SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR FISCAL YEAR ENDED: DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NO. 1-8383
MISSION WEST PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 95-2635431
State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification Number)
10050 BANDLEY DRIVE, CUPERTINO CA 95014
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (408) 725-0700
---------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
Common Stock, par value $.001 per share American Stock Exchange
Pacific Exchange, Inc.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on March
29, 1999, as reported on the American Stock Exchange, was approximately
$52,895,968. As of March 29, 1999, there were 8,233,583 shares of the
Registrant's Common Stock outstanding.
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this Form 10-K:
Form S-4 Registration Statement filed on May 15, 1998 and declared
effective on November 23, 1998. (Registration No. 333-52835-99) (the
"Registration Statement"), and the prospectus dated November 23, 1998
filed pursuant to SEC Rule 424(b)(3), which are incorporated by reference
into Part I, Items 1 and 4.
Form 8-K, dated March 12, 1998, to report the Company's change in
independent auditors. This Form 8-K is incorporated by reference into Part
I, Item 9.
Form 8-K, dated on December 30, 1998, to report the Company's succession
to the assets and liabilities of Mission West Properties, a California
corporation. This Form 8-K is incorporated by reference into Part I, Item
1.
WHERE YOU CAN FIND MORE INFORMATION
This annual report does not contain all the information set forth in the
exhibits and schedules filed in accordance with the rules and regulations of the
SEC, and we are incorporating omitted information by this reference. Statements
made in this annual report concerning the contents of any contract, agreement or
other document filed as an exhibit to the registration statement are summaries
of the terms of the contracts, agreements or documents and are not necessarily
complete. You should read each exhibit for a more complete description of the
matters involved. The exhibits filed with the SEC may be inspected, without
charge, and copies may be obtained at prescribed rates, at the SEC's Public
Reference facility maintained by the Room 450 Fifth Street, N.W., Washington,
D.C. 20549. The public may obtain information on the operation of the Public
Reference Room by Calling the SEC at 1-800-SEC-0330. Reports, proxy statements
and other information about us filed with the SEC also are available at the web
site maintained by the SEC on the World Wide Web at http://witness.sec.gov. and
may also be inspected at the offices of the American Stock Exchange, 86 Trinity
Place, New York, New York, and the Pacific Exchange Incorporation, 301 Pine
Street, San Francisco, California.
You also may request a copy of these filings, at no cost upon written or oral
request by writing or telephoning us at the following address or telephone
number: Mission West Properties, Inc., 10050 Bandley Drive, Cupertino,
California 95014; telephone: (408) 725-0700.
ii
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MISSION WEST PROPERTIES, INC.
1998 FORM 10-K ANNUAL REPORT
Table of Contents
PART I
PAGE NO.
Item 1. Business 1
Item 2. Properties 12
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
Executive Officers of the Registrant
PART II
Item 5. Market for the Registrant's Common Equity and Related 16
Stockholder Matters
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial 20
Condition and Results of Operations
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on 68
Accounting and Financial Disclosure
PART III
Item 10. Directors and Executive Officers of the Registrant 69
Item 11. Executive Compensation 71
Item 12. Security Ownership of Certain Beneficial Owners and Management 74
Item 13. Certain Relationships and Related Transactions 76
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports 79
on Form 8-K
Signatures 81
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IN ADDITION TO THE HISTORICAL INFORMATION CONTAINED IN THIS ANNUAL REPORT, THE
FOLLOWING DISCUSSION CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED
HEREIN. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT
ARE NOT LIMITED TO, THOSE DISCUSSED IN PART I, ITEM 1 UNDER "RISK FACTORS" AND
IN PART II, ITEM 7, "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS."
PART I
ITEM 1. BUSINESS
ORGANIZATION AND GENERAL BUSINESS DESCRIPTION
Mission West Properties, Inc. (the "Company") is engaged in the management,
leasing, marketing, development and acquisition of R&D office properties,
primarily located in the "Silicon Valley" portion of the San Francisco Bay Area.
We currently manage 71 properties totaling approximately 4.52 million square
feet through our controlling interest in four separate partnerships in which we
are the sole general partner. For the year ending December 31, 1999, we will
elect to be taxed as a real estate investment trust ("REIT") for federal income
tax purposes and will operate as a self-managed, self-administered and fully
integrated REIT. Prior to July 1, 1998, most of our properties were under the
ownership or control of Carl E. Berg, his brother Clyde J. Berg, the members of
their respective immediate families, and certain entities in which Carl E. Berg
and/or Clyde J. Berg held controlling or other ownership interests (the "Berg
Group"). In December 1998, our predecessor corporation Mission West Properties
(also referred to in this document as the "Company"), reincorporated under the
laws of the State of Maryland. Our principal executive offices are located at
10050 Bandley Drive, Cupertino, California 95014, and our telephone number is
(408) 725-0700.
The operating partnerships are engaged in the combined operation and ownership
of our properties under the terms of an acquisition agreement, as amended, and
an agreement of limited partnership, which is identical in all material respects
for all four of the limited partnerships. Generally, as the sole general partner
of the operating partnerships, we control the business and assets of the
operating partnerships and have 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 agents of the operating partnerships.
Through its authority to manage our business and affairs, our board of directors
directs the business of the operating partnerships. The Berg Group members have
the right to nominate two individuals for election to the board of directors as
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
(including all shares of common stock that could be acquired upon the exercise
of all outstanding options to acquire voting stock of the Company, and all units
of limited partnership interests in the operating partnerships ("L.P. Units")
exchangeable or redeemable for common stock). If the members of the Berg Group
and their 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 members
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 the right to vote, in
the aggregate, a majority of the total number of L.P. Units outstanding is
required with respect to certain significant actions involving the operating
partnerships. See "Risk Factors--Control of the Company and the Operating
Partnerships by Mr. Berg and His Affiliates."
As of March 15, 1999, the operating partnerships had an aggregate of 60,151,697
L.P. Units outstanding, of which 56,464,623 L.P. units were held by Carl E. Berg
and other members of the Berg Group.
BUSINESS AND STRATEGY
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 approximately 30 years,
most recently through Berg & Berg Developers ("Berg & Berg"), a general
partnership of Carl E. Berg and Clyde J. Berg. 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). 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-Common 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 Mr. Berg and the Company to
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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.
We believe that Mr. Berg's substantial knowledge of and contacts in the
information technology industry provide a significant benefit to the Company.
The business and portfolio of Silicon Valley R&D properties of the Company are
based upon the historical Berg & Berg business strategy which incorporates the
following elements:
o STRONG GEOGRAPHIC AND INDUSTRY FOCUS. We focus our activities on addressing
the facility requirements of technology-oriented companies in the Silicon
Valley. 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, we believe 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. We
believe that this focus has enabled Berg & Berg, and now the Company, 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.
o 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 was 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. We
have succeeded to Berg & Berg's management team. These managers share a
common approach to property development and management. We believe that the
leanness, experience and continuity of this management team will also
enable us 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 tenants. We
further believe that these advantages translate into significantly lower
costs for operations and construction which give us 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, a
lower cost structure should allow us to generate better returns from
properties whose value can be increased through appropriate remodeling and
efficient property management.
o MARKET AWARENESS AND SENSITIVITY. We will continue to follow Berg & Berg's
demand-driven approach to the R&D property business in which we will use
our 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.
o EMPHASIS ON GENERAL PURPOSE FACILITIES, SINGLE TENANT PROJECTS AND
LONG-TERM TENANT RELATIONSHIPS. All of our 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 our major
tenants have occupied their properties for many years pursuant to fully net
leases under which the tenant pays all operating costs. We intend to
sustain Berg & Berg's practice of emphasizing the development of
single-tenant rather than multi-tenant properties which has contributed to
relatively low turnover and high occupancy rates. We believe that the
relatively small number of tenants occupying our 71 properties allows us to
efficiently manage the properties and serve the needs of our tenants
without the need for an extensive in-house staff or the assistance of a
third-party management organization. In addition, this emphasis allows us
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. We believe that the relatively stable, extended relationships
which Berg & Berg has developed with its key tenants will be a valuable
factor in the expansion of our business.
o SOUND PROPERTY MANAGEMENT PRACTICES. Berg & Berg Enterprises, Inc. ("BBE"),
an affiliate of Carl E. Berg, has provided design and construction
management personnel to Berg & Berg in all phases of its acquisition,
development and property management businesses. We intend to make extensive
use of BBE's staff as we expect to retain Berg & Berg's focus on similar
types of development projects to more efficiently utilize these skills and
experience. For each property, the BBE 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. We believe that, as a result of these
sound operating practices, Berg & Berg has acquired a reputation for
completing its projects on time and within budget, which will benefit us as
we acquire new properties under our existing land acquisition arrangements
with members of the Berg Group.
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o ACQUISITION OF NEW R&D PROPERTIES FROM THE BERG GROUP. We anticipate that
most of our growth in the foreseeable future will come from the acquisition
of new projects that are either currently under development or planned for
future development by the Berg Group. The Pending Projects Acquisition
Agreement and the Berg Land Holdings Option Agreement will provide a
substantial number of new acquisitions for the Company over the next two
years. During 1999 and through the second quarter of 2000, we expect to
acquire a total of approximately 1.4 million additional rentable square
feet currently under development, from members of the Berg Group under the
terms of those two arrangements.
GROWTH OPPORTUNITIES UNDER EXISTING AGREEMENTS WITH CARL E. BERG AND HIS
AFFILIATES
In December 1998, we entered into the Pending Projects Acquisition Agreement
with members of the Berg Group, which permits us to acquire approximately one
million additional rentable square feet upon the completion and leasing of a
number of pending development projects owned by them. The owners of the pending
development projects may obtain cash or, at their option, L.P. Units. The
agreement provides for the issuance of up to 33,919,072 L.P. Units in exchange
for the pending development projects, of which 405,166 L.P. Units have been
issued for new property to date.
o 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 an acquisition value equal to the actual annual base rent divided by an
agreed upon capitalization rate, minus the amount of debt encumbering the
property.
o The acquisition value will be payable in L.P. Units at $4.50 per L.P. Unit
or cash, at the option of the sellers. See-"Risk Factors - Potential
Conflicts of Interest with the Berg Group - Pending Development Projects."
o The closing for the acquisition of an individual R&D property within a
project will occur only when the building has been completed and leased,
unless otherwise agreed by the parties. We and the operating partnerships
are not otherwise required to acquire any of the pending development
projects.
o The sellers will make customary representations and warranties as of the
closing date.
o Leases will be on commercially reasonable terms and conditions.
o All action taken by us under the Pending Projects Acquisition Agreement
must be approved by a majority of the members of the Independent Directors
Committee of our board of directors. See "- Risk Factors-Potential
Conflicts of Interest with the Berg Goup."
Additionally, in December 1998, we entered into the Berg Land Holdings Option
Agreement under which we have the option to acquire any future R&D property
developments on approximately 162 net acres of Silicon Valley land owned by
certain members of the Berg Group.
o The Berg Land Holdings Option Agreement provides that 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, we will have
the option to acquire any building developed by any member of the Berg
Group on the land subject to the agreement at such time as the building has
been leased. Upon our 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 (ranging from $8.50 to $20.00 per square
foot), plus (iv) 10% of (iii) from January 1, 1998 to the close of escrow,
plus (v) interest at LIBOR plus 1.65% on the amounts described in (i) 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.
o The purchase price will be payable in cash, unless otherwise agreed by the
Berg Group representatives. We have the right to contribute such building
to the operating partnerships, subject to any debt incurred in connection
with the acquisition, in exchange for additional percentage interests in
the operating partnerships valued with reference to the market value of a
share of common stock over the 30-trading day period preceding our exercise
of the option.
o We also must assume all assessments.
o If we elect 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.
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o All action taken by us under the Berg Land Holdings Option Agreement must
be approved by a majority of the members of the Independent Directors
Committee.
The following table presents certain information concerning projects that we
have the right to acquire under the Pending Projects Acquisition Agreement and
the Berg Land Holdings Option Agreement. The table includes only those projects
for which construction has commenced as of March 15, 1999.
<TABLE>
<CAPTION>
TOTAL
APPROXIMATE ANTICIPATED ESTIMATED
RENTABLE AREA ACQUISITION ACQUISITION
PROPERTY (SQUARE FEET) DATE COST
- --------------------------------------------------------------------------------
(dollars in thousands)
<S> <C> <C> <C>
PENDING PROJECTS
Great Oaks 54,996 April 1999 $ 6,648
L'Avenida (4 buildings) 415,306 May 1999 93,808
L'Avenida (1 building) 99,694 July 1999 22,521
Richard Avenue 58,740 July 1999 4,185
Automation (1 building) 80,640 May 1999 9,677
Automation (2 buildings) 141,696 September 1999 15,789
Automation (1 building) 114,028 April 2000 12,706
------- ------
SUBTOTAL 965,100 $165,334
BERG LAND HOLDINGS
Fontanosa 77,000 August 1999 $ 7,226
Hellyer/Branham 311,000 February 2000 25,000
------- ------
SUBTOTAL 388,000 $ 32,226
TOTAL 1,353,100 $197,560
========= ========
</TABLE>
The time required to complete the leasing of developments varies from project to
project. Generally, the Company will not acquire any of the above projects until
they are fully completed and leased. There can be no assurance that the
acquisition date and final cost to the Company as indicated above will be
realized. See "-Risk Factors--Potential Conflicts of Interest with the Berg
Group, and Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations-Forward Looking Information."
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Although we expect to acquire the new properties available to us under the terms
of the Pending Projects Acquisition Agreement and the Berg Land Holdings Option
Agreement, there can be no assurance that we actually will consummate any of the
intended transactions, including all of those discussed above. Furthermore, we
have not yet determined the means by which we would acquire and pay for any such
properties or the impact of any of the acquisitions on our business, results of
operations, financial condition, Funds from Operations ("FFO") or available cash
for distribution. See "Risk Factors--Real Estate Investment Considerations and
- --Uncertainties Regarding Distributions to Stockholders."
RECENT DEVELOPMENTS
On August 6, 1998, Berg & Berg and Microsoft Corporation signed a lease with
respect to an approximate 515,000 square foot complex to be constructed by
Microsoft on L'Avenida in Mountain View, California, which is one of the pending
development projects. Microsoft controls the construction of this facility,
which is scheduled to be completed in phases between March and May 1999. We
expect to acquire the R&D properties to be built on the L'Avenida site between
April and July 1999. Microsoft has signed a seven-year lease calling for a first
year's rent of $2.95 per square foot per month with 4% annual increases. We
expect the acquisition cost of the entire complex to total approximately $116
million and have not yet determined the means by which we will acquire and pay
for these properties.
In December 1998, we agreed to acquire two newly constructed R&D office
properties located on Richard Avenue in Santa Clara, California and Hellyer
Avenue in San Jose, California consisting of a total of approximately 163,000
square feet of rentable space. We acquired these properties from Carl E. Berg
and other members of the Berg Group under the Pending Projects Acquisition
Agreement and the Berg Land Holdings Option Agreement. We paid approximately
$4.2 million for the Richard Avenue property, which consists of approximately
53,000 rentable square feet, and approximately $9.5 million for the Hellyer
Avenue property, which consists of approximately 110,000 rentable square feet.
Each property was acquired by a different operating partnership. In connection
with these acquisitions, the two operating partnerships assumed total debt of
approximately $9.6 million and issued a total of 672,064 L.P. Units to the
sellers. Each of such L.P. Units may be exchanged for shares of common stock in
the same manner as other L.P. Units held by the same limited partner. The terms
of the acquisitions were approved by the Independent Directors Committee. We
agreed with the sellers of the properties to treat our acquisitions as effective
as of September 1, 1998 with respect to the Richard Avenue property, and
November 1, 1998 with respect to the Hellyer Avenue property. We began recording
rental income from those properties as of their respective acquisition dates.
NON-COMPETITION ARRANGEMENTS
Mr. Berg has advised us of his intention to conduct all of his material R&D
property investment and development activities through the Company, except with
respect to the land holdings, which are subject to the Berg Land Holdings Option
Agreement, and the pending development projects, which are subject to the
Pending Projects Acquisition Agreement. Accordingly, under the Acquisition
Agreement, dated as of May 14, 1998, as amended, Mr. Berg 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 Risk Factors--Potential Conflicts of
Interest with the Berg Group."
ENVIRONMENTAL MATTERS
To date, compliance with laws and regulations relating to the protection of the
environment, including those regarding the discharge of materials into the
environment, has not had any material effects upon our capital expenditures,
earnings or competitive position.
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.
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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. We are aware that there
are ACMs present at several of the properties, primarily in floor coverings. We
believe that the ACMs present at these properties are generally in good
condition and that no ACMs are present at the remaining properties. We believe
we are in compliance in all material respects with all present federal, state
and local laws relating to ACMs and that if we 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 our financial condition, operating results or ability
to make distributions.
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.
Certain of our tenants routinely handle hazardous substances and wastes as part
of their operations on the properties. Environmental assessments have not been
conducted for most of the properties and none have been conducted by us or Berg
& Berg since 1995.
Although the environmental investigations conducted to date have not revealed
any environmental liability that we believe would have a material adverse effect
on our business, assets or results of operations, and we are not aware of any
such liability, it is possible that there are material environmental liabilities
of which we are unaware. No assurances can be given that (i) future laws,
ordinances, or regulations will not impose any material environmental liability,
or (ii) the current environmental condition of the properties has not been, or
will not be, affected by tenants and occupants of the properties, by the
condition of properties in the vicinity of the properties, or by third parties
unrelated to the Company.
EMPLOYEES
As of March 30, 1999, we employed 5 people, all of whom work at our executive
offices at 10050 Bandley Drive, Cupertino, California, 95014.
RISK FACTORS
THIS REPORT CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS (AS SUCH TERM IS DEFINED
IN SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE
EXCHANGE ACT OF 1934, AS AMENDED) PERTAINING TO, AMONG OTHER THINGS, THE
COMPANY'S FUTURE RESULTS OF OPERATIONS, CASH AVAILABLE FOR DISTRIBUTION,
PROPERTY ACQUISITIONS, LEASE RENEWALS, INCREASES IN BASE RENT, SOURCES OF
GROWTH, PLANNED DEVELOPMENT AND EXPANSION OF LEASED PROPERTIES, CAPITAL
REQUIREMENTS, COMPLIANCE WITH CONTRACTUAL OBLIGATIONS AND GENERAL BUSINESS,
INDUSTRY AND ECONOMIC CONDITIONS APPLICABLE TO MISSION WEST PROPERTIES, INC.
THESE STATEMENTS ARE BASED LARGELY ON MANAGEMENT'S CURRENT EXPECTATIONS AND ARE
SUBJECT TO A NUMBER OF RISKS AND UNCERTAINTIES. ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS. FACTORS THAT CAN CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED
BELOW. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE
FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE
FOLLOWING FACTORS SHOULD BE CONSIDERED IN ADDITION TO THE OTHER INFORMATION
CONTAINED HEREIN IN EVALUATING US AND OUR BUSINESS:
DEPENDENCE ON CARL E. BERG
We are substantially dependent upon the leadership of Carl E. Berg, our
Chairman, President and Chief Executive Officer. He manages our day-to-day
operations and devotes a significant portion of his time to our affairs, but he
has a number of other business interests, as well. Some of these other interests
involve investment and director relationships with a number of technology
companies, including some of our tenants. We obtain valuable information about
our markets and business opportunities from Mr. Berg's other activities. Losing
Mr. Berg's knowledge and abilities could have a material adverse effect on our
business and the value of the common stock.
CONTROL OF THE COMPANY AND THE OPERATING PARTNERSHIPS BY MR. BERG AND HIS
AFFILIATES
OWNERSHIP INTEREST. The Berg Group owns limited partnership interests
representing approximately 82.6% ownership of the operating partnerships. The
L.P. Units may be converted into shares of common stock under certain
circumstances which upon conversion would represent voting control the Company.
The Berg Group's ability to exchange their L.P. Units for common stock permits
them to exert substantial influence over the management and direction of our
corporation.
BOARD OF DIRECTORS REPRESENTATION. The Berg Group has the right to nominate two
of our current five directors for election to the board of directors as long as
they and their affiliates beneficially own at least 15% of the total number of
our outstanding securities, including all securities, such as L.P. Units,
exchangeable or redeemable for common stock or any other voting stock. If the
Berg Group's ownership percentage falls below 15% but is at least 10%, the Berg
Group has the right to nominate one person for election to our board
6
<PAGE>
of directors. Their right to nominate directors may be considered to give the
Berg Group and Mr. Berg substantial control and influence over the management
and direction of our corporation.
SPECIAL BOARD VOTING PROVISIONS. Our governing corporate documents, which are
our Articles of Amendment and Restatement and our Bylaws, also provide
substantial control rights for Mr. Berg and the Berg Group. These rights include
a requirement that Mr. Berg or someone he has designated to replace him as a
director approve certain fundamental corporate actions, including amendments to
our governing corporate documents and any merger, consolidation or sale of all
or substantially all of our assets or the assets of the operating partnerships.
In addition, our Bylaws provide that a quorum necessary to hold a valid meeting
of the board of directors must include Mr. Berg or someone he has designated to
replace him as a director. Also, directors representing more than 75% of the
entire board of directors must approve other significant transactions such as
incurring debt above certain amounts and conducting business other than through
the operating partnerships.
LIMITED PARTNER APPROVAL RIGHTS. Mr. Berg and other limited partners, including
other members of the Berg Group, also may restrict our operations and activities
through rights provided under the terms of the Amended and Restated Agreement of
Limited Partnership which governs each of the operating partnerships and our
legal relationship to each operating partnership as its general partner. Matters
requiring approval of the holders of a majority of the L.P. Units, which must
include Mr. Berg, include the following: (i) the amendment, modification or
termination of the 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, (v) 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 partners in the operating partnerships; and (vi) any other change of
control of the operating partnerships. In addition, until the date on which the
Berg Group and their affiliates own less than 15% of the outstanding shares of
common stock on a fully-diluted basis, the consent of the limited partners
holding the right to vote, in the aggregate, a majority of the total number of
L.P. Units outstanding 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) issuance of limited partnership interests having seniority
as to distributions, assets and voting over the L.P. Units.
POTENTIAL CONFLICTS OF INTEREST WITH THE BERG GROUP
Mr. Berg and other members of the Berg Group possess significant rights to
influence and control us and the operating partnerships and have a variety of
interests that may not be consistent with the interests of our other
stockholders. For example, our headquarters are leased from an entity owned by
Mr. Berg and other Berg Group members, and we pay them rent of approximately
$7,000 per month. Although Mr. Berg has agreed to provide us with the first
opportunity to pursue R&D office property development and acquisition activities
in Washington, Oregon and California, there are many other real estate
activities and other business activities that Mr. Berg and other members of the
Berg Group are free to pursue. If we decline an opportunity that has been
offered to us, Mr. Berg may pursue it. This would reduce the amount of time that
he could devote to our affairs and could result in the development by him or
other Berg Group members of properties that compete with our properties for
tenants. In general, we have agreed to limit the liability of Mr. Berg and other
members of the Berg Group to our corporation and stockholders arising from their
pursuit of these other opportunities. Mr. Berg and other Berg Group members have
agreed that all new transactions between us and any of them, or between us and
any entity in which they directly or indirectly own 5% or more of the equity
interests, including the operating partnerships for this purpose, must be
approved by the Independent Directors Committee of our board of directors. This
committee currently consists of three directors who are independent of Mr. Berg
and the other members of the Berg Group. See Part III, Item 10, "Directors and
Executive Officers of the Registrant."
EXCLUDED PROPERTIES. Mr. Berg and other members of the Berg Group have retained
certain R&D office properties in which we and the operating partnerships have no
ownership interests. Under certain circumstances, efforts of Mr. Berg to lease
these other properties may interfere with similar efforts on our behalf.
PENDING DEVELOPMENT PROJECTS. Mr. Berg and other members of the Berg Group
currently own four pending development projects located in the Silicon Valley
that represent a potential total of 11 R&D office properties aggregating
approximately 965,000 rentable square feet. We and the operating partnerships
have agreed under the terms of a Pending Projects Acquisition Agreement to
acquire each of these properties from Mr. Berg and other members of the Berg
Group as it is completed and leased. The sellers may elect to receive cash or
L.P. Units at a value of $4.50 per unit. As the current market price of a share
of common stock is $7.00, this valuation represents a substantial discount from
the current market value of the common stock that may be issued in exchange for
these L.P. Units. The terms of the Pending Projects Acquisition Agreement were
agreed upon in May 1998 prior to the re-commencement of trading of our common
stock. Mr. Berg and other members of the Berg Group currently have the right to
obtain as many as 33,513,906 additional L.P. Units in exchange for the pending
development projects. They may elect to receive part of the consideration in
cash. In addition, prior to the sale of any of these properties the sellers may
place debt on the property that we and the operating partnerships
7
<PAGE>
would be required to assume. The amount of any assumed debt would reduce the
value of the acquired property in determining the amount of other consideration
in the form of cash or L.P. Units payable to the sellers, however. The rights of
Mr. Berg and other Berg Group members under the Pending Projects Acquisition
Agreement permit them to acquire substantial additional interests in the
operating partnerships and, in the event of any exchange of their L.P. Units for
common stock, in the Company, as well.
BERG LAND HOLDINGS. Mr. Berg and other members of the Berg Group also own
several parcels of unimproved land in the Silicon Valley that we and the
operating partnerships have the right to acquire under the terms of the Berg
Land Holdings Option Agreement. Mr. Berg and the other Berg Group members are
not obligated to exercise certain options they hold to acquire the properties
that are subject to the agreement. As a result, we may lose the ability to
expand our portfolio of properties and to increase our income through the
acquisition of those properties. In addition, we have agreed to pay a fixed
amount plus additional charges for any of the properties that we do acquire and
must pay the acquisition price in cash unless otherwise agreed by the sellers.
At the time of acquisition, these properties may be encumbered by debt that we
or the operating partnerships will be required to assume. An increase in our
indebtedness could materially adversely affect our financial condition, results
of operations or ability to make cash distributions to our stockholders. See
"--Real Estate Investment Considerations," "--Uncertainties Regarding
Distributions to Stockholders." The exercise of our options under the Berg Land
Holdings Option Agreement is subject to approval by the Independent Directors
Committee of our board of directors.
TAX CONSEQUENCES OF SALE OF PROPERTIES. Many of our properties have unrealized
taxable gain, which, if sold, could create adverse income tax consequences for
limited partners of the operating partnerships. Mr. Berg, Clyde J. Berg and John
Kontrabecki have the right to prevent us and the operating partnerships from
selling or transferring properties which they designate in any taxable
transaction for a period of ten years. As a result, our opportunities to sell
those properties may be limited. If we need to sell any of those properties to
raise cash to service our debt, acquire new properties, pay cash distributions
to stockholders, or for other working capital purposes, we may be unable to do
so.
TERMS OF TRANSFERS; ENFORCEMENT OF AGREEMENT OF LIMITED PARTNERSHIP. The terms
of the Pending Projects Acquisition Agreement, the Berg Land Holdings Option
Agreement, the partnership agreement of each operating partnership, and the
terms of other material agreements in which we have acquired our interests in
the operating partnerships and the properties formerly controlled by Mr. Berg
and members of the Berg Group were not determined through arm's length
negotiations. In addition, Mr. Berg and representatives of the Berg Group
sitting on our board of directors may be subject to conflicts of interest with
respect to their obligations as our directors to enforce the terms of the
partnership agreement of each operating partnership when it conflicts with their
personal interests. In addition, the terms of our Articles of Amendment and
Restatement and Bylaws were not determined through arm's length negotiations.
Some of these terms are not as favorable as those that could have been obtained
through arms'-length negotiations.
RELATED PARTY DEBT. We are liable for a loan of approximately $20.8 million
payable to Berg & Berg Enterprises, Inc., which is a member of the Berg Group.
This loan is secured by three of our properties and initially matured in March
1999, but has been extended until December 1999 by agreement with Berg & Berg,
Enterprises, Inc.. We believe that we will be able to repay that loan with
proceeds of our existing line of credit or other sources of working capital.
Effective September 30, 1998, we assumed a $100 million line of credit with
Wells Fargo Bank N.A. previously provided to and guaranteed by the members of
the Berg Group, which is secured by 14 of our properties. We have the right to
draw on the line of credit and are liable for repayment of all amounts owing
under the line of credit, which totaled approximately $27.2 million as of
December 31, 1998. The Berg Group members continue to be liable as guarantors
under the line of credit, which expires in October 1999. If we are unable to
repay our debts to BBE or Wells Fargo Bank when due, however, Mr. Berg or other
Berg Group members, in addition to the lenders, could take action to enforce our
payment obligations. On December 28, 1998, our board of directors, acting for us
in our capacity as the general partner of each of the operating partnerships,
declared a cash distribution to all partners. The total distributions of $9.6
million to Mr. Berg and other Berg Group members were loaned back to the
operating partnerships in lieu of having them draw additional funds under the
line of credit. These loans bear interest at an annual rate equal to that as
charged under the Wells Fargo Bank line of credit. Mr. Berg or any of the Berg
Group members who have loaned these funds to the operating partnerships may
request their repayment at any time. Such requests might be made when we or the
operating partnerships do not have sufficient funds available. In that case,
they would have the right to take legal action to enforce our obligation to
repay the requested amounts.
CHANGES IN POLICIES WITHOUT STOCKHOLDER APPROVAL
Our board of directors determines the investment and financing policies of the
operating partnerships and our policies with respect to certain other
activities, including growth, debt capitalization, distribution and operating
policies. Our board of directors may amend these policies at any time without a
vote of the stockholders. Changes in these policies could materially adversely
affect our financial condition, results of operation, and ability to make cash
distributions to our stockholders.
8
<PAGE>
ANTI-TAKEOVER PROVISIONS
Provisions of our Articles of Amendment and Restatement and our Bylaws could
delay, defer or prevent a transaction or a change in control of our corporation,
or a similar transaction, that might involve a premium price for holders of
common stock or otherwise be in their best interests.
REAL ESTATE INVESTMENT CONSIDERATIONS
Real property investments are subject to varying degrees of risk. Investment
returns available from equity investments in real estate depend in large part on
the amount of income earned and capital appreciation generated by our
properties, as well as our related expenses incurred. If our properties do not
generate revenues sufficient to meet operating expenses, debt service and
capital expenditures, our income and ability to make distributions to our
stockholders will be adversely affected. Income from our properties may also be
adversely affected by general economic conditions, local economic conditions
such as over supply of commercial real estate, the attractiveness of our
properties to tenants and prospective tenants, competition from other available
rental property, our ability to provide adequate maintenance and insurance, the
cost 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 is 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.
Our properties and an investment in our common stock are also subject to a
number of specific risks, including the following:
o Real estate investments are relatively illiquid which limits our ability to
restructure our portfolio in response to changes in economic or other
conditions.
o All of our properties are located in the southern portion of the San
Francisco Bay Area commonly referred to as "Silicon Valley". The Silicon
Valley economy has been strong for the past five years but future increases
in values and rents for our properties depend to a significant extent on
the health of this region's economy. Recent trends suggest that the supply
of R&D office space available for rent has increased and that the demand
for such space in Silicon Valley has declined from near zero vacancy rates
earlier in 1998 and late 1997.
o We might lose key tenants. Most of our properties are occupied by single
tenants, many of whom are large, publicly-traded electronics companies.
Losing a key tenant could adversely affect our operating results and our
ability to make distributions to stockholders if we are unable to obtain
replacement tenants promptly.
o Key tenants could seek the protection of the bankruptcy laws which could
result in the rejection and termination of their leases thereby causing a
reduction in our income.
o We intend to engage in additional real estate acquisition and development.
These activities involve significant risks in addition to those relating to
the ownership and operation of existing, fully-leased properties. For
example, required approvals may not be obtained or may take more time and
resources to obtain than expected, construction may not be completed on
schedule or on budget, and the properties may not achieve anticipated rent
or occupancy levels. Such activities also depend upon the availability of
financing on terms that do not adversely impact our operating results and
our ability to make distributions to our stockholders.
o Our properties are subject to substantial indebtedness. If we are unable to
make required mortgage payments, a loss could be sustained as a result of
foreclosure on our properties by the mortgagee. We have adopted a policy of
maintaining a consolidated ratio of debt to total market capitalization
(which includes for this purpose the value of all shares of common stock
exchangeable at any time for outstanding L.P. Units) of less than 50%. This
ratio may not be exceeded without the approval of more than 75% of our
entire board of directors. Our board of directors may vote to change this
policy, however, and we could become more highly leveraged, resulting in an
increased risk of default on our obligations, and an increase in debt
service requirements that could adversely affect our financial condition,
our operating results and our ability to make distributions to our
stockholders.
o Our properties may expose us to liabilities under applicable environmental
and health and safety laws.
o We may sustain uninsured losses with respect to some of our properties.
o All of our properties are located in areas that are subject to earthquake
activity. Our insurance policies do not cover damage caused by seismic
activity, although they do cover losses from fires after an earthquake. We
generally do not consider such insurance coverage to be economical. If an
earthquake occurs and results in substantial damage to our properties, or
properties that we may acquire in the future, we could lose our investment
in those properties and our financial condition, operating results and
ability to make distributions to our stockholders could be materially
adversely affected.
9
<PAGE>
FEDERAL INCOME TAX RISKS
FAILURE TO QUALIFY AS A REIT. We intend to elect to be taxed as a REIT under the
federal income tax laws for the year ending December 31, 1999. To maintain that
status, we must meet certain tests for income, assets, distributions to
stockholders, ownership interests and other significant conditions. If we fail
to qualify as a REIT in any taxable year, we will not be allowed a deduction for
distributions to our stockholders in computing our taxable income and would be
subject to federal income tax (including any applicable alternative minimum tax)
on our taxable income at regular corporate rates. Moreover, unless we were
entitled to relief under certain provisions of the tax laws, we would be
disqualified from treatment as a REIT for the four taxable years following the
year in which our qualification was lost. As a result, funds available for
distribution to our stockholders would be reduced for each of the years involved
and, in addition, we would no longer be required to make distributions to our
stockholders. Although we currently intend to operate in a manner designed to
enable us to qualify and maintain our REIT status, it is possible that economic,
market, legal, tax or other considerations may cause us to fail to qualify as a
REIT, or may cause our board of directors either to refrain from making the REIT
election or to revoke that election once made.
REIT DISTRIBUTION REQUIREMENTS. To maintain REIT status we must distribute as a
dividend to our stockholders, at least 95% of our otherwise taxable income
(after certain adjustments) with respect to each tax year. We may also be
subject to a 4% non-deductible excise tax in the event our distributions to
stockholders fail to meet certain other requirements. Failure to comply with
these requirements could result in our income being subject to tax at regular
corporate rates and could cause us to be liable for the excise tax.
OWNERSHIP LIMIT NECESSARY TO MAINTAIN REIT QUALIFICATION. As a REIT, we are
subject to certain restrictions on the percentage of the total value of our
stock that may be owned by five or fewer individuals which may not exceed 50% as
determined under federal income tax laws. Our Articles of Amendment and
Restatement generally prohibit the direct or indirect ownership of more than 9%
of our common stock by any stockholder. This limit excludes the members of the
Berg Group, who have an aggregate ownership limit of 20%. In addition, as
permitted by our Articles of Amendment and Restatement, our board of directors
recently provided an exception to two other stockholders that permits them to
collectively own, directly or indirectly, up to 19.4% of our common stock on an
aggregate basis, subject to the terms of an ownership limit exemption agreement.
In general, our Articles of Amendment and Restatement prohibit the transfer of
shares which result in a loss of our REIT qualification and provide that any
such transfer or any other transfer which causes a stockholder to exceed the
ownership limit will be subject to mandatory forfeiture provisions.
UNCERTAINTIES REGARDING DISTRIBUTIONS TO STOCKHOLDERS
Our income will consist primarily of our share of the income of the operating
partnerships, and our cash flow will consist primarily of our share of
distributions from the operating partnerships. Differences in timing between the
receipt of income and the payment of expenses in arriving at our taxable income
or the taxable income of the operating partnerships and the effect of required
debt amortization payments could require us directly or through the operating
partnerships to borrow funds on a short-term basis to meet our intended
distribution policy.
The amount and timing of distributions by the operating partnerships and of our
distributions to our stockholders will be determined by our board of directors.
Our board of directors will consider many factors prior to making any
distributions, including the following:
o The amount of cash available for distribution;
o The operating partnerships' financial condition;
o Any decisions by the board of directors to reinvest funds rather than to
distribute such funds;
o The operating partnerships' capital expenditures;
o The effects of new property acquisitions, including acquisitions under
our existing agreements with members of the Berg Group.
o The annual distribution requirements under the REIT provisions of the
federal income tax laws; and
o Other factors as our board of directors deems relevant.
There is no assurance that we will be able to meet or maintain our intended cash
distribution policies.
OUR OBLIGATION TO PURCHASE TENDERED L.P. UNITS
Each of the limited partners of the operating partnerships (other than Carl E.
Berg and Clyde J. Berg) has the annual right to exercise put rights and cause
the operating partnerships to purchase a portion of the limited partner's 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 any such right by a limited partner, we 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. These put rights
become exercisable on December 29, 1999,
10
<PAGE>
and are available once a year for a maximum of one-third of the eligible limited
partners' total L.P. Units. If the total purchase price of the L.P. Units
tendered by all of the eligible limited partners in one year exceeds $1 million,
we or the operating partnerships will be entitled to reduce proportionately the
number of L.P. Units to be acquired from each tendering limited partner so that
the total purchase price does not exceed $1 million dollars. The exercise of
these put rights may reduce the amount of cash that we have available to
distribute to our stockholders.
SHARES ELIGIBLE FOR FUTURE SALE
We cannot predict the effect, if any, that future sales of shares of common
stock, 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 exercise of the exchange rights
held by the limited partners of the operating partnerships), 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 limited
partners (subject to the applicable REIT qualification ownership limit), if they
exchange their L.P. Units for shares of common stock pursuant to their exchange
rights, or may be sold by the Company to raise funds required to purchase such
L.P. Units if the limited partners elect to tender L.P. Units to us using their
put rights. In addition, stockholders of the Company currently may resell more
than 8 million shares of common stock under two currently effective resale
prospectuses and such offers may adversely affect the market price of the common
stock. Subject to certain rights that we possess to halt offers and sales of
shares of common stock under those prospectuses under certain circumstances, we
intend to maintain the effectiveness with the SEC of the registration statements
under which these shares are offered for sale with the SEC until the end of
December 1999.
MARKET INTEREST RATES MAY HAVE AN EFFECT ON THE VALUE OF OUR PUBLICLY TRADED
SECURITIES
One of the factors that investors consider important in deciding whether to buy
or sell shares of a REIT, is the distribution rate on such shares (as a
percentage of the price of such shares) relative to market interest rates. If
market interest rates go up, prospective purchasers of REIT shares may expect a
higher distribution rate. Higher interest rates would not, however, result in
more funds available for us to distribute, and, in fact, would likely increase
our borrowing costs and potentially decrease funds available for distribution.
Thus, the higher market interest rates could cause the market price of our
common stock to go down.
11
<PAGE>
ITEM 2. PROPERTIES
The following table sets forth certain information relating to the properties of
Mission West Properties, Inc. as of December 31, 1998.
<TABLE>
<CAPTION>
Percentage
Leased Average Major
Property Sq. Ft. as of 1998 Tenants 1998
No. of of December 31, Economic Major Rentable Annualized
Buildings Project 1998 Occupancy(1) Tenants Sq. Ft. Rent (2)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
10401 Bubb(3) 1 20,330 100% 100% Celerity Systems 20,330 $378,138
2001 Logic 1 72,426 100% 100% Motorola 72,426 $1,294,977
45700 Northport Loop 1 47,570 100% 100% Philips Electronics 47,570 $669,960
East
45738 Northport Loop 1 44,256 100% 100% EIC Corporation 44,256 $519,651
West
4050 Starboard 1 52,232 100% 100% Flash Electronics, Inc. 52,232 $752,141
Drive
3501 W. Warren 1 67,864 100% 100% Alcatel Comptech, Inc. 51,864 $1,077,426
Avenue-46600
Fremont Blvd.
48800 Milmont 1 53,000 100% 100% Premisys Communications 53,000 $580,842
Drive
4750 Patrick 1 65,780 100% 100% Cisco Systems, Inc. 65,780 $907,764
Henry
4949 Hellyer 1 200,484 100% 100% Cisco Systems, Inc. 200,484 $2,033,580
Avenue
Triangle Technology 7 416,527 100% 100% $4,554,186
Park (4) Intevac Corporation 167,063
SDL, Inc. 102,150
Maxell Corporation 63,812
5850-5870 Hellyer 1 109,715 100% 100% $404,392
Clear Logic, Inc. 64,805
Gadzoox Networks, Inc. 44,910
2251 Lawson 1 125,000 100% 100% Amdahl Corporation 125,000 $1,169,450
1230 Arques 1 60,000 100% 100% Amdahl Corporation 60,000 $305,669
1250 Arques 4 200,000 100% 100% Amdahl Corporation 200,000 $755,923
3120 Scott 1 75,000 100% 100% Amdahl Corporation 75,000 $1,157,085
20400 Mariani 1 105,000 100% 100% Behring Diagnostic 105,000 $1,008,000
10500 De Anza 1 211,000 100% 100% Apple Computer, Inc. 211,000 $4,338,840
20605-705 2 142,000 100% 100% Apple Computer, Inc. 142,000 $1,975,382
Valley Green
10300 Bubb 1 23,400 100% 100% Apple Computer, Inc. 23,400 $365,040
10440 Bubb Road 1 19,500 100% 100% Linotext Digital Color 19,500 $251,550
10460 Bubb 1 48,302 100% 100% General Surgical 48,302 $579,624
Innovations, Inc.
1135 Kern 1 18,300 100% 100% Davicom Semiconductor, Inc. 18,300 $237,492
Avenue
1190 Morse/405 1 28,350 100% 100% Coptec West 28,350 $320,352
Tasman
450 National 1 36,100 100% 100% Savi Technology, Inc. 36,100 $345,756
3301 Olcott 1 64,500 100% 100% NEC Electronics, Inc. 64,500 $1,076,247
2800 Bayview 1 59,736 100% 100% Concept System Design, Inc. 59,736 $623,605
6850 Santa Teresa 1 30,000 100% 100% Magnex Corporation 30,000 $213,528
12
<PAGE>
140-150 Great 2 104,349 100% 100% $822,602
Oaks-6781 Via Atcor Corporation 52,000
Del Oro GSS/Array Technology 30,549
6540-6541 Via Del Oro 2 66,600 100% 100% $598,966
6385-6387 San Ignacio Exsil Incorporated 20,076
Alcatel Network Systems, Inc. 17,400
Modutek Corporation 17,400
6311-6351 San Ignacio 5 360,254 100% 100% $3,604,218
On Command Video 131,320
Sequel, Inc. 66,042
Avnet, Inc. 53,494
Photon Dynamics 50,400
Teledex 30,000
6320-6360 San Ignacio 1 157,292 100% 100% $1,499,456
Bell Sports, Inc. 63,638
Delrina/Symantec Corporation 45,000
2610 N. First St. 2 170,810 100% 99.7% $2,009,736
&75 E.Trimble Comerica Bank 93,984
County of Santa Clara 63,310
2033-2243 Samaritan 3 235,122 100% 100%
Condor Systems 110,490 $2,891,416
Texas Instruments 48,667
1170 Morse 1 34,750 100% 100% CA Parkinsons Foundation 34,750 $378,664
3236 Scott 1 54,672 100% 100% Celeritek, Inc. 54,672 $698,712
1212 Bordeaux 1 71,800 100% 100% ESL Incorporated 71,800 $1,273,344
McCandless Technology 14 706,367 97.1% 99.7% $8,597,240
Park (5) Larscom, Inc. 118,708
Arrow Electronics, Inc. 104,606
Mektec Corporation 51,602
Sherpa Corporation 50,768
Chartered Semiconductor 45,312
Adaptec 42,700
Panasonic Industrial Co. 40,970
1600 Memorex Drive 1 107,500 100% 100% Sasco 107,500 $697,560
1650 Richard Ave. 1 52,800 100% 100% Forward Technology 52,800 $335,004
-- ----------- ------------
TOTAL 71 4,518,688 $51,303,518
== =========== ============
</TABLE>
(1) Average Economic Occupancy is calculated by taking the 1998 annualized rent
for the subject property, deducting the monthly rent that could have been
received for the vacant space, and dividing by the 1998 annualized rent. The
amount of rent that could have been received for the vacant space is determined
by using the same monthly rent that was ultimately received for the vacant
space.
(2) Annualized rents are calculated by taking the rents for the last two
quarters of 1998 and multiplying them by two.
(3) This property is owned through a joint venture in which the Company, through
the operating partnerships, owns an 83.3% interest.
(4) One of the buildings is owned through a joint venture in which the Company,
through a joint venture in which the Company, through the operating
partnerships, owns a 75% interest.
(5) A lease for 42,700 square feet of space expired on February 28,
1999 and is vacant as of March 15, 1999. The lease for 20,330 square feet of
space had expired and the space was vacant as of December 31, 1998, but has
subsequently been leased with a commencement date of March 1, 1999.
13
<PAGE>
LEASE EXPIRATIONS
The following table sets forth a schedule of the lease expirations for the
properties for each of the ten years beginning with 1999, assuming that none of
the tenants exercise existing renewal options or termination rights.
<TABLE>
<CAPTION>
Percentage of
Year of Number of Rentable Square 1999 Annual Annual Base Rent
Lease Leases Feet Subject to Base Rent Under Represented by
Expiration Expiring Expiring Leases Expiring Leases(1) Expiring Leases(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 10 255,164 $ 3,363,000 6.24%
2000 17 609,625 7,332,544 13.61%
2001 20 475,391 5,235,229 9.72%
2002 20 1,117,201 15,271,604 28.34%
2003 11 506,618 5,680,216 10.54%
2004 14 922,058 10,024,998 18.60%
2005 3 157,285 2,058,126 3.82%
2006 1 93,984 1,060,144 1.97%
2007 4 256,362 2,670,371 4.96%
2008 & 1 125,000 1,186,886 2.20%
thereafter
--- --------- ----------- -------
101 4,518,688 $53,883,118 100.00%
=== ========= =========== =======
</TABLE>
(1) The base rent for leases expiring in 1999 is based on January 1999 monthly
rents multiplied by 12. Base rent for all leases expiring after 1999 are based
upon scheduled 1999 annual rents.
(2) Based upon 1999 annual rents as discussed in note (1).
14
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
Neither the Company, the operating partnerships nor the properties are subject
to any material litigation nor, to our knowledge, is any material litigation
threatened against the Company, the operating partnerships or the properties.
From time to time, we are engaged in legal proceedings arising in the ordinary
course of our business, and we do not consider any of such proceedings to be
material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held a special meeting of the shareholders of Mission West Properties on
December 29, 1998. At the special meeting, the following matters were voted upon
by the holders of outstanding shares of common stock, and with respect to each
matter, the number of votes for and against and the number of abstentions and
broker non-votes are set forth below. (See the Proxy Statement/Prospectus filed
on November 20, 1998 as part of the Registration Statement, which is
incorporated by reference into this Item 4.)
o Approval of proposed private placement of 6,495,058 shares of common stock
for $4.50 per share. There were 1,570,785 votes for the proposal, 29 votes
against the proposal, 34 abstentions and not more than 109,336 broker or
other shareholder non-votes.
o Ratification and approval of our acquisition of the sole general partner
interest representing approximately 12.11% of the total partnership
interests in each of the operating partnerships owning approximately 4.34
million rentable square feet of leased commercial R&D buildings, in which
the principal limited partners are Carl E. Berg and certain of his
affiliates, pursuant to the terms of the Acquisition Agreement, dated as of
May 14, 1998 and an Amendment to Acquisition Agreement, effective July 1,
1998. There were 1,570,795 votes for the proposal, 16 votes against the
proposal, 37 abstentions and not more than 109,336 broker or other
shareholder non-votes.
o Approval of our acquisition of the right to acquire, certain pending
commercial R&D building developments consisting of approximately 1.02
million rentable square feet from Mr. Berg and certain of his affiliates
under the terms of the Pending Projects Acquisition Agreement. There were
1,570,795 votes for the proposal, 16 votes against the proposal, 37
abstentions and not more than 109,336 broker or other shareholder
non-votes.
o Approval of our acquisition of an option to acquire future commercial R&D
building developments on land currently held by Mr. Berg and certain of his
affiliates under the terms of the Berg Land Holdings Option Agreement.
There were 1,570,805 votes for the proposal, 3 votes against the proposal,
37 abstentions and not more than 109,339 broker or other shareholder
non-votes.
o Approval of the issuance of up to 93,398,705 shares of common stock upon
the future redemption or exchange of 93,398,705 L.P. Units, including
33,919,072 L.P. Units issuable upon the acquisition of the pending
development projects from Mr. Berg and certain of his affiliates under the
terms of the Pending Projects Acquisition Agreement. There were 1,570,792
votes for the proposal, 19 votes against the proposal, 34 abstentions and
not more than 109,339 broker or other shareholder non-votes.
o Approval of a proposal to reincorporate Mission West Properties under the
laws of the State of Maryland through a merger with and into its wholly
owned subsidiary Mission West Properties, Inc. and to approve the adoption
of the Merger Agreement and Plan of Merger. There were 1,570,792 votes for
the proposal, 19 votes against the proposal, 28 abstentions and not more
than 109,345 broker or other shareholder non-votes.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANTS' COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock is listed on the American Stock Exchange ("AMEX") and the
Pacific Exchange, Inc. and trades under the symbol "MSW." The previous halt in
trading instituted by AMEX, which began at the opening of trading on October 20,
1997, ended when trading resumed on December 8, 1998.
The following are the high and low sales prices, by quarter, of the 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>
1998 1997
--------------------- ---------------------
High(1) Low(1) High Low
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
1st Quarter(2) N/A N/A 397 1/2 56 1/4(3)
2nd Quarter N/A N/A 112 1/2 52 1/2
3rd Quarter N/A N/A 153 3/4 93 3/4
4th Quarter(4) 11 6 1/2 136 7/8 93 3/4
</TABLE>
1 High and low information for the first three quarters of 1998 is not
presented because trading of the common stock was suspended during this
period.
2 In 1997, we changed our fiscal year end from November 30 to December 31.
Thus, the first quarter of 1997 includes December 1996.
3 During the first fiscal quarter in 1997 (on February 27, 1997), we paid a
$9.00 special dividend ($270 adjusted to give retroactive effect to the 1 for
30 reverse stock split).
4 During the fourth quarter of 1998, amounts shown reflect high and low upon
commencement of trading.
5 During the fourth fiscal quarter in 1997 (on October 21, 1997), we paid a
$3.30 special dividend ($99 adjusted to give retroactive effect to the 1 for
30 reverse stock split).
As of March 15, 1999, the approximate number of holders of record of the common
stock was 408. We declared and paid a special dividend of $9.00 per share on
February 27, 1997. Another special dividend of $3.30 per share was paid on
October 21, 1997. We paid no dividends during 1998.
The closing price of our common stock on December 31, 1998 was $6 3/4 per share.
RECENT SALES OF UNREGISTERED SECURITIES
In December 1998, we issued 6,495,058 shares of common stock at $4.50 per share
to accredited investors subject to the terms of two Stock Purchase Agreements,
each dated as of May 4, 1998, relying on exemptions from registration under the
Securities Act of 1933 provided by Rule 506 of Regulation D. We received the
aggregate consideration of approximately $28.3 million in cash. Of the total
number of shares sold in the private placements, 5,800,000 shares were offered
in a placement managed by Ingalls & Snyder LLC for which purchasers agreed to
pay a placement fee off $.05 per share to Ingalls & Snyder LLC. We had no
liability for the placement fee. In addition, 200,000 of the total shares were
issued to John Moran in payment for services rendered related to our capital
formation efforts in assisting us to obtain such equity financing.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected historical financial information for
Mission West Properties, Inc. Selected consolidated financial data is derived
from the audited financial statements and notes thereto (see Part II - Item 8
"Consolidated Financial Statements and Supplementary Data," below) and is as
follows:
<TABLE>
<CAPTION>
One
Year Month Year Ended December 31,
Ended Ended
December December
31, 31,
------- ------- ----------------------------------
1998 1997 1997 1996 1995 1994
------ ------ ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental revenues $27,285 $1,376 $7,065 $7,146 $ 6,637
Tenant reimbursements 4,193 - - - -
Other 278 $ 27 359 348 380 564
------- ------- ------ ------ ------ -------
Total revenues 31,756 27 1,735 7,413 7,526 7,201
------- ------- ------ ------ ------ -------
Expenses:
Property operating and maintenance
and real estate taxes 4,821 - 246 1,643 1,783 1,991
Interest 4,685 - 425 3,045 3,435 3,088
Interest (related parties) 3,511 - - - - -
General and administrative expenses 1,501 139 1,467 991 945 1,200
Depreciation and amortization 5,410 - 246 1,369 1,352 1,472
------- ------- ------ ------ ------ -------
19,928 139 2,384 7,048 7,515 7,751
------- ------- ------ ------ ------ -------
Income (loss) before gain on sale of real
estate assets, minority interest
and income taxes 11,828 (112) (649) 365 11 (550)
Gain (loss) on sale - 4,736 (306) 76 1,867
Provision for estimated loss on real
estate - - - - - (5,200)
------- ------- ------ ------ ------ -------
Income (loss) before minority interest
and income taxes 11,828 (112) 4,087 59 87 (3,883)
Minority interest 12,049 - - - - -
------- ------- ------ ------ ------ -------
(Loss) income before income taxes (221) (112) 4,087 59 87 (3,883)
(Benefit) provision for income taxes - (38) 1,043 24 35 (1,500)
Cumulative effect of change in accounting - - - - - 440
------- ------- ------ ------ ------ -------
Net income $ (221) $ (74) $3,044 $ 35 $ 52 $(1,943)
======== ======== ======= ======= ======= =======
Basic income (loss) per share (1) $ (.13) $ (.05) $18.48 $ .77 $ 1.12 $ 39.65
Diluted income (loss) per share (1) $ (.13) $ (.05) $18.48 $ .72 $ 1.06 $ 39.69
PROPERTY AND OTHER DATA (2):
Total properties, end of period 71
Total square feet, end of period 4,519
Average monthly rental revenue $1.01
per square foot(3)
Occupancy at end of period 99%
FUNDS FROM OPERATIONS (2)(4)(5): $17,196
Cash flow from operations $16,264 $(46) $(1,000) $1,221 $598 $2,450
Cash flow from investing (118) - 46,198 2,528 191 492
Cash flow from financing (21,469) 150 (42,844) (1,204) (2,415) (1,556)
December 31,
- -------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------ ------ ------
BALANCE SHEET DATA(6): (dollars in thousands)
Real estate assets, net of $516,029 - $46,285 $47,597 $49,612
accumulated depreciation
Total assets $519,866 5,763 46,324 47,570 50,963
Debt 184,389 - 30,753 31,967 34,382
Debt - related parties 20,752 - - - -
Total liabilities 213,234 552 32,142 33,433 36,243
Minority interest 273,379 - - - -
Stockholders' equity 33,253 5,211 14,182 14,137 14,720
Common stock outstanding 8,218,594 1,501,104 45,704 45,624 48,957
LP Units issued and outstanding 60,151,697 - - - -
</TABLE>
17
<PAGE>
(1)As adjusted for the 1 for 30 reverse stock split.
(2)Property and other data and FFO shown only as of December 31, 1998.
(3)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.
(4)Asdefined 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 our 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
we define FFO. See "Distribution Policy."
(5)Through one of the operating partnerships, we own 75% of one of the joint
ventures and an 83.33% interest in the other joint venture. For the period
from July 1, 1998 through December 31, 1998, the amounts of net income from
those joint ventures attributable to the minority interests held outside
the operating partnerships totaled $0.042 million. This amount has not been
added back in the determination of FFO on a fully-diluted basis.
(6)Balance sheet information for 1997 is shown as of December 31, 1997.
18
<PAGE>
The following table sets forth selected historical financial information for the
Berg Properties (our accounting predecessor) as of and for the periods indicated
on an historical basis. Selected consolidated financial data is derived from the
audited financial statements and notes thereto (see Part II - Item 8
"Consolidated Financial Statements and Supplementary Data," below) and is as
follows:
<TABLE>
<CAPTION>
Berg Properties (Predecessor)
- ------------------------------------------------------------------------------------------------------------
Six
Months
Ended
June
30, Year Ended December 31,
------- ---------------------------------------------------
1998 1997 1996 1995 1994 1993
------- ------- ------ ------ ------ ------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental revenues $22,341 $40,163 $28,934 $23,064 $25,186 $25,620
Tenant reimbursements 3,826 6,519 3,902 4,193 3,190 3,486
------- ------- ------- ------- ------- -------
Total revenue 26,167 46,682 32,836 27,257 28,376 29,106
------- ------- ------- ------- ------- -------
Expenses:
Operating expenses 2,088 3,741 1,906 2,032 1,355 1,129
Real estate taxes 2,126 4,229 3,750 3,595 2,716 3,116
Management fee 645 1,050 827 654 739 994
Interest(related parties) 61 248 293 357 329 45
Interest 3,044 5,919 6,090 6,190 8,222 9,054
Depreciation and amortization 3,862 7,717 6,739 6,323 6,851 7,156
------- ------- ------- ------- ------- -------
11,826 22,904 19,605 19,151 20,212 21,494
------- ------- ------- ------- ------- -------
Income before gain on sale of real
estate and extraordinary item 14,341 23,778 13,231 8,106 8,164 7,612
Gain on sale - - - 20,779 - -
------- ------- ------- ------- ------- -------
Income before extraordinary item 14,341 23,778 13,231 28,885 8,164 7,612
Extraordinary item - - 610 3,206 - 1,766
------- ------- ------- ------- ------- -------
Net income $14,341 $23,778 $13,841 $32,091 $8,164 $9,378
======= ======= ======= ======= ======= =======
PROPERTY AND OTHER DATA:
Total properties, end of period 58 58 53 50 41 40
Total square feet, end of period 3,779 3,779 3,392 3,195 2,856 2,796
Average monthly rental revenue
per square foot(1) $0.99 $0.86 $0.78 $0.71 $0.96 $0.84
Occupancy at end of period 100% 97.7% 91.9% 87.4% 80.3% 89.6%
FUNDS FROM OPERATIONS(2) $18,203 $31,495 $19,970 $14,429 $15,015 $14,768
Cash flow from operations $17,798 $29,909 $20,248 $16,392 $16,518 $18,480
Cash flow from investing 690 (17,251) (29,275) (6,353) (5,003) (3,248)
Cash flow from financing (24,207) (8,432) 9,433 (10,013) (12,093) (13,599)
December 31,
June 30, ------------------------------------------------
1998 1997 1996 1995 1994 1993
------- ------- ------- ------- ------- -------
BALANCE SHEET DATA: (dollars in thousands)
Real estate assets, net of
accumulated depreciation $ 95,600 $100,152 $90,710 $72,319 $62,450 $ 61,610
Total assets 104,546 113,950 97,651 73,730 59,957 64,516
Debt 37,868 76,507 73,416 69,543 79,594 100,126
Debt - related parties 156,632 1,975 2,546 3,051 2,889 1,433
Total liabilities 200,779 84,299 80,826 76,199 83,720 104,117
Partners' (deficit) / equity (96,233) 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."
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS, INCLUDING BUT NOT
LIMITED TO STATEMENTS WITH RESPECT TO THE FUTURE FINANCIAL PERFORMANCE,
OPERATING RESULTS, PLANS AND OBJECTIVES OF MISSION WEST PROPERTIES, INC.. ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING,
"FORWARD-LOOKING INFORMATION."
OVERVIEW
Our original predecessor 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, Palomar Mortgage Investors terminated new loan
activity and, in 1975, changed its name to Mission Investment Trust. In 1979,
Mission Investment Trust terminated its status as a REIT and began to develop
and market the properties that it owned. In 1982, Mission West Properties was
incorporated as a successor to Mission Investment Trust.
In July 1996, we entered into an agreement to sell all of our real estate
assets. That agreement was subsequently terminated and replaced, as was a
subsequent agreement. On December 6, 1996, we entered into an agreement to sell
all of our real estate assets to Spieker Properties, L.P. for $50.5 million in
cash.
On February 4, 1997, we 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, we
retained only nominal assets. 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.
Subsequently, we accepted a proposal by Carl E. Berg to acquire control of the
corporation as a vehicle to acquire office/R&D real estate, or interests in
entities owning such real estate from Mr. Berg and the Berg Group, including
BBE. On May 27, 1998, we entered into a Stock Purchase Agreement with BBE, and
transferred most of its share purchase rights to unaffiliated accredited
investors as of August 4, 1997. A special meeting of the shareholders of Mission
West Properties was held on August 5, 1997, at which they approved the
transaction. The transaction was completed on September 2, 1997, at which time
all of our existing officers and directors resigned, and BBE and the other
investors acquired a 79.6% controlling ownership position as a group.
On October 20, 1997, we paid a further distribution of $3.30 per share to
shareholders of record as of August 28, 1997, from available cash including $.9
million 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 American Stock Exchange halted trading of
the common stock at the opening of trading on October 20, 1997.
To increase the price per share of the common stock, raise funds and increase
assets and shareholders' equity, at a special meeting of shareholders of Mission
West Properties held on November 10, 1997, the shareholders approved a 1 for 30
reverse stock split and the sale of 1,250,000 newly issued shares of common
stock at $4.50 per share in a private placement offering. We completed that
transaction as of November 12, 1997. Also in November 1997, we changed our
fiscal year end to December 31.
In May 1998, we, the Berg Group members, John Kontrabecki, and certain other
persons entered into the Acquisition Agreement providing, among other things,
for our acquisition of interests as the sole general partner in the operating
partnerships. At the time, the operating partnerships held approximately 4.34
million rentable square feet of R&D property located in Silicon Valley. The
agreement also provided for the parties to enter into the Pending Projects
Acquisition Agreement, the Berg Land Holdings Option Agreement and the Exchange
Rights Agreement, following shareholder approval. Effective July 1, 1998, we
consummated our acquisition of the general partner interests in the operating
partnerships. We effected our purchase of the general partnership interests by
issuing to each of the operating partnerships a demand note bearing interest at
7.25% per annum, aggregating $35.2 million of principal payable no later than
July 1, 2000 (the "Demand Notes"). All limited partnership interests in the
operating partnerships were converted into 59,479,633 L.P. Units upon
consummation of the acquisition. In the aggregate, L.P. Units represented
ownership of approximately 87.89% of the operating partnerships commencing July
1, 1998. Each L.P. Unit may be exchanged for one share of common stock pursuant
to certain exchange rights.
At December 31, 1998, the outstanding balance under the Demand Notes owed the
operating partnerships by the Company was $2,005. The Demand Notes, along with
the interest expense (interest income to the operating partnerships), is
eliminated in consolidation and is
20
<PAGE>
not included in the corresponding line items
within the consolidated financial statements. However, the interest income
earned by the operating partnerships (interest expense to us) in connection with
this debt is included in the calculation of minority interest as reported on the
consolidated statement of operations, thereby reducing our net income
attributable by this same amount. At present, our only means for repayment of
this debt (be it in this form or refinanced with another lender) is through
distributions received from the operating partnerships in excess of the amount
of dividends to be paid to our shareholders.
On December 29, 1998, we completed the sale of 6,495,058 shares of common stock,
at a price of $4.50 per share, to a number of accredited investors resulting in
aggregate proceeds, net of fees and offering costs, of approximately $27.8
million. All of the proceeds were used to pay down amounts outstanding under the
Demand Notes due to the operating partnerships. Also as of December 29, 1998, we
and the limited partners in the operating partnerships entered into the Exchange
Rights Agreement, and we entered into the Pending Projects Acquisition Agreement
and the Berg Land Holdings Option Agreement with Carl E. Berg and other members
of the Berg Group.
On December 30, 1998, we reincorporated under the laws of the State of Maryland
through the merger of Mission West Properties into Mission West Properties, Inc.
Accordingly, shares of the former company, Mission West Properties, a California
corporation (no par value), which were outstanding at December 30, 1998, have
been converted into shares of our common stock ($.001 par value per share) on a
one-for-one basis.
As of December 31, 1998, we owned a general partnership interest of 12.04%,
12.11%, 11.96% and 12.11% in Mission West Properties, L.P., Mission West
Properties, L.P. I, Mission West Properties, L.P. II and Mission West
Properties, L.P. III, which are the operating partnerships, respectively. This
represents a 12.02% general partnership interest in the operating partnerships,
taken as a whole, on a weighted average basis.
We intend to elect and qualify to be taxed as a REIT commencing with the taxable
year ending December 31, 1999.
We have two wholly owned corporate subsidiaries, MIT Realty, Inc. and Mission
West Executive Aircraft Center. Both corporations are inactive.
RESULTS OF OPERATIONS
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE THIRTEEN-MONTH PERIOD
ENDED DECEMBER 31, 1997.
Acquisition of the general partnership interests in the operating partnerships
effective July 1, 1998 substantially altered our operations. As a consequence,
operating results for the year ended December 31, 1998 are not meaningfully
comparable to operating results for the thirteen-month period ended December 31,
1997.
The acquisition of the general partnership interests in the operating
partnerships was accounted for as a purchase. Our consolidated operating results
for the year ended December 31, 1998 include the results of operations, assets
and other financial data for the operating partnerships from July 1, 1998 to
December 31, 1998, and our results of operations for the period from January 1,
1998 through December 31, 1998. Therefore, the results of operations for the
year ended December 31, 1998 include only six months of activity for our current
real estate operations.
For the year ended December 31, 1998, rental revenues from real estate were
approximately $27.3 million, which included an adjustment for straight-line rent
of approximately $1.6 million. Tenant reimbursements were $4.2 million, and
other income, including interest, totaled approximately $0.3 million. Total
expenses for 1998 reached almost $20 million, of which approximately $18.4
million related directly to newly acquired real estate operations. General and
administrative expenses accounted for the remainder of our expenses.
The minority interest's portion of income was approximately $12.05 million,
resulting in a consolidated net loss of $.221 million to us for the same period.
Minority interest represents the limited partners' ownership interest of 87.98%,
on a weighted average basis, in the operating partnerships.
During the fiscal year ended December 31, 1997, we sold our entire real estate
portfolio of 11 properties. Upon completion of the sale of nine of the
properties, the Company received $50.5 million in cash, from which we repaid all
debt encumbering the properties (thus, the elimination of all future interest
expense) and paid a majority of the related transaction and transaction costs,
including $3.0 million in "break-up" fees from previously terminated sales
transactions. We recognized a net gain of approximately $4.7 million on the
sale.
21
<PAGE>
We declared and paid a special dividend of $9.00 per share to shareholders in
February 1997. That dividend represented the available portion of the proceeds
from the sale of the nine properties. Additionally, we declared and paid a
special cash distribution of $3.30 per share that was paid to shareholders in
October 1997.
Following the sale of all 11 properties, coupled with the cash dividends paid to
shareholders, only cash and receivables were left in the Company and, therefore,
the resulting corporate entity had insignificant revenue-generating and
cash-generating capabilities and minimal operations, aside from interest income
and general and administrative expenses.
COMPARISON OF THE THIRTEEN-MONTH PERIOD ENDED DECEMBER 31, 1997 TO THE FISCAL
YEAR ENDED NOVEMBER 30, 1996
During the month ended December 31, 1997, we held minimal assets, primarily cash
and cash equivalents obtained from sales of common stock and held as temporary
investments. We recognized interest income in the amount of $.027 million and
general and administrative expenses of $.139 million resulting in a net loss
before income tax benefit of $1.12 million for the month ended December 31,
1997. During the 12-month period ended November 30, 1997, our activities
consisted of selling our existing portfolio of real estate, paying our debts,
making distributions to shareholders and raising additional capital through the
sale of common stock to BBE and its co-investors. During fiscal year 1996, we
continued to focus operating efforts on managing our real estate portfolio of
eleven operating projects; no properties were sold and no development occurred
during the year. In addition to managing the portfolio, we entered into an
agreement to sell the portfolio in July 1996. Thereafter our efforts involved
winding up our real estate operations until its transactions with Mr. Berg, BBE
and other investors in 1997.
CHANGES IN FINANCIAL CONDITION
DECEMBER 31, 1998 COMPARED WITH DECEMBER 31, 1997
As a result of our acquisition of the general partnership interests and control
of the operating partnerships, the financial statements of the Company
consolidate the financial position and results of the operating partnerships,
effective as of July 1, 1998. Accordingly, through our general partnership
interests, we own, operate and manage 71 properties representing a total of
approximately 4.52 million rentable square feet.
On September 23, 1998, in our capacity as the general partner of the operating
partnerships, we obtained a loan from Prudential Insurance Company of America in
the amount of $130 million (the "Prudential Loan"). The 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 loan bears interest at a fixed rate of 6.56% per annum and is
payable in monthly installments of approximately $.83 million which includes
principal (based upon a 30 year amortization) and interest. The net proceeds of
the loans were used to pay off approximately $14.22 million of mortgage notes
payable with the remaining amount used to reduce the outstanding principal
balance owed under the mortgage notes payable (related parties).
On September 30, 1998, the operating partnerships assumed lines of credit with
Wells Fargo Bank, N.A from the Berg Group. The Wells Fargo line matures October
1999 and bears interest at the lesser of (a) the Wells Fargo prime rate in
effect on the first day of each calendar month; (b) LIBOR plus 1.65%; or (c) the
Wells Fargo Funds Rate quoted on the first day of each calendar month plus
1.65%. Borrowings outstanding at December 31, 1998 were approximately $27.2
million with availability of $72.8 million.
During the fourth quarter of 1998, we closed on the acquisition of two newly
constructed R&D properties located on Richard Avenue in Santa Clara, California
and Hellyer Avenue in San Jose, California. These acquisitions added
approximately 163,000 square feet of rentable space and were acquired from the
Berg Group under the Berg Land Holdings Option Agreement and the Pending
Projects Acquisition Agreement. The total gross acquisition price for these two
properties was approximately $13.7 million. Through the operating partnerships,
we assumed approximately $9.6 million of debt due Berg & Berg Enterprises, Inc.
and issued 672,064 L.P units of which 618,684 were issued to various members of
the Berg Group.
Additionally, on December 29, 1998, we completed the sale of 6,295,058 shares of
common stock, at a price of $4.50 per share, to a number of accredited investors
in two separate private placements. The aggregate proceeds to us, net of a fees
and offering costs, was approximately $27.8 million. The proceeds were used to
pay outstanding amounts under the Demand Notes. Of the total number of shares
sold in the this transaction, 5,800,000 shares were offered in a placement
managed by Ingalls & Snyder LLC ("Ingalls & Snyder"). John Moran, a principal of
Ingalls & Snyder, received 200,000 shares of common stock in payment for
services rendered in connection with the placement of such shares.
On March 30, 1998 Michael J. Anderson, our Vice President and Chief Operating
Officer, purchased 200,000 shares of common stock at $4.50 per share in exchange
for a $.9 million note payable to us. The note is a full recourse promissory
note bearing interest at 5.59% and is collateralized by a pledge of the shares.
Interest is payable annually and principal is due March 30, 2003. Additionally,
22
<PAGE>
in December 1998, Mr. Anderson acquired 25,000 shares of our common stock upon
partial exercise of his option grant. The exercise price was $4.50 per share.
DECEMBER 31, 1997 COMPARED WITH NOVEMBER 30, 1996
Nearly all changes in our financial position during 1997 resulted from the sale
of our real estate portfolio. Proceeds from the sale of the properties were used
to pay all debt and a substantial portion of all other liabilities, as well as
the special $9.00 per share distribution to shareholders in February 1997. In
addition, the board of directors declared a special distribution of $3.30 per
share which was paid in October 21, 1997.
In connection with the January 1997 sale of real estate, vesting was accelerated
to permit the exercise of stock options for the purchase of 451 shares. During
February 1997, all vested stock options, totaling 5,400 shares, also were
exercised by option holders. Total exercise proceeds to us from all such option
exercises were approximately $0.73 million and were recognized on a "net
exercise" basis. Certain unvested options were canceled in March 1997.
We completed the sale of 200,000 newly issued shares of common stock subsequent
to August 31, 1997. The $0.9 million of proceeds were received on August 5,
1997, and initially classified as a liability until completion of the sale,
which occurred on September 2, 1997.
LIQUIDITY AND CAPITAL RESOURCES
We expect our FFO to be the principal source of liquidity for distributions,
debt service, leasing commissions and recurring capital expenditures. Based
solely upon past operating results for the properties and the results of
operations for the year ended December 31, 1998, on a pro forma basis, the
Company expects its FFO for 1999 to be adequate to meet projected distributions
to shareholders and other presently anticipated liquidity requirements in 1999.
At December 31, 1998, we had total indebtedness of approximately $205.1 million,
including $154 million of fixed rate mortgage debt, $23.9 million of variable
rate mortgage debt (including $20.75 million of related party debt), and $27.2
million of credit facility debt. Of total fixed debt, the Prudential Loan
represents $130 million. The loan bears an interest rate of 6.56% per annum,
maturing October 15, 2008, and is payable in monthly installments of principal
(based upon 30-year amortization) and interest of approximately $0.8 million. We
paid total fees of approximately $0.9 million in connection with that loan.
During 1998, we also assumed responsibility for a $100 million Wells Fargo line
of credit which had an outstanding balance of approximately $27.2 million as of
December 31, 1998. Interest rates on the Wells Fargo Line are variable and have
ranged from approximately 6.49% to 8.20% over the past three fiscal years. The
average rate during the last quarter of 1998 was 6.66%. The Wells Fargo Line
expires in October 1999 and will need to be replaced. The Wells Fargo line of
credit is currently collateralized by 14 properties and is guaranteed by Mr.
Berg and certain members of the Berg Group. There can be no assurance that we
will be able to obtain a similar line of credit with similar terms and our cost
of borrowing funds could increase substantially. As of December 31, 1998, our
debt to total market capitalization ratio (total debt outstanding divided by the
sum of total debt outstanding plus the market value of common stock on a fully
diluted basis) was approximately 31% based upon an estimated total market
capitalization of approximately $666.6 million .
23
<PAGE>
The following table sets forth certain information regarding debt outstanding as
of December 31, 1998:
<TABLE>
<CAPTION>
DEBT DESCRIPTION COLLATERAL MATURITY INTEREST
PROPERTIES BALANCE DATE RATE
- ---------------------------- ----------------------------- --------- --------- ---------
($ in thousands)
<S> <C> <C> <C> <C>
LINES OF CREDIT:
Wells Fargo 1810 McCandless Drive, Milpitas, CA $27,201 10/99 (1)
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 NOTES PAYABLE
(RELATED PARTIES):
2033-2043 Samaritan Drive, San Jose, CA 20,752 12/99 (1)
2133 Samaritan Drive, San Jose, CA
2233-2243 Samaritan Drive, San Jose, CA
MORTGAGE NOTES PAYABLE:
Great West Life & Annuity 6320 San Ignacio Ave, San Jose, CA 7,732 2/04 7.0%
Insurance Company
Great West Life & Annuity 6540 Via del Oro, San Jose, CA 3,689 5/04 7.0%
Insurance Company 6385 San Ignacio Ave., San Jose, CA
Prudential Capital Group 20400 Mariani, Cupertino, CA 2,034 3/09 8.75%
New York Life Insurance 10440 Bubb Road, Cupertino, CA 430 8/09 9.625%
Company
Home Savings & Loan 10460 Bubb Road, Cupertino, CA 525 1/07 9.5%
Association
Amdahl Corporation 3120 Scott, Santa Clara, CA 6,945 3/14 9.42%
Citicorp U.S.A., Inc. 2800 Bayview Drive, Fremont, CA 3,105 4/00 (2)
Mellon Mortgage Company 3530 Bassett, Santa Clara, CA 2,961 6/01 8.125%
Prudential Insurance Company 10300 Bubb, Cupertino, CA 129,767 10/08 6.56%
of America 10500 N. DeAnza, Cupertino, CA
4050 Starboard, Fremont, CA
45700 Northpoint Loop, Fremont, CA
45738 Northpoint Loop, Fremont, CA
450-460 National Ave., 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 Notes Payable Subtotal 157,188
---------
TOTAL $205,141
=========
</TABLE>
(1) The lesser of (a) Wells Fargo prime rate in effect on the first day of each
calendar month; (b) LIBOR plus 1.65%; or (c) the Wells Fargo Purchased
Funds Rate quoted on the first day of each calendar month plus 1.65%.
(2) One month LIBOR plus 1.625% adjusted monthly.
24
<PAGE>
On August 6, 1998, Berg & Berg Developers and Microsoft Corporation entered into
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. We will acquire the R&D properties to be built by
Berg & Berg Developers on the L'Avenida site when and if construction has been
completed and the buildings have been fully leased. Upon any acquisition by us
of the Pending Development Projects, the Berg Group may elect to receive cash or
L.P. Units from the operating partnerships.
HISTORICAL CASH FLOWS
Net cash provided by operating activities for the year ended December 31, 1998
was approximately $16.3 million compared to net cash used in operating
activities of approximately $1.0 million and net cash provided by operating
activities of $1.2 million for the thirteen-month period ended December 31, 1997
and the fiscal year ended December 31, 1996, respectively. The change was a
direct result of our acquisition of the general partnership interests in each of
the operating partnerships.
Net cash used in investing activities was approximately $.12 million for the
year ended December 31, 1998 compared to net cash provided by investing
activities of approximately $46.2 million and $2.5 million for the
thirteen-month period ended December 31, 1997 and the fiscal year ended November
30, 1996, respectively. Cash used in investing activities during 1998 related
solely to improvements made to existing real estate assets acquired as part of
our investment in the operating partnerships. Net cash provided by investing
activities in 1997 related solely to the sales proceeds realized by us on the
final disposition of our real estate holdings held prior to 1998.
Net cash used in financing activities was approximately $21.5 million for the
year ended December 31, 1998 compared to approximately $42.7 million and $1.2
for the thirteen-month period ended December 31, 1997 and the fiscal year
November 30, 1996, respectively. During 1998, we reduced debt outstanding by
utilizing proceeds from new borrowings, issuing 6,495,058 shares of common stock
for gross proceeds of approximately $28.3 million and utilizing cash provided by
operating activities. During the thirteen-month period ended December 31, 1997,
we repaid all debt outstanding at that time, and made dividend payments
aggregating approximately $18.9 million.
CAPITAL EXPENDITURES
The properties require periodic investments of capital for tenant-related
capital expenditures and for general capital improvements. For the years ended
December 31, 1994 through December 31, 1998, the recurring tenant improvement
costs and leasing commissions incurred with respect to new leases and lease
renewals of the properties previously owned or controlled by members of the Berg
Group averaged approximately $1.5 million annually. We will have approximately
865,000 rentable square feet under expiring leases annually from January 1, 1999
through December 31, 2000. We expect 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, 1999 through December 31, 2000. We
believe we will recover substantially all of these sums from the tenants under
the new or renewed leases through increases in rental rates. We expect to meet
our long-term liquidity requirements for the funding of property development,
property acquisitions and other material non-recurring capital improvements
through long-term secured and unsecured indebtedness and the issuance of
additional equity securities by the Company. See "--Forward Looking
Information."
25
<PAGE>
FUNDS FROM OPERATIONS
As defined by 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 our 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 we define FFO. FFO, along with cash provided by
(used in) operating, investing and financing activities for the year ended
December 31, 1998 presented on a historical basis, are summarized in the
following table:
FOR THE
YEAR
ENDED
DECEMBER 31,
1998
-----------
CALCULATION OF FUNDS FROM OPERATIONS:
Net (loss) $ (221)
Add back:
Minority Interest (1) 12,007
Real estate depreciation 5,410
-----------
Total Funds from Operations $17,196
CASH FLOW PROVIDED BY (USED IN): ===========
Operating activities $16,264
Investing activities (118)
Financing activities (21,469)
(1) Through one of the operating partnerships, we own partnership interests in
two joint ventures each of which owns one property. The operating partnership
owns a 75% interest in one of the joint ventures and an 83.33% interest in the
other joint venture. For the period from July 1, 1998 through December 31, 1998,
the amounts of net income from those joint ventures attributable to the minority
interests held outside the operating partnerships totaled $0.042 million. This
amount has not been added back in the determination of FFO on a fully-diluted
basis.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
We do not believe that recently issued accounting standards will materially
impact our financial statements.
YEAR 2000
We utilize computer software for our corporate and real property accounting
records and to prepare our financial statements. The vendor of our current
principal software accounting system has advised us that it will provide a Year
2000 compliant software upgrade to us in mid 1999. If necessary, we 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. We do not believe that any such delays would have
a material adverse effect on us.
26
<PAGE>
FORWARD LOOKING INFORMATION
This annual report contains forward-looking statements within the meaning of the
federal securities laws. We intend such forward-looking statements to be covered
by the safe harbor provisions for forward-looking statements contained in the
PrivateSecurities Litigation Reform Act of 1995, and are including this
statement for purposes of complying with these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of us, are generally identifiable by
use of the words "believe," "expect," "intend," "anticipate," "estimate,"
"project" or similar expressions. Our ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on the operations and future prospects of
the Company include, but are not limited to, changes in: economic conditions
generally and the real estate market specifically, legislative or regulatory
provisions affecting us (including changes to laws governing the taxation of
REITs), availability of capital, interest rates, competition, supply of and
demand for office and industrial properties in our current and proposed market
areas, and general accounting principles, policies and guidelines applicable to
REITs. These risks and uncertainties, together with the other risks described
from time to time in our reports and documents filed with the Securities and
Exchange Commission, should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. See Part
I, Item 1, "Risk Factors."
27
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk for changes in interest rates relates primarily to
our current and future debt obligations. We are vulnerable vulnerable, however,
to significant fluctuations of interest rates on our floating rate debt, and
pricing on our future debt.
The following table provides information about our financial instruments that
are sensitive to changes in interest rates. For debt obligations, the table
presents principal cash flows and related weighted average interest rates by
expected maturity dates.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
---- ---- ---- ---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
VARIABLE RATE DEBT:
Secured line of credit $27,201 $27,201 $ 27,201
Average interest rate (1) (6.93%)
Secured notes payable (related parties) 20,752 $20,752 $ 20,752
Average interest rate (1) (6.93%)
Secured notes payable $3,105 $ 3,105 $ 3,105
Average interest rate (1) (7.13%)
FIXED RATE DEBT:
Secured notes payable 2,189 2,351 $5,137 $2,578 $2,768 $139,060 $154,083 $154,083(2)
Average interest rate (6.80%) (6.80%) (6.80%) (6.80%) (6.80%) (6.80%)
</TABLE>
(1) Based upon implied LIBOR for respective time period
(2) Fair value approximates book value for fixed rate debt. $129,767 of this
amount is the Prudential Loan which funded on September 23, 1998.
28
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
MISSION WEST PROPERTIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants................................................. 30
Consolidated Balance Sheets of Mission West Properties, Inc.at December 31,
1998 and 1997................................................................... 31
Consolidated Statements of Operations of Mission West Properties, Inc. for
the year ended December 31, 1998, the one-month end December 31, 1997 and the
years ended November 30, 1997 and 1996.......................................... 32
Consolidated Statements of Changes in Stockholders' Equity of Mission West
Properties, Inc. for the year ended December 31, 1998, the one-month ended
December 31, 1997 and the years ended November 30, 1997 and 1996................ 33
Consolidated Statements of Cash Flows of Mission West Properties, Inc. for
the year ended December 31, 1998, the one-month ended December 31, 1997 and
the years ended November 30, 1997 and 1996...................................... 34
Notes to the Consolidated Financial Statements.................................... 35
Report of Independent Accountants................................................. 50
Schedule III: Real Estate and Accumulated Depreciation of Mission West
Properties, Inc. as of December 31, 1998........................................ 51
Report of Independent Accountants................................................. 54
Combined Balance Sheets of the Berg Properties (Predecessor) at June 30, 1998
and December 31, 1997........................................................... 55
Combined Statement of Operations of the Berg Properties (Predecessor) for the
six months ended June 30, 1998 and the years ended December 31, 1997 and 1996... 56
Combined Statements of Net Equity (Deficit) of the Berg Properties
(Predecessor) for the six months ended June 30, 1998 and the years ended
December 31, 1997 and 1996...................................................... 57
Combined Statements of Cash Flows for the Berg Properties (Predecessor) for the
six months ended June 30, 1998 and the years ended December 31, 1997
and 1996....................................................................... 58
Notes to the Consolidated Financial Statements.................................... 59
Report of Independent Accountants................................................. 65
Schedule III: Real Estate and Accumulated Depreciation of the Berg Properties
(Predecessor) as of December 31, 1997........................................... 66
</TABLE>
29
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Mission West Properties, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Mission West
Properties, Inc. and its subsidiaries (the "Company") at December 31, 1998 and
1997, and the results of their operations and their cash flows for the years
ended December 31, 1998, November 30, 1997 and 1996 and the one month period
ended December 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
San Francisco, California
January 29, 1999
30
<PAGE>
<TABLE>
<CAPTION>
MISSION WEST PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
REAL ESTATE ASSETS:
LAND $ 90,929
BUILDINGS AND IMPROVEMENTS 430,510
-----------
521,439
LESS ACCUMULATED DEPRECIATION (5,410)
-----------
NET REAL ESTATE ASSETS 516,029
CASH AND CASH EQUIVALENTS 246 $ 5,569
DEFERRED RENT 1,624 -
DEFERRED COSTS AND OTHER ASSETS (NET OF 1,967 194
ACCUMULATED AMORTIZATION OF
$43 AT DECEMBER 31, 1998) ------------ -----------
TOTAL ASSETS $519,866 $ 5,763
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
LINE OF CREDIT $ 27,201
MORTGAGE NOTES PAYABLE 157,188
MORTGAGE NOTES PAYABLE (RELATED PARTIES)
20,752
INTEREST PAYABLE
632
SECURITY DEPOSITS
2,061
PREPAID RENTAL INCOME
3,246
ACCOUNTS PAYABLE AND ACCRUED EXPENSES $ 552
2,154
------------ -----------
TOTAL LIABILITIES 213,234 552
------------ -----------
COMMITMENTS AND CONTINGENCIES (NOTES 4, 6
AND 17)
MINORITY INTEREST 273,379 -
STOCKHOLDERS' EQUITY: - -
PREFERRED STOCK, NO PAR VALUE, 200,000
SHARES AUTHORIZED, NONE ISSUED
AND OUTSTANDING
COMMON STOCK, $.001 PAR VALUE AND NO PAR AT 8
DECEMBER 31, 1998 AND 1997, RESPECTIVELY,
200,000,000 SHARES AUTHORIZED, 8,218,594
SHARES AND 1,501,104 SHARES ISSUED AND
OUTSTANDING AT DECEMBER 31, 1998 AND 1997,
RESPECTIVELY
PAID-IN CAPITAL 55,528 26,707
LESS AMOUNTS RECEIVABLE FROM PRIVATE (900) (334)
PLACEMENT
ACCUMULATED DEFICIT (21,383) (21,162)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 33,253 5,211
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' $519,866 $ 5,763
EQUITY =========== ===========
</TABLE>
See notes to consolidated financial statements
31
<PAGE>
<TABLE>
<CAPTION>
MISSION WEST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
ONE MONTH
YEAR ENDED ENDED YEARS ENDED NOVEMBER 30,
DECEMBER DECEMBER
31, 31,
----------------------
1998 1997 1997 1996
----------- ------------ ---------- -----------
<S> <C> <C> <C> <C>
REVENUE:
RENTAL REVENUES FROM REAL
ESTATE $27,285 $ - $1,376 $ 7,065
TENANT REIMBURSEMENTS 4,193 - - -
OTHER INCOME, INCLUDING 278 27 359 348
INTEREST -------- -------- -------- --------
31,756 27 1,735 7,413
-------- -------- -------- --------
EXPENSES:
PROPERTY OPERATING, 4,821 - 246 1,643
MAINTENANCE AND REAL
ESTATE TAXES
INTEREST 4,685 - 425 3,045
INTEREST (RELATED PARTIES) 3,511 - - -
GENERAL AND ADMINISTRATIVE 1,501 139 1,467 991
EXPENSES
DEPRECIATION AND AMORTIZATION 5,410 - 246 1,369
-------- -------- -------- --------
19,928 139 2,384 7,048
-------- -------- -------- --------
INCOME (LOSS) BEFORE GAIN 11,828 (112) (649) 365
(LOSS) ON SALE OF REAL
ESTATE ASSETS, MINORITY
INTEREST AND INCOME TAXES
GAIN (LOSS) ON SALE OF - - 4,736 (306)
REAL ESTATE ASSETS -------- -------- -------- --------
INCOME (LOSS) BEFORE MINORITY 11,828 (112) 4,087 59
INTEREST AND INCOME TAXES
MINORITY INTEREST 12,049 - - -
-------- -------- -------- --------
NET (LOSS) INCOME BEFORE (221) (112) 4,087 59
INCOME TAXES
BENEFIT (PROVISION) FOR - 38 (1,043) (24)
INCOME TAXES -------- -------- -------- --------
NET(LOSS)INCOME (221) (74) 3,044 35
======== ======== ======== ========
PER SHARE AMOUNTS:
BASIC NET (LOSS) INCOME $ (0.13) $(0.05) $18.48 $ 0.77
PER SHARE ======== ======== ======== ========
DILUTED NET (LOSS) INCOME $ (0.13) $(0.05) $18.48 $ 0.72
PER SHARE ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
32
<PAGE>
<TABLE>
<CAPTION>
MISSION WEST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
AMOUNTS
SHARES RECEIVABLE
OF ON TOTAL
STOCK COMMON PAID-IN PRIVATE ACCUMULATED STOCKHOLDERS'
OUTSTANDING STOCK CAPITAL PLACEMENT DEFICIT EQUITY
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, NOVEMBER 30, 1996 $ 45,624 - $ 19,446 - $ (5,309) $ 14,137
ISSUANCE OF COMMON STOCK 80 10 10
UPON OPTION EXERCISE
NET INCOME 35 35
-------- -------- -------- -------- -------- --------
BALANCE, NOVEMBER 30, 1996 45,704 19,456 (5,274) 14,182
ISSUANCE OF COMMON STOCK 200,000 900 900
UPON PRIVATE PLACEMENT
ISSUANCE OF COMMON STOCK 1,250,000 5,625 5,625
UPON PRIVATE PLACEMENT
AMOUNTS RECEIVABLE ON (484) (484)
1997 PRIVATE PLACEMENTS
ISSUANCE OF COMMON STOCK 5,400 726 726
UPON OPTION EXERCISE
NET INCOME 3,044 3,044
DIVIDENDS PAID (18,858) (18,858)
-------- -------- -------- -------- -------- --------
BALANCE, NOVEMBER 30, 1997 1,501,104 26,707 (484) (21,088) 5,135
AMOUNTS RECEIVED FROM 150 150
1997 PRIVATE PLACEMENTS
NET (LOSS) (74) (74)
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1997 1,501,104 26,707 (334) (21,162) 5,211
ISSUANCE OF COMMON STOCK 225,000 1,013 (900) 113
UPON OPTION EXERCISE
ISSUANCE OF COMMON STOCK 6,495,058 27,827 27,827
UPON PRIVATE PLACEMENT
AMOUNTS RECEIVED FROM 1997 PRIVATE 334 334
PLACEMENTS
ODD LOT TENDER OFFER (2,568) (11) (11)
NET (LOSS) (221) (221)
REINCORPORATION (NOTE 1) 8 (8) -
-------- -------- -------- -------- -------- --------
BALANCE, DECEMBER 31, 1998 $8,218,594 $8 $ 55,528 $(900) $(21,383) $ 33,253
========== ======== ======== ======== ======== ========
</TABLE>
See notes to consolidated financial statements
33
<PAGE>
<TABLE>
<CAPTION>
MISSION WEST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
ONE MONTH
YEAR ENDED ENDED
DECEMBER DECEMBER YEAR ENDED NOVEMBER 30,
31, 31,
1998 1997 1997 1996
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (221) $ (74) $ 3,044 $ 35
Adjustments to reconcile net (loss) income
to net cash provided by operating
activities
Minority interest 12,049 - - -
Depreciation 5,410 - 246 1,379
Deferred income taxes - - - 35
(Gain) loss on sale of real estate - - (4,736) 306
assets
Change in operating assets and liabilities:
Deferred rent (1,624) - - -
Other assets (1,594) - 1,295 (457)
Interest payable 632 - - -
Security deposits 218 - - -
Prepaid rental income 812 - - -
Accounts payable and accrued expenses 582 28 (849) (77)
-------- --------- --------- ---------
Net cash provided by (used in) 16,264 (46) (1,000) 1,221
operating activities -------- --------- --------- ---------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Improvements to real estate (118) - - -
Net maturities of short-term - - - 2,528
investments
Net proceeds from the sale of - - 46,198 -
real estate assets -------- --------- --------- ---------
Net cash (used in) provided by (118) - 46,198 2,528
investing activities -------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on line of credit (11,843) - - -
Proceeds from mortgage notes payable 130,000 - - -
Principal payments on mortgage notes payable (19,586) - (30,753) (1,214)
Principal payments on mortgage notes payable(148,279) - - -
(related parties)
Proceeds from issuance of common stock 28,161 150 6,041 -
Net proceeds from exercise of stock options 113 - 726 10
Repurchase of common stock (11) - - -
Minority interest distributions (24) - - -
Dividends - - (18,858) -
-------- --------- --------- ---------
-------- --------- --------- ---------
Net cash (used in) provided by (21,469) 150 (42,844) (1,204)
financing activities -------- --------- --------- ---------
-------- --------- --------- ---------
Net (decrease) increase in cash (5,323) 104 2,354 2,545
and cash equivalents
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,569 5,465 3,111 566
-------- --------- --------- ---------
-------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 246 $ 5,569 $ 5,465 $ 3,111
======== ========= ========= =========
</TABLE>
See notes to consolidated financial statements
34
<PAGE>
MISSION WEST PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
1. ORGANIZATION AND FORMATION OF THE COMPANY
Mission West Properties, Inc. ("the Company") is a fully integrated,
self-managed real estate company that acquires and manages office/research and
development/manufacturing ("R&D") properties in the portion of the San Francisco
Bay Area commonly referred to as Silicon Valley. In July 1998, the Company
acquired control of four existing limited partnerships (referred to collectively
as the "operating partnerships"), by becoming the sole general partner in each
one effective July 1, 1998 for financial accounting and reporting purposes ("the
Acquisition"). The Company purchased an approximate 12.11% interest in each of
the operating partnerships. The Company effected the purchase of its general
partnership interests by issuing to the operating partnerships separate demand
notes bearing interest at 7.25% per annum (the "Demand Notes"). The total
principal amount of the Demand Notes issued was $35,200. All limited partnership
interests in the operating partnerships were converted into 59,479,633 units of
limited partnership interest ("L.P. Units"), which represented an ownership
interest of approximately 87.89% of the operating partnerships. The operating
partnerships are the vehicles through which the Company will own its assets,
will make its future acquisitions, and generally conduct its business.
On December 30, 1998, the Company was reincorporated under the laws of the State
of Maryland through a merger with and into Mission West Properties, Inc.
Accordingly, shares of the former company, Mission West Properties, a California
corporation (no par), which were outstanding at December 30, 1998, were
converted into shares of common stock ($.001 par value per share) on a
one-for-one basis.
As of December 31, 1998, the Company owns a general partnership interest of
12.04%, 12.11%, 11.96% and 12.11% in Mission West Properties, L.P., Mission West
Properties, L.P. I, Mission West Properties, L.P. II and Mission West
Properties, L.P. III, respectively, for a 12.02% general partnership interest in
the operating partnerships, taken as a whole, on a weighted average basis.
The Company, through the operating partnerships, owns interests in 71 R&D
properties, all of which are located in the Silicon Valley.
The Company was formerly engaged in developing, owning, operating, and selling
income-producing real estate located principally in Southern California. As
discussed in NOTE 15, SALE OF REAL ESTATE INVESTMENTS below, the Company sold
all of its Southern California real estate holdings during 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION:
The accompanying consolidated financial statements include the accounts of the
Company, and its controlled subsidiaries, including the operating partnerships.
All significant intercompany transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of revenue and expenses during the reporting periods.
Actual results could differ from those estimates.
REAL ESTATE ASSETS:
Real estate assets are stated at the lower of cost or fair value. Cost includes
expenditures for improvements or replacements. Maintenance and repairs are
charged to expense as incurred. Gains and losses from sales are included in
income in accordance with Statement of Financial Accounting Standard ("SFAS")
No. 66, ACCOUNTING FOR SALES OF REAL ESTATE.
35
<PAGE>
The Company reviews real estate assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. If the carrying amount of the asset exceeds its estimated
undiscounted net cash flow before interest, the Company will recognize an
impairment loss equal to the difference between its carrying amount and its fair
value. If an impairment is recognized, the reduced carrying amount of the asset
will be accounted for as its new cost. For a depreciable asset, the new cost
will be depreciated over the asset's remaining useful life. Generally, fair
values are estimated using discounted cash flow, replacement cost or market
comparison analyses. The process of evaluating for impairment requires estimates
as to future events and conditions, which are subject to varying market and
economic factors. Therefore, it is reasonably possible that a change in estimate
resulting from judgments as to future events could occur which would affect the
recorded amounts of the property. As of December 31, 1998, the properties'
carrying values did not exceed the estimated fair values.
DEPRECIATION:
Depreciation is computed using the straight-line method over estimated useful
lives of 40 years for buildings and improvements.
CASH AND CASH EQUIVALENTS:
The Company considers highly liquid short-term investments with initial
maturities of three months or less to be cash equivalents.
Cash and cash equivalents are primarily held in a single financial institution,
and at times, such balances may be in excess of the Federal Deposit Insurance
Corporation insurance limit.
DEFERRED COST AND OTHER ASSETS:
Included in deferred costs and other assets are costs associated with obtaining
debt financing. Such costs are being amortized over the term of the associated
debt, by a method that approximates the effective interest method.
REVENUE RECOGNITION:
Rental income is recognized on the straight-line method of accounting required
by generally accepted accounting principles under which contractual rent payment
increases are recognized evenly over the lease term. The difference between
recognized rental income and rental cash receipts is recorded as deferred rent
on the balance sheet. Certain lease agreements contain terms that provide for
additional rents based on reimbursement of certain costs. These additional rents
are reflected on the accrual basis.
INCOME TAXES:
The Company intends to elect to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended, (the "Code")
commencing with the taxable year ending December 31, 1999. In order for the
Company to qualify as a REIT, it must distribute annually at least 95% of its
REIT taxable income, as defined in the Code, to its stockholders and comply with
certain other requirements.
Income taxes are accounted for in accordance with SFAS No. 109, ACCOUNTING FOR
INCOME TAXES. Deferred income taxes are provided for all temporary differences
and operating loss and tax credit carryforwards. Deferred tax assets are reduced
by a valuation allowance when, in the opinion of management, it is more likely
than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
The Company had no tax liability for the year ended December 31, 1998.
36
<PAGE>
NET INCOME PER SHARE:
The Company has adopted SFAS No. 128 EARNINGS PER SHARE effective for its year
ended November 30, 1997. The computation of net income per share is based on the
weighted average number of common shares outstanding during the period. Diluted
earnings per share amounts are based upon the weighted average of common and
common equivalent shares outstanding during the year.
ACCOUNTING FOR STOCK-BASED COMPENSATION:
SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, encourages, but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES and related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's financial instruments include cash, receivables, payables and
debt. Considerable judgement is required in interpreting market data to develop
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Based on borrowing rates currently available to the Company, the carrying amount
of mortgage debt and the line of credit approximates fair value. Cash,
receivables and payables are also carried at amounts that approximate fair value
due to their short-term maturities.
CONCENTRATION OF CREDIT RISK
The Company's properties are not geographically diverse, and our tenants operate
primarily in the technology industry. Additionally, because the properties are
leased to 71 tenants, default by any major tenant could significantly impact the
results of the consolidated total. One tenant, Apple Computers, Inc. accounted
for approximately 12.2% of the Company's rental revenues for the year ended
December 31, 1998, with the next largest tenant accounting for 6.6% of total
rental revenues. However, management believes the risk of default is reduced
because of the critical nature of these properties for ongoing tenant
operations.
REVERSE STOCK SPLIT:
All share and per share amounts have been adjusted to reflect the 1 for 30
reverse stock split which occurred in November 1997.
FISCAL YEAR CHANGE:
In November 1997, the board of directors approved a change in the Company's
fiscal year end from November 30 to December 31, effective for the calendar year
beginning January 1, 1997. The results for the year ended November 30, 1997 and
the one month ended December 31, 1997 are presented.
RECLASSIFICATIONS:
Certain 1997 and 1996 amounts have been reclassified to conform to the 1998
presentation.
37
<PAGE>
3. ACQUISITION
The Acquisition was accounted for as a purchase with the results of the
Operating partnerships included from July 1,1998. The fair value of the assets
acquired was $507,807 and liabilities assumed totaled $239,903.
The pro forma results listed below are unaudited and assume the Acquisition
occurred at the beginning of each period presented:
<TABLE>
<CAPTION>
Proforma Proforma
Year Ended Year Ended
December December
31, 1998 31, 1997
------------ ------------
<S> <C> <C>
Total Revenues $ 62,253 $ 56,120
------------ ------------
Expenses:
Operating, maintenance and real estate taxes 9,251 8,511
Interest expenses (including related parties) 17,631 18,055
General and administrative expenses 1,501 1,467
Depreciation and ammortization 10,781 10,842
------------ ------------
39,164 38,875
------------ ------------
Income before minority interest, gain on sale of real 23,089 17,245
estate and income taxes
Minority interest 22,541 16,691
------------ ------------
Income before gain on real estate and income taxes 548 554
Gain on sale of real estate - 4,736
------------ ------------
Income before income taxes 548 5,290
Provision for income taxes 142 1,375
------------ ------------
Net income $ 406 $ 3,915
============ ============
Basic and diluted net income per share $ 0.24 $ 23.77
============ ============
</TABLE>
4. STOCK TRANSACTIONS
On May 27, 1997, the Company entered into a Stock Purchase Agreement with a
group of private investors led by Carl E. Berg, his brother Clyde J. Berg, the
members of their respective immediate families, and certain entities they
control (the "Berg Group") pursuant to which the Company agreed to sell 200,000
shares of common stock to the Berg Group for a purchase price of $900 in cash,
or $4.50 per share. On August 5, 1997, the shareholders approved the stock sale
transaction. This sale of common stock was completed on September 2, 1997, at
which time all officers and directors resigned and the Berg Group became the
controlling shareholder with an approximate 80% ownership position in the
Company.
Subsequent to the September 1997 common stock sale, a series of transactions
were approved by the Company's shareholders that included the 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 1997 Stock Option
Plan.
On December 29, 1998, the Company completed the sale of 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. The aggregate proceeds to the Company, net
of fees and offering costs, was $27,827. The proceeds were used to pay a portion
of the outstanding amounts under the Demand Notes due the operating
partnerships. As of December 31, 1998, $2,050 remained outstanding under the
Demand Notes. The Demand Notes, along with interest expense (interest income to
the operating partnerships), is eliminated in consolidation and is not included
in the corresponding line items within the consolidated financial statements.
38
<PAGE>
Each of the limited partners of the operating partnerships has the right to
exchange their L.P. Units for shares of common stock. Such exchange rights,
however, are not available until December 29, 1999. During the period prior to
December 29, 1999, the limited partners will be allowed to seek one registration
of not more than 500,000 shares of common stock for resale (on 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. Subsequent to December 29, 1999, the limited partners are generally
limited to the exchange or sale of L.P. Units 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.
Each of the limited partners of the operating partnerships (other than Carl E.
Berg and Clyde J. Berg) has the annual right to exercise put rights and cause
the operating partnerships to purchase a portion of the limited partner's 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 any such 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. These put
rights become exercisable on December 29, 1999, and are available once a year
for a maximum of one-third of the eligible limited partners' total L.P. Units.
If the total purchase price of the L.P. Units tendered by all of the eligible
limited partners in one year exceeds $1 million, the Company or the operating
partnerships will be entitled to reduce proportionately the number of L.P. Units
to be acquired from each tendering limited partner so that the total purchase
price does not exceed $1 million dollars.
On March 30, 1998, the Company issued 200,000 shares of common stock at $4.50
per share to an executive officer of the Company in exchange for a $900 note
receivable payable to the Company. The note is a full recourse promissory note
bearing interest at 5.59% and is collateralized by a pledge of the shares.
Interest is payable annually and principal is due March 30, 2003.
During the second and fourth quarters of 1998, the Company received total
payments of $334 relating to amounts receivable from the private placements of
shares of common stock in November 1997.
5. MINORITY INTEREST
Minority interest represents the separate private ownership of the operating
partnerships, by the Berg Group and other non-affiliate interests. In total,
these interests account for 87.98%, on a weighted average basis, of the
ownership interests in the real estate operations of the Company as of December
31, 1998. Minority interest in earnings has been calculated by taking the net
income of the operating partnerships (on a stand-alone basis) multiplied by the
respective minority interest ownership percentage.
There are two properties (owned through two separate single asset joint
ventures) for which 100% of the ownership is not held within the operating
partnerships. The operating partnerships own a 75% interest in one of the joint
ventures and an 88% interest in the other joint venture. For the period of July
1, 1998 through December 31, 1998, income associated with the interests held by
the non-affiliated third parties of these two propertiess is $42.
6. REAL ESTATE
PENDING PROJECTS ACQUISITION AGREEMENT The Company has entered into a Pending
Projects Acquisition Agreement which permits the acquisition by the Company
through the operating partnerships of approximately one million additional
rentable square feet upon the completion and leasing of a number of pending
development projects owned by certain members of the Berg Group. To date, the
Company has completed one acquisition under the Pending Projects Acquisition
Agreement representing 52,800 rentable square feet (Richard Avenue Property -
see PROPERTY ACQUISITIONS below). There are four additional projects with total
rentable square feet of approximately 965,100 anticipated to be acquired under
the Pending Projects Acquisition Agreement. As of December 31, 1998, the
estimated acquisition cost for these four remaining projects is $165,334. The
Company expects to acquire the last of these pending development projects by the
end of first quarter 2000.
39
<PAGE>
The Berg Group as sellers of the pending development projects may elect to
receive cash or L.P. Units at a value of $4.50 per unit. As the current market
value price of a share of common stock exceeds the $4.50 price, this valuation
represents a substantial discount from the current market value of the common
stock that may be issued in exchange for these L.P. Units. Consequently, the
"absolute" acquisition cost may be greater than the stated acquisition value
given the significant discount that the sellers receive in connection with the
L.P. Units issued to them.
One of the intended acquisitions under the Pending Projects Acquisition
Agreement is the L'Avenida project in Mountain View, California that is
currently under development and is planned to have approximately 515,000 of
rentable square feet. On August 6, 1998, Microsoft Corporation entered into a
lease with respect to this property. Microsoft controls the construction of this
facility, which is well underway and scheduled to be completed in phases in the
spring and summer of 1999. The Company will acquire the R&D properties being
built on the L'Avenida site when and if construction has been completed. The
expected acquisition value to the Company is approximately $116 million.
Microsoft has signed a seven-year lease with a first year's rent of $2.95 per
square foot per month and 4% annual increases.
BERG LAND HOLDINGS OPTION AGREEMENT Through the operating partnerships, the
Company also has the option to acquire, any future R&D property developments on
approximately 162 acres of Silicon Valley Land owned by certain members of the
Berg Group under the terms of the Berg Land Holdings Option Agreement. The
owners of the future R&D property developments may obtain cash or, at their
option, L.P. Units. To date, the Company has completed one acquisition under the
Berg Land Holdings Option Agreement representing approximately 110,000 rentable
square feet (Hellyer Avenue Property - SEE PROPERTY ACQUISITIONS below). Upon
the Company's exercise of an option to purchase any of the future R&D property
developments, the acquisition price will equal the sum of (a) the full
construction cost of the building; (b) 10% of the full construction cost of the
building; (c) the agreement's acquisition value of the parcel on which the
improvements were constructed (ranging from $8.50 to $20.00 per square foot);
(d) 10% of the acquisition value of the parcel for the period from January 1,
1998 to the close of escrow; and e) interest at LIBOR (London Interbank Offer
Rate) plus 1.65% on the cost of the construction costs of the building; less (f)
any debt encumbering the property.
No estimate can be given at this time as to the total cost to the Company to
acquire projects under the Berg Land Holdings Agreement, nor the timing as to
when the Company will acquire such projects. However, the Berg Group is
currently constructing two properties with a total of 388,000 rentable square
feet that the Company has the right to acquire under this agreement. As of
December 31, 1998, the estimated acquisition value to the operating partnerships
for these two projects is $32,226. The final acquisition price of these two
properties could differ significantly from this estimate.
PROPERTY ACQUISITIONS During the fourth quarter of 1998, the Company acquired
two newly constructed R&D properties located on Richard Avenue in Santa Clara,
California and Hellyer Avenue in San Jose, California. These acquisitions added
approximately 163,000 square feet of rentable space and were acquired from the
Berg Group under the Berg Land Holdings Option Agreement and the Pending
Projects Acquisition Agreement. The total gross acquisition price for these two
properties was $13,692. The Company assumed $9,606 of debt due Berg & Berg
Enterprises, Inc. and issued 672,064 L.P units of which 618,684 were issued to
various members of the Berg Group.
The Richard Avenue property is a single-story building containing approximately
52,800 rentable square feet. The total purchase price was $4,198. The building
is currently 100% leased by one tenant with a lease expiration of August 2003.
The Hellyer Avenue property is a single-story contemporary building containing
approximately 110,000 rentable square feet. The total purchase price was $9,494.
The building is currently 100% leased by two tenants with both leases expiring
in November 2005.
40
<PAGE>
The following table provides information as to the estimated fair market value,
calculated using an estimated capitalization rate of 10% based upon the first
year's cash rent, actual cost (to the Berg Group), which includes land and
construction costs, and the actual acquisition price paid by the operating
partnerships:
<TABLE>
<CAPTION>
Average 1st
Year's Rent Estimated
Per Square Fair Cost to Berg Acquisition
Foot Value Group Price
----------- --------- ------------ -----------
(unaudited)
<S> <C> <C> <C> <C>
Richard Avenue $1.06 $ 6,716 $ 2,080 $ 4,198
Hellyer Avenue $0.99 13,034 8,380 9,494
----------- --------- ------------ -----------
Total $19,750 $10,460 $13,692
========= ============ ===========
</TABLE>
41
<PAGE>
7. DEBT
The following table sets forth certain information regarding debt
outstanding as of December 31, 1998:
<TABLE>
<CAPTION>
DEBT DESCRIPTION COLLATERAL MATURITY INTEREST
PROPERTIES BALANCE DATE RATE
- ---------------------------- ----------------------------- --------- --------- ---------
<S> <C> <C> <C> <C>
LINES OF CREDIT:
Wells Fargo 1810 McCandless Drive, Milpitas, CA $27,201(1) 10/99 (2)
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 NOTES PAYABLE(5)
(RELATED PARTIES):
2033-2043 Samaritan Drive, San Jose, CA 20,752(3) 12/99(4) (2)
2133 Samaritan Drive, San Jose, CA
2233-2243 Samaritan Drive, San Jose, CA
MORTGAGE NOTES PAYABLE:
Great West Life & Annuity 6320 San Ignacio Ave, San Jose, CA 7,732 2/04 7.0%
Insurance Company
Great West Life & Annuity 6540 Via del Oro, San Jose, CA 3,689 5/04 7.0%
Insurance Company 6385 San Ignacio Ave., San Jose, CA
Prudential Capital Group 20400 Mariani, Cupertino, CA 2,034 3/09 8.75%
New York Life Insurance 10440 Bubb Road, Cupertino, CA 430 8/09 9.625%
Company
Home Savings & Loan 10460 Bubb Road, Cupertino, CA 525 1/07 9.5%
Association
Amdahl Corporation 3120 Scott, Santa Clara, CA 6,945 3/14 9.42%
Citicorp U.S.A., Inc. 2800 Bayview Drive, Fremont, CA 3,105 4/00 (6)
Mellon Mortgage Company 3530 Bassett, Santa Clara, CA 2,961 6/01 8.125%
Prudential Insurance Company 10300 Bubb, Cupertino, CA 129,767 10/08 6.56%
of America 10500 N. DeAnza, Cupertino, CA
4050 Starboard, Fremont, CA
45700 Northpoint Loop, Fremont, CA
45738 Northpoint Loop, Fremont, CA
450-460 National Ave., 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 Notes Payable Subtotal 157,188
---------
TOTAL $205,141
=========
</TABLE>
(1)Amounts available under the Wells Fargo line at December 31, 1998 were
$72,799. Certain members of the Berg Group are liable as guarantors under
this line of credit.
(2)The lesser of (a) the Wells Fargo prime rate in effect on the first day of
each calendar month; (b) LIBOR plus 1.65%; or (c) the Wells Fargo Purchased
Funds Rate quoted on the first day of each calendar month plus 1.65%. The
average rate for the three months ended December 31, 1998 was 6.66%.
(3)There is no set repayment plan associated with this debt; payments are made
to Berg & Berg Enterprises, Inc. on demand.
(4)Original due date was March 1999. The Company has received an extension from
Berg & Berg Enterprises, Inc. to December 1999.
(5)Mortgage notes payable generally require monthly installments of interest and
principal over various terms extending through the year 2014. The weighted
average interest rate of mortgage notes payable was 6.80% at December 31,
1998.
(6)One month LIBOR plus 1.625% adjusted monthly (6.68% at December 31, 1998).
(7)The Prudential Loan is payable in monthly installments of $827, which
includes principal (based upon a 30 year amortization) and interest. John
Kontrabecki, one of the limited partners, has guaranteed approximately
$12,000 of this debt. Costs and fees incurred with obtaining this loan
aggregated approximately $900.
42
<PAGE>
Scheduled principal payments on debt for the years ending, are as follows:
<TABLE>
<CAPTION>
Lines Mortgage Mortgage
of Notes Notes Total
Credit Payable Payable
(Related
Parties)
------- --------- -------------- --------
<S> <C> <C> <C> <C>
December 31, 1999 $27,201 2,189 $20,752 50,142
December 31, 2000 5,456 5,456
December 31, 2001 5,137 5,137
December 31, 2002 2,578 2,578
December 31, 2003 2,768 2,768
Thereafter 139,060 139,060
------- --------- -------------- --------
$27,201 $157,188 $20,752 $205,141
======= ========= ============== ========
</TABLE>
8. OPERATING PARTNERSHIP DISTRIBUTIONS
On December 28, 1998, the Company, as general partner of the operating
partnerships, declared a $0.17 per L.P. Unit distribution for total
distributions of $11,633. Of this amount, $9,599 was due to various members of
the Berg Group and was converted to related party debt on December 31, 1998. The
Company received $1,408 which was used to repay amounts outstanding under the
Demand Notes owed to the operating partnerships. A distribution in the amount of
$298 was attributable to units held by John Kontrabecki and were applied against
amounts owed by him to the operating partnerships as of December 31, 1998. The
remaining amount of $328 was owed to other L.P. Unit holders and is included in
accounts payable and accrued expenses in the consolidated balance sheet as of
December 31, 1998. Such amounts were paid in January 1999.
9. STOCK-BASED COMPENSATION PLANS
The Company's 1997 Stock Option Plan was approved by the Company's shareholders
on November 10, 1997. The 1997 Stock 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 1997 Stock Option Plan provides for the granting to employees, including
officers (whether or not they are directors) of "incentive stock options" within
the meaning of Section 422 of the Code, and for the granting of non-statutory
options to employees, consultants and directors of the Company. Options to
purchase a maximum of 5,500,000 shares of common stock may be granted under the
1997 Stock Option Plan, subject to equitable adjustments to reflect certain
corporate events. All options granted to employees in 1998 become exercisable as
follows: a) six months from date of grant, 6.25%; b) one year from date of
grant, an additional 12.50%; c) each month thereafter for 36 months, an
additional 2.26%. Each option has a term of 6 years from the date of grant
subject to earlier termination in certain events related to termination of
employment. Options granted to directors 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. The option price is equal to the fair
market value of the common stock on the date of grant.
The remaining contractual lives of unexercised options granted range from
January 2004 to December 2004. All options granted during 1998 have a $4.50
option price per share.
43
<PAGE>
The following table shows the activity and detail for the 1997 Stock Option
Plan:
1997 Stock Option Price
Option Plan Per Share
----------- ------------
Balance, December 31, 1997
Options granted 905,000 $4.50
Options exercised (225,000)
---------
Balance, December 31, 1998 (680,000)
=========
As of December 31, 1998, 4,595,000 additional options were available for grant.
None of the options granted are contingent upon the attainment of performance
goals or subject to other restrictions. As of December 31, 1998, outstanding
options to purchase 19,063 shares of common stock were exercisable.
The Company applies APB 25 and related interpretations in accounting for its
stock-based compensation plans. Accordingly, no compensation expense has been
recognized for its stock-based compensation plans. Had compensation cost for the
Company's stock option plans been determined based upon the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed under SFAS No. 123, "ACCOUNTING FOR STOCK-BASED COMPENSATION", the
Company's net loss and net loss per share would have been increased by
approximately $146 or $.09 per share for the year ended December 31, 1998,
resulting in a total net loss of $367 or $.21 per share, for the year ended
December 31, 1998. The estimated fair value of the options granted during 1998
ranged from $4.95 to $5.01 per share on the date of grant using the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 8%, volatility of 24.07%, risk free rates of 4.53% to 5.72% and an
expected life of 5 years.
Prior to the adoption of the 1997 Stock Option Plan, the Company had a Director
Stock Option Plan and an Incentive Stock Option Plan under which non-salaried
directors and officers, respectively, could purchase shares of the Company's
common stock at a minimum option price based on market value at the date of
grant. Options granted under these two plans became exercisable ratably over
five years and expired after a period not to exceed ten years. As of November
30, 1996, 5,000 and 6,667 shares were authorized under each plan, of which 4,387
and 5,453 were available for grant and 880 and 1,636 were exercisable under the
Director Stock Option Plan and the Incentive Stock Option Plan, respectively.
Upon the sale of the majority of the Company's real estate assets (see Note 15)
the provisions of these two plans accelerated (unvested shares at that date were
451). All the options described above were exercised or cancelled in February
1997.
Activity in these two plans comprised the following:
December 31, November 30,
1997 1996
----------- -----------
Beginning share balance 2,967 3,333
Exercised (Between $90 and (2,747) (80)
$292.5 per share)
Canceled ($274 per share) (220) (286)
--------- ---------
Ending share balance - 2,967
========= =========
The Company has adopted an employee investment plan (the "Plan"), under Section
401(k) of the Internal Revenue Code. Employees who are at least 21 years old and
who have completed six months of eligibility service may become participants in
the Plan. Each participant may make contributions to the Plan through salary
deferrals in amounts of at least 1% to a maximum of 15% of the participant's
compensation, subject to certain limitations imposed by the Internal Revenue
Code. The Company contributes an amount up to 15% of the participant's
compensation contributed, based upon management's discretion. A participant's
contribution to the Plan is 100% vested and nonforfeitable. A participant will
become vested in 100% of the Company's contributions after two years of eligible
service. For the year ended December 31, 1998, the Company recognized $22 of
expense for employer contributions made in connection with this plan.
44
<PAGE>
10. NET INCOME PER SHARE
The Company adopted SFAS No. 128, EARNINGS PER SHARE, effective with its year
ended November 30, 1997. This Statement requires the Company to present basic
and diluted net income per share on the face of the income statement. Basic net
income per share is computed by dividing net income by the weighted-average
number of common shares outstanding for the period. Diluted net income per share
is computed by dividing net income by the sum of weighted-average number of
common shares outstanding for the period plus the assumed exercise of all
dilutive securities.
The computation for weighted average shares is detailed below:
<TABLE>
<CAPTION>
Year Month
Ended Ended
December December
31, 31, Years Ended November 30,
1998 1997 1997 1996
--------- ---------- -------- ---------
<S> <C> <C> <C> <C>
Weighted average shares outstanding (basic) 1,688,059 1,501,104 164,692 45,684
Incremental shares from assumed option exercise 22,730 - - 2,901
--------- ---------- -------- ---------
Weighted average shares outstanding (diluted) 1,710,789 1,501,104 164,692 48,585
========= ========== ======== =========
</TABLE>
The outstanding L.P. Units have been excluded from the diluted net income per
share calculation as there would be no effect on the amounts since the minority
interests' share of income would also be added back to net income. L.P. Units
outstanding at December 31, 1998 were 60,151,697.
11. INCOME TAXES
The Company intends to elect to be taxed as a REIT commencing with the taxable
year ended December 31, 1999. In order for the Company to qualify as a REIT, it
must distribute annually at least 95% of its REIT taxable income, as defined in
the Code, to its shareholders and comply with certain other requirements.
Deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>
December 31,
1998 1997
------------------------
<S> <C>
Prepaid Rent $ 134 -
-------- ---------
Deferred Tax Assets 134 -
Deferred Rental Revenue (67) -
-------- ---------
Deferred Tax Liabilities (67) -
-------- ---------
67 -
Deferred tax asset valuation (67) -
allowance -------- ---------
Net deferred taxes - -
======== =========
</TABLE>
45
<PAGE>
The provision for (benefit from) income taxes reconciles to the statutory rate
as follows:
<TABLE>
<CAPTION>
One Month
Ended November 30,
December 31, December 31, ----------------------
1998 1998 1997 1996
---------------------------------------------------
<S> <C> <C> <C> <C>
Statutory federal tax rate 34.0% 34.0% 34.0% 34.0%
Increase (decrease) in taxes resulting from:
Depreciation differences 6 - - -
Change in deferred tax asset valuation allowance (34.0) - 1.6 (64.2)
Alternative minimum taxes - - - 60.9
State income tax, net of federal tax benefit (6) - (1.4) 6.1
Reconciliation of previous tax estimates - - (8.9) -
Other - - - 3.9
---------------------------------------------------
0% 34.0% 25.3% 40.7%
===================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The provision for (benefit from) income taxes comprises the following:
Year One month Year ended
ended ended November 30, 1996
December 31, December 31, --------------------------
1998 1997 1997 1996
------------------------------------------------------
<S> <C> <C> <C> <C>
Current:
Federal - $ (38) $ 491 $(21)
State - 85 10
------------------------------------------------------
- 576 (11)
------------------------------------------------------
Deferred:
Federal - 467 35
State - - -
------------------------------------------------------
- 467 35
------------------------------------------------------
- $ (38) $1,043 $ 24
======================================================
</TABLE>
As of December 31, 1998 and 1997, the Company had no deferred tax assets or
liabilities. The provision for (benefit from) income taxes reflects temporary
differences in the recognition of revenue and expense for tax and financial
reporting purposes. These temporary differences primarily arise from the
recognition of rental revenue from real estate, recognition of accrued expenses,
capitalized interest and a difference in the depreciable basis for tax than for
financial reporting purposes. The Company carried back federal net operating
losses to prior years for refunds and carried forward state net operating losses
to be applied against future operating income, if any.
Due to the uncertainty of realizing the benefit of certain deferred tax assets
given the Company's intent on electing to be taxed as a REIT, a valuation
allowance was established in 1998. The net decrease in the valuation allowance
for fiscal years 1997 and 1996 were due to changes in the state loss
carryforward amounts.
46
<PAGE>
12. RELATED PARTY TRANSACTIONS
As of December 31, 1998, the Berg Group owned 56,464,623 L.P. Units of the total
60,151,697 L.P. Units issued and outstanding. Along with the Company's common
shares owned by the Berg Group, the Berg Group's interest in the Company
represents 82.8% of the Company, assuming conversion of the 60,151,697 L.P.
Units into common shares of the Company.
In connection with the Acquisition, through the operating partnerships, the
Company assumed certain liabilities which included amounts due to the Berg Group
in the amount of $1,989 for management fees and interest expense. Such amounts
have been paid as of December 31, 1998.
As of December 31, 1998, debt in the amount of $20,752 was due Berg & Berg
Enterprises, Inc. This amount includes $9,606 of debt assumed in connection with
the fourth quarter 1998 acquisitions of two properties (see Note 6).
Additionally, on December 28, 1998, the operating partnerships declared a
distribution of $0.17 per L.P. Unit (see Note 8). The amount of this
distribution payable to members of the Berg Group in the amount of $9,599 was
converted to related party debt on December 31, 1998. Interest expense incurred
in connection with debt due Berg & Berg Enterprises, Inc. was $3,511 for the
year ended December 31, 1998.
Carl E. Berg has a significant financial interest in two companies that lease
space from the operating partnerships. These companies occupy, in the aggregate,
35,862 square feet at a weighted average of $.63 per square foot per month.
These leases were in effect prior to the Company's acquisition of its general
partnership interests. The leases expire in 2001 (5,862 square feet) and 2002
(30,000 square feet).
The Company currently leases space owned by Berg & Berg Enterprises, Inc. an
affiliate of Carl E. Berg and Clyde J. Berg. Rental amounts and overhead
reimbursements paid to Berg & Berg Enterprises, Inc. were $61 for the year ended
December 31, 1998.
13. FUTURE MINIMUM RENTS
The Company, through the operating partnerships, owns interest in 71 R&D
properties that are leased to tenants under net operating leases with initial
terms extending to the year 2008, and are typically subject to fixed increases.
Generally, the leases grant tenants renewal options. Future minimum rentals
under noncancellable operating leases, excluding tenant reimbursements of
expenses, as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
<S> <C>
1999 $ 52,219
2000 48,084
2001 43,473
2002 33,595
2003 22,910
Thereafter 30,801
--------
$231,082
========
</TABLE>
Rental income from one tenant, Apple Computers, was $3,340 for the year ended
December 31, 1998, or 12.2% of total rental revenues for the same period. Future
minimum rents from this tenant are $24,266.
14. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest was $7,540, $0, $410 and $3,106 for the year ended
December 31, 1998, the one month ended December 31, 1997 and for the years ended
November 30, 1997 and 1996, respectively. The Company received an income tax
refund of $228 and $17 for the years ended December 31, 1998 and November 30,
1996, respectively and paid income taxes, net of refunds, of $546 for the year
ended November 30, 1997.
In connection with the Acquisition, the Company, through the operating
partnerships, acquired assets with a fair value of $507,807 and assumed
liabilities of $239,903.
47
<PAGE>
The Company assumed the Wells Fargo line of credit on September 30, 1998 from
the Berg Group. As of that date, the outstanding balance on the Wells Fargo line
of credit was $39,044. In connection with this assumption, the Company retired
$39,044 of related party debt due Berg & Berg Enterprises, Inc.
In connection with the fourth quarter acquisitions of the Richard Avenue and
Hellyer Avenue properties, the Company assumed $9,606 of related party debt due
to Berg & Berg Enterprises, Inc., and issued 672,064 L.P. Units for a total
acquisition value of $13,692.
Amounts due to the Berg Group in the amount of $9,599 for distributions declared
to L.P. Unit holders, were converted to related party debt due Berg & Berg
Enterprises, Inc. on December 31, 1998.
15. SALE OF REAL ESTATE INVESTMENTS
On December 6, 1996, the Company entered into an agreement to sell all its real
estate assets to Spieker Properties, L.P. (Spieker), a California limited
partnership, for $50,500 in cash. The Company's shareholders approved the sale
of the real estate assets to Spieker on December 16, 1996. A majority of the
sale transaction was completed January 22, 1997, at which time, nine of the
Company's 11 real estate properties were sold. The sale of the two remaining
properties was completed on May 6, 1997.
The Company used the $47,500 in cash received from the sale of the nine
properties to repay all outstanding debt, as well as related transaction and
closing costs, including $3,000 in "break-up" fees from previously terminated
sales transactions. The Company received $3,000 in cash from the sale of the two
remaining properties which was used to pay related transaction costs.
On February 4, 1997, the Company declared a special dividend of $9.00 per share,
which was paid on February 27, 1997 to all shareholders of record as of February
19, 1997. This dividend represented the currently available portion of the
proceeds from the sale of the real estate assets. On October 21, 1997, the
Company paid a dividend of $3.30 per share to all shareholders. The record date
for this distribution was August 28, 1997.
16. SUBSEQUENT EVENTS
The Company expects to close on an acquisition of a newly constructed R&D
property located on Santa Teresa Boulevard, in San Jose California, on April 1,
1999. This acquisition will add approximately 54,996 square feet of rentable
space and will be acquired from the Berg Group under the Pending Projects
Acquisition Agreement (Note 6). The total gross acquisition price for this
property will be $6,648.
17. COMMITMENTS AND CONTINGENCIES
The Company and the operating partnerships, from time to time, are party to
litigation arising out of the normal course of business. Management does not
expect that such matters would have a material adverse effect on the
consolidated financial position or results of operations of the Company.
Insurance policies currently maintained by the Company do not cover seismic
activity, although they do cover losses from fires after an earthquake.
48
<PAGE>
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the year ended December 31, 1998 is as
follows:
<TABLE>
<CAPTION>
First Second Third Fourth
----- ------ ----- ------
<S> <C> <C> <C> <C>
Revenue $ 77 $ 64 $ 15,455 $ 16,160
(Loss) income before minority interest (153) (273) 5,519 6,735
Net (loss) income (153) (273) 130 75
Per share data:
Basic net (loss) per share (0.10) (0.16) 0.08 0.05
Diluted net (loss) per share (0.10) (0.16) 0.08 0.05
Weighted average number of common shares
outstanding (basic) 1,503,933 1,698,536 1,698,536 1,847,342
Weighted average number of common shares
outstanding (diluted) 1,503,933 1,698,536 1,698,536 1,935,936
</TABLE>
49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of Mission West Properties, Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 29, 1999 included in this Form 10-K of Mission West Properties,
Inc. also included an audit of the financial statement schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
San Francisco, California
January 29, 1999
50
<PAGE>
SCHEDULE III
Mission West Properties, Inc.
REAL ESTATE AND ACCUMULATED DEPRECIATION
(Dollars in thousands)
December 31, 1998
<TABLE>
<CAPTION>
Initial Cost Total Cost (A)
------------------------ Cost ------------------------
December 31, Buildings Subsequent to Buildings
1998 and Construction\ and
Property Name City Encumbrances Land Improvements Acquisition Land Improvements Total
- ------------------------------------ -------------- -------- -------------- ------------- -------- -------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
10401-10411 Bubb Cupertino B 632 $ 3,078 $ 632 $ 3,078 $ 3,710
2001 Logic Cupertino 2,288 11,134 2,288 11,134 13,422
47000 Northport Fremont C 1,184 5,760 $ 7 1,184 5,767 6,951
45738 Northport Fremont C 891 4,338 5 891 4,343 5,234
4050 Starboard Fremont C 1,329 6,467 8 1,329 6,475 7,804
3501 W. Warren/Fremont Fremont 1,866 9,082 1,866 9,082 10,948
48800 Milmont Fremont 1,013 4,932 1,013 4,932 5,945
4750 Patrick Henry Santa Clara 1,604 7,805 1,604 7,805 9,409
4949 Hellyer San Jose C 3,593 17,484 61 3,593 17,545 21,138
3520 Bassett Santa Clara D 1,104 5,371 1,104 5,371 6,475
3530 Bassett Santa Clara D,E $ 2,961 849 4,133 849 4,133 4,982
5850-5870 Hellyer San Jose 2,787 6,502 2,787 6,502 9,289
2251 Lawson Lane Santa Clara 1,952 9,498 1,952 9,498 11,450
1230 E. Arques Sunnyvale 540 2,628 540 2,628 3,168
1250 E. Arques Sunnyvale 1,335 6,499 1,335 6,499 7,834
3120 Scott Blvd. Santa Clara 6,945 2,044 9,948 2,044 9,948 11,992
20400 Mariani Cupertino 2,034 1,670 8,125 1,670 8,125 9,795
10500 De Anza Cupertino C 7,666 37,304 7,666 37,304 44,970
20605-705 Valley Green Cupertino 3,490 16,984 3,490 16,984 20,474
10300 Bubb Cupertino C 635 3,090 635 3,090 3,725
10440 Bubb Cupertino 430 434 2,112 434 2,112 2,546
10460 Bubb Cupertino 525 994 4,838 16 994 4,854 5,848
1135 Kern Sunnyvale 407 1,982 407 1,982 2,389
405 Tasman Sunnyvale 550 2,676 550 2,676 3,226
450 National Mountain View C 611 2,973 611 2,973 3,584
3301 Olcott Santa Clara 1,846 8,984 1,846 8,984 10,830
2800 Bayview Fremont 3,105 1,070 5,205 1,070 5,205 6,275
6850 Santa Teresa San Jose 377 1,836 377 1,836 2,213
140-160 Great Oaks San Jose 1,402 6,822 1,402 6,822 8,224
6541 Via del Oro/ San Jose 3,689 1,039 5,057 1,039 5,057 6,096
6385-6387 San Ignacio
6311-6351 San Ignacio San Jose C 6,246 30,396 21 6,246 30,417 36,663
6320-6360 San Ignacio San Jose 7,732 2,616 12,732 2,616 12,732 15,348
75 E. Trimble/2610 San Jose 3,477 16,919 3,477 16,919 20,396
N. First Street
2033-2243 Samaritan San Jose 20,752 5,046 24,556 5,046 24,556 29,602
1170 Morse Sunnyvale C 658 3,201 658 3,201 3,859
3236 Scott Santa Clara C 1,234 6,005 1,234 6,005 7,239
1212 Bordeaux Sunnyvale 2,250 10,948 2,250 10,948 13,198
1325-1810 McCandless Milpitas 27,201 13,994 66,213 13,994 66,213 80,207
1600 Memorex Santa Clara 1,221 5,940 1,221 5,940 7,161
1688 Richard Santa Clara 1,248 2,912 1,248 2,912 4,160
3506-3510 Bassett Santa Clara D 943 4,591 943 4,591 5,534
3540-3544 Bassett Santa Clara D C 1,565 7,615 1,565 7,615 9,180
3550 Bassett Santa Clara D C 1,079 5,251 1,079 5,251 6,330
3560 Bassett Santa Clara D C 1,075 5,233 1,075 5,233 6,308
3570-3580 Bassett Santa Clara D C 1,075 5,233 1,075 5,233 6,308
Prudential Capital 129,767
Group Loan -------- -------- -------- ---- ------- -------- --------
$205,141 $90,929 $430,392 $118 $90,929 $430,510 $521,439
======== ======== ======== ==== ======= ======== ========
</TABLE>
51
<PAGE>
- ------------------------------------------------------
(A) The aggregate cost for federal income tax purposes at December 31, 1998 is
$199,085
(B) 16.67% of this property's ownership is held by unaffiliated parties outside
the operating partnerships or the Company
(C) Encumbered by the $129,767 Prudential Capital Group loan - full amount of
loan shown at the bottom of the schedule.
(D) Part of the property group referred to as Triangle Technology Park (E) 25%
of this property's ownership is held by unaffiliated parties outside the
operating partnerships or the Company.
(E) 25% of this property's ownership is held by unaffiliated parties outside the
operating partnerships of the Company.
52
<PAGE>
<TABLE>
SCHEDULE III
Mission West Properties, Inc.
REAL ESTATE AND ACCUMULATED DEPRECIATION
(Dollars in thousands)
December 31, 1998
<CAPTION>
Accumulated Date of Depreciable
Property Name City Depreciation Acquisition Life
- ------------------------------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
10401-10411 Bubb Cupertino B $ 40 7/98 40 Years
2001 Logic Cupertino 141 7/98 40 Years
47000 Northport Fremont 74 7/98 40 Years
45738 Northport Fremont 56 7/98 40 Years
4050 Starboard Fremont 83 7/98 40 Years
3501 W. Warren/Fremont Fremont 116 7/98 40 Years
48800 Milmont Fremont 64 7/98 40 Years
4750 Patrick Henry Santa Clara 100 7/98 40 Years
4949 Hellyer San Jose 220 7/98 40 Years
3520 Bassett Santa Clara D 69 7/98 40 Years
3530 Bassett Santa Clara D,E 54 7/98 40 Years
5850-5870 Hellyer San Jose 29 11/98 40 Years
2251 Lawson Lane Santa Clara 121 7/98 40 Years
1230 E. Arques Sunnyvale 35 7/98 40 Years
1250 E. Arques Sunnyvale 83 7/98 40 Years
3120 Scott Blvd. Santa Clara 126 7/98 40 Years
20400 Mariani Cupertino 104 7/98 40 Years
10500 De Anza Cupertino 468 7/98 40 Years
20605-705 Valley Green Cupertino 214 7/98 40 Years
10300 Bubb Cupertino 41 7/98 40 Years
10460 Bubb Cupertino 63 7/98 40 Years
1135 Kern Sunnyvale 27 7/98 40 Years
405 Tasman Sunnyvale 35 7/98 40 Years
450 National Mountain View 39 7/98 40 Years
3301 Olcott Santa Clara 114 7/98 40 Years
2800 Bayview Fremont 67 7/98 40 Years
6850 Santa Teresa San Jose 25 7/98 40 Years
140-160 Great Oaks San Jose 87 7/98 40 Years
6541 Via del Oro/ San Jose 65 7/98 40 Years
6385-6387 San Ignacio
6311-6351 San Ignacio San Jose 382 7/98 40 Years
6320-6360 San Ignacio San Jose 161 7/98 40 Years
N. First Street
2033-2243 Samaritan San Jose 310 7/98 40 Years
1170 Morse Sunnyvale 42 7/98 40 Years
3236 Scott Santa Clara 77 7/98 40 Years
1212 Bordeaux Sunnyvale 139 7/98 40 Years
1325-1810 McCandless Milpitas 854 7/98 40 Years
1600 Memorex Santa Clara 76 7/98 40 Years
1688 Richard Santa Clara 10 9/98 40 Years
3506-3510 Bassett Santa Clara D 59 7/98 40 Years
3540-3544 Bassett Santa Clara D 97 7/98 40 Years
3550 Bassett Santa Clara D 68 7/98 40 Years
3560 Bassett Santa Clara D 67 7/98 40 Years
3570-3580 Bassett Santa Clara D 67 7/98 40 Years
------
$5,410
=====
</TABLE>
51
<PAGE>
(A) The aggregate cost for federal income tax purposes at December 31, 1998
is $199,085.
(B) 16.67% of this property's ownership is held outside the operating
partnerships.
(C) Encumbered by the $129,767 Prudential Capital Group loan-full amount of loan
shown at the bottom of the schedule.
(D) Part of the property group referred to as Triangle Technology Park.
(E) 25% of this property's ownership is held outside the operating partnerships.
52
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTE TO SCHEDULE III
December 31, 1998
(Dollars in thousands)
1. Reconciliation of real estate and accumulated depreciation:
1998
--------------
Real estate investments:
Balance at beginning of year -
Additions $ 521,439
Dispositions -
--------------
Balance at end of year $ 521,439
==============
Accumulated depreciation:
Balance at beginning of year -
Additions $ 5,410
Dispositions -
==============
Balance at end of year $ 5,410
==============
53
<PAGE>
Report of Independent Accountants
To the members of the Berg Group
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of net equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of the Berg
Properties at June 30, 1998 and December 31, 1997, and the results of its
operations and its cash flows for the six month period ended June 30, 1998 and
each of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements 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 of these statements in accordance with generally accepted
auditing standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
January 29, 1999
54
<PAGE>
<TABLE>
<CAPTION>
THE BERG PROPERTIES (PREDECESSOR)
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30, December 31,
1998 1997
-------- --------
ASSETS
<S> <C> <C>
Real estate assets:
Land $ 30,426 $ 30,426
Buildings and 61,323 61,262
improvements
Tenant improvements 85,790 86,541
-------- --------
177,539 178,229
Less, accumulated (81,939) (78,077)
depreciation
-------- --------
Net real estate 95,600 100,152
assets
Cash and cash - 5,719
equivalents
Deferred rent 4,964 4,144
Deferred costs and 3,982 3,935
other assets -------- --------
Total assets $104,546 $113,950
======== ========
LIABILITIES AND NET (DEFICIT) EQUITY
Liabilities:
Lines of credit - $ 37,953
Mortgage notes $ 37,868 38,554
payable
Mortgage notes 156,632 -
payable (related
parties)
Notes payable - 1,975
(related parties)
Accounts payable 2,233 2,102
and accrued expenses
Other liabilities 4,046 3,715
-------- --------
Total liabilities 200,779 84,299
-------- --------
Net (deficit) equity (96,233) 29,651
========= ========
Total liabilities $104,546 $113,950
and net (deficit) ======== ========
equity
</TABLE>
See notes to combined financial statements
55
<PAGE>
<TABLE>
<CAPTION>
THE BERG PROPERTIES (PREDECESSOR)
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Six Months
Ended Year Ended December 31,
June 30, ----------------------------
1998 1997 1996
----------- ----------- ---------
REVENUE:
<S> <C> <C> <C>
Rental revenue from $22,341 $40,163 $28,934
real estate
Tenant reimbursements 3,826 6,519 3,902
--------- --------- ---------
26,167 46,682 32,836
--------- --------- ---------
EXPENSES:
Property operating 2,088 3,741 1,906
and maintenance
Real estate taxes 2,126 4,229 3,750
Interest 3,044 5,919 6,090
Interest (related 61 248 293
parties)
Management fees 645 1,050 827
(related parties)
Depreciation and 3,862 7,717 6,739
amortization --------- --------- ---------
11,826 22,904 19,605
Income before 14,341 23,778 13,231
extraordinary item
Extraordinary item - - 610
--------- --------- ---------
Net income $14,341 $23,778 $13,841
========= ========= =========
</TABLE>
See notes to combined financial statements
56
<PAGE>
<TABLE>
<CAPTION>
THE BERG PROPERTIES (PREDECESSOR)
COMBINED STATEMENTS OF NET EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<S> <C>
Balance (deficit), January 1, 1996 $ (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 (140,225)
Net income 14,341
-------
Balance (deficit), June 30, 1998 $(96,233)
========
</TABLE>
See notes to combined financial statements
57
<PAGE>
<TABLE>
<CAPTION>
THE BERG PROPERTIES (PREDECESSOR)
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Six months
ended
June 30, Year Ended December 31,
----------- -------------------------
1998 1997 1996
------------ ------------ -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 14,341 $ 23,778 $ 13,841
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and amortization 3,862 7,717 6,739
Loan fee amortization 6 12 10
Extraordinary gain on - - (610)
extinguishment of debt
Changes in operating assets
and liabilities:
Deferred rent (820) (1,330) (586)
Other assets (53) (1,221) (406)
Accounts payable and 131 (160) 353
accrued expenses
Other liabilities 331 1,113 907
------- ------- -------
Net cash provided by 17,798 29,909 20,248
operating activities ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase and improvements (132) (17,251) (29,275)
to real estate
Tenant reimbursements for 822 - -
improvements
------- ------- -------
Net cash provided by (used 690 (17,251) (29,275)
in) investing activities ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net (repayments) borrowings on (1,277) 2,415 6,047
lines of credit
Proceeds from mortgage notes payable - 3,105 -
Principal payments on mortgage (686) (2,429) (1,563)
notes payable
Proceeds from mortgage 119,956 - -
notes payable (related
parties)
Principal payments on (1,975) (571) (504)
mortgage notes payable
(related parties)
Capital contributions - 755 12,299
Capital distributions (140,225) (11,707) (6,846)
-------- -------- --------
Net cash (used in) provided by (24,207) (8,432) 9,433
financing activities -------- -------- --------
Net (decrease) increase in cash (5,719) 4,226 406
and cash equivalents
Cash and cash equivalents, 5,719 1,493 1,087
beginning of year -------- -------- --------
Cash and cash equivalents, $ - $ 5,719 $ 1,493
end of year ======== ======== ========
Supplemental information:
Cash paid for interest, $ 1,731 $ 6,272 $ 6,278
net of amounts capitalized
Supplemental schedule of non-cash
investing and financing activities:
Assumption of lines of $ 36,676 - -
credit by Carl Berg ======== ======== ========
Non-cash transfers of - $ 6,775 $ 75
construction-in-progress ======== ======== ========
</TABLE>
See notes to combined financial statements
58
<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, were 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 (the "Berg Group"). 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 Berg Group is
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 the Berg Properties.
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, Inc. (the "Company"), an American Stock
Exchange listed real estate company (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 for 200,000
shares of common stock at $4.50 per pursuant to a restricted stock purchase
agreement.
In May 1998, the Berg Group along with other certain parties, entered into an
acquisition agreement, providing, among other things, for the Company's
acquisition of interests as the sole general partner in four operating
partnerships which hold the Berg Properties, along with other properties
previously controlled by another Silicon Valley developer. The acquisition by
the company of its general partnership interests became effective as of July 1,
1998 for accounting and reporting purposes.
2. BASIS OF PRESENTATON 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 were under the common management of the Berg
Group. All significant intergroup transactions and balances have been eliminated
in combination.
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 the straight-line method of accounting required
by generally accepted accounting principles under which contractual rent payment
increases are recognized evenly over the lease term. The difference between
recognized rental income and rental cash receipts is recorded as deferred rent
on the balance sheet. Certain lease agreements contain terms that provide for
additional rents based on reimbursement of certain costs. These additional rents
are reflected on the accrual basis.
59
<PAGE>
THE BERG PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
REAL ESTATE ASSETS:
Real estate assets are 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 $0 for the six
months ended June 30, 1998 and $257 and $459 for the years ended December 31,
1997 and 1996 respectively. Maintenance and repairs are charged to expense as
incurred. Gains and losses from sales are included in income in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 66, ACCOUNTING FOR
SALES OF REAL ESTATE.
The Company reviews real estate assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. If the carrying amount of the asset exceeds its estimated
undiscounted net cash flow before interest, the Company will recognize an
impairment loss equal to the difference between its carrying amount and its fair
value. If an impairment is recognized, the reduced carrying amount of the asset
will be accounted for as its new cost. For a depreciable asset, the new cost
will be depreciated over the asset's remaining useful life. Generally, fair
values are estimated using discounted cash flow, replacement cost or market
comparison analyses. The process of evaluating for impairment requires estimates
as to future events and conditions, which are subject to varying market and
economic factors. Therefore, it is reasonably possible that a change in estimate
resulting from judgements as to future events could occur which would affect the
recorded amounts of the property. As of December 31, 1998, the properties'
carrying values did not exceed the estimated fair values.
DEPRECIATION:
Depreciation is computed using the straight-line method over estimated useful
lives of 40 years for buildings and improvements, and over the life of lease
terms which average 10 years for tenant improvements.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include all cash and liquid investments with an
original maturity date from date of purchase of three months or less.
DEFERRED COSTS AND OTHER ASSETS:
Deferred costs and other assets include external lease acquisition costs which
are capitalized and amortized over the lives of the related leases. Accumulated
amortization related to these costs aggregated $1,709, $1,353 and $661 as of
June 30, 1998, December 31, 1997 and 1996, respectively.
Also included in deferred costs and other assets are loan fees which 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. Accumulated amortization related to loan fees aggregated $204, $198
and $186 as of June 30, 1998, December 31, 1997 and 1996, respectively.
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:
The Berg Properties are not geographically diverse, and their tenants operate
primarily in the technology industry. Additionally, because the Berg Properties
are leased to 61 tenants, default by any major tenant could significantly impact
the results of the combined total. One tenant, Apple Computers, Inc., accounted
for approximately 14.9% of the Berg Properties rental revenues for the six
months ended June 30, 1998, with the next largest tenant accounting for 7.5% of
total rental revenues. However, management believes the risk of default is
reduced because of the critical nature of these properties for ongoing tenant
operations.
60
<PAGE>
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. DEBT
LINES OF CREDIT:
Historically, the Berg Properties have had access to credit facilities entered
into by members of the Berg Group. Generally, balances under such facilities
have been allocated to entities within the Berg Group 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
which have not been 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. In September
1998, two lines of credit aggregating $30,000 were retired. The remaining line
of credit is collateralized by certain Berg Properties. Certain members of the
Berg Group are liable as guarantors under this line of credit.
On June 30, 1998, all balances under the $100,000 line of credit allocated to
the Berg Properties were assumed by Carl Berg and refinanced with proceeds from
mortgage notes payable (related parties). Aggregate borrowings outstanding under
the lines of credit facilities at December 31, 1997 totaled $99,192 with $37,953
allocated to the Berg Properties.
MORTGAGE NOTES PAYABLE:
The Mortgage notes payable generally require monthly installments of interest
and principal over various terms extending through the year 2014.
MORTGAGE NOTES PAYABLE (RELATED PARTIES):
The Berg Properties acquired new debt from Berg & Berg Enterprises, Inc. in June
of 1998 in order to repay amounts previously allocated to the Berg Properties
under the lines of credit as well as to fund distributions to the Berg Group.
Total distributions to the Berg Group during the six months ended June 30, 1998
were $140,225, of which $119,956 was funded with proceeds from mortgage notes
payable (related parties). Such debt was originally due March 1999, and bears
interest at a rate equal to that charged on the line of credit. The Company has
received an extension from Berg & Berg Enterprises, Inc. to December 1999.
There is no set repayment plan associated with this debt; payments are made to
Berg & Berg Enterprises, Inc. on demand.
In connection with the Company's acquisition of the sole general partnership
interests in the four operating partnerships (See Note 1), certain mortgage
notes payable and portions of mortgage notes payable (related parties) were
retired subsequent to June 30, 1998 through a combination of new debt and
equity.
61
<PAGE>
The following table sets forth certain information regarding debt outstanding as
of June 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
Balance Balance
June 30, Dec.31,
Description Collateral Properties 1998 1997 Matures Rate
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
LINES OF CREDIT:
Wells Fargo Bank 2251 Lawson Lane, Santa Clara, CA - $37,953 10/99 (1)
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 Mariani, Cupertino, CA
2033 - 2243 Samaritan Drive, San Jose, CA
10500 De Anza Boulevard, Cupertino, CA
MORTGAGE NOTES 2033-2043 Samaritan Drive, San Jose, CA
(RELATED PARTIES) 2133 Samaritan Drive, San Jose, CA
2233-2243 Samaritan Drive, San Jose, CA $156,632 - 3/99 (1)
MORTGAGE NOTES:
Great West Life & 6320 San Ignacio Ave, San Jose, CA 7,804 7,872 2/04 7%
Annuity Insurance
Company
Great West Life & 6385 San Ignacio Ave, San Jose, CA 3,723 3,755 5/04 7%
Annuity Insurance 6540 Via del Oro, San Jose, CA
Company
Great West Life & 1170 Morse Ave., Sunnyvale, CA 1,969 1,986 5/04 7%
Annuity Insurance
Company
National Electrical 2251 Lawson Lane, Santa Clara, CA 4,692 4,820 1/09 9.75%
Contractors Association
Pension Benefit Trust Fund
Prudential Capital Group 1230 E. Arques, Sunnyvale, CA 1,110 1,147 11/07 9%
Prudential Capital Group 20605-20705 Valley Green Drive, Cupertino, CA 3,158 3,250 10/98 8.5%
Prudential Capital Group 20400 Mariani, Cupertino, CA 2,095 2,154 3/09 8.75%
Prudential Capital Group 1250 E. Arques, Sunnyvale, CA 2,184 2,312 11/99 9.5%
New York Life 10440 Bubb Road, Cupertino, CA 441 452 8/09 9.63%
Insurance Company
Home Savings & Loan 10460 Bubb Road, Cupertino, CA 547 569 1/07 9.5%
Association
Amdahl Corporation 3120 Scott, Santa Clara, CA 7,040 7,132 3/14 9.42%
Citicorp U.S.A. Inc. 2800 Bayview Drive, Fremont, CA 3,105 3,105 4/00 (2)
----------------------
Mortgage Notes Total $ 37,868 $38,554
======================
</TABLE>
(1)The lesser of (a) the Wells Fargo prime rate in effect on the first day of
each calendar month; (b) LIBOR plus 1.65%;or (c) the Wells Fargo Purchased
Funds Rate quoted on the first day of each calendar month plus 1.65%. The
average rates for the six months ended June 30, 1998 and the years ended
December 31, 1997 and 1996 were 7.24%, 7.25% and 7.04%, respectively.
(2)One month LIBOR plus 1.625% adjusted monthly.
62
<PAGE>
Principal payments on outstanding borrowings as of June 30, 1998 are due as
follows:
<TABLE>
<CAPTION>
Mortgage Notes
Payable Mortgage Notes
(Related Parties) Payable Total
--------------- -------------- ----------
<S> <C> <C> <C>
1998 - $3,778 3,778
1999 $156,632 1,325 157,957
2000 - 4,552 4,552
2001 - 1,580 1,580
2002 - 1,726 1,726
Thereafter - 24,907 24,907
-------- ------- --------
$156,632 $37,868 $194,500
======== ======= ========
</TABLE>
4. FAIR VALUES OF FINANCIAL INSTRUMENTS
The Berg Properties' financial instruments include receivables, payables, and
debt. Considerable judgement is required in interpreting market data to develop
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodoligies may have a material effect on the estimated fair value
amounts.
Based on borrowing rates currently available to the Berg Properties, management
has estimated that mortgage notes payable with an aggregate carrying value of
$37,868 have an estimated aggregate fair value of $37,531 at June 30, 1998.
Receivables and payables are carried at amounts that approximate fair value due
to their short-term maturities.
5. 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 $645, $1,050 and $827 for the six months
ended June 30, 1998 and for the years ended December 31, 1997 and1996,
respectively.
Included in the financing described in Note 3, certain affiliated entities have
extended funds to the partnerships which own the properties. These amounts are
included in mortgage 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 credit facilities and interest incurred on such advances is
included in interest expense (related parties) in the combined statements of
operations.
6. OPERATING LEASES
The Berg Properties are leased to tenants under net operating leases with
initial terms extending to the year 2008. Future minimum rentals under
noncancelable operating leases, excluding tenant reimbursements of expenses, as
of June 30, 1998, are approximately as follows:
1998 $22,065
1999 43,585
2000 38,867
2001 33,960
2002 27,296
Thereafter 41,851
--------
$207,624
========
63
<PAGE>
Minimum rental revenues, as presented for the six months ended June 30, 1998 and
for the years ended December 31, 1997, and 1996, 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 six months ended June 30, 1998 and for the
years ended December 31, 1997 and 1996 were $820, $1,301 and $586, respectively.
64
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the members of the Berg Group
Our audits of the combined financial statements referred to in our report dated
January 29, 1999, included in this Form 10-K of Mission West Proprties, Inc.,
also included an audit of the combined financial statement schedule listed in
Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related combined financial statements.
PricewaterhouseCoopers LLP
San Francisco, California
January 29, 1999
65
<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 2,375,884 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
--------- ----------- ----------- ------------ ------------ -------------
--------- ----------- ----------- ------------ ------------ -------------
66
<PAGE>
<CAPTION>
THE BERG PROPERTIES
SCHEDULE III
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>
66
<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>
67
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company changed its independent auditors on March 12, 1998 as set forth in a
report on Form 8-K which is incorporated herein by this reference.
68
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The directors and executive officers of Mission West Properties, Inc. as of
March 10, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- -------------------- ----- ---------------------------------------------
<S> <C> <C>
Carl E. Berg 61 Chairman of the Board, Chief Executive
Officer, President and Director
Michael J. Anderson 39 Vice President, Chief Operating Officer,
Secretary and Director
Marianne K. Aguiar 32 Vice President of Finance and Controller
John Bolger(1), (2), (3) 52 Director
William A. Hasler(1), (3) 57 Director
Lawrence B. Helzel(2), (3) 50 Director
</TABLE>
- --------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Independent Directors Committee
The following is a biographical summary of the experience of our
executive/senior officers and directors:
Mr. Berg has served as Chief Executive Officer, President and Director of the
Company since September 1997. Since 1979, Mr. Berg has been a general partner of
Berg & Berg Developers and has been a director and officer of Berg & Berg
Enterprises, Inc. since its inception. Mr. Berg is also a director of Integrated
Device Technologies, Inc., Videonics, Inc., Valence Technology, Inc. and System
Integrated Research, Ltd.
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 next six years in private real
estate development with Sandhill Homes, LP and Sandhill Property Company.
Ms. Aguiar joined the Company on March 29, 1998 and was appointed Vice President
of Finance and Controller. From June 1996 to March 1998, Ms. Aguiar served as
Vice President, Controller of Oasis Residential, Inc. and from July 1996 to
March 1998 she was Treasurer. From November 1995 to May 1996, Ms. Aguiar was
employed by SBT Accounting Systems where from April 1996 to June 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 her last title was
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. from May 1989 through December 1992. Mr. Bolger is also a director
of Integrated Device Technology, Inc., Integrated Systems Inc., Sanmina
Corporation and TCSI Corporation.
Mr. Hasler became a director of the Company on December 4, 1998. Mr. Hasler was
Dean of Haas School of Business, University of California, Berkeley, a position
from which he resigned in June 1998 to assume the position of Co-CEO of Aphton
Corporation, a public pharmaceutical company. Mr. Hasler is also a director of
Aphton, Solectron, Quickturn Design, Walker Interactive, TCSI Corporation and
several start-up companies. He is a public governor of the Pacific Stock and
Options Exchange and a member of the Advisory Board of Critical Technologies
Institute.
Mr. Helzel became a director of the Company on December 4, 1998. Mr. Helzel is a
general partner of Helzel Kirshman, L.P., a private investment partnership and
is a member of the Pacific Exchange.
69
<PAGE>
Mr. Helzel has been a director for Pacific Gateway Properties, a publicly traded
real estate company for the past seven years and also serves on the board of
directors of Infotec Commercial Systems, Inc. and Avirnex Communications Group,
Inc., both privately held companies.
NUMBER, TERMS AND ELECTION OF DIRECTORS
The number of directors is set at five. Each director will serve for a term of
one year or until the next annual meeting at which directors are elected. In the
election of directors, each shareholder is entitled to one vote for each share
of common stock held by such shareholder.
COMPENSATION OF DIRECTORS
We intend to pay our directors who are not officers fees for their services as
directors. They 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.
Each non-employee member of the board of directors who became or becomes a
member of the board of directors after November 10, 1997, the date on which the
1997 Stock Option Plan (the "Option Plan") was approved by the shareholders of
the Company, automatically receives 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 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
remains a director.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Directors, executive officers and each beneficial owner of more than ten percent
of our common stock are required by Section 16(a) of the Securities Exchange Act
of 1934, as amended, to file reports periodically disclosing their transactions
in our securities. Based on a review of such reports, no reporting person failed
to file required reports on a timely basis during fiscal year 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, John C. Bolger and Roger S. Kirk served as members of the
Compensation Committee. Neither Mr. Bolger nor Mr. Kirk were officers or
employees of the Company. No executive officer served as a member of the
compensation committee of another entity, one of whose executive officers served
on the Compensation Committee. No executive officer served as a director of
another entity, one of whose executive officers served on the Compensation
Committee. No executive officer served as a member of a compensation committee
of another entity, one of whose executive officers served as a director.
70
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth salary and other compensation earned by or paid
for the period of January 1, 1998 to December 31, 1998 to the Chief Executive
Officer and each of the Company's other executive officers. No current officer
received compensation in any other prior fiscal year. All current officers,
except Carl E. Berg, joined the Company in 1998. Carl E. Berg joined the Company
in September 1997, but received no compensation from the Company in 1997.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ------------------
SECURITIES
UNDERLYING
OTHER ANNUAL OPTIONS GRANTED
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION IN 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Carl E. Berg 1998 $100,000 - - -
Chief Executive Officer and
President
Michael J. Anderson 1998 $147,919 $50,000 $22,188(1) 600,000
Vice President,
Chief Operating Officer
and Secretary
Bradley P. Perkins(2) 1998 $146,667 - - 80,000
Vice President,
General Counsel
and Secretary
Marianne K. Aguiar 1998 $ 74,775 - - 75,000
Vice President
and Controller
</TABLE>
(1) Employer contribution to 401(k) plan.
(2) Bradley P. Perkins resigned from the Company effective February 2, 1999.
The following table shows certain information relating to options to purchase
shares of common stock granted to the executive and executive officers during
1998.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS (1) OPTION TERM(2)
------------------------------------ --------------------
PERCENT
NUMBER OF OF TOTAL
SHARES OF OPTIONS
COMMON STOCK GRANTED TO
UNDERLYING EMPLOYEES EXERCISE
OPTIONS IN FISCAL PRICE PER EXPIRATION
NAME GRANTED(#) YEAR SHARE DATE 5% 10%
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Carl E. Berg - - - - - -
Michael J. Anderson 600,000 79.5% $4.50 01/01/04 $918,000 $2,082,000
Bradley P. Perkins 80,000 10.6% $4.50 02/02/04(3) $122,400 $ 277,600
Marianne K. Aguiar 75,000 9.9% $4.50 03/29/04 $114,750 $ 260,250
</TABLE>
(1) All options granted in 1998 become exercisable as follows: a) six months
from date of grant, 6.25%; b) one year from date of grant, an additional
12.5%; c) each month thereafter for 36 months, an additional 2.26%. Each
option has a term of 6 years from the date of grant subject to earlier
termination in certain events related to termination of employment. The
option price is equal to the fair market value of the common stock on the
date of grant.
(2) Assumed annual rates of stock price appreciation for illustrative purposes
only. Actual stock prices will vary from time to time based upon market
factors and the Company's financial performance. No assurances can be given
that these appreciation rates will be achieved.
(3) Bradley P. Perkins resigned effective February 2, 1999 and all unvested
options lapsed by their terms. At that date the total number of shares
vested under his option grant was 15,000.
The following table sets forth certain information concerning exercised and
unexercised options held by executive and executive offices at December 31,
1998:
71
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998
----------------------------------------------------------------
SHARES
ACQUIRED ON VALUE
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISAGBLE EXERCISABLE(1) UNEXERCISABLE(1)
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Carl E. Berg - N/A -
Michael J. Anderson 225,000 - - 375,000 - $843,750
Bradley P. Perkins(2) - N/A 5,000 75,000 $11,250 $157,500
Marianne K. Aguiar - N/A 4,688 70,312 $10,548 $158,202
</TABLE>
(1) Based on closing price of $6 3/4 per share of common stock on December
31,1998, as reported by the American Stock Exchange.
(2) Bradley P. Perkins resigned effective February 2, 1999. At such time, total
vested options under his option grant were 15,000. Mr. Perkins exercised
these options within 3 days of his termination of employment with the
Company.
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 his 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 at $4.50 per share upon
delivery of a full recourse note payable in four years or upon termination of
employment. Mr. Anderson's note is secured by the shares, which are subject to
repurchase by the Company to the extent not vested upon termination of
employment.
BENEFIT PLANS
1997 STOCK OPTION PLAN.
The 1997 Stock Option Plan (the "Option Plan") was approved by the Company's
stockholders 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 Option Plan provides for the granting to employees, including officers
(whether or not they are directors) of "incentive stock options" within the
meaning of Section 422 of the Code, and for the granting of non-statutory
options to employees, consultants and directors, of the Company. 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. Options to purchase no more than 500,000 shares may be granted in one
calendar year to any individual.
Each option granted under the Option Plan is evidenced by a written stock option
agreement between the Company and the optionee and generally will 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
services to the Company.
The exercise price per share for 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
72
<PAGE>
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 no more than six months following
the termination.
401(K) PLAN
The Company has adopted an employee investment plan (the "Plan"), under Section
401(k) of the Internal Revenue Code. Employees who are at least 21 years old and
who have completed six months of eligibility service may become participants in
the Plan. Each participant may make contributions to the Plan through salary
deferrals in amounts of at least 1% to a maximum of 15% of the participant's
compensation, subject to certain limitations imposed by the Internal Revenue
Code. The Company contributes an amount up to 15% of the participant's
compensation contributed, based upon management's discretion. A participant's
contribution to the Plan is 100% vested and nonforfeitable. A participant will
become vested in 100% of the Company's contributions after two years of eligible
service.
73
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock as of March 10, 1999 by (i) each person
who is a shareholder of the Company holding more than a 5% interest in the
Company, (ii) directors and Named Executive Officer 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 Company has
relied on information supplied by its officers, directors and certain
shareholders and on information contained in filings with the SEC.
<TABLE>
<CAPTION>
Percent
of all
Shares of
Percent Common Stock Percent of All
of All Assuming Shares of
Number of Shares Shares of Number Exchange of Common
Beneficially Common of L.P. Holder's L.P. Stock/L.P.
Name Owned(1) Stock Units Units (2) Units(1)(2)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND
EXECUTIVE OFFICERS:
Michael J. Anderson 311,112(3) 3.8% - 3.8% *
Vice President,
Chief Operating
Officer, and
Director
Lawrence B. Helzel 185,293(4) 2.3% - 2.3% *
Director
c/o Helzel Kirshman, LP
5550 Redwood Road,
Suite 4
Oakland, CA 94619
Carl E. Berg 77,333(5)(15) * 34,599,447(6)(15) 81.3% 50.9%
President, Chief
Executive Officer, and
Director
John C. Bolger 36,810(7) * - * *
Director
96 Sutherland Drive
Atherton, CA 94027
Marianne K. Aguiar 19,991(8) * - * *
Vice President of
Finance and Controller
William A. Hasler 5,210(9) * - * *
Director
c/o Aphton Corporation
1 Market Street
Spear Tower, Ste. 1850
San Francisco, CA 94105
5% SHAREHOLDERS:
Ingalls & Snyder LLC(10) 2,744,917 33.4% - * *
61 Broadway
New York, NY 10006
Ingalls & Snyder 1,125,067 13.7% - * *
Value Partners, L.P.(11)
61 Broadway
New York, NY 10006
Dan McCarthy 870,000(12) 10.6% - * *
c/o Ingalls &
Snyder LLC
61 Broadway
New York, NY 10006
Clyde J. Berg 27,333(13)(15) * 27,061,507(14)(15) 77.2% 39.7%
c/o Berg & Berg
Developers
10050 Bandley Drive
Cupertino, CA 95014
Berg & Berg Enterprises, 27,333 * 6,305,487 44.2% 9.3%
Inc.(15)
10050 Bandley Drive
Cupertino, CA 95014
All Directors and Officers 635,749 7.8% 34,599,447 82.4% 51.6%
as a group (6 persons)(16)
</TABLE>
* Less than 1%.
74
<PAGE>
(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 March 10, 1999. 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. Percent of all
shares of common stock calculations are based on 8,233,538 shares
outstanding as of March 10, 1999. Percent of all shares of common stock/L.P.
Units calculations are based on 68,185,235 shares of common stock and L.P.
Units exchangeable for common stock as of March 10, 1999.
(2) Assumes L.P. Units are exchanged for shares of common stock without regard
to (i) whether such L.P. Units may be exchanged for shares of common stock
within 60 days of March 10, 1999, and (ii) certain ownership limit
provisions set forth in the Company's Articles of Amendment and Restatement.
(3) Includes (i) 86,112 shares of common stock issuable on exercise of options,
and (ii) 144,444 shares of common stock which are subject to repurchase upon
termination of employment.
(4) Includes 5,210 shares of common stock issuable on exercise of Option 5.
(5) Includes 27,333 shares of common stock held of record by BBE. Mr. Berg
disclaims beneficial ownership of 53,071 shares of Common Stock held by him
as a trustee under various pension and profit sharing plans. Such shares are
not included herein. Mr. Berg has no investment control over such shares.
(6) Includes L.P. Units in which Mr. Berg has a pecuniary interest as a result
of his status as a limited partner in the operating partnerships. Also
includes an additional 6,305,487 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.
(7) Includes 14,588 shares of common stock issuable on exercise of options.
(8) Includes 17,449 shares of common stock issuable on exercise of options.
(9) All 5,210 shares of common stock are issuable on exercise of options.
(10)Edward H. Oberst, Managing Director, has the power to vote and the power to
direct the investment of Ingalls & Snyder LLC with respect to the common
stock.
(11)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.
(12)Includes 100,000 shares held in Mr. McCarthy's Individual Retirement
Account.
(13) All shares are held by BBE.
(14)Includes L.P. Units in which Mr. Berg has a pecuniary interest as a result
of his status as a limited partner in the operating partnerships. Also
includes L.P. Units held by Mr. Berg as trustee of the Carl Berg Child's
Trust UTA dated June 2, 1978; and the 1981 Kara Ann Berg Trust, and an
additional 6,305,487 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.
(15)Carl E. Berg is an executive officer and 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.
(16) Current officers and directors include Carl E. Berg, Michael J. Anderson,
Marianne K. Aguiar, John C. Bolger, William A. Hasler, and Lawrence B.
Helzel. See Notes 3 through 9.
75
<PAGE>
ITEM 13. CERTAIN TRANSACTIONS
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 private placement
transactions,. The Company did not obtain 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 include, among others, the following
officers, directors, 5% shareholders and purchasers, who by reason of the
purchase of common stock in the private placement, became 5% shareholders:
Non-Placement Agent Ingalls & Snyder
Private Placement Placement
------------------- ----------------
Carl E. Berg 50,000 -
Lawrence Helzel 180,083
Dan McCarthy 870,000
Ingalls & Snyder LLC 2,744,917
Ingalls & Snyder Value Partners 1,125,067
Prism Partners I, L.P. 450,000
See "Item 1--Business" and "Item 4--Recent Sales of Unregistered Securities."
TRANSACTIONS WITH CARL E. BERG AND THE BERG GROUP
The Company entered into a series of transactions with Carl E. Berg who is an
officer, director and 5% security holder of the Company, and his affiliates in
the Berg Group, including Clyde J. Berg.
UPREIT TRANSACTIONS
Prior to July 1998, three of the four limited partnerships comprising the
operating partnerships were controlled by Carl E. Berg, his brother, Clyde J.
Berg and other members of the Berg Group. The Messrs. Berg also owned 50% of the
fourth limited partnership as limited partners and they and other members of the
Berg Group held R&D properties that were contributed to the operating
partnerships in July of 1998. The prior interests in the operating partnerships
were converted to L.P. Units at the closing of the formation of the operating
partnerships when the Company became the sole general partner in each of the
operating partnerships. Additional L.P. Units were issued in connection with the
acquisition of the R&D properties held outside the operating partnerships.
Under the terms of the Acquisition Agreement dated as May 14, 1998, as amended,
the L.P. Units were valued at $4.50 per share for purposes of these
transactions. The Company did not obtain a "fairness" opinion or other
independent financial advice with respect to the transactions. The L.P. Units in
which the Messrs. Berg and Berg & Berg Enterprises, Inc. acquired a pecuniary
interest are as follows:
76
<PAGE>
L.P. Units
------------------------------
Carl E. Berg 28,091,377
Clyde J. Berg 17,347,806
Berg & Berg 6,305,487
Enterprises, Inc.
Additional L.P. Units were acquired by certain members of their immediate
families, to which they disclaim beneficial ownership. See Item
1.--"Business-Organization and General Business Description," "-Risk Factors,"
Item 4. "Submission of Matters to a Vote of Security Holders," and "Item 12.
Security Ownership of Certain Beneficial owners and Management."
PENDING DEVELOPMENT PROJECTS. Carl E. Berg and other members of the Berg Group
entered into the Pending Projects Acquisition Agreement pursuant to which the
Company, through the operating partnerships, will acquire certain pending
development projects from Carl E. Berg and other members of the Berg Group as
each property is completed and leased. One of the four projects has been
completed and leased. As a result of the completion and leasing of the pending
development project, one of the operating partnerships acquired the property and
Carl E. Berg and Clyde J. Berg each received additional L.P. Units in the
operating partnership. Each received 202,583 L.P. Units.
Carl E. Berg and other members of the Berg Group have the right to obtain as
many as 33,513,906 additional L.P. Units in exchange for the pending development
projects. The sellers of these projects may elect to receive cash or L.P. Units
at a value of $4.50 per L.P. Unit, which is a substantial discount from the
current market price of the common stock.
See "Item 1--Business--Business" and "--Risk Factors"
BERG LAND HOLDINGS AGREEMENT. Carl E. Berg and other members of the Berg Group
own several parcels of unimproved land in the Silicon Valley and have entered
into the Berg Land Holdings Option Agreement with the Company and the operating
partnerships. Pursuant to the agreement, the Company and the operating
partnerships have the right to acquire any building developed on the land at the
time the building has been leased. The purchase will be payable in cash as
determined in accordance with the formula set out in the agreement.
Effective December 31, 1998, Messrs. Berg and other members of the Berg Group
loaned $9.6 million to the operating partnerships which was equal to the amount
of distributions payable by the partnerships with respect to their L.P. Units as
of December 28, 1998. See Item 1.- Business Risk Factors and Item 7.-
"Management's Discussion and Analysis of Fianacial Condition and Results of
Operation."
See "Item 1--Business--Business" and "--Risk Factors"
ISSUANCE AND ASSUMPTION OF DEBT. The Company is liable for a loan of
approximately $21 million payable to BBE, which is a member of the Berg Group.
Both Carl E. Berg and Clyde J. Berg are directors of BBE and, together with
their immediate families, own all of the capital stock of BBE. The loan is
secured by three properties, and the maturity date has recently been extended.
In September 1998, the Company also assumed a $100 million line of credit with
the Wells Fargo Bank N.A. previously provided to and guaranteed by some members
of the Berg Group. The outstanding balance on the line of credit was $27.2
million as of December 31, 1998.
Effective Decmber 31, 1998, Messrs. Berg and other members of the Berg Group
loaned $9.6 million to the operating partnerships, which was equal to the amount
of distributions payable by the operating partnerships with respect to their
L.P. Units as of December 28, 1998. See Item 1 - "Business Risk Factors" and
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
77
<PAGE>
See "Item 1--Business--Risk Factors"
LEASE FROM BERG & BERG ENTERPRISES, INC. The Company leases its executive
offices from BBE. In 1998, the Company paid approximately $61,000 to BBE under
the terms of the loan agreement for its executive offices.
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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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Exhibits required by Item 601 of Regulation S-K.
EXHIBIT INDEX
- -------- --------------------------------------------------------------
2.1** Merger Agreement and Plan of Merger between Mission West
Properties and Mission West Properties, Inc.
3.2.1** Articles of Amendment and Restatement of Mission West
Properties, Inc.
3.2.2** Restated Bylaws of Mission West Properties, Inc.
10.1.1* Amended and Restated Agreement of Limited Partnership of
Mission West Properties, L.P.
10.1.2* Amended and Restated Agreement of Limited Partnership of
Mission West Properties, L.P. I
10.1.3* Amended and Restated Agreement of Limited Partnership of
Mission West Properties, L.P. II
10.1.4* Amended and Restated Agreement of Limited Partnership of
Mission West Properties, L.P. III
10.2* Exchange Rights Agreement between the Company and the
Limited Partners
10.3.1** 1997 Stock Option Plan of the Company
10.3.2** Form of Incentive Stock Option Agreement
10.3.3** Form of Non-statutory Stock Option Agreement
10.3.4** Form of Director's Stock Option Agreement
10.4.1** Acquisition Agreement, dated as of May 14, 1998, among the Company,
Certain Partnerships and the Berg Group (as defined therein)
10.4.2** Amendment of Acquisition Agreement, dated as of July 1, 1998
10.4.3** Form of Partnership Interest Purchase Demand Note
10.5.1** Stock Purchase Agreement dated as of May 4, 1998, between the Company
and the purchasers of Common Stock in a private placement of 5,800,000
shares and Subscription Agreement relating to same
10.5.2** Stock Purchase Agreement dated as of May 4, 1998 between the Company
and the purchasers of Common Stock in a private placement of 695,058
shares and Subscription Agreement relating to same
10.5.3*** Form of Registration Rights Agreement for purchasers, who acquired
shares of Common Stock under the May 4, 1998 Stock Purchase Agreements
(filed as Exhibit 10.8 to Post-effective Amendment No. 1 to S-4
Registration Statement filed on Form S-3 on February 11, 1999.
Commission File No. 333-52835-99).
10.6* Pending Projects Acquisition Agreement among the Company, the
Operating Partnership and the members of the Berg Group
10.7* Berg Land Holdings Option Agreement between the Company and certain
members of the Berg Group
10.8** Berg & Berg Enterprises, Inc. Sublease Agreement
10.9 Amended and Restated Incentive Stock Option Agreement for
Michael J. Anderson (200,000 shares of Common Stock)
10.10** Restricted Stock Purchase Agreement for Michael J. Anderson (200,000
shares of Common Stock)
10.11** Promissory Note from Michael J. Anderson
10.12** Lease Agreement with Apple Computer, Inc.
10.13** Lease Agreement with Cisco Systems, Inc.
10.14** Lease Agreement with Amdahl Corporation
10.15** Prudential Promissory Note
10.16** Prudential Deed of Trust
10.17** Prudential Certificate Regarding Distribution
10.18** Prudential Guaranty
10.19** Waiver Agreement
10.20 Ownership Limit Exemption Agreement dated December 29, 1998 between
the Company and Dan and Paul McCarthy
21.1 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
79
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24.1 Powers of Attorney
27.1 Financial Data Schedule
* Incorporated herein by reference to the same-numbered exhibit to
the Company's Registration Statement on Form S-4 filed on May 15, 1998
and declared effective on November 23, 1998.
** Incorporated herein by reference to the same-numbered exhibit to
the Company's Post-effective Amendment No. 1 to Registration Statement
on Form S-4 filed on Form S-3 on February 11, 1999. (Commission File
No. 333-52835-99).
*** Incorporated by reference.
(b)Reports on Form 8-K.
1) The Company filed on January 4, 1999 the Current Report on Form 8-K
dated December 30, 1998 to report on becoming the successor by merger to
all of the assets and liabilities of Mission West Properties, a
California corporation.
2) The Company filed on January 4, 1999 the Current Report on Form 8-K
dated December 31, 1998 to report on Mission West Properties shareholder
approval of matters submitted to vote at a special meeting of
shareholders held on December 28, 1998, the completion of a private
placement of 6,495,058 shares of common stock, and the reincorporation
merger of Mission West Properties into the Company.
80
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant and has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MISSION WEST PROPERTIES, INC.
Date: March 30, 1999 By: /S/ CARL E. BERG
------------------
Carl E. Berg
Chairman of the Board, Chief Executive
Officer, President and Director
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Carl E. Berg and Michael J. Anderson, or
either of them, each with the power of substitution, his or her
attorney-in-fact, to sign any amendments to this Report on Form 10-K and to file
the same, with exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, hereby ratifying and confirming all
that each of said attorney-in-fact, or his or her substitute, may do or choose
to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
/S/ CARL E. BERG Chief Executive March 30, 1999
------------------ Officer, President
Carl E. Berg and Director
/S/ MICHAEL J. ANDERSON Chief Operating March 30, 1999
------------------ Officer and Director
Michael J. Anderson
/S/ MARIANNE K. AGUIAR Vice President and March 30, 1999
------------------ Controller (Principal
Marianne K. Aguiar Financial and
Accounting Officer)
/S/ JOHN BOLGER Director March 30, 1999
------------------
John Bolger
/S/ WILLIAM A. HASLER Director March 30, 1999
------------------
William A. Hasler
/S/ LAWRENCE B. HELZEL Director March 30, 1999
------------------
Lawrence B. Helzel
81
<PAGE>
AMENDED AND RESTATED
STOCK OPTION AGREEMENT
Mission West Properties, a California corporation (the "Company"), hereby
grants to Michael J. Anderson (the "Optionee"), an option (the "Option") to
purchase a total of Two Hundred Thousand (200,000) shares of Common Stock (the
"Shares") of the Company, at the price set forth herein.
1. NATURE OF THE OPTION. The Option is intended to be a nonstatutory
stock option and not an incentive stock option within the meaning of Section 422
of the Internal Revenue Code of 1986, as amended (the "Code").
2. OPTION PRICE. The Option Price is Four Dollars and Fifty Cents
($4.50) for each Share.
3. VESTING AND EXERCISE OF OPTION. The Option shall vest and become
exercisable during its term, subject to the Optionee's continuous employment
with the Company, as follows:
(a) Vesting and Right to Exercise.
(i) The Option shall vest in accordance with the
following vesting schedule:
(A) as of July 1, 1998, Twelve Thousand Five
Hundred (12,500) shares subject to the Option shall become exercisable;
(B) as of January 1, 1999, an additional
Twenty-Five Thousand (25,000) shares subject to the Option shall become
exercisable;
(C) Beginning on February 1,1999 and on the first
day of each consecutive month an additional Four Thousand Five Hundred Fourteen
(4,514) shares subject to the Option shall become exercisable until all shares
subject to the option have vested and become exercisable.
Notwithstanding the foregoing, but subject to the
provisions of subparagraph (ii) below, at the election of the Optionee, the
Option can be exercised in whole or in part at any time as to the Shares which
have not vested, provided that the Optionee shall, as a condition of such
exercise, execute and deliver the Restricted Stock Purchase Agreement in the
form of Exhibit A hereto (the "Restricted Stock Purchase Agreement"), pursuant
to which the Company shall be granted a Repurchase Option as to all Unvested
Shares (as such term is defined in the Restricted Stock Purchase Agreement).
(ii) TERMINATION OF STATUS AS EMPLOYEE. If Optionee
ceases to be an employee of the Company for any reason other than permanent and
total disability or death, he may, but only within 30 days after the date he
ceases to be an employee, exercise his Option to the extent that he was entitled
to exercise it at the date of such termination, subject to the condition that no
Option shall be exercisable after the expiration of the term of the Option.
(iii)DISABILITY OF OPTIONEE. If Optionee ceases to be an
employee due to permanent and total disability, and Optionee is, or was within
the 90-day period prior to such termination, an employee and who was in
continuous employment as such from the date of the grant of the Option until the
date of disability or termination, the Option may be exercised at any time
within six months following the date of termination, but only to the extent of
the accrued right to exercise at the time of termination, subject to the
condition that no option shall be exercised after the expiration of the Option
period.
(iv) DEATH OF OPTIONEE. In the event of the death during
the Option period of an Optionee who is at the time of his or her death, or was
within the 90-day period immediately prior thereto, an employee, non-employee
director or consultant and was such from the date of the grant of the Option
until the date of death or termination, the Option may be exercised, at any time
within six months following the date of death, by the Optionee's estate or by a
person who acquired the right to exercise the Option by bequest, inheritance or
otherwise as a result of the Optionee's death, but only to the extent of the
accrued right to exercise at the time of the termination or death, whichever
comes first, subject to the condition that no option shall be exercised after
the expiration of the Option period.
(v) The Option may not be exercised for fractional
shares or for less than ten (10) Shares.
(b) METHOD OF EXERCISE. In order to exercise any portion of this
Option, the Optionee shall notify the Company in writing of the election to
exercise the Option, the number of shares in respect of which the Option is
being exercised by executing and delivering the Notice of Exercise of Stock
Option in the form attached as Exhibit B hereto, and shall execute and deliver
to the Chief Financial Officer of the Company the Restricted Stock Purchase
Agreement, together with the Stock Assignments, Escrow Agreement and, if
applicable, the Consent of Spouse, Promissory Note, and Security Agreement,
forms of which are attached as exhibits to the Restricted Stock Purchase
Agreement. The Restricted Stock Purchase Agreement must be accompanied by
payment in full of the aggregate purchase price for the Shares to be purchased.
The certificate or certificates representing Shares as to which this Option has
been exercised shall be registered in the name of the Optionee.
(c) RESTRICTIONS ON EXERCISE. This Option may not be exercised
if the issuance of the Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
Federal or state securities law or other law or regulation. Furthermore, the
method and manner of payment of the Option Price will be subject to the rules
under Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G")
as promulgated by the Federal Reserve Board if such rules apply to the Company
at the date of exercise. As a condition to the exercise of this Option, the
Company may require the Optionee to make any representation or warranty to the
Company at the time of exercise of this Option as in the opinion of legal
counsel for the Company may be required by any applicable law or regulation,
including the execution and delivery of an appropriate representation statement.
Accordingly, the stock certificates for the Shares issued upon exercise of this
Option may bear appropriate legends restricting transfer.
4. NON-TRANSFERABILITY OF OPTION. This Option may be exercised during
the lifetime of the Optionee only by the Optionee and may not be transferred in
any manner other than by will or by the laws of descent and distribution, except
that Optionee may transfer this Option solely by gift to members of the
Optionee's immediate family. The terms of this Option shall be binding upon the
executors, administrators, heirs and successors of the Optionee.
5. METHOD OF PAYMENT. Payment of the exercise price shall be by
any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash; or
(b) certified or bank cashier's check; or
(c) full recourse promissory note secured by the Shares or
equivalent collateral; or
(d) in the event there exists a public market for the Company's
Common Stock on the date of exercise, by delivery of a sell order to a broker
for the shares being purchased and an agreement to pay (or have the broker remit
payment for) the purchase price of the shares being purchased on or before the
settlement date for the sale of such shares to the broker; or
(e) in the event there exists a public market for the Company's
Common Stock on the date of exercise, by surrender of shares of the Company's
Common Stock, provided that if such shares were acquired upon exercise of an
incentive stock option, the Optionee must have first satisfied the holding
period requirements under Section 422(a)(1) of the Code. In this case payment
shall be made as follows:
(i) In addition to the execution and delivery of the
Restricted Stock Purchase Agreement, Optionee shall deliver to the Secretary of
the Company a written notice which shall set forth the portion of the purchase
price the Optionee wishes to pay with Common Stock, and the number of shares of
such Common Stock the Optionee intends to surrender pursuant to the exercise of
this Option, which shall be determined by dividing the aforementioned portion of
the purchase price by the average of the last reported bid and asked prices per
share of Common Stock of the Company, as reported in THE WALL STREET JOURNAL
(or, if not so reported, as otherwise reported by Nasdaq or, in the event the
Common Stock is listed on a national securities exchange, or on the Nasdaq
National Market System (or any successor national market system), the closing
price of Common Stock of the Company on such exchange as reported in THE WALL
STREET JOURNAL), for the day on which the notice of exercise is sent or
delivered;
(ii) Fractional shares shall be disregarded and the
Optionee shall pay in cash an amount equal to such fraction multiplied by the
price determined under subparagraph (i) above;
(iii)The written notice shall be accompanied by a duly
endorsed blank stock power with respect to the number of Shares set forth in the
notice, and the certificate(s) representing said Shares shall be delivered to
the Company at its principal offices within three (3) working days from the date
of the notice of exercise;
(iv) The Optionee hereby authorizes and directs the
Secretary of the Company to transfer so many of the Shares represented by such
certificate(s) as are necessary to pay the purchase price in accordance with the
provisions herein;
(v) If any such transfer of Shares requires the consent
of the California Commissioner of Corporations or of some other agency under the
securities laws of any other state, or an opinion of counsel for the Company or
Optionee that such transfer may be effected under applicable Federal and state
securities laws, the time periods specified herein shall be extended for such
periods as the necessary request for consent to transfer is pending before said
Commissioner or other agency, or until counsel renders such an opinion, as the
case may be. All parties agree to cooperate in making such request for transfer,
or in obtaining such opinion of counsel, and no transfer shall be effected
without such consent or opinion if required by law; and
(vi) Notwithstanding any other provision herein, the
Optionee shall only be permitted to pay the purchase price with Shares of the
Company's Common Stock owned by him as of the exercise date in the manner and
within the time periods allowed under 17 CFR ss.240.16b-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), as such
regulation is presently constituted, as it is amended from time to time, and as
it is interpreted now or hereafter by the Securities and Exchange Commission.
6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION OR MERGER. Subject to
any required action by the shareholders of the Company, the number of Shares
covered by this Option, and the per share exercise price of such Option, shall
be proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock resulting from a stock split, reverse stock split,
recapitalization, combination, reclassification, the payment of a stock dividend
on the Common Stock or any other increase or decrease in the number of such
shares of Common Stock effected without receipt of consideration by the Company;
provided, however, that conversion of any convertible securities of the Company
shall not be deemed to have been "effected without receipt of consideration".
Such adjustment shall be made by the board of directors or a committee of the
board of cirectors, whose determination in that respect shall be final, binding
and conclusive. Except as expressly provided herein, no issue by the Company of
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of shares of Common Stock subject to an Option.
7. TERM OF OPTION. This Option may not be exercised more than six (6)
years from the date of grant of this Option, as set forth below, and may be
exercised during such term only in accordance with the terms of this Option.
8. REPURCHASE RIGHTS. The Optionee hereby agrees that any Shares
acquired upon the exercise of this Option shall be subject to the rights of the
Company to repurchase such Shares to the extent such Shares have not yet vested
and to certain restrictions on transfer specified in the Restricted Stock
Purchase Agreement.
9. NOT EMPLOYMENT CONTRACT. Nothing in this shall confer upon the
Optionee any right to continue in the employ of the Company or shall interfere
with or restrict in any way the rights of the Company, which are hereby
expressly reserved, to discharge the Optionee at any time for any reason
whatsoever, with or without cause, subject to the provisions of applicable law.
This is not an employment contract.
10. INCOME TAX WITHHOLDING.
(a) The Optionee authorizes the Company to withhold in
accordance with applicable law from any compensation payable to him or her any
taxes required to be withheld by Federal, state or local laws as a result of the
exercise of this Option. The Optionee agrees to notify the Company immediately
in the event of any disqualifying disposition (within the meaning of Section
421(b) of the Code) of the shares acquired upon exercise of an incentive stock
option. Furthermore, in the event of any determination that the Company has
failed to withhold a sum sufficient to pay all withholding taxes due in
connection with the exercise of this Option, or a disqualifying disposition of
the shares acquired upon exercise of an incentive stock option, the Optionee
agrees to pay the Company the amount of such deficiency in cash within five (5)
days after receiving a written demand from the Company to do so, whether or not
Optionee is an employee of the Company at that time.
(b) At such time as the Optionee is required to pay to the
Company an amount with respect to tax withholding obligations as set forth in
paragraph (a), the Optionee may elect prior to the date the amount of such
withholding tax is determined (the "Tax Date") to make such payment, or such
increased payment as the Optionee elects to make up to the maximum federal,
state and local marginal tax rates (including any related FICA obligation)
applicable to the Optionee and the particular transaction by: (i) delivering
cash; (ii) delivering part or all of the payment in previously owned shares of
Common Stock (whether or not acquired through the prior exercise of an Option);
and/or (iii) irrevocably directing the Company to withhold from the Shares that
would otherwise be issued upon exercise of the Option that number of whole
Shares having a fair market value equal to the amount of tax required or elected
to be withheld (a "Withholding Election"). If an Optionee's Tax Date is deferred
beyond the date of exercise and the Optionee makes a Withholding Election, the
Optionee will initially receive the full amount of Optioned Shares otherwise
issuable upon exercise of the Option, but will be unconditionally obligated to
surrender to the Company on the Tax Date the number of Shares necessary to
satisfy his or her minimum withholding requirements, or such higher payment as
he or she may have elected to make, with adjustments to be made in cash after
the Tax Date.
(c) Any adverse consequences incurred by an Optionee with
respect to the use of shares of Common Stock to pay any part of the Option Price
or of any tax in connection with the exercise of an Option, including, without
limitation, any adverse tax consequences arising as a result of a disqualifying
disposition within the meaning of Section 422 of the Code, shall be the sole
responsibility of the Optionee.
11. TERMINATION.
(a) Should optionee voluntarily terminate for Good Cause (as
defined below) or be involuntarily terminated for other than Bad Cause (as
defined below) more than twelve (12) months from Optionee's date of employment
with the Company, then any portion of this option that would have vested in the
six (6) months following Optionee's termination date, shall vest on Optionee's
termination date.
(b) GOOD CAUSE shall be defined as any of the following
condition, which condition(s) remain(s) in effect ten (10) days after written
notice to the Board of Directors of the Company from Optionee of such
condition(s):
(i) a decrease in Optionee's base salary and/or a
material decrease in Optionee's standard management bonus plan or employee
benefits;
(ii) a material reduction in Optionee's title, authority,
responsibilities or duties, as measured against Optionee's title, authority
or responsibility or duties immediately prior to such reduction;
(iii)Optionee is not promoted to President of the Company
within eighteen (18) months following his date of employment;
(iv) the relocation of the Optionee's work place for the
Company to a location outside Santa Clara County, California; or
(v) the Company is in breach of the employment agreement
(attached) with Optionee.
(b) BAD CAUSE shall be defined as:
(i) theft, dishonesty, or intentional falsification of
any employment or Company records;
(ii) intentional and improper disclosure of the Company's
confidential or proprietary information; or
(iii)Optionee's conviction for any criminal act which
materially impairs Optionee's ability to perform his duties.
DATE OF GRANT: January 1, 1998
MISSION WEST PROPERTIES
By: /S/ CARL E. BERG
---------------------
Title: PRESIDENT
The Optionee acknowledges receipt of copies of the Restricted Stock
Purchase Agreement and the exhibits referred to therein, and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof.
Dated: January 1, 1998
/s/ Michael J. Anderson
-----------------------------
Michael J. Anderson
<PAGE>
EXHIBIT B
NOTICE OF EXERCISE OF STOCK OPTION
TO: Mission West Properties
10050 Bandley Drive
Cupertino, California 95014
ATTN: President
SUBJECT: Notice of Exercise of Stock Option
(Payment in cash or check)
In respect to the stock option granted to the undersigned on
____________, 19__, to purchase an aggregate of _________ shares of the Common
Stock of Mission West Properties, a California corporation (the "Company"), this
is official notice that the undersigned hereby elects to exercise such option to
purchase shares as follows:
Number of Shares:
Date of Purchase: ___________________, 19
Mode of Payment:
(Certified Check, Cash, Other Consideration as
permitted by the terms of the Option Agreement)
The shares should be issued as follows:
Name:
Address:
Signed:
Date:
Please send this notice of exercise to:
Mission West Properties
10050 Bandley Drive
Cupertino, California 95014
Attention: President
OWNERSHIP LIMIT EXEMPTION AGREEMENT
THIS OWNERSHIP LIMIT EXEMPTION AGREEMENT (the "Agreement"), dated as of
December 29, 1998, is entered into by and between Mission West Properties, Inc.,
a Maryland corporation (the "Company") and Dan McCarthy and Paul McCarthy (the
"McCarthys").
R E C I T A L S
A. Pursuant to Section 7.2.7 of the Company's Articles of Amendment and
Restatement (the "Articles"), a copy of which is attached to this Agreement as
Appendix I, the board of directors of the Company is authorized to exempt
certain persons from the ownership limitation set forth in the Articles (the
"Ownership Limitation"), which limits a person from owning, beneficially or
constructively, more than nine percent (9%) in value of the aggregate of the
outstanding shares of the Company's equity securities, including, without
limitation, common stock, preferred stock and any other equity security of the
Company convertible into or exchangeable for common stock or preferred stock
(the "Capital Stock"), upon satisfaction of certain conditions.
B. The McCarthys may be deemed to Beneficially Own or Constructively Own
(as those terms are defined in the Articles) more than nine percent (9%) of the
Capital Stock of the Company.
C. The board of directors of the Company has determined to permit the
McCarthys to be Excepted Holders (as that term is defined in the Articles) and
therefore, to be exempt from the Ownership Limitation, and to establish an
Excepted Holder Limit (as that term is defined in the Articles) for the
McCarthys.
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises and the mutual covenants,
conditions and promises hereinafter set forth, the parties agree as follows:
1. REPRESENTATIONS OF THE MCCARTHYS. Each of the McCarthys represent and
undertake as follows:
1.1 BASIC RESTRICTIONS. He and they will not Beneficially Own or
Constructively Own shares of Capital Stock:
(a) in excess of the Excepted Holder Limit set forth in Section 2
hereof; or(b) to the extent that such Beneficial or Constructive Ownership of
Capital Stock would result in the Company being "closely held" within the
meaning of Section 856(h) of the Internal Revenue Code of 1986, as amended (the
"Code") (without regard to whether the ownership interest is held during the
last half of a taxable year), or otherwise failing to qualify as a Real Estate
Investment Trust ("REIT") for a reason related to his or their Beneficial or
Constructive Ownership of Capital Stock.
1.2 RESTRICTIONS RELATED TO TENANTS. They do not and will not own, actually
or Constructively, an interest in a tenant of the Company (or a tenant of any
entity owned or controlled by the Company) that would cause the Company to own,
actually or Constructively, more than 9.9% interest (as set forth in Section
856(d)(2)(B) of the Code) in such tenant (for this purpose, a tenant from whom
the Company, or an entity owned or controlled by the Company, derives and is
expected to continue to derive a sufficiently small amount of revenue such that,
in the opinion of the board of directors of the Company, rent from such tenant
would not adversely affect the Company's ability to qualify as a REIT, shall not
be treated as a tenant of the Company).
2. EXCEPTED HOLDER LIMIT. The aggregate Excepted Holder Limit for the McCarthys,
in combination with all persons who may be deemed to have Constructive Ownership
of their shares of Capital Stock and all persons whose shares of Capital Stock
may be deemed Constructively Owned by either Dan McCarthy or Paul McCarthy,
shall be eighteen and one-half percent (18.50%), such that the Capital Stock
Constructively Owned by both of them and all such persons at one time may not
exceed eighteen and one-half percent (18.50%).
3. RESULTS OF VIOLATIONS. The McCarthys hereby acknowledge and agree that any
violation or attempted violation of the terms of this Agreement (or other action
which is contrary to the restrictions contained in Sections 7.2.1 through 7.2.6
of the Articles) will result in such shares of Capital Stock being automatically
transferred to a trust in accordance with Sections 7.2.1(b) and Section 7.3 of
the Articles.
4. MISCELLANEOUS.
4.1 NOTICES. All communications under this agreement shall be in writing
and shall be deemed to have been duly given when (a) delivered by hand, (b) sent
by facsimile transmission (with receipt confirmed), provided that a copy is
mailed by registered mail, return receipt requested, or (c) when received by the
addressee, if sent by Express Mail, Federal Express or other express delivery
service (receipt requested), in each case to the appropriate addresses, and
telecopier numbers set forth on the signature page hereto (or to such other
addresses, and fax numbers as a party may designate as to itself by notice to
the other parties).
4.2 GOVERNING LAW. This Agreement and (unless otherwise provided) all
amendments hereof and waivers and consents hereunder shall be governed by the
internal laws of the State of Maryland, without regard to the conflicts of laws
principles thereof.
4.3 CAPTIONS. The captions or headings of the Sections of this Agreement
are for convenience only, and shall not control or affect the meaning or
construction of any of the terms or provisions of this Agreement. References in
this Agreement to Sections are references to Sections of this Agreement, unless
expressly stated to the contrary.
4.4 NO WAIVER. The failure of a party to insist upon strict adherence to
any term of this Agreement on any occasion shall not be considered a waiver or
deprive that party of the right thereafter to insist upon strict adherence to
that term or any other term of this Agreement. Any waiver must be in writing.
4.5 SUCCESSORS AND ASSIGNS. This Agreement may be assigned by the Company,
but may not be assigned by the McCarthys without the prior written consent of
the Company. This Agreement shall bind, and to the extent assignable shall inure
to the benefit of, the parties hereto and their respective heirs, executors,
personal representatives, successors and permitted assigns.
4.6 ENTIRE AGREEMENT; AMENDMENT. This Agreement supersedes all prior
agreements among the parties with respect to its subject matter, and is intended
(with the documents referred to herein) as a complete and exclusive statement of
the terms of the agreement among the parties with respect thereto and cannot be
changed or terminated except by a written instrument executed by the Company and
the McCarthys.
4.7 SEVERABILITY. If one or more provisions of this Master Agreement are
held to be unenforceable under applicable law, such provision shall be excluded
from this Master Agreement and the balance of the Master Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
4.8 COUNTERPARTS. This Agreement may be executed in counterparts and
delivered by electronic facsimile transmission, and each signed counterpart
transmitted by electronic facsimile shall be considered an original, but all of
which together shall constitute the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
MISSION WEST PROPERTIES, INC., PAUL MCCARTHY
a Maryland corporation
/S/ PAUL MCCARTHY
By: /S/ CARL E. BERG ------------------
------------------------
Carl E. Berg DAN MCCARTHY
Chairman, Chief Executive
Officer and President /S/ DAN MCCARTHY
------------------
Exhibit 21.1
LIST OF SUBSIDIARIES OF MISSION WEST PROPERTIES
Mission West Properties, L.P., a Delaware limited partnership
Mission West Properties, L.P.I, a Delaware limited partnership, doing business
in California as Mission West Properties I, L.P.
Mission West Properties, L.P.II, a Delaware limited partnership, doing business
in California as Mission West Properties II, L.P.
Mission West Properties, L.P.III, a Delaware limited partnership, doing business
in California as Mission West Properties III, L.P.
MIT Realty, Inc., a California corporation wholly owned by the Company.
Mission West Executive Aircraft Center, Inc., a California corporation wholly
owned by the Company.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Mission West Properties, Inc. Post-Effective Amendment No. 1 to Form S-4 on Form
S-3 (File No. 333-52835-99) and Form S-3 (File No. 333-41203) of our reports
dated January 29, 1999, on our audits of the consolidated financial statements
and financial statement schedule of Mission West Properties, Inc. as of December
31, 1998 and 1997, and for the years ended December 31, 1998, November 30, 1997
and 1996 and the one month period ended December 31, 1997, which reports are
included in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
San Francisco, California
March 30, 1999
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Mission West Properties, Inc. Post-Effective Amendment No. 1 to Form S-4 on Form
S-3 (File No. 333-52835-99) and Form S-3 (File No. 333-41203) of our reports
dated January 29, 1999, on our audits of the combined financial statements and
financial statement schedule of the Berg Properties as of June 30, 1998 and
December 31, 1997, and for the six month period ended June 30, 1998 and each of
the two years in the period ended December 31, 1997, which reports are included
in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
San Francisco, California
March 30, 1999
<TABLE> <S> <C>
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<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of December 31, 1998, and the Consolidated
Statement of Operations for the year ended December 31, 1998 of Mission West
Properties, Inc., and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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