636,776
1190 Morse/405 Tasman 28,350 49,231 263,040 249,865 136,082
10440 Bubb 19,500 452,335 55,493 292,807 494,892 136,061
10460 Bubb 30,460 568,721 175,162 364,464 219,312 136,861
3120 Scott 75,000 7,131,711 350,574 3,387,720 3,074,872 900,100
3501 W Warren Bld 67,864 4,902,185 1,436,890 1,813,361 1,789,802 (15,482
48800 Milmont Drive 53,000 3,170,096 1,052,190 1,158,065 1,172,833 9,430
4750 Patrick Henry 65,780 2,375,984 1,163,575 1,146,854 1,147,020 0
10401 Bubb 20,330 95,966 132,403 208,010 0
2800 Bayview 59,736 3,105,000 737,855 1,734,146 0 0
--------- ----------- ----------- ------------ ------------ -------------
Subtotal 3,779,914 $76,507,501 $30,426,287 $51,806,662 $57,977,217 $38,018,786
--------- ----------- ----------- ------------ ------------ -------------
--------- ----------- ----------- ------------ ------------ -------------
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------------
Gross Amount at Which Carried at Close of
Period
----------------------------------------------
Shell & Tenant Accumulated Date of
Building Land Improvements Improvements Total Depreciation Completion
- ------------------------------ ----------- ------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
6850 Santa Teresa $ 105,060 $ 317,106 $ 188,211 $ 610,377 $ (509,475) 1979
6331 San Ignacio 122,928 1,356,086 4,441,056 5,920,070 (2,587,448) 1980
6341 San Ignacio 122,928 981,548 733,060 1,837,536 (1,155,158) 1980
75 E. Trimble 960,000 1,150,928 3,123,820 5,234,748 (2,054,859) 1981
1170 Morse 48,685 909,965 1,593,345 2,551,995 (1,257,784) 1980
6540 Via Del Oro 80,772 334,458 303,990 719,220 (564,532) 1980
6385-6387 San Ignacio 88,923 365,741 332,669 787,333 (617,790) 1980
1212 Bordeaux 1,102,092 530,517 4,776,668 6,409,277 (1,474,232) 1984
150-160 Great Oaks 187,425 572,879 988,399 1,748,703 (1,263,387) 1982
140 Great Oaks 187,425 572,879 988,399 1,748,703 (1,264,760) 1982
6311 San Ignacio 60,461 289,629 276,716 626,806 (494,691) 1981
6321 San Ignacio 191,461 1,120,216 2,898,304 4,209,981 (1,956,235) 1981
6320 San Ignacio 178,414 1,920,011 2,417,899 4,516,324 (2,496,504) 1982
2610 N. First St. 639,999 1,435,464 1,865,198 3,940,661 (2,344,027) 1981
2033-43 Samaritan 409,321 912,880 3,029,032 4,351,233 (2,689,750) 1984
2133 Samaritan 435,634 971,583 2,974,704 4,381,921 (2,863,030) 1984
2233 - 43 Samaritan 435,220 970,640 2,971,878 4,377,738 (2,769,310) 1984
3236 Scott 1,457,273 724,086 2,088,005 4,269,364 (2,041,780) 1981
1810 McCandless Dr. 564,762 787,362 789,392 2,141,516 (322,450) 1995
1740 McCandless Dr. 732,232 1,019,348 1,020,913 2,772,493 (260,940) 1995
1680 McCandless Dr. 990,398 1,721,342 1,840,890 4,552,630 (541,969) 1996
1600 McCandless Dr. 581,364 809,839 811,451 2,202,654 (266,610) 1995
1500 McCandless Dr. 605,913 844,216 845,715 2,295,844 (277,866) 1995
1450 McCandless Dr. 593,511 1,057,469 1,091,140 2,742,120 (345,049) 1995
1350 McCandless Dr. 606,086 1,079,873 1,114,257 2,800,216 (352,358) 1996
1325 McCandless Dr. 1,027,049 1,738,889 1,835,282 4,601,220 (612,079) 1997
1425 McCandless Dr. 549,423 765,344 766,868 2,081,635 (261,180) 1995
1525 McCandless Dr. 406,614 566,413 567,540 1,540,567 (193,498) 1995
1575 McCandless Dr. 472,002 657,498 658,806 1,788,306 (224,614) 1995
1625 McCandless Dr. 477,139 664,653 665,976 1,807,768 (227,058) 1995
1745 McCandless Dr. 507,023 706,281 707,687 1,920,991 (241,280) 1995
1765 McCandless Dr. 1,532,956 2,627,962 2,390,864 6,551,782 (812,926) 1997
1600 Memorex Drive 1,000,000 875,000 875,559 2,750,559 (704,447) 1995
4949 Hellyer Avenue 1,986,336 4,575,362 4,735,026 11,296,724 (1,399,886) 1995
2001 Logic 1,007,959 1,440,000 1,277,443 3,725,402 (779,626) 1992
2251 Lawson 998,430 2,163,118 2,377,128 5,538,676 (3,831,224) 1979
1230 Arques 49,867 805,423 697,079 1,552,369 (1,373,925) 1977
450-460 National 29,161 240,292 299,260 568,713 (568,713) 1973
1135 Kern Avenue 65,306 126,199 221,215 412,720 (391,853) 1973
10300 Bubb 94,336 152,665 339,387 586,388 (478,274) 1972
20400 Mariani 596,259 956,846 1,139,174 2,692,279 (2,060,466) 1978
3301 Olcott 576,082 633,859 1,434,735 2,644,676 (1,225,375) 1977
1250 Arques 413,831 1,570,769 2,587,230 4,571,830 (4,359,010) 1974
10500 De Anza 1,498,500 5,086,027 7,200,447 13,784,974 (13,293,962) 1981
20605-705 Valley Green 532,821 1,644,011 2,815,624 4,992,456 (3,853,122) 1975
1190 Morse/405 Tasman 49,231 327,704 321,283 698,218 (602,821) 1976
10440 Bubb 55,493 366,034 557,726 979,253 (787,043) 1979
10460 Bubb 175,162 418,778 301,859 895,799 (698,076) 1976
3120 Scott 350,574 3,377,720 3,984,972 7,713,266 (5,032,610) 1983
3501 W Warren Bld 1,436,890 1,847,476 1,740,205 5,024,571 (351,697) 1997
48800 Milmont Drive 1,052,190 1,158,065 1,182,263 3,392,518 (316,976) 1996
4750 Patrick Henry 1,163,575 1,146,854 1,147,020 3,457,449 (425,734) 1996
10401 Bubb 95,966 132,403 208,010 436,379 (405,719) 1972
2800 Bayview 737,855 1,734,146 0 2,472,001 (437,151) 1994
----------- ------------ ------------ ------------ -----------
Subtotal $30,426,317 $61,261,856 $86,540,779 $178,228,952 $78,077,441
----------- ------------ ------------ ------------ -----------
----------- ------------ ------------ ------------ -----------
</TABLE>
FS-21
<PAGE>
THE BERG PROPERTIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(IN THOUSANDS)
----------
Summary of activity for real estate and accumulated depreciation is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1997 1996 1995
----------------- ------------------ ----------------
<S> <C> <C> <C>
Real estate:
Balance at beginning of year $154,999 $133,014 $120,382
Improvements and acquisition/development
of real estate 23,230 22,775 35,910
Disposal of real estate - (790) (23,278)
----------------- ------------------ ----------------
Balance at end of year $178,229 $154,999 $133,014
----------------- ------------------ ----------------
----------------- ------------------ ----------------
Accumulated depreciation:
Balance at beginning of year $71,064 $64,857 $66,174
Depreciation expense 7,013 6,387 6,132
Disposal of real estate - (180) (7,449)
----------------- ------------------ ----------------
Balance at end of year $78,077 $71,064 $64,857
----------------- ------------------ ----------------
----------------- ------------------ ----------------
</TABLE>
FS-22
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Berg Group:
We have audited the accompanying Statement of Revenue and Certain Expenses of
the Fremont Properties as described in Note 2 for the year ended December 31,
1997. The Statement of Revenue and Certain Expenses is the responsibility of the
management of the Fremont Properties. Our responsibility is to express an
opinion on the Statement of Revenue and Certain Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying Statement of Revenue and Certain Expenses was prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission, for inclusion in the registration statement on Form S-4 of
Mission West Properties as described in Note 1, and is not intended to be a
complete presentation of the Fremont Properties' revenue and expenses.
In our opinion, the Statement of Revenue and Certain Expenses referred to above
present fairly, in all material respects, the revenue and certain expenses of
the Fremont Properties described in Note 2 for the year ended December 31, 1997,
in conformity with generally accepted accounting principles.
San Francisco, California
April 17, 1998 Coopers & Lybrand L.L.P.
FS-23
<PAGE>
FREMONT PROPERTIES
STATEMENT OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
----------
<TABLE>
<CAPTION>
Six Months Ended June 30,
------------------------------ Year Ended
1998 1997 December 31, 1997
-------------- -------------- ------------------
(unaudited)
Revenue:
<S> <C> <C> <C>
Base rent $1,015 $602 $1,256
Tenant reimbursements 218 58 173
-------------- -------------- ------------------
1,233 660 1,429
Expenses:
Property operating
and maintenance 19 19 40
Real estate taxes 197 110 234
-------------- -------------- ------------------
Total expenses 216 129 274
-------------- -------------- ------------------
Revenue in excess of
certain expenses $1,017 $531 $1,155
============== ============== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-24
<PAGE>
FREMONT PROPERTIES
NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES
----------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The accompanying Statement of Revenue and Certain Expenses was prepared for
the purpose of complying with the rules and regulations of the Securities
and Exchange Commission for inclusion in the registration statement on Form
S-4 of Mission West Properties. The accompanying statement is not
representative of the actual operations of the Fremont Properties, as
defined in Note 2, for the period presented nor indicative of future
operations. Certain expenses, primarily depreciation, amortization and
interest expense, which may not be comparable to the expenses expected to
be incurred by Mission West Properties in future operations of the Fremont
Properties, have been excluded.
REVENUE AND EXPENSE RECOGNITION:
Revenue is recognized on a straight-line basis over the terms of the
related leases. Expenses are recognized in the period in which they are
incurred.
USE OF ESTIMATES:
The preparation of the Statement of Revenue and Certain Expenses in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of the combined revenue and expenses during the reporting periods.
Actual results could differ from these estimates.
2. DESCRIPTION OF PROPERTIES:
The accompanying Statement of Revenue and Certain Expenses relate to the
combined operations of three properties at 4050 Starboard Drive, 45700
Northport Loop East and 45738 Northport Loop West. The commercial buildings
have approximately 144,000 rental square feet and are located in Fremont,
California. The Fremont Properties have been presented on a combined basis
because the Fremont Properties were under common ownership and management
of the developer.
The Properties were developed with physical completion and lease-up
concluded in the first quarter of 1997. Therefore no prior period
information is available.
3. RENTALS:
The Properties have entered into tenant leases that provide for tenants to
share in the operating expenses and real estate taxes on a pro rata basis,
as defined.
FS-25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Berg Group:
We have audited the accompanying combined Statements of Revenue and Certain
Expenses of the Kontrabecki Properties as described in Note 2 for the years
ended December 31, 1997, 1996 and 1995. The Statements of Revenue and Certain
Expenses are the responsibility of the management of the Kontrabecki Properties.
Our responsibility is to express an opinion on these Statements of Revenue and
Certain Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, for inclusion in the registration statement
on Form S-4 of Mission West Properties as described in Note 1, and is not
intended to be a complete presentation of the Kontrabecki Properties' revenue
and expenses.
In our opinion, the combined Statements of Revenue and Certain Expenses referred
to above presents fairly, in all material respects, the combined revenue and
certain expenses of the Kontrabecki Properties described in Note 2 for the years
ended December 31, 1997, 1996 and 1995, in conformity with generally accepted
accounting principles.
San Francisco, California
April 17, 1998 Coopers & Lybrand L.L.P.
FS-26
<PAGE>
KONTRABECKI PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
----------
<TABLE>
<CAPTION>
Six Months Ended
June 30, Year Ended December 31,
-------------------- -----------------------------
1998 1997 1997 1996 1995
--------- --------- -------- -------- ---------
(unaudited)
Revenue:
<S> <C> <C> <C> <C> <C>
Base rent $2,286 $1,828 $4,153 $3,388 $3,136
Other income - - 77 61 58
--------- --------- -------- -------- ---------
2,286 1,828 4,230 3,449 3,194
--------- --------- -------- -------- ---------
Expenses:
Property operating
and maintenance - 6 9 170 417
Real estate taxes - 6 12 48 11
--------- --------- -------- -------- ---------
Total expenses - 12 21 218 428
--------- --------- -------- -------- ---------
Revenue in excess of
certain expenses $2,286 $1,816 $4,209 $3,231 $2,766
========= ========= ======== ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-27
<PAGE>
KONTRABECKI PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
----------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The accompanying combined Statements of Revenue and Certain
Expenses were prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange
Commission for inclusion in the registration statement on Form
S-4 of Mission West Properties. The accompanying combined
statements are not representative of the actual operations of
the Kontrabecki Properties, as defined in Note 2, for the
periods presented nor indicative of future operations. Certain
expenses, primarily depreciation, amortization and interest
expense, which may not be comparable to the expenses expected
to be incurred by Mission West Properties in future operations
of the Properties, have been excluded.
REVENUE AND EXPENSE RECOGNITION:
Revenue is recognized on a straight-line basis over the terms
of the related leases. Expenses are recognized in the period
in which they are incurred.
USE OF ESTIMATES:
The preparation of the combined Statements of Revenue and
Certain Expenses in conformity with generally accepted
accounting principles requires management to make estimates
and assumptions that affect the reported amounts of the
combined revenue and expenses during the reporting periods.
Actual results could differ from these estimates.
2. DESCRIPTION OF THE PROPERTIES:
The accompanying combined Statements of Revenue and Certain Expenses
relate to the combined operations of the Kontrabecki Properties,
office buildings with approximately 416,000 rentable square feet,
located in Santa Clara, California. The Kontrabecki Properties have
been presented on a combined basis because the Kontrabecki Properties
were under common ownership and management.
3. RENTALS:
The Kontrabecki Properties' management has entered into tenant leases
that provide for tenants to share in the operating expenses and real
estate taxes on a pro forma basis, as defined. During the fourth
quarter of 1996 and throughout 1997, occupancy increase obtained at
the Kontrabecki Properties allowed for a significant portion of such
expenses to be charged to the tenants pursuant to the lease
agreements.
FS-28
