<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 15, 1999
REGISTRATION STATEMENT NO. 333-80203
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1 TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
MISSION WEST PROPERTIES, INC.
(Exact name of registrant as specified in governing instruments)
10050 BANDLEY DRIVE, CUPERTINO, CALIFORNIA 95014
(408) 725-0700
(Address, including zip code and telephone number, including
area code, of registrant's principal executive offices)
MR. CARL E. BERG
CHIEF EXECUTIVE OFFICER AND PRESIDENT
10050 BANDLEY DRIVE, CUPERTINO, CALIFORNIA 95014
(408) 725-0700
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
COPIES TO:
ALAN B. KALIN DHIYA EL-SADEN
DANIEL D. MEYERS SCOTT J. CALFAS
McCutchen, Doyle, Brown & Enersen, LLP Gibson, Dunn & Crutcher LLP
3150 Porter Drive, Palo Alto, CA 333 South Grand Avenue, Los Angeles,
94304-1212 CA 90071
Tel: (650) 849-4400, Fax: (650) Tel: (213) 229-7000, Fax: (213)
849-4800 229-7520
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
AS SOON AS PRACTICABLE FOLLOWING THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
--------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 15, 1999
6,750,000 SHARES
[LOGO]
COMMON STOCK
---------------------
Mission West Properties, Inc. is offering 6,750,000 shares of common stock.
Our common stock is listed on the American Stock Exchange, or the AMEX, and the
Pacific Exchange, Inc. under the symbol "MSW." On June 11, 1999, the last
reported sale price of our common stock on the AMEX was $8 1/16 per share.
------------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS.
SEE "RISK FACTORS" BEGINNING ON PAGE 8.
---------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
---------- ----------
<S> <C> <C>
Public offering price........................................................ $ $
Underwriting discount........................................................ $ $
Proceeds, before expenses, to Mission West Properties, Inc................... $ $
</TABLE>
Mission West Properties, Inc. has granted the underwriters the right to
purchase up to an additional 1,012,500 shares of common stock to cover
over-allotments. The underwriters expect to deliver the shares to purchasers on
, 1999.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
------------------------
A.G. EDWARDS & SONS, INC.
LEGG MASON WOOD WALKER
INCORPORATED
SUTRO & CO. INCORPORATED
<PAGE>
Prospectus dated , 1999
<PAGE>
[MAP]
A map of the south San Francisco Bay Area, including southern San Mateo
County, southern Alameda County, northern Santa Clara County and eastern Santa
Cruz County, which we refer to as the Silicon Valley. The map depicts the
locations of our properties and major highways and cities. Dots on the map show
the locations of the properties.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY CONTAINS BASIC INFORMATION ABOUT THIS OFFERING. IT
LIKELY DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU IN MAKING A
DECISION WHETHER TO PURCHASE THE COMMON STOCK OFFERED IN THIS OFFERING. FOR A
MORE COMPLETE UNDERSTANDING OF THIS OFFERING, WE ENCOURAGE YOU TO READ THIS
ENTIRE DOCUMENT AND OTHER DOCUMENTS TO WHICH WE REFER. UNLESS OTHERWISE
INDICATED, THE INFORMATION CONTAINED IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. UNLESS THE CONTEXT
OTHERWISE INDICATES, ALL REFERENCES IN THIS DOCUMENT TO "OUR CORPORATION," "WE,"
"US," AND "OUR" MEAN MISSION WEST PROPERTIES, INC. AND ITS PREDECESSORS.
OUR BUSINESS
We acquire, market, lease and manage R&D properties, primarily in the
Silicon Valley portion of the San Francisco Bay Area. We currently own and
manage 77 properties totaling approximately 5.1 million square feet. This class
of properties is designed for research and development and office uses and, in
some cases, includes space for light manufacturing operations with loading
docks. We believe that we have one of the largest portfolios of R&D properties
in the Silicon Valley. The four tenants who lease the most square footage from
us are Microsoft Corporation, Amdahl Corporation (a subsidiary of Fujitsu
Limited), Apple Computer, Inc. and Cisco Systems, Inc.
Carl E. Berg, our President and Chief Executive Officer, has been engaged in
the development and long-term ownership of Silicon Valley real estate for
approximately 30 years. Through a series of transactions, we have become the
vehicle for substantially all of the Silicon Valley R&D property activities of
the Berg Group, which includes Mr. Berg, his brother Clyde J. Berg, members of
their families and a number of entities in which they have controlling or
substantial ownership interests. We own our properties through four limited
partnerships, or operating partnerships, of which we are the sole general
partner. The Berg Group currently owns approximately 84.7% of the units of
interests in the operating partnerships, or O.P. Units, and the Berg Group will
own approximately 78.1% of our equity interests, on a fully diluted basis, after
the offering. Through various property acquisition agreements with the Berg
Group, we have the right to purchase, on pre-negotiated terms, R&D and other
types of office and light industrial properties that the Berg Group develops in
the future in California, Oregon and Washington. This relationship provides us
with the economic benefits of development, while eliminating development and
initial lease-up risks. It also provides us with access to one of the most
experienced development teams in the Silicon Valley without the expense of
maintaining property development personnel.
OUR MARKET
We focus on the facility requirements of information technology companies in
the Silicon Valley. With the Silicon Valley's highly educated and skilled work
force, 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.
OUR STRATEGY
Our acquisition and growth strategy incorporates the following elements:
- working with the Berg Group to take advantage of its abilities and
resources to pursue development opportunities which we have an option to
acquire, on pre-negotiated terms, upon completion and leasing;
- capitalizing on opportunistic acquisitions from third parties of
high-quality R&D properties that provide attractive initial yields and
significant potential for growth in cash flow;
3
<PAGE>
- focusing on general purpose, single-tenant Silicon Valley R&D properties
for information technology companies in order to maintain low operating
costs, reduce tenant turnover and capitalize on our relationships with
these companies and our extensive knowledge of their real estate needs;
and
- maintaining prudent financial management principles that emphasize the
maximization of current cash flow while building long-term value, the
acquisition of pre-leased properties to reduce development and leasing
risks and the maintenance of sufficient liquidity to acquire and finance
properties on desirable terms.
RECENT DEVELOPMENTS
On April 1, 1999, we purchased from the Berg Group a 515,700 square foot,
five-building R&D complex located in Mountain View, California, which has been
fully leased to Microsoft Corporation. All five of the buildings are currently
under construction, and Microsoft controls the construction of this facility. We
refer to this complex as the Microsoft project or the Microsoft properties.
Microsoft commenced paying rent to us on four of the five buildings on April 1,
1999 and on the fifth building on June 1, 1999.
THE OFFERING
The following information is based on 8,115,454 shares of our common stock
outstanding at May 10, 1999. The information excludes 1,012,500 shares of common
stock issuable upon exercise of the over-allotment option. The over-allotment
option is described in the section entitled "Underwriting." This information
also excludes 5,460,000 shares of common stock reserved for issuance under our
stock option plan, including outstanding options to purchase 365,278 shares of
common stock at a weighted average exercise price of $4.50 per share.
<TABLE>
<S> <C>
Common stock offered................ 6,750,000 shares
Common stock to be outstanding after
the offering...................... 14,865,454 shares
Use of proceeds..................... We estimate that we will receive net proceeds of
$50,857,000 from the offering after deducting
estimated underwriting commissions and expenses. We
intend to use our net proceeds to repay outstanding
indebtedness and, if the underwriters exercise their
over-allotment option, for general corporate purposes
as well.
Dividends........................... For 1999, we expect to pay to stockholders an
aggregate annual distribution of $0.55 per share of
common stock. On April 8, 1999, our board of directors
authorized a dividend of $0.12 per share of common
stock, which was paid on April 30, 1999. On June 14,
1999, our board of directors authorized a dividend of
$0.14 per share of common stock, payable on July 2,
1999, to stockholders of record on June 21, 1999.
American Stock Exchange symbol...... MSW
</TABLE>
OUR PRINCIPAL EXECUTIVE OFFICES ARE LOCATED AT 10050 BANDLEY DRIVE,
CUPERTINO, CALIFORNIA 95014, AND OUR TELEPHONE NUMBER IS (408) 725-0700. OUR WEB
SITE CAN BE FOUND AT WWW.MISSIONWEST.COM. INFORMATION CONTAINED ON OUR WEB SITE
DOES NOT CONSTITUTE PART OF THIS PROSPECTUS.
4
<PAGE>
SUMMARY AND PRO FORMA FINANCIAL DATA
The selected historical financial information and selected consolidated
financial data set forth below are derived from our audited and unaudited
financial statements and the accompanying notes. The following information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and all of the financial
statements and accompanying notes contained elsewhere in this prospectus.
The unaudited pro forma statements of operations for the three months ended
March 31, 1999 and the year ended December 31, 1998 are based upon our audited
and unaudited historical financial statements and have been prepared as if each
of the following transactions had occurred as of January 1, 1998:
- our purchase, effective July 1, 1998, of the general partnership interest
in each of the operating partnerships, which we refer to as the UPREIT
acquisition;
- our purchases of additional property during the last two quarters of 1998
and the first quarter of 1999, consisting of three newly constructed R&D
properties comprising, in the aggregate, approximately 218,000 rentable
square feet located in the Silicon Valley; and
- our purchase, effective April 1, 1999, of the Microsoft project, fully
leased.
The unaudited pro forma balance sheet as of March 31, 1999 is based on our
unaudited historical financial statements and has been prepared as if our
purchase of the Microsoft project had occurred on March 31, 1999. The unaudited
pro forma balance sheet does not give effect to the offering. For additional
information, see "Unaudited Pro Forma Condensed Consolidated Financial
Statements" and the accompanying notes contained elsewhere in this prospectus.
The unaudited pro forma financial statements are not necessarily indicative
of what the actual financial position or results of operations would have been
assuming the completion of the above transactions as of the beginning of the
periods indicated, nor do they purport to project our financial position or
results of operations at any future date or for any future period. In addition,
the historical operating results for the three months ended March 31, 1999 are
not necessarily indicative of our results for the year ending December 31, 1999.
In addition, the pro forma statements of operations have been prepared
assuming the following:
- our election to be a REIT is effective as of January 1, 1998;
- pro forma rental revenues have been recognized over the pro forma period
on a straight-line basis, assuming a lease commencement date of January 1,
1998 for all leases entered into prior to July 1, 1998;
- the minority interest represents approximately 90% for the entire pro
forma period, giving effect to all changes in stockholders' equity during
the period as of the first day of the period;
- additional depreciation expense associated with acquired properties has
been computed as if we had acquired the property at the beginning of the
period, and recorded the expense on a straight-line basis over 40 years;
and
- our receipt of the proceeds of all loans and stock sales (other than the
offering) during the period as of the first day of the pro forma period.
The pro forma as adjusted data assumes our use of the proceeds of this
offering to repay pro forma indebtedness outstanding as of January 1, 1998.
5
<PAGE>
For a discussion of the components of the adjustments reflected in the pro
forma operating, property, balance sheet and other data, see "Selected Financial
Data" and "Unaudited Pro Forma Condensed Consolidated Financial Statements" and
the accompanying notes.
<TABLE>
<CAPTION>
THREE MONTHS ENDED YEAR ENDED
MARCH 31, 1999 DECEMBER 31, 1998
-------------------- ----------------------
PRO FORMA ACTUAL PRO FORMA ACTUAL
--------- --------- ----------- ---------
(UNAUDITED) (UNAUDITED)
($ IN THOUSANDS, EXCEPT PER SHARE AND
AVERAGE MONTHLY RENTAL DATA)
<S> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rental revenues................................. $ 19,256 $ 14,027 $ 76,961 $ 27,285
Tenant reimbursements........................... 2,307 2,236 8,833 4,193
Other income, including interest................ 149 149 278 278
--------- --------- ----------- ---------
Total revenues.................................... 21,712 16,412 86,072 31,756
--------- --------- ----------- ---------
Expenses:
Property operating, maintenance and real estate
taxes......................................... 2,331 2,311 9,589 4,821
Interest........................................ 3,491 2,971 15,681 4,685
Interest (related parties)...................... 860 416 3,619 3,511
General and administrative...................... 406 406 1,501 1,501
Depreciation of real estate..................... 3,411 2,703 13,636 5,410
--------- --------- ----------- ---------
Total expenses.................................... 10,499 8,807 44,026 19,928
--------- --------- ----------- ---------
Income before minority interest................. 11,213 7,605 42,046 11,828
Minority interest............................... 10,184 6,724 38,378 12,049
--------- --------- ----------- ---------
Net income (loss)................................. $ 1,029 $ 881 $ 3,668 $ (221)
--------- --------- ----------- ---------
--------- --------- ----------- ---------
Basic income (loss) per share................... $ 0.13 $ 0.11 $ 0.45 $ (.13)
Diluted income (loss) per share................. $ 0.12 $ 0.10 $ 0.45 $ (.13)
PROPERTY AND OTHER DATA:
Total properties, end of period................... 77 72 77 71
Total square feet, end of period.................. 5,089,384 4,573,684 5,089,384 4,518,688
Average monthly rental revenue per square
foot(1)......................................... $ 1.19 $ .98 $ 1.19 $ .95
Occupancy at end of period........................ 99% 99% 99% 99%
Funds from operations(2).......................... $ 14,624 $ 10,308 $ 55,682 $ 17,238
Funds available for distribution(3)............... $ 13,172 $ 9,369 $ 50,465 $ 15,356
CASH FLOW DATA:
Cash flow from operations......................... $ 9,346 $ 16,264
Cash flow from investing.......................... (107) (118)
Cash flow from financing.......................... (9,351) (21,469)
</TABLE>
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER
1999 31, 1998
--------- -----------
PRO FORMA AS ADJUSTED DATA:(4)
<S> <C> <C> <C> <C>
Net income........................................ $ 1,994 $ 7,195
Basic income per share.......................... $ .13 $ .48
Diluted income per share........................ $ .13 $ .48
Funds from operations(2).......................... $ 15,450 $ 59,288
Funds available for distribution(3)............... $ 13,998 $ 57,857
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
AT MARCH 31, 1999
--------------------
PRO FORMA ACTUAL
--------- ---------
(UNAUDITED)
<S> <C> <C>
($ IN THOUSANDS)
BALANCE SHEET DATA:
Real estate assets, net of accumulated depreciation.................. $ 678,098 $ 521,991
Total assets......................................................... 682,913 526,806
Debt................................................................. 207,236 175,179
Debt (related parties)............................................... 49,080 24,080
Total liabilities.................................................... 264,625 207,568
Minority interest.................................................... 384,087 285,037
Stockholders' equity................................................. 34,201 34,201
Common stock outstanding............................................. 8,233,583 8,233,583
O.P. Units issued and outstanding.................................... 74,052,356 60,845,727
</TABLE>
- ------------------------
(1) Average monthly rental revenue per square foot has been determined by
dividing the base rent for the period by the number of months in the period,
and then dividing the quotient by the total square feet of occupied space.
(2) As defined by the National Association of Real Estate Investment Trusts,
referred to as NAREIT, funds from operations, or 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, make capital
expenditures and pay dividends. 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 FFO exactly as we do. For a
discussion of FFO see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Funds from Operations."
(3) We calculate funds available for distribution, or FAD, as FFO less
straight-lined rents, leasing commissions paid and capital expenditures made
during the period indicated.
(4) Represents selected pro forma financial data adjusted to reflect the sale of
6,750,000 shares of common stock in this offering, at an assumed price of
$8 1/16 and the use of the net proceeds to repay debt owed under our line of
credit and debt owed to the Berg Group.
7
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS, TOGETHER WITH THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS AND THE REGISTRATION STATEMENT OF WHICH
THIS PROSPECTUS IS A PART BEFORE DECIDING WHETHER TO INVEST IN SHARES OF OUR
COMMON STOCK. SEE "WHERE YOU CAN FIND MORE INFORMATION" AND "FORWARD-LOOKING
STATEMENTS." THE FOLLOWING RISKS RELATE PRINCIPALLY TO OUR BUSINESS AND THE
INDUSTRY IN WHICH WE OPERATE. THE RISKS AND UNCERTAINTIES CLASSIFIED BELOW ARE
NOT THE ONLY ONES WE FACE.
WE ARE DEPENDENT ON CARL E. BERG, AND IF WE LOSE HIS SERVICES OUR BUSINESS MAY
BE HARMED AND OUR STOCK PRICE COULD FALL.
We are substantially dependent upon the leadership of Carl E. Berg, our
Chairman, President and Chief Executive Officer. Losing Mr. Berg's knowledge and
abilities could have a material adverse effect on our business and the value of
our common stock. Mr. Berg 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. These other activities reduce Mr. Berg's attention
to our business.
MR. BERG AND HIS AFFILIATES EFFECTIVELY CONTROL OUR CORPORATION AND THE
OPERATING PARTNERSHIPS AND MAY ACT IN WAYS THAT ARE DISADVANTAGEOUS TO OTHER
STOCKHOLDERS.
SPECIAL BOARD VOTING PROVISIONS. Our governing corporate documents, which
are our articles of amendment and restatement, or charter, and our bylaws,
provide substantial control rights for the Berg Group. The Berg Group's control
of our corporation means that the value and returns from your investment in us
are subject to the Berg Group's exercise of its rights. These rights include a
requirement that Mr. Berg or his designee as director approve certain
fundamental corporate actions, including amendments to our charter and bylaws
and any merger, consolidation or sale of all or substantially all of our assets.
In addition, our bylaws provide that a quorum necessary to hold a valid meeting
of the board of directors must include Mr. Berg or his designee. The rights
described in the two preceding sentences apply only as long as the Berg Group
members and their affiliates, other than us and the operating partnerships,
beneficially own, in the aggregate, at least 15% of our outstanding shares of
common stock on a fully diluted basis, which is calculated based on all
outstanding shares of common stock and all shares of common stock that could be
acquired upon the exercise of all outstanding options to acquire our voting
stock, as well as all shares of common stock issuable upon exchange of all O.P.
Units. 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. Without the approval of Mr. Berg or his designee, board of
directors approval that we may need for actions that might result in a sale of
your stock at a premium or raising additional capital when needed could be
difficult or impossible to obtain.
BOARD OF DIRECTORS REPRESENTATION. The Berg Group members have the right to
designate two of the director nominees submitted by our board of directors to
stockholders for election, as long as the Berg Group members and their
affiliates, other than us and the operating partnerships, beneficially own, in
the aggregate, at least 15% of our outstanding shares of common stock on a fully
diluted basis, which is calculated based on all outstanding shares of common
stock and all shares of common stock that could be acquired upon the exercise of
all outstanding options to acquire our voting stock, as well as all shares of
common stock issuable upon exchange of all O.P. Units. If the fully diluted
ownership of the Berg Group members and their affiliates, other than us and the
operating partnerships, is less than 15% but is at least 10% of the common
stock, the Berg Group members have the right to designate one of the director
nominees submitted by our board of directors to stockholders for election. Its
right to designate director nominees affords the Berg Group substantial control
and influence over the management and direction of our corporation. The Berg
Group's interests could conflict with the interests of our stockholders, and
could adversely affect the price of our common stock.
8
<PAGE>
SUBSTANTIAL OWNERSHIP INTEREST. The Berg Group currently owns O.P. Units
representing approximately 84.7% of the equity interests in the operating
partnerships and approximately 84.5% of our equity interests on a fully diluted
basis, which is calculated based on all outstanding shares of common stock and
all shares of common stock that could be acquired upon the exercise of all
outstanding options to acquire our voting stock, as well as all shares of common
stock issuable upon exchange of all O.P. Units. After the offering, the Berg
Group will own approximately 78.1% of our equity interests, on a fully diluted
basis. The O.P. Units may be converted into shares of common stock, subject to
limitations set forth in our charter and other agreements with the Berg Group,
and upon conversion would represent voting control of our corporation. The Berg
Group's ability to exchange its O.P. Units for common stock permits it to exert
substantial influence over the management and direction of our corporation. This
influence increases our dependence on the Berg Group.
LIMITED PARTNER APPROVAL RIGHTS. Mr. Berg and other limited partners,
including other members of the Berg Group, 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
O.P. Units, which necessarily would include the Berg Group, include the
following:
- the amendment, modification or termination of any of the operating
partnership agreements;
- the transfer of any general partnership interest in the operating
partnerships, including, with certain exceptions, transfers attendant to
any merger, consolidation or liquidation of our corporation;
- the admission of any additional or substitute general partners in the
operating partnerships;
- any other change of control of the operating partnerships;
- 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; and
- the institution of any bankruptcy proceeding for any operating
partnership.
In addition, as long as the Berg Group members and their affiliates, other
than us and the operating partnerships, beneficially own, in the aggregate, at
least 15% of the outstanding shares of common stock on a fully diluted basis,
which is calculated based on all outstanding shares of common stock and all
shares of common stock that could be acquired upon the exercise of all
outstanding options to acquire our voting stock, as well as all shares of common
stock issuable upon exchange of all O.P. Units, the consent of the limited
partners holding the right to vote a majority of the total number of O.P. Units
outstanding is also required with respect to:
- 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 O.P. Units;
- the issuance of limited partnership interests senior to the O.P. Units as
to distributions, assets and voting; and
- the liquidation of the operating partnerships.
The liquidity of your investment in our common stock, including our ability
to respond to acquisition offers, will be subject to the exercise of these
rights.
9
<PAGE>
OUR CONTRACTUAL BUSINESS RELATIONSHIPS WITH THE BERG GROUP PRESENT ADDITIONAL
CONFLICTS OF INTERESTS WHICH MAY RESULT IN THE REALIZATION OF ECONOMIC
BENEFITS OR THE DEFERRAL OF TAX LIABILITIES BY THE BERG GROUP WITHOUT
EQUIVALENT BENEFITS TO OUR STOCKHOLDERS.
Our contracts with the Berg Group provide it with interests that could
conflict with those of our other stockholders, including the following:
- our headquarters are leased from an entity owned by the Berg Group, to
whom we pay rent of approximately $6,700 per month;
- the Berg Group is permitted to conduct real estate and business activities
other than our business;
- if we decline an opportunity that has been offered to us, the Berg Group
may pursue it, which would reduce the amount of time that Mr. Berg could
devote to our affairs and could result in the Berg Group's development of
properties that compete with our properties for tenants;
- in general, we have agreed to limit the liability of the Berg Group to our
corporation and our stockholders arising from the Berg Group's pursuit of
these other opportunities;
- we acquired most of our properties from the Berg Group on terms that were
not negotiated at arm's length and without many customary representations
and warranties that we would have sought in an acquisition from an
unrelated party; and
- we have assumed liability for debt to the Berg Group and debt for which
the Berg Group was liable.
The Berg Group has agreed that the independent directors committee of our
board of directors must approve all new transactions between us and any of its
members, or between us and any entity in which it directly or indirectly owns 5%
or more of the equity interests, including the operating partnerships for this
purpose. This committee currently consists of three directors who are
independent of the Berg Group.
EXCLUDED PROPERTIES. With our prior knowledge, the Berg Group retained two
R&D properties in Scotts Valley, Santa Cruz County, California, in which we and
the operating partnerships have no ownership interest. Efforts of the Berg Group
to lease these other properties could interfere with similar efforts on our
behalf.
PENDING DEVELOPMENT PROJECTS. We and the operating partnerships have agreed
under the terms of a pending projects acquisition agreement to acquire from the
Berg Group each of five R&D properties potentially aggregating approximately
395,000 rentable square feet as it is completed and leased. The purchase price
for each property will be calculated based on a fixed capitalization rate
applied to actual average rental rates on the property over the lease term. We
currently estimate that the aggregate purchase price of these five properties,
assuming payment in cash and/or assumption of debt, will be approximately $41.9
million. The Berg Group may elect to receive cash or O.P. Units, valued at $4.50
per unit, which value was set when we entered into the acquisition agreement
with the Berg Group in May 1998. Our stock was not trading at that time. As the
market price of a share of common stock was $8 1/16 at June 11, 1999, this
valuation represents a substantial discount from the current market value of the
common stock that may be issued in exchange for these O.P. Units. Our issuance
of O.P. Units to acquire any of these properties, instead of paying cash, may
result in a higher acquisition cost and additional depreciation expenses that
reduce our net income per share. Acquisitions of additional O.P. Units by the
Berg Group will increase the Berg Group's ownership interest in our business and
could reduce the amount of cash available for distribution per share to our
other stockholders which could cause our stock price to fall.
The Berg Group's election to receive cash in place of O.P. Units for these
properties and to place debt on the properties that we would be required to
assume would reduce our liquidity and could increase our debt to total market
capitalization ratio. These factors could harm our business and cause our stock
price to fall, while the Berg Group receives substantial benefits.
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BERG LAND HOLDINGS. The Berg Group owns or has an option to purchase
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. The Berg Group is not obligated to exercise the
option that it holds to acquire one of the properties that is subject to the
agreement, however. If the Berg Group fails to exercise that option, we will
lose the ability to purchase that property. In addition, we have agreed to pay a
fixed amount plus additional charges for any of the properties that we do
acquire. We must pay the acquisition price in cash unless the Berg Group elects,
in its discretion, to receive O.P. Units valued at the average market price of a
share of common stock during the 30-day period preceding the acquisition date.
At the time of acquisition, which is subject to the approval of the independent
directors committee of our board of directors, these properties may be
encumbered by debt that we or the operating partnerships will be required to
assume or repay. The use of our cash or an increase in our indebtedness to
acquire these properties could have a material adverse effect on our financial
condition, results of operations and ability to make cash distributions to our
stockholders.
TAX CONSEQUENCES OF SALE OF PROPERTIES. Because many of our properties have
unrealized taxable gain, a sale of those properties could create adverse income
tax consequences for limited partners of the operating partnerships. We have
agreed with Carl E. Berg, Clyde J. Berg and John Kontrabecki, a limited partner
in some of the operating partnerships, that each can prevent us and the
operating partnerships from selling or transferring properties that were
directly or indirectly acquired from him in the UPREIT acquisition in any
taxable transaction prior to December 29, 2008. As a result, our opportunities
to sell these properties may be limited. If we need to sell any of these
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. These restrictions could harm our business and cause our stock
price to fall.
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
other material agreements through which we have acquired our interests in the
operating partnerships and the properties formerly controlled by the Berg Group
were not determined through arm's-length negotiations, and could be less
favorable to us than those obtained from an unrelated party. In addition, Mr.
Berg and representatives of the Berg Group sitting on our board of directors may
be subject to conflicts of interests with respect to their obligations as our
directors to enforce the terms of the partnership agreement of each operating
partnership when such terms conflict with their personal interests. The terms of
our charter and bylaws also were not determined through arm's-length
negotiations. Some of these terms, including representations and warranties
applicable to acquired properties, are not as favorable as those that we would
have sought through arm's-length negotiations with unrelated parties. As a
result, an investment in our common stock may involve risks not found in
businesses in which the terms of material agreements have been negotiated at
arm's length.
RELATED PARTY DEBT. As of March 31, 1999, we were liable for loans
aggregating approximately $24.1 million payable to the Berg Group. These loans
are secured by three of our properties and were initially scheduled to mature on
March 31, 1999. The maturity date has been extended to December 31, 1999 by
agreement with the Berg Group. 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 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 $18.5
million at March 31, 1999. The Berg Group continues to be liable as guarantor
under the line of credit, which expires on October 1, 1999. All of these loans
bear interest at an annual rate equal to that under the Wells Fargo Bank line of
credit. If we are unable to repay our debts to the Berg Group or Wells Fargo
Bank when due, however, the Berg Group, in addition to the lenders, could take
action to enforce our payment obligations. Loan defaults of this type could
materially adversely affect our business, financial condition and our results of
operations and cause our stock price to fall. They also could result in a
substantial reduction in the amount of cash distributions to our stockholders.
In turn, if we fail to meet the minimum distributions test
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<PAGE>
because of a loan default or another reason, we could lose our REIT
classification for federal income tax purposes, as discussed in "Federal Income
Tax Considerations--Requirements for REIT Qualification-- Annual Distribution
Requirements."
RETAINED DISTRIBUTIONS. In December 1998 and April 1999, in our capacity as
the general partner of each of the operating partnerships, we declared cash
distributions to all partners. The total distributions of approximately $16.5
million in the aggregate to the Berg Group were loaned back to the operating
partnerships in lieu of having them draw additional funds under the line of
credit. As of March 31, 1999, the amount owed was $9.6 million, which represents
the portion of the loan related to the December 1998 distribution. The Berg
Group may request repayment of these funds at any time. Such requests might be
made when we or the operating partnerships do not have sufficient funds
available to repay the loans. In that case, the Berg Group would have the right
to take legal action to enforce our obligation to repay the requested amounts,
which could harm our business and financial condition and could cause our stock
price to fall. In addition, we do not anticipate that the Berg Group will always
allow us to retain distributions payable to the Berg Group as a source of
additional financing for our operations.
OUR OPTION TO ACQUIRE R&D PROPERTIES DEVELOPED ON EXISTING LAND AND LAND
ACQUIRED IN THE FUTURE BY THE BERG GROUP WILL TERMINATE WHEN THE BERG GROUP'S
OWNERSHIP INTEREST HAS BEEN REDUCED.
The Berg land holdings option agreement, as amended, which provides us with
significant benefits and opportunities to acquire additional R&D properties from
the Berg Group, will expire when the Berg Group and their affiliates (excluding
us and the operating partnerships) own less than 65% of our common stock on a
fully diluted basis, which is calculated based on all outstanding shares of
common stock and all shares of common stock that could be acquired upon the
exercise of all outstanding options to acquire our voting stock, as well as
shares of common stock issuable upon exchange of all O.P. Units. Termination of
the Berg land holdings option agreement could result in limitation of our
growth, which could cause our stock price to fall.
WE MAY CHANGE OUR INVESTMENT AND FINANCING POLICIES AND INCREASE YOUR INVESTMENT
RISK 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 our business 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 operations and ability to
make cash distributions to our stockholders, which could harm our business and
cause our stock price to fall.
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER COULD PREVENT ACQUISITIONS OF OUR STOCK
AT A SUBSTANTIAL PREMIUM.
Provisions of our charter 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 our shares of common stock or otherwise
be in the best interests of our stockholders. Provisions of the Maryland general
corporation law, which would apply to potential business combinations with
acquirers other than the Berg Group or stockholders who invested in us in
December 1998, also could prevent the acquisition of our stock for a premium, as
discussed in "Certain Provisions of Maryland Law and of our Charter and Bylaws."
AN INVESTMENT IN OUR STOCK INVOLVES RISKS RELATED TO REAL ESTATE INVESTMENTS
THAT COULD HARM OUR BUSINESS AND CAUSE OUR STOCK PRICE TO FALL.
RENTAL INCOME VARIES. 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
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earned and capital appreciation which our properties generate, 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 oversupply 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.
EXPENDITURES FOR PROPERTY OWNERSHIP ARE FIXED. Income from properties and
real estate values are also 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. 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.
Thus, our operating results and our cash flow may decline materially if our
rental income is reduced.
ILLIQUIDITY. Real estate investments are relatively illiquid, which limits
our ability to restructure our portfolio in response to changes in economic or
other conditions.
GEOGRAPHIC CONCENTRATION. All of our properties are located in the southern
portion of the San Francisco Bay Area commonly referred to as the "Silicon
Valley." The Silicon Valley economy has been strong for the past several 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 space available for rent has increased and that the
demand for such space in the Silicon Valley has declined. According to the "BT
Commercial Real Estate Silicon Valley R&D Report, Q1 1999," vacancy rates rose
from approximately 5.1% in early 1998 to 11.9% in early 1999.
LOSS OF KEY TENANTS. Most of our properties are occupied by single tenants,
many of whom are large, publicly traded information technology 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.
TENANT BANKRUPTCIES. 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.
OUR SUBSTANTIAL INDEBTEDNESS. Our properties are subject to substantial
indebtedness. If we are unable to make required mortgage payments, we could
sustain a loss as a result of foreclosure on our properties by the mortgagee.
Failure to renew or replace our Wells Fargo line of credit when it expires in
October 1999 would materially affect our business and our ability to pay
dividends to stockholders. We cannot assure you that we will be able to obtain a
replacement line of credit with terms similar to the Wells Fargo line of credit,
or at all. Our cost of borrowing funds could increase substantially after the
Wells Fargo line of credit expires. We have adopted a policy of maintaining a
consolidated ratio of debt to total market capitalization, which includes for
this purpose the market value of all shares of common stock for which
outstanding O.P. Units are exchangeable, 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.
ENVIRONMENTAL CLEAN-UP LIABILITIES. Our properties and properties formerly
held by our subsidiaries may expose us to liabilities under applicable
environmental and health and safety laws. If these liabilities
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are material, our financial condition and ability to pay cash distributions may
be affected adversely, which would cause our stock price to fall.
UNINSURED LOSSES. We may sustain uninsured losses with respect to some of
our properties. If these losses are material, our financial condition, our
operating results and our ability to make distributions to our stockholders may
be affected adversely.
EARTHQUAKE DAMAGES ARE UNINSURED. 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, we could lose our investment in those properties, which loss
would have a material adverse effect on our financial condition, our operating
results and our ability to make distributions to our stockholders.
FAILURE TO SATISFY FEDERAL INCOME TAX REQUIREMENTS FOR REITS COULD REDUCE OUR
DISTRIBUTIONS, REDUCE OUR INCOME AND CAUSE OUR STOCK PRICE TO FALL.
FAILURE TO QUALIFY AS A REIT. We intend to elect to be a REIT and to be
taxed as such under the federal income tax laws for the year ending December 31,
1999. 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. To maintain REIT 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.
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, the
federal tax laws restrict the percentage of the total value of our stock that
may be owned by five or fewer individuals to 50% or less. Our charter generally
prohibits the direct or indirect ownership of more than 9% of our common stock
by any stockholder. This limit excludes the Berg Group, which has an aggregate
ownership limit of 20%. In addition, as permitted by our charter, our board of
directors recently provided an exception to two other stockholders that permits
them to collectively own, directly or indirectly, up to 18.5% of our common
stock on an aggregate basis, subject to the terms of an ownership limit
exemption agreement. In general, our charter prohibits the transfer of shares
which result in a loss of our REIT qualification and provides that any such
transfer or any other transfer which causes a stockholder to exceed the
ownership limit will result in the shares being automatically transferred to a
trust for the benefit of a charitable beneficiary. Accordingly, in the event
that either the Berg Group or the two stockholders increase their stock
ownership in our corporation, a stockholder who acquires shares of our common
stock, even though his, her or its aggregate ownership may be less than 9%, may
be required to transfer a portion of their shares to such a trust in order to
preserve our status as a REIT.
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STOCKHOLDERS ARE NOT ASSURED OF RECEIVING CASH DISTRIBUTIONS FROM US.
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 to borrow funds, directly or through
the operating partnerships, on a short-term basis to meet our intended
distribution policy.
Our board of directors will determine the amount and timing of distributions
by the operating partnerships and of distributions to our stockholders. Our
board of directors will consider many factors prior to making any distributions,
including the following:
- the amount of cash available for distribution;
- the operating partnerships' financial condition;
- whether to reinvest funds rather than to distribute such funds;
- the operating partnerships' capital expenditures;
- the effects of new property acquisitions, including acquisitions under our
existing agreements with the Berg Group;
- the annual distribution requirements under the REIT provisions of the
federal income tax laws; and
- such other factors as our board of directors deems relevant.
We cannot assure you that we will be able to meet or maintain our cash
distribution objectives.
OUR PROPERTIES COULD BE SUBJECT TO PROPERTY TAX REASSESSMENTS.
We do not believe that our acquisition of interests in the operating
partnerships in the UPREIT acquisition resulted in any statutory changes in
ownership that could give rise to a reassessment of any of the properties for
California property tax purposes. We cannot assure you, however, that county
assessors or other tax administrative agencies in California will not attempt to
assert that such a change occurred as a result of these transactions. Although
we believe that such a challenge would not be successful ultimately, we cannot
assure you regarding the outcome of any related dispute or proceeding. A
reassessment could result in increased real estate taxes on our properties that,
as a practical matter, we may be unable to pass through to our tenants in full.
This could reduce our net income and our funds available for distribution and
cause our stock price to fall.
OUR OBLIGATION TO PURCHASE TENDERED O.P. UNITS COULD REDUCE OUR CASH
DISTRIBUTIONS.
Each of the limited partners of the operating partnerships, other than Mr.
Berg and Clyde J. Berg, has the annual right to cause the operating partnerships
to purchase a portion of the limited partner's O.P. Units at a purchase price
based on the average market value of the common stock for the ten-trading-day
period immediately preceding the date of tender. Upon a limited partner's
exercise of any such right, we will have the option to purchase the tendered
O.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 O.P. Units annually. If the total purchase
price of the O.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 O.P. Units to be acquired from each
tendering limited partner so that the total purchase price does not exceed $1
million. The exercise of these put rights may reduce the amount of cash that we
have available to distribute to our stockholders and could cause our stock price
to fall.
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In addition, after December 1999, all O.P. Unit holders may tender their
O.P. Units to us for shares of common stock on a one-for-one basis at
then-current market value or an equivalent amount in cash, at our election. If
we elect to pay cash for the O.P. Units, our liquidity may be reduced and we may
lack sufficient funds to continue paying the amount of our anticipated or
historical cash distributions. This could cause our stock price to fall. The
decision to pay cash for tendered O.P. Units is not subject to prior
determination by the independent directors committee.
SHARES ELIGIBLE FOR FUTURE SALE COULD AFFECT THE MARKET PRICE OF OUR COMMON
STOCK.
We cannot predict the effect, if any, that future sales of shares of common
stock, or the availability of shares for future sale, could 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 O.P. Units for shares of common stock pursuant to their exchange
rights, or may be sold by us to raise funds required to purchase such O.P. Units
if the limited partners elect to tender O.P. Units to us using their put rights.
In addition, as of May 10, 1999, the holders of approximately 6.5 million shares
of common stock whose shares are not eligible for sale under Rule 144 under the
Securities Act may resell those shares under a currently effective resale
prospectus. Resales of these shares 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 that prospectus, we intend to maintain the
effectiveness with the Securities and Exchange Commission, or the Commission, of
the registration statements under which these shares are offered for sale until
the end of December 1999. In addition, the holders of approximately 1.1 million
shares of common stock that can be sold subject to Rule 144, including the
volume limitation, can resell those shares free of that limitation under another
currently effective resale prospectus. We also may halt offers and sales of
shares under that prospectus under certain circumstances.
MARKET INTEREST RATES MAY REDUCE THE VALUE OF THE COMMON STOCK.
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, increase the
funds available for us to distribute, and, in fact, would likely increase our
borrowing costs and decrease funds available for distribution. Thus, higher
market interest rates could cause the price of our common stock to fall.
FORWARD-LOOKING STATEMENTS
This prospectus 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 Private Securities Reform Act of 1995, and we include 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 our corporation, 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 our operations and future prospects
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, the
availability of capital, interest rates, competition, supply of and demand for
R&D properties in our current and proposed market areas, general accounting
principles, policies and guidelines applicable to REITs and the risk factors
described above and elsewhere in this prospectus. These risks and uncertainties,
together with the other risks described from time to time in reports and
documents we file with the Commission should be considered in evaluating
forward-looking statements, and undue reliance should not be placed on such
statements.
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USE OF PROCEEDS
We estimate that the net proceeds from the offering, after deducting
estimated underwriting discounts and estimated offering expenses, will be $50.9
million, or $58.5 million if the underwriters exercise the over-allotment option
in full, and assuming an offering price of $8 1/16. We intend to use all of the
net proceeds from the offering to repay outstanding indebtedness and, if the
underwriters exercise their over-allotment option, for general corporate
purposes as well. Approximately $25.0 million of this indebtedness, which is
owed to the Berg Group, carries a variable interest rate which was 6.49% at
March 31, 1999, and is payable on demand. We owe Microsoft approximately $32.1
million for reimbursement for shell and tenant improvements. Interest accrues on
this amount at an annual rate of approximately 7% from April 1, 1999. We may
repay a portion of our debt to Microsoft prior to closing with proceeds from the
Wells Fargo line of credit. In that event, we expect to use proceeds of the
offering to repay that additional debt under the line of credit. Amounts due
under the line of credit carry a variable interest rate, which was 6.49% at
March 31, 1999. The Wells Fargo line of credit expires on October 1, 1999.
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CAPITALIZATION
The following table sets forth our unaudited actual capitalization at March
31, 1999, our pro forma capitalization at that date, giving effect to the
acquisition of the Microsoft project and our pro forma capitalization adjusted
to reflect the sale of 6,750,000 shares of common stock in this offering at an
assumed price of $8 1/16 and the use of the proceeds to repay debt owed under
our line of credit or to Microsoft and debt owed to the Berg Group. The
information set forth in the following table should be read in conjunction with
the combined historical financial statements and accompanying notes and the
unaudited pro forma financial information and accompanying notes included
elsewhere in this prospectus. Minority interest, on a pro forma as adjusted
basis, represents approximately 83.2% of our equity interests, taken as a whole
and assuming the exchange of all O.P. Units for common stock, on a weighted
average basis. The table excludes any effect of exercise or conversion of
options, which are potentially dilutive securities.
<TABLE>
<CAPTION>
AT MARCH 31, 1999
-----------------------------------
PRO FORMA
AS ADJUSTED PRO FORMA ACTUAL
----------- ----------- ---------
($ IN THOUSANDS)
<S> <C> <C> <C>
Debt:
Line of credit............................................. $ -- $ 50,580 $ 18,523
Mortgage notes payable..................................... 156,656 156,656 156,656
Mortgage notes payable (related parties)................... 48,803 49,080 24,080
----------- ----------- ---------
Total debt............................................... 205,459 256,316 199,259
Minority interest............................................ 384,087 384,087 285,037
Stockholders' equity:
Preferred stock, $0.001 par value, 20,000,000 authorized,
none issued and outstanding.............................. -- -- --
Common stock, $0.001 par value, 200,000,000 authorized,
8,233,583 issued and outstanding on an actual and pro
forma basis; and 14,983,583 issued and outstanding on a
pro forma as adjusted basis.............................. 15 8 8
Paid in capital............................................ 106,445 55,595 55,595
Receivable on private placement............................ (900) (900) (900)
Accumulated deficit........................................ (20,502) (20,502) (20,502)
----------- ----------- ---------
Total stockholders' equity............................... 85,058 34,201 34,201
----------- ----------- ---------
Total capitalization......................................... $ 674,604 $ 674,604 $ 518,497
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
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COMPANY HISTORY
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 January and May 1997, we sold all of our real estate assets to Spieker
Properties, L.P. for approximately $50.5 million in cash. In February 1997, we
paid a special dividend of $9.00 per share to our stockholders. After the sale
of assets and the payment of the dividend to stockholders, we retained only
nominal assets. The board of directors and management considered available
strategic alternatives for the remaining corporate entity, including possible
business or asset acquisitions or combinations, a sale of the corporate entity,
and outright liquidation.
Subsequently, we accepted a proposal by the Berg Group to acquire control of
the corporation as a vehicle to acquire R&D properties, or interests in entities
owning such properties, from the Berg Group. On May 27, 1997, we entered into a
stock purchase agreement with the Berg Group, which transferred most of its
share purchase rights to unaffiliated accredited investors. The transaction was
completed on September 2, 1997, at which time all of our existing officers and
directors resigned and the Berg Group 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
our stockholders from available cash, including approximately $900,000 received
in the September 1997 transaction. No portion of the distribution was paid on
shares acquired by the Berg Group and its co-investors. In connection with that
distribution, the AMEX halted trading of the common stock on October 20, 1997.
Neither we nor the AMEX set a deadline for the resumption of trading, nor did
the AMEX provide guidance beyond declaring its desire that we have a firm
commitment to acquire a controlling interest in the R&D properties of the Berg
Group and to raise additional capital. On November 23, 1998, we sent to
stockholders a proxy statement/prospectus for a meeting on December 28, 1998 to
approve or ratify the transactions constituting our UPREIT acquisition, our sale
of common stock under two May 1998 private placements, the pending projects
acquisition agreement and the Berg land holdings option agreement between us and
the Berg Group, and our reincorporation in the State of Maryland. On December 8,
1998, the AMEX recommenced trading of our common stock.
On December 28, 1998, our stockholders approved and ratified the proposed
transactions, and 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. Shares of the former company, Mission West Properties, a
California corporation, which were outstanding at December 30, 1998, were
converted into shares of our common stock on a one-for-one basis.
19
<PAGE>
COMMON STOCK MARKET PRICE, DIVIDENDS AND DISTRIBUTION POLICY
MARKET PRICE OF COMMON STOCK
Our common stock is listed on the AMEX and trades under the symbol "MSW."
The previous halt in trading instituted by the AMEX, which began at the opening
of trading on October 20, 1997, ended when trading resumed on December 8, 1998.
In 1997, prior to our becoming the vehicle for the R&D properties of the
Berg Group and the suspension of trading of our common stock, giving effect to
the 1 for 30 reverse stock split which was effective as of November 10, 1997,
the high sales price of the common stock in the first quarter was $397 35/64,
and the low sales price was $67 1/2; for the second quarter, the high was
$112 33/64 and the low was $56 1/4; for the third quarter, the high was
$153 49/64 and the low was $101 17/64; and for the fourth quarter, until trading
was halted on October 20, the high was $148 9/64 and the low was $93 49/64.
Trading of our common stock was suspended for the first three quarters of
1998. The high sales price for the fourth quarter of 1998, after trading
recommenced on December 8, 1998, was $11, and the low sales price was $6 1/2.
During the first quarter of 1999, the high sales price was $7 11/16 and the low
sales price was $6 1/2.
At June 14, 1999, we had approximately 304 holders of record of common
stock.
DIVIDEND HISTORY
On February 27, 1997, we paid a $9.00 special dividend, or $270 adjusted to
give retroactive effect to the 1 for 30 reverse stock split. On October 21,
1997, we paid a $3.30 special dividend, or $99 adjusted to give retroactive
effect to the 1 for 30 reverse stock split. We paid no dividends during 1998. In
April 1999, we declared and paid a dividend of $0.12 per outstanding share of
common stock. On June 14, 1999, our board of directors authorized a dividend of
$0.14 per share of common stock, payable on July 2, 1999 to stockholders of
record on June 21, 1999. We expect to pay distributions totaling $0.55 per share
of common stock for 1999.
OVERVIEW OF DISTRIBUTION POLICY
We intend to make regular quarterly distributions to holders of common stock
based on our funds available for distribution, or FAD. Our ability to make such
distributions will be affected by numerous factors including, most importantly,
the receipt of distributions from the operating partnerships.
FAD does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not necessarily
indicative of cash available to fund cash needs. The actual return that we will
realize and the amount available for distributions to stockholders will be
affected by a number of factors, including the revenues received from our
properties, our operating expenses, the interest expense incurred on borrowings
and planned and unanticipated capital expenditures.
We anticipate that cash available for distribution will exceed earnings and
profits for federal income tax purposes, as the latter figure takes into account
non-cash expenses, such as depreciation and amortization, that we will incur.
Distributions, other than capital gain distributions, by us to the extent of our
current and accumulated earnings and profits for federal income tax purposes
most likely will be taxable to U.S. stockholders as ordinary dividend income
unless a stockholder is a tax-exempt entity. For a discussion of the tax effects
of distributions, see "Federal Income Tax Considerations--Taxation of
Stockholders--Taxation of U.S. Taxable Stockholders". Distributions in excess of
earnings and profits generally will be treated as a non-taxable reduction of the
U.S. stockholder's basis in the common stock to the extent of such basis, and
thereafter as taxable gain. The percentage of such distributions in excess of
earnings and profits, if any, may vary from period to period. We anticipate that
a substantial percentage of the distributions to stockholders for the 12 months
following the consummation of the offering will
20
<PAGE>
constitute taxable income. For a further discussion of our distributions, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Funds from Operations."
Distributions will be determined by our board of directors and will depend
on actual FAD, our financial condition, capital requirements, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the board of directors deems relevant. We expect to pay aggregate
distributions totaling $0.55 per share of common stock for fiscal year 1999. For
a discussion of the risk that we will not meet our distribution objectives, see
"Risk Factors--Stockholders are not assured of receiving cash distributions from
us."
21
<PAGE>
SELECTED FINANCIAL DATA
Selected historical financial information and selected consolidated
financial data set forth in the following table are derived from the audited and
unaudited financial statements and accompanying notes. The following information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and all of the financial
statements and accompanying notes contained elsewhere in this prospectus.
Average monthly rental revenue per square foot has been determined by dividing
the base rent for the period by the number of months in the period, and then
dividing the quotient by the total square feet of occupied space. FAD is
calculated as FFO less straight-lined rents, leasing commissions paid and
capital expenditures made during the period indicated
The unaudited pro forma statements of operations for the three months ended
March 31, 1999 and the year ended December 31, 1998 are based upon our audited
and unaudited historical financial statements and have been prepared as if each
of the following transactions had occurred as of January 1, 1998:
- our UPREIT acquisition;
- our purchases of additional property during the last two quarters of 1998
and the first quarter of 1999, consisting of three newly constructed R&D
properties comprising, in the aggregate, approximately 218,000 rentable
square feet located in the Silicon Valley; and
- our purchase of the Microsoft project, fully leased.
The unaudited pro forma balance sheet as of March 31, 1999 is based on our
unaudited historical financial statements and has been prepared as if our
purchase of the Microsoft project had occurred on March 31, 1999. For additional
information, see "Unaudited Pro Forma Condensed Consolidated Financial
Statements" and the accompanying notes contained elsewhere in this prospectus.
The unaudited pro forma financial statements are not necessarily indicative
of what the actual financial position or results of operations would have been
assuming the completion of the above transactions as of the beginning of the
periods indicated, nor do they purport to project our financial position or
results of operations at any future date or for any future period. In addition,
the unaudited historical operating results for the three months ended March 31,
1999 are not necessarily indicative of the results to be obtained by us for the
year ending December 31, 1999.
In addition, the pro forma statements of operations have been prepared
assuming the following:
- our election to be a REIT is effective as of January 1, 1998;
- pro forma rental revenues have been recognized over the pro forma period
on a straight-line basis, assuming a lease commencement date of January 1,
1998 for all leases entered into prior to July 1, 1998;
- the minority interest represents approximately 90% for the entire pro
forma period, giving effect to all changes in stockholders' equity during
the period as of the first day of the period;
- additional depreciation expense associated with acquired properties has
been computed as if we had acquired the property as of January 1, 1998,
and recorded the expense on a straight-line basis over 40 years; and
- our receipt of the proceeds of all loans and stock sales, other than the
offering, during the period and applied the proceeds to the repayment of
existing debt as of January 1, 1998.
The pro forma as adjusted data assumes our use of the proceeds of this
offering to repay pro forma indebtedness outstanding as of January 1, 1998.
22
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31
---------------------------------
YEAR ENDED THIRTEEN YEARS ENDED NOVEMBER
PRO FORMA HISTORICAL DECEMBER 31, 1998 MONTHS ENDED 30,
----------- -------------------- ---------------------- DECEMBER 31, --------------------
1999 1999 1998 ACTUAL 1997 1996 1995
----------- --------- --------- PRO FORMA --------- ------------- --------- ---------
-----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($ IN THOUSANDS, EXCEPT PER SHARE AND AVERAGE MONTHLY RENTAL DATA)
OPERATING DATA:
Revenue:
Rental revenues.............. $ 19,256 $ 14,027 $ -- $ 76,961 $ 27,285 $ 1,376 $ 7,065 $ 7,146
Tenant reimbursements........ 2,307 2,236 -- 8,833 4,193 -- -- --
Other........................ 149 149 77 278 278 386 348 380
----------- --------- --------- ----------- --------- ------------- --------- ---------
Total revenues................. 21,712 16,412 77 86,072 31,756 1,762 7,413 7,526
----------- --------- --------- ----------- --------- ------------- --------- ---------
Expenses:
Property operating,
maintenance and real estate
taxes...................... 2,331 2,311 -- 9,589 4,821 246 1,643 1,783
Interest..................... 3,491 2,971 -- 15,681 4,685 425 3,045 3,435
Interest (related parties)... 860 416 -- 3,619 3,511 -- -- --
General and administrative... 406 406 230 1,501 1,501 1,606 991 945
Depreciation of real
estate..................... 3,411 2,703 -- 13,636 5,410 246 1,369 1,352
----------- --------- --------- ----------- --------- ------------- --------- ---------
Total expenses................. 10,499 8,807 230 44,026 19,928 2,523 7,048 7,515
----------- --------- --------- ----------- --------- ------------- --------- ---------
Income (loss) before gain
(loss) on sale of real
estate assets, minority
interest and income
taxes...................... 11,213 7,605 (153) 42,046 11,828 (761) 365 11
Gain (loss) on sale of real
estate..................... -- -- -- -- -- 4,736 (306) 76
Provision for estimated loss
on real estate............. -- -- -- -- -- -- -- --
----------- --------- --------- ----------- --------- ------------- --------- ---------
Income (loss) before minority
interest and income
taxes...................... 11,213 7,605 (153) 42,046 11,828 3,975 59 87
Minority interest............ 10,184 6,724 -- 38,378 12,049 -- -- --
----------- --------- --------- ----------- --------- ------------- --------- ---------
Income (loss) before income
taxes...................... 1,029 881 (153) 3,668 (221) 3,975 59 87
Provision (benefit) for
income taxes............... -- -- -- -- -- 1,005 24 35
Cumulative effect of change
in accounting.............. -- -- -- -- -- -- -- --
----------- --------- --------- ----------- --------- ------------- --------- ---------
Net income (loss).............. $ 1,029 $ 881 $ (153) $ 3,668 $ (221) $ 2,970 $ 35 $ 52
----------- --------- --------- ----------- --------- ------------- --------- ---------
----------- --------- --------- ----------- --------- ------------- --------- ---------
Basic income (loss) per
share...................... $ 0.13 $ 0.11 (0.10) $ 0.45 $ (0.13) $ 18.43 $ 0.77 $ 1.12
Diluted income (loss) per
share...................... $ 0.12 $ 0.10 (0.10) $ 0.45 $ (0.13) $ 18.43 $ 0.72 $ 1.06
PROPERTY AND OTHER DATA:
Total properties, end of
period....................... 77 72 -- 77 71
Total square feet, end of
period....................... 5,089,384 4,573,684 -- 5,089,384 4,518,688
Average monthly rental revenue
per square foot(1)........... $ 1.19 $ .98 -- $ 1.19 $ .95
Occupancy at end of period..... 99% 99% -- 99% 99%
Funds from operations(2)....... $ 14,624 $ 10,308 -- $ 55,682 $ 17,238
Funds available for
distribution(3).............. $ 13,172 $ 9,369 -- $ 50,465 $ 15,356
CASH FLOW DATA:
Cash flow from operations...... $ 9,346 $ (405) $ 16,264 $ (1,046) $ 1,221 $ 598
Cash flow from investing....... (107) -- (118) 46,198 2,528 191
Cash flow from financing....... (9,351) (11) (21,469) (42,694) (1,204) (2,415)
<CAPTION>
1994
---------
<S> <C>
OPERATING DATA:
Revenue:
Rental revenues.............. $ 6,637
Tenant reimbursements........ --
Other........................ 564
---------
Total revenues................. 7,201
---------
Expenses:
Property operating,
maintenance and real estate
taxes...................... 1,991
Interest..................... 3,088
Interest (related parties)... --
General and administrative... 1,200
Depreciation of real
estate..................... 1,472
---------
Total expenses................. 7,751
---------
Income (loss) before gain
(loss) on sale of real
estate assets, minority
interest and income
taxes...................... (550)
Gain (loss) on sale of real
estate..................... 1,867
Provision for estimated loss
on real estate............. (5,200)
---------
Income (loss) before minority
interest and income
taxes...................... (3,883)
Minority interest............ --
---------
Income (loss) before income
taxes...................... (3,883)
Provision (benefit) for
income taxes............... (1,500)
Cumulative effect of change
in accounting.............. 440
---------
Net income (loss).............. $ (1,943)
---------
---------
Basic income (loss) per
share...................... $ 39.65
Diluted income (loss) per
share...................... $ 39.69
PROPERTY AND OTHER DATA:
Total properties, end of
period.......................
Total square feet, end of
period.......................
Average monthly rental revenue
per square foot(1)...........
Occupancy at end of period.....
Funds from operations(2).......
Funds available for
distribution(3)..............
CASH FLOW DATA:
Cash flow from operations...... $ 2,450
Cash flow from investing....... 492
Cash flow from financing....... (1,556)
</TABLE>
<TABLE>
<CAPTION>
THREE
MONTHS YEAR ENDED
ENDED MARCH DECEMBER
31, 1999 31, 1998
----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA AS ADJUSTED DATA:(4)
Net income..................... $ 1,994 $ 7,195
Basic income per share....... $ .13 $ .48
Diluted income per share..... $ .13 $ .48
Funds from operations(2)....... $ 15,450 $ 59,288
Funds available for
distribution(3).............. $ 13,998 $ 57,857
<CAPTION>
<S> <C>
PRO FORMA AS ADJUSTED DATA:(4)
Net income.....................
Basic income per share.......
Diluted income per share.....
Funds from operations(2).......
Funds available for
distribution(3)..............
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
AT MARCH 31, 1999 AT DECEMBER 31, AT NOVEMBER 30,
----------------------- --------------------- -------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA ACTUAL 1998 1997 1996 1995 1994
----------- ---------- ---------- --------- --------- --------- ---------
(UNAUDITED)
($ IN THOUSANDS)
BALANCE SHEET DATA:
Real estate assets, net of
accumulated depreciation......... $ 678,098 $ 521,991 $ 516,029 $ -- $ 46,285 $ 47,597 $ 49,612
Total assets....................... 682,913 526,806 519,866 5,763 46,324 47,570 50,963
Debt............................... 207,236 175,179 184,389 -- 30,753 31,967 34,382
Debt (related parties)............. 49,080 24,080 20,752 -- -- -- --
Total liabilities.................. 264,625 207,568 213,234 552 32,142 33,433 36,243
Minority interest.................. 384,087 285,037 273,379 -- -- -- --
Stockholders' equity............... 34,201 34,201 33,253 5,211 14,182 14,137 14,720
Common stock outstanding........... 8,233,583 8,233,583 8,218,594 1,501,104 45,704 45,624 48,957
O.P. Units issued and
outstanding...................... 74,052,356 60,845,727 60,151,69 -- -- -- --
</TABLE>
- ------------------------
(1) Average monthly rental revenue per square foot has been determined by
dividing the base rent for the period by the number of months in the period,
and then dividing the quotient by the total square feet of occupied space.
(2) As defined by the National Association of Real Estate Investment Trusts,
referred to as NAREIT, funds from operations, or 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, make capital
expenditures and pay dividends. 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 FFO exactly as we do. For a
discussion of of FFO see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Funds from Operations."
(3) We calculate funds available for distribution, or FAD, as FFO less
straight-lined rents, leasing commissions paid and capital expenditures made
during the period indicated.
(4) Represents selected pro forma financial data adjusted to reflect the sale of
6,750,000 shares of common stock in this offering at an assumed offering
price of $8 1/16 and the use of net proceeds to repay debt owed under our
line of credit and debt owed to the Berg Group.
24
<PAGE>
The following table sets forth selected historical financial information for
the Berg Properties (our accounting predecessor) as of and for the periods
indicated on an historical basis. Average monthly rental revenue per square foot
has been determined by dividing the base rent for the period by the number of
months in the period, and then dividing the quotient by the total square feet of
occupied space.
<TABLE>
<CAPTION>
BERG PROPERTIES (PREDECESSOR)
------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, -----------------------------------------------------
1998 1997 1996 1995 1994 1993
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
($ AND SQUARE FEET IN THOUSANDS, EXCEPT PER SHARE AND AVERAGE
MONTHLY RENTAL DATA)
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 (related parties)...................... 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........ $ 0.99 $ 0.86 $ 0.78 $ 0.71 $ 0.96 $ 0.84
Occupancy at end of period............................ 100% 98% 92% 87% 80% 90%
Funds from operations................................. $ 18,203 $ 31,495 $ 19,970 $ 14,429 $ 15,015 $ 14,768
CASH FLOW DATA:
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)
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31,
AT JUNE 30, -----------------------------------------------------
1998 1997 1996 1995 1994 1993
----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
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' equity (deficit)................................ (96,233) 29,651 16,825 (2,469) (23,763) (39,601)
</TABLE>
25
<PAGE>
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 our future financial performance,
operating results, plans and objectives, as discussed in "Forward-Looking
Statements." Actual results may differ materially from those currently
anticipated, depending upon a variety of factors. The following discussion
should be read in conjunction with the selected financial data and our financial
statements and accompanying notes appearing elsewhere in this prospectus.
OVERVIEW
In May 1998, we, the members of the Berg Group, John Kontrabecki and certain
other persons entered into an acquisition agreement providing, among other
things, for our acquisition of interests as the sole general partner of the
operating partnerships. At the time, the operating partnerships held
approximately 4.3 million rentable square feet of R&D property located in the
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 stockholder approval. Effective
July 1, 1998, we consummated our acquisition of the general partnership
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 approximately $35.2
million of principal payable no later than July 1, 2000. Effective July 1, 1998,
all limited partnership interests in the operating partnerships were converted
into 59,479,633 O.P. Units, representing ownership of approximately 87.89% of
the operating partnerships, upon consummation of the acquisition. Each O.P. Unit
may be exchanged for one share of common stock pursuant to certain exchange
rights and is treated as a share of common stock on a fully diluted basis and
also represents our minority ownership interests. At March 31, 1999, we owned an
11.92% general partnership interest in the operating partnerships, taken as a
whole, on a weighted average basis.
On December 29, 1998, we sold 6,495,058 shares of common stock at a price of
$4.50 per share to a number of accredited investors to complete our May 1998
private placements. The aggregate proceeds, net of fees and offering costs, of
approximately $27.8 million 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 the Berg Group and other
sellers.
At March 31, 1999, the outstanding balance under the demand notes that we
owe to the operating partnerships was approximately $2.0 million. The principal
of the demand notes, along with the interest expense, which is interest income
to the operating partnerships, is eliminated in consolidation and is not
included in the corresponding line items within the consolidated financial
statements. However, the interest income earned by the operating partnerships,
which is 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 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
stockholders.
In April 1999, we acquired the Microsoft properties by purchasing all of the
interests of Baccarat Shoreline LLC, which we have renamed Mission West
Shoreline LLC, a wholly owned limited liability company. In the transaction, we
assumed debt totaling approximately $57.1 million on a consolidated basis, and
the former members of Baccarat Shoreline LLC received 13,206,629 O.P. Units, of
which various members of the Berg Group received 12,467,058 O.P. Units.
26
<PAGE>
We intend to elect and qualify to be taxed as a REIT commencing with the
taxable year ending December 31, 1999.
RESULTS OF OPERATIONS
Our acquisition of the general partnership interests in the operating
partnerships during the third quarter of 1998 substantially altered our
operations. As a consequence, operating results for the three months ended March
31, 1999 are not meaningfully comparable to our operating results for the same
period of 1998, and 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.
COMPARISON OF THE THREE-MONTH PERIOD ENDED MARCH 31, 1999 TO THE THREE-MONTH
PERIOD ENDED MARCH 31, 1998.
For the three months ended March 31, 1999, rental revenues from real estate
were approximately $14.0 million, which included an increase of approximately
$753,000 over base rental revenues to reflect rental revenues on a straight-line
basis. Tenant reimbursements were approximately $2.2 million, and other income,
including interest, was approximately $149,000. Total expenses for the three
months ended March 31, 1999, were approximately $8.8 million, of which
approximately $8.4 million related directly to our real estate operations.
General and administrative expenses accounted for the remainder of the expenses.
The minority interest portion of income was approximately $6.7 million,
resulting in net income of approximately $881,000 for the three months ended
March 31, 1999. Minority interest represents the limited partners' ownership
interest of 88.08%, on a weighted average basis as of March 31, 1999, in the
operating partnerships.
During the three months ended March 31, 1998, our assets consisted only of
cash and receivables. Therefore, we had insignificant revenue-generating and
cash-generating capabilities and minimal activities, aside from interest income
and general and administrative expenses.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE THIRTEEN-MONTH PERIOD
ENDED DECEMBER 31, 1997.
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, respectively, which are the operating partnerships. We
owned a 12.02% general partnership interest in the operating partnerships, taken
as a whole, on a weighted average basis as of December 31, 1998.
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
rents of approximately $1.6 million. Tenant reimbursements were approximately
$4.2 million and other income, including interest, totaled approximately
$278,000. Total expenses for 1998 were approximately $20.0 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.
27
<PAGE>
The minority interest's portion of income was approximately $12.0 million,
resulting in a consolidated net loss of approximately $221,000 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, we received approximately $50.5 million in cash, from which we
repaid all debt encumbering the properties, thereby eliminating all future
interest expense, and paid a majority of the related 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. In addition, we declared and paid a special dividend of $9.00 per share on
February 27, 1997 to stockholders of record on February 19, 1997 and a special
cash distribution of $3.30 per share on October 21, 1997 to stockholders of
record on August 28, 1997. Accordingly, a comparison of the operating results
for that period with the operating results for the year ended December 31, 1998
is not meaningful and has been omitted.
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 held as temporary investments which we obtained from
sales of common stock. We recognized interest income in the amount of
approximately $27,000 and general and administrative expenses of approximately
$139,000, resulting in a net loss before income tax benefit of approximately
$112,000 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 stockholders and raising
additional capital through the sale of common stock to the Berg Group 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 our transactions with the Berg Group and other investors in
1997.
CHANGES IN FINANCIAL CONDITION
MARCH 31, 1999 COMPARED TO DECEMBER 31, 1998
During the first quarter of 1999, we acquired a newly constructed R&D
property located on Santa Teresa Boulevard in San Jose, California from the Berg
Group under the pending projects acquisition agreement. This property contains
approximately 55,000 square feet of rentable space. The total acquisition price
for this property was approximately $8.6 million. We assumed approximately $3.5
million of debt due to the Berg Group, as well as other liabilities of
approximately $88,000, and issued 694,030 O.P. Units to members of the Berg
Group.
Borrowings outstanding at March 31, 1999 under the line of credit with Wells
Fargo Bank, N.A. were approximately $18.5 million, with availability of
approximately $81.5 million.
In February 1999, a former officer of our corporation purchased 15,000
shares pursuant to an option at $4.50 per share. The total proceeds to us were
approximately $67,000.
DECEMBER 31, 1998 COMPARED TO DECEMBER 31, 1997
As a result of our acquisition of the general partnership interests and
control of the operating partnerships, our financial statements consolidate the
financial position and results of the operating partnerships, effective as of
July 1, 1998. Accordingly, through our general partnership interests, as of
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<PAGE>
December 31, 1998 we owned, operated and managed 71 properties representing 4.5
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. We used the net proceeds of the loan to
repay approximately $14.2 million of mortgage notes payable, and used the
remaining amount to reduce the outstanding principal balance owing under the
mortgage notes payable to the Berg Group, which is a related party. 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 rentable space, all of which are owned by the operating
partnerships. The loan bears interest at a fixed rate of 6.56% per annum,
matures on October 15, 2008 and is payable in monthly installments of
approximately $827,000, which includes principal, based upon a 30-year
amortization, and interest. The Prudential secured loan has a substantial
prepayment penalty. The loan is nonrecourse to the operating partnerships and
us, except with respect to certain matters such as environmental liability
relating to the encumbered properties, the payment of taxes and assessments with
respect to the encumbered properties, the responsibility to return security
deposits to the tenants of the encumbered properties, insurance or condemnation
proceeds that are not properly applied under the terms of the loan, damages that
result from early termination or amendment to specified major leases, waste of
the subject properties, bankruptcy or insolvency of any of the operating
partnerships or us, and any fraud or misrepresentations by us or the operating
partnerships in connection with the loan. In addition, some limited partners
have guaranteed portions of the loan.
On September 30, 1998, the operating partnerships assumed a line of credit
with Wells Fargo Bank, N.A. from the Berg Group. The Wells Fargo line matures in
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%; and (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 approximately $72.8 million.
During the fourth quarter of 1998, we closed 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 acquisition price for these two
properties was approximately $13.7 million. Through the operating partnerships,
we assumed approximately $9.6 million of debt due to the Berg Group and issued
672,064 O.P. Units, of which 618,684 O.P. Units were issued to various members
of the Berg Group.
On March 30, 1998, Michael J. Anderson, our former Vice President and Chief
Operating Officer, purchased 200,000 shares of common stock at $4.50 per share
in exchange for a $900,000 note payable to us and due March 30, 2003. The note
is a full recourse promissory note bearing interest at an annual rate of 5.59%
and is collateralized by a pledge of the shares. Additionally, 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. Mr. Anderson resigned
from the corporation effective April 30, 1999. Upon Mr. Anderson's resignation,
we repurchased 117,361 of the 200,000 shares of common stock, and canceled the
related share purchase obligation representing $528,000 of the original $900,000
note receivable. We waived interest expense of approximately $32,000 due on the
portion of the note receivable relating to the canceled shares. The remaining
$372,000 of the note receivable is collateralized by a pledge of 82,639 shares
of common stock. We expect to receive payment of the balance of the note
receivable during the second quarter of 1999.
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 in two
May 1998 private placements. The aggregate
29
<PAGE>
proceeds to us, net of fees and offering costs, were approximately $27.8
million. We used the proceeds to pay outstanding amounts under the demand notes
owed to the operating partnerships. Offering costs included 200,000 shares of
common stock issued for services rendered with the placement of such shares.
Following the sale of all 11 of our properties in 1997, coupled with the
cash dividends paid to stockholders, only cash and receivables remained 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.
DECEMBER 31, 1997 COMPARED TO NOVEMBER 30, 1996
The receipt of private placement proceeds from an investment led by the Berg
Group constituted our principal new activity during fiscal 1997. Accordingly, a
comparison of the changes in financial condition between the fiscal years ended
November 30, 1996 and December 31, 1997 is not meaningful and has been omitted.
LIQUIDITY AND CAPITAL RESOURCES
We expect our principal sources of liquidity for distributions to
stockholders, debt service, leasing commissions and recurring capital
expenditures to be FFO, the proceeds of this offering and borrowings under our
Wells Fargo line of credit or a replacement line of credit. We expect these
sources of liquidity to be adequate to meet projected distributions to
stockholders and other presently anticipated liquidity requirements in 1999,
assuming the renewal or replacement of the Wells Fargo line of credit. We
believe that we will be able to renew or replace this line of credit on
acceptable terms, although we cannot assure you that we will succeed in doing
so.
At March 31, 1999, we had total indebtedness of approximately $199.3
million, including approximately $153.6 million of fixed rate mortgage debt,
approximately $27.2 million of variable rate mortgage debt, including
approximately $24.1 million of related party debt, and approximately $18.5
million of credit facility debt. Our total fixed debt included the Prudential
secured loan balance of approximately $129.4 million and interest of
approximately $827,000.
During 1998, we assumed the $100.0 million Wells Fargo line of credit, which
had an outstanding balance of approximately $18.5 million at March 31, 1999. The
interest rate on the Wells Fargo line is variable and has ranged from
approximately 6.49% to 7.37% since January 1997 to the present. The average rate
during the first quarter of 1999 was 6.49%. The Wells Fargo line of credit is
currently collateralized by 14 properties and is guaranteed by Mr. Berg and
certain other members of the Berg Group. The Wells Fargo line of credit expires
on October 1, 1999 and will need to be replaced. We are currently evaluating
alternative sources of credit. We cannot assure you that we will be able to
obtain a similar line of credit with similar terms, and our cost of borrowing
could increase substantially.
At March 31, 1999, our debt to total market capitalization ratio, calculated
as 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 29.0%
of our estimated total market capitalization of approximately $691.4 million.
The closing price for a share of our common stock on AMEX was $7 1/8 per share
on March 31, 1999.
Effective April 1, 1999, we acquired the Microsoft project. Microsoft has
signed a seven-year lease that provides for a first year's rent of $2.95 per
square foot per month with annual rent increases of approximately 4%. The lease
is triple net, and we receive a management fee equal to 1% of the annual base
rent. In accordance with the lease terms, on April 1, 1999, Microsoft began
paying monthly base rent of approximately $1.2 million for the first four
buildings, consisting of approximately 415,700 rentable square feet. On June 1,
1999, Microsoft began paying monthly rent of approximately $295,000 for the
fifth building, consisting of approximately 100,000 rentable square feet.
Microsoft controls the construction of
30
<PAGE>
this facility, which is currently scheduled to be completed and ready for
occupancy during the second half of 1999.
Under the terms of the pending projects acquisition agreement, the
acquisition price of the Microsoft project was approximately $116.5 million,
determined as follows:
- our assumption of $25.0 million of mortgage debt due to the Berg Group;
- our assumption of the sellers' obligation to reimburse Microsoft for shell
and tenant improvements of approximately $32.1 million; and
- the issuance of 13,206,629 O.P. Units, at the agreed value of $4.50 per
unit for a total of approximately $59.4 million.
Under generally accepted accounting principles, the value of the O.P. Units
was equal to the closing price of our common stock on April 30, 1999, the date
the acquisition closed, or $7.50 per share as reported on the AMEX, resulting in
our recorded purchase price of approximately $156.1 million for the Microsoft
project.
The $25.0 million debt owed to the Berg Group carries a variable interest
rate equal to the rate applicable to the Wells Fargo line of credit, which was
6.49% annually at March 31, 1999 and is payable in full on demand. Interest
accrues on the amount owed by us to Microsoft at an annual rate of approximately
7% from April 1, 1999. We expect to pay this obligation in full by August 31,
1999. We expect to use proceeds of this offering or the Wells Fargo line of
credit to repay this additional debt.
After the offering we will own a general partnership interest of 23.70%,
12.19%, 11.82% and 12.19% in Mission West Properties, L.P., Mission West
Properties, L.P. I, Mission West Properties, L.P. II and Mission West
Properties, L.P. III, respectively. We expect to own a 16.90% general
partnership interest in the operating partnerships, taken as a whole, on a
weighted average basis.
MORTGAGE DEBT. The following table sets forth certain information regarding
debt outstanding as of March 31, 1999 giving effect to related party mortgage
debt and anticipated draws on the line of credit to pay tenant improvement and
shell reimbursements assumed in connection with the acquisition of the Microsoft
project effective April 1, 1999. The interest rate for the Wells Fargo Bank line
of credit and the related party notes is equal to the lesser of (a) the Wells
Fargo Prime Rate in effect on the first day of each calendar month; (b) LIBOR
plus 1.65%, or (c) the Wells Fargo Purchased Funds Rate quoted on the first
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<PAGE>
day of each calendar month plus 1.65%. The interest rate on the Citicorp U.S.A.
Inc. mortgage note is equal to one month LIBOR plus 1.625%, adjusted monthly.
<TABLE>
<CAPTION>
PRO FORMA
BALANCE AT
MARCH 31, MATURITY INTEREST
DEBT DESCRIPTION COLLATERAL PROPERTIES 1999 DATE RATE
- --------------------------- -------------------------------------- ------------- ----------- ---------
($ IN
THOUSANDS)
<S> <C> <C> <C> <C>
LINE OF CREDIT:
Wells Fargo Bank 1325-1810 McCandless Drive, Milpitas, $ 50,580 10/99 variable
CA
-------------
MORTGAGE NOTES PAYABLE
(RELATED PARTIES):
Berg & Berg Enterprises, 2033-2243 Samaritan Drive, San Jose, 49,080 12/99 variable
Inc. CA
-------------
MORTGAGE NOTES PAYABLE:
Great West Life & Annuity 6320 San Ignacio Ave., San Jose, CA 7,697 2/04 7.000%
Insurance Company
Great West Life & Annuity 6540 Via del Oro, San Jose, CA 3,672 5/04 7.000%
Insurance Company 6385 San Ignacio Ave., San Jose, CA
Prudential Capital Group 20400 Mariani, Cupertino, CA 2,002 3/09 8.750%
New York Life Insurance 10440 Bubb Road, Cupertino, CA 424 8/09 9.625%
Company
Home Savings & Loan 10460 Bubb Road, Cupertino, CA 513 1/07 9.500%
Association
Amdahl Corporation 3120 Scott, Santa Clara, CA 6,895 3/14 9.420%
Citicorp U.S.A. Inc. 2800 Bayview Drive, Fremont, CA 3,105 4/00 variable
Mellon Mortgage Company 3530 Bassett, Santa Clara, CA 2,935 6/01 8.125%
Prudential Insurance 10300 Bubb, Cupertino, CA 129,413 10/08 6.560%
Company of America 10500 N. DeAnza, Cupertino, CA
4050 Starboard, Fremont, CA
45700 Northpoint Loop, Fremont, CA
45738 Northpoint Loop, Fremont, CA
450-460 National, Mountain View, CA
4949 Hellyer, San Jose, CA
6311-6351 San Ignacio, San Jose, CA
3236 Scott, Santa Clara, CA
3560-3580 Bassett, Santa Clara, CA
1135 Kern, Sunnyvale, CA
1212 Bordeaux, Sunnyvale, CA
1230 and 1250 E. Arques, Sunnyvale, CA
1170 Morse, Sunnyvale, CA
3540-3550 Bassett, Santa Clara, CA
-------------
Mortgage Notes Payable Subtotal 156,656
-------------
Total $ 256,316
-------------
-------------
</TABLE>
HISTORICAL CASH FLOWS
Net cash provided by operating activities for the three months ended March
31, 1999 was approximately $9.3 million compared to net cash used in operating
activities of approximately $405,000 for the same period in 1998. The change was
a direct result of the Company's acquisition of its general partnership
interests in the operating partnerships during the third quarter of 1998.
32
<PAGE>
Net cash used in investing activities was approximately $107,000 and zero
for the three months ended March 31, 1999 and 1998, respectively. Cash used in
investing activities during the quarter ended March 31, 1999 related solely to
improvements made to existing real estate assets acquired as part of the
Company's investment in the operating partnerships.
Net cash used in financing activities was approximately $9.4 million for the
three months ended March 31, 1999 compared to approximately $11,000 for the same
period in 1998. During the quarter ended March 31, 1999, the Company reduced
debt outstanding by utilizing cash generated from operating activities.
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 $118,000 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 million for the thirteen-month period ended December 31, 1997 and the
fiscal year ended 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 the Berg Group
averaged approximately $1.5 million annually. We will have approximately 865,000
rentable square feet under expiring leases 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 annually from January 1, 1999 through December 31,
2000. We believe we will recover substantially all of these sums from the
tenants under new or renewed leases through increases in rental rates. Until we
actually sign the leases, however, we cannot assure you that this will occur. We
expect to meet our long-term liquidity requirements for the funding of property
acquisitions and other material non-recurring capital improvements through
long-term secured and unsecured indebtedness and our issuance of additional
equity securities.
FUNDS FROM OPERATIONS
As defined by NAREIT, FFO represents net income (loss) before minority
interest of O.P. unitholders, computed in accordance with generally accepted
accounting principles, 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
33
<PAGE>
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 and it
is not comparable to cash flows provided by operating activities determined in
accordance with generally accepted accounting principles, nor is FFO necessarily
indicative of funds available to meet our cash needs, including our need to make
cash distributions to satisfy REIT requirements.
Our definition of FFO also assumes conversion at the beginning of the period
of all convertible securities, including minority interests that might be
exchanged for common stock. Our FFO does not represent the amount available for
management's discretionary use, as such funds may be needed for capital
replacement or expansion, debt service obligations or other commitments and
uncertainties.
Furthermore, FFO is not comparable to similarly entitled items reported by
other REITs that do not define FFO exactly as we do. FFO for the quarter ended
March 31, 1999 and the year ended December 31, 1998, presented on a historical
basis, are summarized in the table below:
<TABLE>
<CAPTION>
THREE
MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1999 1998
------------- ---------------
(UNAUDITED)
($ IN THOUSANDS)
<S> <C> <C>
Calculation of FFO:
Net income (loss)............................ $ 881 $ (221)
Add back:
Minority interest........................ 6,724 12,049
Real estate depreciation................. 2,703 5,410
------------- -------
FFO.......................................... $ 10,308 $ 17,238
------------- -------
------------- -------
</TABLE>
We intend to pay distributions to stockholders based upon total FAD, which
is calculated as FFO less straight-lined rents, leasing commissions paid and
capital expenditures made during the respective period. The calculation of FAD
for the three months ended March 31, 1999 and the year ended December 31, 1998
is as follows:
<TABLE>
<CAPTION>
THREE
MONTHS ENDED YEAR ENDED
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
(UNAUDITED)
<CAPTION>
($ IN THOUSANDS)
<S> <C> <C>
FFO....................................................... $ 10,308 17,238
Less:
Straight-line rents..................................... 753 1,624
Leasing commissions..................................... 78 140
Capital expenditures.................................... 108 118
------- ------
FAD....................................................... $ 9,369 15,356
------- ------
------- ------
</TABLE>
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 to significant
fluctuations of interest rates on our floating rate debt, and pricing on our
future debt.
34
<PAGE>
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. Average interest rates are based on implied LIBOR for
the respective time period. Fair value approximates book value for fixed rate
debt. Of the fair value of secured notes payable, approximately $129.4 million
represents the Prudential secured loan. This table gives effect to the
acquisition of the Microsoft project, which was effective on April 1, 1999.
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 THEREAFTER TOTAL FAIR VALUE
--------- --------- --------- --------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
($ IN THOUSANDS)
VARIABLE RATE DEBT:
Secured line of credit..... $ 50,580 -- -- -- -- -- $ 50,580 $ 50,580
Average interest rate...... 6.93% -- -- -- -- --
Secured notes payable
(related parties)........ $ 49,080 -- -- -- -- -- $ 49,080 $ 49,080
Average interest rate...... 6.93% -- -- -- -- --
Secured notes payable...... $ 3,105 -- -- -- -- $ 3,105 $ 3,105
Average interest rate...... 7.13% -- -- -- --
FIXED RATE DEBT:
Secured notes payable...... $ 1,657 $ 2,351 $ 5,137 $ 2,578 $ 2,768 $ 139,060 $ 153,551 $ 153,551
Average interest rate...... 6.80% 6.80% 6.80% 6.80% 6.80% 6.80%
</TABLE>
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
We do not believe that recently issued accounting standards will materially
impact our financial statements.
YEAR 2000
INTRODUCTION
The term "Year 2000 issue" is a general term used to describe various
problems that may result from the improper processing by computer systems of
dates after 1999. These problems could result in a system failure or
miscalculations causing disruptions of operations.
Our efforts to address Year 2000 issues consist of reviewing our computer
information systems, evaluating other computer systems that do not relate to our
internal information systems but include embedded technology at our properties,
such as security, heating, ventilation and air conditioning, elevator, fire and
safety systems, and communicating with certain significant third-party service
providers to determine whether there will be any interruption in their systems
that could affect us.
OUR STATE OF READINESS
INFORMATION TECHNOLOGY SYSTEMS. We have reviewed our information technology
systems and have contacted vendors to determine whether such systems are Year
2000 compliant. Based upon our inquiries, we have determined that our primary
network operating system, Windows NT Server 4.0, and all of our desktop personal
computers are Year 2000 compliant. The vendor for our property management and
accounting software has advised us that it will provide a Year 2000 compliant
software upgrade to us during the third quarter of 1999.
EMBEDDED SYSTEMS. We believe that, in most cases, under the lease terms it
is the tenant's sole responsibility to ensure that the embedded systems,
providing, for example, building security, heating, ventilation, air
conditioning, fire alarms and sprinklers, and elevator service, are Year 2000
compliant. We have made limited inquiries to the vendors for some of the
embedded systems used on our properties.
35
<PAGE>
Based upon responses to those inquiries, we are not aware of any systems that
are not Year 2000 compliant.
COSTS TO ADDRESS OUR YEAR 2000 ISSUES
THIRD PARTY RELATIONSHIPS. We plan to contact third parties, such as
utility companies, financial institutions and our transfer agent, that provide
important services to us and ascertain whether those third parties are aware of
Year 2000 issues that would adversely impact our operations. At this time, we do
not intend to contact all of our third party service providers or our tenants,
however.
RISKS PRESENTED BY YEAR 2000 ISSUES AND OUR CONTINGENCY PLAN
We have not budgeted any amount to address Year 2000 issues. Because our
Year 2000 assessment is ongoing and additional funds may be required as a result
of future findings, we may need to accrue amounts as a result of unanticipated
delays or preparedness issues. While our efforts to address our Year 2000 issues
may involve additional costs, we believe, based on available information, that
these costs will not have a material adverse effect on our financial condition,
results of operations and ability to make cash distributions to our
stockholders. Although we have concluded that many of our tenants are
responsible for certain Year 2000 compliance costs, there is a possibility that
certain tenants will not agree with such conclusions.
At this time, we have not identified any specific business functions that
are likely to suffer material disruption as a result of Year 2000-related
events. Due to the unique and pervasive nature of the Year 2000 issues, it is
not possible to anticipate each of the wide variety of Year 2000 events,
particularly outside of our internal operations, that might arise in a worst
case scenario and have a material adverse effect on our financial condition,
results of operations and ability to make cash distributions to our
stockholders.
A reasonably likely worst case scenario might be the failure of an energy
management system in a building. Such a failure could adversely affect the
environmental conditions of the occupied space, creating discomfort and
inconvenience to the tenants until the condition could be manually corrected.
Persistence of this problem for a long period of time could result in an
increase in operating costs for the building until the energy management system
is restored to proper operations.
We utilize computer software for our corporate and real property accounting
records and to prepare our financial statements. 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.
Although we believe that our estimates and expectations concerning the scope
and cost of Year 2000 issues that we may confront are based on reasonable
assumptions, our actual cost, progress and expenses with respect to our plan to
address Year 2000 issues could differ materially from those set forth in the
foregoing forward-looking statements. Factors which could have a material
adverse effect on our results and progress include, but are not limited to,
changes in the expenses or delays in our identification and upgrade or
replacement of computer systems that do not relate to information technology but
include embedded technology, and the Year 2000 compliance of vendors, including
vendors of our computer information systems, or third party-service providers,
including our primary bank. These risks and uncertainties should be considered
in evaluating forward-looking statements, and undue reliance should not be
placed on such statements.
36
<PAGE>
BUSINESS
OVERVIEW
We acquire, market, lease and manage R&D properties, primarily located in
the Silicon Valley portion of the San Francisco Bay Area. We currently own and
manage 77 properties totaling approximately 5.1 million square feet and believe
that we have one of the largest portfolios of R&D properties in the Silicon
Valley. This class of properties is designed for research and development and
office uses and, in some cases, includes space for light manufacturing
operations with loading docks. The four tenants who lease the most square
footage from us are Microsoft Corporation, Amdahl Corporation (a subsidiary of
Fujitsu Limited), Apple Computer, Inc. and Cisco Systems, Inc.
In July 1998, we acquired approximately 3.8 million rentable square feet of
Silicon Valley R&D properties previously controlled by the Berg Group. In
addition, we acquired ten properties with approximately 560,000 rentable square
feet from entities controlled by third parties in which Berg Group members were
significant owners.
Through various property acquisition agreements with the Berg Group, we have
the right to purchase, on pre-negotiated terms, R&D and other types of office
and light industrial properties that the Berg Group develops in the future. With
in-house development, architectural and construction personnel, the Berg Group
continues to focus on a full range of land acquisition, development and
construction activities for R&D properties, often build-to-suit, to meet the
demands of Silicon Valley information technology companies. As the developer,
the Berg Group takes on the risks of purchasing the land, obtaining regulatory
approvals and permits, financing construction and leasing the properties. Since
September 1998, we have acquired approximately 733,000 additional rentable
square feet of R&D properties from the Berg Group under these agreements.
OUR RELATIONSHIP WITH THE BERG GROUP
Through a series of transactions occurring between May 1997 and December
1998, we have become the vehicle for substantially all of the Silicon Valley R&D
property activities of the Berg Group. We are now the general partner pursuant
to the partnership agreements of the operating partnerships and, along with
members of the Berg Group and other individuals, are party to an exchange rights
agreement, a pending projects acquisition agreement and the Berg land holdings
option agreement. Each agreement defines the material rights and obligations
among us, the Berg Group members, and other parties to those agreements. Among
other things, these agreements give us rights to:
- control the operating partnerships;
- acquire, on pre-negotiated terms, existing, identified R&D properties
under development by the Berg Group;
- acquire, on pre-negotiated terms, all future R&D properties developed by
the Berg Group on land currently owned or acquired in the future; and
- acquire R&D, office and industrial properties identified by the Berg Group
in California, Oregon and Washington.
Under these agreements, our charter or our bylaws, the Berg Group has the
right to:
- designate two of five nominees for director to be elected by our
stockholders, subject to its maintenance of certain ownership interests;
- participate in our securities offerings;
- exchange its O.P. Units for our common stock;
- vote on major transactions, subject to its maintenance of certain
ownership interests; and
37
<PAGE>
- prevent us from selling properties when the sale will have adverse tax
consequences to it.
Carl E. Berg has been engaged in the development and long-term ownership of
Silicon Valley real estate for approximately 30 years. In 1969, Mr. Berg foresaw
the rising demand for efficient, multi-purpose facilities for the rapidly
growing information technology industry in the Silicon Valley and began
developing R&D properties to meet this demand. Since 1972, in addition to his
real estate activities, Mr. Berg also has been actively involved in venture
capital investments in many information technology companies in the Silicon
Valley, including such companies as Amdahl Corporation, Sun Microsystems, Inc.,
and Integrated Device Technologies, Inc. He serves on the board of directors of
numerous information technology companies. These activities have helped Mr. Berg
develop a detailed understanding of the real estate requirements of information
technology companies, acquire valuable market information and increase his name
recognition within the venture capital and entrepreneurial communities. We
believe that Mr. Berg's substantial knowledge of and contacts and name
recognition in the information technology industry provide a significant benefit
to us.
BUSINESS STRATEGY
Our acquisition and growth strategy incorporates the following elements:
- working with the Berg Group to take advantage of their abilities and
resources to pursue development opportunities which we have an option to
acquire upon completion and leasing;
- capitalizing on opportunistic acquisitions from third parties of
high-quality R&D properties that provide attractive initial yields and
significant potential for growth in cash flow;
- continued focus on general purpose, single-tenant Silicon Valley R&D
properties for information technology companies to capitalize on our
extensive contacts in these companies and our extensive knowledge of their
real estate needs; and
- maintaining operating principles for prudent financial management that
emphasize current cash flow as well as long-term value in the company's
acquisition and financing policies, the pre-leasing of buildings prior to
acquisition or development to reduce the risks of owning them and the
maintenance of sufficient liquidity to acquire and finance properties on
desirable terms.
ACQUIRING PROPERTIES DEVELOPED BY THE BERG GROUP
We anticipate that most of our growth in the foreseeable future will come
from the acquisition of new R&D properties that are either currently under
development or developed in the future by the Berg Group. These acquisitions
will be completed on pre-negotiated terms under the pending projects acquisition
agreement and the Berg land holdings option agreement. During the remainder of
1999 and through the second quarter of 2000, we expect to acquire a total of
approximately 783,000 additional rentable square feet currently under
development. In addition to projects currently under development, the Berg land
holdings option agreement gives us the right to acquire future developments by
the Berg Group on up to 116 additional acres of land currently controlled by the
Berg Group, which could support approximately 1.9 million square feet of new
development. Under that agreement, we also have an option to purchase all land
acquired, directly or indirectly, by Carl E. Berg or Clyde J. Berg that has not
been improved with completed buildings and which is zoned for, intended for or
appropriate for research and development, office and/or industrial development
or use in the states of California, Oregon and Washington. In addition, Carl E.
Berg has agreed not to directly or indirectly acquire or develop any real
property zoned for office, industrial or R&D use in the states of California,
Oregon and Washington without first disclosing and making the acquisition
opportunity available to us. Our Independent Directors Committee will decide
whether we will assume the opportunity presented to us by Mr. Berg. This
restriction will expire when there is no Berg Group nominee on our board of
directors and the Berg Group's fully diluted ownership percentage, which is
calculated based on all outstanding shares of common stock and all shares
38
<PAGE>
of common stock that could be acquired upon the exercise of all outstanding
options to acquire our voting stock, as well as all shares of common stock
issuable upon exchange of all O.P. Units, falls below 25%.
PENDING PROJECTS ACQUISITION AGREEMENT. In December 1998, we entered into
the pending projects acquisition agreement with members of the Berg Group, under
which we will acquire approximately 1.0 million additional rentable square feet
upon the completion and leasing of a number of pending development projects
owned by them. To date, we have acquired approximately 623,000 rentable square
feet of such projects. Based upon the agreement, when we acquire properties from
the Berg Group, the Berg Group members may obtain cash or, at their option, O.P.
Units for their equity interests in the properties. The agreement provides for
the issuance of a maximum of 33,919,072 O.P. Units in exchange for the pending
development projects, of which 14,305,825 O.P. Units have been issued for new
property to date, including the Microsoft project.
We will acquire the pending projects upon the following terms:
- The acquisition price is payable in cash or, at the option of the Berg
Group, in O.P. Units valued at $4.50 per O.P. Unit, which was the price
per share of our common stock in May 1998, when we agreed to the terms of
the pending projects acquisition agreement.
- The Berg Group will build and deliver each completed and fully-leased R&D
property in the pending development projects to the operating partnerships
at an acquisition price equal to the average monthly rental rate per
square foot over the term of the lease divided by an agreed upon
capitalization rate, which ranges from 14.0% to 16.0%, minus the amount of
debt encumbering the property.
- 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.
- Leases will be on commercially reasonable terms and conditions.
- 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.
For a discussion of risks associated with the pending projects acquisition
agreement and related transactions, see "Risk Factors--Our contractual business
relationships with the Berg Group present additional conflicts of interests
which may result in the realization of economic benefits or the deferral of tax
liabilities by the Berg Group without equivalent benefits to our stockholders."
The following table presents certain information concerning projects subject
to the pending projects acquisition agreement as of April 30, 1999. Management
believes the current market capitalization rate for good quality Silicon Valley
R&D properties is approximately 8.5% to 9.5%.
<TABLE>
<CAPTION>
PROJECTED PROJECTED ESTIMATED
APPROXIMATE ANTICIPATED NET MONTHLY RENTAL TOTAL AGREED
RENTABLE AREA ACQUISITION ANNUAL BASE RATE PER SQUARE ACQUISITION CAPITALIZATION
PROPERTY (SQUARE FEET) PERIOD RENT FOOT PRICE RATE
- -------------------------------- ------------- ----------- ------------ ----------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard Avenue.................. 58,740 Q3 1999 $ 599,148 $ 0.85 $ 3,744,675 16.0%
Automation Park................. 80,640 Q3 1999 1,354,752 1.40 9,676,800 14.0
Automation Park................. 80,640 Q3 1999 1,257,984 1.30 8,985,600 14.0
Automation Park................. 61,056 Q3 1999 952,474 1.30 6,803,386 14.0
Automation Park................. 114,028 Q2 2000 1,778,836 1.30 12,705,971 14.0
------------- ------------ -------------
TOTAL........................... 395,104 $5,943,194 $ 41,916,432
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
The time required to complete the leasing of developments varies from
project to project. Generally, we will not acquire any of the above projects
until they are fully completed and leased. We cannot assure
39
<PAGE>
you that the acquisition date and final cost to us as indicated above will be
realized. Although the capitalization rates have been agreed upon and will not
change, the sellers of the pending development projects may elect to receive
cash or O.P. Units at the value of $4.50 per unit, which was set in May 1998
based on the selling price for our shares in private placement transactions with
unrelated purchasers. This valuation represents a substantial discount from the
current price of our common stock and may be substantially lower than the value
of our common stock at the future issuance dates of the O.P. Units. Under
generally accepted accounting principles, the acquisition cost in the form of
O.P. Units issued will be calculated based upon the current market value of our
common stock on the date the acquisition closes. Consequently, our actual cost
of these future acquisitions as well as the actual capitalization rate for
accounting rather than cash purposes will depend in large part on the percentage
of the fixed acquisition value paid for by the issuance of O.P. Units and the
price of the common stock on the closing of the acquisition.
BERG LAND HOLDINGS OPTION AGREEMENT. We believe that control of high
quality, developable land is an important strategic factor for continued success
in the Silicon Valley market. In December 1998, we entered into the Berg land
holdings option agreement under which we have the option to acquire any future
R&D, office and industrial property developed by the Berg Group on land
currently owned or optioned, or acquired for these purposes in the future,
directly or indirectly, by Carl E. Berg or Clyde J. Berg. To date, we have
acquired one leased R&D property totaling approximately 110,000 rentable square
feet under this agreement at a cost of approximately $9.5 million, for which we
issued 266,898 O.P. Units and assumed debt of approximately $7.2 million. The
principal terms of the agreement include the following:
- So long as the Berg Group members and their affiliates own or have the
right to acquire shares representing at least 65% of our 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 acquisition price will equal the sum of:
(1) the full construction cost of the building; plus
(2) 10% of the full construction cost of the building; plus
(3) interest at LIBOR plus 1.65%, which rate is consistent with the
borrowing cost under our existing line of credit, on the amount of
the full construction cost of the building for the period from the
date funds were disbursed by the developer to the close of escrow;
plus
(4) the original acquisition cost of the parcel on which the improvements
will be constructed, which range from $8.50 to $20.00 per square foot
for land currently owned or under option; plus
(5) 10% per annum of the amount of the original acquisition cost of the
parcel from the later of January 1, 1998 and the seller's acquisition
date, to the close of escrow; minus
(6) the aggregate principal amount of all debt encumbering the acquired
property.
- The acquisition cost, net of any debt, will be payable in O.P. Units
valued at the average closing price of our common stock over the
30-trading-day period preceding the acquisition or in cash, at the option
of the Berg Group.
- We must assume all tax assessments.
- If we elect not to exercise the option with respect to any property, the
Berg Group may hold and lease the property for its own account, or may
sell it to a third party.
- 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 of our board of directors.
The following table presents certain information concerning currently
identified land or projects that we have the right to acquire under the Berg
land holdings option agreement. The property at Fremont &
40
<PAGE>
Cushing is subject to an option held by members of the Berg Group, which they
are not obligated to exercise. The Berg Group's option expires in January 2000.
Acquisition of the land is subject to receipt of building permits and the
resolution of issues concerning the set aside of wetlands. The Berg Group
intends to propose offsite mitigation to the Army Corps of Engineers. If this
mitigation cannot be obtained, the buildable site would be reduced to
approximately 22 acres and 335,000 rentable square feet. If the Berg Group fails
to exercise its option, we will be unable to acquire that property.
<TABLE>
<CAPTION>
PROJECTED ESTIMATED TOTAL
PROJECTED ACQUISITION ACQUISITION
PROPERTY NET ACRES RENTABLE AREA PERIOD PRICE
- -------------------------------------------------- ------------- ------------- ----------------- ----------------
<S> <C> <C> <C> <C>
UNDER CONSTRUCTION:
Fontanosa......................................... 5 77,000 Q3 1999 $ 7,226,000
Hellyer/Branham................................... 24 311,000 Q1 2000 25,000,000
--- ------------- ----------------
Subtotal.......................................... 29 388,000 32,226,000
--- ------------- ----------------
AVAILABLE LAND:
King Ranch........................................ 85 1,370,000
Hellyer & Piercey................................. 7 113,000
Fremont & Cushing................................. 24 387,000
--- -------------
Subtotal.......................................... 116 1,870,000
--- -------------
Total............................................. 145 2,258,000
--- -------------
--- -------------
</TABLE>
The time required to complete the leasing of developments varies from
property to property. Generally, we will not acquire any of the above projects
until they are fully completed and leased. We cannot assure you that the
acquisition date and our final cost as indicated above will be realized. No
estimate can be given at this time as to our total cost to acquire projects
under the Berg land holdings agreement, nor the timing as to when we will
acquire any of the projects.
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, we cannot assure you that we will consummate any of the
intended transactions, including any 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 or available cash for distribution. See "Risk
Factors--Our contractual business relationships with the Berg Group present
additional conflicts of interests which may result in the realization of
economic benefits or the deferral of tax liabilities by the Berg Group without
equivalent benefits to our stockholders."
OPPORTUNISTIC ACQUISITIONS
In addition to our principal opportunities under the pending projects
acquisition agreement and the Berg land holdings option agreement, we believe
our acquisitions experience, established network of real estate and information
technology professionals and overall financial condition will continue to
provide opportunities for external growth. In general, we will seek
opportunistic acquisitions of high quality, well located Silicon Valley R&D
properties in situations where illiquidity or inadequate management permit their
acquisition at favorable prices, and where our management skills and knowledge
of Silicon Valley submarkets may facilitate increases in cash flow and asset
value. Furthermore, our use of the operating partnership structure gives
prospective sellers the opportunity to contribute properties on a tax-deferred
basis in exchange for O.P. Units. This capacity to complete tax-deferred
transactions with sellers of real property will further enhance our ability to
acquire additional properties.
41
<PAGE>
FOCUS ON SINGLE TENANT SILICON VALLEY R&D PROPERTIES
We intend to continue to emphasize the acquisition of single-tenant rather
than multi-tenant properties, a practice that has contributed to the relatively
low turnover and high occupancy rates on our properties. We believe that the
relatively small number of tenants (88) occupying our 77 properties, mostly
under the triple-net lease structure, allows us to efficiently manage the
properties and to serve our tenants' needs without extensive in-house staff or
the assistance of a third-party property management organization. In addition,
this emphasis allows us to incur less expense for tenant improvements and
leasing commissions than multi-tenant, high turnover property owners. This
strategy also reduces the time and expense associated with obtaining building
permits and other government approvals. We believe that the relatively stable,
extended relationships which we have developed with our key tenants are valuable
in the expansion of our business.
OPERATIONS
We will operate as a self-administered, self-advised and self-managed REIT
with our own employees. 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, acquiring additional properties, borrowing funds, raising new
capital, leasing buildings and selecting and supervising all agents of the
operating partnerships.
Although most of our leases are triple net and building maintenance and
tenant improvements are the responsibility of the tenants, from time to time we
may be required to undertake construction and repair work at our properties. We
will bid all major work competitively to subcontractors. Members of the Berg
Group may participate in the competitive bidding for the work.
We generally will market the properties and negotiate leases with tenants
ourselves. We make the availability of our properties known to the brokerage
community to garner their assistance in locating prospective tenants. As a
result, we expect to retain our policy of paying fixed commissions to tenants'
brokers.
We believe that our business practices, including the following, provide us
with competitive advantages:
- EXTERNAL DEVELOPMENT AFFILIATE. The Berg Group operates as our development
entity. We have the the obligation to acquire projects developed by the
Berg Group under the pending projects acquisition agreement. We also have
an option to purchase all future R&D, office and industrial property
development of the Berg Group on land currently held or acquired directly
or indirectly by Carl E. Berg or Clyde J. Berg that is zoned for those
purposes and located in California, Oregon and Washington following
completion and lease-up of the property. Our option will terminate when
the Berg Group's ownership percentage falls below 65% of our common stock
calculated on a fully-diluted basis. Carl E. Berg has agreed to refer to
us, and not acquire through the Berg Group, all opportunities to acquire
the same kinds of real property in these states that he identifies in the
future, until the Berg Group's fully-diluted ownership percentage falls
below 25% and there is no Berg Group nominee on our board of directors.
The acquisition terms and conditions for the existing and identified
projects have been pre-negotiated and are documented under the pending
projects acquisition agreement, and the Berg land holdings option
agreement, as amended by the supplemental agreement. This relationship
provides us with the economic benefits of development while eliminating
development and initial lease-up risks. It also provides us with access to
one of the most experienced development teams in the Silicon Valley
without the expense of maintaining property development personnel.
42
<PAGE>
- LEAN, EXPERIENCED ORGANIZATION. In part because of our primary focus on
the Silicon Valley, our experience with the special real estate
requirements of information technology tenants and the long-term,
triple-net structure of our leases, we are able to conduct and expand our
business with a small management team comprised of highly qualified and
experienced professionals working within a relatively flat organizational
structure. We believe that the leanness, experience and continuity of our
management team will enable us to rapidly assess and respond to market
opportunities and tenant needs, 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 give us the ability, along with the Berg Group, to compete favorably
with other R&D property developers in the 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.
- SOUND PROPERTY MANAGEMENT PRACTICES. For each property, our management
team, along with the Berg Group staff, develop a specific marketing and
property management program. We select vendors and subcontractors on a
competitive bid basis from a select group of highly qualified firms with
whom we maintain ongoing relationships and carefully supervise their work.
We intend to maintain a ratio of debt to total market capitalization,
calculated as the aggregate market value of our shares of common stock, plus the
value of the O.P. Units on an as-converted basis, plus the amount of total debt,
of no more than 50%. Our ratio of debt to total market capitalization was
approximately 29.0% at March 31, 1999 and would have been 22.3%, on a pro forma
as adjusted basis, which is reflected under "Capitalization." We may from time
to time reevaluate our debt policy in light of then current economic conditions,
relative costs of debt and equity capital, the market values of our properties,
growth and acquisition opportunities and other factors. Subject to the need for
more than 75% of the directors to approve debt increases above 50% of total
market capitalization, we may modify our debt policy and increase or decrease
our ratio of debt to total market capitalization.
LEGAL PROCEEDINGS
Neither we, the operating partnerships nor the properties are subject to any
material litigation nor, to our knowledge, is any material litigation threatened
against us, 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.
EMPLOYEES
As of May 16, 1999, we employed 6 people, all of whom work at our executive
offices at 10050 Bandley Drive, Cupertino, California 95014.
FACILITIES
We sublease office space from the Berg Group at 10050 Bandley Drive and
share clerical staff and other overhead on what we consider to be very favorable
terms. The total monthly rent payable by us to the Berg Group is $6,720.
43
<PAGE>
PROPERTIES
GEOGRAPHIC AND TENANT FOCUS
We focus on the facility requirements of information technology companies in
the Silicon Valley, which include space for office, research and development,
light manufacturing and assembly. With the Silicon Valley's highly educated and
skilled work force, 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 our focus
and thorough understanding of the Silicon Valley real estate market enable us
to:
- anticipate trends in the market;
- identify and concentrate our efforts on the most favorably located
sub-markets;
- take advantage of our experience and extensive contacts and relationships
with local government agencies, real estate brokers and subcontractors, as
well as with tenants and prospective tenants; and
- identify strong tenants.
All of our properties are general purpose R&D properties, located in
desirable sub-markets of the Silicon Valley. Many of our properties have been
developed for, or leased to, single tenants, many of which are large, publicly
traded information technology companies. Most of our major tenants have occupied
our properties for many years under triple-net leases that require the tenant to
pay substantially all operating costs, including property insurance, real estate
taxes and general operating costs.
LEASING
The current leases for the properties typically have terms ranging from
three to ten years. Most of the leases provide for fixed periodic rental
increases. Substantially all of the leases are triple-net leases pursuant to
which the tenant is required to pay substantially all of the operating expenses
of the property, including all maintenance and repairs, excluding only certain
structural repairs to the building shell, property taxes and insurance. Most of
the leases contain renewal options which allow the tenant to extend the lease
based on adjustments to then prevailing market rates, or based on fixed rental
adjustments, which may be below market rates.
PROPERTY PORTFOLIO
All of our properties are R&D properties. Generally, our properties are one-
to four-story buildings of tilt-up concrete construction, have 3.5 or more
parking spaces per thousand rentable square feet, clear ceiling heights of less
than 18 feet, and range in size from 18,000 to 211,000 rentable square feet.
Most of the office space is open and suitable for configuration to meet the
tenants' requirements with the use of movable dividers.
The following table sets forth certain information relating to our
properties as of March 31, 1999, based upon the following adjustments or
assumptions:
- as adjusted to include the L'Avenida lease to Microsoft for five
properties acquired effective as of April 1, 1999, four with rental
revenues commencing on April 1, 1999, and one with rental revenues
commencing on June 1, 1999;
- the first month's rent for each of the five Microsoft properties has been
multiplied by 12 to calculate 1999 annualized rent, and economic occupancy
of these properties assumes the commencement of the leases on March 31,
1999;
- annualized rent for all other properties equals March rent multiplied by
12;
44
<PAGE>
- no rent is included for vacant space as of March 31, 1999, which totaled
42,700 square feet; and
- expiring leases are assumed to have been re-rented at a monthly rental
rate equal to the amount of March rent.
<TABLE>
<CAPTION>
ECONOMIC
TOTAL OCCUPANCY MAJOR
NUMBER RENTABLE AS OF 1999 TENANTS'
OF SQUARE MARCH 31, ANNUALIZED RENTABLE
LOCATION PROPERTIES FEET 1999 RENT MAJOR TENANT(S) SQ. FT.
- -------------------------- --------------- --------- --------------- ---------- -------------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
L'Avenida................. 5 515,700 100% $18,255,780 Microsoft Corporation 515,700
McCandless Technology 14 706,367 94 8,385,217 Larscom, Inc. 118,708
Park....................
Arrow Electronics, Inc. 104,606
Mektec Corporation 51,602
Sherpa Corporation 50,768
Chartered Semiconductor
Manufacturing, Inc. 45,312
Panasonic Industrial
Company 40,970
Triangle Technology 7 416,527 100 4,679,876 Intevac Corporation 167,063
Park....................
SDL, Inc. 102,150
Maxell Corporation 63,812
10500 De Anza............. 1 211,000 100 4,338,840 Apple Computer, Inc. 211,000
6311-6351 San Ignacio..... 5 360,254 100 3,708,641 On Command Corporation 131,320
Sequel, Inc. 66,042
Avnet, Inc. 53,494
Photon Dynamics, Inc. 50,400
Teledex Corporation 30,000
2033-2243 Samaritan....... 3 235,122 100 2,907,732 Condor Systems, Inc. 110,490
Texas Instruments
Incorporated 48,677
2610 N. First St. &....... 2 170,810 100 2,054,832 Comerica Bank--California 93,984
75 E. Trimble County of Santa Clara 63,310
4949 Hellyer Avenue....... 1 200,484 100 2,033,580 Cisco Systems Inc. 200,484
20605-705 Valley Green.... 2 142,000 100 1,975,382 Apple Computer, Inc. 142,000
6320-6360 San Ignacio..... 1 157,292 100 1,559,271 Bell Sports, Inc. 63,638
Delrina/Symantec
Corporation 45,000
5850-5870 Hellyer......... 1 109,715 100 1,303,416 Clear Logic, Inc. 64,805
Gadzoox Networks, Inc. 44,910
2001 Logic................ 1 72,426 100 1,294,977 Motorola, Inc. 72,426
1212 Bordeaux............. 1 71,800 100 1,273,344 TRW Incorporated 71,800
2251 Lawson............... 1 125,000 100 1,182,650 Amdahl Corporation 125,000
3120 Scott................ 1 75,000 100 1,157,085 Amdahl Corporation 75,000
3301 Olcott............... 1 64,500 100 1,108,534 NEC Electronics, Inc. 64,500
3501 W. Warren Avenue-.... 1 67,864 100 1,087,989 Alcatel Comptech, Inc. 51,864
46600 Fremont Blvd.
20400 Mariani............. 1 105,000 100 1,008,000 Behring Diagnostics Inc. 105,000
6810 Santa Teresa......... 1 54,996 100 910,740 Quantum3D, Inc. 54,996
4750 Patrick Henry........ 1 65,780 100 907,764 Cisco Systems Inc. 65,780
140-150 Great Oaks-....... 2 104,349 100 839,496 Atcor Corporation 52,000
6781 Via Del Oro GSS/Array Technology 30,549
1250 Arques............... 4 200,000 100 755,923 Amdahl Corporation 200,000
4050 Starboard Drive...... 1 52,232 100 752,141 Flash Electronics, Inc. 52,232
1600 Memorex Drive........ 1 107,500 100 718,489 Sasco 107,500
3236 Scott................ 1 54,672 100 698,712 Celeleritek, Inc. 54,672
1650 Richard Ave.......... 1 52,800 100 670,008 Forward Technology
Industries, Inc. 52,800
45700 Northport Loop 1 47,570 100 669,960 Philips Electronics N.V. 47,570
East....................
2800 Bayview.............. 1 59,736 100 623,605 Concept System Design,
Inc. 59,736
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
ECONOMIC
TOTAL OCCUPANCY MAJOR
NUMBER RENTABLE AS OF 1999 TENANTS'
OF SQUARE MARCH 31, ANNUALIZED RENTABLE
LOCATION PROPERTIES FEET 1999 RENT MAJOR TENANT(S) SQ. FT.
- -------------------------- --------------- --------- --------------- ---------- -------------------------- -----------
<S> <C> <C> <C> <C> <C> <C>
6540-6541 Via Del Oro..... 2 66,600 100% $ 608,072 Exsil Incorporated 20,076
6385-6387 San Ignacio Alcatel Network Systems,
Inc. 17,400
Modutek Corporation 17,400
48800 Milmont Drive....... 1 53,000 100 588,012 Premisys Communications
Inc. 53,000
10460 Bubb................ 1 48,302 100 579,624 General Surgical
Innovations, Inc. 48,302
45738 Northport Loop 1 44,256 100 535,241 EIC Corporation 44,256
West....................
10300 Bubb................ 1 23,400 100 393,120 Apple Computer, Inc. 23,400
1170 Morse................ 1 34,750 100 381,864 CA Parkinsons Foundation 34,750
10401 Bubb................ 1 20,330 100 378,138 Celerity Systems, Inc. 20,330
450 National.............. 1 36,100 100 345,756 Savi Technology, Inc. 36,100
1190 Morse/405 Tasman..... 1 28,350 100 324,888 Coptec West 28,350
1230 Arques............... 1 60,000 100 305,669 Amdahl Corporation 60,000
10440 Bubb Road........... 1 19,500 100 252,720 Linotext Digital Imaging 19,500
1135 Kern Avenue.......... 1 18,300 100 244,622 Davicom Semiconductor,
Inc. 18,300
6850 Santa Teresa......... 1 30,000 100 213,528 Magnex Corporation 30,000
-- --------- ----------
Total..................... 77 5,089,384 $72,013,238
</TABLE>
We own 100% of all of the properties, except for one of the buildings in the
Triangle Technology Park, which is owned by a joint venture in which we, through
an operating partnership, own a 75% interest, and the property at 10401 Bubb,
which is owned by a joint venture in which we, through an operating partnership,
own an 83.33% interest.
SILICON VALLEY R&D PROPERTY MARKET
Santa Clara County, which comprises much of the Silicon Valley, including
the San Jose metropolitan area, has grown in population from approximately
659,000 in 1960 to approximately 1.6 million in 1998, according to census data.
Much of Santa Clara County's economic growth has been driven by the development
and expansion of companies engaged in the information technology business. In
recent years, space requirements and higher rents for R&D properties in Santa
Clara County have led these and other technology-oriented companies to seek
facilities at office parks located in southwestern Alameda County, southeastern
San Mateo County and eastern Santa Cruz County. As a result, we believe that the
term "Silicon Valley" refers to the more or less contiguous areas of R&D
development in all four counties where a substantial number of high technology
companies can be found.
We believe that, in 1998, the overall condition of the Silicon Valley R&D
market remained fundamentally strong. Despite recent weakness in some segments
of the information technology business, the Silicon Valley remains one of the
premier markets in the United States for rental rate growth. We believe that
this trend is due, in part, to the region's geography. The Silicon Valley is
bordered on two sides by mountains and on a third side by the San Francisco Bay.
These natural barriers limit expansion of the marketplace by restricting the
amount of new land available for additional development. Thus, we believe that
control of high quality, developable land is an important strategic factor for
continued success in the Silicon Valley R&D marketplace.
According to BT Commercial, the total R&D property space in the Silicon
Valley at the end of 1998 was approximately 131.6 million rentable square feet.
Gross absorption for the R&D market for the year was approximately 14.8 million
square feet. Showing signs of strength late in the year, gross absorption in the
fourth quarter was approximately 4.5 million square feet, the highest quarterly
gross absorption during 1998.
The total available vacant space increased from 6.4 million to 14.1 million
square feet in 1998, primarily as a result of an increase in sublease space. The
completion of 3.7 million square feet of
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speculative development and 3.5 million square feet of build-to-suits during the
year also contributed to the increased supply of available space. The increase
in construction resulted in an increase in the vacancy rate of the entire
Silicon Valley R&D market to 10.7% by the end of 1998. According to BT
Commercial, however, the amount of construction in speculative development as
well as build-to-suit development began to fall towards the end of 1998.
Even with the increase in supply and the existence of turbulent financial
markets during the year, the average asking monthly rental rate for R&D space in
the Silicon Valley remained flat throughout 1998, at approximately $1.58 per
square foot. Moreover, this market has been characterized by its substantial
number of submarkets subject to varying conditions and factors. Factors
affecting rental and vacancy rates include the R&D property's location, size,
proximity to residential areas and freeways, tenant usage, the type of tenants
occupying neighboring properties, architectual style and building configuration.
Due to differences attributable to such factors, monthly rental rates ranged
from $0.55 to $3.75 per square foot during 1998, and desirable buildings in some
Silicon Valley cities routinely have commanded higher rents than comparable
buildings in other cities in the area. Vacancy rates also vary considerably by
submarket and by location within each submarket. Consequently, we do not believe
that Silicon Valley R&D property market data or leasing trends necessarily
reflect the leasing activities, financial prospects or future operations of our
properties, which are discussed in "Management Discussion and Analysis of
Financial Condition and Results of Operations" and "Properties--Description of
the Properties."
The average asking rate for the Silicon Valley R&D market remained $1.58 per
square foot per month at the end of the first quarter of this year, according to
BT Commercial. New speculative construction continued coming on line during the
quarter, increasing the vacancy rate to 11.9% from 10.7% in the previous
quarter. According to BT Commercial, however, average asking rates and leasing
activity remained steady. Build-to-suit and speculative construction levels
appeared to be much lower than their levels in late 1998, indicating a slowdown
in new construction.
The following table sets forth square footage data, vacancy rates, and
monthly rental rates by calendar quarter for R&D properties in the Silicon
Valley and is taken from the "BT Commercial Real Estate Silicon Valley R&D
Report, Q1 1999":
<TABLE>
<CAPTION>
Q1 1998 Q2 1998 Q3 1998 Q4 1998 Q1 1999
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Total building base.................. 125,097,758 126,571,871 129,209,128 131,552,897 132,576,034
Direct availabilities................ 3,949,532 4,550,321 7,260,121 9,076,738 11,121,361
Sublease availabilities.............. 2,429,210 2,874,288 3,793,134 5,044,827 4,672,082
Total availabilities................. 6,378,742 7,424,609 11,053,255 14,121,565 15,793,443
Vacancy.............................. 5.10% 5.87% 8.55% 10.73% 11.91%
Gross absorption..................... 2,621,820 3,946,240 3,741,135 4,458,155 3,679,024
Net absorption....................... 582,556 428,246 (991,389) (724,541) (648,741)
Completed build-to-suit.............. 442,464 1,045,794 998,980 968,100 13,570
Completed speculative construction... 239,905 428,319 1,638,277 1,375,669 1,009,567
Total completed construction......... 682,369 1,474,113 2,637,257 2,343,769 1,023,137
Market rental range (triple net)..... $ 0.55-3.00 $ 0.55-3.50 $ 0.55-3.75 $ 0.55-3.75 $ 0.60-4.40
</TABLE>
Approximately 3.7 million square feet of R&D space were absorbed in the
first quarter. Available sublease space declined for the first time since the
fourth quarter of 1997, after an increase in 1998. We believe that the decrease
in supply of sublease space resulted from stronger tenant demand, and that the
limited amount of unimproved land in the Silicon Valley will continue to impact
the amount of R&D property space available.
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DESCRIPTION OF THE PROPERTIES
OCCUPANCY AND RENTAL RATES
The following table sets forth information regarding the properties as of
December 31, 1995 to 1998 and March 31, 1999. Amounts for 1999 give effect to
the acquisition and leasing of the Microsoft project, which we acquired on April
1, 1999. Total annual base rent for 1999 is calculated as actual base rent for
March 1999 multiplied by 12, except for the Microsoft project, for which total
annual base rent is calculated as the first month's rent for each property
multiplied by 12.
<TABLE>
<CAPTION>
AVERAGE MONTHLY
TOTAL RENTABLE BASE RENT TOTAL ANNUAL
SQUARE FOOTAGE OCCUPANCY PER LEASED BASE RENT
YEAR (IN MILLIONS) AT PERIOD END SQUARE FOOT (IN THOUSANDS)
- ----------- ------------------- --------------- --------------------------- ---------------------
<S> <C> <C> <C> <C>
1999....... 5.1 99% $ 1.19 $ 72,013
1998....... 4.5 100 0.95 47,182
1997....... 3.8 99 0.86 38,833
1996....... 3.4 92 0.80 28,348
1995....... 3.2 87 0.75 22,987
</TABLE>
LEASE EXPIRATIONS
The following table sets forth a schedule of the lease expirations for our
properties as of March 31, 1999 for each of the ten years beginning with 1999,
assuming that none of the tenants exercise existing renewal options or
termination rights. The base rent for leases is calculated based on March 1999
monthly rents multiplied by 12. The 1999 figures include a lease which expired
on February 28, 1999 and was vacant as of March 31, 1999; no 1999 Annual Base
Rent was assumed regarding this property for purposes of this table. The table
includes the lease entered into with Microsoft for 515,700 square feet of
rentable space which we acquired effective April 1, 1999; 1999 Annual Base Rent
for this lease is calculated based on the first month's rent for each property
multiplied by 12.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL RENTABLE SQUARE
NUMBER OF 1999 ANNUAL ANNUAL BASE RENT FOOTAGE SUBJECT PERCENTAGE OF
YEAR OF LEASE LEASES BASE RENT UNDER REPRESENTED BY TO TOTAL SQUARE
EXPIRATION EXPIRING EXPIRING LEASES EXPIRING LEASES EXPIRING LEASES FOOTAGE
- --------------------- ------------- --------------------- --------------------- ----------------- ---------------------
<S> <C> <C> <C> <C> <C>
1999................. 12 $ 3,994,488 5.6% 327,376 6.4%
2000................. 15 6,315,785 8.8 537,413 10.6
2001................. 20 5,202,022 7.2 475,391 9.3
2002................. 20 15,022,834 20.9 1,117,201 22.0
2003................. 11 5,646,550 7.8 506,618 9.9
2004................. 14 9,832,773 13.7 922,058 18.1
2005................. 3 1,973,376 2.7 157,285 3.1
2006................. 3 20,181,552 28.0 664,680 13.1
2007................. 4 2,661,208 3.7 256,362 5.0
2008................. 1 1,182,650 1.6 125,000 2.5
--- --------------------- --- ----------------- ---
Total................ 103 $ 72,013,238 100% 5,089,384 100%
--- --------------------- --- ----------------- ---
--- --------------------- --- ----------------- ---
</TABLE>
SIGNIFICANT TENANTS
As of April 1, 1999, the properties were occupied by a total of 88 tenants.
The following table sets forth information concerning tenants which represent,
on an individual basis, 1.5% or more of total annual base rent from all leases
as of March 31, 1999, and gives effect to the lease to Microsoft, which took
effect on April 1, 1999. Annual base rent for the Microsoft lease is calculated
based on the first month's rent multiplied by 12. For all other properties,
annual base rent is based on March 1999 rents multiplied by 12.
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Most of the properties are occupied by single tenants, and we derive
approximately 75% of rental revenue as of March 31, 1999, giving effect to the
lease entered into on April 1, 1999 with Microsoft, from publicly held or
investment grade companies. The space previously occupied by Motorola, Inc.
became vacant on April 1, 1999.
<TABLE>
<CAPTION>
PERCENT OF PERCENT OF WEIGHTED
TOTAL ANNUAL AGGREGATE AVERAGE
ANNUAL BASE BASE RENT FROM SQUARE SQUARE REMAINING
TENANT RENT ALL LEASES FOOTAGE FOOTAGE LEASE TERM
- ------------------------------------------ ------------- ----------------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Microsoft Corporation..................... $ 18,255,780 25.4% 515,700 10.1% 112 months
Apple Computer, Inc....................... 6,707,342 9.3 376,400 7.4 41 months
Amdahl Corporation
(Fujitsu Limited)....................... 3,401,327 4.7 460,000 9.0 76 months
Cisco Systems, Inc........................ 2,941,344 4.1 266,264 5.2 35 months
Intevac Corporation....................... 1,910,398 2.7 166,663 3.3 36 months
Larscom, Inc.............................. 1,703,695 2.4 118,708 2.3 65 months
Arrow Electronics......................... 1,407,480 2.0 104,606 2.1 95 months
On Command Video.......................... 1,370,378 1.9 131,320 2.6 63 months
Motorola, Inc............................. 1,294,977 1.8 72,426 1.4 1 month
TRW Inc................................... 1,273,344 1.8 71,800 1.4 12 months
SDL, Inc.................................. 1,120,447 1.6 102,150 2.0 36 months
NEC Electronics, Inc...................... 1,108,534 1.5 64,500 1.3 35 months
------------- --- ---------- ---
Total..................................... $ 42,495,046 59.2% 2,450,537 48.1%
------------- --- ---------- ---
------------- --- ---------- ---
</TABLE>
Set forth below is additional information concerning our most significant
leases.
MICROSOFT PROPERTIES
The Microsoft properties comprise a 515,700 square-foot office complex of
five buildings located in the Microsoft Silicon Valley Campus in Mountain View,
California. Microsoft, who is the sole tenant, commenced paying us rent on four
of the five buildings on April 1, 1999 and commenced paying rent on the fifth
building on June 1, 1999. All five of these properties are currently under
construction. Microsoft controls the construction of this facility, which is
scheduled to be completed in phases during the fall and winter of 1999. The
Microsoft properties represent approximately 10.1% of the total rentable square
footage of our properties. Microsoft has stated that it intends to locate some
of its business groups, such as the Graphics Product Unit, Hotmail, the Web
Essentials Development Group and WebTV Networks, at this facility.
The annualized rent per square foot for the Microsoft properties will be
$35.40 for 1999, or $2.95 per month. The total income tax basis for the
Microsoft properties is projected to be $54.2 million. Depreciation will be
recorded for tax purposes using the straight-line method over the useful lives
of the respective assets from the dates the assets were placed in service, which
range from 5 to 45 years.
DESCRIPTION OF TENANT. Microsoft is one of the preeminent companies in the
world, with approximately 30,000 employees and annual revenue of approximately
$14.5 billion for fiscal year 1998.
LEASE TERMS. Microsoft has signed a seven-year lease calling for a first
year's rent of $2.95 per square foot per month and annual increases of 4%. The
lease is triple net, and we receive a management fee equal to 1% of the annual
base rent. Microsoft has three five-year options to extend the term of the
lease, subject to an adjustment of the rent to 95% of the market rate of
standard concrete "tilt-up" buildings, as more particularly defined in the
lease, but in no case shall the monthly base rental rate be less than $3.40 per
square foot for the first extended term. The option to extend can be exercised
with respect to less than all five buildings, provided that Microsoft exercises
its option on a minimum of two entire buildings and only
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for entire buildings. Once Microsoft has waived its option for a building or
buildings, the options on those buildings are terminated. Microsoft has the
right of first offer to buy the properties if we choose to sell. There are no
termination, relocation or buy-out rights in favor of Microsoft under the lease.
APPLE PROPERTIES
The Apple properties consist of four buildings located at three locations in
Cupertino, California totaling approximately 376,400 square feet, which have
been occupied by Apple Computer, Inc., or Apple, for more than seven years. Each
of these buildings is located a short distance from Apple's Cupertino
headquarters building, which was completed in 1993 at an estimated cost of $200
million. The Apple properties represent approximately 7.4% of the total rentable
square footage in the operating partnerships. The largest building is a
four-story, 211,000 square-foot building located across the street from Apple's
850,000 square-foot corporate headquarters. Apple spent approximately $14.0
million in 1992 to renovate and upgrade this building, which is currently used
for software development activities. Apple also leases a two-building "campus"
complex, totaling 142,000 square feet, located one-half block from Apple's
headquarters building. Apple spent approximately $10.0 million to renovate and
upgrade this facility in 1991 and currently uses this building for engineering
activities. Apple also leases a 23,400 square-foot building in Cupertino,
California approximately two miles from Apple's corporate headquarters. This
facility is currently used for prototype manufacturing. None of the Apple
properties is sublet or unoccupied.
The total income tax basis in the Apple properties was approximately $3.6
million as of December 31, 1998. Depreciation has been recorded for tax purposes
using the straight-line method over the useful lives of the respective assets
from the dates they were placed in service, which have ranged from 5 to 45
years. The annual property taxes, including assessments, for the Apple
properties aggregate approximately $441,000 for the fiscal year ending June 30,
1999.
DESCRIPTION OF TENANT. Apple is a Fortune 500 company and one of the
largest computer firms in the world. As of March 31, 1999, Apple employed
approximately 8,700 people, and its total annual revenues for 1998 were
approximately $5.9 billion.
LEASE TERMS. The lease for the four-story building expires on May 31, 2002.
The lease currently provides for annualized rental payments of approximately
$4.3 million, or $1.71 per square foot per month. Apple has the option to extend
the term of this lease for one five-year period, subject to fixed rent
adjustments. The lease for the two-building campus expires on December 31, 2002.
This lease currently provides for rental payments of approximately $2.0 million
per year, or $1.16 per square foot per month. Apple has the option to extend the
term of this lease for five years, subject to an adjustment of the rent to
market rates. The lease for the 23,400 square-foot building expires on November
30, 2002. This lease currently provides for rental payments of approximately
$393,000 per year, or $1.40 per square foot per month. There are no termination,
relocation or buy-out rights in favor of Apple under any of these leases.
AMDAHL PROPERTIES
The Amdahl properties comprise an approximately 260,000 square-foot office
complex of five buildings located in the Oakmead Business Park in Sunnyvale,
California and two buildings of approximately 125,000 square feet and 75,000
square feet located in Santa Clara, California about two miles from the
Sunnyvale complex. These properties are occupied by Amdahl Corporation, or
Amdahl. The Amdahl properties represent approximately 9.0% of the total rentable
square footage in the operating partnerships. Amdahl utilizes the Sunnyvale
facility for its corporate headquarters and the Santa Clara facility for
research and development activities. These buildings were built between 1972 and
1983 under build-to-suit arrangements with Amdahl. Amdahl has sublet
approximately 55,000 square feet of one of the Santa Clara buildings.
The total income tax basis in the Amdahl properties was approximately $6.7
million as of December 31, 1998. Depreciation has been recorded for tax purposes
using the straight-line method over the
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useful lives of the respective assets from the dates the assets were placed in
service, which range from 5 to 45 years. The annual property taxes, including
assessments, for the Amdahl properties aggregated approximately $489,000 for the
fiscal year ending June 30, 1999.
DESCRIPTION OF TENANT. Amdahl is a major international computer company,
and a wholly owned subsidiary of Fujitsu Limited. For its 1998 fiscal year,
Amdahl employed over 11,000 people and its total revenues for the year were
approximately $2.2 billion.
LEASE TERMS. The leases for the five-building office complex, expire in
February and June of 2004. These leases currently provide for aggregate annual
rent of approximately $1.1 million, or $0.34 per square foot per month. The
lease for the 125,000 square-foot building in Santa Clara expires on November
30, 2008. Currently, annual rental for this building totals approximately $1.2
million during 1999, or $0.79 per square foot per month, and increases by 7%
every five years. The lease for the remaining 75,000 square-foot building
expires on April 14, 2004. Currently, annual rental for this facility is
approximately $1.2 million, or $1.29 per square foot per month before
adjustments. The leases contain 14 five-year options remaining with rental rates
increasing at pre-negotiated increments for each option period. We believe that
the rental rates for all of the Amdahl properties are significantly below
present market rates, and the pre-negotiated rate adjustments will not
necessarily bear any relationship to present or future market rates. There are
no termination, relocation or buy-out rights in favor of Amdahl under any of the
leases.
CISCO PROPERTIES
The Cisco properties consist of two buildings presently occupied by Cisco
Systems, Inc., or Cisco. One building, an approximately 200,000 square-foot,
build-to-suit building located in south San Jose California, was completed in
January 1996. The other building, which is located in Santa Clara California,
totals approximately 66,000 square feet and was acquired in 1996 and leased to
Cisco effective February 1, 1997. The larger facility is used by Cisco as a
major manufacturing and research and development site. The Cisco properties
represent approximately 5.2% of our total rentable square footage.
The total income tax basis in the Cisco properties was approximately $13.7
million as of December 31, 1998. Depreciation has been recorded for tax purposes
using the straight-line method over the useful lives of the respective assets
from the dates the assets were placed in service, which approximate 40 years for
these improvements. The annual property taxes, including assessments, for the
Cisco properties aggregate approximately $339,000 based on the 1998-99 real
property tax bills.
DESCRIPTION OF TENANT. Cisco is a Fortune 500 company and a leading
computer network products manufacturer. Cisco employs over 17,000 people, and
its total revenues for 1998 were approximately $8.5 billion.
LEASE TERMS. The lease for the approximately 200,000 square-foot building
expires on December 31, 2002. The current annual rental is approximately $2.0
million, or $0.85 per square foot per month, with fixed periodic increases.
Cisco has an option to purchase this property, which is exercisable before
January 1, 2000. The purchase price on exercise of this option would equal the
actual monthly rent in effect on the date of exercise calculated on an
annualized basis and divided by a 9% capitalization rate. Cisco has two
five-year options to extend the term of its existing lease at fixed annual rent
increases. The lease for the approximately 66,000 square-foot building will be
terminated effective as of July 31, 1999. The current rent for this property is
approximately $908,000, or $1.15 per square foot per month. We believe that the
rental rates for this property are below present market rates.
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 effect upon our capital expenditures,
earnings or competitive position.
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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 on the owner and expose the owner to
governmental proceedings without regard to whether the owner knew of, or was
responsible for, the presence of the hazardous or toxic substances. The cost of
any required remediation or removal of such substances may be substantial. In
addition, the owner's liability as to any specific property is generally not
limited and could exceed the value of the property and/or the aggregate assets
of the owner. The presence of such substances, or the failure to properly remove
or remediate such substances, may also adversely affect the owner's ability to
sell or rent the property or to borrow using the property as collateral. Persons
who arrange for treatment or the disposal of hazardous or toxic substances may
also be liable for the costs of any required remediation or removal of the
hazardous or toxic substances at a disposal facility, regardless of whether the
facility is owned or operated by such owner or entity. In connection with the
ownership of the properties or the treatment or disposal of hazardous or toxic
substances, we may be liable for such costs.
Some of our properties are leased, in part, to businesses, including
manufacturers, that use, store or otherwise handle hazardous or toxic substances
in their business operations. These operations create a potential for the
release of hazardous or toxic substances. In addition, groundwater contaminated
by chemicals used in various manufacturing processes, including semiconductor
fabrication, underlies a significant portion of northeastern Santa Clara County,
where many of our properties are located.
Environmental laws also govern the presence, maintenance and removal of
asbestos. These laws require that owners or operators of buildings containing
asbestos properly manage and maintain the asbestos, that they adequately inform
or train those who may come into contact with asbestos and that they undertake
special precautions, including removal or other abatement in the event that
asbestos is disturbed during renovation or demolition of a building. These laws
may impose fines and penalties on building owners or operators for failure to
comply with these requirements and may allow third parties to seek recovery from
owners or operators for personal injury associated with exposure to asbestos
fibers. We are aware that there are asbestos-containing materials, or 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, results of operations and ability to
make cash distributions to our stockholders.
Phase I assessments are intended to discover and evaluate information
regarding the environmental condition of the surveyed property and surrounding
properties. Phase I assessments generally include a historical review, a public
records review, an investigation of the surveyed site and surrounding properties
and the preparation and issuance of a written report, but do not include soil
sampling or subsurface investigations and typically do not include an asbestos
survey. Environmental assessments have been conducted for about half of the
properties.
The environmental investigations that have been conducted on our properties
have not revealed any environmental liability that we believe would have a
material adverse effect on our financial condition, results of operations and
assets, and we are not aware of any such liability. Nonetheless, it is possible
that there are material environmental liabilities of which we are unaware. We
cannot assure you that future laws, ordinances, or regulations will not impose
any material environmental liability, or that 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 us.
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POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of our policies with respect to investment,
financing, conflicts of interest and other activities. These policies have been
formulated by our board of directors, are set forth in our charter, bylaws,
operating partnership agreements or agreements with the Berg Group, and
generally may be amended or revised from time to time, subject to applicable
agreement terms, at the discretion of the board of directors without a vote of
the stockholders. Among other things, these policies provide that:
- so long as the Berg Group members and their affiliates, other than us and
the operating partnerships, beneficially own, in the aggregate, at least
15% of the outstanding shares of common stock on a fully diluted basis,
which is calculated based on all outstanding shares of common stock and
all shares of common stock that could be acquired upon the exercise of all
outstanding options to acquire our voting stock, as well as all shares of
common stock issuable upon exchange of all O.P. Units, the approval of a
majority of our directors, including Carl E. Berg or his designee as a
director, and of the holders of a majority of the O.P. Units is required
for us to take title to assets, other than temporarily in connection with
an acquisition prior to contributing such assets to the operating
partnerships, or to conduct business other than through the operating
partnerships, or for us or the operating partnerships to engage in any
business other than the ownership, construction, development and operation
of real estate properties, or for certain fundamental corporate actions,
including amendments to our charter, bylaws or any operating partnership
agreement and any merger, consolidation or sale of all or substantially
all of our assets or the assets of the operating partnerships;
- changes in certain policies with respect to conflicts of interest must be
consistent with legal requirements;
- certain policies with respect to competition by the Berg Group are imposed
pursuant to provisions of the acquisition agreement that cannot be amended
or waived without the approval of the independent directors committee of
our board of directors;
- we cannot take any action intended to terminate our qualification as a
REIT without the approval of more than 75% of the entire board of
directors; and
- we cannot undertake certain other specified transactions, including the
issuance of securities, and borrowings in excess of specified limits, or
the amendment of our charter and bylaws, without the approval of more than
75% of the entire board of directors.
INVESTMENT POLICIES
We expect to pursue our business and investment objectives principally
through the direct ownership by the operating partnerships of our properties and
future acquired properties. Development or investment activities are not limited
to any specified percentage of our assets. We may also participate with other
entities in property ownership, through joint ventures or other types of
co-ownership. Equity investments may be subject to existing mortgage financing
and other indebtedness which have priority over our equity interests.
While we will emphasize equity real estate investments, we may, in our
discretion and subject to the percentage ownership limitations and gross income
tests necessary for REIT qualification, invest in mortgage and other real estate
interests, including securities of other real estate investment trusts. We have
not previously invested in mortgages or securities of other real estate
investment trusts, and we do not have any present intention to make such
investments.
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FINANCING POLICIES
To the extent that our board of directors determines to seek additional
capital, we may raise such capital through additional equity offerings, debt
financing or retention of cash flow, or through a combination of these sources,
after consideration of provisions of the Code requiring the distribution by a
REIT of a certain percentage of its taxable income and taking into account taxes
that would be imposed on undistributed taxable income. It is our present
intention that any additional borrowings will be made through the operating
partnerships, although we may incur borrowings that would be reloaned to the
operating partnerships. Borrowings may be unsecured or may be secured by any or
all of our assets, the operating partnerships or any existing or new property,
and may have full or limited recourse to all or any portion of our assets, the
operating partnerships or any existing or new property.
We have not established any limit on the number or amount of mortgages that
may be placed on any single property or on our portfolio as a whole. We may also
determine to finance acquisitions through the exchange of properties or the
issuance of additional O.P. Units in the operating partnerships, shares of
common stock or other securities.
In the event that the board of directors determines to raise additional
equity capital, it has the authority, without stockholder approval, to issue
additional shares of common stock, preferred stock or other capital stock,
including securities senior to the common stock, in any manner and on such terms
and for such consideration it deems appropriate, including in exchange for
property. In the event that we issue any shares of common stock or securities
convertible into or exchangeable or exercisable for, shares of common stock,
subject to limited exceptions, such as the issuance of common stock pursuant to
any stock incentive plan adopted by us or pursuant to limited partners' exercise
of the exchange rights or the put rights, the limited partners will have the
right to purchase common stock or such securities in order to maintain their
respective percentage interests in us on a fully diluted basis. If the board of
directors determines that we will raise additional equity capital to fund
investments by the operating partnerships, we will contribute such funds to the
operating partnerships as a contribution to capital and purchase of additional
general partnership interest; however, holders of O.P. Units will have the right
to participate in such funding on a pro rata basis. In the event that holders of
O.P. Units sell their O.P. Units to us upon exercise of their put rights, we are
authorized to raise the funds for such purchase by issuing additional shares of
common stock. Alternatively, we may issue additional shares of common stock in
exchange for the tendered O.P. Units.
Our board of directors also has the authority to cause the operating
partnerships to issue additional O.P. Units in any manner and on such terms and
for such consideration as it deems appropriate, including in exchange for
property. In the event that the operating partnerships issue new O.P. Units for
cash, but not property, the limited partners holding O.P. Units in an operating
partnership will have the right to purchase O.P. Units in order, and to the
extent necessary, to maintain their respective percentage interests in that
operating partnership. The new O.P. Units will be exchangeable for common stock
pursuant to the exchange rights or may be tendered to us pursuant to the put
rights.
DISPOSITION POLICIES
We have no current intention of disposing of any of our properties, although
we reserve the right to do so. The tax basis of the limited partners in the
properties in the operating partnerships is substantially less than current fair
market value. Accordingly, prior to the disposition of their O.P. Units, upon a
disposition of any of the properties, a disproportionately large share of the
gain for federal income tax purposes would be allocated to the limited partners.
For a more detailed discussion of these tax effects, see "Federal Income Tax
Considerations--Tax Aspects of the Operating Partnerships." Consequently, it may
be in the interests of the limited partners that we continue to hold the
properties in order to defer such taxable gain. In light of this tax effect, the
operating partnership agreements provide that, until January 2009, or until the
Berg Group members and their affiliates, other than us and the operating
partnerships, beneficially
54
<PAGE>
own, in the aggregate, less than 15% of the outstanding shares of common stock
on a fully diluted basis, which is calculated based on all outstanding shares of
common stock and all shares of common stock that could be acquired upon the
exercise of all outstanding options to acquire our voting stock, as well as all
shares of common stock issuable upon exchange of all O.P. Units, if earlier, Mr.
Berg and Clyde J. Berg may prohibit the operating partnerships from disposing of
properties which they designate in a taxable transaction. Mr. Kontrabecki has a
similar right with respect to seven of the properties, which right will lapse
before the end of the ten-year period if his beneficial ownership interest falls
below 750,000 O.P. Units. The limited partners may seek to cause us to retain
the properties even when such action may not be in the interests of some, or a
majority, of our stockholders. The operating partnerships will be able to effect
"tax-free," like-kind exchanges under Section 1031 of the Code, or in connection
with other non-taxable transactions, such as a contribution of property to a new
partnership, without obtaining the prior written consent of these individuals.
The approval of a majority of our directors, including Mr. Berg or his designee,
will be required to sell all or substantially all of our assets. The consent of
the holders of a majority of the O.P. Units will be required to effect a sale or
sales of all, or substantially all, of the assets of any of the operating
partnerships.
CONFLICTS OF INTERESTS POLICIES
We have adopted certain policies and entered into certain agreements with
the Berg Group that were designed to eliminate or minimize potential conflicts
of interest. We cannot assure you that these policies will be successful in
eliminating the influence of such conflicts. If these policies are not
successful, decisions affecting us could be made that might fail to reflect
fully the interests of all stockholders.
The acquisition agreement, Berg land holdings option agreement and
supplemental agreement to which we and the Berg Group, or Carl E. Berg and Clyde
J. Berg, individually are parties includes the undertaking of Carl E. Berg not
to directly or indirectly acquire or develop, or acquire any equity ownership
interest in any entity that has an ownership interest in, any real estate zoned
or intended for use as R&D, office or industrial properties, with the exception
of investments in securities of publicly traded companies, which securities do
not represent more than 10% of the outstanding voting securities of such
companies, in California, Oregon or Washington without first disclosing such
investment opportunity to us and making such opportunity available to us,
subject to the approval of the independent directors committee. This restriction
does not apply to any acquisition of the projects subject to the pending
projects acquisition agreement or completed buildings acquired pursuant to the
Berg land holdings option agreement or the supplemental agreement. This
restriction remains in effect until the date on which both of the following
conditions are satisfied:
- no nominee of the Berg Group is a member of our board of directors; and
- the Berg Group and its affiliates, other than us and the operating
partnerships, beneficially own less than 25% of our outstanding common
stock, including for these purposes all shares issuable upon exercise of
the rights to exchange O.P. Units for common stock.
In addition, transactions between us and any member of the Berg Group, or an
entity in which a member of the Berg Group holds at least 5% of the equity
interests, including our election to issue common stock or pay cash in exchange
for O.P. Units tendered by the Berg Group are subject to review and approval by
the independent directors committee. Aside from these restrictions, the Berg
Group will generally be free to conduct its business activities and will not be
required to seek the approval of such activities or refer business opportunities
to us, nor will it have any liability to us for its failure to do so.
55
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors as of May 17, 1999 were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Carl E. Berg......................................... 61 Chairman of the Board, Chief Executive Officer,
President and Director
Marianne K. Aguiar................................... 32 Vice President of Finance and Controller
John C. Bolger....................................... 52 Director
William A. Hasler.................................... 57 Director
Lawrence B. Helzel................................... 50 Director
</TABLE>
Mr. Bolger and Mr. Hasler comprise the audit committee. Mr. Bolger and Mr.
Helzel comprise the compensation committee. Mr. Bolger, Mr. Hasler and Mr.
Helzel comprise the independent directors committee.
The following is a biographical summary of the experience of our executive
officers and directors:
Mr. Berg has served as our Chief Executive Officer, President and a director
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.
Ms. Aguiar joined us 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 our corporation 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 our corporation on December 4, 1998. For
seven years, 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 our corporation 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. 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.
56
<PAGE>
OTHER KEY EMPLOYEES
In May 1999, Allan Melkesian became our Director of Leasing & Development.
From 1992 to 1994, Mr. Melkesian served as Director of International Development
for Trammell Crow West Coast. From September 1995 to June 1997, Mr. Melkesian
served as Director of Industrial Development for the San Jose Redevelopment
Group.
Michael L. Knapp became our Director of Operations in May 1999. From 1994
through 1999, Mr. Knapp was employed by Berg & Berg Enterprises, Inc. as a
financial and property management executive. Mr. Knapp was Chief Financial
Officer and controller for The Wooditch Company Insurance Services from January
1993 through May 1994. Prior to that he was an executive officer of The Fairway
Land Company.
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 stockholder is entitled to one vote for each
share of common stock held by such stockholder. There is currently one vacancy
on our board of directors which the Berg Group has the right to fill, as
discussed in "Certain Provisions of Maryland Law and of our Charter and
Bylaws--The Board of Directors."
COMPENSATION OF DIRECTORS
We pay fees to our directors who are not officers 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 who are also directors are
not 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 was approved by our stockholders, automatically receives,
upon joining the board of directors, 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. Such options
become exercisable cumulatively with respect to 1/48(th) 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, John C. Bolger and a former director, Roger S. Kirk, served as
members of our compensation committee. Neither Mr. Bolger nor Mr. Kirk were or
are officers or employees of our corporation.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth salary and other compensation for the period
of January 1, 1998 to December 31, 1998 earned by or paid to our chief executive
officer and each of our other executive officers. No current officer received
compensation in any other prior fiscal year. Other Annual Compensation comprises
our contribution to the executive's 401(k) plan. Bradley P. Perkins resigned
from our corporation effective February 2, 1999. Michael J. Anderson resigned
from our corporation effective April 30, 1999.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
ANNUAL COMPENSATION ------------------
------------------------------------ SECURITIES
OTHER ANNUAL UNDERLYING OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION GRANTED 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 $ 22,188 600,000
Former Vice President, Chief Operating
Officer and Secretary
Bradley P. Perkins ............................ 1998 146,667 -- -- 80,000
Former Vice President, General Counsel and
Secretary
Marianne K. Aguiar ............................ 1998 74,775 -- -- 75,000
Vice President and Controller
</TABLE>
The following table shows certain information relating to options to
purchase shares of common stock granted to our executive officers during 1998.
Assumed annual rates of stock price appreciation are included for illustrative
purposes only. Actual stock prices will vary from time to time based upon market
factors and our financial performance; we cannot assure you that these
appreciation rates will be achieved.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK PRICE
SHARES OF TOTAL OPTIONS APPRECIATION FOR OPTION
COMMON STOCK GRANTED TO EXERCISE TERM
UNDERLYING EMPLOYEES IN PRICE PER EXPIRATION ------------------------
NAME OPTIONS GRANTED FISCAL 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 02/02/04 122,400 277,600
Marianne K. Aguiar....................... 75,000 9.9 4.50 03/29/04 114,750 260,250
</TABLE>
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 six years from the date of grant, subject to earlier termination on the
occurrence of 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.
When Mr. Perkins resigned effective February 2, 1999, he had total vested
options for 15,000 shares, which he exercised within 30 days of termination of
his employment. When Mr. Anderson resigned effective April 30, 1999, we
repurchased 117,361 shares acquired upon exercise of his options in
58
<PAGE>
March 1998 and Mr. Anderson had total vested options to purchase 167,917 shares,
which he exercised on May 28, 1999.
The following table sets forth certain information concerning exercised and
unexercised options held by executive officers at December 31, 1998. For the
purposes of this table, the value of in-the-money options is based on the
closing price of $6.75 per share of common stock on December 31, 1998, as
reported by the American Stock Exchange.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED OPTIONS AT DECEMBER 31, 1998 DECEMBER 31, 1998
ON VALUE ---------------------------- --------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---------------------------------------------- --------- ----------- ------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Carl E. Berg.................................. -- -- N/A
Michael J. Anderson........................... 225,000 -- -- 375,000 -- $ 843,750
Bradley P. Perkins............................ -- N/A 5,000 75,000 $ 11,250 $ 157,500
Marianne K. Aguiar............................ -- N/A 4,688 70,312 $ 10,548 $ 158,202
</TABLE>
CONTRACTUAL ARRANGEMENTS
In January 1998, we entered into an employment agreement with Mr. Anderson,
our former Vice President, Chief Operating Officer and Director. Among other
things, the agreement provided that, in the case of voluntary termination for
good cause, as defined in the agreement, or involuntary termination other than
for cause, Mr. Anderson would be entitled to a severance payment of $100,000 and
a continuation of medical and other group insurance benefits for six months.
When Mr. Anderson resigned from the corporation effective April 30, 1999, he
received these benefits.
BENEFIT PLANS
1997 STOCK OPTION PLAN.
The 1997 stock option plan was approved by our stockholders on November 10,
1997. The option plan was adopted so that we may attract and retain the high
quality employees, consultants and directors necessary to build our
infrastructure and to provide ongoing incentives to our existing employees by
enabling them to participate in our 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 our employees, consultants and directors. Options to purchase a
maximum of 5,500,000 shares of common stock may be granted under the option
plan, subject to equitable adjustments to reflect certain corporate events.
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 us 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 us.
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 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.
59
<PAGE>
On June 10, 1999, we registered options to purchase 5,485,000 shares under
the option plan under the Securities Act of 1933, including 450,000 shares
issued or issuable to our "affiliates" which we registered for resale.
Currently, 207,150 of those shares outstanding or issuable upon exercise of
outstanding options under the option plan may be resold by our affiliates or
former affiliates, including Michael J. Anderson.
401(K) PLAN
We have adopted an employee investment plan under Section 401(k) of the
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 Code. We contribute 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 our contributions after two years of
eligible service.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The Maryland general corporation law, or MGCL, permits a Maryland
corporation to include in its charter a provision limiting the liability of its
directors and officers to the corporation and its stockholders for money damages
except for liability resulting from (a) actual receipt of an improper benefit or
profit in money, property or services, or (b) active and deliberate dishonesty
established by a final judgment and which is material to the cause of action.
The charter contains such a provision which eliminates such liability to the
maximum extent permitted by the MGCL.
Our charter also authorizes us, to the maximum extent permitted by Maryland
law, to indemnify and to pay or reimburse reasonable expenses in advance of
final disposition of a proceeding to any present or former director or officer,
or any individual who, while a director of our corporation and at our request,
serves or has served another corporation, real estate investment trust,
partnership, joint venture, trust, employee benefit plan or any other enterprise
as a director, officer, partner or trustee of such corporation, real estate
investment trust, partnership, joint venture, trust, employee benefit plan or
other enterprise from and against any claim or liability to which such person
may become subject or which such person may incur by reason of his status as a
present or former director or officer of our corporation. The bylaws obligate
us, to the maximum extent permitted by Maryland law, to indemnify and to pay or
reimburse reasonable expenses in advance of final disposition of a proceeding to
any present or former director or officer who is made a party to the proceeding
by reason of his service in that capacity or any individual who, while a
director of our corporation and at our request, serves or has served another
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or any other enterprise as a director, officer, partner or
trustee of such corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or other enterprise and who is made a
party to the proceeding by reason of his service in that capacity. Our charter
and bylaws also permit us to indemnify and advance expenses to any person who
served a predecessor of our corporation in any of the capacities described above
and any employee or agent of our corporation or our predecessors.
The MGCL requires a corporation, unless its charter provides otherwise,
which ours does not, to indemnify a director or officer who has been successful,
on the merits or otherwise, in the defense of any proceeding to which he is made
a party by reason of his service in that capacity. The MGCL permits a
corporation to indemnify its present and former directors and officers, among
others, against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by them in connection with any proceeding to which they may be
made a party by reason of their service in those capacities unless it is
established that (a) the act or omission of the director or officer was material
to the matter giving rise to the proceeding and (i) was committed in bad faith
or (ii) was the result of active and deliberate dishonesty, (b) the director or
officer actually received an improper personal benefit in money, property or
services or (c) in the case of any criminal proceeding, the director or officer
had reasonable cause to believe that the
60
<PAGE>
act or omission was unlawful. However, under the MGCL, a Maryland corporation
may not indemnify for an adverse judgment in a suit by or in the right of the
corporation or for a judgment of liability on the basis that personal benefit
was improperly received, unless in either case a court orders indemnification
and then only for expenses. In addition, the MGCL permits a corporation to
advance reasonable expenses to a director or officer upon the corporation's
receipt of (a) a written affirmation by the director or officer of his good
faith belief that he has met the standard of conduct necessary for
indemnification by the corporation and (b) a written undertaking by him or on
his behalf to repay the amount paid or reimbursed by the corporation if it shall
ultimately be determined that the standard of conduct was not met. None of these
limitations of liability apply to liabilities arising under the federal
securities laws, nor do they affect the availability of equitable remedies such
as injunctive relief or rescission.
61
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our common stock as of June 11, 1999 by (a) each person who is a
stockholder of our corporation holding more than a 5% interest in our
corporation, (b) directors and officers, and (c) our directors and officers as a
group before and after the offering. 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. We have relied on information
supplied by our officers, directors and certain stockholders and on information
contained in filings with the Commission.
<TABLE>
<CAPTION>
PERCENT OF ALL
SHARES OF COMMON
NUMBER OF STOCK (ASSUMING PERCENT OF ALL
SHARES PERCENT OF ALL EXCHANGE OF SHARES OF COMMON
BENEFICIALLY SHARES OF COMMON NUMBER OF O.P. HOLDER'S O.P. STOCK/O.P.
NAME AND ADDRESS OWNED(1) STOCK UNITS UNITS)(2) UNITS(1)(2)
- ------------------------------------ --------------- ----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Lawrence B. Helzel, Director ....... 188,419(3) 2.3% -- 2.3%* *
c/o Helzel Kirshman, LP
5550 Redwood Road, Ste 4
Oakland, CA 94619
Carl E. Berg ....................... 77,333(4)(14) * 47,413,520(5)(14) 85.5 57.8%
President, Chief Executive Officer
and Director
John C. Bolger, Director ........... 39,936(6) * -- * *
96 Sutherland Drive
Atherton, CA 94027
Marianne K. Aguiar ................. 23,377(7) * -- * *
Vice President of Finance and
Controller
William A. Hasler, Director ........ 8,336(8) * -- * *
c/o Aphton Corporation
1 Market Street,
Spear Tower, Ste. 1850
San Francisco, CA 94105
5% STOCKHOLDERS:
Ingalls & Snyder LLC(9) ............ 1,989,667 24.5 -- 24.5 2.4
61 Broadway
New York, NY 10006
Ingalls & Snyder Value Partners,
L.P.(10) ......................... 1,025,067 12.6 -- 12.6 1.2
61 Broadway
New York, NY 10006
Dan McCarthy ....................... 870,000(11) 10.7 -- 10.7 1.1
c/o Ingalls & Snyder LLC
61 Broadway
New York, NY 10006
Clyde J. Berg ...................... 27,333(12)(14) * 27,408,523(13)(14) 77.2 33.4
c/o Berg & Berg Developers
10050 Bandley Drive
Cupertino, CA 95014
Berg & Berg Enterprises, 27,333 * 6,305,487 43.9 7.7
Inc.(14) .........................
10050 Bandley Drive
Cupertino, CA 95014
All Directors and Officers as a
group (5 persons)................. 337,401(15) 4.2 47,413,520(15) 86.0 58.1
<CAPTION>
POST-OFFERING
PERCENT OF ALL
SHARES OF COMMON
STOCK (ASSUMING
EXCHANGE OF
HOLDER'S O.P.
NAME AND ADDRESS UNITS)(2)
- ------------------------------------ -----------------
<S> <C>
DIRECTORS AND EXECUTIVE OFFICERS:
Lawrence B. Helzel, Director ....... *
c/o Helzel Kirshman, LP
5550 Redwood Road, Ste 4
Oakland, CA 94619
Carl E. Berg ....................... 53.4%
President, Chief Executive Officer
and Director
John C. Bolger, Director ........... *
96 Sutherland Drive
Atherton, CA 94027
Marianne K. Aguiar ................. *
Vice President of Finance and
Controller
William A. Hasler, Director ........ *
c/o Aphton Corporation
1 Market Street,
Spear Tower, Ste. 1850
San Francisco, CA 94105
5% STOCKHOLDERS:
Ingalls & Snyder LLC(9) ............ 2.2
61 Broadway
New York, NY 10006
Ingalls & Snyder Value Partners,
L.P.(10) ......................... 1.2
61 Broadway
New York, NY 10006
Dan McCarthy ....................... *
c/o Ingalls & Snyder LLC
61 Broadway
New York, NY 10006
Clyde J. Berg ...................... 30.9
c/o Berg & Berg Developers
10050 Bandley Drive
Cupertino, CA 95014
Berg & Berg Enterprises, 7.1
Inc.(14) .........................
10050 Bandley Drive
Cupertino, CA 95014
All Directors and Officers as a
group (5 persons)................. 53.7
</TABLE>
- ------------------------------
* Less than 1%.
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<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 of which such person has the right to acquire beneficial
ownership within 60 days of June 11, 1999. Unless otherwise indicated, or
except pursuant to applicable community property laws, 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 8,115,454 shares
outstanding as of June 11, 1999. Percent of all shares of common stock/O.P.
Units calculations are based on 74,052,356 shares of common stock and O.P.
Units exchangeable for common stock as of June 11, 1999.
(2) Assumes O.P. Units are exchanged for shares of common stock without regard
to (i) whether such O.P. Units may be exchanged for shares of common stock
within 60 days of June 11, 1999, and (ii) certain ownership limit
provisions set forth in our charter.
(3) Includes 8,336 shares of common stock issuable on exercise of options.
(4) Includes 27,333 shares of common stock held of record by Berg & Berg
Enterprises, Inc. 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 the shares held under the pension and profit
sharing plans.
(5) Includes O.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 O.P. Units beneficially owned by Berg & Berg Enterprises,
Inc, and 12,467,058 shares of common stock issuable on exchange of O.P.
Units held by West Coast Venture Capital, Limited, L.P., because Mr. Berg
is an executive officer and director of the sole general partner, West
Coast Venture Capital, Inc. Mr. Berg disclaims beneficial interest in these
shares, however. This does not include any share deemed beneficially owned
by Kara Ann Berg, his daughter, as to which he disclaims beneficial
ownership.
(6) Includes 17,714 shares of common stock issuable on exercise of options.
(7) Includes 20,835 shares of common stock issuable on exercise of options.
(8) All 8,336 shares of common stock are issuable on exercise of options.
(9) Includes shares beneficially owned by Ingalls & Snyder Value Partners, L.P.
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.
(10) Thomas Boucher and Robert L. Cipson, general partners of Ingalls & Snyder
Value Partners, L.P. have the power to vote and the power to direct the
investment of Value Partners with respect to the common stock.
(11) Includes 100,000 shares held in Mr. McCarthy's Individual Retirement
Account.
(12) All shares are held by Berg & Berg Enterprises, Inc.
(13) Includes O.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 O.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 O.P. Units beneficially owned by Berg & Berg Enterprises. This
does not include any shares deemed beneficially owned by Sonya L. Berg and
Sherri L. Berg, his daughters, as to which he disclaims beneficial
ownership.
(14) Carl E. Berg is an executive officer and director and Clyde J. Berg is a
director of Berg & Berg Enterprises. With members of their immediate
families, the Messrs. Berg beneficially own, directly and indirectly, all
of the shares of capital stock of Berg & Berg Enterprises.
(15) Current officers and directors include Carl E. Berg, Marianne K. Aguiar,
John C. Bolger, William A. Hasler and Lawrence B. Helzel. See Notes 3
through 9.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PRIVATE PLACEMENT TRANSACTIONS--1998
On May 4, 1998, we entered into agreements with prospective purchasers to
sell and issue 6,495,058 shares of common stock in two separate private
placement transactions. We did not obtain a "fairness opinion" or other
independent financial advice with respect to the terms, including price, of the
private placements, 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% stockholders and purchasers, who by reason of the
purchase of common stock in the private placement, became 5% stockholders:
<TABLE>
<CAPTION>
INGALLS & SNYDER
NON-PLACEMENT AGENT PRIVATE
PRIVATE PLACEMENT PLACEMENT
--------------------- ----------------
<S> <C> <C>
Carl E. Berg.......................................... 50,000 --
Lawrence Helzel....................................... -- 180,083
Dan McCarthy.......................................... -- 720,000
Ingalls & Snyder LLC.................................. -- 2,744,917
Ingalls & Snyder Value Partners....................... -- 1,125,067
Prism Partners I, L.P................................. -- 450,000
</TABLE>
TRANSACTIONS WITH CARL E. BERG AND THE BERG GROUP
We have entered into a series of transactions with Mr. Berg, who is an
officer, director and 5% security holder of our corporation, and his affiliates
in the Berg Group, including Clyde J. Berg, which are described in this
prospectus. A summary of these transactions follows:
UPREIT TRANSACTIONS. Prior to July 1998, three of the four limited
partnerships comprising the operating partnerships were controlled by the Berg
Group. The Berg Group also owned 50% of the fourth limited partnership as
limited partners and held other R&D properties that were contributed to the
operating partnerships in July 1998. The prior interests in the operating
partnerships were converted to O.P. Units at the closing of the transactions by
which we became the sole general partner of each of the operating partnerships.
Additional O.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 of May 14, 1998, as
amended, the O.P. Units were valued at $4.50 per share for purposes of these
transactions. We did not obtain a fairness opinion or other independent
financial advice with respect to the transactions. The O.P. Units in which Carl
E. Berg, Clyde J. Berg and Berg & Berg Enterprises, Inc. acquired a pecuniary
interest are as follows:
<TABLE>
<CAPTION>
O.P. UNITS
------------
<S> <C>
Carl E. Berg.................................................................... 28,091,377
Clyde J. Berg................................................................... 17,347,806
Berg & Berg Enterprises, Inc.................................................... 6,305,487
</TABLE>
Additional O.P. Units were acquired by certain members of the immediate
families of Messrs. Berg, of which they disclaim beneficial ownership.
PENDING DEVELOPMENT PROJECTS. The Berg Group entered into the pending
projects acquisition agreement pursuant to which we, through the operating
partnerships, will acquire certain pending development projects from the Berg
Group as each property is completed and leased. Three of the five projects have
been completed and leased. As a result of the completion and leasing of the
pending development projects, two of the operating partnerships acquired these
properties and members of the Berg Group received an additional 13,566,254 O.P.
Units.
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The Berg Group has the right to obtain approximately 19.6 million additional
O.P. Units in exchange for the pending development projects that we have not yet
acquired. The sellers of these projects may elect to receive cash or O.P. Units
at a value of $4.50 per O.P. Unit, which was the price paid for contemporaneous
purchases of common stock but currently represents a substantial discount from
the current market price of the common stock. We do not believe that we will
issue all of the additional O.P. Units reserved under the pending projects
acquisition agreement.
BERG LAND HOLDINGS OPTION AGREEMENT. The Berg Group owns several parcels of
unimproved land in the Silicon Valley and has entered into the Berg land
holdings option agreement with us and the operating partnerships. Pursuant to
the agreement, we 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 price will be payable in cash or O.P. Units, at the Berg Group's
option, as determined in accordance with the formula set out in the agreement.
Under the agreement and the supplemental agreement, which amends it, we also
have the right to acquire projects for R&D, office or industrial use on land
subsequently acquired, directly or indirectly, by Carl E. Berg or Clyde J. Berg.
Such acquisitions do not include property acquired by a publicly-traded company
unless the Bergs collectively beneficially own at least 20% of the company's
voting securities and one of them is a senior executive officer of the company.
ISSUANCE AND ASSUMPTION OF DEBT. As of March 31, 1999, we were liable for
loans aggregating approximately $24.1 million payable to the Berg Group. These
loans are secured by three properties, and the maturity date has recently been
extended to December 31, 1999. When we acquired the Microsoft project in April
1999, we assumed a mortgage loan of $25.0 million payable to the Berg Group.
In September 1998, we assumed a $100 million line of credit with the Wells
Fargo Bank N.A. previously provided to and guaranteed by the Berg Group. The
outstanding balance on the line of credit was $18.5 million as of March 31,
1999. The line of credit carries a variable interest rate, which was 6.49% at
March 31, 1999.
Effective December 31, 1998, 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 the Berg Group's O.P. Units as of
December 28, 1998. On April 30, 1999, the Berg Group loaned approximately $6.9
million to the operating partnerships, which was equal to the amount of
distributions payable by the operating partnerships to the Berg Group with
respect to its O.P. Units on that date.
LEASE FROM BERG GROUP. We lease our executive offices from the Berg Group.
For the three months ended March 31, 1999 and for the year ended December 31,
1998, we paid $20,000 and $61,000, respectively, to the Berg Group under the
terms of the lease agreement for its executive offices.
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OPERATING PARTNERSHIP AGREEMENTS
MANAGEMENT
The operating partnerships consist of four separate Delaware limited
partnerships engaged in the combined operation and ownership of our properties,
the operating partnership agreements are identical in all material respects for
all four of the limited partnerships. Generally, pursuant to the operating
partnership agreement, we act as the sole general partner of the operating
partnerships, in which capacity we have exclusive control of the business and
assets of the operating partnerships and full and complete authority, discretion
and responsibility with respect to the operating partnerships' operations and
transactions, including, without limitation, acquisitions of additional
properties, borrowing funds, raising new capital, leasing buildings, as well as
selecting and supervising all employees and agents of the operating
partnerships. Through our authority to manage our business and affairs, our
board of directors will direct the business of the operating partnerships.
Notwithstanding our effective control of the operating partnerships, the
consent of the limited partners holding a majority of the outstanding O.P. Units
is required with respect to certain extraordinary actions involving the
operating partnerships, including:
- the amendment, modification or termination of the operating partnership
agreements;
- 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;
- the institution of any proceeding for bankruptcy of the operating
partnerships;
- the transfer of any general partnership interests in the operating
partnerships, including, with certain exceptions, transfers attendant to
any merger, consolidation or liquidation of our corporation;
- the admission of any additional or substitute general partner in the
operating partnerships; and
- a change of control of the operating partnerships.
The Berg Group holds a substantial majority of the outstanding O.P. Units.
In addition, until the ownership interest of the Berg Group and its affiliates
is less than 15% of the common stock on a fully diluted basis, which is
calculated based on all outstanding shares of common stock and all shares of
common stock that could be acquired upon the exercise of all outstanding options
to acquire our voting stock, as well as all shares of common stock issuable upon
exchange of all O.P. Units, the consent of the limited partners holding a
majority of the outstanding O.P. Units is also required with respect to:
- the liquidation of the operating partnerships;
- 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 O.P. Units; and
- the issuance of limited partnership interests having seniority as to
distributions, assets and voting over the O.P. Units.
TRANSFERABILITY OF O.P. UNITS
The operating partnership agreement provides that the limited partners may
transfer their O.P. Units, subject to certain limitations. Except for certain
transfers by the limited partners to or from certain of their affiliates,
however, all transfers may be made only with our prior written consent as the
sole general partner of the operating partnerships.
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In addition, no transfer of O.P. Units by the limited partners may be made
in violation of certain regulatory and other restrictions set forth in the
operating partnership agreement. Except in the case of certain permitted
transfers to or from certain affiliates of the limited partners, the exchange
rights, the put rights, rights to participate in future equity financings and
provisions requiring the approval of certain limited partners for certain
matters will no longer be applicable to O.P. Units so transferred, and the
transferee will not have any rights to nominate persons to our board of
directors.
ADDITIONAL CAPITAL CONTRIBUTIONS AND LOANS
Each operating partnership agreement provides that, if the operating
partnership requires additional funds to pursue its investment objectives, we
may fund such investments by raising additional equity capital and making a
capital contribution to the operating partnerships or by borrowing such funds
and lending the net proceeds of such loans to the operating partnerships. If we
intend to provide additional funds through a contribution to capital and
purchase of units of general partnership interest, the limited partners will
have the right to participate in such funding on a pro rata, PARI PASSU basis
and to acquire additional O.P. Units. If the limited partners do not participate
in such financing, we will acquire additional units of general partnership
interest.
In either case, the number of additional units of partnership interest will
be increased based upon the amount of the additional capital contributions and
the value of the operating partnerships as of the date such contributions are
made.
In addition, as general partner of the operating partnerships, we have the
ability to cause the operating partnerships to issue additional O.P. Units. In
the event that the operating partnerships issue new O.P. Units for cash but not
property, the limited partners will have the right to purchase new O.P. Units at
the price we offer in the transaction giving rise to such participation right in
order, and to the extent necessary, to maintain their respective percentage
interests in the operating partnerships.
EXCHANGE RIGHTS, PUT RIGHTS AND REGISTRATION RIGHTS
The limited partners will have exchange rights, which generally become
exercisable on December 29, 1999. However, the limited partners may, in the
aggregate, tender O.P. Units for exchange prior to the first anniversary solely
in connection with (a) the registration of 500,000 shares of common stock
acquired upon exercise of the exchange rights by resale on a Form S-3 or any
equivalent form and (b) a registered public offering of common stock initiated
by us to the extent of 25% of the total shares in the offering, including this
offering, subject to the underwriters' unlimited right to reduce the
participation of all selling stockholders. The limited partners have elected not
to exercise their rights in connection with this offering. In addition, once in
each 12-month period beginning on December 29, 1999, the limited partners, other
than Mr. Berg and Clyde J. Berg, will have the right to exchange a portion of
their O.P. Units for shares of common stock, subject to the ownership limit in
our charter, and to exercise the put rights to sell a portion of their O.P.
Units to the operating partnerships at a price equal to the average market price
of the common stock for the 10-trading day period immediately preceding the date
of tender. Upon any exercise of the put rights, we will have the opportunity for
a period of 15 days to elect to fund the purchase of the O.P. Units and purchase
additional general partner interests in the operating partnerships for cash,
unless the purchase price exceeds $1 million in the aggregate for all tendering
limited partners, in which case, the operating partnerships or we shall be
entitled to reduce proportionally the number of O.P. Units to be acquired from
each tendering limited partner so that the total purchase price is not more than
$1 million.
The exchange rights agreement permits every limited partner to tender O.P.
Units to us, and, at our election, to receive common stock on a one-for-one
basis at then-current market value, an equivalent amount of cash, or a
combination of cash and common stock in exchange for the O.P. Units tendered,
subject to the ownership limit, or the Berg Group ownership limit, as the case
may be. The exchange rights agreement gives the holders of O.P. Units the right
to participate in any registered public offering of the
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common stock initiated by us to the extent of 25% of the total shares sold in
the offering upon converting O.P. Units to shares of common stock, but subject
to the underwriters' unlimited right to reduce the participation of all selling
stockholders. In this offering, the underwriters have advised us that such
participation would be reduced to zero. The holders of O.P. Units will be able
to request resale registrations of shares of common stock acquired on exchange
of O.P. Units on a Form S-3, or any equivalent form of registration statement,
and after December 29, 1999, we will be obligated to effect no more than two
such registrations in any 12-month period. We are obligated to assist the O.P.
Unit holders in obtaining a firm commitment underwriting agreement for such
resale from a qualified investment banking firm. If registration on Form S-3, or
an equivalent form, is not available for any reason, we will be obligated to
effect a registration of the shares to be acquired on exercise of the exchange
rights on Form S-11, or an equivalent form, in an underwritten public offering,
upon demand by the holders of no fewer than 500,000 O.P. Units. All holders of
O.P. Units will be entitled to participate in such registration. We will bear
all costs of such registrations other than selling expenses, including
commissions and separate counsels' fees of the O.P. Unit holders. We will not be
required to effect any registration for resale on Form S-3, or equivalent form
of common stock shares issuable to the holder of O.P. Units if the request is
for less than 250,000 shares.
OTHER MATTERS
The operating partnership agreements require that the operating partnerships
be operated in a manner that will enable us to satisfy the requirements for
being classified as a REIT and to avoid any federal income or excise tax
liability.
The operating partnership agreements provide that the combined net operating
cash flow from all of the operating partnerships, as well as net sales and
refinancing proceeds, will be distributed from time to time as determined by our
board of directors, but not less frequently than quarterly, pro rata in
accordance with the partners' percentage interests in the operating
partnerships, taken as a whole. This provision is intended to cause the periodic
distributions per O.P. Unit and per share of our common stock to be equal. As a
consequence of this provision, the capital interest of a partner in each of the
operating partnerships, including our capital interests, might at times differ
significantly from the partner's percentage interest in the net income and cash
flow of that operating partnership. We do not believe that such differences
would have a material impact on our business, financial condition or FAD,
however.
Pursuant to the operating partnership agreements, the operating partnerships
will also assume and pay when due, or reimburse us for payment of, certain costs
and expenses relating to our continuity of existence and operations. In
addition, the operating partnership agreements obligated the operating
partnerships to reimburse all organization costs and expenses of the UPREIT
acquisition paid or incurred by the Berg Group.
The operating partnership agreements provide that, upon the exercise of an
outstanding option under the 1997 option plan, we may purchase additional
general partner interests in the operating partnerships by contributing the
exercise proceeds to the operating partnerships. Our increased interest shall be
equal to the percentage of outstanding shares of common stock and O.P. Units on
an as-converted basis represented by the shares acquired upon exercise of the
option.
TERM
The operating partnerships will continue in full force and effect until
December 31, 2048 or until sooner dissolved pursuant to the terms of the
operating partnership agreement.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Our charter authorizes us to issue up to 200,000,000 shares of common stock,
$.001 par value per share, and 20,000,000 shares of preferred stock, $.001 par
value per share. Upon completion of the offering, 14,865,454 shares of common
stock will be issued and outstanding, and no shares of preferred stock will be
issued and outstanding.
All shares of common stock included in the offering will be duly authorized,
fully paid and nonassessable. As a holder of common stock, you will be entitled
to receive distributions on common stock if, as and when our board of directors
authorizes and declares distributions. However, your rights to distributions may
be subordinated to the rights of holders of preferred stock, if and when
preferred stock is issued and outstanding. In any liquidation, dissolution or
winding up of our corporation, each outstanding share of common stock will
entitle its holder to a proportionate share of the assets that remain after we
pay our liabilities and any preferential distributions owed to preferred
stockholders.
Subject to the matters discussed under "Certain Provisions of Maryland Law
and of Our Charter and Bylaws," holders of the common stock are entitled to one
vote for each share on all matters submitted to a stockholder vote. Unless our
charter provides otherwise with respect to preferred stock, the holders of the
common stock possess exclusive voting power. There is no cumulative voting in
the election of directors. This means that the holders of a majority of the
outstanding shares of common stock can elect all of the directors then standing
for election, and the holders of the remaining shares of common stock cannot
elect any directors.
Holders of shares of common stock have no preference, conversion, sinking
fund, redemption, appraisal or exchange rights or any preemptive rights to
subscribe for any of our securities. All shares of common stock have equal
dividend, distribution, liquidation and other rights.
Under the MGCL, corporations generally cannot dissolve, amend their
charters, merge, sell all or substantially all of their assets, engage in a
share exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two-thirds of the shares entitled to vote on the matter. However, as
permitted under the MGCL, our charter provides, subject to certain protective
provisions for the benefit of the Berg Group, for approval of any of these
actions by a majority of the votes entitled to be cast on the matter. A number
of other provisions of Maryland law could significantly affect the holders of
common stock and could delay, defer or prevent a change in control or other
transaction in which the holders of some or a majority of the common stock might
receive a premium price for their common stock or which such holders might
believe to be otherwise in their best interest. See "Certain Provisions of
Maryland Law and of Our Charter and Bylaws."
WE HAVE THE POWER TO ISSUE ADDITIONAL SHARES OF STOCK
Our charter grants the board of directors the power to issue additional
authorized but unissued shares of common stock and preferred stock. The board of
directors may also classify or reclassify unissued shares of common stock or
preferred stock and authorize the issuance of these classified or reclassified
shares of stock. Under the MGCL and our charter, the board of directors is
required to fix the terms and conditions for each class or series before the
issuance of the shares of each class or series of stock. These terms and
conditions include preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends or other distributions, qualifications
and terms or conditions of redemption.
We believe that these powers of the board of directors provide us with
increased flexibility in structuring possible future financings and acquisitions
and in meeting other needs which might arise. Unless stockholder action is
required by applicable law or the rules of any stock exchange or automated
quotation system on which our securities may be listed or traded, the additional
classes or series, as well as the common stock, will generally be available for
issuance without further action by our stockholders.
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Although the board of directors does not intend to do so at the present time, it
could authorize the issuance of a class or series that could delay, defer or
prevent a change of control or other transaction that might involve a premium
price for the common stock or otherwise be in the best interest of the
stockholders.
The charter also provides that, to the extent permitted by Maryland law, the
board of directors may, without any action by the stockholders, amend the
charter from time to time to increase or decrease the aggregate number of shares
of stock or the number of shares of stock of any class or series that we have
authority to issue. Legislation permitting such action will take effect on
October 1, 1999.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
REIT RESTRICTIONS. To maintain our REIT qualification, no fewer than six
individuals can own, actually or constructively, more than 50% in value of our
issued and outstanding stock at any time during the last half of a taxable year.
Attribution rules in the Code determine if any individual or entity actually or
constructively owns our stock under this requirement. Additionally, at least 100
persons must beneficially own our stock during at least 335 days of a taxable
year. Also, rent from "related party tenants" is not qualifying income for
purposes of the gross income tests of the Internal Revenue Code. See "Federal
Income Taxation--Taxation as a REIT." To help insure that we meet these tests,
our charter restricts the acquisition and ownership of shares of our stock.
RESTRICTIONS IN CHARTER. Subject to exceptions specified in our charter, no
holder, other than members of the Berg Group, may own more than 9% in value of
our outstanding stock. By agreement, the Berg Group and its affiliates, other
than us and the operating partnerships, may own up to 20% of the outstanding
stock; provided, however that neither the Berg Group and its affiliates nor any
other stockholder may own shares of stock which would cause us to violate any of
the REIT requirements.
Our board of directors, in its sole discretion, may exempt a person other
than the Berg Group, referred to here as an excepted holder, from the ownership
limit. However, no person may own shares of stock, directly or indirectly, which
represent more than 9% of the value of our outstanding shares of stock if such
ownership would result in us being deemed to be "closely held" within the
meaning of the Code or otherwise would result in us failing to qualify as a
REIT. In order to be considered an excepted holder, a person also must not own,
directly or indirectly, an interest in a tenant of our corporation, or a tenant
of any entity owned or controlled by us, that would cause us to own more than a
9.9% interest in such a tenant. A person seeking excepted holder status must
satisfy the board of directors that it will not violate these two restrictions.
The person also must agree that any violation or attempted violation of any of
these restrictions will result in the automatic transfer of the shares of stock
causing such violation to a trust for a charitable beneficiary that we
designate. Our board of directors may require a ruling from the IRS or an
opinion of counsel, in either case satisfactory to the board of directors, in
order to ensure our status as a REIT.
Our board of directors has exempted Dan McCarthy and Paul McCarthy, who are
brothers, from the ownership limit. Under the terms of an ownership limit
exemption agreement, they are permitted to collectively own directly and
indirectly a maximum of 18.5% of our outstanding shares of stock. They currently
own approximately 16.5% of our outstanding shares, and after the offering will
own approximately 9.0%.
Any transfer of shares of stock is prohibited if such transfer would result
in our shares being owned by fewer than 100 persons. Any person who acquires or
attempts or intends to acquire ownership of shares that will or may violate any
of these restrictions on transferability and ownership, or any person who would
have owned shares that have been transferred to the charitable beneficiary
trust, must give us immediate notice and provide such other information as we
may request in order to determine the effect of such transfer on our status as a
REIT. The restrictions on transferability and ownership will not apply if the
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board of directors, by the affirmative vote of 75% of all directors, determines
that it is no longer in our best interests to qualify as a REIT.
If any transfer of shares is attempted which, if effective, would result in
a violation of the transfer or ownership limitations, that number of shares the
ownership of which otherwise would cause such violation, rounded to the nearest
whole share, shall be automatically transferred to the charitable beneficiary
trust, and the person to whom they were meant to be transferred to, or the
prohibited owner, shall not acquire any rights in such shares. Such automatic
transfer shall be deemed to be effective as of the close of business on the
business day prior to the date of such violative transfer. Shares of stock held
in the trust shall be issued and outstanding shares of stock of our corporation.
The prohibited owner shall not benefit economically from ownership of any shares
of stock held in the trust, shall have no rights to dividends, no right to vote
and no other rights attributable to such shares. The trustee of the trust shall
have all voting rights and rights to dividends or other distributions with
respect to shares of stock held in the trust, to be exercised for the exclusive
benefit of the charitable beneficiary. Any dividend or other distribution paid
prior to our discovery that shares of stock have been transferred to the trust
shall be paid by the recipient of such dividend or distribution to the trustee
upon demand. Any dividend or other distribution authorized but unpaid shall be
paid when due to the trustee. Any dividend or distribution paid to the trustee
shall be held in trust for the charitable beneficiary. Subject to Maryland law,
effective as of the date that the shares have been transferred to the trust, the
trustee shall have the authority, in his sole discretion, to rescind any vote
cast by a prohibited owner prior to our discovery that such shares have been
transferred to the trust and to recast such vote in accordance with the desires
of the trustee acting for the benefit of the charitable beneficiary. However, if
we have already taken irreversible corporate action, then the trustee shall not
have the authority to rescind and recast such vote.
Within 20 days of receiving notice from us that shares have been transferred
to the trust, the trustee shall sell the shares to a person designated by the
trustee, whose ownership of the shares will not violate the ownership
limitations contained in the charter. From the net proceeds of the sale, the
prohibited owner shall receive the lesser of (a) the price he paid for the
shares or, if he did not give value for the shares, e.g., shares acquired by
gift, devise or other such transaction, the market price of such shares on the
day of the event causing the shares to be transferred to the trust and (b) the
price received by the trustee from the sale. Any net sale proceeds in excess of
the amount payable to the prohibited owner shall be paid immediately to the
charitable beneficiary. If, prior to our discovery that shares of stock have
been transferred to the trust, the shares are sold by a prohibited owner, such
shares shall be deemed to have been sold on behalf of the trust, and that
portion of the price received by the prohibited owner in excess the amount that
he would have been entitled to receive under the above formula shall be paid to
the trustee upon demand.
In addition, shares of stock held in the trust shall be deemed to have been
offered for sale to us, or our designee, at a price per share equal to the
lesser of (a) the price per share in the transaction that resulted in the
transfer to the trust, or, in the case of a devise or gift, the market price at
the time of the devise or gift, and (b) the market price on the date we, or our
designee, accept the offer. We may accept the offer until the trustee has sold
the shares. Upon sale to us, the interest of the charitable beneficiary in the
shares sold shall terminate and the trustee shall distribute the net proceeds of
the sale to the prohibited owner.
These restrictions do not apply to shares originally issued to the Berg
Group. All certificates representing shares of common stock other than such
shares will bear a legend referring to the restrictions described above.
Every owner of more than 5%, or such lower percentage as required by the
Code or regulations under the Code, of our outstanding stock, within 30 days
after the end of each taxable year, is required to give us written notice
stating the name and address of such owner, the number of shares of stock which
the owner beneficially owns and a description of the manner in which such shares
are held. Each such owner shall also provide us such additional information as
we may request in order to determine the effect, if any, of
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such ownership on our status as a REIT and to ensure compliance with the stock
ownership limit. In addition, each stockholder shall upon demand be required to
provide us such information as we may request, in good faith, in order to
determine our status as a REIT and to comply with the requirements of any taxing
authority or governmental authority or to determine such compliance.
These ownership limits could delay, defer or prevent a transaction or a
change in control of our corporation that might involve a premium price for the
common stock or otherwise be in the best interest of the stockholders.
REINVESTMENT AND SHARE PURCHASE PLAN
We may adopt a Distribution Reinvestment and Share Purchase plan that would
allow stockholders to automatically reinvest cash distributions on their
outstanding shares of common stock and/or O.P. Units to purchase additional
shares of common stock at a discounted price and without the payment of any
brokerage commission or service charge. Stockholders and limited partners would
also have the option of investing limited additional amounts by making cash
payments. We have not yet decided whether or not to adopt such a plan, and we
cannot assure you that we will ever adopt such a plan.
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CERTAIN PROVISIONS OF MARYLAND LAW AND OF OUR CHARTER AND BYLAWS
THE BOARD OF DIRECTORS
Our charter provides that the number of our directors shall be five and that
the number may be increased or decreased pursuant to the bylaws. Our bylaws
provide that, as long as the Berg Group and its affiliates, other than us and
the operating partnerships, own at least 15% of the voting shares on a fully
diluted basis, which is calculated based on all outstanding shares of common
stock and all shares of common stock that could be acquired upon the exercise of
all outstanding options to acquire our voting stock, as well as all shares of
common stock issuable upon exchange of all O.P. Units, at least two directors
must be directors nominated by the Berg Group, one of whom must be Mr. Berg or a
person designated by him. If such ownership is at least 10%, but less than 15%,
one director must be a director nominated by the Berg Group. Under our bylaws,
the board of directors may establish, increase or decrease the number of
directors, provided that the number of directors shall never be less than the
minimum number required by Maryland law, nor more than 15. In general, any
vacancy will be filled by a majority of the remaining directors, except that a
vacancy resulting from an increase in the number of directors must be filled by
a majority of the entire board of directors. A vacancy created by the departure
of a Berg Group board representative, however, must be filled by another Berg
Group board representative until the date that the right of the Berg Group to
name the Berg Group board representatives has expired.
REMOVAL OF DIRECTORS
Our charter provides that, subject to the rights of the holders of preferred
stock and the rights of the Berg Group, a director may be removed only for
cause, as defined in the charter, and only by the affirmative vote of at least a
majority of the votes entitled to be cast in the election of directors. This
provision, when coupled with the provision in the bylaws authorizing the board
of directors to fill vacant directorships, precludes stockholders from removing
incumbent directors without cause and filling the vacancies created by such
removal with their own nominees.
BUSINESS COMBINATIONS
Under Maryland law, "business combinations" between a Maryland corporation
and an interested stockholder or an affiliate of an interested stockholder are
prohibited for five years after the most recent date on which the interested
stockholder becomes an interested stockholder. These business combinations
include a merger, consolidation, share exchange, or, in circumstances specified
in the statute, an asset transfer or issuance or reclassification of equity
securities. An interested stockholder is defined as:
- any person who beneficially owns ten percent or more of the voting power
of our shares; or
- an affiliate or associate of the corporation who, at any time within the
two-year period prior to the date in question, was the beneficial owner of
ten percent or more of the voting power of the then outstanding voting
stock of the corporation.
After the five-year prohibition, any business combination between the
Maryland corporation and an interested stockholder generally must be recommended
by the board of directors of the corporation and approved by the affirmative
vote of at least:
- two-thirds of the votes entitled to be cast by holders of outstanding
shares of voting stock of the corporation; and
- two-thirds of the votes entitled to be cast by holders of voting stock of
the corporation other than shares held by the interested stockholder with
whom or with whose affiliate the business combination is to be effected or
held by an affiliate or associate of the interested stockholder.
These super-majority vote requirements do not apply if the corporation's
common stockholders receive a minimum price, as defined under Maryland law, for
their shares in the form of cash or other
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consideration in the same form as previously paid by the interested stockholder
for its shares. None of these provisions of Maryland law apply, however, to
business combinations that are approved or exempted by the board of directors of
the corporation prior to the time that the interested stockholder becomes an
interested stockholder. Pursuant to the statute, our board of directors has
exempted any business combination involving the Berg Group and any purchaser in
the private placement. Consequently, the five-year prohibition and the
super-majority vote requirements will not apply to business combinations between
us and any of them. As a result, the Berg Group and such purchasers may be able
to enter into business combinations with us that may not be in the best interest
of our stockholders, without compliance with the super-majority vote
requirements and the other provisions of the statute.
The business combination statute may discourage others from trying to
acquire control of us and increase the difficulty of consummating any offer.
CONTROL SHARE ACQUISITIONS
Maryland law provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be cast on the
matter. Our bylaws contain a provision exempting from the control share
acquisition statute any and all acquisitions by any person of our shares of
stock. Our board of directors may amend or eliminate this provision at any time
in the future, and if it did we would be subject to the control share
restrictions under Maryland law. Shares of stock owned by the acquirer, by
officers or by directors who are employees of the corporation are excluded from
shares entitled to vote on the matter. "Control shares" are voting shares of
stock which, if aggregated with all other shares of stock owned by the acquirer
or shares of stock for which the acquirer is able to exercise or direct the
exercise of voting power except solely by virtue of a revocable proxy, would
entitle the acquirer to exercise voting power in electing directors within one
of the following ranges of voting power:
- one-fifth or more but less than one-third.
- one-third or more but less than a majority; or
- a majority or more of all voting power.
Control shares do not include shares the acquiring person is then entitled
to vote as a result of having previously obtained stockholder approval. Except
as otherwise specified in the statute, a "control share acquisition" means the
acquisition of control shares.
Once a person who has made or proposes to make a control share acquisition
has undertaken to pay expenses and satisfied other conditions, the person may
compel the board of directors to call a special meeting of stockholders to be
held within 50 days of demand to consider the voting rights of the shares. If no
request for a meeting is made the corporation may itself present the question at
any stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring person
does not deliver an acquiring person statement as required by the statute, then,
subject to the conditions and limitations in the statute, the corporation may
redeem any or all of the control shares for fair value, except for control
shares for which voting rights previously have been approved. Fair value is
determined without regard to the absence of voting rights for control shares, as
of the date of the last control share acquisition or of any meeting of
stockholders at which the voting rights of control shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquirer becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The fair
value of the shares as determined for purposes of these appraisal rights may not
be less than the highest price per share paid in the control share acquisition.
Some of the limitations and restrictions otherwise applicable to the exercise of
dissenters' rights do not apply in the context of a control share acquisition.
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The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the corporation is a party to the
transaction or to acquisitions approved or exempted by the charter or bylaws of
the corporation.
BOARD QUORUM AND SPECIAL VOTING REQUIREMENTS
Generally, under the MGCL, a majority of the total number of directors
constitutes a quorum for the transaction of business. Our bylaws provide that,
generally, the action of the majority of the directors present at a meeting at
which a quorum is present shall be the action of the board of directors.
However, our bylaws provide that as long as the Berg Group and its affiliates
own at least 15% of the voting shares on a fully diluted basis, which is
calculated based on all outstanding shares of common stock and all shares of
common stock that could be acquired upon the exercise of all outstanding options
to acquire our voting stock, as well as all shares of common stock issuable upon
exchange of all O.P. Units, all meetings of the board of directors shall require
the presence of Mr. Berg or, in the event he is no longer a director, his
designee, and our charter provides that the approval of a majority of the
directors which includes Mr. Berg or his designee will be required to take or
permit to be taken any of the following actions:
- hold a meeting of the directors which is not attended by Mr. Berg or his
designee;
- approve an amendment to the charter or the bylaws; and
- approve any merger, consolidation or sale of all or substantially all of
our assets.
Our bylaws provide that the approval of more than 75% of the entire board of
directors will be required for (a) our taking title to assets or conducting
business other than through the operating partnerships, (b) the termination of
our status as a REIT, and (c) exceeding our target debt to total market
capitalization ratio of 50%.
AMENDMENT TO THE CHARTER AND BYLAWS
Amendment of our charter, including its provisions regarding removal of
directors, generally requires the affirmative vote of the holders of a majority
of all of the votes entitled to be cast on the matter. The board of directors
has the exclusive power to amend the bylaws. However, as long as the Berg Group
and its affiliates, other than us and the operating partnerships, own at least
15% of the voting shares on a fully diluted basis, which is calculated based on
all outstanding shares of common stock and all shares of common stock that could
be acquired upon the exercise of all outstanding options to acquire our voting
stock, as well as all shares of common stock issuable upon exchange of all O.P.
Units, all amendments to our charter and bylaws require the approval of a
majority of the directors, including Mr. Berg or his designee.
CORPORATE DISSOLUTION
The dissolution of our corporation must be advised by the board of directors
and approved by the stockholders by the affirmative vote of the holders of a
majority of all of the votes entitled to be cast on the matter.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
Our bylaws provide that nominations of persons for election to the board of
directors and the proposal of business to be considered by stockholders at the
annual meeting of stockholders may be made only:
- pursuant to our notice of the meeting;
- by or at the direction of the board of directors; and
- by a stockholder who is entitled to vote at the meeting and has complied
with the advance notice procedures, including the minimum time period, set
forth in the bylaws.
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Our bylaws also provide that only the business specified in our notice of
meeting may be brought before a special meeting of stockholders. Nominations of
persons for election to the board of directors at a special meeting of
stockholders may be made only:
- pursuant to our notice of the meeting;
- by or at the direction of the board of directors; or
- provided that the board of directors has determined that directors shall
be elected to such meeting, by a stockholder who is entitled to vote at
the meeting and has complied with the advance notice provisions, including
the minimum time period, set forth in the bylaws.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER
AND BYLAWS
The control share acquisition provisions of the MGCL, assuming the Board of
Directors amends or eliminates the present exemption from the statute, our
charter provisions with respect to removal of directors and the advance notice
provisions of the bylaws could delay, defer or prevent a transaction or a change
in control of our corporation that might involve a premium price for holders of
common stock or otherwise be in their best interest.
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FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material federal income tax
considerations that are relevant to an investment in our common stock. This
discussion is general in nature and is based on current law, but is not intended
to be tax advice. The tax consequences to particular investors may differ from
the following description, depending on their individual circumstances. This
discussion does not address the tax consequences to certain types of
stockholders, such as insurance companies, financial institutions and
broker-dealers, or persons who hold stock as part of a conversion transaction, a
hedging transaction, or a straddle transaction. This discussion does not address
any state, local or foreign tax considerations.
The REIT provisions of the Internal Revenue Code are highly technical and
complex. The following discussion is merely a summary of those provisions and is
qualified in its entirety by the applicable provisions of the Internal Revenue
Code, Treasury regulations and IRS rulings, and administrative and judicial
interpretations. The laws and rules that apply to REITs may change at any time
and any changes may be applied retroactively.
WE ADVISE YOU TO CONSULT YOUR OWN TAX ADVISOR REGARDING THE SPECIFIC TAX
CONSEQUENCES TO YOU OF AN INVESTMENT IN OUR COMMON STOCK.
TAXATION AS A REIT
We will elect to be taxed as a REIT for our taxable year ending December 31,
1999. We believe that we are organized and that we will operate in a manner that
will qualify for taxation as a REIT under Sections 856 through 860 of the
Internal Revenue Code and the applicable Treasury regulations, which we refer to
in this prospectus as the "REIT provisions." In the opinion of McCutchen, Doyle,
Brown & Enersen, LLP, we have been organized in conformity with the REIT
provisions and, commencing with our taxable year that will end on December 31,
1999, our method of operation has enabled, and our proposed method of operation
will enable, us to continue to comply with the REIT provisions. We must
emphasize that this opinion is based on various assumptions and on certain
representations made by us as to factual matters, and that an opinion of counsel
is not binding upon the IRS. We do not intend to seek a ruling from the IRS that
we have been organized or that we are or have been operating in conformity with
the REIT provisions. Moreover, our qualification as a REIT depends upon our
ability to operate in a way that satisfies the REIT provisions from year to
year. Therefore, we cannot assure you that we qualify as a REIT or that we will
remain qualified as a REIT in subsequent years.
If we satisfy the requirements of the REIT provisions, we generally will not
be taxed on our net income that is currently distributed to our stockholders.
This treatment substantially eliminates the "double taxation" to the corporation
and the stockholders that generally results from owning stock in a corporation.
However, we will be subject to federal taxes in the following circumstances:
- We will be taxed on any undistributed REIT taxable income, including
undistributed net capital gains.
- We may be subject to the "corporate alternative minimum tax" on our items
of tax preference.
- We will be taxed at the highest corporate tax rate on any net income from
the sale or other disposition of "foreclosure property" that is held
primarily for sale to customers in the ordinary course of business, and on
other nonqualifying income from foreclosure property.
- We will be taxed at the rate of 100% on any net income from "prohibited
transactions," which are, generally, sales or other dispositions of
property held for sale to customers in the ordinary course of business,
other than foreclosure property and certain involuntary conversions.
- If we fail the 75% income test or the 95% income test, which are discussed
below, but we maintain our REIT status, we will be taxed at the rate of
100% on the greater of the amounts by which we failed either of those
tests multiplied by a fraction that is intended to reflect our
profitability.
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- If we fail to distribute during each taxable year at least the sum of (a)
85% of our REIT ordinary income for such year, (b) 95% of our REIT capital
gain net income for such year, and (c) any undistributed taxable income
from prior years, we will be subject to a 4% excise tax on the amount by
which the required distributions exceed actual distributions.
- If we recognize "built-in gain" on the disposition of any asset during the
"recognition period," we will pay tax at the highest corporate rate on the
built-in gain. "Built-in gain" is any gain inherent in our assets on the
first day of the first taxable year in which we qualify as a REIT and any
gain inherent in an asset that we acquire from a regular corporation in a
carryover basis transaction, such as a merger. The "recognition period" is
a ten year period beginning on the first day we qualify as a REIT or the
date on which the asset is acquired, as appropriate.
FAILURE TO QUALIFY AS A REIT
If we fail to qualify as a REIT in any taxable year and certain relief
provisions do not apply, we will be subject to tax on our taxable income at
regular corporate rates, including any applicable corporate alternative minimum
tax. A failure to qualify as a REIT would have an adverse effect on the market
value and the marketability of our stock. Distributions to stockholders in any
year in which we fail to qualify as a REIT will not be deductible and we will
not be required to make those distributions. Any distributions to stockholders
will be ordinary income to them, to the extent of our accumulated earnings and
profits, although distributions to corporate stockholders may be eligible for
the dividends received deduction. Unless we are entitled to relief under the
REIT provisions, we will also be disqualified from taxation as a REIT until the
fifth taxable year after the year in which we are disqualified as a REIT. We
cannot assure you that we will be entitled to the relief provided by the REIT
provisions if we are disqualified as a REIT.
REQUIREMENTS FOR REIT QUALIFICATION
The Internal Revenue Code defines a REIT as a corporation, trust, or
association (1) which is managed by one or more trustees or directors, (2) the
beneficial ownership of which is evidenced by transferable shares or by
transferable certificates of beneficial interest, (3) which would be taxable as
a domestic corporation, but for sections 856-859 of the Internal Revenue Code,
(4) which is neither a financial institution nor an insurance company subject to
certain provisions of the Internal Revenue Code, (5) the beneficial ownership of
which is owned by 100 or more persons (determined without attribution of stock
ownership) during 335 days of each taxable year of 12 months, or during a
proportionate period of a short taxable year, (6) during the last half of each
taxable year, not more than 50% in value of the outstanding stock of which is
owned, directly or by attribution, by five or fewer individuals, (7) which makes
or has made an election to be taxed as a REIT and the election has not been
revoked or terminated, and (8) which meets certain other requirements, discussed
below, regarding the character of its income and assets.
We previously have issued sufficient shares to satisfy requirements (5) and
(6). Our charter and the acquisition agreement contain restrictions regarding
transfers of shares which are intended to help us continue to satisfy those
requirements. In particular, under the acquisition agreement to which we and the
Berg Group are party, the Berg Group may not own more than 20% of our
outstanding stock, and the McCarthys may not own more than 18.5% of the
outstanding stock. Under our charter, no one may acquire any shares if the
acquisition would result in our failure to satisfy the REIT provisions. The
ownership and transfer restrictions are described in "Description of Capital
Stock--Restrictions on Ownership and Transfer." If we fail to satisfy
requirement (6), but we comply with certain rules regarding requesting
information from our shareholders as to their ownership of our shares and we do
not know, and would not have known through the exercise of reasonable diligence
that we failed requirement (6), we will be treated as having met the
requirement.
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The REIT provisions will not apply to us or to our stockholders during any
tax year in which we have earnings and profits as of the close of such taxable
year which were accumulated in any year in which we were not a REIT. Although we
operated for several years during which we were not a REIT, we believe that all
of the earnings and profits accumulated during those years have been
distributed. If we are mistaken and we have failed to distribute all accumulated
earnings and profits from those years, the REIT provisions will not be
applicable until those accumulated earnings and profits are distributed.
INCOME REQUIREMENTS
We must satisfy two gross income requirements each taxable year to maintain
our qualification as a REIT: (1) At least 75% of our gross income, excluding
gross income from prohibited transactions, must be derived directly or
indirectly from real property or mortgages on real property, including "rents
from real property," discussed below and, in certain circumstances, interest, or
from certain types of temporary investments (the "75% Test"); and (2) at least
95% of our gross income, excluding gross income from prohibited transactions,
must be derived from the sources included in the 75% Test as well as dividends,
interest and gain from the sale or disposition of stock or securities, which we
refer to in this prospectus as the "95% Test."
The rents we receive will qualify as "rents from real property" only if
several conditions are met, as follows:
- The amount of rent we receive must not be based in whole or in part on the
income or profits derived by any person from the property, but the amount
of rent may generally be based on a percentage of receipts or sales.
- Rents received from a tenant will not qualify as "rents from real
property" if we directly or constructively own 10% or more of the tenant.
- If rent attributable to personal property leased in connection with a
lease of real property is greater than 15% of the total rent received
under the lease, then the portion of rent attributable to the personal
property will not qualify as "rents from real property."
- Rents received will not qualify as "rents from real property" if we
provide services to tenants other than services that are "usually or
customarily rendered" in connection with the rental of space for
occupancy.
We currently own and operate all of the properties through the operating
partnerships. Treasury Regulations provide that a REIT which is a partner in a
partnership will be deemed to own its proportionate share of the assets of the
partnership, determined with reference to the REIT's capital interest in the
partnership, and will be deemed to be entitled to the income of the partnership
that is allocable to that share. In addition, the character of the assets and
the gross income of the partnership retain the same character in the hands of
the REIT for purposes of satisfying the REIT provisions. Thus, our proportionate
share of the assets and income of the operating partnerships will be treated as
our assets and income for purposes of applying the income tests described above
and the asset test described below.
We believe that our income from the operating partnerships and other sources
will enable us to satisfy the 75% Test and the 95% Test and that our income from
the properties will be "rents from real property." Although certain properties
are leased to corporations in which the Berg Group owns in excess of 10% of the
outstanding stock, no member of the Berg Group owns, directly or by attribution,
10% of our stock and the provisions of our charter and the terms of the
acquisition agreement prohibit the Berg Group from acquiring additional shares
of our stock if the acquisition would result in our loss of REIT status.
If we fail to satisfy one or both of the gross income requirements for any
taxable year, we may nevertheless qualify as a REIT for that year if we are
entitled to relief under certain provisions of the Internal Revenue Code. These
relief provisions will generally be available if our failure to meet the gross
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income requirements is due to reasonable cause and not due to willful neglect,
we attach a schedule of the sources of our income to our federal income tax
return, and any incorrect information on the schedule is not due to fraud with
intent to evade tax. As discussed above, even if these relief provisions were to
apply, a tax would be imposed on the excess net income.
As noted above, income from prohibited transactions is excluded from income
for purposes of the 75% Test and the 95% Test, but the gain from prohibited
transactions is taxed at the rate of 100%. A prohibited transaction is a sale of
property held primarily for sale to customers in the ordinary course of a trade
or business, commonly referred to as "dealer" property. Whether property is
dealer property is a factual question and we cannot assure you that none of our
properties will be dealer properties. However, property will not be dealer
property if (1) we have held the property for at least four years for the
production of rental income, (2) capitalized expenditures on the property during
the four years preceding sale do not exceed 30% of the net selling price of the
property, and (3) we either (A) have seven or fewer sales of property (excluding
sales of foreclosure property and involuntary conversions) during the taxable
year, or (B) the aggregate adjusted tax bases of the properties sold during the
taxable year does not exceed 10% of the aggregate tax bases of all our assets at
the beginning of the taxable year, again excluding foreclosure property and
property that is involuntarily converted. If we fail to meet these "safe harbor"
provisions, that failure does not mean that the property is dealer property for
purposes of the 100% tax on prohibited transactions.
ASSET REQUIREMENTS
We must also satisfy the following three asset tests at the close of each
quarter of our taxable year:
- At least 75% of the value of our total assets must be represented by
interests in real estate assets, cash, cash items, government securities
and temporary investments in stock or debt instruments purchased with the
proceeds of new issuances of our stock;
- Not more than 25% of our assets may be represented by securities other
than those in the 75% asset class; and
- Of the investments included in the 25% asset class, the value of any one
issuer's securities owned by us may not exceed 5% of the value of our
total assets and we may not own more than 10% of any one issuer's
outstanding voting securities, although we may own 100% of the stock of a
"qualified REIT subsidiary."
If we meet the asset requirements at the end of any quarter, we will not
forfeit our REIT status for failure to satisfy the asset tests at the end of a
later quarter solely by reason of changes in asset values. Furthermore, if we
fail to meet the asset requirements because we acquired securities or other
property during a quarter, we can cure the failure by disposing of a sufficient
amount of non-qualifying assets within 30 days after the close of that quarter.
We intend to maintain adequate records of the values of our assets to ensure
compliance with the asset requirements, and to take any action as may be
required to cure any noncompliance.
ANNUAL DISTRIBUTION REQUIREMENTS
To qualify as a REIT, we are required to distribute dividends, other than
capital gain dividends, to our stockholders in an amount at least equal to (1)
the sum of 95% of our "REIT taxable income," computed without regard to the
dividends paid deduction and our net capital gain, if any, and 95% of our net
income after tax, if any, from foreclosure property, minus (2) the sum of
certain items of non-cash income. In addition, if we recognize any built-in gain
from the sale of an asset during its recognition period, we will be required to
distribute at least 95% of the built-in gain after tax. These required
distributions must be paid in the taxable year to which they relate or in the
following year, if declared before our tax return is filed and if paid on or
before the next regular dividend payment date.
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If we do not distribute all of our net capital gain, or if we distribute at
least 95% but less than 100% of our REIT taxable income, we will be taxed on the
undistributed amounts at regular corporate tax rates. We may elect to designate
undistributed net capital gains as a capital gain dividend and to pay a tax on
the amount so designated. Each stockholder will be required to report his share
of the capital gain dividend and will receive a credit for the tax we have paid
on his share of the capital gain dividend.
We intend to make timely distributions sufficient to satisfy the annual
distribution requirements. We expect to have adequate cash and cash equivalents
to enable us to make those distributions. Nevertheless, on occasion we might not
have sufficient cash or cash equivalents to make timely dividend distributions
in the required amounts, either because our share of the operating partnerships'
cash flow for a particular year is inadequate or because of timing differences
between actual receipt of income and payment of deductible expenses and the
reporting of such income and expenses for tax purposes. We might need to arrange
for borrowings to make the required distributions.
Certain of the REIT provisions may permit us to remedy our failure to meet
the distribution requirements for a taxable year by paying "deficiency
dividends" to stockholders in a later year. By paying deficiency dividends we
can avoid tax on the amounts so distributed, but we would be required to pay
interest on the amount deducted as deficiency dividends.
TAXATION OF STOCKHOLDERS
TAXATION OF U.S. TAXABLE STOCKHOLDERS
For purposes of this discussion, a "U.S. stockholder" means a holder of
common stock that, for federal income tax purposes is: (a) a citizen or resident
of the United States, (b) a corporation, partnership or other entity created or
organized in the United States or under the laws of the United States or of any
political subdivision thereof, (c) an estate whose income is includible in gross
income for United States federal income tax purposes regardless of its source,
or (d) a trust, if a United States court is able to exercise primary supervision
over the administration of the trust and one or more United States persons have
the authority to control all substantial decisions of the trust or certain
electing trusts that were in existence on August 19, 1996, and treated as a
domestic trust on such date. "United States" refers to the United States of
America, including the States and the District of Columbia, and United States
possessions, which include, Puerto Rico, the U.S. Virgin Islands, Guam, American
Samoa, Wake Island, and Northern Mariana Islands.
As long as we qualify as a REIT, distributions that are made to our U.S.
stockholders who are not tax exempt and that are made out of current or
accumulated earnings and profits and not designated as capital gain dividends
will be ordinary income to the stockholders and will not be eligible for the
dividends received deduction for corporate stockholders. Distributions, not
designated as capital gain dividends, that exceed our current and accumulated
earnings and profits will not be income to a U.S. stockholder until those
distributions exceed the stockholder's basis in his stock. If those
distributions exceed the basis of the stockholder's stock, the excess will be
long-term capital gain if the stock has been held for more than one year at the
time of distribution or will be short-term capital gain, and taxable at ordinary
income rates, if the stock has been held for one year or less at the time of
distribution. Under certain circumstances, a distribution received in January
will be treated as having been received as of December 31 of the prior year. If
we sustain losses in any taxable year, those losses may not be reported by our
stockholders.
Distributions that we designate as capital gain dividends will be taxed as
long-term capital gain to the extent they do not exceed our actual net capital
gain for the taxable year if the gains are realized from assets we have held
more than one year, regardless of the time a stockholder has held his stock.
Long-term capital gains realized by individual taxpayers are taxed at a maximum
federal rate of 20%, or 25% to the extent the gain arises from unrecaptured
depreciation deductions. Corporate stockholders may be required to treat up to
20% of certain capital gain dividends as ordinary income.
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We may elect to retain our net long term capital gains and pay a
corporate-level tax on those retained capital gains. A stockholder who owns
shares of our stock on December 31st of the year in which we have retained
capital gains will be required to include in his gross income his proportionate
share of the retained capital gains. He will also be deemed to have paid his
proportionate share of tax on such long-term capital gain and, therefore, will
receive a tax credit equal to his share of the corporate-level tax we have paid
on those retained capital gains. In addition, the stockholder's basis in his
stock will be increased by the difference between his share of the retained
capital gains and his share of the corporate-level tax. If we elect this
treatment, we must so notify the stockholders within 60 days following the end
of the taxable year in which the retained capital gains are realized.
If a stockholder realizes a loss on shares of our stock that he has held for
six months or less, the loss will be treated as a long term capital loss to
extent of capital gain dividends received by the stockholder with respect to
those shares. Distributions received by our stockholders and any gain from the
sale of their stock will not be treated as "passive activity income" and
therefore may not be offset by "passive losses."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
In general, distributions we make to tax-exempt stockholders will not
constitute "unrelated business taxable income" unless the tax-exempt stockholder
has borrowed to acquire or carry its stock. However, if we are "predominantly
held" by qualified pension trusts, any pension trust that holds more than 10% of
our stock may be required to report a portion of our distributions as unrelated
business taxable income. We will be "predominantly held" by qualified pension
trusts if one pension trust owns more than 25% of our stock or if a group of
pension trusts, each owning more than 10% of our stock, together own more than
50% of our stock. For this purpose, stock ownership is measured by the value of
our stock.
TAXATION OF FOREIGN STOCKHOLDERS
The rules governing U.S. federal income taxation of nonresident alien
individuals, foreign corporations, foreign partnerships and other foreign
stockholders, which we refer to collectively in this prospectus as "foreign
stockholders," are complex and we will provide only a limited discussion of
those rules.
PROSPECTIVE FOREIGN STOCKHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS
TO DETERMINE THE IMPACT OF U.S. FEDERAL, STATE AND LOCAL INCOME, ESTATE AND GIFT
TAX LAWS ON AN INVESTMENT IN OUR STOCK, INCLUDING U.S. WITHHOLDING AND REPORTING
REQUIREMENTS.
Distributions that are not attributable to gain from dispositions of U.S.
real property interests and are not designated as capital gain dividends will be
treated as ordinary income to the extent they are made out of our current or
accumulated earnings and profits. These distributions will ordinarily be subject
to a 30% withholding tax, unless a treaty reduces or eliminates the withholding
tax. However, if income from our stock is treated as effectively connected with
the conduct by the foreign stockholder of a U.S. trade or business, the
distributions generally will be taxed at graduated tax rates in the same manner
as U.S. stockholders are taxed, and the income may also be subject to the U.S.
branch profits tax if the foreign stockholder is a corporation. We will withhold
at the rate of 30% on distributions to our foreign stockholders unless (1) a
lower treaty rate applies, or (2) the foreign stockholder certifies (on IRS Form
4224 or a suitable successor form, such as IRS Form W-8ECI.) that its investment
in our stock is effectively connected with a U.S. trade or business of the
foreign stockholder.
Distributions in excess of our current and accumulated earnings and profits
will not be taxable to a foreign stockholder to the extent the distributions do
not exceed the basis of the stock, but rather will reduce the basis of the
stock. Such distributions may, however, be subject to withholding as if they
were dividends, although amounts so withheld may be refundable if it is later
determined that the distribution was, in fact, in excess of our current and
accumulated earnings and profits. To the extent the distributions in excess of
current and accumulated earnings and profits exceed the basis of the foreign
stockholder's stock, they will result in gain that is taxable as described below
as if the foreign stockholder sold the stock.
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For any year in which we qualify as a REIT, distributions that are
attributable to gain from sales or exchanges by us of U.S. real property
interests will be taxed to foreign stockholders under the provisions of the
Foreign Investment in Real Property Tax Act of 1980, or FIRPTA. Under FIRPTA,
these distributions are taxed to a foreign stockholder as if such gain is
effectively connected with a U.S. business. Thus, foreign stockholders will be
taxed at the normal capital gain rates that apply to U.S. stockholders, subject
to applicable alternative minimum tax and a special alternative minimum tax
applicable to nonresident alien individuals. Also, distributions subject to
FIRPTA may be subject to a 30% branch profits tax in the hands of a foreign
stockholder that is a corporation. We are required by Treasury regulations to
withhold 35% of any distribution to a foreign stockholder that is designated by
us as a capital gain dividend. Amounts we withhold may be credited by the
foreign stockholder against its U.S. federal income tax liability.
If we are a "domestically-controlled REIT," a foreign stockholder who sells
our stock generally will not be subject to U.S. taxation on the sale. A
"domestically-controlled REIT" is a REIT in which at all times during a
particular testing period, which is generally five years preceding the sale in
question, less than 50% of the value of the REITs shares are held directly or
indirectly by foreign stockholders. Because our stock is publicly traded, we
cannot assure you that we will be a domestically-controlled REIT. Even if we are
a domestically-controlled REIT, gain realized by a foreign stockholder on our
stock will be subject to U.S. federal income tax if (1) investment in our stock
is effectively connected with the foreign stockholder's U.S. trade or business
(or, if an income tax treaty applies, is attributable to a U.S. permanent
establishment of foreign stockholders), or (2) the foreign stockholder is a
nonresident alien individual who was present in the U.S. for 183 or more days
during the taxable year of the sale and certain other conditions apply.
If we are not, or if we cease to be, a domestically-controlled REIT, whether
gain from the disposition of our stock by a foreign stockholder will be taxed
under FIRPTA will depend on whether our stock is "regularly traded" on an
established securities market (e.g., the AMEX, on which our stock is listed) and
the extent of the foreign stockholder's direct and indirect ownership of our
stock. If our stock is "regularly traded," as defined in Treasury regulations,
on an established securities market at any time during the calendar year, a sale
of our stock by a foreign stockholder will be subject to tax under FIRPTA only
if the foreign stockholder owns, directly or indirectly, more than 5% of the
total fair market value of our outstanding stock at any time during the
five-year period ending on the date of the sale or other applicable
determination date. If the gain on disposition of our stock is subject to
FIRPTA, the foreign stockholder will be subject to the same U.S. tax treatment
as a U.S. stockholder with respect to the gain, subject to application of the
alternative minimum tax, a special alternative minimum tax in the case of
nonresident alien individuals and the possible application of the U.S. branch
profits tax if the foreign stockholder is a corporation. In addition, the
purchaser of the stock may be required to withhold 10% of the purchase price and
remit that amount to the IRS.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
We will report to our stockholders and to the IRS the amount of dividends
paid or deemed paid during each calendar year and the amount of tax withheld, if
any.
Under certain circumstances, U.S. stockholders may be subject to backup
withholding at a 31% rate on distributions on, or proceeds of a sale of, our
stock. Backup withholding will apply only if the stockholder (1) fails to
furnish his Taxpayer Identification Number, or TIN, which, for an individual, is
the individual's Social Security Number, (2) furnishes an incorrect TIN, (3) is
notified by the IRS that he has failed to properly report payments of interest
and dividends, or (4) fails to certify, under penalty of perjury, that he has
furnished a correct TIN and has not been notified by the IRS that he is subject
to backup withholding. U.S. stockholders should consult their own tax advisors
regarding their qualification for exemption from backup withholding and the
procedure for obtaining such an exemption.
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Additional issues may arise pertaining to information reporting and backup
withholding with respect to foreign stockholders, and foreign stockholders
should consult their tax advisors with respect to any such information reporting
and backup withholding requirements.
Backup withholding is not an additional tax. Rather, the amount of any
backup withholding will be allowed as a credit against the stockholder's U.S.
federal income liability and may entitle the stockholder to a refund, provided
the required information is reported to the IRS.
TAX ASPECTS OF THE OPERATING PARTNERSHIPS
Substantially all of our investments are and will be held indirectly through
the operating partnerships, which in turn will own the properties. In general,
partnerships are "pass-through" entities that are not themselves subject to
federal income tax. Instead, the partners receive allocations of the
partnership's income, gain, loss and deduction and the partners are subject to
tax on those allocations, without regard to actual cash distributions from the
partnership. We will include in income our shares of these allocations from the
operating partnerships for purposes of the REIT income tests and for purposes of
computing our REIT taxable income. In addition, we will include our share of the
assets of the operating partnerships, based on our capital interest in the
operating partnerships, for purposes of the REIT assets tests. See "Federal
Income Tax Considerations--Requirements for REIT Qualification."
PARTNERSHIP CLASSIFICATION
If the operating partnerships were to be taxed as corporations, rather than
as partnerships, the income from the properties would be subject to the
corporate "double tax" and we would fail to qualify as a REIT. We believe the
operating partnerships will be classified as partnerships. Applicable Treasury
regulations provide that certain business entities formed under corporate or
similar statutes will be taxed as corporations. Other business entities,
including the operating partnerships, which have at least two members and are
not formed under a corporate or similar statute will be taxed as partnerships
unless they affirmatively elect to be taxed as corporations. The operating
partnerships have not elected, and they do not intend to elect, to be taxed as
corporations. In addition, in the opinion of McCutchen, Doyle, Brown & Enersen,
LLP, based on the provisions of the operating partnership agreements and related
documents, and on certain factual representations and assumptions described in
the opinion, each of the operating partnerships is treated as a partnership for
federal income tax purposes (and not as an association or a publicly traded
partnership taxable as a corporation). An opinion of counsel is not binding on
the IRS or the courts, and a successful challenge to the status of the operating
partnerships as partnerships for federal income tax purposes would result in our
failure to qualify as a REIT.
PARTNERSHIP ALLOCATIONS
The provisions of a partnership agreement generally determine the partners'
respective shares of partnership income, gain, loss and deduction. However,
those allocations will be disregarded for tax purposes if they do not have
"substantial economic effect" under Section 704(b) of the Internal Revenue Code
and applicable Treasury regulations. If an allocation is not recognized for
federal income tax purposes, the item subject to the allocation will be
reallocated in accordance with the partners' interests in the partnership,
taking into account all of the facts and circumstances of the partners'
arrangement. The allocations in the partnership agreements of the operating
partnerships are intended to comply with the requirements of Section 704(b) and
the applicable Treasury regulations.
TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTIES
Section 704(c) of the Internal Revenue Code requires all income, gain, loss
and deduction attributable to property that is contributed to a partnership to
be allocated for federal income tax purposes so that the partner who contributed
the property is charged with the difference between the fair market value of the
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property and its adjusted tax basis at the time of contribution, which we refer
to in this prospectus as a book-tax disparity. Similar rules apply to
partnership property that is "revalued" when a new or existing partner obtains
an interest in a partnership in exchange for a new contribution to partnership
capital, as was the case when we became the general partner of the operating
partnerships.
In general, allocations under Section 704(c) are intended to eliminate the
book-tax disparity over the period of the partnership's ownership of the
property, by allocating disproportionate amounts of depreciation and gain or
loss among the partners. These allocations are made solely for federal income
tax purposes and do not affect the book capital accounts or other economic
arrangements among the partners. In certain circumstances, the special
allocation rules of Section 704(c) may not entirely correct the book-tax
disparity with respect to a particular taxable year or a specific transaction.
Thus, we may be allocated smaller amounts of depreciation and possibly greater
amounts of taxable income from the operating partnerships than if the book-tax
disparity did not exist, and those allocations might adversely affect our
ability to comply with the REIT distribution requirements. See "Federal Income
Tax Considerations--Requirements for REIT Qualification--Annual Distribution
Requirements."
BASIS IN PARTNERSHIP INTEREST
Our adjusted tax basis in our interests in the operating partnerships
generally (1) will be equal to the amount of cash and the basis of any other
property we contribute to the operating partnerships, (2) will be increased by
our allocable share of the indebtedness of the operating partnerships and their
operating income, and (3) will be reduced, but not below zero, by our allocable
share of the losses of the operating partnerships and distributions we receive
from the operating partnerships, including constructive distributions resulting
from reductions in our share of indebtedness of the operating partnerships.
If an allocation of loss from an operating partnership would reduce the
adjusted tax basis of our partnership interest below zero, the recognition of
that loss will be deferred until such time as the recognition of that loss will
not reduce our adjusted tax basis below zero. If a distribution from an
operating partnership, or a constructive distribution resulting from a reduction
in our share of partnership indebtedness, exceeds the adjusted tax basis of our
partnership interest, the distribution will be gain to us. Such gain will
normally be characterized as capital gain and, if our partnership interest has
been held longer than one year, the gain will be long term capital gain.
OTHER TAX CONSEQUENCES
The state and local tax treatment of us and our stockholders may not conform
to the federal income tax treatment discussed above. You should consult your own
tax advisor regarding the effect of state and local taxes on an investment in
our stock.
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ERISA CONSIDERATIONS
GENERAL
In evaluating a prospective purchase of common stock, a fiduciary of a
qualified profit-sharing, pension or stock bonus plan, including a plan for
self-employed individuals and their employees or any other employee benefit plan
(a "plan") subject to the Employee Retirement Income Security Act of 1974, as
amended, or ERISA, should consider (a) whether the ownership of common stock is
in accordance with the documents and instruments governing such plan; (b)
whether the ownership of common stock is consistent with the fiduciary's
responsibilities and satisfies the requirements of Part 4 of Title I of ERISA,
where applicable, and, in particular, the diversification, and prudence
requirements of Section 404 of ERISA; (c) the effect in the unlikely event that
our assets are treated as assets of the plan; and (d) the need to value the
assets of the plan annually.
The fiduciary investment considerations summarized below provide a general
discussion that does not include all the fiduciary investment considerations
relevant to a plan. This summary is based on the current provisions of ERISA and
the Internal Revenue Code and regulations and rulings thereunder, both of which
may be changed, perhaps adversely and with retroactive effect, by future
legislative, administrative or judicial actions. This discussion does not deal
with all aspects of ERISA, of the Internal Revenue Code or, to the extent not
preempted, state law that may be relevant to the particular circumstances of a
plan. This discussion should not be construed as legal advice and prospective
purchasers of common stock should consult with and rely upon their own advisors
in evaluating these matters in light of their own personal circumstances.
PLAN ASSETS REGULATIONS
Under Department of Labor, or DOL, regulations determining the assets of a
plan for purposes of ERISA and the related prohibited transaction excise tax
provisions of the Internal Revenue Code, when a plan makes an equity investment
in another entity, the underlying assets of that entity will not be considered
assets of the plan if the equity interest is a "publicly-offered security."
For purposes of the DOL regulations, a "publicly-offered security" is a
security that is (a) "freely transferable," (b) part of a class of securities
that is "widely held," and (c) part of a class of securities that is registered
under section 12(b) or 12(g) of the Securities Exchange Act of 1934 or sold
pursuant to an effective registration statement under the Securities Act
provided the securities are registered under the Exchange Act within 120 days
after the end of the fiscal year of the issuer during which the offering
occurred. The common stock has been registered under the Securities Act and the
Exchange Act.
The DOL regulations provide that a security is "widely held" only if it is a
part of the class of securities that is owned by 100 or more investors
independent of the issuer and of one another. A security will not fail to be
"widely held" because the number of independent investors falls below 100
subsequent to the offering as a result of events beyond the control of the
issuer. We expect the common stock to remain "widely held."
The DOL regulations provide that whether a security is "freely transferable"
is a factual question to be determined on the basis of all the relevant facts
and circumstances. The DOL regulations further provide that when a security is
part of an offering in which the minimum investment is $10,000 or less, as is
the case with the offering of the common stock, certain restrictions ordinarily
will not, alone or in combination, affect the finding that such securities are
"freely transferable." The DOL regulations indicate that a restriction or
prohibition against a transfer or assignment which would result in a termination
or reclassification of an entity for federal or state tax purposes will not
affect the determination of whether securities are "freely transferable." We
believe that the restrictions imposed under our charter on the transfer of the
common stock are limited to the restrictions on transfer generally permitted
under the DOL
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regulations and are not likely to result in the failure of the common stock to
be "freely transferable." However, we cannot assure you that the DOL will not
reach a contrary conclusion.
Therefore, we believe that the common stock should be treated as
"publicly-offered securities," under the DOL regulations and, accordingly, that
our underlying assets should not be considered to be assets of any plan
investing in the common stock.
GENERAL ERISA REQUIREMENTS
ERISA generally requires that the assets of a plan be held in trust and that
the trustee, or an investment manager within the meaning of Section 3(38) of
ERISA, have exclusive authority and discretion to manage and control the assets
of the plan. As discussed above, under current law, our assets do not appear
likely to be assets of plans receiving shares of common stock. However, if our
assets were deemed to be assets of plans under ERISA, our directors would likely
be fiduciaries with respect to the plans that invest in us and the prudence and
other fiduciary standards set forth in ERISA would apply to the directors and to
all of our investments. Plan fiduciaries who make the decision to invest in the
common stock could, under certain circumstances, be liable as co-fiduciaries for
actions taken by us or our directors that do not conform to the ERISA standards
for investments under Part 4 of Title I of ERISA.
PROHIBITED TRANSACTIONS
Section 406 of ERISA provides that plan fiduciaries are prohibited from
causing a plan to engage in certain types of transactions. Section 406(a)
prohibits a fiduciary from knowingly causing a plan to engage directly or
indirectly in, among other things: (a) a sale or exchange, or leasing, of
property with a party in interest; (b) a loan or other extension of credit with
a party in interest; (c) a transaction involving the furnishing of goods,
services or facilities with a party in interest; or (d) a transaction involving
the transfer of plan assets to, or use of plan assets by or for the benefit of,
a party in interest. Additionally, Section 406 prohibits a plan fiduciary from
dealing with plan assets in his own interest or for his own account, from acting
in any capacity in any transaction involving the plan on behalf of a party or
representing a party whose interests are adverse to the interest of the plan,
and from receiving any consideration for his own account from any party dealing
with the plan in connection with a transaction involving plan assets. Similar
provisions in Section 4975 of the Internal Revenue Code apply to qualified
plans, and to certain other plans and individual retirement arrangements not
subject to ERISA.
If our assets were deemed to be assets of a plan, a director could be
characterized as a fiduciary of the plan under ERISA or the Internal Revenue
Code. A director's characterization as a fiduciary would cause him to be deemed
as a "party in interest" under ERISA and a "disqualified person" under the
Internal Revenue Code with respect to a plan, or other plan or individual
retirement arrangement, receiving common stock, which could cause various
transactions between the director and us to constitute prohibited transactions
under ERISA and the Internal Revenue Code. Moreover, if our assets were deemed
to be assets of the plans, transactions between us and parties in interest or
disqualified persons with respect to any plan, or other plan or individual
retirement arrangement, that has invested in us could be prohibited transactions
with respect to the plan, unless a statutory or administrative exemption is
available.
If a prohibited transaction has occurred, certain of the parties involved in
the transaction could be required to (a) undo the transaction, (b) restore to
the plan any profit realized on the transaction, (c) make good to the plan any
loss suffered by it as a result of the transaction and (d) pay an excise tax
equal to fifteen percent of the "amount involved" in the transaction for each
year in which the transaction remains uncorrected. If such transaction is not
corrected within the "taxable period," as defined in Section 4975(f)(2) of the
Internal Revenue Code, the parties involved in the transaction could be required
to pay an excise tax equal to 100% of the "amount involved."
If the investment constituted a prohibited transaction under Section
408(e)(2) of the Internal Revenue Code by reason of us engaging in a prohibited
transaction with the individual who established an
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individual retirement arrangement, or IRA, or his beneficiary, the IRA would
lose its tax-exempt status under federal tax laws. The other penalties for
prohibited transactions would not apply.
REPORTING AND DISCLOSURE
As part of the reporting and disclosure requirements applicable to plans
under ERISA and the Internal Revenue Code, fiduciaries of a plan are required to
determine annually the fair market value of the assets of such plan as of the
close of such plan's fiscal year and to file annual reports valuing such assets.
Since the common stock is listed on the AMEX, and since our assets will not be
deemed to be assets of the plans, the requirements for valuation should be
complied with by such listing and trading.
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UNDERWRITING
The underwriters named below, acting through their representatives, A.G.
Edwards & Sons, Inc., Legg Mason Wood Walker, Incorporated and Sutro & Co.
Incorporated have severally agreed, subject to the terms and conditions of the
underwriting agreement between the underwriters and us to purchase from us the
respective number of shares of common stock set forth opposite their name below:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ----------------------------------------------------------------------------------------------- -----------------
<S> <C>
A.G. Edwards & Sons, Inc.......................................................................
Legg Mason Wood Walker, Incorporated...........................................................
Sutro & Co. Incorporated.......................................................................
Total........................................................................................
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
are subject to certain conditions precedent and that the underwriters will
purchase all such shares of the common stock if any of such shares are
purchased. The underwriters are obligated to take and pay for all of the shares
of common stock offered by this prospectus, other than those covered by the
over-allotment option described below, if any are taken.
The representatives of the underwriters have advised us that the
underwriters propose initially to offer such shares of common stock to the
public at the public offering price set forth on the cover page of this
prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The underwriters may allow, and such dealers may re-allow,
a concession not in excess of $ per share to certain other dealers. After
the shares of common stock are released for sale to the public, the offering
price and other selling terms may be changed by the underwriters.
We have granted to the underwriters an option, exercisable for 30 days after
the date of this prospectus, to purchase up to an aggregate 1,012,500 additional
shares of common stock at the public offering price, less the underwriting
discounts and commissions, set forth on the cover page of this prospectus. The
underwriters may exercise such option solely to cover over-allotments, if any,
made in connection with the sale of the shares of common stock that the
underwriters have agreed to purchase. To the extent that the underwriters
exercise such option, each of the underwriters will become obligated, subject to
certain conditions, to purchase approximately the same percentage of such
additional shares as the number set forth next to such underwriter's name in the
preceding table bears to the total number of shares in such table, and we will
be obligated, pursuant to the option, to sell such shares to the underwriters.
The price of the shares of common stock purchased by the underwriters will
be the public offering price set forth on the cover page of this prospectus less
the following discounts, to be paid to the underwriters by Mission West
Properties, Inc. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares of common
stock.
<TABLE>
<CAPTION>
FULL
NO EXERCISE EXERCISE
----------- ------------
<S> <C> <C>
Per Share.......................................................... $ $
Total..............................................................
</TABLE>
We expect to incur expenses of approximately $ in connection with
this offering.
We and our directors and officers have agreed, for a period of 180 days
after the date of this prospectus, not to issue, sell, offer to sell, transfer,
grant any third party the right to purchase or otherwise dispose of any shares
of common stock or any securities convertible into common stock without the
prior written consent of A.G. Edwards & Sons, Inc. This 180-day period is known
as the lock-up period. Our agreement does not include shares of common stock
issued pursuant to our stock option plan to employees or independent contractors
who are not directors or officers. A.G. Edwards & Sons, Inc. may, without
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notice and in its sole discretion, allow us and our directors and officers to
dispose of common stock or other securities prior to the expiration of such
180-day period. There are, however, no agreements between A.G. Edwards & Sons,
Inc. and us and our directors and officers that would allow them to do so.
The underwriters have informed us that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
The underwriters have advised us that, in connection with this offering,
certain persons participating in this offering may engage in transactions that
may have the effect of stabilizing, maintaining or otherwise affecting the
market price of the common stock at a level above that which might otherwise
prevail in the open market. These transactions may include stabilizing bids,
syndicate covering transactions and the imposition of penalty bids. A
stabilizing bid is a bid for or the purchase of common stock on behalf of the
underwriters for the purpose of preventing or retarding a decline in the market
price of the common stock. A syndicate covering transaction is the bid for or
the purchase of the common stock on behalf of the underwriters to reduce a short
position incurred by the underwriters in connection with this offering. A
penalty bid is an arrangement permitting the representatives to reclaim the
selling concession otherwise accruing to an underwriter or syndicate member in
connection with the offering if the common stock originally sold by such
underwriter or syndicate member is purchased by the representatives in a
syndicate covering transaction and has therefore not been effectively placed by
such underwriter or syndicate member. The representatives have advised us that
such transactions may be effected on the American Stock Exchange or otherwise
and, if commenced, may be discontinued at any time.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
LEGAL MATTERS
The validity of the shares of common stock offered hereby, as well as
certain tax matters described under "Federal Income Tax Considerations", will be
passed upon for us by McCutchen, Doyle, Brown & Enersen LLP. A partner of
McCutchen, Doyle, Brown & Enersen, LLP, who is rendering services to us with
respect to the offering, owns 12,333 shares of common stock. Gibson, Dunn &
Crutcher LLP will pass on certain legal matters for the underwriters. McCutchen,
Doyle, Brown & Enersen, LLP and Gibson, Dunn & Crutcher LLP will rely on the
opinion of Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland, as to
certain matters of Maryland law.
EXPERTS
The financial statements of Mission West Properties, Inc. as of December 31,
1998 and 1997 and for the year ended December 31, 1998, the one month ended
December 31, 1997 and the years ended November 30, 1997 and 1996 and the Berg
Properties (Predecessor) as of June 30, 1998 and December 31, 1997 and for the
six months ended June 30, 1998 and the years ended December 31, 1997 and 1996
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
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WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission a registration statement on Form S-11,
including exhibits, schedules and amendments filed with the registration
statement, under the Securities Act with respect to the common stock to be sold
under this prospectus. This prospectus does not contain all the information set
forth in the registration statement. For further information about Mission West
and the shares of common stock to be sold in the offering, please refer to the
registration statement. Statements made in this prospectus concerning the
contents of any contract, agreement or other document filed as an exhibit to the
registration statement are summaries of the terms of contracts, agreements or
documents and are not necessarily complete. Complete copies of these documents
have been filed with the registration statement.
We also file required reports, proxy statements and other information with
the Commission. These reports and statements and the registration statement and
exhibits may be inspected, without charge, and copies may be obtained at
prescribed rates, at the Commission's Public Reference facility maintained by
the Commission, 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. The registration statement and other information filed by
us with the Commission is available at the web site maintained by the Commission
on the world wide web at http://www.sec.gov. These documents may also be
inspected at the office of the American Stock Exchange, 86 Trinity Place, New
York, New York, and the Pacific Exchange, Inc., 115 Sansome Street, 8th Floor,
San Francisco, California.
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MISSION WEST PROPERTIES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Unaudited Pro Forma Condensed Consolidated Balance Sheet as of March 31, 1999.............................. F-2
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the three months ended March 31,
1999..................................................................................................... F-3
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the year ended December 31, 1998.... F-4
Notes and Management's Assumptions to the Pro Forma Condensed Consolidated Financial Statements............ F-5
HISTORICAL CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants.......................................................................... F-11
Consolidated Balance Sheets as of March 31, 1999 (unaudited) and December 31, 1998 and 1997................ F-12
Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998 (unaudited) and
the year ended December 31, 1998, the one month ended December 31, 1997 and the years ended November 30,
1997 and 1996............................................................................................ F-13
Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 1999 and
1998 (unaudited) and the year ended December 31, 1998, the one month ended December 31, 1997 and the
years ended November 30, 1997 and 1996................................................................... F-14
Consolidated Statements of Cash Flows for the three months ended March 31, 1999 (unaudited) and the year
ended December 31, 1998, the one month ended December 31, 1997 and the years ended November 30, 1997 and
1996..................................................................................................... F-15
Notes to Consolidated Financial Statements................................................................. F-16
Report of Independent Accountants.......................................................................... F-36
Schedule III: Real Estate and Accumulated Depreciation of Mission West Properties, Inc. as of December 31,
1998..................................................................................................... F-37
Notes to Schedule III...................................................................................... F-38
COMBINED FINANCIAL STATEMENTS FOR THE BERG PROPERTIES:
Report of Independent Accountants.......................................................................... F-39
Combined Balance Sheet as of June 30, 1998................................................................. F-40
Combined Statements of Operations for the six months ended June 30, 1998 and the years ended December 31,
1997 and 1996............................................................................................ F-41
Combined Statements of Net Equity for the six months ended June 30, 1998 and the years ended December 31,
1997 and 1996............................................................................................ F-42
Combined Statements of Cash Flows for the six months ended June 30, 1998 and the years ended December 31,
1997 and 1996............................................................................................ F-43
Notes to Combined Financial Statements..................................................................... F-44
</TABLE>
F-1
<PAGE>
MISSION WEST PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACQUISITION OF
MISSION WEST THE
PROPERTIES, MICROSOFT
INC. PROJECT PRO FORMA
MARCH 31, 1999 (NOTE 3) MARCH 31, 1999
-------------- ---------------- --------------
<S> <C> <C> <C>
ASSETS:
Real estate:
Land....................................................... $ 93,496 $ 46,833 $ 140,329
Buildings and improvements................................. 436,608 109,274 545,882
-------------- -------- --------------
530,104 156,107 686,211
Less, accumulated depreciation............................... (8,113) -- (8,113)
-------------- -------- --------------
521,991 156,107 678,098
Cash and cash equivalents.................................... 134 -- 134
Deferred rent receivable..................................... 2,377 -- 2,377
Other assets................................................. 2,304 -- 2,304
-------------- -------- --------------
TOTAL ASSETS............................................. $ 526,806 $ 156,107 $ 682,913
-------------- -------- --------------
-------------- -------- --------------
LIABILITIES AND SHAREHOLDERS' EQUITY:
Line of credit............................................... $ 18,523 $ 32,057 $ 50,580
Mortgage notes payable....................................... 156,656 -- 156,656
Mortgage notes payable (related parties)..................... 24,080 25,000 49,080
Interest payable............................................. 458 -- 458
Interest payable (related parties)........................... 416 -- 416
Security deposits............................................ 2,060 -- 2,060
Prepaid rental income........................................ 3,018 -- 3,018
Accounts payable and accrued expenses........................ 2,357 -- 2,357
-------------- -------- --------------
TOTAL LIABILITIES........................................ 207,568 57,057 264,625
-------------- -------- --------------
Minority interest.............................................. 285,037 99,050 384,087
STOCKHOLDERS' EQUITY:
Preferred Stock, $0.001 par value, 20,000,000 authorized,
none issued and outstanding on a pro forma basis........... -- -- --
Common Stock, $0.001 par value, 200,000,000 authorized
8,233,583 issued and outstanding on a pro forma basis...... 8 -- 8
Additional paid in capital................................... 55,595 -- 55,595
Less amounts receivable on private placement................. (900) -- (900)
Accumulated deficit.......................................... (20,502) -- (20,502)
-------------- -------- --------------
TOTAL STOCKHOLDERS' EQUITY............................... 34,201 34,201
-------------- -------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY..................... $ 526,806 $ $156,107 $ 682,913
-------------- -------- --------------
-------------- -------- --------------
</TABLE>
The accompanying notes and management's assumptions are an integral part of this
statement.
F-2
<PAGE>
MISSION WEST PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-------------------------------------------
<S> <C> <C> <C> <C> <C>
MISSION WEST ACQUISITION
PROPERTIES, OF OTHER
INC. MICROSOFT PROPERTY OTHER PRO FORMA
MARCH 31, PROJECT ACQUISITIONS ADJUSTMENTS MARCH 31,
1999 (NOTE 3) (NOTE 5) (NOTE 6) 1999
-------------- ------------- ------------- ------------- ------------
REVENUE:
Rental revenues from real estate....... $ 14,027 $ 5,150 $ 172 $ (93) $ 19,256
Tenant reimbursements.................. 2,236 46 25 -- 2,307
Other income, including interest....... 149 -- -- -- 149
-------------- ------------- ----- ----- ------------
TOTAL REVENUE........................ 16,412 5,196 197 (93) 21,712
-------------- ------------- ----- ----- ------------
EXPENSES:
Property operating, maintenance and
real estate taxes.................... 2,311 -- 20 -- 2,331
Interest............................... 2,971 520 -- -- 3,491
Interest (related parties)............. 416 406 38 -- 860
General and administrative............. 406 -- -- -- 406
Depreciation of real estate............ 2,703 683 25 -- 3,411
-------------- ------------- ----- ----- ------------
TOTAL EXPENSES....................... 8,807 1,609 83 -- 10,499
-------------- ------------- ----- ----- ------------
Income before minority interest.......... 7,605 3,587 114 (93) 11,213
Minority interest........................ 6,724 3,342 101 17 10,184
-------------- ------------- ----- ----- ------------
Net income........................... $ 881 $ 245 $ 13 $ (110) $ 1,029
-------------- ------------- ----- ----- ------------
-------------- ------------- ----- ----- ------------
Basic earnings per share (Note 2)........ $ 0.11 $ 0.13
-------------- ------------
-------------- ------------
Diluted earnings per share (Note 2)...... $ 0.10 $ 0.12
-------------- ------------
-------------- ------------
Weighted average number of common shares
outstanding (basic).................... 8,227,261 8,227,261
-------------- ------------
-------------- ------------
Weighted average number of common shares
outstanding (diluted).................. 8,415,412 8,415,412
-------------- ------------
-------------- ------------
</TABLE>
The accompanying notes and management's assumptions are an integral part of this
statement.
F-3
<PAGE>
MISSION WEST PROPERTIES, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ACQUISITION OF
MISSION WEST JULY 1998 THE MICROSOFT OTHER PROPERTY OTHER PRO FORMA
PROPERTIES, INC. ACQUISITION PROJECT (NOTE ACQUISITIONS ADJUSTMENTS DECEMBER 31,
DECEMBER 31, 1998 (NOTE 4) 3) (NOTE 5) (NOTE 6) 1998
----------------- ---------- --------------- --------------- ------------- ------------
REVENUE:
Rental revenues from real
estate......................... $ 27,285 $ 25,642 $ 20,599 $ 2,861 $ 574 $ 76,961
Tenant reimbursements............ 4,193 4,044 183 413 -- 8,833
Other income, including
interest....................... 278 -- -- -- -- 278
----------------- ---------- ------- ------ ------ ------------
TOTAL REVENUE.................. 31,756 29,686 20,782 3,274 574 86,072
----------------- ---------- ------- ------ ------ ------------
EXPENSES:
Property operating, maintenance
and real estate taxes.......... 4,821 4,430 -- 338 -- 9,589
Interest......................... 4,685 3,044 2,273 5,679 15,681
Interest (related parties)....... 3,511 61 1,773 789 (2,515) 3,619
General and administrative....... 1,501 -- -- -- -- 1,501
Management fees (related
parties)....................... -- 645 -- -- (645) --
Depreciation of real estate...... 5,410 3,862 2,732 338 1,294 13,636
----------------- ---------- ------- ------ ------ ------------
TOTAL EXPENSES................. 19,928 12,042 6,778 1,465 3,813 44,026
----------------- ---------- ------- ------ ------ ------------
Income before minority interest.... 11,828 17,644 14,004 1,809 (3,239) 42,046
Minority interest.................. 12,049 15,897 13,047 1,643 (4,258) 38,378
----------------- ---------- ------- ------ ------ ------------
Net (loss) income.............. $ (221) $ 1,747 $ 957 $ 166 $ 1,019 $ 3,668
----------------- ---------- ------- ------ ------ ------------
----------------- ---------- ------- ------ ------ ------------
Basic and diluted (loss) earnings
per share (Note 2)............... $ (0.13) $ 0.45
----------------- ------------
----------------- ------------
Weighted average number of common
shares outstanding (basic) (Note
2)............................... 1,688,059 8,183,117
----------------- ------------
----------------- ------------
Weighted average number of common
shares outstanding (diluted)
(Note 2)......................... 1,710,789 8,205,847
----------------- ------------
----------------- ------------
</TABLE>
The accompanying notes and management's assumptions are an integral part of this
statement.
F-4
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND O.P. UNIT DATA)
1. ORGANIZATION AND BASIS OF PRESENTATION:
Mission West Properties, Inc. (the "Company") is engaged in the acquisition,
marketing and leasing of R&D office properties, located primarily in the
"Silicon Valley" portion of the San Francisco Bay Area. As of March 31, 1999,
the Company managed 72 properties totaling approximately 4.57 million square
feet through its controlling interests in four separate partnerships (the
"operating partnerships") in which the Company is the sole general partner. For
the year ending December 31, 1999, the Company intends to 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, self-advised and fully integrated
REIT.
The unaudited pro forma balance sheet as of March 31, 1999 is based on the
unaudited historical financial statements of the Company and has been prepared
as if the purchase, effective as of April 1, 1999, of an approximately 515,700
square foot five-building R&D complex located on L'Avenida Avenue in Mountain
View, California, which has been fully leased to Microsoft Corporation ("the
Microsoft Project"), had occurred on March 31, 1999. The unaudited pro forma
statements of operations for the three months ended March 31, 1999 and the year
ended December 31, 1998 are based upon the historical financial statements of
the Company and have been prepared as if each of the following transactions had
occurred as of January 1, 1998: (i) the purchase completed by the Company,
effective as of July 1, 1998, of our general partnership interest in each of the
operating partnerships, (ii) the purchase, effective as of April 1, 1999, of the
Microsoft Project which has been fully leased to Microsoft, and (iii) the
purchases completed by the Company during the last two quarters of 1998 and the
first quarter of 1999 consisting of three newly constructed R&D properties
comprising, in the aggregate, 217,511 rentable square feet located in Silicon
Valley.
The unaudited pro forma financial statements are not necessarily indicative
of what the actual financial position or results of operations would have been
assuming the completion of the above transactions as of the beginning of the
periods indicated, nor do they purport to project the Company's financial
position or results of operations at any future date or for any future period.
In addition, the historical operating results for the three months ended March
31, 1999 are not necessarily indicative of the results to be obtained by the
Company for the year ending December 31, 1999.
2. ASSUMPTIONS:
The following assumptions have been made regarding the operations of the
Company in the preparation of the pro forma financial statements:
a. The Company has elected to be and qualified as a REIT for income tax
reporting purposes and has distributed sufficient taxable income to meet
the requirements of the Internal Revenue Code and, therefore, incurred no
income tax liabilities effective with the year ended December 31, 1998.
The Company has assumed that there were no dividends required to be paid
to maintain REIT status for the year ended December 31, 1998.
b. Rent has been recognized on the straight-line method of accounting in
accordance with generally accepted accounting principles.
F-5
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND O.P. UNIT DATA)
2. ASSUMPTIONS: (CONTINUED)
c. Depreciation has been computed using the straight-line method over
estimated useful lives of 40 years for buildings and improvements.
d. Weighted average number of common shares outstanding on a pro forma
basis (basic and diluted) for the year ended December 31, 1998 assumes
that the private placement of 6,495,058 shares of the Company's common
stock completed in December 1998 had occurred as of January 1, 1998. The
pro forma financial statements, have not however, been adjusted to
reflect the new capital structure of the Company upon the completion of
this proposed offering of 6,750,000 shares of the Company's common stock.
The following amounts give effect to the new capital structure
contemplated by this prospectus and assume an offering price of $8 1/16
net of underwriting discount and offering expenses of approximately
$3,565:
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AS ADJUSTED AS ADJUSTED
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
Net income................................................ $ 1,994 $ 7,195
Basic income (loss) per share............................. $ .13 $ .48
Diluted income (loss) per share........................... $ .13 $ .48
Funds from Operations..................................... $ 15,450 $ 59,288
Funds Available for Distribution.......................... $ 13,998 $ 57,857
</TABLE>
3. ACQUISITION OF THE MICROSOFT PROJECT:
The total acquisition cost of the Microsoft Project was $156,107 based on
the debt assumed and the value of the O.P. Units issued. In connection with the
acquisition, the Company assumed $25,000 of mortgage debt due to the Berg Group,
an affiliate of Carl E. Berg and Clyde J. Berg, $32,057 due to Microsoft for
shell and tenant improvements, and issued 13,206,629 limited partnership units
("O.P. Units") (representing $99,050 of net equity attributable to minority
interests). For pro forma financial statement purposes, we assume that amounts
due to Microsoft had been funded through additional borrowings on the Wells
Fargo line of credit. The average interest rate on the line of credit was 6.49%
and 7.09% for the three months ended March 31, 1999 and the year ended December
31, 1998, respectively. The debt due the Berg Group is due on demand and bears
an interest rate identical to that as charged on the Company's line of credit.
In accordance with the terms of the lease, on April 1, 1999, Microsoft began
paying monthly base rent of approximately $1,226 for the first four buildings,
which consist of approximately 415,700 rentable square feet. On June 1, 1999,
Microsoft began paying monthly rent of approximately $295 for the fifth
building, which consists of approximately 100,000 rentable square feet. On an
annual basis, rental income from the Microsoft Project, which has been reflected
on a straight-line basis, is $20,599, or $5,150 per quarter, assuming all rents
commenced on January 1, 1998. Additionally, the lease with Microsoft provides
for a management fee equal to 1% of the base rent. For the first year of the
lease, this fee is $183, or $46 per quarter.
F-6
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND O.P. UNIT DATA)
3. ACQUISITION OF THE MICROSOFT PROJECT: (CONTINUED)
For the three months ended March 31, 1999, the Company would have incurred
additional interest expense of $520 and interest expense (related parties) of
$406 as a result of the debt assumed in connection with this acquisition, on a
pro forma basis. Additionally, for the year ended December 31, 1998, the Company
would have incurred additional interest expense of $2,273, as well as interest
expense (related parties) of $1,773.
Additionally, an adjustment has been made to reflect depreciation expense in
the amount of $683 and $2,732 for the three months ended March 31, 1999 and the
year ended December 31, 1998, respectively.
4. THE JULY 1998 ACQUISITION:
On July 1, 1998, the Company acquired control of four existing limited
partnerships by becoming the sole general partner in each such partnership (the
"July 1998 Acquisition"). The July 1998 Acquisition was accounted for as a
purchase with the results of operations of the operating partnerships included
from July 1, 1998. Accordingly, the historical consolidated statement of
operations of the Company for the year ended December 31, 1998 includes the
results of operations for the properties acquired in the July 1998 Acquisition
for the six months ended December 31, 1998. In order to reflect the consummation
of the July 1998 Acquisition as of January 1, 1998 for pro forma financial
statement purposes, the actual results of operations of the properties acquired
in the July 1998 Acquisition for the six months ended June 30, 1998 have been
included.
5. OTHER PROPERTY ACQUISITIONS
During the second half of 1998 and the first quarter of 1999, the Company,
through the operating partnerships, acquired three additional properties
comprising, in the aggregate, 217,511 square feet of rentable space (the "Other
Property Acquisitions"). These acquisitions were accounted for as a purchase and
were acquired from the Berg Group under the Berg land holdings option agreement
and the pending projects acquisition agreement. The total acquisition cost for
these three properties was $22,250. In the acquisitions, the Company assumed
$13,131 of debt due the Berg Group, and issued 1,366,094 O.P. Units. The
following table contains information about the acquisitions:
<TABLE>
<CAPTION>
RICHARD AVENUE HELLYER AVENUE SANTA TERESA TOTAL
--------------------- -------------------- ---------------- ----------
<S> <C> <C> <C> <C>
Acquisition Date..................... September 1, 1998 November 1, 1998 March 1, 1999
Debt Assumed......................... $ 2,374 $ 7,232 $ 3,525 $ 13,131
Other Liabilities Assumed............ -- 561 88 649
Total Acquisition Value.............. 4,198 9,494 8,558 22,250
Depreciable basis.................... 2,912 6,502 5,990 15,404
Monthly Rent (Straight-lined)........ 60 136 86 282
O.P. Units Issued.................... 405,166 266,898 694,030 1,366,094
Estimated Value of O.P. Units at
Acquisition Date................... $ 1,824 $ 1,701 4,945 $ 8,470
</TABLE>
F-7
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND O.P. UNIT DATA)
5. OTHER PROPERTY ACQUISITIONS (CONTINUED)
The debt assumed in connection with these acquisitions bears an interest
rate identical to that as charged on the Company's line of credit. The average
interest rate on the line of credit was 6.49% and 7.09% for the three months
ended March 31, 1999 and the year ended December 31, 1998, respectively. Based
on the information in the above table, the following adjustments have been made
to the pro forma financial statements in order to reflect these acquisitions as
of January 1, 1998:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED MARCH 31, 1999
----------------------------------------------------------------
<S> <C> <C> <C> <C>
RICHARD AVENUE HELLYER AVENUE SANTA TERESA TOTAL
----------------- ----------------- --------------- ---------
Rental revenue...................................... -- -- $ 172 $ 172
Tenant reimbursements............................... -- -- 25 25
Property operating and maintenance expenses and real
estate taxes...................................... -- -- 20 20
Interest (related parties).......................... -- -- 38 38
Depreciation........................................ -- -- 25 25
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------
<S> <C> <C> <C> <C>
RICHARD AVENUE HELLYER AVENUE SANTA TERESA TOTAL
----------------- --------------- ------------- ---------
Rental revenue...................................... $ 476 $ 1,356 $ 1,029 $ 2,861
Tenant reimbursements............................... 57 207 149 413
Property operating and maintenance expenses and real
estate taxes...................................... 45 171 122 338
Interest (related parties).......................... 112 427 250 789
Depreciation........................................ 50 138 150 338
</TABLE>
6. OTHER ADJUSTMENTS:
The following additional adjustments were made in preparing the pro forma
financial statements:
(a) Adjustments of $(93) and $574 have been made to rental revenues from
real estate to reflect straight-lined rents as if the Company acquired
the July 1998 Acquisition properties on January 1, 1998 for the three
months ended March 31, 1999 and the year ended December 31, 1998,
respectively.
(b) Adjustments have been made to the pro forma statements of operations for
the three months ended March 31, 1999 and the year ended December 31,
1998 to state interest expense on a pro forma basis as a result of the
following transactions that altered the capital structure of the Company,
as if they had occurred on January 1, 1998:
(1) In connection with the July 1998 Acquisition, the Company assumed
$233,638 of debt.
(2) On September 23, 1998, the Company, in its capacity as the general
partner of the operating partnerships, obtained a $130,000 secured
loan with Prudential Insurance Company of America. The interest rate
on the loan is fixed at 6.56% per annum, the amortization period
F-8
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND O.P. UNIT DATA)
6. OTHER ADJUSTMENTS: (CONTINUED)
is 30 years, and the term of the loan is 10 years. The proceeds from
the loan were used to pay a portion of mortgage notes payable
(including amounts due to related parties) in the amount of $118,636.
(3) Effective September 1, 1998, the Company assumed $2,374 of debt due
the Berg Group in connection with the acquisition of the Richard
Avenue property.
(4) Effective November 1, 1998, the Company assumed $7,232 of debt due
the Berg Group in connection with the acquisition of the Hellyer
Avenue property.
(5) On December 29, 1998, the Company completed the private placement of
6,495,058 shares for total net proceeds of $27,827 that were utilized
to reduce outstanding debt under the line of credit facility.
(6) Effective March 1, 1999, the Company assumed $3,525 of debt due the
Berg Group in connection with the acquisition of the Santa Teresa
property.
(7) Effective April 1, 1999, the Company assumed $25,000 of mortgage debt
due to the Berg Group and $32,057 due to Microsoft for shell and
tenant improvements in connection with the acquisition of the
Microsoft project. For pro forma financial statement purposes, we
assume that amounts due to Microsoft are funded through additional
borrowings on the line of credit facility.
A schedule of interest expense on a pro forma basis for the three months
ended March 31, 1999 and the year ended December 31, 1998 is as follows:
F-9
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND O.P. UNIT DATA)
6. OTHER ADJUSTMENTS: (CONTINUED)
<TABLE>
<CAPTION>
PRO FORMA INTEREST
EXPENSE FOR THE PRO FORMA INTEREST
THREE MONTHS EXPENSE FOR THE
PRO FORMA BALANCE INTEREST ENDED MARCH 31, YEAR ENDED DECEMBER
AT MARCH 31, 1999 RATE 1999 31, 1998
------------------ --------- ------------------- -------------------
<S> <C> <C> <C> <C>
LINE OF CREDIT:
Wells Fargo Bank, N.A............................ $ 50,580 variable $ 836 $ 5,003
MORTGAGE NOTES PAYABLE:
Great West Life and Annuity Insurance Company.... 7,697 7.00% 135 546
Great West Life and Annuity Insurance Company.... 3,672 7.00% 64 261
Prudential Capital Group......................... 2,002 8.75% 44 184
New York Life Insurance Company.................. 424 9.625% 10 43
Home Savings and Loan Association................ 513 9.50% 12 52
Amdahl Corporation............................... 6,895 9.42% 156 636
Citicorp U.S.A. Inc.............................. 3,105 variable 55 228
Mellon Mortgage Company.......................... 2,935 8.125% 60 243
Prudential Insurance Company of America.......... 129,413 6.56% 2,119 8,485
-------- ------ -------
Subtotal..................................... $ 156,656 2,655 10,678
------ -------
Total (including Line of Credit)............. 3,491 15,681
Historical interest expense prior to pro forma
adjustment....................................... 2,971 7,729
------ -------
Gross pro forma adjustment to interest expense..... 520 7,952
Less:
Amounts reflected in pro forma adjustment(Note
4)........................................... 520 2,273
------ -------
Net pro forma adjustment to interest expense....... $ -- $ 5,679
------ -------
------ -------
MORTGAGE NOTES PAYABLE (RELATED PARTIES):
The Berg Group................................... $ 49,080 variable $ 860 $ 3,619
Historical expense (related party) prior to pro
forma adjustment............................... 416 3,572
------ -------
Gross pro forma adjustment to interest expense
(related party)................................ 444 47
Less:
Amounts reflected in pro forma adjustment(Note
4)........................................... 406 1,773
Amounts reflected in pro forma adjustment(Note
5)........................................... 38 789
------ -------
Net pro forma adjustment to interest expense
(related parties)................................ $ -- $ (2,515)
------ -------
------ -------
</TABLE>
(c) The Company is self-managed and ceased paying management fees June 30,
1998. Therefore, historical management fees have been eliminated to
reflect the Company as a self-managed REIT.
(d) Upon the effective date of the Company's acquisition of the July 1998
Acquisition properties, the real estate assets were recorded at their
estimated fair values. A pro forma adjustment of $1,294 has been made to
historical depreciation expense for the year ended December 31, 1998 to
reflect the higher cost basis to the Company for the period from January
1, 1998 to June 30, 1998.
(e) Minority interest represents the separate private ownership of the
operating partnerships by the Berg Group and other non-affiliated
interests. Upon the Company's initial investment in
F-10
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE
CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 31, 1999 AND
FOR THE YEAR ENDED DECEMBER 31, 1998 (CONTINUED)
(UNAUDITED AND DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND O.P. UNIT DATA)
6. OTHER ADJUSTMENTS: (CONTINUED)
July 1998, the Company owned a general partnership interest of 12.11% in
the operating partnerships, on a weighted average basis, taken as a
whole. As a result of several property acquisitions since July 1998, the
Company's ownership percentage has decreased given the overall increase
in O.P. Units issued and outstanding. As of March 31, 1999 and December
31, 1998, on a pro forma basis, the Company owned general partnership
interests in the operating partnerships of 10%, on a weighted average
basis, taken as a whole.
F-11
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
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.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------------
PricewaterhouseCoopers LLP
San Francisco, California
January 29, 1999
F-12
<PAGE>
MISSION WEST PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1998 1997
MARCH 31, ---------- ---------
1999
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Real estate assets:
Land........................................................................ $ 93,496 $ 90,929 $ --
Buildings and improvements.................................................. 436,608 430,510 --
----------- ---------- ---------
530,104 521,439 --
Less accumulated depreciation............................................... (8,113) (5,410) --
----------- ---------- ---------
Net real estate assets........................................................ 521,991 516,029
Cash and cash equivalents..................................................... 134 246 5,569
Deferred rent................................................................. 2,377 1,624 --
Other assets.................................................................. 2,304 1,967 194
----------- ---------- ---------
Total assets.............................................................. $ 526,806 $ 519,866 $ 5,763
----------- ---------- ---------
----------- ---------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Line of credit................................................................ $ 18,523 $ 27,201 $ --
Mortgage notes payable........................................................ 156,656 157,188 --
Mortgage notes payable (related parties)...................................... 24,080 20,752 --
Interest payable.............................................................. 458 632 --
Interest payable (related parties)............................................ 416 -- --
Security deposits............................................................. 2,060 2,061 --
Prepaid rental income......................................................... 3,018 3,246 --
Accounts payable and accrued expenses......................................... 2,357 2,154 552
----------- ---------- ---------
Total liabilities......................................................... 207,568 213,234 552
----------- ---------- ---------
Commitments and contingencies (Notes 4, 6 and 17)
Minority interest............................................................. 285,037 273,379 --
Stockholders' equity:
Preferred stock, $0.001 par value, 20,000,000 shares authorized, none issued
and outstanding............................................................. -- -- --
Common stock, $.001 par value at March 31, 1999 and December 31, 1998 and no
par at December 31, 1997, 200,000,000 shares authorized, 8,233,583 shares,
8,218,594 shares and 1,501,104 shares issued and outstanding at March 31,
1999, December 31, 1998 and 1997, respectively.............................. 8 8 --
Paid-in capital............................................................... 55,595 55,528 26,707
Less amounts receivable from private placement................................ (900) (900) (334)
Accumulated deficit........................................................... (20,502) (21,383) (21,162)
----------- ---------- ---------
Total stockholders' equity................................................ 34,201 33,253 5,211
----------- ---------- ---------
Total liabilities and stockholders' equity................................ $ 526,806 $ 519,866 $ 5,763
----------- ---------- ---------
----------- ---------- ---------
</TABLE>
See notes to consolidated financial statements
F-13
<PAGE>
MISSION WEST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED ONE MONTH YEARS ENDED NOVEMBER
MARCH 31, YEAR ENDED ENDED 30,
-------------------- DECEMBER 31, DECEMBER 31, --------------------
1999 1998 1998 1997 1997 1996
--------- --------- ------------ ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUE:
Rental revenues from real estate.................... $ 14,027 -- $ 27,285 $ -- $ 1,376 $ 7,065
Tenant reimbursements............................... 2,236 -- 4,193 -- -- --
Other income, including interest.................... 149 $ 77 278 27 359 348
--------- --------- ------------ ------ --------- ---------
16,412 77 31,756 27 1,735 7,413
--------- --------- ------------ ------ --------- ---------
EXPENSES:
Property operating, maintenance and real estate
taxes............................................. 2,311 -- 4,821 -- 246 1,643
Interest............................................ 2,971 -- 4,685 -- 425 3,045
Interest (related parties).......................... 416 -- 3,511 -- -- --
General and administrative.......................... 406 230 1,501 139 1,467 991
Depreciation and amortization....................... 2,703 -- 5,410 -- 246 1,369
--------- --------- ------------ ------ --------- ---------
8,807 230 19,928 139 2,384 7,048
--------- --------- ------------ ------ --------- ---------
Income (loss) before gain (loss) on sale of real
estate assets, minority interest and income
taxes............................................. 7,605 (153) 11,828 (112) (649) 365
Gain (loss) on sale of real estate assets........... -- -- -- -- 4,736 (306)
--------- --------- ------------ ------ --------- ---------
Income (loss) before minority interest and income
taxes............................................. 7,605 (153) 11,828 (112) 4,087 59
Minority interest................................... 6,724 -- 12,049 -- -- --
--------- --------- ------------ ------ --------- ---------
Income (loss) before income taxes................... 881 (153) (221) (112) 4,087 59
Benefit (provision) for income taxes................ -- -- -- 38 (1,043) (24)
--------- --------- ------------ ------ --------- ---------
Net income (loss)................................... $ 881 $ (153) $ (221) $ (74) $ 3,044 $ 35
--------- --------- ------------ ------ --------- ---------
--------- --------- ------------ ------ --------- ---------
Per share amounts:
Basic net income (loss) per share................... $ 0.11 $ (0.10) $ (0.13) $ (0.05) $ 18.48 $ 0.77
--------- --------- ------------ ------ --------- ---------
--------- --------- ------------ ------ --------- ---------
Diluted net income (loss) per share................. $ 0.10 $ (0.10) $ (0.13) $ (0.05) $ 18.48 $ 0.72
--------- --------- ------------ ------ --------- ---------
--------- --------- ------------ ------ --------- ---------
</TABLE>
See notes to consolidated financial statements
F-14
<PAGE>
MISSION WEST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SHARES OF AMOUNTS
COMMON RECEIVABLE TOTAL
STOCK COMMON PAID-IN ON 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 upon option
exercise................................. 80 10 10
Net income................................. 35 35
----------- --------- --------- ------------ ------------ -------------
Balance, November 30, 1996................. 45,704 19,456 (5,274) 14,182
Issuance of common stock upon private
placement................................ 200,000 900 900
Issuance of common stock upon private
placement................................ 1,250,000 5,625 5,625
Amounts receivable on 1997 private
placements............................... $ (484) (484)
Issuance of common stock upon option
exercise................................. 5,400 726 726
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 1997 private
placements............................... 150 150
Net (loss)................................. (74) (74)
----------- --------- --------- ------------ ------------ -------------
Balance, December 31, 1997................. 1,501,104 26,707 (334) (21,162) 5,211
Issuance of common stock upon option
exercise................................. 225,000 1,013 (900) 113
Issuance of common stock upon private
placement................................ 6,495,058 27,827 27,827
Amounts received from 1997 private
placements............................... 334 334
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
Issuance of common stock upon option
exercise................................. 15,000 67 67
Odd lot tender offer....................... (11) --
Net income................................. 881 881
----------- --------- --------- ------------ ------------ -------------
Balance, March 31, 1999 (unaudited)........ 8,233,583 8 $ 55,595 $ (900) $ (20,502) $ 34,201
----------- --------- --------- ------------ ------------ -------------
----------- --------- --------- ------------ ------------ -------------
</TABLE>
See notes to consolidated financial statements
F-15
<PAGE>
MISSION WEST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED ONE MONTH YEAR ENDED NOVEMBER
MARCH 31, YEAR ENDED ENDED 30,
-------------------- DECEMBER 31, DECEMBER 31, --------------------
1999 1998 1998 1997 1997 1996
--------- --------- ------------ ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................... $ 881 $ (153) $ (221) $ (74) $ 3,044 $ 35
Adjustments to reconcile net income (loss) to net
cash provided by operating activities
Minority interest................................. 6,724 -- 12,049 -- -- --
Depreciation...................................... 2,703 -- 5,410 -- 246 1,379
Deferred income taxes............................. -- -- -- -- -- 35
(Gain) loss on sale of real estate assets......... -- -- -- -- (4,736) 306
Change in operating assets and liabilities
Deferred rent..................................... (753) -- (1,624) -- -- --
Other assets...................................... (337) (135) (1,594) -- 1,295 (457)
Interest payable.................................. (174) -- 632 -- -- --
Interest payable (related parties)................ 416 -- -- -- -- --
Security deposits................................. (89) -- 218 -- -- --
Prepaid rental income............................. (228) -- 812 -- -- --
Accounts payable and accrued expenses............. 203 (117) 582 28 (849) (77)
--------- --------- ------------ ------ --------- ---------
Net cash provided by (used in) operating
activities...................................... 9,346 (405) 16,264 (46) (1,000) 1,221
--------- --------- ------------ ------ --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to real estate......................... (107) -- (118) -- -- --
Net maturities of short-term investments............ -- -- -- -- -- 2,528
Net proceeds from the sale of real estate assets -- -- -- -- 46,198 --
--------- --------- ------------ ------ --------- ---------
Net cash (used in) provided by investing
activities...................................... (107) -- (118) -- 46,198 2,528
--------- --------- ------------ ------ --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on line of credit.................... (8,678) -- (11,843) -- -- --
Proceeds from mortgage notes payable................ -- -- 130,000 -- -- --
PRINCIPAL PAYMENTS ON MORTGAGE NOTES PAYABLE........ (532) -- (19,586) -- (30,753) (1,214)
Principal payments on mortgage notes payable
(related parties)................................. (196) -- (148,279) -- -- --
Proceeds from issuance of common stock.............. -- -- 28,161 150 6,041 --
Net proceeds from exercise of stock options......... 67 -- 113 -- 726 10
Repurchase of common stock.......................... -- (11) (11) -- -- --
Minority interest distributions..................... (12) -- (24) -- -- --
Dividends........................................... -- -- -- -- (18,858) --
--------- --------- ------------ ------ --------- ---------
Net cash (used in) provided by financing
activities...................................... (9,351) (11) (21,469) 150 (42,844) (1,204)
--------- --------- ------------ ------ --------- ---------
Net (decrease) increase in cash and cash
equivalents..................................... (112) (416) (5,323) 104 2,354 2,545
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR........ 246 5,569 5,569 5,465 3,111 566
--------- --------- ------------ ------ --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR.............. $ 134 $ 5,153 $ 246 $ 5,569 $ 5,465 $ 3,111
--------- --------- ------------ ------ --------- ---------
--------- --------- ------------ ------ --------- ---------
</TABLE>
See notes to consolidated financial statements
F-16
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER 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 $35,200. All limited partnership
interests in the operating partnerships were converted into 59,479,633 units of
limited partnership interest ("O.P. Units"), which represented an ownership
interest of approximately 87.89% of the operating partnerships. The operating
partnerships are the vehicles through which the Company will own its assets,
will make its future acquisitions, and generally conduct its business.
On December 30, 1998, the Company was reincorporated under the laws of the
State of Maryland through a merger with and into Mission West Properties, Inc.
Accordingly, shares of the former company, Mission West Properties, a California
corporation (no par), which were outstanding at December 30, 1998, were
converted into shares of common stock ($.001 par value per share) on a
one-for-one basis.
As of March 31, 1999, the Company owns a general partnership interest of
12.07%, 12.13%, 11.76% and 12.13% 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 11.92% general partnership interest in
the operating partnerships, taken as a whole, on a weighted average 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.
As of March 31, 1999, the Company, through the operating partnerships, owns
interests in 72 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 ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of
F-17
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
The accompanying unaudited interim financial statements have been prepared
by the Company's management in accordance with GAAP and in conjunction with the
rules and regulations of the Securities and Exchange Commission. In the opinion
of management, the interim financial statements presented herein, reflect all
adjustments of a normal and recurring nature which are necessary to fairly state
the interim financial statements. The results of operations for the interim
period ended March 31, 1999 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999.
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.
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 future 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 March 31, 1999 and December 31, 1998,
the properties' carrying values did not exceed the estimated fair values.
DEPRECIATION:
Depreciation is computed using the straight-line method over the estimated
useful lives of 40 years for buildings and improvements.
CASH AND CASH EQUIVALENTS:
The Company considers highly liquid short-term investments with original
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.
F-18
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
OTHER ASSETS:
Included in 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 GAAP 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 three months ended March 31, 1999
and 1998, and the year ended December 31, 1998.
NET INCOME PER SHARE:
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 ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES and related interpretations. Accordingly, compensation cost for
stock options is measured as the excess, if any,
F-19
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 judgment 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 the Company's
tenants operate primarily in the technology industry. Additionally, because the
properties are leased to 72 tenants, default by any major tenant could
significantly impact the results of the consolidated total. One tenant, Apple
Computers, Inc. accounted for approximately 12.0% and 12.2% of the Company's
rental revenues for the three months ended March 31, 1999 and the year ended
December 31, 1998, respectively, with the next largest tenant accounting for
5.4% and 6.6% of total rental revenues for those same periods, respectively.
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.
F-20
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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>
PRO FORMA YEAR ENDED PRO FORMA YEAR ENDED
DECEMBER 31, 1998 DECEMBER 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 amortization................. 10,781 10,842
------- -------
39,164 38,875
------- -------
Income before minority interest, gain on sale of
real estate and income taxes.................. 23,089 17,245
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.......... $ .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
F-21
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. STOCK TRANSACTIONS (CONTINUED)
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 March 31, 1999 and December 31, 1998, $1,941 and $2,050
remained outstanding under the Demand Notes, respectively. The Demand Notes,
along with the interest expense (interest income to the operating partnerships),
are eliminated in consolidation and are not included in the corresponding line
items within the consolidated financial statements.
Each of the limited partners of the operating partnerships has the right to
exchange their O.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 O.P. Units once during any 12-month period by
each limited partner of up to one-third of the aggregate number of O.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 O.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 O.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 O.P. Units.
If the total purchase price of the O.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 O.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. SEE NOTE
16--SUBSEQUENT EVENTS.
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.
In February 1999, a former officer of the Company purchased 15,000 shares
pursuant to an option at $4.50 per share. Total proceeds to the Company were
$67.
F-22
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 88.08% and 87.98%, on a weighted average basis, of
the ownership interests in the real estate operations of the Company as of March
31, 1999 and December 31, 1998, respectively. 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 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
83% interest in the other joint venture. For the three months ended March 31,
1999 and 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 properties was $23 and $42, respectively.
6. REAL ESTATE
PENDING PROJECTS ACQUISITION AGREEMENT
The Company has entered into a pending projects acquisition agreement under
which the Company will acquire through the operating partnerships 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 and other sellers. The agreement fixes the acquisition value to be
received by the sellers based upon the capitalized rental value of the property
when fully leased. During the second half of 1998 and the first quarter of 1999,
the Company completed two acquisitions under the pending projects acquisition
agreement representing 107,796 rentable square feet (see PROPERTY ACQUISITIONS
below). In April 1999, the Company acquired the L'Avenida project consisting of
approximately 515,700 rentable square feet currently being constructed and under
lease to Microsoft Corporation ("Microsoft")--SEE NOTE 16. At March 31, 1999,
excluding the Microsoft project at L'Avenida, there were two remaining projects
comprising approximately 395,104 rentable square feet which the Company expects
to acquire under the pending projects acquisition agreement.
The sellers of the pending development projects may elect to receive cash or
O.P. Units at a value of $4.50 per unit, which was set in May 1998 based on the
$4.50 per share price of the Company's common stock agreed to in private
placement transactions at that time. 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 O.P. Units. Under GAAP, the acquisition cost in
the form of O.P. Units issued will be valued based upon the current market value
of the Company's common stock on the date the acquisition closes. Consequently,
the Company's actual cost of these future acquisitions will depend in large part
on the percentage of the fixed acquisition value paid for by the issuance of
O.P. Units and the price of the Company's common stock on the closing of the
acquisition.
F-23
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. REAL ESTATE (CONTINUED)
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 154 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, O.P. Units. To date,
the Company has completed one acquisition under the Berg land holdings option
agreement representing approximately 110,000 rentable square feet. 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 acquisition value of the parcel as defined in the agreement
upon which the improvements are constructed (ranging from $8.50 to $20.00 per
square foot); (d) 10% per annum 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% per annum on the full construction
costs of the building for the period from the date funds were distributed by the
developer to the close of escrow; 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 March
31, 1999, 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 acquisition price for these two
properties was $13,692. The Company assumed $9,606 of debt due Berg & Berg
Enterprises, Inc. (an affiliate of Carl E. Berg and Clyde J. Berg) 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.
During the first quarter of 1999, the Company acquired a newly constructed
R&D property located on Santa Teresa Boulevard in San Jose, California. This
acquisition added approximately 54,996 square feet of rentable space and was
acquired from the Berg Group under the pending projects acquisition agreement.
The total acquisition price for this property was $8,558. In connection with
this acquisition, the Company
F-24
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. REAL ESTATE (CONTINUED)
assumed $3,525 of debt due Berg & Berg Enterprises, Inc., as well as other
liabilities of $88, and issued 694,030 O.P. Units to various members of the Berg
Group.
The Santa Teresa property is a two-story building which is currently leased
by one tenant with a lease expiration of January 2006.
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
1(ST) YEAR'S
RENT ESTIMATED COST TO BERG ACQUISITION
PROPERTY PER SQUARE FOOT FAIR VALUE GROUP PRICE
- ---------------------------------------------------------- --------------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Richard Avenue............................................ $ 1.06 $ 6,716 $ 2,080 $ 4,198
Hellyer Avenue............................................ $ 0.99 13,034 8,380 9,494
Santa Teresa.............................................. $ 1.38 9,107 3,613 8,558
----------- ------------ -----------
Total..................................................... $ 28,857 $ 14,073 $ 22,250
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
7. DEBT
The following table sets forth certain information regarding debt
outstanding as of March 31, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MATURITY INTEREST
DEBT DESCRIPTION COLLATERAL PROPERTIES 1999 1998 DATE RATE
- ------------------------------ ------------------------------------------ ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
LINE OF CREDIT:
Wells Fargo................... 1810 McCandless Drive, Milpitas, CA $ 18,523 $ 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
</TABLE>
F-25
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. DEBT (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MATURITY INTEREST
DEBT DESCRIPTION COLLATERAL PROPERTIES 1999 1998 DATE RATE
- ------------------------------ ------------------------------------------ ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
MORTGAGE NOTES PAYABLE
(RELATED PARTIES):
2033-2043 Samaritan Drive, San Jose, CA
2133 Samaritan Drive, San Jose, CA
2233-2243 Samaritan Drive, San Jose, CA 24,080 20,752(3) 12/99(4) (2)
MORTGAGE NOTES PAYABLE):(5)
Great West Life & Annuity
Insurance Company........... 6320 San Ignacio Ave, San Jose, CA 7,697 7,732 2/04 7.0%
Great West Life & Annuity 6540 Via del Oro, San Jose, CA
Insurance Company........... 6385 San Ignacio Ave., San Jose, CA 3,672 3,689 5/04 7.0%
Prudential Capital Group...... 20400 Mariani, Cupertino, CA 2,002 2,034 3/09 8.75%
New York Life Insurance
Company..................... 10440 Bubb Road, Cupertino, CA 424 430 8/09 9.625%
Home Savings & Loan
Association................. 10460 Bubb Road, Cupertino, CA 513 525 1/07 9.5%
Amdahl Corporation............ 3120 Scott, Santa Clara, CA 6,895 6,945 3/14 9.42%
Citicorp U.S.A. Inc........... 2800 Bayview Drive, Fremont, CA 3,105 3,105 4/00 (6)
Mellon Mortgage Company....... 3530 Bassett, Santa Clara, CA 2,935 2,961 6/01 8.125%
</TABLE>
F-26
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. DEBT (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31, MATURITY INTEREST
DEBT DESCRIPTION COLLATERAL PROPERTIES 1999 1998 DATE RATE
- ------------------------------ ------------------------------------------ ----------- ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
Prudential Insurance Company
of America(7)............... 10300 Bubb, Cupertino, CA 129,413 129,767 10/08 6.56%
10500 N. DeAnza, Cupertino, CA
4050 Starboard, Fremont, CA
45700 Northpoint Loop, Fremont, CA
45738 Northpoint Loop, Fremont, CA
450-460 National, Mountain View, CA
4949 Hellyer, San Jose, CA
6311 San Ignacio, San Jose, CA
6321 San Ignacio, San Jose, CA
6325 San Ignacio, San Jose, CA
6331 San Ignacio, San Jose, CA
6341 San Ignacio, San Jose, CA
6351 San Ignacio, San Jose, CA
3236 Scott, Santa Clara, CA
3560 Bassett, Santa Clara, CA
3570 Bassett, Santa Clara, CA
3580 Bassett, Santa Clara, CA
1135 Kern, Sunnyvale, CA
1212 Bordeaux, Sunnyvale, CA
1230 E. Arques, Sunnyvale, CA
1250 E. Arques, Sunnyvale, CA
1170 Morse, Sunnyvale, CA
3540 Bassett, Santa Clara, CA
3542 Bassett, Santa Clara, CA
3544 Bassett, Santa Clara, CA
3550 Bassett, Santa Clara, CA
----------- ------------
Mortgage Notes Payable
Subtotal.................... 156,656 157,188
----------- ------------
Total......................... $ 199,259 $ 205,141
----------- ------------
----------- ------------
</TABLE>
- --------------------------
(1) Amounts available under the Wells Fargo line at March 31, 1999 and December
31,1998 were $81,477 and $72,799, respectively. 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 rates for the three months ended March 31, 1999 and December 31,
1998 were 6.49% and 6.66%, respectively.
(3) There is no set repayment plan associated with this debt; payments are made
to Berg & Berg Enterprises, Inc. on demand.
F-27
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
7. DEBT (CONTINUED)
(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 March
31, 1999 and December 31, 1998.
(6) One month LIBOR plus 1.625% adjusted monthly (6.46% and 6.68% at March 31,
1999 and December 31, 1998, respectively).
(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.
Scheduled principal payments on debt as of March 31, 1999 for the periods
ending, are as follows:
<TABLE>
<CAPTION>
LINES OF MORTGAGE NOTES MORTGAGE NOTES PAYABLE
CREDIT PAYABLE (RELATED PARTIES) TOTAL
-------------- -------------- ---------------------- ----------
<S> <C> <C> <C> <C>
December 31, 1999............................ $ 18,523 $ 1,657 $ 24,080 $ 44,260
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
------- -------------- ------- ----------
$ 18,523 $ 156,656 $ 24,080 $ 199,259
------- -------------- ------- ----------
------- -------------- ------- ----------
</TABLE>
8. OPERATING PARTNERSHIP DISTRIBUTIONS
On December 28, 1998, the Company, as general partner of the operating
partnerships, declared a $0.17 per O.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 was applied against
amounts owed by him to the operating partnerships as of December 31, 1998. The
remaining amount of $328 was owed to other O.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.
F-28
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. STOCK-BASED COMPENSATION PLANS (CONTINUED)
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 1/48(th) 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.
The following table shows the activity and detail for the 1997 Stock Option
Plan:
<TABLE>
<CAPTION>
1997 STOCK OPTION PRICE
OPTION PLAN PER SHARE
----------- -------------
<S> <C> <C>
Balance, December 31, 1997.................................... --
Options granted............................................. 905,000 $ 4.50
Options exercised........................................... (225,000)
-----------
Balance, December 31, 1998.................................... 680,0000
Options exercised........................................... (15,000)
Options cancelled........................................... (65,000)
-----------
Balance, March 31, 1999....................................... 600,000
-----------
-----------
</TABLE>
As of March 31, 1999, 4,660,000 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 March 31, 1999, outstanding
options to purchase 100,867 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, the Company's net loss and net loss per share
would have been increased by approximately $146 or $.09 per share, resulting in
a total consolidated 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.
F-29
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. STOCK-BASED COMPENSATION PLANS (CONTINUED)
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:
<TABLE>
<CAPTION>
DECEMBER 31, 1997 NOVEMBER 30, 1996
----------------- -------------------
<S> <C> <C>
Beginning share balance............................ 2,967 3,333
Exercised (Between $90 and $292.5 per share)....... (2,747) (80)
Canceled ($274 per share).......................... (220) (286)
------ -----
Share Balance...................................... -- 2,967
------ -----
------ -----
</TABLE>
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 three months ended March 31, 1999 and the
year ended December 31, 1998, the Company recognized $0 and $22, respectively,
of expense for employer contributions made in connection with this plan.
10. NET INCOME PER SHARE
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.
F-30
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. NET INCOME PER SHARE (CONTINUED)
The computation for weighted average shares is detailed below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED MONTH YEARS ENDED NOVEMBER
MARCH 31, YEAR ENDED ENDED 30,
---------------------- DECEMBER 31, DECEMBER 31, --------------------
1999 1998 1998 1997 1997 1996
---------- ---------- ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Weighted average shares outstanding (basic).... 8,227,261 1,503,933 1,688,059 1,501,104 164,692 45,684
Incremental shares from assumed
option exercise.............................. 188,151 -- 22,730 -- -- 2,901
---------- ---------- ------------ ------------ --------- ---------
Weighted average shares outstanding
(diluted).................................... 8,415,412 1,503,933 1,710,789 1,501,104 164,692 48,585
---------- ---------- ------------ ------------ --------- ---------
---------- ---------- ------------ ------------ --------- ---------
</TABLE>
The outstanding O.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. O.P.
Units outstanding at March 31, 1999 and December 31, 1998 were 60,845,727 and
60,151,697, respectively.
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,
--------------------
1997
---------
1998
---------
<S> <C> <C>
Prepaid rent.............................................................. $ 134 --
--------- ---------
Deferred tax assets..................................................... 134 --
--------- ---------
--------- ---------
Deferred rental revenue................................................... (67) --
--------- ---------
Deferred tax liabilities................................................ (67) --
--------- ---------
--------- ---------
67 --
Deferred tax asset valuation allowance.................................... (67) --
--------- ---------
Net deferred taxes........................................................ $ -- --
--------- ---------
--------- ---------
</TABLE>
F-31
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. INCOME TAXES (CONTINUED)
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......................................... 6.0 -- -- --
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..................... (6.0) -- (1.4) 6.1
Reconciliation of previous tax estimates......................... -- -- (8.9) --
Other............................................................ -- -- -- 3.9
----- --- --- ---------
0% 34.0% 25.3% 40.7%
----- --- --- ---------
----- --- --- ---------
</TABLE>
The provision for (benefit from) income taxes comprises the following:
<TABLE>
<CAPTION>
YEAR ENDED
YEAR ENDED ONE MONTH ENDED NOVEMBER 30,
DECEMBER 31, DECEMBER 31, --------------------
1998 1997 1997 1996
--------------- --------------- --------- ---------
<S> <C> <C> <C> <C>
Current:
Federal................................................ -- $ (38) $ 491 $ (21)
State.................................................. -- -- 85 10
----- --- --------- ---
-- (38) 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
F-32
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
11. INCOME TAXES (CONTINUED)
the valuation allowance for fiscal years 1997 and 1996 were due to changes in
the state loss carryforward amounts.
12. RELATED PARTY TRANSACTIONS
As of March 31, 1999 and December 31, 1998, the Berg Group owned 57,158,653
and 56,464,623 O.P. Units, respectively, of the total 60,845,727 and 60,151,697
O.P. Units issued and outstanding for those same periods, respectively. Along
with the Company's common shares owned by the Berg Group, the Berg Group's
interest in the Company represents 82.9% and 82.8% of the Company as of March
31, 1999 and December 31, 1998, respectively, assuming conversion of the O.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 March 31, 1999 and December 31, 1998, debt in the amount of $24,080
and $20,752, respectively, was due Berg & Berg Enterprises, Inc. This amount
includes $13,131 of debt assumed in connection with the first quarter 1999 and
the fourth quarter 1998 acquisitions of three properties (SEE NOTE 6)
Additionally, on December 28, 1998, the operating partnerships declared a
distribution of $0.17 per O.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 $416 and $3,511
for the three months ended March 31, 1999 and the year ended December 31, 1998,
respectively.
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.
Rental amounts and overhead reimbursements paid to Berg & Berg Enterprises, Inc.
were $20 and $61 for the three months ended March 31, 1999 and the year ended
December 31, 1998, respectively.
13. FUTURE MINIMUM RENTS
The Company, through the operating partnerships, owns an interest in 72 R&D
properties (71 at December 31, 1998) 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
F-33
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. FUTURE MINIMUM RENTS (CONTINUED)
options. Future minimum rentals under noncancellable operating leases, excluding
tenant reimbursements of expenses, as of March 31, 1999 and December 31, 1998,
are as follows:
<TABLE>
<CAPTION>
MARCH 31, 1999 DECEMBER 31, 1998
-------------- -----------------
<S> <C> <C>
1999.................................................. $ 39,777 $ 52,219
2000.................................................. 49,028 48,084
2001.................................................. 44,453 43,473
2002.................................................. 34,616 33,595
2003.................................................. 23,972 22,910
Thereafter............................................ 33,151 30,801
-------------- --------
Total............................................. $ 224,997 $ 231,082
-------------- --------
-------------- --------
</TABLE>
14. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest was $3,139, $0, $7,540, $0, $410 and $3,106 for the
three months ended March 31, 1999 and 1998, 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 $115 and $546 for the three months
ended March 31, 1998 and the year ended November 30, 1997, respectively.
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.
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 1998 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 O.P. Units
for a total acquisition cost of $13,692.
Amounts due to the Berg Group in the amount of $9,599 for distributions
declared to O.P. Unit holders, were converted to related party debt due Berg &
Berg Enterprises, Inc. on December 31, 1998.
In connection with the first quarter 1999 acquisition of the Santa Teresa
property, the Company assumed $3,525 of related party debt due Berg & Berg
Enterprises, Inc., as well as other liabilities of $88, and issued 694,030 O.P.
Units for a total acquisition cost of $8,558.
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
F-34
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
15. SALE OF REAL ESTATE INVESTMENTS (CONTINUED)
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
Effective April 1, 1999, the Company acquired an approximately 515,700
square foot five-building R&D complex located on L'Avenida Avenue in Mountain
View, California, which has been fully leased to Microsoft Corporation under the
terms of the Company's pending projects acquisition agreement with the Berg
Group members and other owners of projects subject to the agreement.
Under the terms of the pending projects acquisition agreement, the L'Avenida
project had an acquisition value of $116,487, which was to be funded with cash,
assumption of liabilities, and/or O.P. Units (at a value of $4.50 per unit which
was the market value at the time the Company entered into the pending projects
acquisition agreement). The acquisition value of $116,487 was funded by a)
assumption by the Company of $25,000 of mortgage debt due Berg & Berg,
Enterprises, Inc.; b) assumption of the sellers' obligation to reimburse
Microsoft for shell and tenant improvements of $32,057 and; c) the issuance of
13,206,629 O.P. Units, including 12,467,058 O.P. Units issued to various members
of the Berg Group, based upon a value of $4.50 per unit, or $59,430. Under GAAP,
the O.P. Units issued in connection with this acquisition were valued based upon
the closing price of the Company's common stock on April 30, 1999 (the date the
acquisition closed), or $7.50 per share as reported on the AMEX, resulting in a
valuation for GAAP purposes of $156,107.
On April 1, 1999, Microsoft began paying monthly base rent of approximately
$1,226 for the first four buildings, which consist of approximately 415,700
rentable square feet. On June 1, 1999, Microsoft begins paying monthly rent of
approximately $295 for the fifth building, which consists of approximately
100,000 rentable square feet. Microsoft controls the construction of this
facility, which is currently scheduled to be completed and ready for occupancy
during the second half of 1999. Microsoft has signed a seven-year lease that
provides for a first year's rent of $2.95 per square foot per month with
approximately 4% annual rent increases.
On April 8, 1999, the Company declared a $0.12 per share dividend on its
common stock. The dividend was paid on April 30, 1999 to all common stockholders
of record as of April 15, 1999. At the same time, the operating partnerships
paid a distribution of $0.12 per O.P. Unit on April 30, 1999, as well. The
F-35
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31,
1999 (UNAUDITED) AND THE YEARS ENDED DECEMBER 31, 1998 AND NOVEMBER 30, 1997 AND
THE ONE MONTH PERIOD ENDED DECEMBER 31, 1997 (CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16. SUBSEQUENT EVENTS (CONTINUED)
amount of this distribution payable to members of the Berg totaling $6,859 was
converted to related party debt on April 30, 1999.
Michael Anderson, Chief Operating Officer and a director of the Company,
resigned from the Company effective April 30, 1999. The Company had previously
issued 200,000 shares of its common stock to Mr. Anderson in exchange for a note
receivable payable to the Company for $900. Upon Mr. Anderson's resignation, the
Company, in accordance with the terms of its agreements with Mr. Anderson,
repurchased and subsequently cancelled 117,361 of the 200,000 shares of common
stock, representing $528 of the original $900 note receivable. The remaining
portion of the note receivable in the amount of $372 remains outstanding and is
collateralized by a pledge of 82,639 shares of common stock. The Company
believes that the remaining outstanding balance on the note receivable will be
paid in full during the second quarter of 1999. The Company also waived interest
expense in the amount of $32 due the Company on the portion of the note
receivable relating to the cancelled shares
17. COMMITMENTS AND CONTINGENCIES
The Company and the operating partnerships, from time to time, are parties
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.
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>
F-36
<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
F-37
<PAGE>
MISSION WEST PROPERTIES, INC.
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INITIAL COST
DECEMBER 31, ------------------------
1998 BUILDINGS AND
PROPERTY NAME CITY ENCUMBRANCES LAND IMPROVEMENTS
- ------------------------------------------------------------------------ --------------- ------------- --------- -------------
<S> <C> <C> <C> <C>
10401-10411 Bubb........................................................ Cupertino B $ 632 $ 3,078
2001 Logic.............................................................. Cupertino 2,288 11,134
47000 Northport......................................................... Fremont C 1,184 5,760
45738 Northport......................................................... Fremont C 891 4,338
4050 Starboard.......................................................... Fremont C 1,329 6,467
3501 W. Warren/Fremont.................................................. Fremont 1,866 9,082
48800 Milmont........................................................... Fremont 1,013 4,932
4750 Patrick Henry...................................................... Santa Clara 1,604 7,805
4949 Hellyer............................................................ San Jose C 3,593 17,484
3520 Bassett............................................................ Santa Clara D 1,104 5,371
3530 Bassett............................................................ Santa Clara D,E $ 2,961 849 4,133
5850-5870 Hellyer....................................................... San Jose 2,787 6,502
2251 Lawson Lane........................................................ Santa Clara 1,952 9,498
1230 E. Arques.......................................................... Sunnyvale 540 2,628
1250 E. Arques.......................................................... Sunnyvale 1,335 6,499
3120 Scott Blvd......................................................... Santa Clara 6,945 2,044 9,948
20400 Mariani........................................................... Cupertino 2,034 1,670 8,125
10500 De Anza........................................................... Cupertino C 7,666 37,304
20605-705 Valley Green.................................................. Cupertino 3,490 16,984
10300 Bubb.............................................................. Cupertino C 635 3,090
10440 Bubb.............................................................. Cupertino 430 434 2,112
10460 Bubb.............................................................. Cupertino 525 994 4,838
1135 Kern............................................................... Sunnyvale 407 1,982
405 Tasman.............................................................. Sunnyvale 550 2,676
450 National............................................................ Mountain View C 611 2,973
3301 Olcott............................................................. Santa Clara 1,846 8,984
2800 Bayview............................................................ Fremont 3,105 1,070 5,205
6850 Santa Teresa....................................................... San Jose 377 1,836
140-160 Great Oaks...................................................... San Jose 1,402 6,822
6541 Via del Oro/6385-6387 San Ignacio.................................. San Jose 3,689 1,039 5,057
6311-6351 San Ignacio................................................... San Jose C 6,246 30,396
6320-6360 San Ignacio................................................... San Jose 7,732 2,616 12,732
75 E. Trimble/2610 N. First St.......................................... San Jose 3,477 16,919
2033-2243 Samaritan..................................................... San Jose 20,752 5,046 24,556
1170 Morse.............................................................. Sunnyvale C 658 3,201
3236 Scott.............................................................. Santa Clara C 1,234 6,005
1212 Bordeaux........................................................... Sunnyvale 2,250 10,948
1325 - 1810 McCandless.................................................. Milpitas 27,201 13,994 66,213
1600 Memorex............................................................ Santa Clara 1,221 5,940
1688 Richard............................................................ Santa Clara 1,248 2,912
3506-3510 Bassett....................................................... Santa Clara D 943 4,591
3540-3544 Bassett....................................................... Santa Clara D C 1,565 7,615
3550 Bassett............................................................ Santa Clara D C 1,079 5,251
3560 Bassett............................................................ Santa Clara D C 1,075 5,233
3570-3580 Bassett....................................................... Santa Clara D C 1,075 5,233
Prudential Capital Group Loan......................................... 129,767C
-------------
$ 205,141 $ 90,929 $ 430,392
------------- --------- -------------
------------- --------- -------------
<CAPTION>
TOTAL COST (A)
COST SUBSEQUENT ------------------------
TO CONSTRUCTION\ BUILDINGS AND
PROPERTY NAME ACQUISITION LAND IMPROVEMENTS TOTAL
- ------------------------------------------------------------------------ ----------------- --------- ------------- ---------
<S> <C> <C> <C>
10401-10411 Bubb........................................................ $ 632 $ 3,078 $ 3,710
2001 Logic.............................................................. 2,288 11,134 13,422
47000 Northport......................................................... $ 7 1,184 5,767 6,951
45738 Northport......................................................... 5 891 4,343 5,234
4050 Starboard.......................................................... 8 1,329 6,475 7,804
3501 W. Warren/Fremont.................................................. 1,866 9,082 10,948
48800 Milmont........................................................... 1,013 4,932 5,945
4750 Patrick Henry...................................................... 1,604 7,805 9,409
4949 Hellyer............................................................ 61 3,593 17,545 21,138
3520 Bassett............................................................ 1,104 5,371 6,475
3530 Bassett............................................................ 849 4,133 4,982
5850-5870 Hellyer....................................................... 2,787 6,502 9,289
2251 Lawson Lane........................................................ 1,952 9,498 11,450
1230 E. Arques.......................................................... 540 2,628 3,168
1250 E. Arques.......................................................... 1,335 6,499 7,834
3120 Scott Blvd......................................................... 2,044 9,948 11,992
20400 Mariani........................................................... 1,670 8,125 9,795
10500 De Anza........................................................... 7,666 37,304 44,970
20605-705 Valley Green.................................................. 3,490 16,984 20,474
10300 Bubb.............................................................. 635 3,090 3,725
10440 Bubb.............................................................. 434 2,112 2,546
10460 Bubb.............................................................. 16 994 4,854 5,848
1135 Kern............................................................... 407 1,982 2,389
405 Tasman.............................................................. 550 2,676 3,226
450 National............................................................ 611 2,973 3,584
3301 Olcott............................................................. 1,846 8,984 10,830
2800 Bayview............................................................ 1,070 5,205 6,275
6850 Santa Teresa....................................................... 377 1,836 2,213
140-160 Great Oaks...................................................... 1,402 6,822 8,224
6541 Via del Oro/6385-6387 San Ignacio.................................. 1,039 5,057 6,096
6311-6351 San Ignacio................................................... 21 6,246 30,417 36,663
6320-6360 San Ignacio................................................... 2,616 12,732 15,348
75 E. Trimble/2610 N. First St.......................................... 3,477 16,919 20,396
2033-2243 Samaritan..................................................... 5,046 24,556 29,602
1170 Morse.............................................................. 658 3,201 3,859
3236 Scott.............................................................. 1,234 6,005 7,239
1212 Bordeaux........................................................... 2,250 10,948 13,198
1325 - 1810 McCandless.................................................. 13,994 66,213 80,207
1600 Memorex............................................................ 1,221 5,940 7,161
1688 Richard............................................................ 1,248 2,912 4,160
3506-3510 Bassett....................................................... 943 4,591 5,534
3540-3544 Bassett....................................................... 1,565 7,615 9,180
3550 Bassett............................................................ 1,079 5,251 6,330
3560 Bassett............................................................ 1,075 5,233 6,308
3570-3580 Bassett....................................................... 1,075 5,233 6,308
Prudential Capital Group Loan.........................................
$ 118 $ 90,929 $ 430,510 $ 521,439
----- --------- ------------- ---------
----- --------- ------------- ---------
<CAPTION>
ACCUMULATED DATE OF DEPRECIABLE
PROPERTY NAME DEPRECIATION ACQUISITION LIFE
- ------------------------------------------------------------------------ --------------- ------------- -----------
10401-10411 Bubb........................................................ $ 40 7/98 40 Years
2001 Logic.............................................................. 141 7/98 40 Years
47000 Northport......................................................... 74 7/98 40 Years
45738 Northport......................................................... 56 7/98 40 Years
4050 Starboard.......................................................... 83 7/98 40 Years
3501 W. Warren/Fremont.................................................. 116 7/98 40 Years
48800 Milmont........................................................... 64 7/98 40 Years
4750 Patrick Henry...................................................... 100 7/98 40 Years
4949 Hellyer............................................................ 220 7/98 40 Years
3520 Bassett............................................................ 69 7/98 40 Years
3530 Bassett............................................................ 54 7/98 40 Years
5850-5870 Hellyer....................................................... 29 11/98 40 Years
2251 Lawson Lane........................................................ 121 7/98 40 Years
1230 E. Arques.......................................................... 35 7/98 40 Years
1250 E. Arques.......................................................... 83 7/98 40 Years
3120 Scott Blvd......................................................... 126 7/98 40 Years
20400 Mariani........................................................... 104 7/98 40 Years
10500 De Anza........................................................... 468 7/98 40 Years
20605-705 Valley Green.................................................. 214 7/98 40 Years
10300 Bubb.............................................................. 41 7/98 40 Years
10440 Bubb.............................................................. 28 7/98 40 Years
10460 Bubb.............................................................. 63 7/98 40 Years
1135 Kern............................................................... 27 7/98 40 Years
405 Tasman.............................................................. 35 7/98 40 Years
450 National............................................................ 39 7/98 40 Years
3301 Olcott............................................................. 114 7/98 40 Years
2800 Bayview............................................................ 67 7/98 40 Years
6850 Santa Teresa....................................................... 25 7/98 40 Years
140-160 Great Oaks...................................................... 87 7/98 40 Years
6541 Via del Oro/6385-6387 San Ignacio.................................. 65 7/98 40 Years
6311-6351 San Ignacio................................................... 382 7/98 40 Years
6320-6360 San Ignacio................................................... 161 7/98 40 Years
75 E. Trimble/2610 N. First St.......................................... 213 7/98 40 Years
2033-2243 Samaritan..................................................... 310 7/98 40 Years
1170 Morse.............................................................. 42 7/98 40 Years
3236 Scott.............................................................. 77 7/98 40 Years
1212 Bordeaux........................................................... 139 7/98 40 Years
1325 - 1810 McCandless.................................................. 854 7/98 40 Years
1600 Memorex............................................................ 76 7/98 40 Years
1688 Richard............................................................ 10 9/98 40 Years
3506-3510 Bassett....................................................... 59 7/98 40 Years
3540-3544 Bassett....................................................... 97 7/98 40 Years
3550 Bassett............................................................ 68 7/98 40 Years
3560 Bassett............................................................ 67 7/98 40 Years
3570-3580 Bassett....................................................... 67 7/98 40 Years
Prudential Capital Group Loan.........................................
$ 5,410
------
------
</TABLE>
- ----------------------------------------
(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.
F-38
<PAGE>
MISSION WEST PROPERTIES, INC.
NOTE TO SCHEDULE III
December 31, 1998
(DOLLARS IN THOUSANDS)
1. RECONCILIATION OF REAL ESTATE AND ACCUMULATED DEPRECIATION:
<TABLE>
<CAPTION>
1998
----------
<S> <C>
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
----------
----------
</TABLE>
F-39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders
of Mission West Properties, Inc.
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
F-40
<PAGE>
THE BERG PROPERTIES (PREDECESSOR)
COMBINED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
---------- ------------
<S> <C> <C>
ASSETS
Real estate assets:
Land................................................................................. $ 30,426 $ 30,426
Buildings and improvements........................................................... 61,323 61,262
Tenant improvements.................................................................. 85,790 86,541
---------- ------------
177,539 178,229
Less, accumulated depreciation......................................................... (81,939) (78,077)
---------- ------------
Net real estate assets............................................................... 95,600 100,152
Cash and cash equivalents.............................................................. -- 5,719
Deferred rent.......................................................................... 4,964 4,144
Deferred costs and other assets........................................................ 3,982 3,935
---------- ------------
Total assets....................................................................... $ 104,546 $ 113,950
---------- ------------
---------- ------------
LIABILITIES AND NET (DEFICIT) EQUITY
Liabilities:
Lines of credit...................................................................... -- $ 37,953
Mortgage notes payable............................................................... $ 37,868 38,554
Mortgage notes payable (related parties)............................................. 156,632 --
Notes payable (related parties)...................................................... -- 1,975
Accounts payable and accrued expenses................................................ 2,233 2,102
Other liabilities.................................................................... 4,046 3,715
---------- ------------
Total liabilities.................................................................. 200,779 84,299
---------- ------------
Net (deficit) equity................................................................... (96,233) 29,651
---------- ------------
Total liabilities and net (deficit) equity......................................... $ 104,546 $ 113,950
---------- ------------
---------- ------------
</TABLE>
See notes to combined financial statements
F-41
<PAGE>
THE BERG PROPERTIES (PREDECESSOR)
COMBINED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEARS ENDED
JUNE 30, DECEMBER 31,
----------- --------------------
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
REVENUE:
Rental revenue from real estate.............................................. $ 22,341 $ 40,163 $ 28,934
Tenant reimbursements........................................................ 3,826 6,519 3,902
----------- --------- ---------
26,167 46,682 32,836
----------- --------- ---------
EXPENSES:
Property operating and maintenance........................................... 2,088 3,741 1,906
Real estate taxes............................................................ 2,126 4,229 3,750
Interest..................................................................... 3,044 5,919 6,090
Interest (related parties)................................................... 61 248 293
Management fees (related parties)............................................ 645 1,050 827
Depreciation and amortization................................................ 3,862 7,717 6,739
----------- --------- ---------
11,826 22,904 19,605
----------- --------- ---------
Income before extraordinary item............................................... 14,341 23,778 13,231
----------- --------- ---------
Extraordinary item............................................................. -- -- 610
----------- --------- ---------
Net income..................................................................... $ 14,341 $ 23,778 $ 13,841
----------- --------- ---------
----------- --------- ---------
</TABLE>
See notes to combined financial statements
F-42
<PAGE>
THE BERG PROPERTIES (PREDECESSOR)
COMBINED STATEMENTS OF NET EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<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
F-43
<PAGE>
THE BERG PROPERTIES (PREDECESSOR)
COMBINED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED
JUNE 30, 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 extinguishment of debt............. -- -- (610)
Changes in operating assets and liabilities:
Deferred rent.......................................... (820) (1,330) (586)
Other assets........................................... (53) (1,221) (406)
Accounts payable and accrued expenses.................. 131 (160) 353
Other liabilities...................................... 331 1,113 907
------------- --------- ---------
Net cash provided by operating activities................ 17,798 29,909 20,248
------------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase and improvements to real estate................. (132) (17,251) (29,275)
Tenant reimbursements for improvements................. 822 -- --
------------- --------- ---------
Net cash provided by (used in) investing activities...... 690 (17,251) (29,275)
------------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings on lines of credit........... (1,277) 2,415 6,047
Proceeds from mortgage notes payable................... -- 3,105 --
Principal payments on mortgage notes payable........... (686) (2,429) (1,563)
Proceeds from mortgage notes payable (related parties)... 119,956 -- --
Principal payments on notes payable (related parties).... (1,975) (571) (504)
Capital contributions.................................... -- 755 12,299
Capital distributions.................................... (140,225) (11,707) (6,846)
------------- --------- ---------
Net cash (used in) provided by financing activities...... (24,207) (8,432) 9,433
------------- --------- ---------
Net (decrease) increase in cash and cash
equivalents........................................ (5,719) 4,226 406
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR............. 5,719 1,493 1,087
------------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF YEAR................... $ -- $ 5,719 $ 1,493
------------- --------- ---------
Supplemental information:
Cash paid for interest, net of amounts capitalized..... $ 1,731 $ 6,272 $ 6,278
------------- --------- ---------
------------- --------- ---------
Supplemental schedule of non-cash investing and financing
activities:
Assumption of lines of credit by Carl Berg............... $ 36,676 -- --
------------- --------- ---------
------------- --------- ---------
Non-cash transfers of construction-in-progress........... -- $ 6,775 $ 75
------------- --------- ---------
------------- --------- ---------
</TABLE>
See notes to combined financial statements
F-44
<PAGE>
THE BERG PROPERTIES (PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS
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.
F-45
<PAGE>
THE BERG PROPERTIES (PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. BASIS OF PRESENTATON AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
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.
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.
F-46
<PAGE>
THE BERG PROPERTIES (PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
2. BASIS OF PRESENTATON AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(CONTINUED)
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.
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.
F-47
<PAGE>
THE BERG PROPERTIES (PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. DEBT (CONTINUED)
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.
The following table sets forth certain information regarding debt
outstanding as of June 30, 1998 and December 31, 1997:
<TABLE>
<CAPTION>
BALANCE BALANCE
DESCRIPTION COLLATERAL PROPERTIES JUNE 30, 1998 DEC. 31, 1997 MATURES
- ----------------------------------- ------------------------------------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
LINES OF CREDIT:
Wells Fargo Bank................... 2251 Lawson Lane, Santa Clara, CA -- $ 37,953 10/99
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
<CAPTION>
DESCRIPTION RATE
- ----------------------------------- ---------
<S> <C>
LINES OF CREDIT:
Wells Fargo Bank................... (1)
</TABLE>
F-48
<PAGE>
THE BERG PROPERTIES (PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
3. DEBT (CONTINUED)
<TABLE>
<CAPTION>
BALANCE BALANCE
DESCRIPTION COLLATERAL PROPERTIES JUNE 30, 1998 DEC. 31, 1997 MATURES
- ----------------------------------- ------------------------------------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
MORTGAGE NOTES
(RELATED PARTIES)................ 2033-2043 Samaritan Drive, San Jose, CA $ 156,632 -- 3/99
2133 Samaritan Drive, San Jose, CA
2233-2243 Samaritan Drive, San Jose, CA
MORTGAGE NOTES:
Great West Life & Annuity Insurance
Company.......................... 6320 San Ignacio Ave, San Jose, CA 7,804 7,872 2/04
Great West Life & Annuity Insurance
Company.......................... 6385 San Ignacio Ave, San Jose, CA 3,723 3,755 5/04
6540 Via del Oro, San Jose, CA
Great West Life & Annuity Insurance
Company.......................... 1170 Morse Avenue, Sunnyvale, CA 1,969 1,986 5/04
National Electrical Contractors
Association Pension Benefit Trust
Fund............................. 2251 Lawson Lane, Santa Clara, CA 4,692 4,820 1/09
Prudential Capital Group........... 1230 E. Arques, Sunnyvale, CA 1,110 1,147 11/07
20605-20705 Valley Green Drive, Cupertino,
Prudential Capital Group........... CA 3,158 3,250 10/98
Prudential Capital Group........... 20400 Mariani, Cupertino, CA 2,095 2,154 3/09
Prudential Capital Group........... 1250 E. Arques, Sunnyvale, CA 2,184 2,312 11/99
New York Life Insurance Company.... 10440 Bubb Road, Cupertino, CA 441 452 8/09
Home Savings & Loan Association.... 10460 Bubb Road, Cupertino, CA 547 569 1/07
Amdahl Corporation................. 3120 Scott, Santa Clara, CA 7,040 7,132 3/14
Citicorp U.S.A. Inc................ 2800 Bayview Drive, Fremont, CA 3,105 3,105 4/00
------------- -------------
------------- -------------
Mortgage Notes Total............... 37,868 38,554
------------- -------------
------------- -------------
<CAPTION>
DESCRIPTION RATE
- ----------------------------------- ---------
<S> <C>
MORTGAGE NOTES
(RELATED PARTIES)................ (1)
MORTGAGE NOTES:
Great West Life & Annuity Insurance
Company.......................... 7%
Great West Life & Annuity Insurance
Company.......................... 7%
Great West Life & Annuity Insurance
Company.......................... 7%
National Electrical Contractors
Association Pension Benefit Trust
Fund............................. 9.75%
Prudential Capital Group........... 9%
Prudential Capital Group........... 8.5%
Prudential Capital Group........... 8.75%
Prudential Capital Group........... 9.5%
New York Life Insurance Company.... 9.63
Home Savings & Loan Association.... 9.5%
Amdahl Corporation................. 9.42%
Citicorp U.S.A. Inc................ (2)
Mortgage Notes Total...............
</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.
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>
F-49
<PAGE>
THE BERG PROPERTIES (PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
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 methodologies 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 and 1996,
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:
<TABLE>
<S> <C>
1998.............................................................. $ 22,065
1999.............................................................. 43,585
2000.............................................................. 38,867
2001.............................................................. 33,960
2002.............................................................. 27,296
Thereafter........................................................ 41,851
---------
$ 207,624
---------
---------
</TABLE>
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.
F-50
<PAGE>
[Description of photographs of buildings and tenant logos to be submitted by
amendment]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
YOU MAY RELY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE INFORMATION DIFFERENT FROM THAT CONTAINED IN THIS
PROSPECTUS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT AFTER THE DATE OF
THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THESE SHARES OF COMMON STOCK IN ANY CIRCUMSTANCES UNDER WHICH THE
OFFER OR SOLICITATION IS UNLAWFUL.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 8
Forward-Looking Statements................................................ 16
Use of Proceeds........................................................... 17
Capitalization............................................................ 18
Company History........................................................... 19
Common Stock Market Price, Dividends and Distribution Policy.............. 20
Selected Financial Data................................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 26
Business.................................................................. 37
Properties................................................................ 44
Policies with Respect to Certain Activities............................... 53
Management................................................................ 56
Principal Stockholders.................................................... 62
Certain Relationships and Related Transactions............................ 64
Operating Partnership Agreements.......................................... 66
Description of Capital Stock.............................................. 69
Certain Provisions of Maryland Law and of our Charter and Bylaws.......... 73
Federal Income Tax Considerations......................................... 77
ERISA Considerations...................................................... 86
Underwriting.............................................................. 89
Legal Matters............................................................. 90
Experts................................................................... 90
Where You Can Find More Information....................................... 91
Index to Financial Statements............................................. F-1
</TABLE>
6,750,000 SHARES
[MISSION WEST LOGO]
COMMON STOCK
----------------
PROSPECTUS
---------------------
A.G. EDWARDS & SONS, INC.
LEGG MASON WOOD WALKER
INCORPORATED
SUTRO & CO. INCORPORATED
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 31. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
It is expected that the following expenses, all of which will be paid by us,
will be incurred in connection with the registration and distribution of the
securities being offered (all such amounts are estimates except the Securities
and Exchange Commission filing fee and the AMEX filing fee):
<TABLE>
<S> <C>
Commission registration fee....................................... $ 18,883
AMEX registration fee............................................. $ 17,500
Pacific Stock Exchange listing fee................................ $ 5,500
NASD filing fee................................................... $ 7,292
Blue Sky fees and expenses........................................ $ 0
Accounting fees and expenses...................................... $ 100,000
Legal fees and expenses........................................... $ 100,000
Printing and engraving expenses................................... $ 60,000
Miscellaneous expenses............................................ $ 10,000
---------
Total............................................................. $ 319,175
---------
---------
</TABLE>
ITEM 32. SALES TO SPECIAL PARTIES.
Not applicable.
ITEM 33. 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.
ITEM 34. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services; or (b) active and deliberate dishonesty established by a
final judgment and which is material to the cause of action. Our charter
contains such a provision which eliminates such liability to the maximum extent
permitted by the MGCL.
Our charter also authorizes us to the maximum extent permitted by Maryland
law, to obligate itself to indemnify and to pay or reimburse reasonable expenses
in advance of final disposition of a proceeding to any present or former
director or officer, or any individual who, while a director of our corporation
and at our request, serves or has served another corporation, real estate
investment trust, partnership, joint venture, trust, employee benefit plan or
any other enterprise as a director, officer, partner or trustee of such
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise from and against any claim or
liability to which such person may become subject or which
II-1
<PAGE>
such person may incur by reason of his status as a present or former director or
officer of our corporation. The bylaws obligate us, to the maximum extent
permitted by Maryland law, to indemnify and to pay or reimburse reasonable
expenses in advance of final disposition of a proceeding to (i) any present or
former director or officer who is made a party to the proceeding by reason of
his service in that capacity or (ii) any individual who, while a director of our
corporation and at our request, serves or has served another corporation, real
estate investment trust, partnership, joint venture, trust, employee benefit
plan or any other enterprise as a director, officer, partner or trustee of such
corporation, real estate investment trust, partnership, joint venture, trust,
employee benefit plan or other enterprise and who is made a party to the
proceeding by reason of his service in that capacity. Our charter and bylaws
also permit us to indemnify and advance expenses to any person who served a
predecessor of our corporation in any of the capacities described above and any
employee or agent of our corporation or a predecessor.
The MGCL requires a corporation (unless its charter provides otherwise,
which our charter does not) to indemnify a director or officer who has been
successful, on the merits or otherwise, in the defense of any proceeding to
which he is made a party by reason of his service in that capacity. The MGCL
permits a corporation to indemnify its present and former directors and
officers, among others, against judgments, penalties, fines, settlements and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those capacities
unless it is established that (a) the act or omission of the director or officer
was material to the matter giving rise to the proceeding and (i) was committed
in bad faith or (ii) was the result of active and deliberate dishonesty, (b) the
director or officer actually received an improper personal benefit in money,
property or services or (c) in the case of any criminal proceeding, the director
or officer had reasonable cause to believe that the act or omission was
unlawful. However, under the MGCL, a Maryland corporation may not indemnify for
an adverse judgment in a suit by or in the right of the corporation or for a
judgment of liability on the basis that personal benefit was improperly
received, unless in either case a court orders indemnification and then only for
expenses. In addition, the MGCL permits a corporation to advance reasonable
expenses to a director or officer upon the corporation's receipt of (a) a
written affirmation by the director or officer of his good faith belief that he
has met the standard of conduct necessary for indemnification by the corporation
and (b) a written undertaking by him or on his behalf to repay the amount paid
or reimbursed by the corporation if it shall ultimately be determined that the
standard of conduct was not met.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
ITEM 36. FINANCIAL STATEMENTS AND EXHIBITS.
Exhibits required by Item 601 of Regulation S-K.
EXHIBIT INDEX
<TABLE>
<S> <C>
1.1 Underwriting Agreement
3.2.1+ Articles of Amendment and Restatement of Mission West Properties, Inc.
3.2.2+ Restated Bylaws of Mission West Properties, Inc.
5.1 Opinion of McCutchen, Doyle, Brown & Enersen, LLP
8.1# Tax Opinion of McCutchen, Doyle, Brown & Enersen, LLP
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
</TABLE>
II-2
<PAGE>
<TABLE>
<S> <C>
10.1.4** Amended and Restated Agreement of Limited Partnership of Mission West Properties,
L.P. III
10.2** Exchange Rights Agreement between Mission West Properties and the Limited Partners
10.3.1* 1997 Stock Option Plan
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 us, 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 Mission West Properties
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 Mission West Properties
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 Mission West Properties, the
Operating Partnership and the Berg Group
10.7** Berg Land Holdings Option Agreement between Mission West Properties and certain
members of the Berg Group
10.8* Berg & Berg Enterprises, Inc. Sublease Agreement
10.9++ Amended and Restated 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, 1999 between Mission West
Properties and Dan and Paul McCarthy
10.21(x ) Lease Agreement with Microsoft Corporation
10.22(x ) Contribution Agreement
10.23 Assumption Agreement for Wells Fargo Line of Credit
10.24# Form of secured note payable to the Berg Group
10.25# Form of deed of trust granted to the Berg Group
10.26 Supplemental Agreement among Mission West Properties, Inc., Carl E. Berg and Clyde
J. Berg
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
21.1++ Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of PricewaterhouseCoopers LLP
24.1(xx ) Powers of Attorney
24.2 Power of Attorney
</TABLE>
- ------------------------
# To be filed by amendment.
* Incorporated herein by reference to the same-numbered exhibit to our
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 our
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 herein by reference to the same-numbered exhibit to Amendment
No. 4 to our Registration Statement on Form S-4 filed on November 16, 1998
and declared effective on November 23, 1998.
++ Incorporated herein by reference to the same-numbered exhibit to our annual
report on Form 10-K for 1998 filed on March 31, 1999.
(x) Incorporated herein by reference to the same-numbered exhibit to current
report on Form 8-K filed on May 14, 1999 (Commission File No. 000-25235).
(xx) previously filed
ITEM 37. UNDERTAKINGS.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities as that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-11 and has duly caused this Amendment
No. 1 to the Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
MISSION WEST PROPERTIES, INC.
Date: June 15, 1999 By: /s/ CARL E. BERG
-----------------------------------------
Carl E. Berg
CHAIRMAN OF THE BOARD, CHIEF EXECUTIVE
OFFICER, PRESIDENT AND DIRECTOR
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ CARL E. BERG
- ------------------------------ Chief Executive Officer, June 15, 1999
Carl E. Berg President and Director
Vice President and
* MARIANNE K. AGUIAR Controller (Principal
- ------------------------------ Financial and Accounting June 15, 1999
Marianne K. Aguiar Officer)
* WILLIAM A. HASLER
- ------------------------------ Director June 15, 1999
William A. Hasler
* LAWRENCE B. HELZEL
- ------------------------------ Director June 15, 1999
Lawrence B. Helzel
* JOHN C. BOLGER
- ------------------------------ Director June 15, 1999
John C. Bolger
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ CARL E. BERG
-------------------------
Carl E. Berg
AS ATTORNEY-IN-FACT
PURSUANT TO POWER OF
ATTORNEY PREVIOUSLY FILED
WITH THE COMMISSION OR
FILED WITH THE COMMISSION
HEREWITH
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<S> <C>
1.1 Underwriting Agreement
3.2.1+ Articles of Amendment and Restatement of Mission West Properties, Inc.
3.2.2+ Restated Bylaws of Mission West Properties, Inc.
5.1 Opinion of McCutchen, Doyle, Brown & Enersen, LLP
8.1# Tax Opinion of McCutchen, Doyle, Brown & Enersen, LLP
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 Mission West Properties and the Limited Partners
10.3.1* 1997 Stock Option Plan
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 us, 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 Mission West Properties
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 Mission West Properties
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 Mission West Properties, the
Operating Partnership and the Berg Group
10.7** Berg Land Holdings Option Agreement between Mission West Properties and certain
members of the Berg Group
10.8* Berg & Berg Enterprises, Inc. Sublease Agreement
10.9++ Amended and Restated 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, 1999 between Mission West
Properties and Dan and Paul McCarthy
</TABLE>
<PAGE>
<TABLE>
<S> <C>
10.21(x ) Lease Agreement with Microsoft Corporation
10.22(x ) Contribution Agreement
10.23 Assumption Agreement for Wells Fargo Line of Credit
10.24# Form of secured note payable to the Berg Group
10.25# Form of deed of trust granted to the Berg Group
10.26 Supplemental Agreement among Mission West Properties, Inc., Carl E. Berg and Clyde
J. Berg
21.1++ Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of PricewaterhouseCoopers LLP
24.1(xx ) Powers of Attorney
24.2 Power of Attorney
</TABLE>
- ------------------------
# To be filed by amendment.
* Incorporated herein by reference to the same-numbered exhibit to our
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 our
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 herein by reference to the same-numbered exhibit to Amendment
No. 4 to our Registration Statement on Form S-4 filed on November 16, 1998
and declared effective on November 23, 1998.
++ Incorporated herein by reference to the same-numbered exhibit to our annual
report on Form 10-K for 1998 filed on March 31, 1999.
(x) Incorporated herein by reference to the same-numbered exhibit to current
report on Form 8-K filed on May 14, 1999 (Commission File No. 000-25235).
(xx) previously filed
<PAGE>
EXHIBIT 1.1
7,762,500 SHARES
COMMON STOCK
($.001 PAR VALUE)
UNDERWRITING AGREEMENT
June , 1998
A.G. Edwards & Sons, Inc.
Legg Mason Wood Walker Incorporated
Sutro & Co. Incorporated
As Representatives of the Several Underwriters
c/o A.G. Edwards & Sons, Inc.
One North Jefferson Avenue
St. Louis, Missouri 63103
The undersigned, Mission West Properties, a Maryland corporation (the
"Company"), and each of (i) Mission West Properties, L.P., a Delware limited
partnership, (ii) Mission West Properties, L.P. I, a Delaware limited
partnership, (iii) Mission West Properties, L.P. II, a Delaware limited
partnership, and (iv) Mission West Properties, L.P. III, a Delaware limited
partnership (collectively, the "OPERATING PARTNERSHIPS") hereby address you as
the representatives (the "REPRESENTATIVES") of each of the persons, firms and
corporations listed on SCHEDULE I HERETO (collectively, the "UNDERWRITERS") and
hereby confirm their agreement with the several Underwriters as follows:
1. DESCRIPTION OF SHARES. The Company proposes to issue and sell to the
Underwriters 6,750,000 shares of its Common Stock, par value $.001 per share, as
set forth on SCHEDULE I hereto (such 6,750,000 shares of Common Stock are herein
collectively referred to as the "FIRM SHARES"). Solely for the purpose of
covering over-allotments in the sale of the Firm Shares, the Company further
proposes to grant to the Underwriters the right to purchase up to an additional
1,012,500 shares of Common Stock (the "OPTION SHARES"), as provided in Section 3
of this Agreement. The Firm Shares and the Option Shares are herein sometimes
referred to as the "SHARES" and are more fully described in the Prospectus
hereinafter defined.
2. PURCHASE, SALE AND DELIVERY OF FIRM SHARES. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each such Underwriter agrees, severally and not jointly, to
purchase from the Company at a purchase price of $ per share, the number of
Firm Shares set forth opposite the name of such Underwriter in SCHEDULE I hereto
and any additional number of Option Shares which such Underwriter may become
obligated to purchase pursuant to Section 3 hereof.
The Company will deliver definitive certificates for the Firm Shares at the
office of A.G. Edwards & Sons, Inc., 77 Water Street, New York, New York
("EDWARDS' OFFICE"), or such other place as you and the Company may mutually
agree upon, for the accounts of the Underwriters against payment to the Company
of the purchase price for the Firm Shares sold by them to the several
Underwriters by wire transfer of immediately available funds payable to the
order of the Company and delivered to One North Jefferson Avenue, St. Louis,
Missouri 63103, or at such other place as may be agreed upon between you and the
Company (the "PLACE OF CLOSING"), at 10:00 a.m., New York time, on ,
1999, or at such other time and date not later than five full business days
thereafter as you and the Company may agree, such time and date of payment and
delivery being herein called the "CLOSING DATE."
The certificates for the Firm Shares so to be delivered will be made
available to you for inspection at Edwards' Office (or such other place as you
and the Company may mutually agree upon) at least one full business day prior to
the Closing Date and will be in such names and denominations as you may request
at least forty-eight hours prior to the Closing Date.
It is understood that an Underwriter, individually, may (but shall not be
obligated to) make payment on behalf of the other Underwriters whose funds shall
not have been received prior to the Closing Date for
<PAGE>
Shares to be purchased by such Underwriter. Any such payment by an Underwriter
shall not relieve the other Underwriters of any of their obligations hereunder.
It is understood that the Underwriters propose to offer the Shares to the
public upon the terms and conditions set forth in the Registration Statement
hereinafter defined.
3. PURCHASE, SALE AND DELIVERY OF THE OPTION SHARES. The Company hereby
grants options to the Underwriters to purchase from it on a PRO RATA basis up to
1,012,500 Option Shares, on the same terms and conditions as the Firm Shares;
PROVIDED, HOWEVER, that such options may be exercised only for the purpose of
covering any over-allotments which may be made by them in the sale of the Firm
Shares. No Option Shares shall be sold or delivered unless the Firm Shares
previously have been, or simultaneously are, sold and delivered.
The options are exercisable on behalf of the several Underwriters by you, as
Representatives, at any time, and from time to time, before the expiration of 30
days from the date of the Prospectus (or, if such 30th day shall be a Saturday
or Sunday or a holiday, on the next day thereunder when the American Stock
Exchange is open for trading), for the purchase of all or part of the Option
Shares covered thereby, by notice given by you to the Company in the manner
provided in Section 13 hereof, setting forth the number of Option Shares as to
which the Underwriters are exercising the options, and the date of delivery of
said Option Shares, which date shall not be more than five business days after
such notice unless otherwise agreed to by the parties. You may terminate the
options at any time, as to any unexercised portion thereof, by giving written
notice to the Company to such effect.
You, as Representatives, shall make such allocation of the Option Shares
among the Underwriters as may be required to eliminate purchases of fractional
Shares.
Delivery of the Option Shares with respect to which the options shall have
been exercised shall be made to or upon your order at Edwards' Office (or at
such other place as you and the Company may mutually agree upon), against
payment by you of the per share purchase price to the Company by wire transfer
of immediately available funds. Such payment and delivery shall be made at 10:00
a.m., New York time, on the date designated in the notice given by you as above
provided for (which may be the same as the Closing Date), unless some other date
and time are agreed upon, which date and time of payment and delivery are called
the "OPTION CLOSING DATE." The certificates for the Option Shares so to be
delivered will be made available to you for inspection at Edwards' Office at
least one full business day prior to the Option Closing Date and will be in such
names and denominations as you may request at least forty-eight hours prior to
the Option Closing Date. On the Option Closing Date, the Company shall provide
the Underwriters such representations, warranties, agreements, opinions,
letters, certificates and covenants with respect to the Option Shares as are
required to be delivered on the Closing Date with respect to the Firm Shares.
4. REPRESENTATIONS, WARRANTIES AND AGREEMENTS OF THE COMPANY AND THE
OPERATING PARTNERSHIPS.
(a) The Company and each Operating Partnership, jointly and severally,
represent and warrant to and agree with each Underwriter that:
(i) A registration statement (Registration No. 333-80203) on Form S-11
with respect to the Shares, including a preliminary prospectus, and such
amendments to such registration statement as may have been required to the
date of this Agreement, has been carefully prepared by the Company pursuant
to and in conformity with the requirements of the Securities Act of 1933, as
amended (the "1933 ACT"), and the rules and regulations thereunder (the
"1933 ACT RULES AND REGULATIONS") of the Securities and Exchange Commission
(the "SEC") and has been filed with the SEC under the 1933 Act. Copies of
such registration statement, including any amendments thereto, each related
preliminary prospectus (meeting the requirements of Rule 430 or 430A of the
1933 Act Rules and Regulations) contained therein, and the exhibits,
financial statements and schedules thereto have heretofore been delivered by
the Company to you. If such registration statement has not become
2
<PAGE>
effective under the 1933 Act, a further amendment to such registration
statement, including a form of final prospectus, necessary to permit such
registration statement to become effective will be filed promptly by the
Company with the SEC. If such registration statement has become effective
under the 1933 Act, a final prospectus containing information permitted to
be omitted at the time of effectiveness by Rule 430A of the 1933 Act Rules
and Regulations will be filed promptly by the Company with the SEC in
accordance with Rule 424(b) of the 1933 Act Rules and Regulations. The term
"REGISTRATION STATEMENT" as used herein means the registration statement as
amended at the time it becomes effective under the 1933 Act (the "EFFECTIVE
DATE"), including financial statements and all exhibits and, if applicable,
the information deemed to be included by Rule 430A of the 1933 Act Rules and
Regulations. If it is contemplated, at the time this Agreement is executed,
that a post-effective amendment to such registration statement will be filed
and must be declared effective before the offering of Shares may commence,
the term "Registration Statement" as used herein means the registration
statement as amended by said post-effective amendment. If an abbreviated
registration statement is prepared and filed with the SEC in accordance with
Rule 462(b) under the 1933 Act (an "ABBREVIATED REGISTRATION STATEMENT"),
the term "Registration Statement" as used in this Agreement includes the
Abbreviated Registration Statement. The term "PROSPECTUS" as used herein
means (i) the prospectus as first filed with the SEC pursuant to Rule 424(b)
of the 1933 Act Rules and Regulations, or (ii) if no such filing is
required, the form of final prospectus included in the Registration
Statement at the Effective Date or (iii) if a Term Sheet or Abbreviated Term
Sheet (as such terms are defined in Rule 434(b) and 434(c), respectively, of
the 1933 Act Rules and Regulations) is filed with the SEC pursuant to Rule
424(b)(7) of the 1933 Act Rules and Regulations, the Term Sheet or
Abbreviated Term Sheet and the last Preliminary Prospectus filed with the
SEC prior to the time the Registration Statement became effective, taken
together. The term "PRELIMINARY PROSPECTUS" as used herein shall mean a
preliminary prospectus as contemplated by Rule 430 or 430A of the 1933 Act
Rules and Regulations included at any time in the Registration Statement.
For purposes of this Agreement, the words "amend," "amendment," "amended,"
"supplement" or "supplemented" with respect to the Registration Statement or
the Prospectus shall mean amendments or supplements to the Registration
Statement or the Prospectus, as the case may be.
(ii) Neither the SEC nor any state or other jurisdiction or other
regulatory body has issued, and neither is, to the knowledge of the Company,
threatening to issue, an any stop order under the 1933 Act or other order
suspending the effectiveness of the Registration Statement (as amended or
supplemented) or preventing or suspending the use of any Preliminary
Prospectus or the Prospectus or suspending the qualification or registration
of the Shares for offering or sale in any jurisdiction nor instituted or, to
the knowledge of the Company, threatened to institute proceedings for any
such purpose. Each Preliminary Prospectus at its date of issue, the
Registration Statement and the Prospectus and any amendments or supplements
thereto contain or will contain, as the case may be, all statements which
are required to be stated therein by, and in all material respects conform
or will conform, as the case may be, to the requirements of, the 1933 Act
and the 1933 Act Rules and Regulations. Neither the Registration Statement
nor any amendment thereto, as of the applicable effective date, contains or
will contain, as the case may be, any untrue statement of a material fact or
omits or will omit to state any material fact required to be stated therein
or necessary to make the statements therein, not misleading, and neither any
Preliminary Prospectus, the Prospectus nor any supplement thereto contains
or will contain, as the case may be, any untrue statement of a material fact
or omits or will omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; PROVIDED, HOWEVER,
that the Company makes no representation or warranty as to information
contained in or omitted from the Registration Statement or the Prospectus,
or any such amendment or supplement, in reliance upon, and in conformity
with, written information furnished to the Company relating to the
Underwriters by or on behalf of the Underwriters expressly for use in the
preparation thereof (as provided in Section 14 hereof). There is no contract
or document required to be described
3
<PAGE>
in the Registration Statement or Prospectus or to be filed as an exhibit to
the Registration Statement which is not described or filed as required.
(iii) This Agreement has been duly authorized, executed and delivered by
the Company and each of the Operating Partnerships and constitutes a valid
and legally binding obligation of the Company and the Operating Partnerships
enforceable against the Company and the Operating Partnerships in accordance
with its terms, except as enforceability may be limited by bankruptcy,
insolvency, fraudulent conveyance, reorganization, moratorium and other
similar laws relating to or affecting creditors' rights generally and by
general principles of equity (the "EXCEPTIONS").
(iv) (a) The Company has been duly organized and is validly existing as
a corporation in good standing under the laws of the State of Maryland, with
full power and authority (corporate and other) to own, lease and operate its
properties and conduct its businesses as described in the Prospectus and to
execute and deliver, and perform its obligations under this Agreement. The
Company is duly qualified to do business as a foreign corporation in good
standing in California and in each state or other jurisdiction in which its
ownership or leasing of property or conduct of business legally requires
such qualification, except where the failure to be so qualified,
individually or in the aggregate, would not have a Material Adverse Effect.
The term "MATERIAL ADVERSE EFFECT" as used herein means any material adverse
effect on the condition (financial or other), net worth, business, affairs,
management, prospects, results of operations or cash flow of the Company and
the Subsidiaries (as defined below), taken as a whole.
(b) Each Operating Partnership is a limited partnership duly formed
and existing under and by virtue of the laws of the State of Delaware and
is in good standing under the Delaware Revised Uniform Limited
Partnership Act with partnership power and authority to own, lease and
operate its properties and conduct its businesses as described in the
Prospectus and to execute and deliver, and perform its obligations under
this Agreement. Each Operating Partnership is duly qualified to do
business as a foreign corporation in good standing in California and in
each state or other jurisdiction in which its ownership or leasing of
property or conduct of business legally requires such qualification,
except where the failure to be so qualified, individually or in the
aggregate, would not have a Material Adverse Effect. The Company is the
sole general partner of each Operating Partnership and immediately after
the Closing Date will be the sole general partner of each Operating
Partnership and will own the outstanding partnership interests as set
forth in the Prospectus. Each of the Amended and Restated Agreements of
Limited Partnership of each Operating Partnership filed as exhibits to
the Registration Statement (collectively, the "OPERATING PARTNERSHIP
AGREEMENTS") has been duly and validly authorized, executed and delivered
by the parties thereto and constitutes a valid and legally binding
obligation of the Company and the Operating Partnerships enforceable
against the Company and the Operating Partnerships in accordance with its
terms, except as enforceability may be limited by the Exceptions.
(c) MIT Realty, Inc., a California corporation, and Mission West
Executive Aircraft Center, Inc., a California corporation (collectively,
the "CORPORATE SUBSIDIARIES" and, together with the Operating
Partnerships, the "SUBSIDIARIES"), are the only subsidiaries of the
Company other than the Operating Partnerships. Each of the Corporate
Subsidiaries has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of California,
with full power and authority (corporate and other) to own, lease and
operate its properties and conduct its businesses. Each Corporate
Subsidiary is duly qualified to do business as a foreign corporation in
good standing in each state or other jurisdiction in which its ownership
or leasing of property or conduct of business legally requires such
qualification, except where the failure to be so qualified, individually
or in the aggregate, would not have a Material Adverse Effect.
4
<PAGE>
(v) Neither the Company nor any of its Subsidiaries has sustained since
the date of the latest audited financial statements included in the
Prospectus any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental action, order or decree.
otherwise than as set forth in the Prospectus. Since the respective dates as
of which information is given in the Prospectus, other than as set forth in
or contemplated by the Prospectus: (A) there has not been any material
change in the capital stock, short-term debt or long-term debt of the
Company or any of its Subsidiaries or any material adverse change, or any
development involving a prospective material adverse change, in or affecting
the general affairs, management, financial position, stockholders' equity or
results of operations of the Company and its Subsidiaries taken as a whole,
(B) the Company has not purchased any of its outstanding capital stock, nor
declared, paid or otherwise made any dividend or distribution of any kind on
its capital stock, (C) no Operating Partnership has purchased any of its
outstanding Units, nor declared, paid or otherwise made any dividend or
distribution of any kind on its Units and (D) none of the Company or its
Subsidiaries have incurred any material liability or obligation, direct or
contingent, or entered into any material transaction not in the ordinary
course of business.
(vi) The issuance and sale of the Shares and the execution, delivery and
performance by the Company and the Operating Partnerships of this Agreement,
and the consummation of the transactions herein contemplated, will not (A)
conflict with or result in a breach or violation of any of the terms or
provisions of, or constitute a default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any properties or assets
of the Company or any of its Subsidiaries under, any indenture, mortgage,
deed of trust, loan agreement, partnership agreement, joint venture
agreement or other agreement or instrument to which the Company or any of
its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound or to which any of the properties or assets of the
Company or any of its Subsidiaries is subject, except to such extent as,
individually or in the aggregate, does not have a Material Adverse Effect,
(B) result in any violation of the provisions of the Company's Articles of
Amendment and Restatement (the "CHARTER") or bylaws, the Operating
Partnership Agreements, certificates of limited partnership or other
governing documents of the Company or its Subsidiaries or (C) result in a
violation of any statute, rule, regulation or other law, or any order or
judgment, of any court or governmental agency or body having jurisdiction
over the Company or any of its Subsidiaries or any of their properties. No
consent, approval, authorization, order, registration or qualification of or
with any such court or governmental agency or body is required for the
execution, delivery and performance of this Agreement, the issuance and sale
of the Shares or the consummation of the transactions contemplated hereby,
except such as have been, or will be prior to the Closing Date, obtained
under the 1933 Act or as may be required by the National Association of
Securities Dealers, Inc. (the "NASD") and such consents, approvals,
authorizations, registrations or qualifications as may be required under
state securities or blue sky laws in connection with the purchase and
distribution of the Shares by the Underwriters.
(vii) (a) The Company has duly and validly authorized capital stock as
set forth in the Prospectus. All outstanding shares of Common Stock of the
Company and the Shares conform, or when issued will conform, to the
description thereof in the Prospectus and have been, or, when issued and
paid for in the manner described herein will be, duly authorized, validly
issued, fully paid and non-assessable. The issuance of the Shares to be
purchased from the Company hereunder will be consummated in compliance with
all applicable laws (including, without limitation, federal and state
securities laws), is not subject to preemptive or other similar rights, or
any restriction upon the voting or transfer thereof pursuant to applicable
law (including the Maryland General Corporate Law (the "MGCL")) or the
Company's Charter, bylaws or governing documents or any agreement to which
the Company or any of its Subsidiaries is a party or by which any of them
may be bound. All corporate action required to be taken by the Company for
the authorization, issuance and sale of the Shares has been duly and validly
taken.
5
<PAGE>
(b) Except as disclosed in the Prospectus, there are no outstanding
subscriptions, rights, warrants, options, calls, convertible securities,
commitments of sale or rights related to or entitling any person to
purchase or otherwise to acquire any shares of, or any security
convertible into or exchangeable or exercisable for, the capital stock or
Units (as defined below) of, or other ownership interest in, the Company
or any Subsidiary.
(c) All of the outstanding shares of capital stock of the Corporate
Subsidiaries have been duly authorized and validly issued, are fully paid
and non-assessable and are owned by the Company free and clear of any
mortgage, pledge, lien, encumbrance, charge or adverse claim and are not
the subject of any agreement or understanding with any person and were
not issued in violation of any preemptive or similar rights. There are no
outstanding subscriptions, rights, warrants, options, calls, convertible
securities, commitments of sale or instruments related to or entitling
any person to purchase or otherwise acquire any shares of, or any
security convertible into or exchangeable or exercisable for, the capital
stock of, or other ownership interest in any of the Corporate
Subsidiaries.
(d) The outstanding units of the Operating Partnerships ("UNITS"),
including without limitation, Units issued and to be issued to the
Company, have been duly authorized for issuance by each respective
Operating Partnership to the holders thereof and are validly issued and
fully paid. The Units held by the Company are owned directly by the
Company, free and clear of any mortgage, pledge, lien, encumbrance,
charge or adverse claim and are not the subject of any agreement or
understanding with any person and were not issued in violation of any
preemptive or similar rights. The Units have been and will be offered and
sold on or prior to the Closing Date in compliance with all applicable
laws (including, without limitation, federal and state securities laws).
The following table sets forth, as of the date hereof and on the Closing
Date, the number issued and outstanding Units of each Operating
Partnership, indicating the number of Units held by the Company and those
held by the limited partners of the Operating Partnerships.
<TABLE>
<CAPTION>
TOTAL OUTSTANDING
ENTITY UNITS UNITS HELD BY COMPANY
- ---------------------------------------------- ---------------------- ---------------------
<S> <C> <C>
Mission West Properties L.P. .................
Mission West Properties L.P. I................
Mission West Properties L.P. II...............
Mission West Properties L.P. III..............
TOTAL.........................................
</TABLE>
(viii) The statements set forth in the Prospectus describing the Shares
and this Agreement, insofar as they purport to describe the provisions of
the laws and documents referred to therein, are accurate, complete and fair.
(ix) Each of the Company and its Subsidiaries is in possession of and is
operating in compliance with all franchises, grants, authorizations,
licenses, certificates, permits, easements, consents, orders and approvals
("PERMITS") from all state, federal, foreign and other regulatory
authorities, and has satisfied the requirements imposed by regulatory
bodies, administrative agencies or other governmental bodies, agencies or
officials, that are required for the Company and its Subsidiaries lawfully
to own, lease and operate their properties and conduct their businesses as
described in the Prospectus, and, each of the Company and its Subsidiaries
is conducting its business in compliance with all of the laws, rules and
regulations of each jurisdiction in which it conducts its business, in each
case with such exceptions, individually or in the aggregate, as would not
have a Material Adverse Effect. Each of the Company and its Subsidiaries has
filed all notices, reports, documents or other information ("NOTICES")
required to be filed under applicable laws, rules and regulations, in each
case, with such exceptions, individually or in the aggregate, as would not
have a Material Adverse Effect. Except as
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<PAGE>
otherwise specifically described in the Prospectus, neither the Company nor
any of its Subsidiaries has received any notification from any court or
governmental body, authority or agency, relating to the revocation or
modification of any such Permit or, to the effect that any additional
authorization, approval, order, consent, license, certificate, permit,
registration or qualification ("APPROVALS") from such regulatory authority
is needed to be obtained by any of them, in any case where it could be
reasonably expected that obtaining such Approvals or the failure to obtain
such Approvals, individually or in the aggregate, would have a Material
Adverse Effect.
(x) The Company and its Subsidiaries have filed all necessary federal,
state, local and foreign income and franchise tax returns and have paid all
taxes required to be paid and any other assessment, fine or penalty levied
against them, to the extent that any of the foregoing is due and payable,
except, in all cases, for any such tax, assessment, fine or penalty that is
being contested in good faith (and except in any case in which the failure
to so file or pay would not have a Material Adverse Effect). All such tax
returns are complete and correct in all material respects. All tax
liabilities are adequately provided for on the books of the Company and its
Subsidiaries except to such extent as would not have a Material Adverse
Effect. The Company and its Subsidiaries have made all necessary payroll tax
payments and are current and up-to-date. The Company and its Subsidiaries
have no knowledge of any tax proceeding or action pending or threatened
against the Company or its Subsidiaries which, individually or in the
aggregate, might have a Material Adverse Effect.
(xi) Except as described in the Prospectus, the Company and its
Subsidiaries own or possess, or can acquire on reasonable terms, adequate
patents, patent licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks and trade
names necessary to conduct the business now operated by them, and neither
the Company nor any of its Subsidiaries has received any notice of
infringement of or conflict with asserted rights of others with respect to
any of the foregoing which, individually or in the aggregate, if the subject
of an unfavorable decision, ruling or finding, would have a Material Adverse
Effect.
(xii) (a) Except as described in the Prospectus, the Company and its
Subsidiaries have good and marketable title in fee simple to all items of
real property and the improvements thereon and good and marketable title to
all personal property owned by them (collectively, the "PROPERTIES") and all
other assets that are required for the effective operation of the Properties
in the manner in which they are currently operated, in each case free and
clear of all liens, encumbrances, restrictions and defects except such as
are described in the Prospectus or do not materially affect the value of
such property and do not interfere with the use made and proposed to be made
of such property. (b) Any property held under lease or sublease by the
Company or any of its Subsidiaries is held under valid, subsisting and
enforceable leases or subleases with such exceptions as are not material and
do not interfere with the use made and proposed to be made of such property
by the Company and its Subsidiaries. (c) All liens, charges, encumbrances,
claims, or restrictions on or affecting any of the Properties and the assets
of the Company or any of its Subsidiaries which are required to be disclosed
in the Prospectus are disclosed therein. (d) Neither any Subsidiary nor any
tenant of any of the Properties is in default under any of the leases
pursuant to which any Subsidiary, as lessor, leases its Property (and
neither the Company nor the Operating Partnerships know of any event which,
but for the passage of time or the giving of notice, or both, would
constitute a default under any of such leases) other than such defaults that
would not result in a Material Adverse Effect. (e) Except as described in
the Prospectus, no person has an option or right of first refusal to
purchase all or part of any Property or any interest therein which is
material to the Company. (f) Each of the Properties complies with all
applicable codes, laws and regulations (including, without limitation,
building and zoning codes, laws and regulations and laws relating to access
to the Properties), except if and to the extent disclosed in the Prospectus
and except for such failures to comply that would not individually or in the
aggregate result in a Material Adverse Effect. (g) Neither of the Company
nor any of the Operating Partnerships has
7
<PAGE>
knowledge of any pending or threatened condemnation proceedings, zoning
change, or other similar proceeding or action that will in any manner affect
the size of, use of, improvements on, construction on or access to any of
the Properties, except such proceedings or actions that would not have a
Material Adverse Effect.
(xiii) Except as disclosed in the Prospectus: (i) each Property,
including, without limitation, the Environment (as defined below) associated
with such Property, is free of any Hazardous Substance (as defined below) in
violation of any Environmental Law (as defined below) applicable to such
Property, except for Hazardous Substances that would not result in a
Material Adverse Effect; (ii) none of the Company or any Subsidiary or any
prior owner of any of the Properties affiliated with the Berg Group has
caused or suffered to occur any Release (as defined below) of any Hazardous
Substance into the Environment on, in, under or from any Property in
violation of any Environmental Law applicable to such Property, other than
such Releases which, singly or in the aggregate, do not require significant
remediation, and no condition exists on, in, under or, to the knowledge of
the Company and its Subsidiaries, adjacent to any Property that could result
in the incurrence of material liabilities or any material violations of any
Environmental Law applicable to such Property, give rise to the imposition
of any material Lien (as defined below) under any Environmental Law, or
cause or constitute a material health, safety or environmental hazard to any
property, person or entity; (iii) none of the Company or any Subsidiary is
engaged, and none of the Company, the Operating Partnership or any of the
Subsidiaries intends to engage in any manufacturing or any other similar
operations at the Properties that (1) require the use, handling,
transportation, storage, treatment or disposal of any Hazardous Substance
(other than cleaning solvents and similar materials and other than
insecticides and herbicides or other Hazardous Substances that are used in
the ordinary course of operating the Properties and in compliance with all
applicable Environmental Laws) or (2) require permits or are otherwise
regulated pursuant to any Environmental Law; (iv) none of the Company or any
Subsidiary has received any written notice of a claim under or pursuant to
any Environmental Law applicable to a Property or under common law
pertaining to Hazardous Substances on or originating from any Property; (v)
none of the Company or any Subsidiary has received any notice from any
Governmental Authority (as defined below) claiming any violation of any
Environmental Law applicable to a Property that is uncured or unremediated
as of the date hereof; (vi) no Property is included or, to the knowledge of
the Company and its Subsidiaries, proposed for inclusion on the National
Priorities List issued pursuant to CERCLA (as defined below) by the United
States Environmental Protection Agency (the "EPA") or on the Comprehensive
Environmental Response, Compensation, and Liability Information System
database maintained by the EPA, and has not otherwise been identified by the
EPA as a potential CERCLA removal, remedial or response site or included or,
to the knowledge of the Company and the Operating Partnerships, proposed for
inclusion on, any similar list of potentially contaminated sites pursuant to
any other applicable Environmental Law nor has the Company or any Subsidiary
received any written notice from the EPA or any other Governmental Authority
proposing the inclusion of any Property on such list; and (vii) there are no
underground storage tanks located on or in any Property which have not been
disclosed to the Representatives.
As used herein: "HAZARDOUS SUBSTANCE" shall include, without limitation, any
hazardous substance, hazardous waste, toxic or dangerous substance, pollutant,
solid waste or similarly designated materials, including, without limitation,
oil, petroleum or any petroleum-derived substance or waste, asbestos or
asbestos-containing materials, PCBs, pesticides, explosives, radioactive
materials, dioxins, urea formaldehyde insulation or any constituent of any such
substance, pollutant or waste, including any such substance, pollutant or waste
identified or regulated under any Environmental Law (including, without
limitation, materials listed in the United States Department of Transportation
Optional Hazardous Material Table, 49 C.F.R. Section 172.101, as heretofore
amended, or in the EPA's List of Hazardous Substances and Reportable Quantities,
40 C.F.R. Part 302, as heretofore amended); "ENVIRONMENT" shall mean any surface
water, drinking water, ground water, land surface, subsurface strata, river
sediment, buildings, structures,
8
<PAGE>
and ambient, workplace and indoor air; "ENVIRONMENTAL LAW" shall mean the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended (42 U.S.C. Section 9601 et seq.) ("CERCLA"), the Resource Conservation
and Recovery Act of 1976, as amended (42 U.S.C. Section 6901, et seq.), the
Clean Air Act, as amended (42 U.S.C. Section 7401, et seq.), the Clean Water
Act, as amended (33 U.S.C. Section 1251, et seq.), the Toxic Substances Control
Act, as amended (15 U.S.C. Section 2601, et seq.), the Occupational Safety and
Health Act of 1970, as amended (29 U.S.C. Section 651, et seq.), the Hazardous
Materials Transportation Act, as amended (49 U.S.C. Section 1801, et seq.), and
all other applicable federal, state and local laws, ordinances, regulations,
rules, orders, decisions and permits relating to the protection of the
environment or of human health from environmental effects; "GOVERNMENTAL
AUTHORITY"shall mean any federal, state or local governmental office, agency or
authority having the duty or authority to promulgate, implement or enforce any
Environmental Law; "LIEN" shall mean, with respect to any Property, any
mortgage, deed of trust, pledge, security interest, lien, encumbrance, penalty,
fine, charge, assessment, judgment or other liability in, on or affecting such
Property; and "RELEASE" shall mean any spilling, leaking, pumping, pouring,
emitting, emptying, discharging, injecting, escaping, leaching, dumping,
emanating or disposing of any Hazardous Substance into the Environment,
including, without limitation, the abandonment or discard of barrels,
containers, tanks (including, without limitation, underground storage tanks) or
other receptacles containing or previously containing any Hazardous Substance or
any release, emission, discharge or similar term, as those terms are defined or
used in any Environmental Law.
The Company and its Subsidiaries (i) are in compliance with any and all
applicable federal, state and local laws and regulations relating to the
protection of occupational health and safety and all Environmental Laws, (ii)
have received all permits, licenses or other approvals required of them under
applicable federal and state occupational safety and health laws and regulations
and Environmental Laws to conduct their respective businesses and (iii) are in
compliance with all terms and conditions of any such permit, license or
approval, except in each case where such noncompliance, failure to receive
required permits, licenses or other approvals or failure to comply with the
terms and conditions of such permits, licenses or approvals would not, singly or
in the aggregate, have a Material Adverse Effect.
There are no costs or liabilities associated with Environmental Laws
(including, without limitation, any capital or operating expenditures required
for clean-up, closure of properties or compliance with Environmental Laws or any
permit, license or approval, any related constraints on operating activities and
any potential liabilities to third parties) which would, singly or in the
aggregate, have a Material Adverse Effect.
(xiv) No labor disturbance exists with the employees of the Company or
any of its Subsidiaries or is imminent which, individually or in the
aggregate, would have a Material Adverse Effect. None of the employees of
the Company or any of its Subsidiaries is represented by a union and, to the
best knowledge of the Company and its Subsidiaries, no union organizing
activities are taking place. The Company is not aware of any existing,
threatened or imminent labor disturbance by the employees of any of its
principal suppliers, manufacturers or contractors that could result in a
Material Adverse Effect. Neither the Company nor any of its Subsidiaries has
violated any federal, state or local law or foreign law relating to
discrimination in hiring, promotion or pay of employees, nor any applicable
wage or hour laws, or the rules and regulations thereunder, or analogous
foreign laws and regulations, which might, individually or in the aggregate,
result in a Material Adverse Effect.
(xv) The Company and its Subsidiaries are in compliance in all material
respects with all presently applicable provisions of the Employee Retirement
Income Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA"); no "reportable event" (as
defined in ERISA) has occurred with respect to any "pension plan" (as
defined in ERISA) for which the Company and its Subsidiaries would have any
liability; the Company and its Subsidiaries have not incurred and do not
expect to incur liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Sections 412
or 4971 of the
9
<PAGE>
Internal Revenue Code of 1986, as amended, including the regulations and
published interpretations thereunder (the "CODE"); and each "pension plan"
for which the Company or any of its Subsidiaries would have any liability
that is intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects, and nothing has occurred, whether by
action or by failure to act, which would cause the loss of such
qualification. Each "pension plan" for which the Company, the Operating
Partnerships or any of their affiliates has any liability or with respect to
which the Company, the Operating Partnerships or any of their affiliates is
a disqualified person (as defined in the Code) or party-in-interest (as
defined in ERISA) has not been a party to any "prohibited transaction" (as
defined in ERISA and the Code), except for such noncompliance, reportable
events, liabilities, or failures to qualify that would not have a Material
Adverse Effect.
(xvi) Except as disclosed in the Prospectus, the Company and each of the
Subsidiaries are insured by insurers of recognized financial responsibility
against such losses and risks and in such amounts as are prudent and
customary in the businesses in which they are engaged, including, but not
limited to, directors' and officers' insurance, insurance covering real and
personal property owned or leased by the Company and its Subsidiaries
against theft, damage, destruction, acts of vandalism and all other risks
customarily insured against, all of which insurance is in full force and
effect. Neither the Company nor any of its Subsidiaries has been refused any
insurance coverage sought or applied for, and the Company has no reason to
believe that it and its Subsidiaries will not be able to renew their
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not have a Material Adverse Effect.
(xvii) Neither the Company nor any of its Subsidiaries is, or with the
giving of notice or lapse of time or both would be, in default or violation
with respect to its Charter or bylaws, the Operating Partnership Agreements
or other governing documents. Neither the Company nor any of its
Subsidiaries is, or with the giving of notice or lapse of time or both would
be, in default in the performance or observance of any material obligation,
agreement, covenant or condition contained in any indenture, mortgage, deed
of trust, loan agreement, lease or other agreement or instrument to which
the Company or any of its Subsidiaries is a party or by which the Company or
any of its Subsidiaries is bound or to which any of the properties or assets
of the Company or any of its Subsidiaries is subject, or in violation of any
statutes, laws, ordinances or governmental rules or regulations or any
orders or decrees to which it is subject, which default or violation,
individually or in the aggregate, would have a Material Adverse Effect.
Neither the Company nor any of its Subsidiaries has, at any time during the
past five years, (A) made any unlawful contributions to any candidate for
any political office, or failed fully to disclose any contribution in
violation of law, or (B) made any payment to any state, federal or foreign
government official, or other person charged with similar public or
quasi-public duty (other than payment required or permitted by applicable
law).
(xviii) Other than as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of its
Subsidiaries is a party or of which any property of the Company or any of
its Subsidiaries is the subject that, if determined adversely to the Company
or any of its Subsidiaries, would individually or in the aggregate have a
Material Adverse Effect or which would materially and adversely affect the
consummation of the transactions contemplated hereby or which is required to
be disclosed in the Prospectus; to the best of the Company's knowledge, no
such proceedings are threatened or contemplated. Any statutes, regulations,
contracts or other documents that are required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement are described or filed as required.
(xix) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be a "holding company," or a "subsidiary
company" of a "holding company," or an "affiliate" of a "holding company" or
of a "subsidiary company," as such terms are defined in the Public Utility
Holding Company Act of 1935, as amended (the "1935 ACT").
10
<PAGE>
(xx) The Company is not and, after giving effect to the offering and sale
of the Shares, will not be an "investment company" or an entity "controlled"
by an "investment company," as such terms are defined in the Investment
Company Act of 1940, as amended (the "1940 ACT").
(xxi) PriceWaterhousecoopers LLP, the accounting firm which has certified
the financial statements filed with and as a part of the Registration
Statement, is an independent public accounting firm within the meaning of
the 1933 Act and the 1933 Act Rules and Regulations. The Company and each of
its Subsidiaries maintains a system of internal accounting controls
sufficient to provide reasonable assurance that: (1) transactions are
executed in accordance with management's general or specific authorizations;
(2) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (3) access to assets
is permitted only in accordance with management's general or specific
authorization; and (4) the recorded accounts for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken with
respect thereto. The consolidated financial statements and schedules of the
Company, including the notes thereto, filed with and as a part of the
Registration Statement or Prospectus, are accurate in all material respects
and present fairly the financial condition of the Company and its
Subsidiaries as of the respective dates thereof and the consolidated results
of operations and changes in financial position and consolidated statements
of cash flow for the respective periods covered thereby, all in conformity
with generally accepted accounting principles applied on a consistent basis
throughout the periods involved except as otherwise disclosed therein. All
adjustments necessary for a fair presentation of results for such periods
have been made. The selected financial data included in the Registration
Statement and Prospectus present fairly the information shown therein and
have been compiled on a basis consistent with that of the audited financial
statements. Any operating or other statistical data included in the
Registration Statement and Prospectus comply in all material respects with
the 1933 Act and the 1933 Act Rules and Regulations and present fairly the
information shown therein. Pro forma financial information included in the
Prospectus has been prepared in accordance with the applicable requirements
of Rules 11-01 and 11-02 of Regulation S-X under the 1933 Act, and the
necessary pro forma adjustments have been properly applied to the historical
amounts in the compilation of such information, and, in the opinion of the
Company, the assumptions used in the preparation thereof are reasonable and
the adjustments used therein are appropriate to give effect to the
transactions and circumstances referred to therein.
(xxii) Except as described in the Prospectus, no holder of any security of
the Company has any right to require registration of shares of Common Stock
or any other security of the Company because of the filing of the
Registration Statement or the consummation of the transactions contemplated
hereby and, except as disclosed in the Prospectus, no person has the right
to require registration under the 1933 Act of any shares of Common Stock or
other securities of the Company. All rights of any holders of securities of
the Company or any Operating Partnerships to require registration of shares
of Common Stock because of the filing of the Registration Statement have
been duly and validly waived in accordance with the agreements granting any
such rights. No person has the right, contractual or otherwise, to cause the
Company to permit such person to underwrite the sale of any of the Shares.
Except for this Agreement, there are no contracts, agreements or
understandings between the Company or any of its Subsidiaries and any person
that would give rise to a valid claim against the Company, its Subsidiaries
or any Underwriter for a brokerage commission, finder's fee or like payment
in connection with the issuance, purchase and sale of the Shares.
(xxiii) The Company has not distributed and, prior to the later to occur
of (i) the Closing Date or the Option Closing Date, if any, and (ii)
completion of the distribution of the Shares, will not distribute any
offering material in connection with the offering and sale of the Shares
other than the Registration Statement, the Preliminary Prospectus or the
Prospectus.
11
<PAGE>
(xxiv) The Company has not taken and will not take, directly or
indirectly, any action designed to or which might reasonably be expected to
cause or result in stabilization or manipulation of the price of the
Company's Common Stock, and the Company is not aware of any such action
taken or to be taken by affiliates of the Company.
(xxv) The Company is intended to be organized in conformity with the
requirements for qualification as a real estate investment trust under the
Code, and its proposed method of operation will enable it to meet the
requirements for taxation as a real estate investment trust under the Code
for its taxable periods beginning or otherwise including the period after
the Closing Date.
(xxvi) The Company and the Operating Partnerships have complied with all
provisions of Section 517.075, Florida Statutes relating to doing business
with the Government of Cuba or with any person or affiliate located in Cuba.
(xxvii) No relationship, direct or indirect, exists between or among the
Company or its Subsidiaries on the one hand, and the directors, officers,
stockholders (in the case of the Company), limited partners (in the case of
the Operating Partnerships), customers or suppliers of the Company or its
Subsidiaries on the other hand, which is required to be described in the
Prospectus which is not so described.
(xxviii) The Company and the Subsidiaries are currently in substantial
compliance with all presently applicable provisions of the Americans with
Disabilities Act and no failure of the Company or any Subsidiary to comply
with all presently applicable provisions of the Americans with Disabilities
Act would have a Material Adverse Effect.
(b) Any certificate signed by any officer of the Company and delivered to
you or to counsel for the Underwriters shall be deemed a representation and
warranty by the Company to each Underwriter as to the matters covered thereby.
5. ADDITIONAL COVENANTS. The Company covenants and agrees with the several
Underwriters that:
(a) The Company will timely transmit copies of the Prospectus, and any
amendments or supplements thereto, or a Term Sheet or Abbreviated Term Sheet, as
applicable, to the SEC for filing pursuant to Rule 424(b) of the 1933 Act Rules
and Regulations.
(b) The Company will deliver to each of the Representatives, and to counsel
for the Underwriters (i) four (4) signed copies of the Registration Statement as
originally filed, including copies of exhibits thereto (other than any exhibits
incorporated by reference therein), of any amendments and supplements to the
Registration Statement and (ii) a signed copy of each consent and certificate
included or incorporated by reference in, or filed as an exhibit to, the
Registration Statement as so amended or supplemented. The Company will deliver
to the Underwriters through the Representatives as soon as practicable after the
date of this Agreement as many copies of the Prospectus as the Representatives
may reasonably request for the purposes contemplated by the 1933 Act; if the
Registration Statement is not effective under the 1933 Act, the Company will use
its best efforts to cause the Registration Statement to become effective as
promptly as possible, and it will notify you, promptly after it shall receive
notice thereof, of the time when the Registration Statement has become
effective. The Company will promptly advise the Representatives of any request
of the SEC for amendment of the Registration Statement or for supplement to the
Prospectus or for any additional information, and of the issuance by the SEC or
any state or other jurisdiction or other regulatory body of any stop order under
the 1933 Act or other order suspending the effectiveness of the Registration
Statement (as amended or supplemented) or preventing or suspending the use of
any Preliminary Prospectus or the Prospectus or suspending the qualification or
registration of the Shares for offering or sale in any jurisdiction, and of the
institution or threat of any proceedings therefor, of which the Company shall
have received notice or otherwise have knowledge prior to the completion of the
distribution of the Shares; and the Company will use its best efforts to prevent
the issuance of any such stop order or other order and, if issued, to secure the
prompt removal thereof.
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(c) The Company will not file any amendment or supplement to the
Registration Statement, the Prospectus (or any other prospectus relating to the
Shares filed pursuant to Rule 424(b) of the 1933 Act Rules and Regulations that
differs from the Prospectus as filed pursuant to such Rule 424(b)), of which the
Underwriters shall not previously have been advised and furnished with a copy or
to which the Underwriters shall have reasonably objected or which is not in
compliance with the 1933 Act Rules and Regulations; and the Company will
promptly notify you after it shall have received notice thereof of the time when
any amendment to the Registration Statement becomes effective or when any
supplement to the Prospectus has been filed.
(d) During the period when a prospectus relating to any of the Shares is
required to be delivered under the 1933 Act by any Underwriter or dealer, the
Company will comply, at its own expense, with all requirements imposed by the
1933 Act and the 1933 Act Rules and Regulations, as now and hereafter amended,
and by the rules and regulations of the SEC thereunder, as from time to time in
force, so far as necessary to permit the continuance of sales of or dealing in
the Shares during such period in accordance with the provisions hereof and as
contemplated by the Prospectus.
(e) If, during the period when a prospectus relating to any of the Shares is
required to be delivered under the 1933 Act by any Underwriter or dealer, (i)
any event relating to or affecting the Company or of which the Company shall be
advised in writing by the Representatives shall occur as a result of which, in
the opinion of the Company or the Representatives, the Prospectus as then
amended or supplemented would include any untrue statement of a material fact or
omit to state a material fact necessary in order to make the statements therein,
in the light of the circumstances under which they were made, not misleading or
(ii) it shall be necessary to amend or supplement the Registration Statement or
the Prospectus to comply with the 1933 Act, the 1933 Act Rules and Regulations,
the 1934 Act or the 1934 Act Rules and Regulations, the Company will forthwith
at its expense prepare and file with the SEC, and furnish to the Representatives
a reasonable number of copies of, such amendment or supplement or other filing
that will correct such statement or omission or effect such compliance.
(f) During the period when a prospectus relating to any of the Shares is
required to be delivered under the 1933 Act by any Underwriter or dealer, the
Company will furnish such proper information as may be lawfully required and
otherwise cooperate in qualifying the Shares for offer and sale under the
securities or blue sky laws of such jurisdictions as the Representatives may
reasonably designate and will file and make in each year such statements or
reports as are or may be reasonably required by the laws of such jurisdictions;
PROVIDED, HOWEVER, that the Company shall not be required to qualify as a
foreign corporation or shall be required to qualify as a dealer in securities or
to file a general consent to service of process under the laws of any
jurisdiction.
(g) In accordance with Section 11(a) of the 1933 Act and Rule 158 of the
1933 Act Rules and Regulations, the Company will make generally available to its
security holders and to holders of the Shares, as soon as practicable, an
earnings statement (which need not be audited) in reasonable detail covering the
12 months beginning not later than the first day of the month next succeeding
the month in which occurred the effective date (within the meaning of Rule 158)
of the Registration Statement.
(h) The Company will furnish to its security holders annual reports
containing financial statements audited by independent public accountants and
quarterly reports containing financial statements and financial information
which may be unaudited. The Company will, for a period of five years from the
Closing Date, deliver to the Underwriters at their principal executive offices a
reasonable number of copies of annual reports, quarterly reports, current
reports and copies of all other documents, reports and information furnished by
the Company to its shareholders or filed with any securities exchange or market
pursuant to the requirements of such exchange or market or with the SEC pursuant
to the 1933 Act or the 1934 Act. The Company will deliver to the Underwriters
similar reports with respect to any significant subsidiaries, as that term is
defined in the 1933 Act Rules and Regulations, which are not consolidated in the
Company's financial statements. Any report, document or other information
required to be furnished
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under this paragraph (h) shall be furnished as soon as practicable after such
report, document or information becomes available.
(i) During the period beginning from the date of this Agreement and
continuing to and including the earlier of (i) the termination of trading
restrictions on the Shares, as determined by the Underwriters, and (ii) 180 days
after the Closing Date, the Company will not, without the prior written consent
of the Representatives, offer for sale, sell or enter into any agreement to
sell, or otherwise dispose of, any equity securities of the Company, except for
the Shares.
(j) The Company will apply the proceeds from the sale of the Shares as set
forth in the description under "Use of Proceeds" in the Prospectus, which
description complies in all respects with the requirements of Item 504 of
Regulation S-K.
(k) The Company will promptly provide you with copies of all correspondence
to and from, and all documents issued to and by, the SEC in connection with the
registration of the Shares under the 1933 Act.
(l) Prior to the Closing Date (and, if applicable, the Option Closing Date),
the Company will furnish to you, as soon as they have been prepared, copies of
any unaudited interim consolidated financial statements of the Company and its
Subsidiaries for any periods subsequent to the periods covered by the financial
statements appearing in the Registration Statement and the Prospectus.
(m) Prior to the Closing Date (and, if applicable, the Option Closing Date),
the Company shall not issue any press releases or other communications directly
or indirectly and will hold no press conferences with respect to the Company or
any of its Subsidiaries, the financial condition, results of operations,
business, properties, assets or liabilities of the Company or any of its
Subsidiaries, or the offering of the Shares, without your prior written consent.
(n) The Company will use its best efforts to obtain approval for, and
maintain the listing of the Shares on, the American Stock Exchange and the
Pacific Stock Exchange.
(o) The Company will cause its directors and officers and each holder of in
excess of shares of Common Stock or securities convertible into or
exercisable or exchangeable for, shares of Common Stock, to furnish to you, on
or prior to the date of this Agreement, a letter or letters, in form and
substance satisfactory to counsel for the Underwriters, pursuant to which each
such person shall agree not to, and the Company will not, directly or
indirectly, offer for sale, contract to sell, sell, distribute, grant any
option, right or warrant to purchase, pledge, hypothecate or otherwise dispose
of any shares of Common Stock, any securities convertible into, or exercisable
or exchangeable for, Common Stock or any other rights to acquire such shares,
for a period of 180 days from the Effective Date (with respect to the officers
and directors) or a period of 90 days from the Effective Date (for the holders
of in excess of shares of Common Stock), without the prior written consent
of A.G. Edwards & Sons, Inc., except for the Shares sold hereunder and except
for sales of shares of Common Stock to the Company's employees pursuant to the
exercise of options outstanding on the date hereof under the Company's stock
option plan.
(p) The Company and its Subsidiaries will maintain and keep accurate books
and records reflecting their assets and maintain internal accounting controls
which provide reasonable assurance that (1) transactions are executed in
accordance with management's authorization, (2) transactions are recorded as
necessary to permit the preparation of the Company's consolidated financial
statements and to maintain accountability for the assets of the Company and its
Subsidiaries, (3) access to the assets of the Company and its Subsidiaries is
permitted only in accordance with management's authorization, and (4) the
recorded accounts of the assets of the Company and its Subsidiaries are compared
with existing assets at reasonable intervals.
(q) [Reserved].
(r) If the Company elects to rely on Rule 462(b) under the 1933 Act, the
Company shall both file an Abbreviated Registration Statement with the SEC in
compliance with Rule 462(b) and pay the applicable
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fees in accordance with Rule 111 of the 1933 Act by the earlier of (i) 9:00
p.m., New York time, on the date of this Agreement, and (ii) the time that
confirmations are given or sent, as specified by Rule 462(b)(2).
(s) If at any time during the 90-day period after the Registration Statement
becomes effective, any rumor, publication or event relating to or affecting the
Company shall occur as a result of which in your opinion the market price of the
Common Stock has been or is likely to be materially affected (regardless of
whether such rumor, publication or event necessitates a supplement to or
amendment of the Prospectus), the Company will, after written notice from you
advising the Company to the effect set forth above, forthwith prepare, consult
with you concerning the substance of, and disseminate a press release or other
public statement, reasonably satisfactory to you, responding to or commenting on
such rumor, publication or event.
6. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The several obligations of the
Underwriters to purchase and pay for the Shares, as provided herein, shall be
subject to the accuracy, as of the date hereof and as of the Closing Date (and,
if applicable, the Option Closing Date), of the representations and warranties
of the Company and the Operating Partnership contained herein, to the
performance by the Company of its covenants and obligations hereunder, and to
the following additional conditions:
(a) The Registration Statement and all post-effective amendments thereto
shall have become effective not later than 1:00 p.m., New York time, on the date
hereof, or, with your consent, at a later date and time, not later than 1:00
p.m., New York time, on the first business day following the date hereof, or at
such later date and time as may be approved by the Representatives; if the
Company has elected to rely on Rule 462(b) under the 1933 Act, the Abbreviated
Registration Statement shall have become effective not later than the earlier of
(x) 10:00 p.m. New York time, on the date hereof, or (y) at such later date and
time as may be approved by the Representatives. All filings required by Rule 424
and Rule 430A of the 1933 Act Rules and Regulations shall have been made. No
stop order suspending the effectiveness of the Registration Statement, as
amended from time to time, shall have been issued and no proceeding for that
purpose shall have been initiated or, to the knowledge of the Company or any
Underwriter, threatened or contemplated by the SEC, and any request of the SEC
for additional information (to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with to the reasonable
satisfaction of the Underwriters.
(b) No Underwriter shall have advised the Company on or prior to the Closing
Date (and, if applicable, the Option Closing Date), that the Registration
Statement or Prospectus or any amendment or supplement thereto contains an
untrue statement of fact which, in the opinion of counsel to the Underwriters,
is material, or omits to state a fact which, in the opinion of such counsel, is
material and is required to be stated therein or is necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading.
(c) On the Closing Date (and, if applicable, the Option Closing Date), you
shall have received the opinion of McCutchen, Doyle, Brown & Enerson, LLP,
counsel for the Company, addressed to you and dated the Closing Date (and, if
applicable, the Option Closing Date), to the effect that:
(i) The Registration Statement and all post-effective amendments thereto
and the Abbreviated Registration Statement, if any, have become effective
under the 1933 Act; any required filing of the Prospectus or any supplement
thereto pursuant to Rule 424(b) or otherwise has been made in the manner and
within the time period required thereby; and, to the knowledge of such
counsel after due inquiry, no stop or other order suspending the
effectiveness of the Registration Statement has been issued and no
proceedings for that purpose have been instituted or are pending or
contemplated under the 1933 Act or under the securities laws of any
jurisdiction.
(ii) The Registration Statement and the Prospectus, and each amendment
or supplement thereto, as of their respective effective or issue date,
comply as to form and appear on their face to be appropriately responsive in
all material respects to the requirements of Form S-11 under the 1933 Act
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and the applicable 1933 Act Rules and Regulations (except that such counsel
need express no opinion as to the financial statements or other financial
data).
(iii) [the Units to be issued in connection with the transactions
contemplated by the Prospectus, including, without limitation, the Units to
be issued to the Company, have been, assuming the due authorization by the
Company in its capacity as the sole general partner of the Operating
Partnerships, duly authorized for issuance by the Operating Partnership to
the holders or prospective holders thereof, and at the Closing Date will be
validly issued and fully paid. Immediately after the Closing Date,
Units will be issued and outstanding. The Units have been and
will be offered and sold on or prior to the Closing Date in compliance with
all federal and California securities laws;]
(iv) assuming due authorization, execution and delivery by the parties
thereto (other than ), each of the: (i) Acquisition Agreement,
dated as of May 14, 1998 filed as Exhibit 10.4.1 to the Registration
Statement, (ii) Amendment to Acquisition Agreement, dated as of July 1, 1998
filed as Exhibit 10.4.2 to the Registration Statement, (iii) Pending
Projects Acquisition Agreement filed as Exhibit 10.6 to the Registration
Statement, (iv) Berg Land Holdings Option Agreement filed as Exhibit 10.7 to
the Registration Statement and (v) [Amendment No. 1 to the Berg Land
Holdings Option Agreement] filed as Exhibit to the Registration Statement
is a valid and binding agreement of the Company and the Operating
Partnerships, enforceable against them in accordance with their terms,
except as enforceability may be limited by the Exceptions;
(v) Each of the Operating Partnerships is a limited partnership duly
formed and existing under and by virtue of the laws of the State of Delaware
and is in good standing under the Delaware Revised Uniform Limited
Partnership Act with partnership power and authority to own, lease and
operate its properties, to conduct the business in which it is engaged or
proposes to engage as described in the Prospectus and to enter into and
perform its obligations under the Underwriting Agreement. Each of the
Operating Partnerships is duly qualified or registered as a foreign
partnership and is in good standing in California and is in good standing in
each other jurisdiction in which such qualification or registration is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except where the failure so to qualify or be registered
or to be in good standing in such other jurisdiction would not have a
Material Adverse Effect. The Company is the sole general partner of each of
the Operating Partnerships and, immediately after the Closing Date will be
the sole general partner of each of the Operating Partnerships and will own
outstanding partnership interests in the Operating Partnerships as set forth
in the Prospectus;
(vi) the Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification, except to the
extent that the failure to be so qualified or be in good standing would not
have a Material Adverse Effect;
(vii) Other than the Operating Partnerships, the Corporate Subsidiaries
are the only subsidiaries, direct or indirect, of the Company. Each
Corporate Subsidiary has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of California, has
the corporate power and authority to own its property and to conduct its
business. Each Corporate Subsidiary is duly qualified to transact business
and is in good standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so qualified or
be in good standing would not have a Material Adverse Effect. The Company
owns, directly or indirectly through other subsidiaries, all of the
outstanding shares of capital stock or other securities evidencing equity
ownership of such Corporate Subsidiaries, and all such securities have been
duly authorized and validly issued, are fully paid and non-assessable and,
to the knowledge of such counsel, are owned by the Company free and clear of
any mortgage, pledge, lien, encumbrance, charge or adverse claim and are not
the subject of any agreement or understanding with any person, and were not
issued in violation of any preemptive or similar rights; and, to the
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knowledge of such counsel, except as disclosed in the Prospectus, there are
no outstanding subscriptions, rights, warrants, options, calls, convertible
securities, commitments of sale, or instruments related to or entitling any
person to purchase or otherwise acquire any shares of, or any security
convertible into or exercisable or exchangeable for, any such shares of
capital stock or other ownership interest of any of such subsidiaries.
(viii) The issuance and sale of the Shares and the execution, delivery and
performance by the Company of this Agreement, and the consummation of the
transactions herein contemplated, (A) will not conflict with or result in a
breach or violation of any of the terms or provisions of, or constitute a
default under, or result in the creation or imposition of any lien, charge
or encumbrance upon any properties or assets of the Company or any of its
subsidiaries under, any indenture, mortgage, deed of trust, loan agreement
or other agreement or instrument known to such counsel after due inquiry to
which the Company or any of its subsidiaries is a party or by which the
Company or any of its Subsidiaries is bound or to which any of the
properties or assets of the Company or any of its Subsidiaries is subject,
except to such extent as, individually or in the aggregate, does not have a
Material Adverse Effect, (B) will not result in any violation of the
provisions of the charter, by-laws, certificate of limited partnership,
partnership agreement or other organizational documents of the Operating
Partnerships or any Corporate Subsidiary, as the case may be and (C) will
not, to the best of such counsel's knowledge, result in any violation of any
statute, rule, regulation or other law (including the federal securities
laws, California law and the General Corporation Law of the State of
Delaware), or any order or judgment known to such counsel after due inquiry,
of any court or governmental agency or body having jurisdiction over the
Company or any of its Subsidiaries or any of their properties.
(ix) No consent, approval, authorization, order, registration or
qualification of or with any court or governmental agency or body is
required in connection with the execution, delivery and performance of this
Agreement, and the issuance and sale of the Shares or the consummation of
the transactions contemplated hereby, except such as may be required under
the 1933 Act or the 1933 Act Rules and Regulations and have been obtained,
or as may be required by the NASD or under state securities or blue sky laws
in connection with the purchase and distribution of the Shares by the
Underwriters. Each of the Company and its Subsidiaries has filed all Notices
pursuant to, and has obtained all Approvals required to be obtained under,
and has otherwise complied with all requirements of, all applicable laws and
regulations in connection with the issuance and sale of the Shares, in each
case with such exceptions, individually or in the aggregate, as would not
affect the validity of the Shares, their issuance or the transactions
contemplated hereby or have a Material Adverse Effect; and no such Notices
or Approvals are required to be filed or obtained by the Company or any of
its Subsidiaries in connection with the execution, delivery and performance
of this Agreement, the issuance and sale of the Shares or the transactions
contemplated hereby, in each case with such exceptions, individually or in
the aggregate, as would not affect the validity of the Shares, their
issuance or the transactions contemplated hereby or have a Material Adverse
Effect.
(x) the statements (A) in the Prospectus under the captions "Risk
Factors," "Business-- Acquiring Properties Developed by the Berg Group,"
"Properties--Microsoft Properties, --Apple Properties, --Amdahl Properties
and --Cisco Properties," "Certain Transactions," "Operating Partnership
Agreements," "Federal Income Tax Consequences," "ERISA Considerations" and
"Underwriters" and (B) in the Registration Statement in Items 33 and 34, in
each case insofar as such statements constitute summaries of the legal
matters, documents or proceedings referred to therein, fairly present the
information called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein.
(xi) To the knowledge of such counsel after due inquiry and other than
as set forth in the Prospectus, there are no legal or governmental
proceedings pending to which the Company or any of its Subsidiaries is a
party or of which any property of the Company or any of its Subsidiaries is
the
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subject that, if determined adversely to the Company or any of its
Subsidiaries, would individually or in the aggregate have a material adverse
effect on the current or future consolidated financial position,
stockholders' equity or results of operations of the Company and its
Subsidiaries taken as a whole; and, to the knowledge of such counsel after
due inquiry, no such proceedings are threatened by governmental authorities
or threatened by others.
(xii) Each of the Operating Partnerships is and will be treated as a
partnership for federal income tax purposes.
(xiii) To the knowledge of such counsel, the Company and each of its
Subsidiaries hold all licenses, certificates, permits and approvals from all
state, federal and other regulatory authorities, and have satisfied in all
material respects the requirements imposed by regulatory bodies,
administrative agencies or other governmental bodies, agencies or officials,
that are required for the Company and its Subsidiaries lawfully to own,
lease and operate its properties and conduct its business as described in
the Prospectus, and, to the knowledge of such counsel after due inquiry,
each of the Company and its Subsidiaries is conducting its business in
compliance in all material respects with all of the laws, rules and
regulations of each jurisdiction in which it conducts its business.
(xiv) Commencing with the Company's taxable year ending December 31,
1999, the Company is organized in conformity with the requirements for
qualification as a "real estate investment trust" under the Code, and its
proposed method of operation will enable the Company to meet the
requirements for qualification and taxation as such a real estate investment
trust.
(xv) Neither the Company nor any of its Subsidiaries is, or with the
giving of notice or lapse of time or both would be, in default or violation
with respect to its Charter or bylaws or applicable Operating Partnership
Agreement. To the knowledge of such counsel, none of the Company nor any of
its Subsidiaries is, or with the giving of notice or lapse of time or both
would be, in default in the performance or observance of any material
obligation, agreement, covenant or condition contained in any indenture,
mortgage, deed of trust, loan agreement, lease or other agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound or to which any of the
properties or assets of the Company or any of its Subsidiaries is subject,
or in violation of any statutes, laws, ordinances or governmental rules or
regulations or any orders or decrees to which it is subject, and neither the
Company nor any of its Subsidiaries has failed to obtain any other license,
permit, franchise, easement, consent, or other governmental authorization
necessary to the ownership, leasing and operation of its properties or to
the conduct of its business, which default, violation or failure,
individually or in the aggregate, would have a Material Adverse Effect.
(xvi) To the knowledge of such counsel, (A) there are no material
(individually, or in the aggregate) legal, governmental or regulatory
proceedings pending or threatened to which the Company or any of its
Subsidiaries is a party or of which the business or properties of the
Company or any of its Subsidiaries is the subject which are not disclosed in
the Registration Statement and Prospectus; (B) there are no contracts or
documents of a character required to be described in the Registration
Statement or the Prospectus or to be filed as an exhibit to the Registration
Statement which are not described or filed as required; and (C) there are no
statutes, ordinances, laws, rules or regulations required to be described in
the Registration Statement or Prospectus which are not described as
required.
(xvii) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be a "holding company," or a "subsidiary
company" of a "holding company," or an "affiliate" of a "holding company" or
of a "subsidiary company," as such terms are defined in the 1935 Act.
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(xviii) The Company is not and, after giving effect to the offering and
sale of the Shares, will not be an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
1940 Act.
(xix) All the outstanding shares of capital stock of the Company were
issued and sold in compliance with all applicable federal and state
securities laws.
(xx) To the knowledge of such counsel after due inquiry and except as
disclosed in the Prospectus, no holder of any security of the Company has
any right to require registration of shares of Common Stock or any other
security of the Company because of the filing of the Registration Statement
or the consummation of the transactions contemplated hereby and, except as
disclosed in the Prospectus, no person has the right to require registration
under the 1933 Act of any shares of Common Stock or other securities of the
Company.
Such counsel shall confirm that during the preparation of the Registration
Statement and Prospectus, such counsel participated in conferences with the
Representatives and their counsel and with officers and representatives of the
Company and its independent accountants, at which conferences the contents of
the Registration Statement and the Prospectus were discussed, reviewed and
revised. On the basis of the information which was developed in the course
thereof, considered in light of such counsel's understanding of applicable law
and the experience gained by such counsel through their practice thereunder,
without such counsel assuming responsibility for the accuracy and completeness
of such statements except to the extent expressly provided above, such counsel
shall confirm that nothing came to their attention that would lead them to
believe that either the Registration Statement, as of the Effective Date,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein,
in the light of the circumstances under which they were made, not misleading, or
the Prospectus or any amendment or supplement thereto as of its respective issue
date and as of the Closing Date, or, if applicable, the Option Closing Date,
contained or contains any untrue statement of a material fact or omitted or
omits to state a material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under which they
were made, not misleading (other than the financial statements or other
financial data as to which such counsel need express no opinion).
In rendering the foregoing opinion, such counsel may rely, (1) as to matters
involving laws of any jurisdictions other than the States of California and
Delaware or the United States, upon opinions addressed to the Underwriters of
other counsel satisfactory to them and Gibson, Dunn & Crutcher LLP, and (2) as
to all matters of fact, upon certificates and written statements of the
executive officers of, and accountants for, the Company, provided, in either
case, that such counsel shall state in their opinion that they and the
Underwriters are justified in relying thereon.
(d) On the Closing Date (and, if applicable, the Option Closing Date), you
shall have received the opinion of Ballard Spahr Andrews & Ingersoll LLP,
special Maryland counsel for the Company, addressed to you and dated the Closing
Date (and, if applicable, the Option Closing Date), to the effect that:
(i) the Company has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the State of Maryland, has
the corporate power and authority to own its property and to conduct its
business as described in the Prospectus and to enter into and perform its
obligations under the Underwriting Agreement to which it is a party;
(ii) the authorized capital stock of the Company conforms as to legal
matters to the description thereof' contained in the Prospectus;
(iii) the shares of Common Stock outstanding prior to the issuance of the
Shares have been duly authorized and are validly issued, fully paid and
non-assessable, and are not subject to preemptive or other similar rights
arising by operation of the MGCL or under the Charter or bylaws of the
Company or any agreement or other instrument known to such counsel;
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(iv) the Shares have been duly authorized and, when issued and delivered
in accordance with the terms of this Agreement, against payment of the
agreed consideration, will be validly issued, fully paid and non-assessable,
and the issuance of such Shares will not be subject to any preemptive or
similar rights arising by operation of the MGCL or under the Charter or
bylaws of the Company or any agreement or other instrument known to such
counsel;
(v) this Agreement has been duly authorized, executed and delivered by
the Company in its individual capacity and in its capacity as the general
partner of the Operating Partnerships;
(vi) the execution, delivery and performance of this Agreement by the
Company and the consummation of the transactions contemplated hereby, (A)
will not contravene any provision of the MGCL, (B) will not result in any
violation of the provisions of the Charter or by-laws of the Company and (C)
will not, to the best of such counsel's knowledge, result in any violation
of any order, rule, regulation or decree of any court or governmental agency
or authority of the State of Maryland issued under or pursuant to the MGCL
and applicable to the properties, assets or businesses owned or proposed to
be owned by the Company;
(vii) the Company has duly authorized and reserved a number of shares of
Common Stock for issuance upon redemption of outstanding Units issued by the
Operating Partnerships as contemplated by the Operating Partnership
Agreements and for issuance upon the exercise of options under the Company's
1997 Stock Option Plan which is not less than the number of outstanding
Units and the number of options issuable under the aforesaid Plan, as of the
Closing Date;
(viii) no consent, approval, authorization, order of or qualification with
any court or governmental agency or authority of the State of Maryland is
required to be obtained by the Company or any Subsidiary under the MGCL in
connection with the offering, issuance or sale of the Shares under this
Agreement except for such as have been obtained;
(ix) the form of certificate used to evidence the Shares is in due and
proper form and complies in all material respects with all applicable
statutory requirements under the laws of the State of Maryland;
(x) the information in the Prospectus under the caption "Description of
Capital Stock" (except for the information under the subsection thereof
entitled "Restrictions on Ownership and Transfer"), to the extent that it
constitutes matters of Maryland Law, summaries of legal matters, documents
or proceedings, or legal conclusions, has been reviewed by them and is
correct in all material respects, and the information under "Description of
Capital Stock--Restrictions on Ownership and Transfer," to the extent that
it constitutes a summary of the provisions of the Company's Charter, has
been reviewed by them and is correct in all material respects; the
provisions of the Company's Charter described under "Description of Capital
Stock--Restrictions on Ownership and Transfer" are enforceable against the
Company in accordance with Maryland law.
(e) You shall have received on the Closing Date (and, if applicable, the
Option Closing Date), from Gibson, Dunn & Crutcher LLP, counsel to the
Underwriters, such opinion or opinions, dated the Closing Date (and, if
applicable, the Option Closing Date) with respect to such matters as you may
reasonably require; and the Company shall have furnished to such counsel such
documents as they reasonably request for the purposes of enabling them to review
or pass on the matters referred to in this Section 6 and in order to evidence
the accuracy, completeness and satisfaction of the representations, warranties
and conditions herein contained.
(f) You shall have received at or prior to the Closing Date from Gibson,
Dunn & Crutcher LLP a memorandum or memoranda, in form and substance
satisfactory to you, with respect to the qualification for offering and sale by
the Underwriters of the Shares under state securities or Blue Sky laws of such
jurisdictions as the Underwriters may have designated to the Company.
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(g) On the business day immediately preceding the date of this Agreement and
on the Closing Date (and, if applicable, the Option Closing Date), you shall
have received from PriceWaterhousecoopers LLP, a letter or letters, dated the
date of this Agreement and the Closing Date (and, if applicable, the Option
Closing Date), respectively, in form and substance satisfactory to you,
confirming that they are independent public accountants with respect to the
Company within the meaning of the 1933 Act and the published Rules and
Regulations, and stating to the effect set forth in Schedule II hereto.
(h) Except as contemplated in the Prospectus, (i) neither the Company nor
any of its Subsidiaries shall have sustained since the date of the latest
audited financial statements included or in the Prospectus any loss or
interference with its business from fire, explosion, flood or other calamity,
whether or not covered by insurance, or from any labor dispute or court or
governmental action, order or decree; and (ii) subsequent to the respective
dates as of which information is given in the Registration Statement and the
Prospectus, neither the Company nor any of its Subsidiaries shall have incurred
any liability or obligation, direct or contingent, or entered into any
transactions, and there shall not have been any change in the capital stock or
short-term or long-term debt of the Company and its Subsidiaries or any change,
or any development involving or which might reasonably be expected to involve a
prospective change in the condition (financial or other), net worth, business,
affairs, management, prospects, results of operations or cash flow of the
Company or its Subsidiaries, the effect of which, in any such case described in
clause (i) or (ii), is in your judgment so material or adverse as to make it
impracticable or inadvisable to proceed with the public offering or the delivery
of the Shares being delivered on such Closing Date (and, if applicable, the
Option Closing Date) on the terms and in the manner contemplated in the
Prospectus.
(i) [Reserved]
(j) There shall not have occurred any of the following: (i) a suspension or
material limitation in trading in securities generally on the New York Stock
Exchange or the American Stock Exchange or The Nasdaq National Market or the
establishing on such exchanges or market by the SEC or by such exchanges or
markets of minimum or maximum prices which are not in force and effect on the
date hereof; (ii) a suspension or material limitation in trading in the
Company's securities on the American Stock Exchange or the Pacific Stock
Exchange or the establishing on such exchange by the SEC or by such exchange of
minimum or maximum prices which are not in force and effect on the date hereof;
(iii) a general moratorium on commercial banking activities declared by either
federal or any state authorities; (iv) the outbreak or escalation of hostilities
involving the United States or the declaration by the United States of a
national emergency or war, which in your judgment makes it impracticable or
inadvisable to proceed with the public offering or the delivery of the Shares in
the manner contemplated in the Prospectus; or (v) any calamity or crisis, change
in national, international or world affairs, act of God, change in the
international or domestic markets, or change in the existing financial,
political or economic conditions in the United States or elsewhere, which in
your judgment makes it impracticable or inadvisable to proceed with the public
offering or the delivery of the Shares in the manner contemplated in the
Prospectus.
(k) You shall have received certificates, dated the Closing Date (and, if
applicable, the Option Closing Date) and signed by the President and the Vice
President of Finance of the Company, in their capacities as such, stating that:
(i) the condition set forth in Section 6(a) has been fully satisfied;
(ii) they have carefully examined the Registration Statement and the
Prospectus as amended or supplemented and nothing has come to their
attention that would lead them to believe that either the Registration
Statement or the Prospectus, or any amendment or supplement thereto as of
their respective effective, issue or filing dates, contained, and the
Prospectus as amended or supplemented, at such Closing Date, contains any
untrue statement of a material fact, or omits to state a material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading;
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(iii) since the Effective Date, there has occurred no event required to
be set forth in an amendment or supplement to the Registration Statement or
the Prospectus which has not been so set forth;
(iv) all representations and warranties made herein by the Company are
true and correct at such Closing Date, with the same effect as if made on
and as of such Closing Date, and all agreements herein to be performed or
complied with by the Company on or prior to such Closing Date have been duly
performed and complied with by the Company;
(v) neither the Company nor any of its subsidiaries has sustained since
the date of the latest audited financial statements included in the
Prospectus any material loss or interference with its business from fire,
explosion, flood or other calamity, whether or not covered by insurance, or
from any labor dispute or court or governmental action, order or decree;
(vi) except as disclosed in the Prospectus, subsequent to the respective
dates as of which information is given in the Registration Statement and the
Prospectus, neither the Company nor any of its subsidiaries has incurred any
liabilities or obligations, direct or contingent, other than in the ordinary
course of business, or entered into any transactions not in the ordinary
course of business, which in either case are material to the Company or such
subsidiary; and there has not been any change in the capital stock or
material increase in the short-term debt or long-term debt of the Company or
any of its subsidiaries or any material adverse change or any development
involving or which may reasonably be expected to involve a prospective
material adverse change, in the condition (financial or other), net worth,
business, affairs, management, prospects, results of operations or cash flow
of the Company and its subsidiaries taken as a whole; and there has been no
dividend or distribution of any kind, paid or made by the Company on any
class of its capital stock or by any Operating Partnership with respect to
any Units;
(vii) there has not been any change or decrease specified in paragraph
[5(a)] of the letter or letters delivered to the Underwriters referred to in
Section 6(g) above, except those changes and decreases that are disclosed
therein; and
(viii) covering such other matters as you may reasonably request.
(l) [Reserved]
(m) The Company and each of the Operating Partnerships shall not have
failed, refused, or been unable, at or prior to the Closing Date (and, if
applicable, the Option Closing Date) to have performed any agreement on their
part to be performed or any of the conditions herein contained and required to
be performed or satisfied by them at or prior to such Closing Date.
(n) The Company and the Operating Partnerships shall have furnished to you
at the Closing Date (and, if applicable, the Option Closing Date) such further
information, opinions, certificates, letters and documents as you may have
reasonably requested.
(o) The Shares shall have been approved for trading upon official notice of
issuance on the American Stock Exchange and the Pacific Stock Exchange.
(p) You shall have received duly and validly executed letter agreements
referred to in Section 5(m) hereof.
All such opinions, certificates, letters and documents will be in compliance
with the provisions hereof only if they are satisfactory in form and substance
to you and to Gibson, Dunn & Crutcher LLP, counsel for the several Underwriters.
The Company will furnish you with such signed and conformed copies of such
opinions, certificates, letters and documents as you may request.
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If any of the conditions specified above in this Section 6 shall not have
been satisfied at or prior to the Closing Date (and, if applicable, the Option
Closing Date) or waived by you in writing, this Agreement may be terminated by
you on notice to the Company and the Selling Shareholders.
7. INDEMNIFICATION AND CONTRIBUTION. (a) The Company and each of the
Operating Partnerships jointly and severally will indemnify and hold harmless
each Underwriter for and against any losses, damages or liabilities, joint or
several, to which such Underwriter may become subject, under the 1933 Act or
otherwise, insofar as such losses, damages or liabilities (or actions or claims
in respect thereof) arise out of or are based upon (i) an untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus, the Registration Statement, the Prospectus or any other prospectus
relating to the Shares, or any amendment or supplement thereto, or in any blue
sky application or other document executed by the Company or based on any
information furnished in writing by the Company, filed in any state or other
jurisdiction in order to qualify any or all of the Shares under the securities
laws thereof (the "BLUE SKY APPLICATION"), or (ii) the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse each
Underwriter for any legal or other expenses incurred by such Underwriter in
connection with investigating, preparing, pursuing or defending against or
appearing as a third party witness in connection with any such loss, damage,
liability or action or claim, including, without limitation, any investigation
or proceeding by any governmental agency or body, commenced or threatened,
including the reasonable fees and expenses of counsel to the indemnified party,
as such expenses are incurred (including such losses, damages, liabilities or
expenses to the extent of the aggregate amount paid in settlement of any such
action or claim, provided that (subject to Section 7(d) hereof) any such
settlement is effected with the written consent of the Company); PROVIDED,
HOWEVER, that the Company and the Operating Partnerships shall not be liable in
any such case to the extent, but only to the extent, that any such loss, damage
or liability arises out of or is based upon an untrue statement or alleged
untrue statement or omission or alleged omission made in any Preliminary
Prospectus, the Registration Statement, the Prospectus or any other prospectus
relating to the Shares, or any such amendment or supplement, in reliance upon
and in conformity with written information relating to the Underwriter furnished
to the Company by you or by any Underwriter through you, expressly for use in
the preparation thereof (as provided in Section 14 hereof).
(b) [Reserved]
(c) Each Underwriter, severally and not jointly, will indemnify and hold
harmless the Company and each Operating Partnership for and against any
losses, damages or liabilities to which the Company or Operating Partnership
may become subject, under the 1933 Act or otherwise, insofar as such losses,
damages or liabilities (or actions or claims in respect thereof) arise out
of or are based upon an untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus, the Registration
Statement, the Prospectus or any other prospectus relating to the Shares, or
any amendment or supplement thereto, or any Blue Sky Application, or arise
out of are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in any Preliminary Prospectus, the
Registration Statement, the Prospectus or any other prospectus relating to
the Shares, or any such amendment or supplement, or any Blue Sky
Application, in reliance upon and in conformity with written information
relating to the Underwriter furnished to the Company by you or by any
Underwriter through you, expressly for use in the preparation thereof (as
provided in Section 14 hereof), and will reimburse the Company or any such
Operating Partnership for any legal or other expenses incurred by the
Company or any such Operating Partnership, as the case may be, in connection
with investigating or defending any such action or claim as such expenses
are incurred (including such losses, damages, liabilities or expenses to the
extent of the aggregate amount paid in settlement of any such action or
claim, provided that (subject to Section 7(d) hereof) any such settlement is
effected with the written consent of the Underwriters).
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(d) Promptly after receipt by an indemnified party under Section 7(a) or
7(c) hereof of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against an
indemnifying party under Section 7(a) or 7(c) hereof, notify each such
indemnifying party in writing of the commencement thereof, but the failure
so to notify such indemnifying party shall not relieve such indemnifying
party from any liability except to the extent that it has been prejudiced in
any material respect by such failure or from any liability that it may have
to any such indemnified party otherwise than under Section 7(a) or 7(c)
hereof. In case any such action shall be brought against any such
indemnified party and it shall notify each indemnifying party of the
commencement thereof, each such indemnifying party shall be entitled to
participate therein and, to the extent that it shall wish, jointly with any
other indemnifying party under Section 7(a) or 7(c) hereof similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of such
indemnified party, be counsel to such indemnifying party), and, after notice
from such indemnifying party to such indemnified party of its election so to
assume the defense thereof, such indemnifying party shall not be liable to
such indemnified party under Section 7(a) or 7(c) hereof for any legal
expenses of other counsel or any other expenses, in each case subsequently
incurred by such indemnified party, in connection with the defense thereof
other than reasonable costs of investigation. The indemnified party shall
have the right to employ its own counsel in any such action, but the fees
and expenses of such counsel shall be at the expense of such indemnified
party unless (i) the employment of counsel by such indemnified party at the
expense of the indemnifying party has been authorized by the indemnifying
party, (ii) the indemnified party shall have been advised by such counsel
that there may be a conflict of interest between the indemnifying party and
the indemnified party in the conduct of the defense, or certain aspects of
the defense, of such action (in which case the indemnifying party shall not
have the right to direct the defense of such action with respect to those
matters or aspects of the defense on which a conflict exists or may exist on
behalf of the indemnified party) or (iii) the indemnifying party shall not
in fact have employed counsel reasonably satisfactory to such indemnified
party to assume the defense of such action, in any of which events such fees
and expenses to the extent applicable shall be borne, and shall be paid as
incurred, by the indemnifying party. If at any time such indemnified party
shall have requested such indemnifying party under Section 7(a) or 7(c)
hereof to reimburse such indemnified party for fees and expenses of counsel,
such indemnifying party agrees that it shall be liable for any settlement of
the nature contemplated by Section 7(a) or 7(c) hereof effected without its
written consent if (i) such settlement is entered into more than 45 days
after receipt by such indemnifying party of such request for reimbursement,
(ii) such indemnifying party shall have received notice of the terms of such
settlement at least 30 days prior to such settlement being entered into and
(iii) such indemnifying party shall not have reimbursed such indemnified
party in accordance with such request for reimbursement prior to the date of
such settlement. No such indemnifying party shall, without the written
consent of such indemnified party, effect the settlement or compromise of,
or consent to the entry of any judgment with respect to, any pending or
threatened action or claim in respect of which indemnification or
contribution may be sought hereunder (whether or not such indemnified party
is an actual or potential party to such action or claim) unless such
settlement, compromise or judgment (A) includes an unconditional release of
such indemnified party from all liability arising out of such action or
claim and (B) does not include a statement as to or an admission of fault,
culpability or a failure to act, by or on behalf of any such indemnified
party. In no event shall such indemnifying parties be liable for the fees
and expenses of more than one counsel, including any local counsel, for all
such indemnified parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances.
(e) If the indemnification provided for in this Section 7 is unavailable
to or insufficient to indemnify or hold harmless an indemnified party under
Section 7(a) or 7(c) hereof in respect of any losses, damages or liabilities
(or actions or claims in respect thereof) referred to therein, then each
indemnifying party under Section 7(a) or 7(c) hereof shall contribute to the
amount paid or payable
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by such indemnified party as a result of such losses, damages or liabilities
(or actions or claims in respect thereof) in such proportion as is
appropriate to reflect the relative benefits received by the Company and the
Operating Partnerships, on the one hand, and the Underwriters, on the other
hand, from the offering of the Shares. If, however, the allocation provided
by the immediately preceding sentence is not permitted by applicable law or
if the indemnified party failed to give the notice required under Section
7(d) hereof and such indemnifying party was prejudiced in a material respect
by such failure, then each such indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault, as applicable, of the Company and the Operating Partnerships, on the
one hand, and the Underwriters, on the other hand, in connection with the
statements or omissions that resulted in such losses, damages or liabilities
(or actions or claims in respect thereof), as well as any other relevant
equitable considerations. The relative benefits received by, as applicable,
the Company and the Operating Partnerships, on the one hand, and the
Underwriters, on the other hand, shall be deemed to be in the same
proportion as the total net proceeds from such offering (before deducting
expenses) received by the Company and the Operating Partnerships bear to the
total underwriting discounts and commissions received by the Underwriters.
The relative fault, as applicable, of the Company or the Operating
Partnerships, on the one hand, and the Underwriters, on the other hand,
shall be determined by reference to, among other things, whether the untrue
or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the
Company or the Operating Partnerships, on the one hand, or the Underwriters,
on the other hand, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission. The Company, the Operating Partnerships and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this
Section 7(e) were determined by PRO RATA allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation that does not take account of the equitable
considerations referred to above in this Section 7(e). The amount paid or
payable by such an indemnified party as a result of the losses, damages or
liabilities (or actions or claims in respect thereof) referred to above in
this Section 7(e) shall be deemed to include any legal or other expenses
incurred by such indemnified party in connection with investigating or
defending any such action or claim. Notwithstanding the provisions of this
Section 7(e), no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The obligations of the Underwriters in this
Section 7(e) to contribute are several in proportion to their respective
underwriting obligations with respect to the Shares and not joint.
(f) The obligations of the Company and the Operating Partnerships under
this Section 7 shall be in addition to any liability that the Company and
the Operating Partnerships may otherwise have and shall extend, upon the
same terms and conditions, to each officer, director, employee, agent or
other representative and to each person, if any, who controls any
Underwriter within the meaning of the 1933 Act; and the obligations of the
Underwriters under this Section 7 shall be in addition to any liability that
the respective Underwriters may otherwise have and shall extend, upon the
same terms and conditions, to each officer and director of the Company who
signed the Registration Statement and to each person, if any, who controls
the Company within the meaning of the 1933 Act and to each person, if any,
who controls the Operating Partnerships within the meaning of the 1933 Act.
(g) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof, including, without limitation,
the provisions of this Section 7, and are fully informed regarding such
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provisions. They further acknowledge that the provisions of this Section 7
fairly allocate the risks in light of the ability of the parties to
investigate the Company and its business in order to assure that adequate
disclosure is made in the Registration Statement, any Preliminary
Prospectus, the Prospectus, and any supplement or amendment thereof, as
required by the 1933 Act.
8. REPRESENTATIONS AND AGREEMENTS TO SURVIVE DELIVERY. The respective
representations, warranties, agreements and statements of the Company and the
Operating Partnerships and the Underwriters, as set forth in this Agreement or
made by or on behalf of them, respectively, pursuant to this Agreement, shall
remain operative and in full force and effect regardless of any investigation
(or any statement as to the results thereof) made by or on behalf of any
Underwriter or any controlling person of any Underwriter, the Company or any of
its officers, directors or any controlling persons, or the Operating
Partnerships, shall survive delivery of and payment for the Shares hereunder.
9. SUBSTITUTION OF UNDERWRITERS. (a) If any Underwriter shall default in
its obligation to purchase the Shares which it has agreed to purchase hereunder,
you may in your discretion arrange for you or another party or other parties to
purchase such Shares on the terms contained herein. If within thirty-six hours
after such default by any Underwriter you do not arrange for the purchase of
such Shares, then the Company shall be entitled to a further period of
thirty-six hours within which to procure another party or parties reasonably
satisfactory to you to purchase such Shares on such terms. In the event that,
within the respective prescribed periods, you notify the Company that you have
so arranged for the purchase of such Shares, or the Company notify you that they
have so arranged for the purchase of such Shares, you or the Company shall have
the right to postpone the Closing Date for a period of not more than seven days,
in order to effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus, or in any other documents or
arrangements, and the Company agrees to file promptly any amendments to the
Registration Statement or the Prospectus which in your opinion may thereby be
made necessary. The term "UNDERWRITER" as used in this Agreement shall include
any persons substituted under this Section 9 with like effect as if such person
had originally been a party to this Agreement with respect to such Shares.
(b) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters made by you and the
Company as provided in subsection (a) above, the aggregate number of Shares
which remains unpurchased does not exceed one-eleventh of the total Shares
to be sold on the Closing Date, then the Company shall have the right to
require each non-defaulting Underwriter to purchase the Shares which such
Underwriter agreed to purchase hereunder and, in addition, to require each
non-defaulting Underwriter to purchase its pro rata share (based on the
number of Shares which such Underwriter agreed to purchase hereunder) of the
Shares of such defaulting Underwriter or Underwriters for which such
arrangements have not been made; but nothing herein shall relieve a
defaulting Underwriter from liability for its default.
(c) If, after giving effect to any arrangements for the purchase of the
Shares of a defaulting Underwriter or Underwriters made by you and the
Company as provided in subsection (a) above, the number of Shares which
remains unpurchased exceeds one-eleventh of the total Shares to be sold on
the Closing Date, or if the Company shall not exercise the right described
in subsection (b) above to require the non-defaulting Underwriters to
purchase Shares of the defaulting Underwriter or Underwriters, then this
Agreement (or, with respect to the Option Closing Date, the obligations of
the Underwriters to purchase and of the Company to sell the Option Shares)
shall thereupon terminate, without liability on the part of any
non-defaulting Underwriter or the Company except for the expenses to be
borne by the Company and the Underwriters as provided in Section 11 hereof
and the indemnity and contribution agreements in Section 7 hereof; but
nothing herein shall relieve a defaulting Underwriter from liability for its
default.
10. EFFECTIVE DATE AND TERMINATION. (a) This Agreement shall become
effective at 1:00 p.m., New York time, on the first business day following the
effective date of the Registration Statement, or at such
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earlier time after the effective date of the Registration Statement as you in
your discretion shall first release the Shares for offering to the public;
provided, however, that the provisions of Section 7 and 11 shall at all times be
effective. For the purposes of this Section 10(a), the Shares shall be deemed to
have been released to the public upon release by you of the publication of a
newspaper advertisement relating to the Shares or upon release of telegrams,
facsimile transmissions or letters offering the Shares for sale to securities
dealers, whichever shall first occur.
(b) This Agreement may be terminated by you at any time before it
becomes effective in accordance with Section 10(a) by notice to the Company
and the Selling Shareholders; provided, however, that the provisions of this
Section 10 and of Section 7 and Section 11 hereof shall at all times be
effective. In the event of any termination of this Agreement pursuant to
Section 9 or this Section 10(b) hereof, the Company shall not then be under
any liability to any Underwriter except as provided in Section 7 or Section
11 hereof.
(c) This Agreement may be terminated by you at any time at or prior to
the Closing Date by notice to the Company if any condition specified in
Section 6 hereof shall not have been satisfied on or prior to the Closing
Date. Any such termination shall be without liability of any party to any
other party except as provided in Sections 7 and 11 hereof.
(d) This Agreement also may be terminated by you by notice to the
Company as to any obligation of the Underwriters to purchase the Option
Shares, if any condition specified in Section 6 hereof shall not have been
satisfied at or prior to the Option Closing Date or as provided in Section 9
of this Agreement.
If you terminate this Agreement as provided in Sections 10(b), 10(c) or
10(d), you shall notify the Company by telephone or telegram, confirmed by
letter.
11. COSTS AND EXPENSES. The Company, whether or not the transactions
contemplated hereby are consummated or this Agreement is prevented from becoming
effective under Section 10 hereof or is terminated, will bear and pay the costs
and expenses incident to the registration of the Shares and public offering
thereof, including, without limitation, (a) all expenses (including stock
transfer taxes) incurred in connection with the delivery to the several
Underwriters of the Shares, the filing fees of the SEC, the fees and expenses of
the Company's counsel and accountants and the fees and expenses of counsel for
the Company, (b) the preparation, printing, filing, delivery and shipping of the
Registration Statement, each Preliminary Prospectus, the Prospectus and any
amendments or supplements thereto (except as otherwise expressly provided in
Section 5(d) hereof) and, if applicable, the printing, delivery and shipping of
this Agreement and other underwriting documents, including the Agreement Among
Underwriters, the Selected Dealer Agreement, Underwriters' Questionnaires and
Powers of Attorney and Blue Sky Memoranda, and any instruments or documents
related to any of the foregoing, (c) the furnishing of copies of such documents
(except as otherwise expressly provided in Section 5(d) hereof) to the
Underwriters, (d) the registration or qualification of the Shares for offering
and sale under the securities laws of the various states and other
jurisdictions, including the fees and disbursements of counsel to the
Underwriters relating to such registration or qualification and in connection
with preparing any Blue Sky Memoranda or related analysis, (e) the filing fees
of the NASD (if any) and fees and disbursements of counsel to the Underwriters
relating to any review of the offering by the NASD, (f) all printing and
engraving costs related to preparation of the certificates for the Shares,
including transfer agent and registrar fees, (g) all fees and expenses relating
to the listing of the Shares for trading on the American Stock Exchange and the
Pacific Stock Exchange, (h) all travel expenses, including air fare and
accommodation expenses, of representatives of the Company in connection with the
offering of the Shares, and (i) all of the other costs and expenses incident to
the performance by the Company of the registration and offering of the Shares;
provided, that the Underwriters will bear and pay the fees and expenses of the
Underwriters' counsel (except as provided in this Section 11), the Underwriters'
out-of-pocket expenses, and any advertising costs and expenses incurred by the
Underwriters incident to the public offering of the Shares.
27
<PAGE>
If this Agreement is terminated by you in accordance with the provisions of
Section 10(c), the Company shall reimburse the Underwriters for all of their
out-of-pocket expenses, including the fees and disbursements of counsel to the
Underwriters.
12. [Reserved]
13. NOTICES. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to the
Underwriters shall be mailed, delivered, sent by facsimile transmission, or
telegraphed and confirmed c/o A.G. Edwards & Sons, Inc. at One North Jefferson
Avenue, St. Louis, Missouri 63103, Attention: Director, Corporate Finance,
facsimile number (314) 955-4775, with a copy to , Attention: General
Counsel, facsimile number [(314) - ], or if sent to the Company shall be
mailed, delivered, sent by facsimile transmission, or telegraphed and confirmed
to the Company at 10050 Bandley Drive, Cupertino, California 95014, facsimile
number (408) - . Notice to any Underwriter pursuant to Section 7 shall be
mailed, delivered, sent by facsimile transmission, or telegraphed and confirmed
to such Underwriter's address as it appears in the Underwriters' Questionnaire
furnished in connection with the offering of the Shares or as otherwise
furnished to the Company.
14. INFORMATION FURNISHED BY UNDERWRITERS. The statements in the first,
third, seventh and eighth paragraphs under the caption "Underwriting" in the
Prospectus constitute the only information furnished by or on behalf of the
Underwriters through you as such information is referred to in Section 4(a)(ii)
and Section 7 hereof.
15. PARTIES. This Agreement shall inure to the benefit of and be binding
upon the Underwriters, the Company, the Operating Partnerships and, to the
extent provided in Sections 7 and 8, the officers and directors of the Company
and each person who controls the Company, any Operating Partnership or any
Underwriter and their respective heirs, executors, administrators, successors
and assigns. Nothing expressed or mentioned in this Agreement is intended or
shall be construed to give any person, corporation or other entity any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained; this Agreement and all conditions and provisions
hereof being intended to be and being for the sole and exclusive benefit of the
parties hereto and their respective successors and assigns and said controlling
persons and said officers and directors, and for the benefit of no other person,
corporation or other entity. No purchaser of any of the Shares from any
Underwriter shall be construed a successor or assign by reason merely of such
purchase.
In all dealings hereunder, you shall act on behalf of each of the several
Underwriters, and the parties hereto shall be entitled to act and rely upon any
statement, request, notice or agreement on behalf of the Underwriters, made or
given by you jointly or by A.G. Edwards & Sons, Inc. on behalf of you as the
representatives, as if the same shall have been made or given in writing by the
Underwriters.
16. COUNTERPARTS. This Agreement may be executed by any one or more of the
parties hereto in any number of counterparts, each of which shall be deemed to
be an original, but all such counterparts shall together constitute one and the
same instrument.
17. PRONOUNS. Whenever a pronoun of any gender or number is used herein,
it shall, where appropriate, be deemed to include any other gender and number.
18. TIME OF ESSENCE. Time shall be of the essence of this Agreement.
19. APPLICABLE LAW. This Agreement shall be governed by, and construed in
accordance with, the laws of the State of Missouri, without giving effect to the
choice of law or conflict of laws principles thereof.
28
<PAGE>
If the foregoing is in accordance with your understanding, please so
indicate in the space provided below for that purpose, whereupon this letter
shall constitute a binding agreement among the Company, each of the Operating
Partnerships and the Underwriters.
<TABLE>
<S> <C> <C>
MISSION WEST PROPERTIES, INC.
By:
-----------------------------------------
Name:
Title
MISSION WEST PROPERTIES, L.P.
MISSION WEST PROPERTIES, L.P. I
MISSION WEST PROPERTIES, L.P. II
MISSION WEST PROPERTIES, L.P. III
By: Mission West Properties, Inc.,
as General Partner
By: -------------------------------------
Name:
Title
</TABLE>
Accepted in St. Louis,
Missouri as of the date
first above written, on
behalf of ourselves and each
of the several Underwriters
named in Schedule II hereto.
A.G. EDWARDS & SONS, INC.
LEGG MASON WOOD WALKER INCORPORATED
SUTRO & CO. INCORPORATED
As Representatives of the Several
Underwriters named on Schedule I hereto
By: A.G. EDWARDS & SONS, INC.
By:
- -----------------------------------------
Title:
- ----------------------------------------
29
<PAGE>
EXHIBIT 5.1
June , 1999
Mission West Properties, Inc.
10050 Bandley Drive
Cupertino, California 95014
REGISTRATION ON FORM S-11
Dear Ladies and Gentlemen:
We have acted as counsel to Mission West Properties, Inc., a Maryland
corporation (the "Company"), in connection with its public offering of 6,750,000
shares of common stock, par value $0.001 per share (the "Common Stock") pursuant
to a registration statement on Form S-11.
In this regard, we have examined such documents, records and matters of law
as we have considered relevant to this opinion. As to certain factual matters we
deem relevant to this opinion, we have relied upon a certificate of officers of
the Company and have not sought to independently verify the matters stated
therein. As to matters of Maryland law, we have relied upon the opinion of
Ballard, Spahr, Andrews & Ingersoll, LLP.
Based upon the foregoing, it is our opinion that the 6,750,000 shares of
Common Stock, as well as any additional shares issued upon exercise by the
underwriters of their option to purchase shares to cover over-allotments, are
duly authorized and, when issued to the underwriters for the consideration set
forth in the registration statement, will be validly issued, fully paid and
non-assessable, and no personal liability will attach to the holders of such
shares by reason of the ownership thereof.
This opinion is rendered solely to you in connection with the registration
of the shares of Common Stock under the registration statement on Form S-11.
We consent to being named as counsel to the Company in the registration
statement and to the inclusion of a copy of this opinion letter as an exhibit to
the registration statement. In giving this consent, however, we do not thereby
admit that we are an "expert" within the meaning of the Securities Act of 1933,
as amended.
Very truly yours,
McCUTCHEN, DOYLE, BROWN & ENERSEN, LLP
By: /s/ Alan B. Kalin
<PAGE>
EXHIBIT 10.23
ASSIGNMENT AND ASSUMPTION AGREEMENT
This Assignment and Assumption Agreement ("Agreement") is made as of the 30th
day of September, 1998 by Berg & Berg Industrial Developers, a California
general partnership ("Assignor") and Mission West Properties, a California
corporation ("Assignee").
RECITALS:
Assignor is the owner of that certain Wells Fargo bank account known as account
#4478-032006 (the "Bank Account").
The Bank Account is a zero balance account in which the daily activity on such
account is posted to Assignor's line of credit with Wells Fargo Bank that is
known as Loan #04020J (the "Line of Credit"). The Line of Credit is a revolving
credit facility secured by certain real property and a portion is personally
guaranteed by members of the Berg family.
Mission West Properties has purchased the general partnership interest in the
properties secured by the Line of Credit.
Assignor desires to assign the Bank Account and the Line of Credit to Assignee
and Assignee desires to assume and accept the Bank Account and Line of Credit.
NOW THEREFORE, IT IS AGREED:
ASSIGNMENT AND ASSUMPTION. For good and valuable consideration, the receipt and
sufficiency of which are acknowledged, Assignor does hereby assign all of
Assignor's right, title, and interest in and to the Bank Account and the Line of
Credit to Assignee. Assignee does hereby accept the assignment and agrees to
assume all of Assignor's rights and obligations under the Bank Account and Line
of Credit.
Notwithstanding the assignment and assumption, the Berg family members shall
continue to guarantee a portion of the Line of Credit, subject to the Berg
family members obligation being subordinate to Assignee's obligation under the
Line of Credit, requiring Assignee to use all its assets prior to any guarantee
obligation being incurred by any member of the Berg family.
IN WITNESS WHEREOF, this Agreement has been effected and executed that day and
year first written above.
Assignor:
Berg & Berg Industrial Developers, a California general partnership
By:
-------------------------
Carl E. Berg
Its: General Partner
-------------------------
<PAGE>
Assignee:
Mission West Properties
- ------------------------------------------------
By: Michael J. Anderson, Chief Operating Officer
<PAGE>
EXHIBIT 10.26
SUPPLEMENTAL AGREEMENT
This Supplemental Agreement is entered into as of June ___, 1999 by and
between Mission West Properties, Inc., a Maryland corporation and successor
to Mission West Properties, a California corporation (the "Company"), on the
one hand, and Carl E. Berg and Clyde J. Berg (together, the "Bergs") on the
other hand.
RECITALS
A. The Company, four limited partnerships of which the Company is
general partner (the "Operating Partnerships") the Bergs, all other limited
partners of the Operating Partnerships, and certain other individuals and
entities have entered into one or more of the following agreements: (i) that
certain Acquisition Agreement dated as of May 14, 1999, as amended as of July
1, 1998 (the "Acquisition Agreement"); (ii) that certain Berg Land Holdings
Option Agreement, dated as of December 29, 1998 (the "Option Agreement"); and
(iii) that certain Exchange Rights Agreement dated as of December 29, 1998
(the "Exchange Agreement"). Capitalized terms not otherwise defined in this
Supplemental Agreement will have the meanings assigned to them in the
applicable agreement.
B. The parties desire to amend each of the agreements as set forth in
this Supplemental Agreement (i) to extend the Option Agreement to additional
lands acquired by the Bergs subsequent to the date of the Option Agreement
but in all other respects subject to the terms thereof; (ii) to provide that
a committee of independent directors will determine the Company's election to
use cash or shares of stock to acquire units of limited partnership interest
tendered by the Bergs pursuant to the Exchange Agreement; and (iii) to extend
the obligation of Carl E. Berg to refer to the Company certain opportunities
to acquire office properties in addition to R&D and industrial properties.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and promises of
the parties, the parties hereto agree as follows:
1. APPLICABILITY OF OPTION AGREEMENT. Each of the Bergs agrees to
be bound by the terms and conditions of the Option Agreement as amended by
this Supplemental Agreement as if he was an original signatory thereto.
2. DEFINITION OF "BERG LAND HOLDINGS". Under the Option Agreement,
the term "Berg Land Holdings" shall include the following:
all land acquired after the date of this Agreement by Carl E. Berg
or Clyde J. Berg, directly or indirectly, that has not been improved with
completed buildings and which is zoned for, intended for, or appropriate for
research and development, office and/or industrial development or use in the
states of California, Oregon and Washington; together with all rights,
privileges, easements and appurtenances pertaining to such land.
Notwithstanding the foregoing, the Bergs will not be deemed to acquire land
acquired by a publicly-traded company unless they collectively beneficially
own at least twenty
<PAGE>
percent (20%) of the company's voting securities, and neither one of them is a
senior executive officer.
3. EXERCISE OF ELECTION TO DETERMINE EXCHANGE RIGHTS CONSIDERATION.
All determinations regarding elections to be made by the Company pursuant to
Section 3.3 of the Exchange Agreement with respect to L.P. Units tendered by
either of the Bergs pursuant to Section 2.1 of such Agreement shall
constitute "interested party transactions" for purposes of Section 9.2(b) of
the Acquisition Agreement, and, as such, shall be made by the Independent
Directors Committee (as defined therein); except as otherwise permitted by
said Section 9.2(b).
4. CORPORATE OPPORTUNITIES. Section 9.2(a) of the Acquisition
Agreement is amended to read in its entirety as follows:
Carl E. Berg agrees not to directly or indirectly acquire or
develop, or acquire an equity ownership interest in any entity that
has an ownership interest in or an intent to acquire or develop,
any improved or unimproved real property zoned for, intended for,
or appropriate for research and development, office and/or
industrial development or use (with the exception of investments in
the securities of publicly-traded companies that do not represent
more than 10% of the outstanding voting securities thereof) in the
states of California, Oregon and Washington without first
disclosing such investment opportunity to the Company and making
such opportunity available to the Company, subject to the approval
of the Independent Directors Committee. The foregoing obligation
shall not apply to any acquisition, development or investment with
respect to lands subject to the Berg Land Holdings Option
Agreement, or the Projects subject to the Pending Projects
Acquisition Agreement dated as of December 29, 1998 among the
Company, the partnerships of which the Company is general partner
(the "Operating Partnerships") and certain members of the Berg
Group, or the Excluded Properties (as defined in the S-4
Registration Statement). The foregoing restriction shall remain in
effect until the date on which both of the following conditions are
satisfied: (a) no nominee of the Berg Group is a member of the
Company's board of directors and (b) the Berg Group beneficially
owns less than 25% of the outstanding Common Stock of the Company
(including for these purposes all shares of Common Stock for which
equity interests in the Operating Partnerships may be exchanged
under the Exchange Agreement without regard to any ownership
limitations set forth therein). The term "the Berg Group" means
Carl E. Berg, Clyde J. Berg, the members of their immediate
families and any entity which is an affiliate of either Carl E.
Berg or Clyde J. Berg (excluding the Company and any Operating
Partnership).
5. BENEFICIAL OWNERSHIP. For purposes of applying the provisions of
this Supplemental Agreement to the applicable agreement amended hereby,
direct or indirect ownership of any real property, equity security or
interest in any asset by the Bergs shall be determined with reference to the
rules for determining beneficial ownership that are set forth in Rule 13d-3
under the Securities Exchange Act of 1934, as amended.
2
<PAGE>
6. CONSIDERATION. The Company and the Bergs agree that this
Supplemental Agreement is entered into for their mutual benefit and that the
covenants set forth herein are based upon adequate consideration.
7. SURVIVAL AND EFFECTIVENESS. All provisions of each applicable
agreement referred to herein that have not been amended hereby shall remain
in full force and effect. All such provisions are deemed to survive this
Supplemental Agreement and to be amended as provided hereby.
IN WITNESS WHEREOF, the parties hereto have executed this Supplemental
Agreement in counterparts, on the date(s) set forth below, effective as of
the day and year first above written.
THE COMPANY
- -----------
MISSION WEST PROPERTIES, INC.
By: ________________________________
Its: _________________________________
CARL E. BERG CLYDE J. BERG
- ------------ -------------
_________________________________ _________________________________
3
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-11 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 appear in such Registration Statement. We also consent to the
incorporation by reference in the 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 appear in such Registration Statements. We also consent to the reference
to us under the heading "Experts" in such Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
San Francisco, California
June 15, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-11 of
our reports dated January 29, 1999, on our audits of the combined financial
statements of the Berg Properties (Predecessor) as of June 30, 1998 and December
31, 1997, and for the six months ended June 30, 1998 and each of the two years
ended December 31, 1997, which appear in such Registration Statement. We also
consent to the incorporation by reference in the 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 of the Berg Properties (Predecessor) as of June 30, 1998
and December 31, 1997, and for the six months ended June 30, 1998 and each of
the two years ended December 31, 1997, which appear in such Registration
Statements. We also consent to the reference to us under the heading "Experts"
in such Registration Statement.
/s/ PRICEWATERHOUSECOOPERS LLP
San Francisco, California
June 15, 1998
