<PAGE>
As filed with the Securities and Exchange Commission on May 15, 1998.
Registration Statement No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM S-4
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
----------------------
MISSION WEST PROPERTIES
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2635431 6798
(State or other (I.R.S. Employee (Primary Standard
jurisdiction incorporation Identification No.) Industrial Classification
or organization) Code Number)
10050 Bandley Drive, Cupertino, California 95014
(408) 725-0700
(Address, including ZIP Code and telephone number of
registrant's principal executive offices)
MR. CARL E. BERG
10050 Bandley Drive
Cupertino, California 95014
----------------------
(Name, address and telephone number
of agent for service)
----------------------
Copies to:
ALAN B. KALIN
KATHI A. RAWNSLEY
Graham & James LLP
600 Hansen Way
Palo Alto, California 94304
Tel: (650) 856-6500
Fax: (650) 856-3619
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 the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [ ]
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(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. [ ] ___________________1
----------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Title of Each Class of Proposed Maximum Amount Proposed Maximum Offering Aggregate Amount of
Securities Being Registered Being Registered Price Per Share(1) Offering Price(1) Registration Fee(2)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock 109,624,072 shares(3) $4.50 $493,308,324 $145,526
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee on
the basis of the price paid by purchasers in the Company's most recent sale
of Common Stock in a private placement.
(2) Calculated pursuant to Rule 457(a) on the basis of the price paid by
purchasers in the most recent sale of the Company's Common Stock in a private
placement, which price is higher than the last reported trading price of the
Common Stock on October 17, 1997.
(3) Includes Common Stock to be issued in the Reincorporation Merger.
Includes 605,000 shares of Common Stock underlying outstanding options issued
under the employee benefit plan of the Company assumed in the Reincorporation
Merger.
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.
This Registration Statement, including Exhibits, contains _____ pages.
The Exhibit Index appears on page ____ of the sequentially numbered pages of
this Registration Statement.
<PAGE>
PROXY STATEMENT/PROSPECTUS
MISSION WEST PROPERTIES
109,624,072 Shares of Common Stock
This proxy statement/prospectus (the "Proxy Statement/Prospectus")
is the proxy statement of Mission West Properties, a California corporation
(the "Company"). This proxy statement is being furnished to holders of common
stock, no par value (the "Common Stock"), of the Company in connection with
the solicitation of proxies by the board of directors of the Company for use
at a special meeting of shareholders to be held at ____ a.m., on
_____________, 1998, at _______________, ________________, _________________,
California, including any adjournments ("Special Meeting").
In December 1996, shareholders approved the sale of substantially
all of the Company's assets and the distribution of the net proceeds on a pro
rata basis. Subsequent to the sale of the assets, a group of investors led by
Carl E. Berg approached the Company with a proposal to recapitalize the
Company and, rather than dissolve the Company, continue the business of the
Company under the control of Mr. Berg with a portfolio of new investment
properties. Following the initial investment in the Company by the Berg-led
investment group and the final distribution of the proceeds of the asset
sales to shareholders, the American Stock Exchange ("AMEX") halted trading of
the Company's Common Stock.
Thereafter, Mr. Berg proposed that the Company undertake several
transactions intended to provide the Company with additional capital and
control of substantial real estate holdings of Mr. Berg, members of his
immediate family and certain entities which they control (the "Berg Group").
The board of directors believes that the proposals and related transactions
are in the best interests of the Company, and has approved the transactions
described below. At the Special Meeting, shareholders will be asked to
consider and vote on the following proposals:
1. Pursuant to rules of the AMEX, the shareholders of the Company
will be asked to approve the sale and issuance by the Company at $4.50 per
share of 6,495,058 shares of Common Stock to accredited investors pursuant to
binding subscription agreements, which are subject to such shareholder
approval (the "Private Placement").
2. The Company has designated the proceeds from the Private
Placement and existing funds to purchase for $35,200,000 approximately 10.91%
of the total partnership interests in each of four existing limited
partnerships (collectively the "Operating Partnership") that will own
approximately 4.34 million square feet of leased buildings, offices, research
and development, light manufacturing, and assembly ("R&D Property") and will
possess the right to acquire approximately 1.02 million rentable square feet
of R&D Property to be constructed and leased prior to acquisition by the
Operating Partnership (the "Pending Development Projects"). The members of
the Berg Group currently own or control substantially all of these R&D
Properties. Upon the purchase, the Company will become the sole general
partner in each of the limited partnerships (the "Berg Acquisition").
Pursuant to AMEX rules, the Company also seeks shareholder approval of the
issuance of up to 100,825,478 shares of Common Stock that could be issuable
in exchange for units of limited partnership interest in the Operating
Partnership ("L.P. Units"), including 33,919,072 L.P. Units that may be
acquired by certain members of the Berg Group in exchange for the Pending
Development Projects under the terms of an agreement among the Company, the
Berg Group and certain other persons (the "Acquisition Agreement"), which is
subject to such shareholder approval.
3. Shareholders are asked also to approve a proposal to
reincorporate the Company under the laws of the State of Maryland through a
merger (the "Reincorporation Merger") with and into Mission West Properties,
Inc., a Maryland corporation ("Mission West-Maryland"), a newly formed wholly
owned subsidiary of the Company. Mission West-Maryland will be the surviving
corporation with articles of incorporation (the "Charter") and bylaws which
differ materially from those of the Company. Mission West-Maryland was formed
for the purpose of redomiciling the Company as a Maryland corporation and
acquiring, recapitalizing and continuing the business and operations of the
Company. In the Reincorporation Merger, shares of the Company's Common Stock
outstanding at the effective time of the merger will be converted into shares
of common stock, $0.001 par value per share of Mission West-Maryland ("New
Common Stock") on a one-for-one basis (the "Exchange Ratio"). Unexercised
employee and consultant stock options to purchase 605,000 shares of Common
Stock will be exchanged for new stock options to purchase the same number of
shares of New Common Stock at the Exchange Ratio. Following the
Reincorporation Merger, Mission West-Maryland expects to qualify as a Real
Estate Investment Trust ("REIT") for federal income tax purposes and conduct
its business on a self-administered, self-managed, and fully
<PAGE>
integrated basis going forward. The Charter and bylaws will include
provisions related to the preservation of Mission West-Maryland's status as a
REIT. As used in this Proxy Statement/Prospectus the term "Company" also may
refer to Mission West-Maryland unless the discussion concerns the
Reincorporation Merger or the Charter or the Mission West-Maryland bylaws.
This Proxy Statement/Prospectus is also the prospectus of the
Company's successor, Mission West-Maryland, to be delivered to the
shareholders of the Company in connection with the Reincorporation Merger and
the exchange with existing equity holders and the purchasers of shares in the
Private Placement of (i) 8,193,594 shares of Common Stock (after giving
effect to the Private Placement) for New Common Stock, (ii) the exchange of
outstanding employee stock options issued by the Company for identical
employee stock options of Mission West-Maryland, and (iii) the reservation of
100,825,478 shares of New Common Stock for issuance upon any future exchange
of L.P. Units as a result of the Reincorporation Merger.
The Company has filed a Registration Statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission
pursuant to the Securities Act of 1933, as amended (the "Securities Act")
covering the shares of New Common Stock to be issued in the Reincorporation
Merger.
The Common Stock is traded on the AMEX and the Pacific Exchange,
Inc. ("PSE") under the symbol "MSW." On ______ __, 199_, the last reported
sale price of the Common Stock on the AMEX was $_____________. See
"INFORMATION WITH RESPECT TO THE COMPANY--Price Range of the Shares and
Distribution History." Based on that price and assuming approval of all
proposals and the consummation of the contemplated transactions, the total
market value of the Company and the Operating Partnership would be
approximately $__________.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF MATERIAL RISKS THAT
SHOULD BE CONSIDERED IN EVALUATING THE PROPOSALS.
THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE
The date of this Prospectus is _____________, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FORWARD-LOOKING INFORMATION...............................................................................................1
AVAILABLE INFORMATION.....................................................................................................1
INFORMATION INCORPORATED BY REFERENCE.....................................................................................2
SUMMARY OF THE PROPOSED TRANSACTIONS AND PURPOSE OF THE SPECIAL MEETING..................................................3
Background.......................................................................................................3
Parties to and Terms of the Berg Acquisition.....................................................................3
Private Placement/Recapitalization...............................................................................3
Reincorporation Merger...........................................................................................4
Structure of the Proposed Transactions...........................................................................4
Reasons for the Berg Acquisition.................................................................................4
Description of the Properties....................................................................................4
Business Objectives and Strategy.................................................................................5
Operations of the Company after the Berg Acquisition, Reincorporation Merger and the REIT Election...............5
Distributions....................................................................................................5
Reasons for the Reincorporation Merger...........................................................................5
Conditions to Consummation.......................................................................................5
Board of Directors; Management...................................................................................5
Conflicts of Interest............................................................................................5
Required Approval................................................................................................6
Dissenters' Rights...............................................................................................6
Accounting Treatment.............................................................................................6
Tax Consequences of the Proposed Transactions....................................................................6
New Common Stock.................................................................................................6
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA................................................................................7
SUMMARY SELECTED FINANCIAL DATA...........................................................................................8
RISK FACTORS..............................................................................................................9
No Independent Appraisal; No Arm's Length Negotiations with Affiliates...........................................9
Dependence on Mr. Berg...........................................................................................9
Control of the Company and the Operating Partnership by the Berg Group...........................................9
Potential Conflicts of Interest with the Berg Group.............................................................10
Changes in Policies Without Shareholder Approval................................................................12
Anti-Takeover Provisions........................................................................................12
Real Estate Investment Considerations...........................................................................12
Federal Income Tax Risks........................................................................................15
Uncertainties Regarding Distributions to Shareholders...........................................................16
Potential Property Tax Reassessments............................................................................17
Market for Common Stock.........................................................................................17
The Company's Obligation to Purchase Tendered L.P. Units........................................................17
Shares Eligible for Future Sale.................................................................................17
THE SPECIAL MEETING......................................................................................................19
Parties to the Berg Acquisition.................................................................................19
Parties to the Reincorporation Merger...........................................................................19
General Information Concerning Solicitation and Voting..........................................................19
Record Date, Voting Rights and Outstanding Shares...............................................................20
Revocability of Proxies.........................................................................................20
</TABLE>
-i-
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Solicitation....................................................................................................20
Votes Required..................................................................................................20
Consequences if the Proposals Are Not Approved..................................................................20
Dissenters' Rights..............................................................................................21
Recommendation of the Board of Directors........................................................................21
BACKGROUND OF THE PROPOSED TRANSACTIONS..................................................................................22
Introduction....................................................................................................22
Background......................................................................................................22
Reasons for the Private Placement and the Berg Acquisition......................................................24
Summary of the Transactions.....................................................................................24
Consequences of the Berg Acquisition and the Private Placement..................................................25
Benefits to the Berg Group......................................................................................26
Valuation of Interests..........................................................................................26
Pro Forma Capitalization........................................................................................27
Included Information............................................................................................28
Price Range of the Common Stock and Distribution History........................................................28
THE COMPANY'S PRO FORMA DATA.............................................................................................29
THE BUSINESS OF BERG & BERG..............................................................................................30
History Of Berg & Berg..........................................................................................30
Regional Economic Profile.......................................................................................31
The Silicon Valley R&D Property Market..........................................................................32
The Silicon Valley..............................................................................................32
Unemployment Rate...............................................................................................33
Silicon Valley R&D Property Market..............................................................................33
Berg & Berg Business Strategy...................................................................................34
BERG PROPERTIES SUMMARY SELECTED FINANCIAL DATA..........................................................................36
SELECTED COMBINED HISTORICAL FINANCIAL DATA FOR THE ACQUIRED PROPERTIES..................................................37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION FOR THE PROPERTIES..................38
Overview........................................................................................................38
Results of Operations...........................................................................................39
Pro Forma Liquidity and Capital Resources.......................................................................42
Historical Cash Flows...........................................................................................43
Inflation.......................................................................................................44
DESCRIPTION OF THE PROPERTIES............................................................................................45
General.........................................................................................................45
Overview of the Berg Properties.................................................................................45
Average Occupancy and Rental Rates..............................................................................45
Leasing Activity................................................................................................46
Lease Expirations...............................................................................................46
Significant Properties and Tenants..............................................................................47
Other Major Tenants.............................................................................................49
The Berg Properties.............................................................................................50
Standard Berg & Berg Lease Terms................................................................................53
Overview of the Acquired Properties.............................................................................53
Average Occupancy and Rental Rates..............................................................................53
Lease Expirations...............................................................................................54
Acquired Properties.............................................................................................55
</TABLE>
-ii-
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Pending Development Projects................................................................................55
Land Holding and Development Arrangements.......................................................................57
Mortgage Debt and Credit Lines..................................................................................59
Property Tax Information........................................................................................60
Environmental Matters...........................................................................................60
Legal Proceedings...............................................................................................61
Employees.......................................................................................................61
FUTURE OPERATIONS OF THE COMPANY.........................................................................................61
Overview........................................................................................................61
Operating and Growth Strategy...................................................................................61
Operations and Management.......................................................................................62
Acquisitions....................................................................................................62
Line of Credit..................................................................................................63
Mortgage Indebtedness Outstanding after Berg Acquisition........................................................63
Overview........................................................................................................64
Distribution Table..............................................................................................64
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES..............................................................................67
Investment Policies.............................................................................................67
Financing Policies..............................................................................................67
Disposition Policy..............................................................................................69
Conflict of Interest Policies...................................................................................69
Policies with Respect to Other Activities.......................................................................69
THE ACQUISITION AGREEMENT................................................................................................71
General.........................................................................................................71
The Closing.....................................................................................................71
Representations and Warranties..................................................................................71
Conditions to Consummation of the Contemplated Transactions.....................................................71
Covenants.......................................................................................................72
Conflicts of Interest Provisions................................................................................72
Termination.....................................................................................................73
Survival and Indemnification Matters............................................................................73
OPERATING PARTNERSHIP AGREEMENT..........................................................................................74
Management......................................................................................................74
Transferability of L.P. Units...................................................................................74
Additional Capital Contributions and Loans......................................................................75
Exchange Rights, Put Rights and Registration Rights.............................................................75
Other Matters...................................................................................................76
Term 76
MANAGEMENT OF THE COMPANY................................................................................................77
Directors and Executive Officers................................................................................77
Number, Terms and Election of Directors.........................................................................78
Contractual Arrangements........................................................................................78
Committees of the Board of Directors............................................................................78
Compensation of Directors.......................................................................................78
Executive Compensation..........................................................................................79
Summary Compensation Table......................................................................................79
Benefit Plans...................................................................................................80
1997 Stock Option Plan..........................................................................................80
Compensation Committee Interlocks and Insider Participation.....................................................80
Limitation of Liability and Indemnification.....................................................................80
</TABLE>
-iii-
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CERTAIN TRANSACTIONS.....................................................................................................82
Private Placement Transactions--1997............................................................................82
Private Placement Transactions--1998............................................................................82
Proposed Transactions...........................................................................................83
Purchase by Michael Anderson....................................................................................83
PRINCIPAL SHAREHOLDERS...................................................................................................84
THE REINCORPORATION MERGER...............................................................................................86
Introduction....................................................................................................86
Exchange of Securities..........................................................................................86
Approval and Effectiveness of Merger............................................................................86
Possible Disadvantages..........................................................................................87
No Change in the Name, Business, Management, Location of Principal Office or Employee Plans of the
Company....................................................................................................87
Comparison Of Rights of Shareholders of the Company and Stockholders of Mission West-Maryland...................87
DESCRIPTION OF MISSION WEST - MARYLAND STOCK............................................................................100
General........................................................................................................100
New Common Stock...............................................................................................100
New Classes or Series of Stock.................................................................................100
Power to Issue Additional Shares of New Common Stock and New Preferred Stock...................................101
Restrictions on Transfer.......................................................................................101
Reinvestment and Share Purchase Plan...........................................................................103
CERTAIN PROVISIONS OF MARYLAND LAW AND OF MISSION WEST-MARYLAND'S CHARTER AND BYLAWS...................................104
The Board of Directors.........................................................................................104
Removal of Directors...........................................................................................104
Business Combinations..........................................................................................104
Control Share Acquisitions.....................................................................................104
Board Quorum and Special Voting Requirements...................................................................105
Amendment to the Charter.......................................................................................105
Dissolution of the Company.....................................................................................105
Advance Notice of Director Nominations and New Business........................................................106
Conflict of Interest...........................................................................................106
Anti-takeover Effect of Certain Provisions of Maryland Law and of the Charter and bylaws.......................106
ACCOUNTING TREATMENT OF THE BERG ACQUISITION AND THE REINCORPORATION MERGER.............................................107
FEDERAL INCOME TAX CONSIDERATIONS.......................................................................................107
Taxation of the Company........................................................................................107
Taxation of United States Shareholders.........................................................................112
Taxation of Tax-Exempt Shareholders............................................................................113
Taxation of Foreign Shareholders...............................................................................114
Information Reporting Requirements and Backup Withholding Tax..................................................115
Tax Aspects of the Operating Partnership.......................................................................116
Federal Income Tax Consequences of the Reincorporation Merger..................................................118
Other Tax Consequences.........................................................................................118
ERISA CONSIDERATIONS....................................................................................................119
General........................................................................................................119
Plan Assets Regulations........................................................................................119
</TABLE>
-iv-
<PAGE>
TABLE OF CONTENTS
(Continued)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
General ERISA Requirements.....................................................................................119
Prohibited Transactions........................................................................................120
Reporting and Disclosure.......................................................................................120
LEGAL MATTERS...........................................................................................................121
EXPERTS.................................................................................................................121
OTHER MATTERS...........................................................................................................121
SHAREHOLDER PROPOSALS...................................................................................................121
</TABLE>
-v-
<PAGE>
FORWARD-LOOKING INFORMATION
Statements contained in or delivered in connection with this Proxy
Statement/Prospectus may constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve a number of risks and uncertainties. Set
forth under "RISK FACTORS," below, and elsewhere in this Proxy
Statement/Prospectus are cautionary statements that accompany those
forward-looking statements. Those cautionary statements identify important
factors that could cause actual results to differ materially from those in
the forward-looking statements and from historical trends. Such factors
include general economic conditions, stock market fluctuations, changes in
yields of fixed income securities, risks associated with the ownership of
industrial and office buildings and with real estate, generally, conditions
in the local real estate market where the properties are located, and the
substantial control rights of the Berg Group with respect to the Company.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and all
required files reports, proxy statements and other information with the
Securities and Exchange Commission ("Commission"). Reports, proxy statements
and other information filed by the Company may be inspected and copied at the
public reference facilities maintained by the Commission at 450 Fifth Street,
N.W., Room 1024, Washington, D.C. 20549, and at the Commission's regional
offices located at 7 World Trade Center, 13th floor, New York, New York
10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661; and copies of such material may be obtained from the Public
Reference Section of the Commission, Washington, D.C. 20549, at prescribed
rates. In addition, the Commission maintains a web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission on EDGAR. The
Commission's web site address is http:\\www.sec.gov. These documents may also
be inspected at the office of the American Stock Exchange, 86 Trinity Place,
New York, New York, and the Pacific Exchange, Inc., 115 Sansome Street, 8th
Floor, San Francisco, California.
This Proxy Statement/Prospectus is part of the Registration
Statement. This Proxy Statement/Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which
are omitted in accordance with the rules of the Commission. For further
information, reference is made to the Registration Statement.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THE OFFER
CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS, AND IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT
RELATES, NOR DOES IT CONSTITUTE AN OFFER TO OR SOLICITATION OF ANY PERSON IN
ANY JURISDICTION TO WHOM IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION. THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS AT ANY TIME
DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
-1-
<PAGE>
INFORMATION INCORPORATED BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated by reference in this Proxy Statement/Prospectus:
1. The Company's Annual Report on Form 10-K for the fiscal year and
one-month transition period ended December 31, 1997.
2. The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998.
3. The Company's Current Report on Form 8-K filed on March 13, 1998.
4. The description of the Company's Common Stock contained in the
Company's registration statement on Form S-8 filed with the
Commission on May 17, 1991 (Registration #33-40664).
Any statement contained herein or in a document incorporated or
deemed to be incorporated by reference herein shall be deemed to be modified
or superseded for purposes of this Proxy Statement/Prospectus to the extent
that a statement contained herein, or in any subsequently filed document
which also is or is deemed to be incorporated by reference herein, modifies
or supersedes such statement. Any such statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a
part of this Proxy Statement/Prospectus.
Documents (except for certain exhibits to such documents, unless
exhibits are specifically incorporated by reference herein) incorporated by
reference in this Proxy Statement/Prospectus are available on oral or written
request from the Secretary of the Company at: Mission West Properties, 10050
Bandley Drive, Cupertino, California 95014; telephone: (408) 725-0700.
This Proxy Statement/Prospectus is accompanied by a form of proxy
for use at the Special Meeting, a copy of the Company's latest Annual Report
on Form 10-K, and a copy of Part 1 of the Company's latest Quarterly Report
on Form-10Q.
-2-
<PAGE>
SUMMARY OF THE PROPOSED TRANSACTIONS AND PURPOSE OF THE
SPECIAL MEETING
THE FOLLOWING BRIEFLY SUMMARIZES THE PROPOSALS TO BE VOTED UPON.
BACKGROUND
Shareholders previously approved the sale of substantially all of
the assets of the Company and the distribution of the net proceeds of sale on
a pro rata basis. Subsequent to the distribution, Carl E. Berg approached the
Company with a proposal to recapitalize the Company, and, rather than
dissolve the Company, continue the business of the Company under the control
of the Berg Group with a portfolio of new investment properties. After the
purchase of shares representing a controlling interest in the Company by
certain members of the Berg Group and other accredited investors and the
final distribution to all previous shareholders in October 1997, the AMEX
halted trading of the Company's Common Stock because the Company no longer
met AMEX minimum listing requirements.
PARTIES TO AND TERMS OF THE BERG ACQUISITION
The Berg Acquisition concerns the Company's purchase of interests as
the sole general partner in four existing limited partnerships (referred to
collectively as the "Operating Partnership"), which will hold approximately
4.34 million rentable square feet of office/research and
development/manufacturing space ("R&D Property") located in the portion of
the San Francisco Bay Area known as "Silicon Valley." Carl E. Berg and his
brother, Clyde J. Berg, have been engaged in developing, owning, operating,
acquiring and selling Silicon Valley R&D Properties under the name "Berg &
Berg Developers" ("Berg & Berg") for nearly 30 years. The four limited
partnerships comprising the Operating Partnership have existed for many years
and no new entity will be created in connection with the Berg Acquisition. Of
the total R&D Properties rentable square footage to be owned and operated by
the Operating Partnership following the Berg Acquisition, properties
representing approximately 3.78 million rentable square feet are owned or
controlled currently by members of the Berg Group and constitute the
historical properties managed by Berg & Berg (the "Berg Properties"). Other
R&D Properties, consisting of approximately .56 million rentable square feet,
(the "Acquired Properties") represent certain R&D Properties held by three
limited partnerships (the "Kontrabecki Properties") controlled by John
Kontrabecki ("Kontrabecki") and certain R&D Properties subject to a purchase
option held by Mr. Berg (the "Fremont Properties"). Certain members of the
Berg Group hold substantial ownership interests in the limited partnerships
managed by Kontrabecki (the "Kontrabecki Partnerships").
Although most of the Berg Properties are currently held by the four
limited partnerships which will constitute the Operating Partnership, certain
Berg Properties and Acquired Properties (collectively, the "Properties") will
be transferred to one such limited partnership, Mission West Properties,
L.P., in exchange for newly issued L.P. Units in connection with the Berg
Acquisition. All of the individuals and entities that currently own the
Properties to be transferred to Mission West Properties, L.P., including the
Berg Group members, Kontrabecki and the Kontrabecki Partnerships, are
accredited investors within the meaning of the federal securities laws, and
all such entities are privately owned. Upon the Company's acquisition of the
general partner interest in the Operating Partnership, the Company will
control all of the Properties. These transactions and the Berg Acquisition
are subject to the terms of an Acquisition Agreement, dated as of May 14,
1998 (the "Acquisition Agreement"). Under the terms of the Acquisition
Agreement, the Operating Partnership and the Company also have agreed to the
terms of a Pending Projects Acquisition Agreement (the "Pending Projects
Acquisition Agreement"), which permits the acquisition by the Operating
Partnership of approximately one million additional rentable square feet upon
the completion and leasing of a number of pending projects (the "Pending
Development Projects") owned by certain members of the Berg Group and under
current development by Berg & Berg Enterprises, Inc. ("BBE"). The Company
will not acquire any properties directly. See "THE ACQUISITION AGREEMENT."
PRIVATE PLACEMENT
The Company also has entered into binding agreements, subject to
certain conditions, to sell 6,495,058 shares of Common Stock at $4.50 per
share to accredited investors, following shareholder approval required by the
AMEX (the "Private Placement"). Of the total number of shares to be sold in
the Private Placement, 5,800,000 shares were offered in a placement managed
by Ingalls & Snyder LLC ("Ingalls & Snyder"). The
-3-
<PAGE>
purchasers of such shares have agreed to pay a placement fee of $0.05 per
share to Ingalls & Snyder, for which the company has no liability. Taking
into account the shares issued in the Private Placement and L.P. Units to be
outstanding immediately after the closing of the Berg Acquisition, the total
number of L.P. Units and shares of Common Stock entitled to receive
distributions of cash flow from the Operating Partnership directly, or
indirectly through dividends paid by the Company (the "Outstanding Shares")
will be 75,100,000.
REINCORPORATION MERGER
Pursuant to a merger agreement ("Merger Agreement") between the
Company and its wholly owned subsidiary, Mission West-Maryland, the Company
will merge into Mission West-Maryland following shareholder approval and the
consummation of the Berg Acquisition and the Private Placement. Following
these transactions, Mission West-Maryland intends to elect to become a REIT.
In approving the Reincorporation Merger, the shareholders also will approve
the Charter and the bylaws of Mission West-Maryland. See "THE REINCORPORATION
MERGER."
STRUCTURE OF THE PROPOSED TRANSACTIONS
The Proposed Transactions are illustrated as follows:
[GRAPHIC]
REASONS FOR THE BERG ACQUISITION
The board of directors of the Company believes that the Berg
Acquisition and the Private Placement will provide the Company with
substantial working capital, a strong real property portfolio and an
effective real estate operation. The board of directors further believes that
these transactions provide an opportunity for the Company to significantly
enhance shareholder value. See "BACKGROUND OF THE PROPOSED
TRANSACTIONS--Reasons for the Berg Acquisition and Private Placement."
DESCRIPTION OF THE PROPERTIES
All of the Berg Properties are located in Silicon Valley. All
together the Operating Partnership will own 69 R&D Properties located on 61
separate sites. As of March 31 1998, the Berg Properties were 100% occupied,
with a total of 73 tenants principally engaged in the information technology
business, and the Acquired Properties were 100% occupied by a total of 10
tenants. The Berg Properties currently are subject to total indebtedness of
approximately $78 million, of which approximately $38.2 million is secured by
first deeds of trust. Certain of the Acquired Properties are subject to
secured indebtedness of approximately $39.2 million. At the closing of the
Berg Acquisition, the Company intends to obtain $135 million of new secured
debt financing and a $50 million line of credit. The proceeds of the New
Secured Loan along with the proceeds of the Company's purchase of its
interest in the Operating Partnership and cash on hand prior to the closing
of the Berg Acquisition will be used to repay $87.6 million of existing debt
secured by the Berg Properties and the Acquired Properties, and to make a
distribution of approximately $91.6 million to Carl E. Berg and Clyde J. Berg
at, or prior to, the closing of the Proposed Transactions. See "BACKGROUND OF
THE PROPOSED TRANSACTION--Consequences of the Berg Acquisition and the
Private Placement" and "DESCRIPTION OF THE PROPERTIES."
-4-
<PAGE>
BUSINESS OBJECTIVES AND STRATEGY
After completing the Proposed Transactions, the Company will operate
as a self-managed, self-administered and fully integrated REIT. The Company
will operate the Berg Properties and may acquire additional R&D Properties
from the Berg Group under the terms of the "Pending Projects Acquisition
Agreement" and the "Berg Land Holding Option Agreement." The Company may also
seek to acquire other R&D properties and other real estate assets in Silicon
Valley and parts of the West Coast. See "FUTURE OPERATIONS."
OPERATIONS OF THE COMPANY AFTER THE BERG ACQUISITION, REINCORPORATION MERGER AND
THE REIT ELECTION
Following the completion of the Proposed Transactions the Company
will occupy the same offices as BBE in a building owned by Berg & Berg. BBE
is a member of the Berg Group and currently provides real estate development
services for the Berg Group and their affiliates, as well as the Berg
Properties. Several current employees of BBE, including Carl E. Berg, will be
employees of the Company. The Company will lease space from Berg & Berg and
will reimburse BBE for a portion of the office overhead. See "FUTURE
OPERATIONS--Operations and Management."
DISTRIBUTIONS
As a REIT, the Company will pay distributions based upon an estimate
of cash available for distribution to shareholders ("Cash Available for
Distribution") with total annual dividends expected to equal at least 95% of
the Company's annual taxable income in accordance with applicable REIT
requirements. During 1998, the Company expects to pay quarterly distributions
of approximately $0.085 per share of Common Stock. See "DISTRIBUTION POLICY."
REASONS FOR THE REINCORPORATION MERGER
The board of directors believes that the Maryland General
Corporation Law ("MGCL") contains provisions conducive to the operations of a
REIT. Many REITs have incorporated in the State of Maryland, and the board of
directors believes that this has provided state regulatory authorities and
courts in Maryland with substantial experience in the administration and
governance of REITs. See "REINCORPORATION MERGER."
CONDITIONS TO CONSUMMATION
The Berg Acquisition and the Private Placement are subject to
shareholder approval and such customary closing conditions as the accuracy of
representations and warranties, the absence of material adverse changes, and
the absence of litigation to enjoin the consummation of any of the Proposed
Transactions. The Reincorporation Merger is subject to similar closing
conditions and the effectiveness of the Registration Statement. See "THE
ACQUISITION AGREEMENT," and "THE REINCORPORATION MERGER."
BOARD OF DIRECTORS; MANAGEMENT
In general, the board of directors and management of the Company
will remain the same after the Reincorporation Merger. The Company does
expect to add one or two additional directors before the end of 1998. See
"MANAGEMENT OF THE COMPANY UPON CONSUMMATION OF THE BERG ACQUISITION".
CONFLICTS OF INTEREST
The Proposed Transactions entail a number of conflicts of interest.
The Operating Partnership and the Company currently are controlled by Carl E.
Berg and other Berg Group members. After the Proposed Transactions, the Berg
Group members will have two representatives on the board of directors (the
"Berg Group Board Representatives"), at least one of whom will be required to
approve certain material transactions involving the Company (the "Required
Directors Approval"). In addition, Berg Group members, in the aggregate, will
own, or have the right under certain circumstances to acquire, shares of
Common Stock representing 84.6% of the total number of the Outstanding Shares
(assuming the exchange of all outstanding L.P. Units for Common Stock),
subject to an aggregate ownership limit of 20% (the "Berg Group Ownership
Limit"), which will be set forth in the Charter. Consent of the Limited
Partners holding a majority of outstanding L.P. Units (the "L.P. Unit
Majority"), principally the Berg Group members, will be required for certain
major transactions involving the Operating
-5-
<PAGE>
Partnership. Furthermore, the Company and the Operating Partnership will, or
may, acquire certain additional R&D Properties from members of the Berg Group
under the terms of the Pending Projects Acquisition Agreement and the Berg Land
Holdings Option Agreement. Although Mr. Berg will be the Company's President and
Chief Executive Officer, he will remain involved in many other real estate and
venture capital activities. Transactions between the Company or the Operating
Partnership and members of the Berg Group, or their affiliates, will be subject
to approval by a committee of directors who are independent of the Berg Group
("Independent Directors Committee") See "RISK FACTORS--Control of the Company
and the Operating Partnership by the Berg Group and Mr. Berg--Potential
Conflicts of Interest with the Berg Group."
REQUIRED APPROVAL
Only holders of Common Stock of record on _________ __, 1998 will be
entitled to vote at the Special Meeting. The affirmative vote of the holders of
a majority of the outstanding shares of record is required to approve each of
the Proposed Transactions. Broker non-votes and abstentions will be counted as
votes against the Proposed Transactions.
DISSENTERS' RIGHTS
Statutory dissenters' rights under the California General Corporation
Law (the "CGCL") are not available with respect to any of the Proposals to be
voted upon at the Special Meeting.
ACCOUNTING TREATMENT
The Berg Acquisition will be accounted for as a reorganization of
entities under common control at historical cost. The Company's acquisition
of the Acquired Properties will be accounted for as a purchase. See
"ACCOUNTING TREATMENT OF THE BERG ACQUISITION AND THE REINCORPORATION MERGER."
TAX CONSEQUENCES OF THE PROPOSED TRANSACTIONS
The Berg Acquisition and the Private Placement will not result in the
recognition of gain or loss by the Company or its shareholders for federal
income tax purposes.
The Reincorporation Merger is expected to be a tax-free reincorporation
transaction within the meaning of Section 368(a)(1)(F) of the Internal Revenue
Code of 1986, as amended (the "Code"). Accordingly, it will not result in
taxable income or result in the recognition of gain or loss by the Company, its
shareholders, or the holders of options to purchase Common Stock.
Once the Company elects REIT status following the Reincorporation
Merger, the Company generally may avoid income tax with respect to its income,
and the shareholders will be subject to income taxation with respect to certain
distributions from the Company. Graham & James LLP will provide a federal income
tax opinion to the Company in connection with the Reincorporation Merger to the
effect that for the Company's taxable year ending December 31, 1998 it will be
organized and able to operate in conformity with the REIT qualification
requirements under the Code. See "FEDERAL INCOME TAX CONSIDERATIONS--Taxation of
the Company."
NEW COMMON STOCK
In connection with the Reincorporation Merger, the Company is
exchanging previously issued and outstanding securities of the Company for new
securities of Mission West-Maryland. The New Common Stock exchanged for Old
Common Stock in connection with the Reincorporation Merger will continue to be
listed on the AMEX. Shares held by affiliates of the Company will be subject to
manner of sale, volume restrictions, and other requirements (aside from holding
period) imposed by Rule 144 and Rule 145(d) promulgated by the Commission. The
Company intends to file with the Commission a registration statement on Form S-8
to register shares of Common Stock reserved for issuance under the Company's
employee benefit plans and resales of any Common Stock issued under such
employee benefit plans.
-6-
<PAGE>
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
Set forth below are summary unaudited pro forma combined financial
information and other data for the Company as of and for the periods indicated,
prepared on the assumption that the Private Placement and the Berg Acquisition
had occurred at March 31, 1998 for balance sheet data and property and other
data. The pro forma operating data further assumes that such transactions had
occurred as of January 1, 1998 and 1997, respectively. This data should be read
in conjunction with the Selected Financial Data and the historical and pro forma
financial statements included elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Three Months Ended Year Ended
March 31, 1998 December 31, 1997
---------------------- -------------------
(in thousands)
<S> <C> <C>
OPERATING DATA:
Revenue:
Rent $ 12,731 $45,572
Tenant reimbursements 2,097 6,769
---------------------- -------------------
Total revenue 14,828 52,341
---------------------- -------------------
Expenses:
Operating expenses 1,026 3,790
Real estate taxes 1,212 4,475
General and administrative 700 2,750
Interest 2,941 11,764
Depreciation and amortization 2,833 11,308
---------------------- -------------------
Total Expenses 8,712 34,087
---------------------- -------------------
Income before minority interest 6,116 18,254
Minority Interest 5,449 16,262
---------------------- -------------------
Net income 667 1,992
---------------------- -------------------
---------------------- -------------------
Basic and Diluted Earnings Per Share(1) $ 0.08 $0.24
---------------------- -------------------
---------------------- -------------------
Weighted average number of common shares outstanding 8,193,594 8,193,594
---------------------- -------------------
---------------------- -------------------
PROPERTY AND OTHER DATA:
Total properties, end of period 69 69
Total square feet, end of period 4,340,569 4,340,569
Average monthly rental revenue per square foot(2) $ 0.94 $0.87
Average occupancy - stabilized 100% 97%
FUNDS FROM OPERATIONS: (3) $ 8,949 $29,562
BALANCE SHEET DATA:
Real estate assets, before accumulated depreciation $248,806
Total assets 181,358
Debt 164,639
Total liabilities 172,880
Minority interest 7,553
Shareholders' equity 925
</TABLE>
- -------------------
(1) Per share calculations do not consider the dilutive effect of (i)
66,906,406 L.P. Units that are exchangeable for common shares of the
Company's stock; and (ii) 605,000 shares of common stock issuable in
connection with options outstanding under the 1997 Stock Option Plan. For
purposes of the pro forma per share calculation, these securities if
converted or exercised, would have no effect on per share calculations.
(2) Average monthly rental revenue per square foot has been determined by
taking the base rent for the period, divided by the number of months in the
period, and then divided by the total square feet of occupied space.
(3) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), FFO represents net income (loss) before minority interest of
unitholders (computed in accordance with GAAP), excluding gains (or losses)
from debt restructuring and sales of property, plus real estate related
depreciation and amortization (excluding amortization of deferred financing
costs and depreciation of non-real estate assets) and after adjustments for
unconsolidated partnerships and joint ventures. Management considers FFO an
appropriate measure of performance of an equity REIT because industry
analysts have accepted it as such. 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.
-7-
<PAGE>
SUMMARY SELECTED FINANCIAL DATA
Set forth below are Summary Combined Financial Data for the Berg
Properties as of and for the periods indicated on an historical basis. This
data should be read in conjunction with the Selected Financial Data and the
historical financial statements included elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
-------------------------- -------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------ ------------ ----------- ---------- ---------- ---------- ----------
($ in thousands)
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rent $11,073 $8,801 $40,163 $28,934 $23,064 $25,186 $25,620
Tenant reimbursements 2,033 1,226 6,519 3,902 4,193 3,190 3,486
------------ ------------ ----------- ---------- ---------- ---------- ----------
Total revenue 13,106 10,027 46,682 32,836 27,257 28,376 29,106
------------ ------------ ----------- ---------- ---------- ---------- ----------
Expenses:
Operating expenses 1,019 1,118 $ 3,741 $ 1,906 $ 2,032 $ 1,355 1,129
Real estate taxes 1,189 980 4,229 3,750 3,595 2,716 3,116
Management fee (related parties) 322 240 1,050 827 654 739 994
Interest (related parties) 61 79 248 293 357 329 45
Interest 1,485 1,470 5,919 6,090 6,190 8,222 9,054
Depreciation and amortization 1,935 1,680 7,717 6,739 6,323 6,851 7,156
------------ ------------ ----------- ---------- ---------- ---------- ----------
6,011 5,567 22,904 19,605 19,151 20,212 21,494
------------ ------------ ----------- ---------- ---------- ---------- ----------
Income before gain on sale of
real estate and extraordinary
item 7,095 4,460 23,778 13,231 8,106 8,164 7,612
Gain on sale - - - - 20,779 - -
------------ ------------ ----------- ---------- ---------- ---------- ----------
Income before extraordinary item 7,095 4,460 23,778 13,231 28,885 8,164 7,612
Extraordinary item - - - 610 3,206 - 1,766
------------ ------------ ----------- ---------- ---------- ---------- ----------
------------ ------------ ----------- ---------- ---------- ---------- ----------
Net income $ 7,095 $ 4,460 $23,778 $13,841 $32,091 $ 8,164 $ 9,378
------------ ------------ ----------- ---------- ---------- ---------- ----------
------------ ------------ ----------- ---------- ---------- ---------- ----------
PROPERTY AND OTHER DATA:
Total properties, end of period 58 55 58 53 50 41 40
Total square feet, end of period 3,779 3,484 3,779 3,392 3,195 2,856 2,796
Average monthly rental revenue
per square foot(1) $ 0.95 $ 0.81 $ 0.86 $0.78 $0.71 $ 0.96 $0.84
Occupancy at end of period 100% 96.2% 97.7% 91.9% 87.4% 80.3% 89.6%
FUNDS FROM OPERATIONS(2)(3) $ 9,030 $ 6,140 $31,495 $19,970 $14,429 $15,015 $14,768
Cash flow from operations $ 9,835 $ 5,477 $29,909 $20,248 $16,392 $16,518 $18,480
Cash flow from investing (236) (3,454) (17,251) (29,275) (6,353) (5,003) (3,248)
Cash flow from financing (505) (640) (8,432) 9,433 (10,013) (12,093) (13,599)
March 31, December 31,
-------------------------- -------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------ ------------ ----------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA: ($ in thousands)
(Unaudited) (Unaudited)
Real estate assets, before
accumulated depreciation $178,465 161,793 $178,229 $154,999 $133,014 $120,382 $115,807
Total assets 122,529 102,791 113,950 97,651 73,730 59,957 64,516
Debt 76,168 73,314 76,507 73,416 69,543 79,594 100,126
Debt - related parties 1,821 2,411 1,975 2,546 3,051 2,889 1,433
Total liabilities 85,795 81,909 84,299 80,826 76,199 83,720 104,117
Partners' equity 36,734 20,882 29,651 16,825 (2,469) (23,763) (39,601)
</TABLE>
- -------------------
(1) Average monthly rental revenue per square foot has been determined by
taking the base rent for the period, divided by the number of months in the
period, and then divided by the total square feet of occupied space.
(2) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), "FFO" represents net income (loss) before minority interest of
unitholders (computed in accordance with GAAP), excluding gains (or losses)
from debt restructuring and sales of property, plus real estate related
depreciation and amortization (excluding amortization of deferred financing
costs and depreciation of non-real estate assets) and after adjustments for
unconsolidated partnerships and joint ventures. Management considers FFO an
appropriate measure of performance of an equity REIT because industry
analysts have accepted it as such. 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.
(3) Non-cash adjustments to FFO were as follows: in all periods, depreciation
and amortization; in 1996, 1995 and 1993, gains on extinguishment of debt;
and in 1995, gain on sale of property.
-8-
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS IN
EVALUATING THE PROPOSALS. THIS PROXY STATEMENT/PROSPECTUS CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS
STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, BELIEFS AND
INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROXY STATEMENT/PROSPECTUS
SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS
WHEREVER THEY APPEAR IN THIS PROXY STATEMENT/PROSPECTUS. THE COMPANY'S ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS PROXY
STATEMENT/PROSPECTUS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES
INCLUDE THOSE DISCUSSED BELOW AND IN OTHER PLACES INCLUDING THE "BUSINESS OF
BERG & BERG," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION FOR THE PROPERTIES," AND "DISTRIBUTION POLICY."
NO INDEPENDENT APPRAISAL; NO ARM'S LENGTH NEGOTIATIONS WITH AFFILIATES
There has been no independent valuation of the Company, nor have there
been any discussions or negotiations between the Berg Group and independent
representatives of the Company concerning obtaining an independent valuation. In
October 1997, the board of directors of the Company determined that future
transactions involving equity securities of the Company would be priced at $4.50
per share, or the equivalent thereof, until the Company had acquired assets and
generated revenues and FFO. That price was not determined by independent
valuation and no third party appraisals of the Properties were obtained for
purposes of the Private Placement, or the Berg Acquisition, nor has a fairness
opinion been obtained. The valuation of the Company implied by the Company's
purchase of a 10.91% general partner interest in the Operating Partnership for
$35.2 million ( approximately $4.30 per share), and the value of the L.P. Units
to be held by the Limited Partners, may not accurately reflect the value of the
Properties in the Operating Partnership prior to the consummation of the Berg
Acquisition. See "BACKGROUND OF THE PROPOSED TRANSACTIONS--Valuation of
Interests."
DEPENDENCE ON MR. BERG
The Company is substantially dependent upon the leadership of Mr.
Berg, its Chairman and Chief Executive Officer. See "THE BUSINESS OF BERG &
BERG--History of Berg & Berg." Mr. Berg will be managing the day-to-day
operations of the Company, as Chairman and Chief Executive Officer, and will
devote a substantial portion of his time to the affairs of the Company,
including the formulation and execution of the Company's growth and business
development strategies. Mr. Berg has a number of other business interests to
which he devotes a portion of his time. See "POTENTIAL CONFLICTS OF
INTEREST." In particular, Mr. Berg is a substantial investor in a number of
technology companies in the Silicon Valley, including tenants of a few of the
Berg Properties, and serves on the board of directors of six of such
technology companies. The Company believes that his active involvement in the
technology industry provides the Company with valuable information regarding
the business and operations of its tenants and their present and future space
requirements, as well as valuable industry contacts and tenant referral
sources. The Company believes that the loss of these benefits, through the
loss of Mr. Berg's knowledge and abilities and their benefits, could have a
material adverse effect on the Company.
CONTROL OF THE COMPANY AND THE OPERATING PARTNERSHIP BY THE BERG GROUP
Following the completion of the Proposed Transactions, the Berg Group,
and Mr. Berg who controls the Berg Group, will exercise significant control over
the operations and affairs of the Company and the Operating Partnership.
OWNERSHIP INTEREST. Following the completion of the Proposed
Transactions, members of the Berg Group will hold L.P. Units representing an
aggregate 84.4% limited partnership interest in the Operating Partnership, and
an aggregate of 84.6% of the Outstanding Shares, (without regard to the Berg
Group Ownership Limit) through their right to exchange L.P. Units for Common
Stock under certain circumstances. Notwithstanding the Berg Group Ownership
Limit, these exchange rights will give the members of the Berg Group substantial
influence over the management and direction of the Company. Moreover, the Berg
Group members also will possess the following material rights with respect to
the governance of the Company and the Operating Partnership. See "PRINCIPAL
SHAREHOLDERS" and "--Shares Eligible for Future Sale."
-9-
<PAGE>
BOARD OF DIRECTORS REPRESENTATION. Pursuant to the Proposed
Transactions the Berg Group will acquire the right to nominate two directors for
election to the board of directors (the "Berg Group Board Representatives") so
long as the members of the Berg Group together with their Affiliates (other than
the Company and the Operating Partnership) own at least 15% of the total number
of shares of voting stock of the Company taking into account the conversion,
exchange or exercise of all outstanding warrants, options, convertible
securities and other rights to acquire voting stock of the Company and all L.P.
Units exchangeable or redeemable for Common Stock or other voting stock of the
Company (without regard to any Ownership Limit) (the "Fully-Diluted" number of
shares). In the event such ownership falls below 15% but is at least 10%, the
Berg Group will have the right to nominate one person for election to the board
of directors. Mr. Berg and Michael Anderson, Vice President and Chief Operating
Officer of the Company, will constitute the initial Berg Group Board
Representatives. The other two directors on the current four-person board of
directors will be unaffiliated with the Berg Group (the "Independent Directors")
and, together, will constitute the Independent Directors Committee of the board
of directors. See "MANAGEMENT OF THE COMPANY UPON CONSUMMATION OF THE BERG
ACQUISITION--Directors and Executive Officers," "OPERATING PARTNERSHIP
AGREEMENT--Management," and "CERTAIN PROVISIONS OF MARYLAND LAW AND OF
MISSION WEST-MARYLAND'S CHARTER AND BYLAWS--The Board of Directors."
SPECIAL BOARD VOTING PROVISIONS. The Charter will provide that,
until such time as the Berg Group and their Affiliates (other than the
Company and the Operating Partnership) own less than 15% of the Fully-Diluted
number of shares of Common Stock (the "Protective Provisions Expiration
Date"), the vote of a majority of the directors including Mr. Berg or someone
he has designated to replace him as a director (the "Required Directors")
shall be required to approve certain fundamental corporate actions, including
amendments to the Charter or bylaws, and any merger, consolidation or sale of
all or substantially all of the assets of the Company or the Operating
Partnership. In addition, the Mission West-Maryland bylaws will provide that
a quorum must include the Required Directors for any action at a meeting.
Also, the approval of more than 75% of the entire board of directors will be
required to approve other significant transactions such as certain borrowings
in excess of 50% of the sum of (i) the total number of Outstanding Shares
multiplied by the market price (the "Market Price") of the Common Stock plus
(ii) the Company's total debt ("Total Market Capitalization"); and the
conduct of business by the Company other than through the Operating
Partnership. Accordingly, under certain circumstances the Berg Group or Mr.
Berg could prevent the Company or the Operating Partnership from taking any
of such actions. See "CERTAIN PROVISIONS OF MARYLAND LAW AND OF MISSION
WEST-MARYLAND'S CHARTER AND BYLAWS--Board Quorum and Special Voting
Requirements."
LIMITED PARTNER APPROVAL RIGHTS. Under the Operating Partnership
Agreement, the consent of holders of the L.P. Unit Majority also is required
with respect to a number of significant actions, including amendments to the
Operating Partnership Agreement and the issuance of limited partnership
interests having senior rights with respect to the L.P. Units. In addition,
until the Protective Provisions Expiration Date, the consent of the L.P. Unit
Majority will be required with respect to other matters, including actions and
transactions similar to those requiring the approval of the Required Directors.
See "OPERATING PARTNERSHIP AGREEMENT--Management." Taxable sales of certain
Properties are subject to the consent, under certain circumstances, of Mr.
Berg and Clyde J. Berg, or Kontrabecki, as well. See "--Tax Consequences of
Sale of Properties."
POTENTIAL CONFLICTS OF INTEREST WITH THE BERG GROUP
Mr. Berg and other members of the Berg Group, who will possess
significant rights in the Company and the Operating Partnership, have a
variety of interests which may not be consistent with the interests of the
other shareholders of the Company. One such conflict arises because the
Company has agreed to pay overhead reimbursements and rent to BBE and Berg &
Berg totaling approximately $15,000 per month. The Acquisition Agreement
specifies that any increase in rent and overhead allocations and all other
transactions between the Company and Mr. Berg or other members of the Berg
Group, or between the Company and any entity in which Berg Group members own
directly or indirectly 5% or more of the equity interests including the
Operating Partnership, must be approved by the Independent Directors
Committee, and provides additional restrictions summarized below relating to
specific matters where conflicts may arise. Mr. Berg also has agreed to refer
all his prospective R&D Property development and acquisition activities in
Washington, Oregon and California to the Company for initial consideration.
There can be no assurance that these restrictions will be successful in
eliminating the influence of such conflicts. If these restrictions are not
successful, decisions could be made that might fail to protect fully the
interests of all shareholders of the Company. Aside from these restrictions,
Mr. Berg and the other members of the Berg Group are entitled to freedom of
action under the terms of the Acquisition Agreement.
-10-
<PAGE>
EXCLUDED PROPERTIES. Although the Company is succeeding to most of the
R&D Properties in which the Berg Group holds interests, certain properties that
are not managed by any member of the Berg Group or are not material to the
Company (the "Excluded Properties") are not being contributed to the Operating
Partnership. Members of the Berg Group will continue to hold ownership interests
in the Excluded Properties that are not contributed to the Operating
Partnership. One such Excluded Property is the Company's headquarters at 10050
Bandley Drive, Cupertino, California, which is owned by Berg & Berg. The other
Excluded Properties (representing an aggregate of approximately 270,000 rentable
square feet) are located in the Silicon Valley and cannot be made available to
the Company by any of the Berg Group members as part of the Berg Acquisition.
The Company does not expect that these Excluded Properties will compete with any
of the Properties, and none of them involve any common tenants or common
financing arrangements with the Properties.
PENDING DEVELOPMENT PROJECTS. There are four Pending Development
Projects which represent a total of 12 R&D Properties and approximately one
million rentable square feet in the aggregate. Under the Acquisition Agreement,
the Company and the owners of these Properties have agreed that the Company or
the Operating Partnership will acquire each of the R&D Properties as it is
completed and fully leased. Under the terms of the Pending Projects Acquisition
Agreement the sellers of the Properties may elect to receive cash or L.P. Units
at a value of $4.50 per unit. The purchase price for each of the Properties will
be adjusted at the time of transfer based upon the ratio of the actual monthly
rental rate per square foot to the projected rental rate per square foot set
forth in the Pending Projects Acquisition Agreement. The Berg Group members who
own the Pending Development Projects, including Carl E. Berg, will determine the
terms of the leases for each of the Properties prior to their transfer to the
Company. The sellers' determination of acceptable terms may differ materially
from those sought by an independent party. See "DESCRIPTION OF THE
PROPERTIES--The Pending Development Projects."
BERG LAND HOLDINGS. The Berg Land Holdings will not be contributed to
the Operating Partnership. The Company and the Operating Partnership have an
option to purchase properties developed on the Berg Land Holdings, as well a
right of first offer relating thereto, pursuant to the terms of the Berg Land
Holdings Option Agreement (the "Option Agreement"). See "DESCRIPTION OF
PROPERTIES--Land Holding and Development Arrangements." If the Independent
Directors Committee does not elect to exercise its rights with respect to some
or all of the Berg Land Holdings and the Berg Group subsequently determines to
develop such Holdings, Carl E. Berg and other members of the Berg Group may
devote a substantial amount of their time to such development activities, and
the developed Berg Land Holdings may compete for available tenants with certain
of the Properties.
TAX CONSEQUENCES OF SALE OF PROPERTIES. Since most of the Properties
have unrealized gain attributable to the difference between fair market value
and adjusted tax basis in such Properties prior to the Company's purchase of its
general partner's interest, the sale of any of such Properties may cause adverse
tax consequences to the Limited Partners. As a result, the Limited Partners
might not favor a sale of a Property even though such a sale could be beneficial
to other shareholders of the Company. Furthermore, until the Protective
Provisions Expiration Date, the Operating Partnership Agreement provides that
for a period of ten years following the closing of the Berg Acquisition, the
Operating Partnership may not sell or otherwise transfer any Property designated
by Mr. Berg or Clyde J. Berg in a taxable transaction. In addition, Mr.
Kontrabecki may designate that the Kontrabecki Properties may not be sold or
transferred in a taxable transaction. See "FEDERAL INCOME TAX CONSIDERATIONS--
Tax Aspects of the Operating Partnership," "CERTAIN PROVISIONS OF MARYLAND LAW
AND MISSION WEST-MARYLAND'S CHARTER AND BYLAWS" and "OPERATING PARTNERSHIP
AGREEMENT--Management."
TERMS OF TRANSFERS; ENFORCEMENT OF PARTNERSHIP AGREEMENT. Neither the
terms of transfers of the Berg Properties to the Operating Partnership by the
Limited Partners or the terms of the Operating Partnership Agreement were
determined through arm's-length negotiation. Some Berg Group members in their
capacity as beneficial owners of the Acquired Properties also had a substantial
interest in determining the terms and conditions of the transfers of the
Acquired Properties and the Pending Development Projects to the Operating
Partnership. The Berg Group Board Representatives also may be subject to a
conflict of interest with respect to their obligations as directors of the
Company to enforce the terms of the Operating Partnership Agreement.
-11-
<PAGE>
CHANGES IN POLICIES WITHOUT SHAREHOLDER APPROVAL
The Company's board of directors will determine the investment and
financing policies of the Operating Partnership and its policies with respect to
certain other activities, including its growth, debt capitalization,
distribution and operating policies. See "POLICIES WITH RESPECT TO CERTAIN
INVESTMENT ACTIVITIES." The board of directors has no present intention to amend
or revise these policies. However, the board of directors may do so at any time
without a vote of the Company's shareholders. A change in these policies could
adversely affect the Company's financial condition or results of operations.
ANTI-TAKEOVER PROVISIONS
Provisions of the Charter and bylaws of Mission West-Maryland could
delay, defer or prevent a transaction or a change in control of Mission
West-Maryland (or other transaction) that might involve a premium price for
holders of Common Stock or otherwise be in their best interest. See "CERTAIN
PROVISIONS OF MARYLAND LAW AND OF MISSION WEST-MARYLAND'S CHARTER AND BYLAWS."
REAL ESTATE INVESTMENT CONSIDERATIONS
GENERAL. Real property investments are subject to varying degrees of
risk. The investment returns available from equity investments in real estate
depend in large part on the amount of income earned and capital appreciation
generated by the Properties as well as the related expenses incurred. If the
Properties do not generate revenue sufficient to meet operating expenses, debt
service and capital expenditures, the Company's income and ability to make
distributions to its shareholders will be adversely affected. Income from the
Properties may also be adversely affected by general economic conditions, local
economic conditions such as oversupply of commercial real estate, the
attractiveness of the Properties to tenants, competition from other available
rental property, the ability of the Company to provide adequate maintenance and
insurance, the costs of tenant improvements, leasing commissions and tenant
inducements and the potential of increased operating costs (including real
estate taxes). Various significant expenditures associated with an investment in
real estate (such as mortgage payments, real estate taxes and maintenance
expenses) generally are not reduced when circumstances cause a reduction in
revenue from the investment. Income from properties and real estate values also
are affected by a variety of other factors, such as governmental regulations and
applicable laws (including real estate, zoning and tax laws), interest rate
levels and the availability of financing.
ILLIQUIDITY OF REAL ESTATE INVESTMENTS. Real estate investments are
relatively illiquid, which limits the ability of the Operating Partnership (and,
therefore, the Company) to restructure its portfolio in response to changes in
economic or other conditions. See "OPERATING PARTNERSHIP AGREEMENT--
Management." In addition, the Properties are subject to fixed expenditures, such
as debt service, real estate taxes, and expenses for repairs, maintenance, and
operations that do not decline with reductions in income. Such illiquidity and
fixed expenditures, together with other factors might impede the Company's
ability to respond to adverse conditions. The Company's ability to make expected
distributions to shareholders also could be adversely effected as a result.
GEOGRAPHIC AND INDUSTRY CONCENTRATION; DEPENDENCE UPON SILICON VALLEY
ECONOMY AND THE ELECTRONICS INDUSTRY. All of the Properties are located in the
southern portion of the San Francisco Bay Area commonly referred to as "Silicon
Valley." Following a recessionary period which ended in 1993, the Silicon Valley
economy has grown robustly and the reported unemployment rate for Santa Clara
County was 3.1% as of December 31, 1997. See "THE BUSINESS OF BERG & BERG--
Regional Economic Profile." As a result of the strong Silicon Valley economy,
values for the Properties and rents payable under new leases have increased
substantially since 1995. Future increases in values and rents for the
Properties depend to a significant extent on the health of the Silicon Valley
economy. All of the Properties are subject to existing leases with fixed rental
rates, and a material downturn in the Silicon Valley economy, or in the
commercial real estate market in Silicon Valley, will not immediately reduce
revenues but could have a material adverse impact on the value of the Company's
Common Stock and on the Company's financial condition. Following the completion
of Proposed Transactions, the Company will consider expansion into other regions
of the West Coast with concentrations of technology companies if R&D Properties
of good quality can be obtained on reasonable terms. See "FUTURE OPERATIONS OF
THE COMPANY--Acquisitions."
-12-
<PAGE>
RISK OF LOSS OF KEY TENANTS. Most of the Properties are occupied by
single tenants, many of whom are large, publicly-traded electronics
companies. The Company's three largest tenants, Apple Computer Inc.
("Apple"), Amdahl Corporation ("Amdahl"), and Cisco Systems, Inc. ("Cisco")
accounted for approximately 16.25%, 8.67%, and 7.17%, respectively, of the
aggregate Annual Base Rent from the Berg Properties for the year ended
December 31, 1997. The Operating Partnership's 12 largest tenants for the
Berg Properties represent at least 56.8% of such Annual Base Rent. Eight of
these tenants have occupied their respective Properties for periods ranging
from five to 22 years and have renewed one or more leases. The Company
believes that Berg & Berg's practice of emphasizing the development of
single-tenant, rather than multi-tenant, Properties has contributed to its
relatively high occupancy rates. Apple has announced operating losses,
internal reorganizations, and layoffs in each of its last two fiscal years.
To date, Apple has not defaulted in the payment of rent under any of its
three leases with the Operating Partnership, nor has Apple, Amdahl or Cisco
notified the Operating Partnership of an intention to vacate, reduce its
occupancy at, or relocate from any of their respective properties. However,
there can be no assurance that Apple, Amdahl, Cisco or other key tenants will
renew their leases. The Company believes that it would be able to relet
Properties of its other key tenants should they be vacated and that some of
such Properties are currently leased at below market rental rates. However,
if the Company is unable to relet properties as leases terminate or if Apple,
Amdahl, Cisco or another key tenant were to terminate their tenancy, and the
Company were unable to relet such Properties within a reasonable period of
time and at comparable rental rates, the Company's operating results and its
ability to make distributions could be adversely affected. See "DESCRIPTION
OF THE PROPERTIES--the Berg Properties."
RISK OF BANKRUPTCY OF KEY TENANTS. At any time, a tenant of the
Properties may seek the protection of the bankruptcy laws which could result
in the rejection and termination of such tenant's lease and thereby cause a
reduction in the Company's income. Although the Operating Partnership's
predecessors have experienced losses from tenant bankruptcies of less than
$25,000 since 1987, no assurance can be given that tenants will not file for
bankruptcy protection in the future or, if a tenant makes such a filing, that
it will affirm its lease and continue to make rental payments in a timely
manner. In addition, from time to time a tenant may experience a downturn in
its business which may weaken its financial condition and result in its
failure to make rental payments when due. If a tenant's lease is not affirmed
following a bankruptcy filing, or if a tenant's financial condition weakens,
the Company's income may be adversely affected. The bankruptcy of one or more
of the Company's key tenants could have a material adverse effect on the
Company's operating results and its ability to make distributions.
ADDITIONAL RISKS OF REAL ESTATE ACQUISITION AND DEVELOPMENT. A focus
of the Company will be the acquisition of additional properties in selected
geographical areas and the renovation and reletting of such properties. The
Company may also undertake the development of new buildings on sites acquired
from the Berg Group or from third parties. See "DESCRIPTION OF THE PROPERTIES
- -Land Holding and Development Arrangements." Real estate acquisition and
development involves significant risks in addition to those relating to the
ownership and operation of existing, fully-leased properties, including the
risks that required approvals may not be obtained or may take more time and
resources to obtain than expected, that construction may not be completed on
schedule or on budget and that the properties may not achieve anticipated
rent or occupancy levels. In addition, if permanent debt or equity financing
is not available on acceptable terms to refinance new development activities
or acquisitions undertaken without permanent financing, further development
activities or acquisitions could be curtailed and the Company's operating
results and its ability to make distribution could be adversely affected.
DEBT FINANCING; RISK OF INABILITY TO SERVICE DEBT. On a pro forma
basis as of March 31, 1998, after giving effect to the Berg Acquisition, 26
of the Properties are mortgaged to secure payment of debt, and the Company
expects to have outstanding approximately $164.6 million of debt secured by
such Properties upon closing the Berg Acquisition. If the Operating
Partnership was unable to meet its mortgage payments, a loss could be
sustained as a result of foreclosure on its Property by the mortgagee. Such a
loss could reduce the value of the Company's investment in the Operating
Partnership. See "DESCRIPTION OF THE PROPERTIES--Mortgage Debt and Wells
Fargo Lines" for information regarding the terms of the mortgages encumbering
the Properties.
As part of its current business strategy, the Company has adopted a
policy of maintaining a consolidated ratio of debt to Total Market
Capitalization of less than 50%, which may not be exceeded without the
approval of more than 75% of the entire board of directors. The Company's pro
forma ratio of debt to Total Market Capitalization would have been
approximately 32.8% at March 31, 1998, assuming the occurrence of the
Proposed Transactions, a Market Price of $4.50 price per share, and
75,100,000 Outstanding Shares issued and
-13-
<PAGE>
outstanding on that date. Within the prescribed limit, the board of directors
of the Company may, from time to time, modify its debt policy and may
increase or decrease its ratio of debt to Total Market Capitalization. If the
Company were to change its debt policy, the Company could become more highly
leveraged, resulting in an increased risk of default on its obligations and
an increase in debt service requirements that could adversely affect the
Company's financial condition, its operating results and its ability to make
distributions.
POTENTIAL ENVIRONMENTAL LIABILITY. Under various federal, state and
local laws, ordinances and regulations, an owner or operator of real property
may be held liable for the costs of removal or remediation of certain
hazardous or toxic substances located on or in the property. Such laws often
impose liability and expose the owner to governmental proceedings without
regard to whether the owner knew of, or was responsible for, the presence of
the hazardous or toxic substances. The cost of any required remediation or
removal of such substances may be substantial. In addition, the owner's
liability as to any specific property is generally not limited and could
exceed the value of the property and/or the aggregate assets of the owner.
The presence of such substances, or the failure to properly remove or
remediate such substances, may also adversely affect the owner's ability to
sell or rent the property or to borrow using the property as collateral.
Persons who arrange for treatment or the disposal of hazardous or toxic
substances may also be liable for the costs of any required remediation or
removal of the hazardous or toxic substances at a disposal facility,
regardless of whether the facility is owned or operated by such owner or
entity. In connection with the ownership of the Properties or the treatment
or disposal of hazardous or toxic substances, the Company may be liable for
such costs.
Other federal, state and local laws impose liability for the release
of asbestos-containing materials ("ACMs") into the air and require the
removal of damaged ACMs in the event of remodeling or renovation. The Company
is aware that there are ACMs present at several of the Properties, primarily
in floor coverings. The Company believes that the ACMs present at these
Properties are generally in good condition and that no ACMs are present at
the remaining Properties. The Company believes it is in compliance in all
material respects with all present federal, state and local laws relating to
ACMs and that if it were given limited time to remove all ACMs present at the
Properties, the cost of such removal would not have a material adverse effect
on its financial condition, operating results or ability to make
distributions.
The Company is not aware of any environmental liability relating to
the Properties that it believes would have a material adverse effect on its
financial condition, its operating results or its ability to make
distributions and has not been notified by any governmental authority or any
other person of any material noncompliance, liability or other claim in
connection with any of the Properties. Groundwater contaminated by chemicals
used in various manufacturing processes, including semiconductor fabrication,
underlies a significant portion of northeastern Santa Clara County, where
many of the Properties are located, however. Environmental assessments have
not been conducted for most of the Properties and none since 1995. Phase I
environmental assessments and some soil and water sampling as recommended by
the environmental consultant have been obtained on each of the Pending
Development Projects. No assurance can be given that future uses and
conditions (including changes in applicable environmental laws and
regulations, the uses and conditions of properties in the vicinity of the
Properties, such as leaking underground storage tanks and the current and
future activities of tenants) will not result in the imposition of
environmental liability and the costs attendant thereto.
GENERAL UNINSURED LOSSES. The Operating Partnership will carry
comprehensive liability, fire, extended coverage and rental loss insurance
covering all of the Properties, with policy specifications and insured limits
which the Company believes are adequate and appropriate under the
circumstances. There are, however, certain types of extraordinary losses that
are not generally insured because they are either uninsurable or not
economically insurable. Should an uninsured loss or a loss in excess of
insured limits occur, the Operating Partnership could lose its capital
invested in a Property, as well as the anticipated future revenues from the
Property, and, in the case of debt which is recourse to the Operating
Partnership, would remain obligated for any mortgage debt or other financial
obligations related to the Property. The Company does not intend to obtain
owner's title insurance policies for any of the Properties, but pursuant to
the Acquisition Agreement certain members of the Berg Group and other Limited
Partners have agreed to indemnify the Company for any losses attributable to
defects in title existing prior to the closing of the Berg Acquisition. If a
loss occurs resulting from a title defect with respect to a Property in
excess of insured limits, or the Company cannot obtain full recovery though
the Berg Group's indemnification where applicable, the Company could lose all
or part of its investment in, and anticipated profits and cash flows from,
such Property.
-14-
<PAGE>
POTENTIAL UNINSURED LOSSES FROM SEISMIC ACTIVITY. All the Properties
are located in areas that are subject to earthquake activity. In light of
such earthquake risk, since the early 1970's, California building codes have
established construction standards for all newly built and renovated
buildings, the current and most strict construction standards having been
adopted in 1994. Most of the Properties were completed prior to the adoption
of more stringent building codes in 1994. The Company believes that all
Properties were constructed in full compliance with applicable laws and
construction standards existing at the time of construction. The Operating
Partnership's insurance policies for the Berg Properties do not cover damage
caused by seismic activity, although they do cover losses from fires after an
earthquake. The Operating Partnership has not obtained earthquake insurance
for the Properties, and the Company believes that such insurance coverage is
generally not economical. Following the October 17, 1989 Loma Prieta
earthquake in the San Francisco Bay Area, which had a magnitude of
approximately 7.1 on the Richter scale, Berg & Berg observed, and its tenants
reported, only minimal damage to the Properties. Should an earthquake occur
that results in substantial damage to the existing Properties, or properties
subsequently acquired by the Company, the Company could lose its investment
in such properties and its financial condition, operating results and ability
to make distributions could be adversely affected.
FEDERAL INCOME TAX RISKS
FAILURE TO QUALIFY AS A REIT. The Company intends to elect to be
taxed as a REIT under the Code for its taxable year ending December 31, 1998,
and to operate in a manner designed to achieve and maintain qualification as
a REIT. Although the Company expects that it will be organized and will
operate in conformity with the requirements for qualification as a REIT, no
assurance can be given that the Company will so qualify or that it will
continue to qualify in the future. Qualification as a REIT involves the
application of highly technical and complex Code provisions for which there
are only limited judicial and administrative interpretations. The Company's
ability to qualify and maintain its status as a REIT will depend on the
Company's ability to meet various requirements. For example, at least 95% of
the Company's gross income in any year must be derived from dividends,
interest, rents from real property, certain capital gains and other qualified
sources, and the Company must make annual distributions to shareholders
totaling at least 95% of its REIT taxable income (excluding net capital
gains). See "FEDERAL INCOME TAX CONSIDERATIONS." These and various other
factual matters and circumstances not entirely within the Company's control
may affect its ability to qualify or maintain its status as a REIT. In
addition, no assurance can be given that new legislation, regulations,
administrative interpretations or court decisions will not significantly
change the tax laws with respect to qualification as a REIT or the federal
income tax consequences of such qualification. See "FEDERAL INCOME TAX
CONSIDERATIONS--Requirements for Qualification."
If the Company were to fail to qualify as a REIT in any taxable
year, it would not be allowed a deduction for distributions to its
shareholders in computing its taxable income, and it would be subject to
federal income tax (including any applicable alternative minimum tax) on its
taxable income at regular corporate rates. Unless entitled to relief under
certain Code provisions, the Company would also be disqualified from
treatment as a REIT for the four taxable years following the year during
which REIT qualification was lost. As a result of the loss of REIT status,
funds available for distribution to the Company's shareholders would be
reduced for each of the years involved and, in addition, the Company would no
longer be required to make distributions to its shareholders. Although the
Company currently intends to operate in a manner designed to enable it to
qualify and maintain its status as a REIT, it is possible that economic,
market, legal, tax or other considerations may cause the Company to fail to
qualify as a REIT or may cause the Company's board of directors either to
refrain from making the REIT election or to revoke the REIT election once
made.
REIT DISTRIBUTION REQUIREMENTS. To obtain and maintain favorable tax
treatment as a REIT, the Company generally will be required each year to
distribute as a dividend to its shareholders at least 95% of its otherwise
taxable income (after certain adjustments). In addition, the Company will be
subject to a 4% nondeductible excise tax on the amount, if any, by which
certain distributions paid by it with respect to any calendar year are less
than the sum of 85% of its ordinary income for the calendar year, 95% of its
capital gain income for the calendar year and any undistributed taxable
income from prior periods. Failure to comply with these requirements would
result in the Company's income being subject to tax at regular corporate
rates.
-15-
<PAGE>
OWNERSHIP LIMIT NECESSARY TO MAINTAIN REIT QUALIFICATION. In order
for the Company to maintain its qualification as a REIT, not more than 50% in
value of its outstanding stock may be owned, directly or indirectly, by five
or fewer individuals, as defined in the Code (the "Five or Fewer Test"). For
the purposes of preserving the Company's qualification as a REIT, the Charter
generally prohibits ownership (the "Ownership Limit") of more than 9% of the
Common Stock by any shareholder (other than limits set by agreements with the
Berg Group, for which the aggregate Ownership Limit is 20% (the "Berg Group
Ownership Limit")). The Charter mandates the aggregation of stock owned by
affiliated owners for purposes of the Ownership Limit. Individuals owning a
percentage of the Common Stock outstanding that exceeds the Ownership Limit
at the time of the Reincorporation Merger will not be required to reduce
their stock holdings but will be subject to the Ownership Limit with respect
to the acquisition of additional shares of Common Stock (other than shares
acquired pursuant to board-approved stock option and other compensation
plans). Following consummation of the Proposed Transactions, the Berg Group
initially will own less than two percent of the issued and outstanding Common
Stock. One current legislative proposal of the Clinton administration would
amend the "closely held" requirement for REIT qualification. See "FEDERAL
INCOME TAX CONSIDERATIONS--Requirements for Qualification."
The constructive ownership rules of the Code are complex and may
cause Common Stock owned, directly or indirectly, by a group of related
individuals and/or entities to be deemed to be constructively owned by one
individual or entity. As a result, the acquisition of less than 9% of the
Common Stock (or the acquisition of an interest in an entity which owns
Common Stock) by an individual or entity could cause that individual or
entity (or another individual or entity) to own constructively in excess of
9% of the Common Stock, and thus subject such stock to the Ownership Limit.
The Charter provides that any transfer of shares by members of the
Berg Group or other shareholders that would result in direct or constructive
ownership in excess of the applicable Ownership Limit would be void, and the
intended transferee of such shares, including any pledgee, will be deemed
never to have had an interest in such shares. Further, if, in the opinion of
the board of directors (i) a transfer or repurchase of shares would result in
any shareholder or group of shareholders acting together owning in excess of
the Ownership Limit, or (ii) a proposed transfer or repurchase of shares may
jeopardize the qualification of the Company as a REIT under the Code, under
the Charter the board of directors may, in its sole discretion, refuse to
allow the shares to be transferred to the proposed transferee. If any
transfer or repurchase of shares of Common Stock occurs which, if effective,
would result in any person beneficially or constructively owning shares of
Stock of the Company in excess or in violation of the above transfer or
ownership limitations (a "Prohibited Owner"), then that number of shares
shall be automatically transferred to a trust (the "Trust") for the exclusive
benefit of one or more charitable beneficiaries (the "Charitable
Beneficiary"), and the Prohibited Owner shall not acquire any rights in such
shares. The Prohibited Owner shall not benefit economically from ownership of
any shares of stock held in the Trust, shall have no rights to dividends and
shall not possess any rights to vote or other rights attributable to the
shares of stock held in the Trust. The trustee of the Trust (the "Trustee")
shall have all voting rights and rights to dividends or other distributions
with respect to shares of stock held in the Trust, which rights shall be
exercised for the exclusive benefit of the Charitable Beneficiary. The shares
or L.P. Units held by the Berg Group members are not subject to automatic
transfer to the Trust, however, as their shares will be subject to the
prohibitions associated with the applicable Berg Group Ownership Limit, as
well as restrictions on any exchanges of L.P. Units and share purchases,
repurchases and transfers of any kind that would result in a violation of the
Five or Fewer Test. See "FEDERAL INCOME TAX CONSIDERATIONS--Requirements for
Qualification."
UNCERTAINTIES REGARDING DISTRIBUTIONS TO SHAREHOLDERS
The Company's income will consist primarily of the Company's share
of the income of the Operating Partnership, and the Company's cash flow will
consist primarily of its share of distributions from the Operating
Partnership. Differences in timing between the receipt of income and the
payment of expenses in arriving at taxable income (of the Company or the
Operating Partnership) and the effect of required debt amortization payments
could require the Company directly, or through the Operating Partnership, to
borrow funds on a short-term basis to meet its intended distribution policy.
See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS FOR THE PROPERTIES--Liquidity and Capital Resources" and
"DISTRIBUTION POLICY" for information concerning the Company's expected cash
flow.
-16-
<PAGE>
The amount and timing of distributions by the Operating Partnership
will be determined by the board of directors of the Company as the sole
general partner of the Partnership and will be dependent on a number of
factors, including the amount of cash available for distribution, the
Operating Partnership's financial condition, any decision by the Board of
Directors to reinvest funds rather than to distribute such funds, the
Operating Partnership's capital expenditures, the annual distribution
requirements under the REIT provisions of the Code and such other factors as
the Company's Board of Directors deems relevant. See "FEDERAL INCOME TAX
CONSIDERATIONS--Taxation of the Company--Requirements for Qualification"
and "--Annual Distribution Requirements." Accordingly, there is no assurance
that the Company will be able to meet or maintain its intended distribution
policy.
POTENTIAL PROPERTY TAX REASSESSMENTS
The Company does not believe that its acquisition of interests in
the Operating Partnership will result in a statutory change in ownership
giving rise to a reassessment of any of the Properties for California
property tax purposes. There can be no assurance, however, that county
assessors or other tax administrative agencies in California will not attempt
to assert that such a change occurred as a result of the transactions related
to the Berg Acquisition. Although the Company believes that such a challenge
would not be successful ultimately, there can be no assurance regarding the
outcome of any such dispute or proceeding. Such a reassessment could result
in increased real estate taxes on the Properties. Substantially all of the
leases for the Properties contain provisions requiring the tenants to pay
their proportionate share of any property tax increases. As a practical
matter, the Company may be unable to pass through to its tenants the full
amount of the increased taxes resulting from a reassessment, however, the
Company believes that any amount not passed through to tenants will not have
a material effect on the Company's operating results. See "THE COMPANY'S PRO
FORMA DATA."
MARKET FOR COMMON STOCK
The AMEX halted trading of the Common Stock at the opening of
trading on October 20,1997. The last day of trading prior to the halt was
October 17, 1997. The closing price of the Common Stock on October 17, 1997
was $3.38. On _____________, 1998, the last trading day immediately preceding
the date of this Proxy Statement/Prospectus, the closing price of the Common
Stock on the AMEX was $________.
THE COMPANY'S OBLIGATION TO PURCHASE TENDERED L.P. UNITS
Each of the Limited Partners (other than Carl E. Berg and Clyde J.
Berg) will have the annual right to exercise their Put Rights and cause the
Operating Partnership to purchase a portion of their L.P. Units at a purchase
price based on the average market value of the Common Stock for the
10-trading day period immediately preceding the date of tender. Upon the
exercise of this put right by a Limited Partner the Company will have the
option to purchase the tendered L.P. Units with available cash, borrowed
funds, or the proceeds of an offering of newly issued shares of Common Stock.
The Limited Partners' Put Rights generally commence one year after the
completion of the Berg Acquisition, and are available once a year for a
maximum of one-third of the Limited Partner's L.P. Units. If the total
purchase price of the L.P. Units tendered by all Limited Partners in one year
exceeds $1 million, the Operating Partnership or the Company shall be
entitled to reduce proportionally the number of L.P. Units to be acquired
from each tendering Limited Partner so that the total purchase price is not
more than $1 million. The exercise by Limited Partners of their Put Rights
may reduce the amount of Cash Available for Distribution to shareholders of
the Company. See "OPERATING PARTNERSHIP AGREEMENT--Exchange Rights, Put
Rights and Registration Rights."
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future
sales of shares, or the availability of shares for future sale, will have on
the market price of the Common Stock. Sales of substantial amounts of Common
Stock (including shares issued in connection with the Exchange Rights) or the
perception that such sales could occur, could adversely affect prevailing
market prices for the Common Stock. Additional shares of Common Stock may be
issued to the Limited Partners (subject to the Ownership Limit) if they
exchange their L.P. Units for shares of Common Stock pursuant to the Exchange
Rights or may be sold by the Company to raise funds to acquire such L.P.
Units if the Limited Partners elect to tender L.P. Units to the Company
pursuant to the Put Rights. Such Exchange Rights and Put Rights, however,
generally are not available during the first year following the Berg
Acquisition. During such initial 12-month period, the Limited Partners will
be allowed to seek one registration of not more than 500,000 shares of Common
Stock for resale (on SEC Form S-3 or the equivalent) and will have
-17-
<PAGE>
"piggyback registration" rights for not more than 25% of the total number of
shares proposed for a public offering of Common Stock by the Company.
Following the first anniversary of the Berg Acquisition, the exercise of the
Exchange Rights generally is limited to the exchange or sale once during any
12-month period by each Limited Partner of up to one-third of the aggregate
number of L.P. Units owned by such Limited Partner. The Company has granted
certain "demand," "resale" and "piggyback" registration rights with respect
to shares of Common Stock which would be acquired by the Limited Partners and
their Affiliates pursuant to the Exchange Rights. All registrations of Berg
Group shares are subject to underwriters' requirements for offering size
reduction, and the right of the board of directors to restrict or delay
registrations for limited periods. Sales of shares acquired by members of the
Berg Group and other Limited Partners through the exercise of their Exchange
Rights and registration rights may adversely impact the price and trading
volume of the Common Stock from time to time to the detriment of other
shareholders.
-18-
<PAGE>
THE SPECIAL MEETING
At the Special Meeting, the board of directors seeks shareholder
approval of the following three proposals. All of the transactions are
subject to distinct terms and conditions, and the Berg Acquisition is
conditioned upon the completion of the Private Placement. Neither of such
transactions is subject to the occurrence of the Reincorporation Merger. The
board of directors intends for the shareholders to consider all three
proposals at once, and this Proxy Statement/Prospectus describes the Proposed
Transactions and their material consequences based on the assumption that all
of the Proposed Transactions will be approved by the shareholders and
consummated by the parties to each transaction at approximately the same time.
PROPOSAL 1
SALE OF 6,495,058 SHARES OF COMMON STOCK AT $4.50 PER SHARE
PROPOSAL 2
APPROVAL OF THE COMPANY'S ACQUISITION OF THE SOLE GENERAL PARTNER INTEREST
IN THE OPERATING PARTNERSHIP AND THE ISSUANCE OF UP TO 100,825,478 SHARES OF
COMMON STOCK IN EXCHANGE FOR LIMITED PARTNERSHIP INTERESTS HELD BY OR
ISSUABLE TO CARL E.BERG AND CERTAIN OTHER MEMBERS OF THE BERG GROUP AND
OTHER LIMITED PARTNERS
PROPOSAL 3
REINCORPORATION OF THE COMPANY AS A MARYLAND REIT
PROPOSALS 1 AND 2 PERTAIN TO THE BERG ACQUISITION. PROPOSAL 3 CONCERNS THE
MERGER OF THE COMPANY INTO MISSION WEST-MARYLAND, WHICH THE COMPANY
ANTICIPATES WILL ELECT REIT STATUS IN 1998.
PARTIES TO THE BERG ACQUISITION
The Berg Group consists of Carl E. Berg and his wife, Clyde J. Berg,
certain trusts for their respective children, BBE, and certain other entities
which they control. See "PRINCIPAL SHAREHOLDERS." The members of the Berg
Group currently own most of the interests in the limited partnerships
comprising the Operating Partnership and, upon consummation of the Berg
Acquisition, will beneficially own 63,381,987 L.P. Units, or approximately
84.4% of the Operating Partnership. The remaining 3,524,421 L.P. Units will
be owned directly, or indirectly, by Mr. Kontrabecki and other non-Affiliates
of the Berg Group. The individuals and entities actually acquiring record
ownership of the L.P. Units pursuant to the Acquisition Agreement will
consist of all Berg Group members, Mr. Kontrabecki and two of the Kontrabecki
Partnerships. All of them are parties to the Acquisition Agreement and have
represented to the Company that they are accredited investors within the
meaning of Rule 501(a) of Regulation D promulgated by the Commission under
the Securities Act. Certain of the Acquired Properties known as the "Fremont
Properties" are subject to an option held by Carl E. Berg. Mr. Berg will
exercise the option and acquire and contribute the Fremont Properties to the
Operating Partnership as part of the Berg Acquisition. The Berg Acquisition
will provide material benefits to the members of the Berg Group. See
"BACKGROUND OF THE PROPOSED TRANSACTIONS--Benefits to the Berg Group."
PARTIES TO THE REINCORPORATION MERGER
The Reincorporation Merger will be effected through the merger of
the Company with and into Mission West-Maryland pursuant to Section 1110 of
the California General Corporation Law (the "CGCL") and Sections 3-101 et
seq. of the Maryland General Corporation Law (the "MGCL"). Mission
West-Maryland was incorporated in Maryland on March 20, 1998. See "THE
REINCORPORATION MERGER."
GENERAL INFORMATION CONCERNING SOLICITATION AND VOTING
The enclosed proxy is solicited on behalf of the board of directors
of the Company for use at the Special Meeting to be held on, or at any
adjournment or postponement thereof, for the purposes set forth herein and
in the
-19-
<PAGE>
accompanying Notice of Special Meeting of Shareholders. The Special Meeting
will be held at 10050 Bandley Drive, Cupertino, California 95014. The mailing
of this Prospectus/Proxy Statement and the accompanying form of proxy to
shareholders of the Company entitled to vote at the Special Meeting is
expected to commence on or about ______________, 1998.
RECORD DATE, VOTING RIGHTS AND OUTSTANDING SHARES
The outstanding securities of the Company at March 31, 1998
consisted of 1,698,536 shares of Common Stock. Each shareholder of record at
the close of business on ___________, 1998 is entitled to one vote for each
share of Common Stock then held. The shares represented by any proxy in the
enclosed form will be voted in accordance with the instructions given on the
proxy if the proxy is properly executed and is received by the Company prior
to the close of voting at the meeting or any adjournment or postponement
thereof.
REVOCABILITY OF PROXIES
A shareholder giving a proxy has the power to revoke it at any time
before it is exercised. A proxy may be revoked by filing with the Secretary
of the Company at the Company's principal executive office at 10050 Bandley
Drive, Cupertino, California 95014, a written notice or revocation or a duly
executed proxy bearing a later date, or it may be revoked by attending the
meeting and voting in person.
SOLICITATION
The cost of soliciting proxies in the enclosed form will be borne by
the Company. Solicitation will be made primarily by mail but shareholders may
be solicited by telephone, telegraph, or personal contact. The board of
directors may retain the services of a proxy-soliciting firm for soliciting
proxies from those entities holding shares in street name.
VOTES REQUIRED
The affirmative vote of the holders of a majority of the outstanding
shares of the Common Stock, either voting in person or by proxy, is necessary
to approve Proposal 3, the Reincorporation Merger. The remaining proposals
require only shareholder approval. Under California law, shareholder approval
is defined as the affirmative vote of a majority of the votes cast to approve
a proposed action.
Two substantially similar Voting Rights Agreements (the "Voting
Rights Agreements") cover all shares of Common Stock acquired from the
Company in a private placement in September 1997, as well as a substantial
number of shares acquired from the Company in a private placement in November
1997. The holders of the 1,097,959 shares subject to the Voting Rights
Agreements have agreed to vote their shares of Common Stock as directed by
Mr. Berg, on behalf of BBE, on all matters submitted to a vote of the
shareholders of the Company. The Voting Rights Agreements terminate at the
earliest of the following dates: (i) upon any sale of the shares pursuant to
a registration statement declared effective under the Securities Act of 1933,
as amended (the "Securities Act"), but only as to the shares so sold; (ii)
upon a sale of the shares pursuant to Rule 144 promulgated under the
Securities Act, but only as to the shares so sold; (iii) two years after the
effective date of the Voting Rights Agreement.
BBE has advised the Company that it will not exercise its rights
under the Voting Rights Agreements with respect to any of the Proposals.
Accordingly, all holders of Common Stock will be entitled to determine
independently whether to vote their shares in favor of each of the Proposals.
CONSEQUENCES IF THE PROPOSALS ARE NOT APPROVED
If the shareholders do not approve the Berg Acquisition, the Company
will not acquire an interest in the Operating Partnership and will have to
find another opportunity to re-enter the real estate business, unless the
board of directors recommends, and the shareholders approve, the dissolution
and liquidation of the Company. The Private Placement is intended to fulfill
certain contractual obligations of the Company.
-20-
<PAGE>
The Berg Acquisition and the Private Placement may be consummated
upon shareholder approval irrespective of whether the shareholders approve
the Reincorporation Merger. If the shareholders fail to adopt Proposal 3, the
Company nevertheless intends to elect to become a REIT in 1998, but it will
remain subject to the CGCL, and will not have adopted the Charter. See
"COMPARISON OF SHAREHOLDERS RIGHTS."
DISSENTERS' RIGHTS
Under California law, none of the shareholders of the Company will
be entitled to exercise dissenters' rights with respect to any of the
Proposals. See "THE REINCORPORATION MERGER--Approval and Effectiveness of
Merger."
RECOMMENDATION OF THE BOARD OF DIRECTORS
The board of directors of the Company unanimously recommends votes
"FOR" Proposal 1, Proposal 2 and Proposal 3.
-21-
<PAGE>
BACKGROUND OF THE PROPOSED TRANSACTIONS
INTRODUCTION
Following the sale of all of its properties in the first half of
1997, the Company's announced objective has been to re-enter the real estate
business. The Company has agreed pursuant to the Acquisition Agreement to
enter into the Berg Acquisition, which will result in the Company's control
of a substantial real estate business. Subject to several conditions,
including shareholder approval of the Proposed Transactions and the
effectiveness of the Registration Statement, the Company intends to close
both transactions and the Private Placement simultaneously in ______________,
1998. After the closings, the Company will be the sole general partner with
an approximate 10.91% interest in the Operating Partnership, the Berg Group
will own L.P. Units representing approximately 84.4% of the interests in the
Operating Partnership, excluding the issuance of L.P. Units for the Pending
Development Projects, and non-Berg Group parties will own approximately 4.69%
of the interests in the Operating Partnership.
BACKGROUND
THE COMPANY. Until recently, the Company was engaged in developing,
owning, operating, and selling income-producing commercial real estate. Since
completing its most recent development projects in 1991, the Company has been
involved principally in owning and operating real estate projects. In January
and May 1997, the Company completed the sale of its entire real estate
portfolio.
The Company was formed in 1969 as Palomar Mortgage Investors, a
California business trust. It operated as a REIT, investing primarily in
short and intermediate-term construction and development loans secured by
first trust deeds on real property. In 1974, the Company terminated new loan
activity except to facilitate the sale of property acquired from borrowers
through foreclosure or by deed in lieu of foreclosure and, in 1975, changed
its name to Mission Investment Trust. In 1979, the Company terminated its
status as a REIT and began to develop and market the properties it owned. In
1982, the Company incorporated under its present name. The Company has two
wholly owned subsidiaries, MIT Realty, Inc. and Mission West Executive
Aircraft Center, Inc. ("MWEAC"). MIT Realty, Inc. and MWEAC are both inactive.
In July 1996, the Company entered into an agreement to sell all of
its real estate assets. That agreement was subsequently terminated and
replaced, as was a subsequent agreement. On December 6, 1996, the Company
entered into an agreement to sell all of its real estate assets to Spieker
Properties, L.P. for $50.5 million in cash. Upon completion of the sale of
eight properties and one parcel of land, the Company received $47.5 million
in cash, from which it repaid all debt encumbering the properties and paid a
majority of the related transaction and closing costs, including $3 million
in "break-up" fees from the terminated sales transactions.
On February 4, 1997, the Company declared a special dividend of
$9.00 per share payable on February 27, 1997 to all shareholders of record as
of February 19, 1997. After the sale of assets and the payment of the
dividend to shareholders, only nominal assets remained in the Company. The
board of directors and management considered available strategic alternatives
for the remaining corporate entity. Those alternatives included possible
business or asset acquisitions or combinations, a sale of the corporate
entity, and outright liquidation.
On May 27, 1997, the Company entered into a Stock Purchase Agreement
with a group of private investors led by Carl E. Berg and BBE (the "Berg
Voting Group"), pursuant to which the Company agreed to sell 6,000,000 shares
of newly issued Common Stock for $900,000, or $0.15 per share. Pursuant to
that agreement the members of the Berg Voting Group agreed to vote their
shares as recommended by BBE, generally for two years. A special meeting of
shareholders was held on August 5, 1997, at which the shareholders of the
Company approved the transaction. The transaction was completed on September
2, 1997, at which time all officers and directors of the Company resigned,
and BBE and the Berg Voting Group acquired a 79.6% controlling ownership
position in the Company.
On October 20, 1997, the Company paid a further distribution of
$3.30 per share to shareholders of record as of August 28, 1997, which
excluded all shares held by the Berg Voting Group (including certain members
of the Berg Group). In connection with that distribution, the AMEX halted
trading of the Common Stock at the opening of trading on October 20, 1997.
-22-
<PAGE>
To increase the price per share of the Common Stock, raise funds and
increase assets and shareholders' equity, at a special meeting of
shareholders held on November 10, 1997, the shareholders of the Company
approved a 1 for 30 reverse stock split (the "Reverse Split"), and the sale
of 1,250,000 newly issued shares of Common Stock at $4.50 per share in a
private placement offering. The Company completed that transaction as of
November 12, 1997. In November 1997, the Company changed its fiscal year to
December 31.
THE OPERATING PARTNERSHIP. The Operating Partnership comprises four
Delaware limited partnerships: Mission West Properties, L.P. (formerly "Berg
Properties, L.P."), Mission West Properties, L.P. I (formerly "Berg Family
Partners"), Mission West Properties, L. P. II (formerly "Berg & Berg
Developers"), and Mission West Properties, L.P. III (formerly "Kontrabecki
Associates"). Under the terms of the Acquisition Agreement, upon the closing
for the Berg Acquisition, the four partnerships will commence operation as
the Operating Partnership, the Company will acquire a 10.91% general partner
interest in each of such limited partnerships, and the current general
partner in each partnership will resign and become a limited partner. In
addition, the Operating Partnership will acquire the Acquired Properties in
exchange for 6,694,027 L.P. Units at the closing, which will result in a
total of 66,906,406 L.P. Units outstanding immediately after the closing.
The Acquisition Agreement provides that the Company may operate the
four limited partnerships as a single enterprise. The Company may commingle
the funds and cash flow of the partnerships, and generally will make them
joint obligors for all recourse indebtedness of the Partnership and secure
mortgage debt proportionately with the Properties held by the respective
partnerships. Operating cash flow shall be distributed based upon the total
partnership interests in the Operating Partnership, and the Company's share
of all distributions with respect to its interest in each of the four limited
partnerships will be identical. The Acquisition Agreement contemplates that
all financing, investing, property acquisitions and dispositions, and all
business expansion activities of the Company and the Operating Partnership
will be undertaken through the Operating Partnership in a manner intended to
maintain a ratio of net equity value for each of the four limited
partnerships to the total net equity value of the Operating Partnership as a
whole that is similar to such ratio as of the closing date of the Berg
Acquisition. See "THE ACQUISITION AGREEMENT."
All holders of L.P. Units (other than Carl Berg and Clyde Berg) may
put their L.P. Units for redemption by the Operating Partnership not more
than once each year, subject to the Company's right to purchase such units
with funds raised through an offering of new shares of Common Stock, and
subject to an aggregate annual limitation of $1 million for the total
purchase price, unless the Company otherwise elects. Upon the exercise of
such put rights, the holder of the L.P. Units will receive cash. In addition,
the holders of the L.P. Units may exchange their L.P. Units for shares of
Common Stock under certain circumstances. See "OPERATING PARTNERSHIP
AGREEMENT--Exchange Rights, Put Rights and Registration Rights."
THE PRIVATE PLACEMENT. To finance its acquisition of the general
partner interests in the Operating Partnership, the Company has agreed to
sell 6,495,058 shares of Common Stock at a price of $4.50 per share to a
number of accredited investors in two separate private placements. In one of
the transactions, Ingalls & Snyder has acted as the placement agent for the
sale of 5,800,000 shares of Common Stock for a total cash purchase price of
$26,100,000. Ingalls & Snyder is entitled to receive a commission of $0.05
per share from each of the purchasers payable at the closing for the purchase
of the shares. The Company is not obligated to pay these commissions. The
Ingalls & Snyder private placement was offered through a Private Placement
Memorandum dated as of April 27, 1998 and was fully subscribed on May 4,
1998. At the same time, the Company effected an additional private placement
for the offer and sale of 695,058 shares of Common Stock at a price of $4.50
per share to a separate group of investors, including Mr. Berg and consisting
primarily of friends and relatives of the Company's senior management. In the
transaction, John Moran, a principal of Ingalls & Snyder, will receive
200,000 shares of Common Stock at the closing in payment for services
rendered related to the Company's recent capital formation efforts in
assisting the Company to obtain its financing. The other 495,058 shares will
be sold for cash. The Private Placement is expected to close at the same time
as the Berg Acquisition but only upon shareholder approval at the Special
Meeting. All of the purchasers in both transactions have signed a stock
purchase agreement which constitutes their irrevocable commitment to purchase
the shares of Common Stock, subject only to customary closing conditions such
as the accuracy of the Company's representations and warranties, in addition
to the approval of the Private Placement by the shareholders at the Special
Meeting. All of the purchasers have represented to the Company that they are
accredited investors.
-23-
<PAGE>
ADDITIONAL DEBT ARRANGEMENTS. At the closing, the Company and the
Operating Partnership expect to obtain a $135 million loan to be secured by
some of the Properties, as negotiated with the lender or lenders (the "New
Secured Loan"). All of the proceeds of the New Secured Loan will be used to
refinance existing debt, including approximately $38 million of debt
outstanding under lines of credit guaranteed by all of the Berg Group
members. At the closing of the Berg Acquisition, the Company and the
Operating Partnership also intend to obtain a $50 million revolving line of
credit, which they are currently negotiating with several financial
institutions (the "New Credit Line"). Proceeds from the New Credit Line will
be used for working capital. Certain of the Limited Partners may guaranty all
or part of the outstanding debt under the New Secured Loan for federal income
tax considerations. See "DESCRIPTION OF THE PROPERTIES Mortgage Debt and
Credit Line" and "FUTURE OPERATIONS OF THE COMPANY--Line of Credit--Mortgage
Indebtedness Outstanding After Berg Acquisition."
REASONS FOR THE PRIVATE PLACEMENT AND THE BERG ACQUISITION
The board of directors believes that the Private Placement and the
Berg Acquisition represent effective means for rapidly acquiring (i) a
substantial portfolio of Silicon Valley R&D Properties, (ii) a strong and
effective real estate management operation, and (iii) a substantial presence
in the REIT industry for future acquisitions and raising capital to finance
the Company's operations. In connection with the Company's July 1997
solicitation of shareholder approval for the sale of shares of Common Stock
constituting control of the Company to BBE and its co-investors, the Company
expressed its intention and desire to continue its historical involvement in
the real estate business through some form of business combination with the
Berg Group. The Company believes that the Proposed Transactions fulfill that
objective. See "FUTURE OPERATIONS OF THE COMPANY--Operating and Growth
Strategy."
Moreover, the acquisition of a controlling interest in the Operating
Partnership rather than the direct acquisition of any of the Properties will
enhance the Company's acquisition and development strategy by providing
several alternatives (e.g., cash, Common Stock or L.P. Units) for acquiring
the Pending Development Projects and one or more of the Berg Land Holdings
from the Berg Group or acquiring additional properties from third parties.
The Company believes that these alternative currencies will enable it to
acquire desirable buildings or sites from sellers (including the Berg Group)
who seek the liquidity provided by shares of Common Stock, or to offer L.P.
Units to sellers (including the Berg Group) interested in deferring potential
taxable gain. It further will allow the Company the flexibility to acquire
significant properties without using cash or issuing Common Stock to sellers
whose ownership thereof would cause them to exceed the Ownership Limit.
As a result of the two transactions, assuming the exchange of all
L.P. Units for Common Stock, the total number of shares entitled to
distributions of cash flow from the Properties would be 75,100,000. Of this
amount, the Berg Group may acquire beneficial ownership of approximately
84.6% of the Outstanding Shares. Except for the Excluded Properties, the
Properties in the Company's initial portfolio will include all of the Silicon
Valley R&D Properties currently owned by any of the Berg Group members.
SUMMARY OF THE TRANSACTIONS
The transactions constituting the Berg Acquisition and the Private
Placement will include the following:
- - The Company will sell 6,495,058 shares of Common Stock for net
proceeds of $28.3 million, including 200,000 shares of Common Stock
valued at $4.50 per share to John Moran as consideration for
consulting services related to the Company's recent capital formation
efforts.
- - The existing general partners in each of the four limited partnerships
comprising the Operating Partnership will resign and become Limited
Partners.
- - The Company will become the sole general partner of the Operating
Partnership by acquiring an approximate 10.91% interest in the capital
and profits of the Operating Partnership for $35.2 million.
- - The partnership interests of the Berg Group members in the four
limited partnerships as of the closing date of the Berg Acquisition,
will be converted into a total of 60,212,379 L.P. Units.
-24-
<PAGE>
- - The Operating Partnership will acquire the Acquired Properties as a
capital contribution in exchange for 6,694,027 additional L.P. Units
issued to certain members of the Berg Group and other accredited
investors.
- - The Company will give the Limited Partners the right to exchange each
of their L.P. Units for one share of Common Stock upon certain
circumstances.
- - The Operating Partnership will give certain Limited Partners the right
to put their L.P. Units to the Operating Partnership once each year for
cash at a price equal to the 10-day average trading price for the
Common Stock, and by agreement with the Company, it will have the
option to purchase the tendered units for cash or shares of Common
Stock at the same price. The total annual purchase price of the
tendered L.P. Units may not exceed $1 million without the Company's
consent.
- - Certain Berg Group members have agreed with the Company that the
Operating Partnership will have the right to acquire each of the
Pending Development Projects in exchange for a specified number of L.P.
Units (estimated to be a total of 33,919,072 L.P. Units) when each such
Project has been completed and fully leased. The number of L.P. Units
to be issued will be adjusted if the Property's first-year monthly
rental rate per square foot differs from the amount projected under the
Pending Project Acquisition Agreement.
- - The Berg Group will grant to the Company and the Operating Partnership
the right to purchase the Berg Land Holdings at a fixed formula
pursuant to the Berg Land Holdings Option Agreement as long as the Berg
Group holds, or has the right to acquire, shares representing 65% of
the Common Stock on a Fully-Diluted basis. In addition, the Berg Group
will provide certain rights of first offer to the Company and the
Operating Partnership in the event the Berg Group exercises any
reserved rights to develop the Berg Land Holdings.
- - Berg & Berg will transfer its property management business to the
Company and will lease a portion of its Bandley Drive headquarters to
the Company pursuant to the Office Lease.
- - The Operating Partnership will obtain secured debt of $135 million to
repay $33.3 million of existing debt secured by the Acquired Properties
and $54.25 million of existing debt secured by some of the Berg
Properties. Existing debt secured by some of the Berg Properties and
one of the Acquired Properties totaling approximately $29.6 million
will remain outstanding.
- - For income tax reasons the Limited Partners intend to guaranty payment
of all or some portion of the New Secured Loan. Such guarantees
would obligate those Limited Partners to repay the debt to the
extent the lender is unable to receive payment through recourse to
the Operating Partnership and its assets.
CONSEQUENCES OF THE BERG ACQUISITION AND THE PRIVATE PLACEMENT
The Berg Acquisition will result in the following:
- - The existing shareholders of the Company will own approximately 20.73%
of the outstanding Common Stock of the Company, and after this
transaction, the purchasers of Common Stock in the Private Placement
will own approximately 79.27% of the outstanding voting securities of
the Company.
- - The Company will be the sole general partner of, and own a 10.91%
interest in, the Operating Partnership.
- - The members of the Berg Group will beneficially own 63,381,987 L.P.
Units representing in the aggregate an approximate 84.4% limited
partnership interest in the Operating Partnership.
- - Individuals and entities, other than members of the Berg Group, will
directly and indirectly own 3,524,421 L.P. Units representing in the
aggregate an approximate 4.69% limited partnership interest in the
Operating Partnership.
- - The Operating Partnership will own the fee interest in all of the
Properties.
-25-
<PAGE>
- - At or prior to the closing of the Proposed Transactions, the
Operating Partnership will obtain new secured debt of $135 million
(the "New Secured Loan"). The proceeds of the New Secured Loan along
with the proceeds of the Company's purchase of its interest in the
Operating Partnership and cash on hand prior to the closing of the
Berg Acquisition will be used to repay $87.6 million of existing
debt secured by the Berg Properties and the Acquired Properties, and
to make a distribution of approximately $91.6 million to Carl E.
Berg and Clyde J. Berg at, or prior to, the closing of the Proposed
Transactions.
BENEFITS TO THE BERG GROUP
The members of the Berg Group, and to a lesser extent the
non-affiliated Limited Partners in the Operating Partnership, will realize
benefits from the Berg Acquisition. These benefits include:
- - All of the L.P. Units in the Operating Partnership will be exchangeable
for shares of Common Stock pursuant to the Exchange Rights (subject to
the Ownership Limit). L.P. Units held by other than Carl E. Berg and
Clyde J. Berg may be tendered to the Operating Partnership pursuant to
the Put Rights. Under certain circumstances, the holders of the L.P.
Units also may require the Company to register the shares of Common
Stock received upon conversion of the L.P. Units. Accordingly, after
the expiration of certain restrictions upon the exercise of these
liquidity rights, the Berg Group's ownership interest in the Operating
Partnership will be more liquid than its ownership interest in the Berg
Properties, and the partnership interests beneficially owned by the
partners in the Operating Partnership will be more liquid than their
current ownership interests in each of the four limited partnerships
that will comprise the Operating Partnership.
- - Certain debt relating to the Properties will be refinanced, including
debt of approximately $38 million owed under lines of credit for
which members of the Berg Group are personally liable. However, in
connection with the New Secured Loan, members of the Berg Group and
other Limited Partners in the Operating Partnership may provide
personal guaranties with respect to all or some portion of the debt for
income tax reasons.
- - Carl E. Berg will receive an annual salary of approximately $100,000
plus additional benefits as the Chief Executive Officer of the Company.
See "MANAGEMENT--Executive Compensation."
VALUATION OF INTERESTS
BERG ACQUISITION. Pursuant to the Berg Acquisition, the Company will
succeed to the Silicon Valley R&D Property ownership and management business
of the Berg Group through the Company's general partnership interest in the
Operating Partnership. In October 1997, the board of directors of the Company
determined that, until such time as the Company had acquired operating
properties or other assets which would generate reportable income and funds
from operations, all issuances of Common Stock and transactions involving the
actual or contingent issuance of equity securities of the Company would be
effected at a price of $4.50 per share, or the equivalent thereof. The
Company sold shares of Common Stock at that price in a private placement in
September 1997 and in another private placement in November 1997. The closing
price of the Common Stock, as quoted on the AMEX, was $3.38 on October 17,
1997, the last trading date prior to the halt in trading declared by the AMEX
effective as of October 20, 1997. On October 21, 1997, a special distribution
of $3.30 per share of Common Stock was paid to shareholders of record as of
August 28, 1997. Upon approval of the shareholders and filing an amendment to
the articles of incorporation of the Company on November 10, 1997, the
Company effected a 1 for 30 reverse stock split of the Common Stock, which
the board of directors expected to result in each outstanding share of Common
Stock having a value approximately equal to the $4.50 price which investors
had paid in the private placement transaction on November 12, 1997. In May
1998, the Company agreed to sell shares of Common Stock to the purchasers in
the Private Placement at $4.50 per share. Pursuant to the Acquisition
Agreement, the Company has agreed to acquire its approximately 10.91% general
partner interest in the Operating Partnership for $35.2 million, which
(assuming 75,100,000 Outstanding Shares) equates to a price of approximately
$4.30 per share of Common Stock. The Company and the Berg Group have used a
price of $4.50 to determine the value of each L.P. Unit as well as the number
of L.P. Units issuable in connection with the Operating Partnership's
acquisition of the Pending Development Projects. See "DESCRIPTION OF THE
PROPERTIES--The Pending Development Projects." The price of $4.50 per share
selected by the board of directors may not be representative of the trading
price of a share of Common Stock and upon the resumption of trading of the
Common Stock on the AMEX, it is likely that the Common Stock will trade at a
different price.
-26-
<PAGE>
Independent appraisals were not obtained to determine the fair
market value of the Berg Properties for purposes of the Berg Acquisition. The
total historical cost of the Berg Properties was approximately $178 million
at March 31, 1998. The Company believes, however, that the most appropriate
valuation is one that reflects the value of the Silicon Valley R&D Property
ownership and management business of the Operating Partnership, taken as a
whole.
PRO FORMA CAPITALIZATION
The following table sets forth the capitalization of the Company
(based on the combined historical financial statements) as of March 31, 1998
and as adjusted to reflect the consummation of the Proposed Transactions. The
information set forth in the following table should be read in conjunction
with the combined historical financial statements and notes thereto and the
(unaudited) pro forma financial information and notes thereto included
elsewhere in this Proxy Statement/Prospectus and the discussion set forth in
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Liquidity and Capital Resources."
<TABLE>
<CAPTION>
March 31, 1998
-----------------------------------
Predecessor Company Pro
Historical Forma(2)
--------------- ---------------
(in thousands)
<S> <C> <C>
Debt:
Lines of credit $ 37,953 -
Notes payable (related parties) 1,821 -
Mortgage notes payable 38,215 $164,639
--------------- ---------------
Total debt(1) 77,989 164,639
Minority Interest in Operating Partnership - 7,553
Shareholders'/owners' equity:
Preferred Stock, $0.001 par value, 20,000,000
authorized, none issued and outstanding on
a pro forma basis - -
Common Stock, $0.001 par value, 200,000,000
authorized, 8,193,594 issued and outstanding
on a pro forma basis - 8
Receivable from issuance of Common Stock - (1,234)
Additional paid in capital - 2,151
Accumulated equity of continuing interests 36,734 -
--------------- ---------------
Total shareholders'/owners' equity 36,734 925
--------------- ---------------
--------------- ---------------
Total Capitalization $114,723 $173,117
--------------- ---------------
--------------- ---------------
</TABLE>
- -----------
(1) For a description of the Company's debt, see Note 5 of Notes to Combined
Financial Statements for the Berg Properties and "DESCRIPTION OF THE
PROPERTIES--Mortgage Debt."
(2) Excludes any effect of exercise or conversion of potentially dilutive
securities.
-27-
<PAGE>
INFORMATION WITH RESPECT TO THE COMPANY
INCLUDED INFORMATION
This Proxy Statement/Prospectus is accompanied by (i) a copy of the
Company's Form 10-K for the one-month transition period and fiscal year ended
December 31, 1997; (ii) Part I of the Company's Form 10-Q for the quarter ended
March 31, 1998; and (iii) combined historical financial statements of the
Operating Partnership's predecessor as of and for the periods or years ended
March 31, 1998 and 1997, and December 31, 1997, 1996 and 1995.
PRICE RANGE OF THE COMMON STOCK AND DISTRIBUTION HISTORY
The following are the high and low sales prices, by quarter, of the
Company's common stock for the two most recent fiscal years as adjusted to give
retroactive effect to the 1 for 30 reverse stock split which was effective as of
November 10, 1997:
<TABLE>
<CAPTION>
1997 1996
------------------------------ ------------------------------
High Low High Low
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
First Quarter(1) 397 1/2 56 1/4(2) 161 1/4 138 3/4
Second Quarter 112 1/2 52 1/2 210 138 3/4
Third Quarter 153 3/4 93 3/4 247 1/2 187 1/2
Fourth Quarter 136 7/8 93 3/4(3) 292 1/2 213 3/4
</TABLE>
- ----------
(1) In 1997, the Company changed its fiscal year end from November 30 to
December 31. Thus, the first quarter of 1997 includes the month of December
1996.
(2) During the first fiscal quarter in 1997 (on February 27, 1997), the Company
paid a $9.00 special dividend ($270 adjusted to give retroactive effect to
the 1 for 30 reverse stock split).
(3) During the fourth fiscal quarter in 1997 (on October 21, 1997), the Company
paid a $3.30 special dividend ($99 adjusted to give retroactive effect to
the 1 for 30 reverse stock split).
As of March 30, 1998, the approximate number of holders of record of
the Company's common stock was 360. The Company paid no dividends during
fiscal 1996. The Company declared and paid a special dividend of $9.00 per
share ($270 per share, post-split) on February 27, 1997. A special dividend
of $3.30 per share was paid on October 21, 1997. ($99 per share, post-split)
The Company intends to qualify as a REIT for tax purposes in the
fiscal year ending December 31, 1998. In order to so qualify, the Company
intends to declare and pay regular quarterly dividends in the future. See
"DISTRIBUTION POLICY."
-28-
<PAGE>
THE COMPANY'S PRO FORMA DATA
SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA
Set forth below are summary unaudited pro forma combined financial
information and other data for the Company as of and for the periods
indicated, prepared on the assumption that the Private Placement and the Berg
Acquisition had occurred at March 31, 1998 for balance sheet data and
property and other data. The pro forma operating data further assumes that
such transactions had occurred as of January 1, 1998 and 1997, respectively.
This data should be read in conjunction with the Selected Financial Data and
the historical and pro forma financial statements included elsewhere in this
Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Three Months Ended Year Ended
March 31, 1998 December 31, 1997
------------------ -----------------
(in thousands)
<S> <C> <C>
OPERATING DATA:
Revenue:
Rent $ 12,731 $ 45,572
Tenant reimbursements 2,097 6,769
---------- ----------
Total revenue 14,828 52,341
---------- ----------
Expenses:
Operating expenses 1,026 3,790
Real estate taxes 1,212 4,475
General and administrative 700 2,750
Interest 2,941 11,764
Depreciation and amortization 2,833 11,308
---------- ----------
Total Expenses 8,712 34,087
---------- ----------
Income before minority interest 6,116 18,254
Minority Interest 5,449 16,262
---------- ----------
Net income 667 1,992
---------- ----------
Basic and Diluted Earnings Per Share(1) $ 0.08 $ 0.24
---------- ----------
---------- ----------
Weighted average number of common shares outstanding 8,193,594 8,193,594
---------- ----------
---------- ----------
PROPERTY AND OTHER DATA:
Total properties, end of period 69 69
Total square feet, end of period 4,340,569 4,340,569
Average monthly rental revenue per square foot(2) $ 0.94 $ 0.87
Average occupancy - stabilized 100% 97%
FUNDS FROM OPERATIONS:(3) $ 8,949 $ 29,562
BALANCE SHEET DATA:
Real estate assets, before accumulated depreciation $ 248,806
Total assets 181,358
Debt 164,639
Total liabilities 172,880
Minority interest 7,553
Shareholders' equity 925
</TABLE>
- -------------
(1) Per share calculations do not consider the dilutive effect of
(i) 66,906,406 L.P. Units that are exchangeable for common shares of the
Company's stock; and (ii) 605,000 shares of common stock issuable in
connection with options outstanding under the 1997 Stock Option Plan. For
purposes of the pro forma per share calculation, these securities if
converted or exercised, would have no effect on per share calculations.
(2) Average monthly rental revenue per square foot has been determined by
taking the base rent for the period, divided by the number of months in the
period, and then divided by the total square feet of occupied space.
(3) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), FFO represents net income (loss) before minority interest of
unitholders (computed in accordance with GAAP), excluding gains (or losses)
from debt restructuring and sales of property, plus real estate related
depreciation and amortization (excluding amortization of deferred financing
costs and depreciation of non-real estate assets) and after adjustments for
unconsolidated partnerships and joint ventures. Management considers FFO an
appropriate measure of performance of an equity REIT because industry
analysts have accepted it as such. 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.
-29-
<PAGE>
THE BUSINESS OF BERG & BERG
HISTORY OF BERG & BERG
Carl E. Berg, the Company's President and Chief Executive Officer and
the controlling member of the Berg Group, has been engaged in the development
and long-term ownership of Silicon Valley real estate for more than 25 years.
In 1969, Mr. Berg foresaw the rising demand for efficient, multi-purpose
facilities for the rapidly growing electronics industry in the area of Santa
Clara County that has come to be known as "Silicon Valley" (a term that now
encompasses much of the southern portion of the San Francisco Bay Area). See
"--The Silicon Valley R&D Property Market". He formed a general partnership,
Sobrato-Berg Properties, with John Sobrato to focus on the development of R&D
Properties, that is, mixed-use facilities providing space for offices,
development and research, light manufacturing and assembly. Between 1969 and
1980, Sobrato-Berg Properties acquired and developed approximately 45 R&D
Properties, totaling approximately 3.5 million rentable square feet. In 1980,
Messrs. Berg and Sobrato terminated their partnership and, as a result of the
subsequent division of its assets, 20 properties totaling approximately
1.2 million rentable square feet were transferred to Berg Family Partnership,
owned by Mr. Berg and other members of the Berg Group.
In 1980, Mr. Berg and his brother, Clyde J. Berg, organized Berg & Berg
to continue the business of acquiring and developing R&D Properties. Between
1980 and 1983, Berg & Berg acquired and developed 18 additional R&D
Properties, totaling approximately 1.4 million rentable square feet.
In 1983, Berg & Berg's assessment of the Silicon Valley commercial real
estate market suggested a significant decline in demand for rental property,
particularly in the R&D Property segment of the market. Based on this
assessment, in 1983 Berg & Berg focused its attention on enhancing investment
returns from its existing portfolio of properties and constructing facilities
for identified tenants on a build-to-suit basis. From 1983 until 1995, Berg &
Berg was engaged primarily in build-to-suit development activities on a
limited basis in selected locations where experience with its portfolio
properties indicated that new buildings could be rented at rates adequate to
justify anticipated development costs and provide an acceptable return on its
investment.
In late 1994, Berg & Berg perceived a change in the market for R&D
Properties in Silicon Valley and in 1995 acquired over 60 acres of land in
Milpitas, Fremont and Mountain View, California and over 450,000 square feet
of R&D Properties with short-term leases at below-market rents. During the
past two years, Berg & Berg has purchased land or options on land totaling
more than 55 acres in south San Jose. In 1995 and 1996, Berg & Berg began
construction of eight buildings comprising over 700,000 square feet and was
one of the two most active developers leasing and building R&D Properties in
Silicon Valley.
Since 1972, Mr. Berg also has been actively involved in venture capital
investments in technology companies in the Silicon Valley. Directly and
through various venture capital partnerships, he has made early-round equity
investments in more than 100 technology companies, including such companies
as Amdahl Corporation, Sun Microsystems, Inc., Integrated Device
Technologies, Inc., Valence Technology, Inc., Iwerks Entertainment, Inc.,
On-Command Video, Inc. and Videonics, Inc. Mr. Berg has served on the boards
of directors of numerous technology companies and currently serves on six
such boards. These activities have helped Berg & Berg to develop a detailed
understanding of the real estate requirements of technology companies, to
acquire valuable market information, to increase its name recognition within
the venture capital and entrepreneurial communities, and to manifest its
commitment to the growth and success of Silicon Valley companies. The Company
believes that Mr. Berg's substantial knowledge of and contacts in the
information technology industry have provided a significant benefit to Berg &
Berg in the operation of its commercial real estate business, and will
continue to benefit the Company after the Berg Acquisition.
-30-
<PAGE>
REGIONAL ECONOMIC PROFILE
The San Francisco Bay Area comprises nine counties, including Santa
Clara, Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, Solano
and Sonoma Counties, covering approximately 7,200 square miles. The
San Francisco Bay Area is the second largest metropolitan area in California
with over 6.5 million people, and the fourth largest metropolitan area in the
United States after New York, Los Angeles, and Chicago.
The economy of the San Francisco Bay Area is one of the strongest and
most diverse in the nation. The growth of the computer, biotechnology, and
engineering industries propels the region's economy forward as new
technologies draw strength from a broad base of industries, services, venture
capital financing, banking, universities, and research institutions. The
San Francisco Bay Area's long term relationship with Pacific Rim countries has
made it one of the major gateways for Asia and Far East trade. Moreover, the
San Francisco Bay Area has a reputation as one of the most desirable areas in
the United States to visit, which has made tourism a major growth industry.
The San Francisco Bay Area is a center of all resources necessary to create,
develop and expand new businesses.
Factors contributing to the region's economic strength include the
following:
- TECHNOLOGY CENTER. The Silicon Valley economy has an expansive
employment base of technology, semiconductor, electronics,
telecommunications, software, and computer related companies
unsurpassed in the nation and the world. The Silicon Valley is
host to over 4,000 technology companies employing in excess of
250,000 people. Santa Clara County ranks fourth in the State
of California in terms of employment and population and is
headquarters to many Fortune 500 companies, including Applied
Materials, Inc., Apple Computer, Inc., Intel Corporation, Sun
Microsystems, U.S. Robotics, Inc., National Semiconductor
Corporation, Cisco Systems, Inc., and Hewlett-Packard.
- FINANCIAL SERVICES CENTER. The San Francisco Bay Area is the
home of the nation's highest density of venture capital firms,
the headquarters for Bank of America, Wells Fargo Bank, and
numerous investment banking firms specializing in technology
industries. According to the Price Waterhouse LLP National
Venture Capital Survey, during 1997, venture capital firms
invested approximately $3.66 billion in Silicon Valley
companies.
- TRANSPORTATION AND FREEWAYS. Silicon Valley has an elaborate
regional freeway system, the San Jose International Airport,
close access to the San Francisco International Airport, and a
modern light rail system that is expected to cover major
portions of the Silicon Valley's R&D areas by the year 2000.
The major freeways are Interstates 280, 680, and 880, U.S. 101,
and Highway 85. U.S. 101 and Interstate 280 converge in
San Jose and connect to San Francisco, while Interstate 880
connects the Oakland area. Interstate 680 provides access to
the East Bay and Pleasanton areas. Highway 85 forms a
semi-circle around San Jose and connects the main residential
areas to the heart of Silicon Valley.
- HIGHLY EDUCATED WORK FORCE. The San Francisco Bay Area has the
highest percentage of college-educated adults in the nation
and its pre-eminent educational institutions, such as Stanford
University and the University of California at Berkeley, have
played a major role in making it one of the world's leading
technology centers. The presence of these major research
institutions and the highly educated work force has fueled the
region's economic engine and will enable the region to build
on its strong technology base in the future.
- CENTER FOR INTERNATIONAL TRADE. The San Francisco Bay Area is
currently the fourth largest trade district behind Los Angeles,
New York and Detroit serving primarily the Pacific Rim countries.
-31-
<PAGE>
THE SILICON VALLEY R&D PROPERTY MARKET
Santa Clara County, which incorporates much of Silicon Valley, including
the San Jose metropolitan area, has grown in population from 659,000 in 1960
to 1,653,100 on January 1, 1997, according to census data. San Jose, with a
population of more than 850,000, is the third largest city in California and
the eleventh largest in the United States. Santa Clara County is the largest
county in the San Francisco Bay Area encompassing an area of 1,312 square
miles, and includes many communities of diverse size and nature.
Much of Santa Clara County's economic growth has been driven by the
development and expansion of high technology industries. In recent years,
space requirements and higher rents for R&D Properties in Santa Clara County
have led technology companies to seek facilities elsewhere at office parks
located in southwestern Alameda County and southwestern San Mateo County. As
a result, the Company believes that the term "Silicon Valley" now refers to
the more or less contiguous areas of industrial development in all three
counties where a substantial number of technology companies can be found.
THE SILICON VALLEY
[MAP]
-32-
<PAGE>
Supported by major educational and research institutions and by a strong
venture capital community, Silicon Valley has been instrumental in the
development and commercialization of technology in virtually every major
field. Over the past 40 years the Silicon Valley economy has grown and
diversified through an evolutionary process as successive generations of
technology emerge, mature and are eventually replaced. In recent years, the
continuous emergence of new generations of technology companies has kept
unemployment rates in Santa Clara County consistently lower than California
rates overall, and generally lower than national rates, as shown by the
following table:
UNEMPLOYMENT RATE
<TABLE>
<CAPTION>
United States (1) California (2) Santa Clara County (2)
----------------- -------------- ----------------------
<S> <C> <C> <C>
1993 6.8% 9.4% 6.8%
1994 6.1% 8.6% 6.2%
1995 5.6% 7.8% 4.9%
1996 5.4% 7.2% 3.6%
1997 4.9% 6.1% 3.1%
</TABLE>
- ----------------
(1) Source: U.S. Bureau of Labor Statistics.
(2) Source: State of California Employment Development Department. The overall
1997 unemployment rates for the area referred to as Silicon Valley in this
Proxy Statement/Prospectus are lower than the rates for Santa Clara County.
While Silicon Valley companies often establish manufacturing plants in
other locations where they can benefit from lower facilities and labor costs,
the headquarters, marketing and research and development functions associated
with running the company and developing new products often remain in Silicon
Valley. This occurs because of the availability of a well-trained and
experienced workforce, an established infrastructure of vendors and
service-providers and the proximity to major universities engaged in advanced
science and technology research. Consequently, the principal space
requirement for entrepreneurial technology companies in Silicon Valley is for
R&D Properties. According to regular quarterly reports on R&D Properties
prepared by BT Commercial Real Estate ("BT Commercial"), Silicon Valley R&D
Properties currently represent over 120 million rentable square feet, more
than 50% of all commercial industrial space in Silicon Valley. At the end of
the fourth quarter of 1997, the vacancy rate for Silicon Valley R&D
Properties stood at 4.5%, an approximate 10% decrease from the fourth quarter
of 1996. Currently, the occupancy rate is close to 100% for properties in
good condition at desirable locations.
SILICON VALLEY R&D PROPERTY MARKET
The following table sets forth data regarding the Silicon Valley R&D
Property market:
<TABLE>
<CAPTION>
Increase in Aggregate Increase in Aggregate Average Asking
Space Available(1) Leased Space(1) Vacancy Rate Rental Rates($)(2)
--------------------- --------------------- ------------ ------------------
<S> <C> <C> <C> <C>
1993 12.1 1.5 14.1% 0.76
1994 15.2 3.0 12.2% 0.76
1995 22.5 8.5 7.0% 0.75 - 0.80
1996 17.2 5.2 5.1% 0.80 - 1.08
1997 16.7 5.5 4.5% 1.19 - 1.39
</TABLE>
- -------------
(1) Millions of square feet.
(2) Per square foot per month.
As indicated by the table, since 1995, the Silicon Valley R&D Property
market has seen a significant reduction in the excess of gross absorption
over net absorption, while witnessing declining vacancy rates and
significantly increasing rental rates. The Company does not anticipate a
significant increase in gross absorption in this market because there are few
large blocks of contiguous space and suitable development sites. For example,
in the fourth quarter of 1997, only five blocks of contiguous R&D Property
space of at least 100,000 square feet were available in the entire market,
according to BT Commercial.
As a result, the Company believes that average asking rental rates
will continue to increase during 1998 and 1999. According to BT Commercial,
between the fourth quarter of 1996 and the fourth quarter of 1997, average
asking rental rates in the Silicon Valley R&D Property market rose from $1.11
to $1.39 per square foot
-33-
<PAGE>
per month. On the other hand, tenant improvement allowances offered by
landlords have declined substantially, and in desirable locations, like
Cupertino, Mountain View, Sunnyvale, San Jose, Fremont and Milpitas, now can
be as much as 50% lower than they were in the past few years. Since January
1995, over 1.4 million rentable square feet of the Berg Properties have been
leased to approximately 45 tenants with rents at least equal to the average
asking rental rate in the Silicon Valley R&D Properties market.
During 1998 and 1999, 13 Berg Properties representing 521,000
rentable square feet will be available for new leases or rent renewals. These
Properties are located in Milpitas, Cupertino, Sunnyvale and San Jose, which
the Company believes are in the highest rent category in Silicon Valley,
aside from Palo Alto, a very specialized market with a low base of R&D
Property square footage and an occupancy rate of 99.4% according to BT
Commercial. Based on current conditions in the Silicon Valley R&D Properties
market, the Company believes that it will be able to lease these Properties
at rents which exceed the rental rates under the existing leases.
BERG & BERG BUSINESS STRATEGY
Berg & Berg's development business and its portfolio of Silicon
Valley R&D Properties have been built on a business strategy incorporating
the following elements:
- STRONG GEOGRAPHIC AND INDUSTRY FOCUS. Berg & Berg has focused its
activities on addressing the facility requirements of
technology-oriented companies in the Silicon Valley. The Company
believes that this focus has enabled Berg & Berg to gain a
thorough understanding of the Silicon Valley real estate market,
to anticipate trends in the market, to identify and concentrate
its efforts on the most favorably located sub-regions of the
market and to take advantage of its experience and its extensive
contacts and relationships with local government agencies, real
estate brokers and subcontractors, as well as with tenants and
prospective tenants.
- LEAN, EXPERIENCED MANAGEMENT TEAM. In part because of its primary
focus on Silicon Valley and the special real estate requirements
of technology tenants, Berg & Berg has been able to conduct and
expand its business with a small management team comprised of
highly-qualified and experienced professionals working within a
relatively flat organizational structure. These managers share a
common approach to property development and management. The
Company believes that the leanness, experience and continuity of
this management team have enabled Berg & Berg to rapidly assess
and respond to market opportunities and tenant needs, minimize
development and construction risks, control operating expenses and
develop and maintain excellent relationships with its tenants. The
Company further believes that these advantages translate into
significantly lower costs for operations and construction which
give the Company the ability to compete favorably with other R&D
Property developers in Silicon Valley, especially for
build-to-suit projects subject to competitive bidding.
Furthermore, its lower cost structure should allow the Company to
generate better returns from properties whose value can be
increased through appropriate remodeling and efficient property
management.
- MARKET AWARENESS AND SENSITIVITY. Berg & Berg has consistently
followed a demand-driven approach to the R&D Property business in
which it has used its in-depth experience and extensive industry
contacts to identify the facility requirements of tenants and
potential tenants in the Silicon Valley and its various
sub-regions.
- EMPHASIS ON GENERAL PURPOSE FACILITIES, SINGLE TENANT PROJECTS AND
LONG-TERM TENANT RELATIONSHIPS. Most of the Properties are general
purpose R&D Properties, located in desirable sub-regions of the
Silicon Valley. Such Properties have been developed for, or leased
to, single-tenants, many of whom are large, publicly-traded
electronics companies. Most of the Company's major tenants have
occupied their Properties for many years pursuant to fully net
leases under which the tenant pays all operating costs. The
Company believes that Berg & Berg's practice of emphasizing the
development of
-34-
<PAGE>
single-tenant rather than multi-tenant properties has
contributed to its relatively low turnover and high occupancy
rates and that the relatively small number of tenants occupying
the Properties allows it to efficiently manage the Properties
and serve the needs of its tenants without the need for an
extensive in-house staff or the assistance of a third-party
management organization. In addition, this emphasis allows the
Company to pay less for tenant improvements and leasing
commissions than multi-tenant, high turnover property owners,
and also reduces the time and expense associated with obtaining
building permits and other government approvals. The Company
believes that the relatively stable, extended relationships
which Berg & Berg has developed with its key tenants have been
a valuable factor in the expansion of its business.
- SOUND PROPERTY MANAGEMENT PRACTICES. Berg & Berg makes extensive
use of its experienced in-house architectural, design and
construction management personnel in all phases of its
acquisition, development and property management businesses, and
focuses on similar types of development projects to more
effectively utilize these skills and experience. For each
property, the Berg & Berg staff develops a specific development,
marketing and property management program. It selects vendors and
subcontractors on a competitive bidding basis from a select group
of highly qualified firms with whom it maintains ongoing
relationships and carefully supervises their work. The Company
believes that, as a result of these sound operating practices,
Berg & Berg has acquired a reputation for completing its projects
on time and within budget.
-35-
<PAGE>
BERG PROPERTIES SUMMARY SELECTED FINANCIAL DATA
Set forth below are Summary Combined Financial Data for the Berg
Properties as of and for the periods indicated on an historical basis. This data
should be read in conjunction with the Selected Financial Data and the
historical pro forma financial statements included elsewhere in this Proxy
Statement/Prospectus.
<TABLE>
<CAPTION>
Three Months Ended
March 31, Year Ended December 31,
-------------------------- -------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------ ------------ ----------- ---------- ---------- ---------- ----------
($ in thousands)
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Revenue:
Rent $ 11,073 $8,801 $40,163 $28,934 $23,064 $25,186 $25,620
Tenant reimbursements 2,033 1,226 6,519 3,902 4,193 3,190 3,486
------------ ------------ ----------- ---------- ---------- ---------- ----------
Total revenue 13,106 10,027 46,682 32,836 27,257 28,376 29,106
------------ ------------ ----------- ---------- ---------- ---------- ----------
Expenses:
Operating expenses 1,019 1,118 $ 3,741 $ 1,906 $ 2,032 $ 1,355 1,129
Real estate taxes 1,189 980 4,229 3,750 3,595 2,716 3,116
Management fee (related parties) 322 240 1,050 827 654 739 994
Interest (related parties) 61 79 248 293 357 329 45
Interest 1,485 1,470 5,919 6,090 6,190 8,222 9,054
Depreciation and amortization 1,935 1,680 7,717 6,739 6,323 6,851 7,156
------------ ------------ ----------- ---------- ---------- ---------- ----------
6,011 5,567 22,904 19,605 19,151 20,212 21,494
------------ ------------ ----------- ---------- ---------- ---------- ----------
Income before gain on sale of
real estate and extraordinary
item 7,095 4,460 23,778 13,231 8,106 8,164 7,612
Gain on sale - - - - 20,779 - -
------------ ------------ ----------- ---------- ---------- ---------- ----------
Income before extraordinary item 7,095 4,460 23,778 13,231 28,885 8,164 7,612
Extraordinary item - - - 610 3,206 - 1,766
------------ ------------ ----------- ---------- ---------- ---------- ----------
Net income $7,095 $4,460 $23,778 $13,841 $32,091 $ 8,164 $ 9,378
------------ ------------ ----------- ---------- ---------- ---------- ----------
------------ ------------ ----------- ---------- ---------- ---------- ----------
PROPERTY AND OTHER DATA:
Total properties, end of period 58 55 58 53 50 41 40
Total square feet, end of period 3,779 3,484 3,779 3,392 3,195 2,856 2,796
Average monthly rental revenue
per square foot(1) $0.95 $0.81 $0.86 $0.78 $0.71 $0.96 $0.84
Occupancy at end of period 100% 96.2% 97.7% 91.9% 87.4% 80.3% 89.6%
FUNDS FROM OPERATIONS(2)(3) $9,030 $6,140 $31,495 $19,970 $14,429 $15,015 $14,768
Cash flow from operations $9,835 $5,477 $29,909 $20,248 $16,392 $16,518 $18,480
Cash flow from investing (236) (3,454) (17,251) (29,275) (6,353) (5,003) (3,248)
Cash flow from financing (505) (640) (8,432) 9,433 (10,013) (12,093) (13,599)
March 31, December 31,
-------------------------- -------------------------------------------------------------
1998 1997 1997 1996 1995 1994 1993
------------ ------------ ----------- ---------- ---------- ---------- ----------
BALANCE SHEET DATA: ($ in thousands)
(Unaudited) (Unaudited)
Real estate assets, before
accumulated depreciation $178,465 161,793 $178,229 $154,999 $133,014 $120,382 $115,807
Total assets 122,529 102,791 113,950 97,651 73,730 59,957 64,516
Debt 76,168 73,314 76,507 73,416 69,543 79,594 100,126
Debt - related parties 1,821 2,411 1,975 2,546 3,051 2,889 1,433
Total liabilities 85,795 81,909 84,299 80,826 76,199 83,720 104,117
Partners' equity 36,734 20,882 29,651 16,825 (2,469) (23,763) (39,601)
</TABLE>
- --------------
(1) Average monthly rental revenue per square foot has been determined by
taking the base rent for the period, divided by the number of months in the
period, and then divided by the total square feet of occupied space.
(2) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), "FFO" represents net income (loss) before minority interest of
unitholders (computed in accordance with GAAP), excluding gains (or losses)
from debt restructuring and sales of property, plus real estate related
depreciation and amortization (excluding amortization of deferred financing
costs and depreciation of non-real estate assets) and after adjustments for
unconsolidated partnerships and joint ventures. Management considers FFO an
appropriate measure of performance of an equity REIT because industry
analysts have accepted it as such. 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.
(3) Non-cash adjustments to FFO were as follows: in all periods,
depreciation and amortization; in 1996, 1995 and 1993, gains on
extinguishment of debt; and in 1995, gain on sale of property.
-36-
<PAGE>
SELECTED COMBINED HISTORICAL FINANCIAL DATA FOR THE ACQUIRED PROPERTIES
Set forth below are Summary Combined Financial Data for the Acquired
Properties as of and for the periods indicated on an historical basis. This data
should be read in conjunction with the historical financial statements included
elsewhere in this Proxy Statement / Prospectus.
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
------------------------------- ----------------------------------------------------------------
1998 1997(1) 1997(1) 1996 1995 1994
-------------- ------------- ------------- ------------- -------------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
(Unaudited) (Unaudited)
Revenue
Base rent $1,658 $1,025 $5,409 $3,388 $3,136 $2,956
Other income 64 28 250 61 58 60
-------------- ------------- ------------- ------------- -------------- ------------
Total Revenue 1,722 1,053 5,659 3,449 3,194 3,016
Expenses
Property operating 7 15 49 170 417 725
Real estate taxes 23 55 246 48 11 128
-------------- ------------- ------------- ------------- -------------- ------------
Total Expenses 30 70 295 218 428 853
-------------- ------------- ------------- ------------- -------------- ------------
Revenue in excess of
certain expenses $1,692 $ 983 $5,364 $3,231 $2,766 2,163
-------------- ------------- ------------- ------------- -------------- ------------
-------------- ------------- ------------- ------------- -------------- ------------
</TABLE>
- -----------
(1) The Fremont Properties commenced operations during the first quarter of
1997.
-37-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION FOR THE PROPERTIES
The following discussion should be read in conjunction with the
Selected Financial Data and the Combined Financial Statements for the
Properties and notes thereto appearing elsewhere in this Proxy
Statement/Prospectus. The Combined Financial Statements of the Berg
Properties are comprised of the operations, assets and liabilities of the
Berg Properties other than the Acquired Properties and the Pending
Development Projects. As part of the Berg Acquisition, the Acquired
Properties will be contributed to the Operating Partnership, of which the
Company will be the sole general partner and the beneficial owner of an
approximately 10.91% interest, and, in general, will control the operations
and activities of the Partnership. As a result, for accounting purposes, the
financial information of the Operating Partnership and the Company will be
consolidated.
OVERVIEW
The Berg Properties are a combination of Silicon Valley R&D
Properties controlled historically by the Berg Group. Since the beginning of
1995, the aggregate R&D Property square footage represented by the Berg
Properties has increased significantly from approximately 2.9 million square
feet at December 31, 1994 to approximately 3.8 million square feet at March
31, 1998, primarily from the development of new buildings. Such increase
combined with a substantial increase in the overall occupancy rate of the
Berg Properties have contributed to a dramatic increase in the revenues
earned by the Berg Group from the Berg Properties.
The table below details the size of the Berg Properties portfolio
and the total occupancy rate as of each of the dates presented:
<TABLE>
<CAPTION>
March 31, December 31,
-------------------- ---------------------------------------------
1998 1997 1997 1996 1995 1994
-------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Square feet (millions) 3.8 3.5 3.8 3.4 3.2 2.9
Occupancy percentage 100% 96.2% 97.7% 91.9% 87.4% 80.3%
</TABLE>
Historically, entities within the Berg Group have developed and
managed the Berg Properties, drawing on funds provided by operations, lines
of credit from Wells Fargo Bank NA ("Wells Fargo"), direct property loans
provided by other lending institutions, and contributions of capital from
time to time by members of the Berg Group, principally to repay indebtedness
outstanding under the Wells Fargo lines of credit. In addition, certain
affiliates of the Berg Group have used the Wells Fargo lines of credit for
other ventures on a demand basis, including loans used primarily to finance
the construction of improvements on certain of the Berg Properties. Those
loans and all other lending arrangements with affiliates will be terminated
upon the closing of the Berg Acquisition.
The table below details the borrowings and repayments by the Berg
Group during the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
----------------------------- --------------------------------------------
1998 1997 1997 1996 1995
------------- -------------- -------------- ------------- -------------
($ in thousands)
<S> <C> <C> <C> <C> <C>
Borrowing of Wells Fargo lines - - $3,750 $6,999 $ 1,034
Repayment of Wells Fargo lines - - (1,335) (952) (5,978)
Borrowing on Notes (related parties) - - - - 637
Repayment on Notes (related parties) $(154) $(135) (571) (504) (474)
Borrowing on Mortgages - - 3,105 - -
Repayment of Mortgages (339) (102) (2,429) (1,563) (1,210)
------------- -------------- -------------- ------------- -------------
Borrowed/(Repaid) Total: $(493) $(237) $2,520 $3,980 $(5,991)
------------- -------------- -------------- ------------- -------------
------------- -------------- -------------- ------------- -------------
</TABLE>
-38-
<PAGE>
Most of the Berg Properties were developed by members of the Berg
Group or their Affiliates who have held such Properties continuously since
their initial construction. Occasionally, the Berg Group has acquired and
sold developed properties, as well. In 1995, the Berg Group sold two
buildings totaling approximately 315,000 rentable square feet: one building
was sold directly to the tenant, Xilinx Corporation; the other building was
distributed by Berg & Berg Developers to its partners and then sold to Xilinx
Corporation (collectively, the "Xilinx Sales"). Immediately after the Xilinx
Sales, Berg & Berg acquired McCandless Technology Park in Milpitas,
California, which comprised approximately 345,000 rentable square feet. Later
in 1995, members of the Berg Group acquired several additional R&D Properties
consisting of approximately 110,000 rentable square feet.
The table below summarizes dispositions, new development, and
acquisitions of R&D Properties by the Berg Group since January 1, 1995, in
rentable square footage:
<TABLE>
<CAPTION>
Three Months Ended March 31, Years Ended December 31,
---------------------------- ---------------------------------------
1998 1997 1997 1996 1995
------------- ------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Constructed - 91,584 387,729 196,348 200,484
Purchased - - - - 454,591
Sold - - - - (315,460)
------------- ------------- ------------ ------------ -----------
Total Net - 91,584 387,729 196,348 339,615
------------- ------------- ------------ ------------ -----------
------------- ------------- ------------ ------------ -----------
</TABLE>
Since 1991, BBE has operated as a management company providing
services to the Berg Group members and their Affiliates that have owned the
Berg Properties and have paid BBE a management fee of approximately 3% of
gross base rental revenue determined on a cash basis. All management fee
arrangements with BBE will be terminated upon the closing of the Berg
Acquisition.
Beginning in 1995, new leases established for approximately 44 of
the Berg Properties (including leases acquired in the purchase of McCandless
Technology Park) obligated the tenants to pay approximately 3% of the base
rent as additional monthly common area charges. Berg & Berg views these
charges as a means for tenants to fund their liability for future repairs of
a non-structural nature ratably over the term of the lease. In the Combined
Financial Statements of the Berg Properties these payments have been
characterized as rent under GAAP accounting, and no reserve has been
established for any future repairs.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997
THE BERG PROPERTIES
RENTAL REVENUES AND TENANT REIMBURSEMENTS. Rental revenue increased
by $2.3 million, or 26.1%, to $11.1 million for the three months ended March
31, 1998 compared to $8.8 million for the three months ended March 31, 1997.
The principal reasons for the increase in rental revenue were the increase in
the overall occupancy rate for the Berg Properties, from 96.2% at March 31,
1997 to 100% at March 31, 1998, the addition of approximately 296,000
rentable square feet of leased space during the second and third quarters of
1997, scheduled rental rate increases, and the higher rents associated with
new leases. Tenant reimbursements increased by $0.8 million, or 66.7%, to
$2.0 million for the three months ended March 31, 1998 from $1.2 million for
the three months ended March 31, 1997. The increase in tenant reimbursements
was due primarily to the higher occupancy level, the increase in total
rentable square feet of leased space, and an increase in the number of
tenants reimbursing the Berg Properties for operating expenses instead of
paying them directly to the service provider.
EXPENSES. Total expenses for the Berg Properties increased by
approximately $0.4 million, or 7.1%, to $6.0 million for the three months
ended March 31, 1998, compared to $5.6 million for the three months ended
March 31, 1997. Property operating expenses decreased slightly by
approximately $0.1 million, or approximately 9.1%, to approximately $1.0
million for the three months ended March 31, 1998 compared to approximately
$1.1 million for the three months ended March 31, 1997. Depreciation expense
increased by approximately $0.2
-39-
<PAGE>
million, or 11.8%, to $1.9 million for the three months ended March 31, 1998
compared to $1.7 million for the three months ended March 31, 1997 primarily
as a result of new improvements and new construction. Real estate taxes
increased slightly and interest expense (including amounts associated with
related parties) for the three months ended March 31, 1998 was essentially
unchanged in comparison to the quarter ended March 31, 1997, as debt
principal balances and interest rates remained substantially the same.
NET INCOME. Net income increased by approximately $2.6 million to
almost $7.1 million for the three months ended March 31, 1998, an increase of
nearly 58% over the net income of $4.5 million for the comparable period
ended March 31, 1997. The substantial rise in net income resulted from a
combination of new leases at higher rental rates and scheduled rental rate
increases, as well as the addition of leased space, while operating expenses
and interest expense were flat and real estate taxes, depreciation and
amortization expense, and the BBE management fee resulted in an overall
increase in expenses for the first quarter of 1998 of just $0.4 million or,
approximately 7.1%, over the first quarter of 1997.
THE ACQUIRED PROPERTIES
RENTAL REVENUES AND TENANT REIMBURSEMENTS. Rental revenue for the
three months ended March 31, 1998 was $1.7 million for the Acquired
Properties, with $1.2 million coming from the Kontrabecki Properties and $0.5
million coming from the Fremont Properties. Tenant reimbursements and other
income were a combined $0.06 million, mostly attributable to the Fremont
Properties. The Kontrabecki Properties had minimal expenses and minimal
tenant reimbursements as the tenants paid most of their expenses directly to
the service providers.
EXPENSES. Total expenses for the Acquired Properties were $0.03
million, all of which were attributable to the Fremont Properties.
REVENUE IN EXCESS OF CERTAIN EXPENSES. The combined revenue in
excess of certain expenses of the Acquired Properties was $1.7 million, of
which $1.2 million was derived from the Kontrabecki Properties and $0.5
million from the Fremont Properties.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
THE BERG PROPERTIES
RENTAL REVENUES AND TENANT REIMBURSEMENTS. Rental revenue increased
by $11.3 million, or 39.1%, to $40.2 million for the year ended December 31,
1997 compared to $28.9 million for the year ended December 31, 1996. The
principal reasons for the increase in rental revenue were the increase in the
overall occupancy rate for the Berg Properties, from 91.9% at December 31,
1996 to 97.7% at December 31, 1997, the addition of approximately 388,000
rentable square feet of leased space, and scheduled rental rate increases.
Tenant reimbursements increased by $2.6 million, or approximately 66.7%, to
$6.5 million for the year ended December 31, 1997 from $3.9 million for the
year ended December 31, 1996. The increase in tenant reimbursements was due
primarily to the higher occupancy level, an increase of 388,000 rentable
square feet of leased space, and an increase in the number of tenants
reimbursing the Berg Properties for operating expenses rather than paying
them directly to the service provider.
EXPENSES. Total expenses for the Berg Properties increased by
approximately $3.3 million, or 16.8%, to $22.9 million for the year ended
December 31, 1997, compared to $19.6 million for the year ended December 31,
1996. Property operating expenses increased by $1.8 million, or 94.7%, to
$3.7 million for the year ended December 31, 1997 from $1.9 million for the
year ended December 31, 1996. The increase in operating expenses was offset
by an increase of $2.6 million in tenant reimbursements and was due primarily
to the increased occupancy of the Berg Properties and the substantial
increase in leased square footage. Depreciation expense increased by $1.0
million, or 14.9%, to $7.7 million for the year ended December 31, 1997 as
compared to $6.7 million for the year ended December 31, 1996. The increase
in depreciation expense resulted primarily from new improvements and new
construction. Real estate taxes increased slightly by $0.4 million, or
approximately 10.5%, to $4.2 million for the year ended December 31, 1997
from $3.8 million for the year ended December 31, 1996. Interest expense
(including amounts associated with related parties) for the year ended
December 31, 1997 was virtually unchanged from the year ended December 31,
1996, as debt principal balances and interest rates remained substantially
the same.
-40-
<PAGE>
NET INCOME. Income before extraordinary item increased by $10.6
million, or approximately 80.3%, to $23.8 million for the year ended December
31, 1997, from $ 13.2 million for the year ended December 31, 1996, as rental
revenue increased substantially due to increased occupancy of the Berg
Properties, scheduled rental rate increases, and the addition of leased space
without a comparable increase in total expenses. For the year ended December
31, 1996, net income included an extraordinary gain of $0.6 million related
to the forgiveness of debt by Great West Life & Annuity Insurance Company.
THE ACQUIRED PROPERTIES
RENTAL REVENUES AND TENANT REIMBURSEMENTS. Rental revenue for the
year ended December 31, 1997 was $5.4 million for the Acquired Properties,
with $4.1 million coming from the Kontrabecki Properties and $1.3 million
coming from the Fremont Properties, which were completed during the first
quarter of 1997. Tenant reimbursements and other income were a combined $0.3
million, with $0.1 million attributable to the Kontrabecki Properties and
$0.2 million attributable to the Fremont Properties.
EXPENSES. Total expenses for the Acquired Properties were $0.29
million, of which $0.02 million applied to the Kontrabecki Properties and
$0.27 million applied to the Fremont Properties.
REVENUE IN EXCESS OF CERTAIN EXPENSES. The combined revenue in
excess of certain expenses of the Acquired Properties was $5.4 million, of
which $4.2 million were generated by the Kontrabecki Properties and $1.2
million by the Fremont Properties.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Berg Properties
RENTAL REVENUE AND TENANT REIMBURSEMENTS. Rental revenue increased
by $5.8 million, or 25.1%, to $28.9 million for the year ended December 31,
1996 from $23.1 million for the year ended December 31, 1995, as the overall
occupancy rate increased to 91.9% at December 31, 1996 from 87.4% at December
31, 1995. In addition, rental rates rose for new and renewal leases, and the
Berg Group added approximately 196,000 square feet of new leased R&D
Properties to the Berg Properties. Tenant reimbursements decreased by $0.3
million, or 7.1%, to $3.9 million for the year ended December 31, 1996 from
$4.2 million for the year ended December 31, 1995, as the additional tenant
reimbursements attributable to increased occupancy of the Berg Properties and
the acquisition of additional leased space were more than offset by the
decline in tenant reimbursements as a result of new tenants paying operating
expenses directly to the service providers.
EXPENSES. Total expenses increased by 2.1% to $19.6 million for the
year ended December 31, 1996, from $19.2 million for the year ended December
31, 1995. Operating expenses decreased by $0.1 million, or 5%. Interest
expense decreased by $0.2 million, or 3.0% to $6.4 million for the year ended
December 31, 1996 from $6.6 million for the year ended December 31, 1995 due
to construction activities and related borrowings. Depreciation and
amortization expense increased by $0.4 million, or 6.3% for the year ended
December 31, 1996, to $6.7 million from $6.3 million for the year ended
December 31, 1995, due to the addition of new R&D Properties and leased space
acquired by the Berg Group during 1995 and 1996. Real estate taxes increased
by $0.2 million, or 5.6% to $3.8 million for the year ended December 31, 1996
from $3.6 million for the year ended December 31, 1995, as a result of minor
reassessments as values rose on certain Berg Properties while the real estate
tax increases attributable to the increase in net rentable square footage
were offset by the disposition of two R&D Properties in the Xilinx Sales. For
the year ended December 31, 1996, general and administrative expenses, as
reflected by the management fee paid to BBE, increased with rental revenues.
NET INCOME. Income before gain on sale of real estate and
extraordinary items increased by $5.1 million to $13.2 million for the year
ended December 31, 1996, from $8.1 million for the year ended December 31,
1995, as growth in revenues far exceeded the increase in expenses. Income
decreased for the year ended December 31, 1996, however, due to the effect of
two extraordinary items for the year ended December 31, 1995: The $20.8
million gain on the Xilinx Sales, and a $3.2 million gain which resulted from
the forgiveness of debt by Great West Life & Annuity Insurance Company. For
the year ended December 31, 1996, $0.6 million of extraordinary gain also
resulted from debt forgiveness by the same lender.
-41-
<PAGE>
THE KONTRABECKI PROPERTIES
RENTAL REVENUE AND TENANT REIMBURSEMENTS. Rental revenue increased
by approximately $0.3 million, or 9.7%, to $3.4 million for the year ended
December 31, 1996 from $3.1 million for the year ended December 31, 1995. The
increase was primarily due to an increase in occupancy to 86.9% at December
31, 1996 from 81.8% at December 31, 1995, and rising rental rates for new and
renewal leases. Tenant reimbursements and other income were level for the
period.
EXPENSES. Total expenses decreased substantially by 48.8%, to $0.22
million for the year ended December 31, 1996, compared to $0.43 million for
the year ended December 31, 1995. For the year ended December 31, 1996,
operating and maintenance expenses decreased by $0.25 million, or 59.5%, to
$0.17 million from $0.42 million for the year ended December 31, 1995. These
substantial reductions resulted primarily from the lease of vacant space to
tenants who paid the expenses directly to the service provider.
REVENUE IN EXCESS OF CERTAIN EXPENSES. The Kontrabecki Properties
produced revenue in excess of certain expenses of $3.23 million for the year
ended December 31, 1996, an approximately 16.8% increase over the same period
for the year ended December 31, 1995.
PRO FORMA LIQUIDITY AND CAPITAL RESOURCES
The Company expects its FFO to be the principal source of liquidity
for distributions, debt service, leasing commissions and recurring capital
expenditures. The Company has not operated previously as a REIT and has no
FFO operating history. The Company also has not previously paid regular
dividends and other distributions to its shareholders and can make no
assurances that it will be able to do so in the future. Based solely upon
past operating results for the Properties and the results of operations for
the first quarter of 1998, on a pro forma basis, the Company expects its FFO
for 1998 to be adequate to meet projected distributions to shareholders and
other presently anticipated liquidity requirements in 1998. See "DISTRIBUTION
POLICY."
Upon completion of the Berg Acquisition, the Company expects to have
total indebtedness on the Properties of approximately $164.6 million,
comprised of mortgage debt secured by certain of the Properties under the New
Secured Loan and existing secured loan arrangements for $29.6 million. The
Company also expects to have $50 million available to borrow under the New
Line of Credit. The Company's debt to Total Market Capitalization ratio will
be approximately 32.8% based upon an estimated market capitalization of
approximately $503 million.
The Company expects to meet its short-term liquidity requirements
generally through its initial working capital, the New Credit Line, and net
cash provided by operations. The Properties require periodic investments of
capital for tenant-related capital expenditures and for general capital
improvements. For the years ended December 31, 1993 through December 31,
1997, the recurring tenant improvement costs and leasing commissions incurred
with respect to new leases and lease renewals of the Berg Properties averaged
approximately $1.5 million annually. Of the Acquired Properties, only 83,902
square feet of space is subject to leases that expire between January 1, 1998
and December 31, 2001. The Company will therefore have approximately 416,000
square feet under expiring leases annually from January 1, 1998 through
December 31, 2000. The Company expects that the average annual cost of
recurring tenant improvements and leasing commissions, related to the
properties, will be approximately $1.5 million from January 1, 1998 through
December 31, 2000. It expects that substantially all of these sums will be
recouped from the tenants under new or renewed leases by way of increased
rental rates. The Company expects to meet its long-term liquidity
requirements for the funding of property development, property acquisitions
and other material non-recurring capital improvements, as well as annual
tenders of L.P. Units by certain Limited Partners, through long-term secured
and unsecured indebtedness (including the New Credit Line) and the issuance
of additional equity securities by the Company. See "POLICIES WITH RESPECT TO
CERTAIN ACTIVITIES--Financing Policies."
-42-
<PAGE>
HISTORICAL CASH FLOWS
BERG PROPERTIES
CASH PROVIDED FROM OPERATIONS. The amount of net cash provided by
operations has consistently increased since 1995. The Berg Properties had net
cash provided by operating activities of approximately $9.8 million and
$5.5 million for the three months ended March 31, 1998 and 1997, respectively,
and approximately $29.9 million, $20.2 million and $16.4 million for the
years ended December 31, 1997, 1996 and 1995, respectively. The $4.3 million
increase in net cash provided by operating activities for the three months
ended March 31, 1998 compared to the same period in 1997 was primarily due to
an increase in net income, a reduction in the increase in other assets, as
well as an increase in accounts payable and accrued expenses. The
approximately $9.7 million increase in net cash provided by operating
activities for the year ended December 31, 1997 over the year ended December
31, 1996 was primarily due to an increase in net income, partially offset by
an increase in other assets and deferred rent receivable. The $3.8 million
increase in net cash provided by operating activities for the year ended
December 31, 1996 over the same period in 1995 was due primarily to an
increase in income before gain on sale of real estate and extraordinary item.
INVESTING ACTIVITIES. Net cash used in investing activities with
respect to the Berg Properties was approximately $0.2 million and $3.5 million
for the three months ended March 31, 1998 and 1997, respectively, and
approximately $17.3 million, $29.3 million and $6.4 million for the years ended
December 31, 1997, 1996, and 1995, respectively. The $3.3 million decrease in
net cash used in investing activities for the three months ended March 31, 1998
compared to the same period in 1997 was primarily due to a decrease in
construction activities. The approximately $12 million decrease in net cash used
in investing activities for the year ended December 31, 1997 compared to the
year ended December 31, 1996 was also due to a decrease in construction
activities. Correspondingly, the approximately $22.9 million increase in net
cash used in investing activities for the year ended December 31, 1996 compared
to the year ended December 31, 1995, was primarily due to an increase in
construction and development expenditures for a number of the R&D Properties,
including several projects in McCandless Technology Park in Milpitas. The volume
and cost of construction and development activities for new projects and tenant
improvements in connection with new leases varies from year to year. The Company
has estimated such expenditures in connection with its estimation of pro forma
cash available for distribution during 1998, and in determining effective annual
rents for the Berg Properties. There can be no assurance that such estimates
will reflect actual results, however, and capital expenditures in prior periods
should not be viewed as indicative of expenditures in future periods.
FINANCING ACTIVITIES. Net cash (used) provided in financing activities
with respect to the Berg Properties was $(0.5) million and $(0.6) million for
the three months ended March 31, 1998 and 1997, respectively, and
$(8.4) million, $9.4 million, and $(10.0) million for the years ended
December 31, 1997, 1996 and 1995, respectively. Changes in financing
activities generally have been directly related to the level of new
construction and development of R&D Properties by the Berg Group. Comparing
the three months ended March 31, 1998 to the three months ended March 31,
1997, there were no changes in debt other than normal recurring principal
payments, and capital distributions decreased to $0.01 million for the three
months ended March 31, 1998 from $0.4 million for the three months ended
March 31, 1997. For the year ended December 31, 1997, the increase in total
debt on the Berg Properties was $1.5 million less than the increase in debt
during the same period in 1996, contributions by partners were reduced by
$11.5 million, and distributions to partners increased by approximately
$4.9 million. Comparing the year ended December 31, 1996 to the year ended
December 31, 1995, the Berg Group increased total debt on the Berg Properties
by $4.0 million, increased capital contributions by $9.3 million, and reduced
capital distributions by $0.1 million.
NON-CASH FINANCING ACTIVITIES. Non-cash investing and financing
activities for the Berg Properties consisted of debt forgiveness gains of
approximately $0.6 million and $3.2 million for the years ended December 31,
1996 and 1995, respectively, attributable to the debt forgiveness by Great West
Life & Annuity Insurance Company. Transfers of construction in progress,
reflecting the difference in the amount of construction in progress at the
beginning and end of each period, were none and $3.3 million for the three
months ended March 31, 1998 and 1997, respectively, and $6.8 million and
$0.08 million and none for the years ended December 31, 1997, 1996 and 1995,
respectively.
-43-
<PAGE>
INFLATION
Most of the leases with the tenants of the Properties require the
tenants to pay all operating expenses, including real estate taxes and
insurance, and increases in common area maintenance expenses, either directly or
by reimbursements paid to the landlord. Such lease provisions substantially
reduce the Company's exposure to increases in costs and operating expenses
resulting from inflation.
-44-
<PAGE>
DESCRIPTION OF THE PROPERTIES
GENERAL
The members of the Berg Group and certain of their Affiliates currently
own all of the Berg Properties, which consist of 50 sites, including 58 separate
buildings aggregating approximately 3,780,000 rentable square feet, and all of
which are located in Silicon Valley. In connection with the Berg Acquisition,
the Company will acquire control of the Berg Properties as well as the Acquired
Properties which consist of 11 sites, including 11 separate buildings
aggregating approximately 561,000 rentable square feet, also located in Silicon
Valley. All of the Properties will be held by the Operating Partnership after
the Berg Acquisition.
OVERVIEW OF THE BERG PROPERTIES
All of the Berg Properties are R&D Properties, designed for research
and development, office and, in some cases, include space for light
manufacturing operations with loading docks. The Company considers all of the
Berg Properties to be "Silicon Valley R&D Properties." Generally, the Berg
Properties are one to four story buildings of tilt-up concrete construction,
have parking of 3.5 spaces per thousand square feet, or greater, clear ceiling
heights less than 18 feet, and range in size from 18,000 to 211,000 rentable
square feet. Most of the office space is open and suitable for configuration to
meet the tenants requirements with the use of movable dividers. Approximately 40
of the 58 R&D Properties are single tenant facilities, although most have been
designed to be divisible and to be usable by multiple tenants.
The current leases for the Berg Properties typically have terms ranging
from three to ten years. Most of the leases provide for fixed periodic rental
increases. Substantially all of the leases are "triple net" leases pursuant to
which the tenant is required to pay substantially all of the operating expenses
of the Property, including all maintenance and repairs (excluding only certain
structural repairs to the building shell), property taxes and insurance. Most of
the leases contain renewal options which allow the tenant to extend the lease
based on fixed rental adjustments (which may be below market ratio) or
adjustment to then prevailing market rates.
AVERAGE OCCUPANCY AND RENTAL RATES
The following table sets forth the aggregate average percent of square
footage leased and the average Annual Base Rent per leased square foot for the
Berg Properties for the periods specified:
<TABLE>
<CAPTION>
Total Rentable Average Occupancy Average Monthly Base Rent Total Annual Base Rent
Square Footage at Period End Per Leased Square Foot (1) (in thousands) (2)
----------------- -------------------- ---------------------------- -------------------------
<S> <C> <C> <C> <C>
1992 2.8 million 87.55% $0.85 $24,893
1993 2.8 million 89.58% 0.84 25,316
1994 2.9 million 80.27% 0.96 26,389
1995 3.2 million 87.38% 0.71 23,745
1996 3.4 million 91.86% 0.78 29,119
1997 3.8 million 97.68% (3) 0.86 38,295
</TABLE>
- ---------------------
(1) Calculated as total Annual Base Rent divided by the average total
leased square footage at period end divided by 12.
(2) Excludes annual base rent under leases entered into wherein the first
date of occupancy is after December 31, 1997 for Berg Properties
consisting of 53,494, 26,150, and 8,206 square feet, respectively.
(3) As of March 31, 1998 the Berg Properties were 100% occupied.
-45-
<PAGE>
LEASING ACTIVITY
The following table sets forth certain information (on a per rentable
square foot basis) about leasing activity for the Berg Properties owned as of
December 31, 1997 for the years indicated:
<TABLE>
<CAPTION>
Number of Square Footage Base Rent Tenant Improvements Effective
Leases(1) Leased Under Leases and Commissions(2) Annual Rent
-------------- ----------------- --------------- ------------------------ -------------
<S> <C> <C> <C> <C> <C>
1992 10 717,673 $9.97 $ - $9.97
1993 10 531,313 $10.26 $0.49 $9.77
1994 10 454,576 $7.01 $0.83 $6.18
1995 17 569,740 $9.58 $0.18 $9.40
1996 24 705,971 $11.31 $0.77 $10.54
1997 18 811,903 $14.57 $0.71 $13.86
</TABLE>
- ---------------------
(1) Excludes leases with a term of less than 12 months and leases related
to new buildings or substantially renovated buildings.
(2) Amounts represent the annual amortization expense associated with leasing
commissions and tenant improvements related to leases executed during the
period. Costs related to new buildings or substantially renovated buildings
have been excluded.
LEASE EXPIRATIONS
The following table shows expirations of leases for the Berg Properties
in place as of December 31, 1997 for each of the next ten years beginning with
1998, assuming none of the tenants exercises renewal options or termination
rights that have not been exercised as of the date hereof:
<TABLE>
<CAPTION>
Percentage of
Annual Base Rent Total Annual Base
Number of Rentable Square Footage Under Expiring Rent Represented By
Leases Expiring Subject to Expiring Leases (in Expiring
Leases thousands)(1) Leases(2)
----------------- ------------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C>
1998 4 94,409 $644 1.50%
1999 9 426,466 $3,471 8.07%
2000 18 642,497 $7,463 17.35%
2001 18 457,758 $4,713 10.95%
2002 11 808,652 $11,250 26.15%
2003 7 338,093 $3,500 8.14%
2004 10 578,853 $7,771 18.06%
2005 - - - -
2006 1 93,984 $1,015 2.36%
2007 and
thereafter 4 339,272 $3,194 7.42%
----------------- ------------------------- ---------------------- ---------------------
82 3,779,984 $43,021 100.00%
</TABLE>
- ---------------------
(1) Actual Base Rent for 1998. Includes additional 26,150 square feet
leased to Sasco, 53,494 leased to Avnet and 8,206 leased to
Breakthrough Software.
(2) Based on actual 1998 Rents under existing leases.
-46-
<PAGE>
SIGNIFICANT PROPERTIES AND TENANTS
The Berg Properties are occupied by a total of 73 tenants. Most of the
Berg Properties are occupied by single tenants, and most of the largest tenants
are publicly-held companies in the electronics industry. The following table
sets forth information concerning the 12 largest tenants for the Berg
Properties, representing 56.8% of the total Annual Base Rent and 50.8% of the
total leased square footage for the Berg Properties as of December 31, 1997. See
"BERG PROPERTIES HISTORICAL FINANCIAL DATA."
<TABLE>
<CAPTION>
Number Number Annual Base Rent Percent of Total Annual
Tenant of Leases of Buildings (in thousands) Base Rent from all Leases
----------------------- ----------- ------------- ------------------ -------------------------
<S> <C> <C> <C> <C>
1 Apple Computer, Inc. 3 4 $6,223 16.25%
2 Amdahl Corporation 4 7 3,320 8.67%
3 Cisco Systems, Inc. 2 2 2,745 7.17%
4 ESL (TRW) 1 1 1,273 3.32%
5 Motorola, Inc. 1 1 1,254 3.27%
6 On Command Video 1 2 1,155 3.02%
7 Arrow Electronics 2 2 1,114 2.91%
8 Condor Systems, Inc. 1 2 1,073 2.80%
9 Comerica Bank 1 1 996 2.60%
10 Behring Pharmaceutical 1 1 945 2.47%
11 Santa Clara County 2 1 873 2.28%
12 NEC Electronics 1 1 784 2.05%
----------- ------------- ------------------ -------------------------
Total 20 25 $21,755 56.81%
</TABLE>
Set forth below is additional information concerning certain Berg
Properties:
APPLE PROPERTIES
The Apple Properties consist of four buildings located at three
locations in Cupertino, California totaling 376,400 square feet occupied by
Apple Computer, Inc. ("Apple") for more than five years. Upon completion of the
Berg Acquisition, the Apple Properties will represent approximately 8.67% of the
total rentable square footage in the Operating Partnership. The largest building
is a four-story 211,000 square foot building located across the street from
Apple's 850,000 square foot corporate headquarters. Apple spent approximately
$14 million in 1992 to renovate and upgrade this building, which is currently
used for software development activities. Apple also leases a three-building
"campus" complex, totaling 142,000 square feet, located one-half block from
Apple's headquarters building. Apple spent approximately $10 million to renovate
and upgrade this facility in 1991 and currently uses this building for
engineering activities. Apple also leases a 23,400 square foot building in
Cupertino, California approximately two miles from Apple's corporate
headquarters. This facility is currently used for prototype manufacturing. None
of the Apple Properties is sublet or unoccupied.
The effective annual rent per square foot for the Apple Properties
was $11.42, $12.98, $13.12, $13.23 and $15.79 for 1993 through 1997,
respectively. The total income tax basis in the Apple Properties was
$3,787,722 as of December 31, 1997. Depreciation has been recorded for tax
purposes using the straight-line method over the useful lives of the
respective assets from the dates they were placed in service, which have
ranged from 5 to 45 years. The annual property taxes, including assessments,
for the Apple Properties aggregated approximately $418,000 for the year ended
December 31, 1997, based on a tax rate of approximately 1.08% plus
assessments.
DESCRIPTION OF TENANT. Apple is a Fortune 500 company and one of the
largest computer firms in the world. As of March 31, 1998, Apple employed
approximately 10,000 people, and its total annual revenues for 1997 were
approximately $7 billion. Apple's Cupertino headquarters building was completed
in 1993 at an estimated cost of $200 million, and the two largest Apple
Properties are the buildings located closest to Apple's headquarters.
LEASE TERMS. The lease for the four-story building expires on May 31,
2002. The lease currently provides for rental payments of $4,338,840 per year
($1.71 per square foot per month). Apple has the option to extend the term of
this lease for two successive five-year periods, subject to fixed rent
adjustments. The lease for the three-building campus expires on December 31,
2002. This lease currently provides for rental payments of
-47-
<PAGE>
$1,975,382 per year ($1.16 per square foot per month). Apple has the option
to extend the term of this lease for five years, subject to an adjustment of
the rental to market rates. The lease for the 23,400 square feet building
expires on November 30, 1998. This lease currently provides for rental
payments of $351,702 per year ($1.25 per square foot per month). There are no
termination, relocation or buy-out rights in favor of Apple under any of
these leases.
AMDAHL PROPERTIES
The Amdahl Properties comprise a 260,000 square foot office complex of
five buildings located in the Oakmead Business Park in Sunnyvale, California and
two buildings of 125,000 square feet and 75,000 square feet, respectively,
located in Santa Clara, California about two miles from the Sunnyvale complex.
These properties are occupied by Amdahl Corporation ("Amdahl"). Upon completion
of the Berg Acquisition, the Amdahl Properties will represent approximately
10.6% of the total rentable square footage in the Operating Partnership. Amdahl
utilizes the Sunnyvale facility for its corporate headquarters and the Santa
Clara facility for research and development activities. These buildings were
built between 1972 and 1983 under build-to-suit arrangements with Amdahl. Amdahl
has sublet approximately 23,000 square feet of one of the Santa Clara buildings.
The effective annual rent per square foot for the Amdahl Properties
was $6.63, $6.86, $7.16, $7.16 and $7.20 for 1993 through 1997, respectively.
The total income tax basis in the Amdahl Properties was $7,192,570 as of
December 31, 1997. Depreciation has been recorded for tax purposes using the
straight-line method over the useful lives of the respective assets from the
dates the assets were placed in service, which range from 5 to 45 years. The
annual property taxes, including assessments, for the Amdahl Properties
aggregated approximately $402,000 for the year ended December 31, 1997, based
on an average tax rate of approximately 1.04% plus assessments.
DESCRIPTION OF TENANT. Amdahl is a major international computer
company, and a wholly owned subsidiary of Fujitsu Limited. As of December 31,
1997, Amdahl employed approximately 9,900 people and its total revenues for the
year were approximately $1.6 billion.
LEASE TERMS. The leases for five of the buildings, totaling 260,000
square feet, expire in the first half of 1999. These leases currently provide
for aggregate annual rent of $1,061,592 ($0.34 per square foot per month). The
lease for the 125,000 square foot building in Santa Clara expires on November
30, 2008. Currently, annual rental for this building totals approximately
$1,104,698 during 1998 and increases by 5% every seven years ($0.74 per square
foot per month before adjustments). The lease for the remaining 75,000 square
foot building expires on April 14, 2004. Currently, annual rental for this
facility is $1,157,085 ($1.29 per square foot per month). The leases contain 14
five-year options remaining with rental rates increasing at pre-negotiated
increments for each option period. The Company believes that the rental rates
for all of the Amdahl Properties are significantly below present market rates,
and the pre-negotiated rate adjustments will not necessarily bear any
relationship to present or future market rates. There are no termination,
relocation or buy-out rights in favor of Amdahl under any of the leases.
CISCO PROPERTIES
The Cisco Properties consist of two buildings presently occupied by
Cisco Systems, Inc. ("Cisco"). One of the buildings is a 200,484 square foot
build-to-suit building located in south San Jose completed in January 1996. The
other building, which is located in Santa Clara, totals 65,780 square feet and
was acquired in 1996 and leased to Cisco effective February 1, 1997. The larger
facility is used by Cisco as a major manufacturing and research and development
site. Upon completion of the Berg Acquisition, the Cisco Properties will
represent approximately 6.13% of the total rentable square footage in the
Operating Partnership.
The effective annual rent per square foot for the Cisco Properties
was $10.20 for 1997. The total income tax basis in the Cisco Properties was
$14,299,768 as of December 31, 1997. Depreciation has been recorded for tax
purposes using the straight-line method over the useful lives of the
respective assets from the dates the assets were placed in service, which
approximate 40 years for these improvements. The annual property taxes,
including assessments, for the Cisco Properties aggregate approximately
$259,185 based on the 1997-98 real property tax bills, with tax rates ranging
from 1.09% to 1.14% plus assessments. Cisco is in the process of completing
certain improvements
-48-
<PAGE>
at the smaller facility which will likely result in a real property tax
reassessment of this property. Any increase in taxes associated with these
improvements during the lease term is Cisco's responsibility.
DESCRIPTION OF TENANT. Cisco is a publicly traded computer network
products manufacturer. As of July 31, 1997, Cisco employed over 11,000 people.
Its revenues grew by 57.2% over the prior year and its total revenues for its
1997 fiscal year were approximately $6.44 billion.
LEASE TERMS. The lease for the 200,484 square foot building expires on
December 31, 2002. The current annual rental is $2,033,580 ($0.85 per square
foot per month) with fixed periodic increases. Cisco has an option to purchase
this property and has the first right of option to lease or purchase additional
buildings to be constructed, if any, on property adjacent to the location of
this building. The purchase option must be exercised during defined periods
during the lease term at fixed prices. Cisco has two five-year options to extend
the term of its existing lease at fixed annual rent increases.
The lease for the 65,780 square foot building expires on January 31,
2000. The current rent for this property is $907,764 ($1.15 per square foot per
month) with no rental increases over the initial term of the lease. Cisco has
one option to extend the term of this lease for a period of one year at a fixed
rental increase.
OTHER MAJOR TENANTS
The other nine of the twelve major tenants for the Berg Properties
currently lease R&D Properties under 11 separate leases which would comprise
approximately 21.63% of the Operating Partnership's total rentable square
footage following the Berg Acquisition. None of the nine tenants accounts for
more than 3.3% of Annual Base Rent for the Berg Properties or more than 3.47% of
the total rentable square footage of all Properties. The Company believes that
all nine tenants currently are in good financial condition. The Company is
unaware of any material defaults under any of their leases. Each of such tenants
has signed a form of the Berg & Berg standard lease agreement. If any of these
tenants were to vacate the Berg Properties that they currently lease or
otherwise terminated their tenancies, the Company believes that it could obtain
new tenants at comparable or higher rents within three months, in light of the
current market for Silicon Valley R&D Properties. See "THE BUSINESS OF BERG &
BERG--The Silicon Valley R&D Property Market."
-49-
<PAGE>
THE BERG PROPERTIES
The following table provides certain additional information
concerning all of the Berg Properties:
<TABLE>
<CAPTION>
Annualized
1997 Effective
Year Developed Annualized 1997 Net Rent Per
Address of Leased ("D") or Rentable Actual Annual Net Rent Per Sq. Sq. Ft. Per
Premises Acquired ("A") Square Feet Tenant Base Rent for 1997 Ft. Per Month Month
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
10401 Bubb Road 1972(D) 9,708 LBE Technology $145,814 $1.25 $1.23
Cupertino
1600/10 McCandless 1995(A) 40,970 Panasonic $270,402 $0.55 $0.55
Milpitas Industrial
1745 McCandless 1995(A) 20,331 EIP Microwave $178,104 $0.73 $0.69
Milpitas
10300 Bubb Road 1972(D) 23,400 Apple $351,702 $1.25 $1.25
Cupertino
1657 McCandless 1995(A) 8,184 Wedge Tech. $70,704 $0.72 $0.72
Milpitas
1230 E. Arques Ave. 1977(D) 60,000 Amdahl $302,337 $0.42 $0.42
Sunnyvale
2001 Logic Drive 1992(D) 72,426 Motorola $1,254,418 $1.44 $1.39
San Jose
1250 E. Arques Ave. 1974(D) 200,000 Amdahl $755,923 $0.31 $0.31
Sunnyvale
2039 Samaritan Drive 1984(D) 14,205 Holonet $251,983 $1.48 $1.41
San Jose
1575 McCandless 1995(A) 11,056 Acropolis $92,870 $0.70 $0.67
Milpitas
2610 No. First Street 1981(D) 6,794 SC Juv. Prob. $103,860 $1.27 $1.21
San Jose
6850 Santa Teresa 1979(D) 30,000 Magnex $210,045 $0.58 $0.58
San Jose
2243 Samaritan Drive 1984(D) 23,801 State Farm $362,727 $1.27 $1.23
San Jose
6385 San Ignacio 1980(D) 17,400 Alcatel $138,330 $0.66 $0.66
San Jose
1135 Kern Avenue 1973(D) 18,300 Davicom $192,150 $0.88 $0.82
Sunnyvale
4750 Patrick Henry 1996(A) 65,780 Siemens/Cisco (1) $898,784 $1.14 $1.08
Santa Clara
10411 Bubb Road 1972(D) 10,622 Enatec/Celerity $166,499 $1.31 $1.25
Cupertino Systems (1)
1212 Bordeaux 1984(D) 71,800 ESL $1,273,344 $1.48 $1.07
Sunnyvale
2239 Samaritan Drive 1984(D) 25,633 Lynx $250,326 $0.81 $0.77
San Jose
1810 McCandless 1995(A) 39,800 Kent Electronics $298,500 $0.63 $0.63
Milpitas
2610-B No. First Street 1981(D) 6,031 Mycom(Nyden) $55,728 $0.77 $0.73
San Jose
1500/20 McCandless 1995(A) 42,700 Adaptec $363,804 $0.71 $0.68
Milpitas
450-460 National Avenue 1973(D) 36,100 Savi Technology $345,756 $0.80 $0.80
Mt. View
140 Great Oaks 1982(D) 30,459 GSS/Array $201,024 $0.55 $0.52
San Jose
2033 Samaritan Drive 1984(D) 12,286 Good Samaritan $179,868 $1.22 $1.22
San Jose
6387 San Ignacio 1980(D) 17,400 Modutek Corporation $127,368 $0.61 $0.61
San Jose
2133-2233 Samaritan Dr. 1984(D) 110,490 Condor $1,072,860 $0.81 $0.81
San Jose
1645 McCandless 1995(A) 6,432 APS Computer/ $65,123 $0.84 $0.72
Milpitas Swinerton Inc. (1)
6540 Via Del Oro 1980(D) 20,076 Exsil $189,672 $0.79 $0.79
San Jose
2600 No. First Street 1981(D) 56,516 SC Cnty(Adult) $769,344 $1.13 $1.13
San Jose
-50-
<PAGE>
<CAPTION>
Annualized
1997 Effective
Year Developed Annualized 1997 Net Rent Per
Address of Leased ("D") or Rentable Actual Annual Net Rent Per Sq. Sq. Ft. Per
Premises Acquired ("A") Square Feet Tenant Base Rent for 1997 Ft. Per Month Month
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
3236 Scott Blvd. 1981(D) 54,672 Celeritek $698,472 $1.06 $0.88
Santa Clara
6320 San Ignacio 1982(D) 45,000 Symantec $368,468 $0.68 $0.65
San Jose
6781 Via Del Oro 1982(D) 21,800 Datum $195,192 $0.75 $0.75
San Jose
6330 San Ignacio 1982(D) 19,600 Tech. Elite $218,344 $0.93 $0.69
San Jose
6351 San Ignacio 1982(D) 15,920 Alteon $176,425 $0.92 $0.88
San Jose
6540 Via Del Oro 1980(D) 5,862 X-Cyte, Inc. $15,300 $0.87 $0.87
San Jose
6540 Via Del Oro 1980(D) 5,862 SVCC/Thinking $39,119 $0.56 $0.53
San Jose Tools, Inc. (1)
6350 San Ignacio 1982(D) 63,638 Bell Sports $595,656 $0.78 $0.54
San Jose
1635 McCandless 1995(A) 7,922 Preston-Holmes $66,705 $0.70 $0.70
Milpitas
6360 San Ignacio 1982(D) 19,104 Silicon Vly Resch $190,330 $0.83 $0.63
San Jose
1625 McCandless 1995(A) 11,087 Rorze Autom. $128,292 $0.96 $0.92
Milpitas
2043 Samaritan Drive 1984(D) 48,677 Amati $709,706 $1.21 $1.09
San Jose
150-160 Great Oaks 1982(D) 52,000 Atcor $396,000 $0.63 $0.63
San Jose
6325 San Ignacio 1981(D) 50,400 Photon Dynamics $547,934 $0.91 $0.69
San Jose
1555 McCandless 1995(A) 14,436 A&D Engineering $144,503 $0.83 $0.83
Milpitas
1450 McCandless 1997(D) 45,312 Chartered $450,998 $0.83 $0.79
Milpitas Semiconductor
1435 McCandless 1995(A) 8,713 SVT Technologies $88,872 $0.85 $0.85
Milpitas
1525-35 McCandless 1995(A) 14,219 TTI West/ADE Tech. $164,232 $0.96 $0.92
Milpitas (1)
1455 McCandless Dr 1995(A) 13,129 CNET $137,203 $0.87 $0.84
Milpitas
3301 Olcott Street 1977(D) 64,500 NEC Electronics $783,675 $1.22 $0.91
Santa Clara
1690 McCandless 1997(D) 14,919 Taxan $167,997 $1.41 $1.33
Milpitas
10500 N. De Anza Blvd 1981(D) 211,000 Apple $4,145,140 $1.64 $1.56
Cupertino
6311 San Ignacio 1981(D) 30,000 Teledex $210,000 $0.58 $0.58
San Jose
6340 San Ignacio 1982(D) 9,750 Aureflam $52,065 $0.89 $0.67
San Jose Corporation
405 Tasman/1190 Morse 1976(D) 28,350 Pacific Pay $286,618 $0.84 $0.83
Sunnyvale Video/Coptec (1)
6341 San Ignacio 1980(D) 79,120 Nelms-Donham $645,198 $0.68 $0.65
San Jose
1725 McCandless Dr 1995(A) 15,400 Spec. Mat. Supply $147,243 $0.80 $0.77
Milpitas
4949 Hellyer Avenue 1995(D) 200,484 Cisco $1,913,292 $0.80 $0.77
San Jose
20605-705 Valley Green 1975(D) 142,000 Apple $1,726,622 $1.01 $0.94
Cupertino
1425 McCandless 1995(A) 16,737 Optical Assoc. $164,469 $0.82 $0.82
Milpitas
20400 Mariani 1978(D) 105,000 Syva $945,000 $0.75 $0.75
Cupertino
2800 Bayview 1994(A) 59,736 Concept $599,568 $0.84 $0.81
Fremont
10440 Bubb Road 1979(D) 19,500 Linotext Digital $245,700 $1.05 $1.00
Cupertino Color
-51-
<PAGE>
<CAPTION>
Annualized
1997 Effective
Year Developed Annualized 1997 Net Rent Per
Address of Leased ("D") or Rentable Actual Annual Net Rent Per Sq. Sq. Ft. Per
Premises Acquired ("A") Square Feet Tenant Base Rent for 1997 Ft. Per Month Month
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1170 Morse Ave. 1980(D) 34,750 CA Parkinson $365,864 $0.88 $0.66
Sunnyvale
1740 McCandless 1995(A) 51,602 Mektec $498,475 $0.81 $0.81
Milpitas
1325 McCandless 1996(D) 50,768 Sherpa $574,084 $0.94 $0.91
Milpitas
1375 McCandless 1996(D) 26,800 Digital DJ $373,109 $1.27 $1.24
Milpitas
6321 San Ignacio 1981(D) 53,494 Avnet(2) -- $0.00 $0.00
San Jose
10460 Bubb Road 1976(D) 30,460 Silicon Video/GSI $433,760 $1.58 $1.55
Cupertino (1)
3120 Scott Blvd. 1983(D) 75,000 Amdahl $1,157,085 $1.29 $1.29
Santa Clara
6331 San Ignacio 1980/1997(D) 131,320(3) On Command Video $1,155,267 $0.73 $0.73
San Jose
1587 & 1595 McCandless 1995(A) 22,207 Spin Tech./Medical $239,313 $0.90 $0.89
Milpitas Innovations
1765 McCandless 1997(D) 118,708 Larscom $614,313 $1.15 $1.12
Milpitas
3501 W. Warren Blvd 1997(D) 51,864 Comptech $267,620 $1.29 $1.24
Fremont
46600 Fremont Blvd. 1997(D) 16,000 A-Trend Technology $95,040 $1.32 $1.29
Fremont
48800 Milmont Drive 1996(D) 53,000 Premisys $563,178 $0.89 $0.85
Fremont
75/85 E. Trimble 1981(D) 93,984 Comerica $996,232 $0.88 $0.86
San Jose
1350 McCandless 1997(D) 46,272 Arrow Electronics, $569,129 $1.12 $1.09
Milpitas Inc.
1600 Memorex Drive 1995(A) 83,516 Sasco $438,460 $0.53 $0.44
Santa Clara
1680 McCandless 1997(D) 58,334 Arrow Electronics, $545,247 $1.04 $1.01
Milpitas Inc.
2251 Lawson Lane 1979(D) 125,000 Amdahl $1,104,698 $0.74 $0.74
Santa Clara
2610-C North First St 1981(D) 8,206 Breakthrough (4) $0 $0.00 $0.00
San Jose
1600 Memorex 1995(A) 26,150 Sasco(2) $0 $0.00 $0.00
Santa Clara
------------ --------------
Totals 3,779,984 $38,294,581
</TABLE>
- -----------------
(1) Space that has been vacated during 1997 by first tenant named and
re-let to second tenant named.
(2) Lease signed prior to December 31, 1997, and Property occupied as of
January 1998. Not considered occupied for occupancy calculations.
(3) 36,320 rentable square feet completed during 1997.
(4) Additional space leased to Breakthrough Software with rent commencing
in February 1998.
-52-
<PAGE>
STANDARD BERG & BERG LEASE TERMS
The standard lease agreement used by Berg & Berg is a triple net lease.
The term of the standard lease ranges from three to ten years with one to three
five-year options for the tenant to extend the lease at market rental rates, but
not less than the rent in the last month of the original term. Most of the
leases contain provisions similar to the following:
- Except to the extent caused by the sole negligence or willful
misconduct of the lessor, the tenant is required to fully indemnify Berg & Berg
for property related actions, suits, proceedings or the like, including any
actions, suits or proceedings relating to hazardous materials. The
indemnification provisions survive the termination of the lease.
- The tenant may not assign the lease or sublet the premises without the
prior written consent of Berg & Berg, except to a bona fide affiliate or
subsidiary of the tenant. In recent leases, Berg & Berg has reserved the right
to withhold consent to any proposed assignment or sublease if the proposed
assignee or sublessee is a generator of hazardous materials. Regardless of an
assignment or sublet permitted, the tenant remains primarily liable for the
performance of all conditions, covenants and obligations under the lease.
- Berg & Berg generally does not require the tenant to obtain
earthquake insurance.
OVERVIEW OF THE ACQUIRED PROPERTIES
All of the Acquired Properties are R&D Properties. They are occupied by
a total of 10 tenants under leases with terms ranging from 4 to 13 years. Most
of the leases provide for fixed periodic rental increases. All of the leases are
triple net leases. Most of the leases contain renewal options which allow the
tenant to extend the lease based on fixed rental adjustments (which may be below
market ratio) or adjustment to then prevailing market rates.
AVERAGE OCCUPANCY AND RENTAL RATES
The following table sets forth the aggregate average percent of square
footage leased and the average Annual Base Rent per leased square foot for the
Acquired Properties for the periods specified:
<TABLE>
<CAPTION>
Total Annual
Total Rentable Average Occupancy Average Annual Base Rent Effective Rent Per Base Rent
Square Footage at Period End Per Leased Square Foot (1) Square Foot(3) (in thousands)
-------------- ----------------- -------------------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
1992 416,527 84.30% $0.87 $0.87 $3,672,036
1993 416,527 74.23% 0.88 0.70 3,259,777
1994 416,527 66.05% 0.89 0.64 2,879,135
1995 416,527 81.76% 0.72 0.72 2,953,399
1996 416,527 86.84% 0.76 0.76 3,313,067
1997 560,585 90.63% 0.86 0.81 5,000,488
</TABLE>
- -----------
(1) Calculated as total Annual Base Rent divided by the average total leased
square footage at period end divided by 12.
(2) Includes the Fremont Properties, which were completed and occupied during
1997.
-53-
<PAGE>
LEASE EXPIRATIONS
The following table shows expirations of leases for the Acquired
Properties in place as of December 31, 1997 for each of the next ten years
beginning with 1998, assuming none of the tenants exercises renewal options or
termination rights that have not been exercised as of the date hereof:
<TABLE>
<CAPTION>
Annual Base Rent Percentage of Total Annual
Number of Rentable Square Footage Under Expiring Leases Base Rent Represented by
Leases Expiring Subject to Expiring Leases (in thousands)(1) Expiring Leases(2)
--------------- -------------------------- --------------------- --------------------------
<S> <C> <C> <C> <C>
1998 1 18,304 $ 64 1.02%
1999 3 65,598 751 11.95%
2000 - - - -
2001 - - - -
2002 7 332,625 3,527 56.16%
2003 - - -
2004 2 99,802 1,422 22.64%
2005 - - - -
2006 - - - -
2007 and
thereafter 1 44,256 517 8.23%
--------------- -------------------------- --------------------- --------------------------
Total 14 560,585 $6,281 100.00%
</TABLE>
- -----------
(1) Based on actual base rent under existing leases for 1998.
(2) Calculated by dividing the Annual Base Rent for 1998 by total 1998 Annual
Base Rents for all Acquired Properties.
-54-
<PAGE>
ACQUIRED PROPERTIES
The following table provides certain additional information concerning
the Acquired Properties:
<TABLE>
<CAPTION>
Year Annualized Annualized
Developed Actual 1997 Net 1997 Effective
("D") or Rentable Annual Base Rent Per Net Rent Per
Address of Acquired Square Rent for Sq. Ft. Sq. Ft. Per
Leased Premises ("A") Feet Tenant 1997 Per Month Month
- ---------------------- ----------- --------- ----------------- ----------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
FREMONT PROPERTIES
4050 Starboard Drive 1997(D) 52,232 Flash - - -
Fremont, California(1) Electronics,
Inc.
45700 Northport 1997(D) 47,570 Phillips $669,960 $1.17 $1.14
Fremont, California Electronics
45738 Northport Loop 1997(D) 44,256 EIC $432,902 $0.82 $0.80
Fremont, California
--------- -----------
Totals 144,058 $1,102,862
KONTRABECKI PROPERTIES
3510 Bassett Street 1983(D) 18,304 Sigma Circuits $153,756 $0.70 $0.55
Santa Clara, California
3540 Bassett Street 1984(D) 19,600 IXYS $180,198 $0.77 $0.70
Santa Clara, California Technologies, Inc.
3542 Bassett Street 1984(D) 20,648 Sigma Circuits $182,872 $0.74 $0.59
Santa Clara, California
3506 Bassett Street 1983(D) 25,350 Crystallume / $261,013 $0.86 $0.74
Santa Clara, California A.R.T.
3530 Bassett Street 1983(D) 50,070 SDL, Inc. $476,974 $0.79 $0.79
Santa Clara, California
3520 Bassett Street 1988(D) 52,080 KLA Instruments $624,674 $1.00 $1.00
Santa Clara, California / SDL, Inc.
3550 Bassett Street 1986(D) 49,080 Intevac $421,950 $0.72 $0.72
Santa Clara, California
3560 Bassett Street 1986(D) 73,093 Intevac $647,018 $0.74 $0.74
Santa Clara, California
3570 Bassett Street 1986(D) 23,372 Intevac $252,418 $0.90 $0.90
Santa Clara, California
3580 Bassett Street 1986(D) 21,118 Intevac $181,557 $0.72 $0.72
Santa Clara, California
3544 Bassett Street 1984(D) 63,812 Maxell Corp. $515,196 $0.67 $0.67
Santa Clara, California
--------- -----------
Totals 416,527 $3,897,626
</TABLE>
- ------------
(1) Lease signed prior to December 31, 1997, rent and occupancy commenced on
January 1, 1998.
(2) Lease for 3560 Bassett commenced on April 1, 1997. Rent for the first
two months was payable at a 50% discount.
THE PENDING DEVELOPMENT PROJECTS
GREAT OAKS/SANTA TERESA This proposed project located on Berg & Berg
land in south San Jose will be a contemporary two-story concrete tilt-up R&D
Property of approximately 54,240 square feet situated on a three-acre site.
BBE expects this project to be completed and leased in late 1998 to mid-1999.
MEMOREX AND RICHARD. This proposed complex located in Santa Clara will
consist of two single story R&D Properties, with limited parking, intended for
single tenant occupancy. The building located on Memorex Drive will have 52,800
rentable square feet, and the building on Richard Ave. will have 58,740 square
feet. BBE expects to complete and lease both buildings by mid-1998.
AUTOMATION PARK. This project is being built on two adjoining parcels
totaling 22 acres in north San Jose. BBE will construct four single story
Spanish-style R&D Properties with approximate rentable areas of 114,028, 80,640,
80,640 and 61,056 square feet, respectively, with 4 per 1,000 square feet
parking areas. BBE expects to complete and lease the four buildings between late
1998 and mid-1999.
-55-
<PAGE>
L'AVENIDA. This Mountain View, California project will be a
five-building complex totaling approximately 513,000 square feet on nearly 30
acres. The buildings will be high-quality contemporary tilt-up R&D Properties
with reflective glass and concrete exteriors designed primarily as
headquarters or research and development facilities for software or
biotechnology firms. The site is a prime location near U.S. Highway 101, and
neighboring tenants include Alza Corporation, Sun Microsystems, Inc. and
Silicon Graphics, Inc. BBE expects to complete and lease all of the buildings
in mid-1999.
THE PENDING PROJECTS ACQUISITION AGREEMENT. The Company, the
Operating Partnership and the members of the Berg Group holding interests in
the Pending Development Projects have entered into the Pending Project
Acquisition Agreement with respect to the acquisition of the Pending
Development Projects by the Company or the Operating Partnership. Currently,
there are no tenants for any of the Projects. Following are the principal
terms of that agreement:
- The selling Berg Group members and BBE will build and deliver
each R&D Property in the Pending Development Projects to the
Operating Partnership at the acquisition value set forth in
the following table, subject to adjustment if the actual
average monthly rental rate per square foot differs from the
projected rental rate set forth in the table. The actual
acquisition value will be equal to the actual Annual Base Rent
divided by the capitalization rate, minus the amount of debt
encumbering the property.
<TABLE>
<CAPTION>
Projected Triple Projected Average
Approximate Net Annual Base Monthly Rental Rate Acquisition Capitalization
Pending Project Building Size Rent Per Square Foot Value Rate(1)
- ------------------ ------------- ------------------ -------------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Great Oaks 54,240 $ 715,968 $1.10 $ 5,226,043 0.137
Memorex Drive 52,800 $ 535,560 $0.85 $ 3,347,250 0.160
Richard (Ave.) 58,740 $ 599,148 $0.85 $ 3,744,675 0.160
Automation Park 114,028 $1,778,836 $1.30 $12,705,971 0.140
80,640 $1,257,984 $1.30 $ 8,985,600 0.140
80,640 $1,257,984 $1.30 $ 8,985,600 0.140
61,056 $ 952,474 $1.30 $ 6,803,386 0.140
L'Avenida(2) 94,134 $3,219,382 $2.85 $18,937,541 0.170
101,622 $3,475,724 $2.85 $20,445,435 0.170
93,314 $3,191,339 $2.85 $18,772,582 0.170
126,236 $4,317,271 $2.85 $25,395,717 0.170
98,166 $3,357,277 $2.85 $19,748,688 0.170
</TABLE>
- -----------------
(1) Calculated as 100 divided by the quotient of the Purchase Price and the
Projected Triple Net Annual Base Rent. Management believes the current
capitalization rate for good quality Silicon Valley R&D Properties is
approximately 8.5 to 9.5.
(2) This project provides an unusually high rate of return and is not
representative of returns or projects that the Company may be able to
obtain or acquire in the future.
- The acquisition value will be payable by the Company or the
Operating Partnership in L.P. Units at $4.50 per Unit or
cash, at the option of the Sellers.
- The closing for the acquisition of a R&D Property within
the Project will occur only when the building has been
completed and fully leased. The Company and the Operating
Partnership are not otherwise required to acquire any of
the Pending Development Projects.
- The sellers will make customary representations and warranties
to the Operating Partnership as of the closing date.
- Leases will be on commercially reasonable terms and
conditions. See "Standard Berg & Berg Lease Terms."
-56-
<PAGE>
LAND HOLDING AND DEVELOPMENT ARRANGEMENTS
BERG LAND HOLDINGS. Certain members of the Berg Group, including
Carl E. Berg, own several parcels of undeveloped real estate in the Silicon
Valley (the "Berg Land Holdings") which have been made available to the
Company for future development, subject to closing the Berg Acquisition,
under the terms of the Option Agreement. Mr. Berg and such other Berg Group
members have not undertaken any obligation to the Company or the Operating
Partnership to exercise any of their options or rights to acquire or develop
the Berg Land Holdings and may not exercise them prior to their current
expiration dates. The following table describes the Berg Land Holdings:
<TABLE>
<CAPTION>
Estimated Remaining
Development Potential
Acres(1) in Rentable Square Feet(2)
------------- -------------------------
<S> <C> <C>
King Ranch Business Park, South San Jose 123 1,900,000
Hellyer and Piercy, South San Jose 7 105,000
Fremont & Cushing, Fremont 32 450,000
</TABLE>
- ------------
(1) Net acres
(2) Assumed coverage ratio of 32-35% of the buildable portion of the parcel.
All three parcels have industrial or industrial business park
zoning, permitting the development of R&D Properties. All discretionary
approvals for the King Ranch, and Hellyer and Piercy properties have been
obtained, with the exception of discretionary architectural reviews.
Development of each of the parcels also requires various administrative and
ministerial permits and approvals prior to the commencement of construction.
The King Ranch site is adjacent to U.S. Highway 101. To date,
designs have been prepared for two buildings of approximately 110,000 square
feet and 70,000 square feet, respectively.
Certain members of the Berg Group hold an option to purchase the
site at Fremont Avenue and Cushing Boulevard in Fremont, California,
exercisable, including all extensions, prior to January 2000. Acquisition of
the land is subject to receipt of building permits and the resolution of
issues concerning the set aside of wetlands. The Berg Group intends to
propose offsite mitigation to the Army Corps of Engineers. If this mitigation
cannot be obtained, the buildable site would be reduced to approximately 22
acres and 335,000 rentable square feet. The optionholders may decide not to
exercise their option to acquire this land, in which case it will no longer
be subject to the Berg Land Holdings Option Agreement.
Certain members of the Berg Group hold an option to purchase the
parcel located at Hellyer Avenue and Piercy Road in south San Jose during
1998. The acquisition of the land is subject to receipt of building permits
and the resolution of street improvement costs with the City of San Jose. The
optionholders may decide not to exercise their right to acquire this
property, in which case it will no longer be subject to the Berg Land
Holdings Option Agreement.
THE OPTION AGREEMENT. The Company, the Operating Partnership and the
members of the Berg Group holding interests in the Berg Land Holdings have
entered into the Option Agreement containing the following principal terms:
- After the closing of the Berg Acquisition and for as long as
the Berg Group members and their Affiliates own or have the
right to acquire shares representing 65% of the Common Stock
on a Fully-Diluted basis, the Company will have the option
(the "Option") to acquire any building developed by any
member of the Berg Group on the Berg Land Holdings at such
time as the building has been leased at a price equal to (i)
the full construction cost of the building, plus (ii) 10% of
(i), plus (iii) the acquisition value of the parcel on which
the improvements were constructed as set forth in the
schedule below, and interest at LIBOR from January 1, 1998
until the close of escrow, plus (iv) taxes and assessments
prorated from January 1, 1998, plus (v) interest at LIBOR on
the amounts described in clauses (i) and (iv) from the date
paid by the
-57-
<PAGE>
developer and ending at the close of escrow, and
minus the sum of the principal amount of all debt
encumbering the acquired property. The acquisition value of
each parcel under the Option Agreement follows:
<TABLE>
<CAPTION>
Parcel Acquisition Value
----------------------------------
Per Acre Per Square Foot
------------- -----------------
<S> <C> <C>
King Ranch $435,600 $10.00
Hillyer & Piercy $370,260 $8.50
Fremont & Cushing $871,200 $20.00
</TABLE>
- The purchase price will be payable in cash, unless otherwise
agreed by the Berg Group representatives, and the Company
may contribute such building to the Operating Partnership,
subject to any debt incurred in connection with the
acquisition, in exchange for additional general partner
interests in the Operating Partnership based up the market
value of the Common Stock over the 30-trading day period
preceding the Company's exercise of the Option.
- The Company also must assume all assessments.
- If the Company elects not to exercise the Option with
respect to any building, the Berg Group may hold and lease
the building for its own account, or sell such building to a
third party.
- All action by the Company under the Option Agreement must be
approved by a majority of the members of Independent
Directors Committee.
NON-COMPETITION ARRANGEMENTS. Mr. Berg has advised the Company of
his intention to conduct all of his material R&D Property investment and
development activities through the Company, except with respect to the Berg
Land Holdings, which are subject to the Option Agreement, and the Pending
Development Projects, which are subject to the Pending Projects Acquisition
Agreement. Accordingly, under the Acquisition Agreement, he has agreed not to
directly or indirectly acquire or develop, or acquire an equity ownership
interest in any entity that has or intends to acquire an ownership interest
in any real estate (with the exception of minor investments not to exceed 10%
of the outstanding voting securities in publicly-traded companies) intended
for R&D Property development or similar industrial use in California, Oregon
or Washington without first disclosing such investment opportunity to the
Company and making such opportunity available to the Company at the option of
the Independent Directors Committee. See "THE ACQUISITION AGREEMENT--Conflicts
of Interest Provisions."
-58-
<PAGE>
MORTGAGE DEBT AND CREDIT LINES
MORTGAGE DEBT. The following table sets forth certain information
regarding the mortgages encumbering the Berg Properties upon the consummation of
the Berg Acquisition, assuming the application of the proceeds therefrom as set
forth in "Use of Proceeds" and that such proceeds were applied effective as of
March 31, 1998. All mortgage debt is nonrecourse to the Company, although
certain of the mortgages are cross-defaulted and cross-collateralized with other
mortgaged Properties.
<TABLE>
<CAPTION>
Pro Forma
Actual March Pro Forma Annual Pro March 31,
31, 1998 Debt Paid off March 31, Forma Debt Maturity 1998
Debt Description Collateral Properties Balance at Offering 1998 Balance Service Date (1) Interest Rate
- ----------------- ----------------------------- ------------ ------------- ------------ ------------ ----------- -------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
LINES OF CREDIT:
Wells Fargo 2251 Lawson Lane, Santa $37,953 $(37,953) - - 10/99 (2)
Clara, CA
3301 Olcott, Santa Clara, CA
1230 & 1250 Arques, Sunnyvale,
CA
1135 Kern, Sunnyvale, CA
405 Tasman, Sunnyvale, CA
1190 Morse Avenue, Sunnyvale,
CA
450 National Avenue, Mountain
View, CA
10300 Bubb Road, Cupertino, CA
10440 Bubb Road, Cupertino, CA
10460 Bubb Road, Cupertino, CA
20605 - 20705 Valley Green Drive,
Cupertino, CA
20400 Mariana, Cupertino,CA
2033 - 2243 Samaritan Drive,
San Jose, CA
10500 de Anza Boulevard,
Cupertino, CA
MORTGAGE LOANS:
Great West Life
& Annuity
Insurance
Company 6320 San Ignacio Ave, San
Jose, CA 7,836 - $7,836 $553 2/04 7.0%
Great West Life
& Annuity
Insurance
Company 6540 Via del Oro, 6385 San
Ignacio Ave., San Jose, CA 1,977 - 1,977 140 5/04 7.0%
Great West Life
& Annuity
Insurance
Company 1170 Morse Avenue,
Sunnyvale, CA 3,739 - 3,739 264 5/04 7.0%
National
Electrical
Contractors
Association
Pension Benefit
Trust Fund 2251 Lawson Lane, Santa
Clara, CA 4,758 (4,758) - - 1/09 -
Prudential
Capital Group 1230 E. Arques, Sunnyvale, CA 1,130 (1,130) - - 11/07 -
Prudential 20605 - 20705 Valley Green
Capital Group Drive, Cupertino, CA 3,206 (3,206) - - 10/98 -
Prudential
Capital Group 20400 Mariani, Cupertino, CA 2,126 (2,126) - - 7/09 -
Prudential
Capital Group 1250 E. Arques, Sunnyvale, CA 2,249 (2,249) - - 11/99 -
New York Life
Insurance
Company 10440 Bubb Road, Cupertino, CA 444 (444) - - 8/09 -
Home Savings &
Loan Association 10460 Bubb Road, Cupertino, CA 558 (558) - - 1/07 -
Amdahl 3120 Scott, Santa Clara, CA 7,087 - 7,087 682 3/14 9.5%
Corporation
Citicorp U.S.A. 2800 Bayview Drive, 3,105 - 3,105 233 4/00 (3)
Inc. Fremont, CA
----------- ------------ ------------ ------------
Mortgage Loans
Sub-total 38,215 (14,471) 23,744 1,872
Related Party 1,821 (1,821) - -
Debt
Acquired Properties 39,218 (33,323) 5,895 442 4/00 7.5%
New Secured Loan 135,000 9,450 (4) 7.0%
-------- -------
$164,639 $11,764
</TABLE>
- -------------
(1) All principal due at maturity date.
(2) The lesser of Wells Fargo prime rate in effect on the first day of each
calendar month, or the LIBOR or the Wells Fargo Purchased Funds Rate
quoted on the first day of each calendar month plus 1.65%. Average rates
for the three months ended March 31, 1998 and the years ended December
31, 1997, 1996 and 1995 were 7.26%, 7.25%, 7.04% and 8.20%, respectively.
(3) One month LIBOR plus 1.625% adjusted monthly.
(4) The Company anticipates that the New Secured Loan will have an initial
term of 10 years.
CREDIT LINE. Historically, some of the Berg Properties have been
pledged as collateral under a line of credit provided by Wells Fargo, which has
been guaranteed by the Berg Group members. At the closing of the Berg
Acquisition, the Company intends to repay the entire indebtedness of
approximately $38 million under the Wells Fargo lines of credit which are
secured by some of the Properties. The Company also intends to repay
-59-
<PAGE>
approximately $33.3 million of indebtedness secured by some of the Acquired
Properties at the closing of the Berg Acquisition. The Company intends to obtain
the New Credit Line at that time, as well. See "FUTURE OPERATIONS OF THE
COMPANY--Line of Credit."
PROPERTY TAX INFORMATION
The aggregate real estate property tax obligations paid by the Company
(with or without tenant reimbursement) for the Berg Properties during calendar
1997 were approximately $4.2 million. This amount does not include real estate
property taxes paid directly by tenants. Of the four limited partnerships
comprising the Operating Partnership, only Mission West Properties, L.P. will
have any Properties transferred to it as part of the Berg Acquisition; the other
three limited partnerships will retain their existing Properties. The Property
transfers to Mission West Properties, L.P. will likely result in a statutory
change in ownership giving rise to a reassessment for California real property
tax purposes, which is not expected to have a material adverse impact on the
operations of the Company.
There can be no assurance that a local assessor will not assert that
the Proposed Transactions also have resulted in a statutory change in
ownership with respect to the Berg Properties held by MWP I, MWP II, and MWP
III as county assessors in California occasionally challenge complex
transactions in which new investors acquire interests in existing real
property holding entities. The Company believes that the Berg Acquisition and
the other Proposed Transactions do not represent a statutory change in
ownership under existing law. Moreover, substantially all of the leases for
the Properties contain provisions requiring the tenants to pay as additional
rent their proportionate shares of any property tax increases over specified
base amounts. The Company may not be able to pass through to its tenants the
full amount of any increased taxes resulting from a reassessment, however.
The Company believes that any amount that cannot be passed through to tenants
will not have a material adverse effect on the Company.
ENVIRONMENTAL MATTERS
Under various federal, state and local laws, ordinances and
regulations, an owner or operator of real property may be held liable for the
costs of removal or remediation of certain hazardous or toxic substances located
on or in the property. Such laws often impose liability and expose the owner to
governmental proceedings, without regard to whether the owner knew of, or was
responsible for, the presence of the hazardous or toxic substances. The costs of
any required remediation or removal of such substances may be substantial. In
addition, the owner's liability as to any specific property is generally not
limited and could exceed the value of the property and/or the aggregate assets
of the owner. The presence of such substances, or the failure to properly remove
or remediate such substances, may also adversely affect the owner's ability to
sell or rent the property or to borrow using the property as collateral. Persons
who arrange for the treatment or disposal of hazardous or toxic substances, such
as asbestos, at a disposal facility may also be liable for the costs of any
required remediation or removal of the hazardous or toxic substances at the
facility, regardless of whether the facility is owned or operated by such owner
or entity. In connection with the ownership of the Properties or the treatment
or disposal of hazardous or toxic substances, the Company may be liable for such
costs.
Other federal, state and local laws impose liability for the release of
ACMs into the air and require the removal of damaged ACMs in the event of
remodeling or renovation. The Company is aware that there are ACMs present at
several of the Properties, primarily in floor coverings. The Company believes
that the ACMs present at these Properties are generally in good condition and
that no ACMs are present in the remaining Properties. The Company believes it is
in compliance in all material respects with all federal, state and local laws
relating to ACMs and that if it were required to remove all ACMs present at the
Properties over a short period of time, the cost of such removal would not have
a material adverse effect on its financial condition, operating results, or
ability to make distributions.
The Company is not aware of any environmental liability relating to the
Properties that it believes would have a material adverse effect on its
financial condition, its operating results or its ability to make distributions
and has not been notified by any governmental authority or any other person of
any material noncompliance, liability or other claim in connection with any of
the Properties. No assurance can be given that future laws, ordinances or
regulations will not impose material environmental liabilities, or that the
current environmental condition of the Properties will not be affected by
tenants and occupants of the Properties, by the uses or condition of properties
in the vicinity of the Properties, such as leaking underground storage tanks, or
by third parties unrelated to the
-60-
<PAGE>
Company. If the Company is required to remove or remediate any toxic wastes
or hazardous substances present on any of the Properties, the cost to the
Company could be material.
LEGAL PROCEEDINGS
From time to time the Company is involved in legal proceedings arising
in the ordinary course of its business, none of which is believed to be
material. The Company is not aware of any material litigation affecting any of
the Properties, the Pending Development Projects, the Berg Land Holdings, or the
Operating Partnership. Berg & Berg is a plaintiff in BERG & BERG v. CHERYL AND
GILBERT CHAVEZ in the Santa Clara County Superior Court. The court has entered a
default judgment against the defendants in that action to recover funds
embezzled by a former employee of Berg & Berg and BBE. Neither the Company nor
the Operating Partnership is entitled to any funds that may be recovered
pursuant to the judgment.
EMPLOYEES
The Company initially expects to employ five persons. The Operating
Partnership will not have any employees. Prior to the consummation of the
Proposed Transactions, three of the Company's employees were employed by BBE.
FUTURE OPERATIONS OF THE COMPANY
OVERVIEW
Upon consummation of the Proposed Transactions, the Company will be
a fully-integrated, self-administered and self-managed REIT organized to
continue and expand the business of acquiring, developing, owning and
managing Silicon Valley R&D Properties currently conducted by the Berg Group.
Upon completion of the Berg Acquisition, the Company, through its general
partnership interest in the Operating Partnership, will own and operate 69
Silicon Valley R&D Properties. As of March 31, 1998, the occupancy rate of
the Properties was approximately 100%. The Company also will acquire the 12
Silicon Valley R&D Properties comprising the Pending Development Projects,
and has an option to acquire additional Berg Group Silicon Valley R&D
Properties pursuant to the Option Agreement.
Consequently, the Company's principal focus upon consummation of the
Proposed Transactions will be the management of Silicon Valley R&D Properties.
With Silicon Valley's highly educated and skilled work force, recent history of
numerous successful start-up companies, and large contingent of venture capital
firms, the Company believes that this region will continue to spawn successful
new high-growth industries and entrepreneurial businesses to an extent matched
nowhere else in the United States.
In 1996, according to the National Venture Capital Survey, venture
capital investment in the Silicon Valley reached $2.3 billion, representing
24.1% of the total of $9.5 billion invested nationally. Most of the investments
were in technology-based companies, particularly in communications and software.
In 1997, total venture capital investment in Silicon Valley exceeded $3.3
billion. Successful, venture capital-backed technology companies typically seek
further capital from the public capital markets. Initial public offerings
("IPOs") by companies in the San Francisco Bay Area raised over $2.2 billion,
$2.1 billion, and $1.7 billion in 1995, 1996, and 1997, respectively.
Frequently, the IPO proceeds are used to fund the companies' growth and
expansion, with a resulting need for additional space. The Company believes that
this financial cycle will continue to generate favorable R&D Property
development and rental opportunities in the Silicon Valley.
OPERATING AND GROWTH STRATEGY
The Company intends to employ Berg & Berg's historical business
strategy and the Company's substantial resources to achieve growth in FFO. The
Company's operating and growth strategy contains the following principal
elements:
- Continued emphasis on general purpose, single-tenant Silicon
Valley R&D Properties for technology-based companies to
capitalize on the Company's extensive contacts in these
companies and its extensive knowledge of their real estate
needs.
-61-
<PAGE>
- Acquiring R&D Properties built by the Berg Group on the Berg
Land Holdings, which now represent one of the largest
aggregations of land available for future construction of R&D
Properties in Silicon Valley.
- Demand-driven development activities, emphasizing
build-to-suit projects for existing and emerging technology
companies experiencing growth in the Silicon Valley.
- Opportunistic acquisitions of high quality, well-located
Silicon Valley R&D Properties in situations where illiquidity
or inadequate management permit their acquisition at favorable
prices, and where the Company's management skills will
facilitate increases in cash flow and asset value.
- Maintenance of a lean, experienced and responsive management
team comprised of highly qualified and experienced
professionals working within a relatively flat organizational
structure.
- Prudent financial management emphasizing current cash flow, as
well as long-term value in the Company's acquisition and
financing policies, the pre-leasing of buildings prior to
acquisition or development to reduce the risks of owning them
and the maintenance of sufficient liquidity to acquire and
finance properties on desirable terms.
- Geographic expansion into other technology-based areas of the
West Coast if good R&D Properties become available there.
OPERATIONS AND MANAGEMENT
The Company will operate as a self-administered, self-managed REIT with
its own employees. It will sublease office space from Berg & Berg at 10050
Bandley Drive and will share clerical staff and other overhead on what the
Company considers to be very favorable terms. The total monthly rent payable by
the Company to Berg & Berg will be $5,625, and the Company's contribution to BBE
overhead when added to the rent payable to Berg & Berg will not exceed $15,000
per month. Carl E. Berg will work for the Company, as well as BBE, and will
provide services to other enterprises. The other employees of the Company,
except Brad Perkins, will work for the Company full-time. The Company may add
two additional employees, as required, but does not anticipate growth in
employment except as acquisitions of new properties, particularly in other
geographic regions, require additional personnel.
Construction and repair work at the Company's Properties for building
maintenance and tenant improvements may be provided by BBE. The Company will bid
all major work competitively to subcontractors.
The Company generally will market the Properties and negotiate leases
with tenants by itself. Occasionally, the Company expects to retain real estate
brokers, and its policy is to pay fixed commissions to tenants' brokers.
ACQUISITIONS
The Company's principal acquisition opportunities are the Pending
Development Projects and the acquisition of R&D Properties constructed by the
Berg Group on the Berg Land Holdings under the Option Agreement. The Berg Group
has acquired approximately 580,000 square feet of buildings in the last four
years. The Company believes its acquisitions experience and the network of real
estate professionals it has done business with will continue to provide
opportunities for external growth. Furthermore, the Company's use of the
Operating Partnership structure gives prospective sellers the opportunity to
contribute properties to the Company (through the Operating Partnership) on a
tax-deferred basis in exchange for L.P. Units. This capacity to complete
tax-deferred transactions with sellers of real property will further enhance the
Company's ability to acquire additional properties. Management also intends to
monitor available, well located, industrial properties on the West Coast of the
United States.
-62-
<PAGE>
LINE OF CREDIT
The Company intends to obtain the New Credit Line in order to finance
acquisitions and for general corporate purposes. It is expected that the
available credit facility will be approximately $50,000,000. Management expects
to obtain this line of credit from a national or regional lending institution.
The Company intends to have the line of credit in place by the closing of the
Berg Acquisition.
MORTGAGE INDEBTEDNESS OUTSTANDING AFTER BERG ACQUISITION
The Company intends to obtain mortgage financing in order to refinance
existing indebtedness. Management has had discussions with three national
lending institutions regarding the mortgage financing. It is expected that the
financing will be secured by a group of the Properties. This New Secured Loan
financing is expected to total $135 million, with a term of 10 to 12 years,
amortized over 25 to 30 years. In addition, secured loans totaling approximately
$29.6 million, which are secured by some of the Properties, will remain
outstanding following the consummation of the Berg Acquisition.
-63-
<PAGE>
DISTRIBUTION POLICY
OVERVIEW
The Company intends to make regular quarterly distributions to
holders of its Common Stock based on its Cash Available for Distribution. The
Company's ability to make such distributions will be affected by numerous
factors including, most importantly, the receipt of distributions from the
Operating Partnership. The first distribution for the period commencing on
the closing of the Berg Acquisition and ending on _________ ____, 1998 is
expected to be $________, which is an amount equivalent to a quarterly
distribution of $0.085 per share (which, if annualized, would equal $0.34 per
share, or an annual yield of ___%, based on the last trading price set forth
on the cover page of this Prospectus/Proxy Statement).
In general, the Company expects that Cash Available for Distribution
will exceed its initial planned distributions. Expected distributions for the
12 months following the closing of the Berg Acquisition will be approximately
88% of the estimated Cash Available for Distribution of the Company and are
expected to exceed 95% of the Company's taxable income, as determined under
federal tax laws applicable to REITs. The amount of estimated Cash Available
for Distribution is based on pro forma FFO of the Company for all of the
Properties for the twelve months ending March 31, 1999, with adjustments for
certain known events occurring after March 31, 1998 that are not reflected in
the Company's historical or pro forma financial statements.
DISTRIBUTION TABLE
The following table illustrates the adjustments made to the
Company's pro forma FFO for the twelve months ended March 31, 1998, as
adjusted, in estimating its initial dividend:
<TABLE>
<CAPTION>
(in thousands,
except
expected initial
dividend per share)
---------------------
<S> <C>
Pro forma income before minority interest and other non-recurring items for the year ended
December 31, 1997 $18,254
Plus: Pro forma real estate depreciation and amortization for the year ended
December 31, 1997 11,308
---------------------
Pro forma FFO for the year ended December 31, 1997 (1) 29,562
Less: Pro forma FFO for the three months ended March 31, 1997 (5,271)
Plus: Pro forma FFO for the three months ended March 31, 1998 8,949
---------------------
Pro forma FFO for the twelve months ended March 31, 1998 33,240
Adjustments:
Net increase in contractual rental income (2) 2,601
---------------------
Estimated adjusted pro forma FFO for the twelve months ended March 31, 1998 35,841
Adjustments:
Net effect of straight-line rents (3) (1,508)
Scheduled mortgage loan principal payments (4) (3,630)
Estimated annual provision for leasing commissions (5) (1,074)
Estimated annual provision for capital expenditures (6) (525)
---------------------
Estimated pro forma Cash Available for Distribution for the twelve months ended March 31, 1999 29,104
---------------------
---------------------
Minority interests' share of estimated pro forma Cash Available for Distribution 25,929
---------------------
---------------------
The Company's share of estimated pro forma Cash Available for Distribution available for
shareholders (7) 3,175
---------------------
---------------------
Estimated initial annual distribution per share (8) $0.34
---------------------
---------------------
Payout ratio based on estimated pro forma Cash Available for Distribution (9) 87.7%
---------------------
---------------------
</TABLE>
- ------------------
(1) 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.
(2) Represents the net increases in contractual rental income, net of
expenses, from new leases and renewals that were not in effect for the
entire twelve month period ended March 31, 1998 and new leases and
renewals that went into effect between March 31, 1998 and May 8, 1998.
(3) Effect of adjusting straight-line rental income included in pro forma
adjusted FFO for the twelve months ended March 31, 1998 to a cash basis.
(4) Represents scheduled payments of debt principal due during the 12 months
ending March 31, 1999.
-64-
<PAGE>
(5) Anticipated leasing commissions to be incurred based on the historical
weighted average of such commissions paid in connection with lease
renewals and re-leasing at the Properties multiplied by the average annual
square feet of space for which leases expire during the period from April
1, 1998 through December 31, 2000.
(6) The estimated cost of recurring building improvements and equipment
replacements (excluding tenant improvements) at the Properties for the
twelve months ending March 31, 1999. Generally, the Properties and their
associated tenant leases are such that non-revenue producing tenant
improvements are immaterial.
(7) The Company's share of estimated pro forma Cash Available for Distribution
and the initial amount available for distribution to the shareholders is
based on the Company's 10.91% partnership interest in the Operating
Partnership.
(8) The estimated annual distribution per share is based on a total of
8,193,594 shares outstanding after the Proposed Transactions assuming no
dilution from the exchange of L.P. Units, or exercise of options pursuant
to the terms of the 1997 Stock Option Plan.
(9) The payout ratio on estimated Cash Available for Distribution is
calculated as the estimated initial annual distribution per share divided
by the Company's share of Cash Available for Distribution per share for
the 12 months ending March 31, 1999.
The Company believes that its estimate of Cash Available for
Distribution constitutes a reasonable basis for setting the amount of the
Company's initial distribution and expects to maintain its initial
distribution rate for the 12 months following the closing of the Berg
Acquisition, unless actual results of operations, economic conditions or
other factors differ materially from the assumptions used in the estimate.
Cash Available for Distribution does not represent cash generated from
operating activities in accordance with GAAP and is not necessarily
indicative of cash available to fund cash needs. The actual return that the
Company will realize and the amount available for distributions to
shareholders will be affected by a number of factors, including the revenues
received from the Properties, the operating expenses of the Company, the
interest expense incurred on borrowings and unanticipated capital
expenditures. The estimate of Cash Available for Distribution is provided in
this Proxy Statement/Prospectus solely for the purpose of setting the initial
distribution amount and is not intended to be a forecast by the Company of
its future results of operations, FFO or Cash Available for Distribution. No
assurance can be given that the Company's estimate will prove accurate.
The Company anticipates that Cash Available for Distribution will
exceed earnings and profits for federal income tax purposes as the latter
figure takes into account non-cash expenses, such as depreciation and
amortization, to be incurred by the Company. Distributions by the Company to
the extent of its current and accumulated earnings and profits for federal
income tax purposes will be taxable to shareholders as ordinary dividend
income unless a shareholder is a tax-exempt entity. See "FEDERAL INCOME TAX
CONSIDERATIONS--Taxation of United States Shareholders". Distributions in
excess of earnings and profits generally will be treated as a non-taxable
reduction of the shareholder's basis in the Common Stock to the extent
thereof, and thereafter as taxable gain. The percentage of such distributions
constituting a non-taxable return of capital, if any, may vary from period to
period. The Company anticipates that a substantial percentage of the
distributions to shareholders for the 12 months following the consummation of
the Offering will constitute ordinary income.
In order to maintain its qualification as a REIT, the Company must
make annual distributions to shareholders of at least 95% of its taxable
income (which does not include net capital gains). See "FEDERAL INCOME TAX
CONSIDERATIONS--Taxation of the Company--Annual Distribution Requirements."
Under certain circumstances, the Company may be required to make
distributions in excess of Cash Available for Distribution in order to meet
such distribution requirements.
Any inability on the part of the Operating Partnership to secure
financing as required to fund capital expenditures and net changes in working
capital, including development activities and expansions, would require the
utilization of distributable cash flow to satisfy such obligations, thereby
possibly reducing distributions to partners, including the Company, and funds
available for the Company to pay dividends. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and
Capital Resources."
Cash Available for Distribution is based on FFO. Management
considers FFO an appropriate measure of performance of an equity REIT because
industry analysts have accepted it as such. The Company computes FFO in
accordance with standards established by the Board of Governors of NAREIT in
its March 1995 White Paper, which may differ from the methodology for
calculating FFO used by other office and/or industrial REITs and,
accordingly, may not be comparable to such other REITs. Furthermore, FFO does
not represent amounts available for management's discretionary use because of
needed capital replacement or expansion, debt service obligations, or other
commitments and uncertainties.
-65-
<PAGE>
Distributions by the Company will be determined by the board of
directors and will depend on actual Cash Available for Distribution of the
Company, its financial condition, capital requirements, the annual
distribution requirements under the REIT provisions of the Code and such
other factors as the Board of Directors deems relevant. For a discussion of
the tax treatment of distributions to holders of shares of Common Stock, see
"FEDERAL INCOME TAX CONSIDERATIONS--Taxation of United States Shareholders"
and "Taxation of Foreign Shareholders."
THE ESTIMATES OF PRO FORMA CASH FLOWS FROM OPERATING ACTIVITIES AND
CASH AVAILABLE FOR DISTRIBUTION ARE MADE SOLELY FOR THE PURPOSE OF SETTING
THE INITIAL DISTRIBUTION RATE AND ARE NOT INTENDED TO BE A PROJECTION OR
FORECAST OF THE COMPANY'S RESULTS OF OPERATIONS OR OF ITS LIQUIDITY. FUNDS
FROM OPERATIONS DOES NOT REPRESENT CASH FLOW FROM OPERATIONS AS DEFINED BY
GAAP, IS NOT NECESSARILY INDICATIVE OF CASH AVAILABLE TO FUND ALL OF THE
COMPANY'S CASH NEEDS, AND SHOULD NOT BE CONSIDERED AS AN ALTERNATIVE TO NET
INCOME FOR PURPOSES OF EVALUATING THE COMPANY'S OPERATING PERFORMANCE. SEE
"FORWARD LOOKING INFORMATION" and "RISK FACTORS--Uncertainties Regarding
Distributions to Shareholders."
-66-
<PAGE>
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The following is a discussion of the Company's policies with respect
to investment, financing, conflicts of interest and other activities of the
Company. These policies have been formulated by the board of directors of the
Company and generally may be amended or revised from time to time at the
discretion of the board of directors without a vote of the shareholders of
the Company. Upon the effective date of the Reincorporation Merger, however,
the Charter will provide that (i) until the Protective Provisions Expiration
Date, the approval of the Required Directors as provided in the Charter and
the consent of the L.P. Unit Majority are required for the Company to take
title to assets (other than temporarily in connection with an acquisition
prior to contributing such assets to the operating partnership) or to conduct
business other than through the operating partnership, or for the Company or
the Operating Partnership to engage in any business other than the ownership,
construction, development and operation of real estate properties, (ii)
changes in certain policies with respect to conflicts of interest must be
consistent with legal requirements, (iii) certain policies with respect to
competition by Carl E. Berg and the Berg Group are imposed pursuant to
provisions of the Acquisition Agreement that cannot be amended or waived
without the approval of the Independent Directors Committee, and (iv) the
Company cannot take any action intended to terminate its qualification as a
REIT without the approval of more than 75% of the entire board of directors.
In addition, until the Protective Provisions Expiration Date, the approval of
the Required Directors will be required for certain fundamental corporate
actions, including amendments to the Charter or bylaws, amendments to the
Operating Partnership Agreement, and any merger, consolidation or sale of all
or substantially all of the assets of the Company or the Operating
Partnership. Certain specific transactions, including the issuance of
securities and borrowings in excess of specified limits, and amendments of
the Charter and bylaws are subject to approval by more than 75% of the
directors. See "DESCRIPTION OF CAPITAL STOCK--Board Quorum and Special Voting
Requirements."
INVESTMENT POLICIES
The Company's business will be focused solely on the ownership,
construction, development and operation of real estate properties,
principally R&D Properties, and the Company intends to conduct all of its
activities through the Operating Partnership. The Company's investment
objective is to provide stable cash flow available for quarterly cash
distributions and achieve long-term appreciation through increases in cash
flows and the value of its properties. The Company intends to pursue these
objectives by (i) investing capital to enhance investment returns on its
existing Properties, and (ii) acquiring or developing additional properties
where the Company believes that opportunities exist for attractive investment
returns. Such additional properties may include some or all of the Berg Land
Holdings, which are subject to options held by the Company. See "DESCRIPTION
OF THE PROPERTIES--Land Holding and Development Arrangements." The Company
may expand or improve its properties or, subject to the approval of the
Required Directors, sell such properties in whole or in part as determined by
the Board. See "FUTURE OPERATIONS--Strategy."
The Company expects to pursue its investment objectives principally
through the direct ownership by the Operating Partnership of the Properties
and future developed properties. Future development or investment activities
will not be limited to any specified percentage of the Company's assets. The
Company may also participate with other entities in property ownership,
through joint ventures or other types of co-ownership. Equity investments may
be subject to existing mortgage financing and other indebtedness which have
priority over the equity interest of the Company.
While the Company will emphasize equity real estate investments, it
may, in its discretion and subject to the percentage ownership limitations
and gross income tests necessary for REIT qualification, invest in mortgage
and other real estate interests including securities of other real estate
investment trusts. The Company has not previously invested in mortgages or
securities of other real estate investment trusts and does not have any
present intention to make such investments.
FINANCING POLICIES
The Company intends to maintain a ratio of debt to Total Market
Capitalization of no more than 50%. The Company's ratio of debt to Total
Market Capitalization would have been approximately 32.8% at March 31, 1998,
on a pro forma basis after giving effect to the Proposed Transactions. See
"PRO FORMA CAPITALIZATION." The Company, however, may from time to time
reevaluate its debt policy in light of then current economic conditions,
relative costs of debt and equity capital, the market values of its
properties, growth and acquisition
-67-
<PAGE>
opportunities and other factors. Subject to the need for more than 75% of the
directors to approve debt increases above 50% of Total Market Capitalization,
the Company may modify its debt policy and may increase or decrease its ratio
of debt to Total Market Capitalization.
The Company has established its debt policy relative to Total Market
Capitalization, because the Company believes that the book value of its
assets (which to a large extent consists of the depreciated value of real
property, the Company's primary tangible asset) does not accurately reflect
its ability to borrow and to meet debt service requirements. However, Total
Market Capitalization is more variable than book value and does not
necessarily reflect the fair market value of the Company's underlying assets.
Although the Company will consider factors other than market capitalization
in making decisions regarding the incurrence of debt (such as the estimated
market value of such properties upon refinancing, and the ability of
particular properties and the Company as a whole to generate cash flow to
cover expected debt services), there can be no assurance that the Company
will maintain the ratio of debt to Total Market Capitalization (or to any
other measure of asset value) described above.
To the extent that the board of directors of the Company determines
to seek additional capital, the Company may raise such capital through
additional equity offerings, debt financing or retention of cash flow (after
consideration of provisions of the Code requiring the distribution by a REIT
of a certain percentage of its taxable income and taking into account taxes
that would be imposed on undistributed taxable income), or through a
combination of these sources. It is the Company's present intention that any
additional borrowings will be made through the Operating Partnership,
although the Company may incur borrowings that would be reloaned to the
Operating Partnership. See "OPERATING PARTNERSHIP AGREEMENT." Borrowings may
be unsecured or may be secured by any or all assets of the Company, the
Operating Partnership, or any existing or new property and may have full or
limited recourse to all or any portion of the assets of the Company, the
Operating Partnership, or any existing or new property.
The Company has not established any limit on the number or amount of
mortgages that may be placed on any single property or on its portfolio as a
whole. At the closing of the Berg Acquisition the Company intends to
establish the New Secured Loan and the New Credit Line. The line of credit
would be available to fund property acquisitions, development activities, and
for general corporate purposes. The Company may determine to issue securities
senior to the Common Stock, including shares of new series of Preferred Stock
and debt securities (either of which may be convertible into Common Stock or
accompanied by warrants to purchase capital stock). The Company may also
determine to finance acquisitions through the exchange of properties or the
issuance of additional L.P. Units in the Operating Partnership, shares of
Common Stock or other securities.
In the event that the board of directors determines to raise
additional equity capital, it has the authority, without shareholder
approval, to issue additional shares of Common Stock, Preferred Stock other
capital stock (including securities senior to the Common Stock) of the
Company in any manner (and on such terms and for such consideration) it deems
appropriate, including in exchange for property. In the event that the
Company issues (whether for cash or property) any shares of Common Stock or
securities convertible into, or exchangeable or exercisable for, shares of
Common Stock, subject to certain limited exceptions, including the issuance
of Common Stock pursuant to any stock incentive plan adopted by the Company
or pursuant to Limited Partners' exercise of the Exchange Rights or the Put
Rights, the Limited Partners will have the right to purchase Common Stock or
such securities in order to maintain their respective percentage interests in
the Company and the Operating Partnership on a consolidated basis. If the
board of directors determines that the Company will raise additional equity
capital to fund investments by the Operating Partnership, the Company will
contribute such funds to the Operating Partnership as a contribution to
capital and purchase of additional general partnership interest; however,
holders of L.P. Units will have the right to participate in such funding on a
pro rata basis. In the event that holders of L.P. Units sell their L.P. Units
to the Company pursuant to their Put Rights, the Company is authorized to
raise the funds for such purchase by issuing additional shares of Common
Stock. In addition, the Company may issue additional shares of Common Stock
in connection with the exchange of L.P. Units for shares of Common Stock
pursuant to the exercise of the Exchange Rights.
The Company's Board of Directors also has the authority to cause the
Operating Partnership to issue additional L.P. Units in any manner (and on
such terms and for such consideration) as it deems appropriate, including in
exchange for property. In the event that the Operating Partnership issues new
L.P. Units for cash (but not property), the Limited Partners will have the
right to purchase L.P. Units in order, and to the extent necessary, to
maintain their respective percentage interests in the Operating Partnership.
Any such new L.P. Units will be
-68-
<PAGE>
exchangeable for Common Stock pursuant to the Exchange Rights or may be
tendered to the Company pursuant to the Put Rights. See "OPERATING
PARTNERSHIP AGREEMENT--Exchange Rights, Put Rights and Registration Rights."
DISPOSITION POLICY
The Company has no current intention to dispose of any of the
Properties, although it reserves the right to do so. The tax basis of the
Limited Partners in the Properties in the Operating Partnership is
substantially less than current fair market value. Accordingly, prior to the
disposition of their L.P. Units in the Operating Partnership, upon a
disposition of any of the Properties, a disproportionately large share of the
gain for federal income tax purposes would be allocated to the Limited
Partners. See "FEDERAL INCOME TAX CONSIDERATIONS--Income Taxation of the
Partnership." Consequently, it may be in the interests of the Limited
Partners that the Company continue to hold the Properties in order to defer
such taxable gain. In light of this, the Operating Partnership Agreement
provides that for a period of ten years after the closing or until the
Protective Provisions Expiration Date, if earlier, Carl Berg and Clyde Berg
may prohibit the Operating Partnership from disposing of Properties which
they designate in a taxable transaction. Kontrabecki has a similar right with
respect to the Kontrabecki Properties which will lapse before the end of the
ten-year period, if his beneficial ownership interest in the Operating
Partnership falls below 750,000 L.P. Units. The Limited Partners may seek to
cause the Company to retain the Properties even when such action may not be
in the interests of some, or a majority, of the shareholders of the Company.
The approval of the Required Directors will be required if the Company sells
in any transaction, or series of related transactions or aggregate sales, all
or substantially all of the assets of the Company. The consent of the holders
of a majority of the L.P. Units will be required to effect a sale or sales of
all, or substantially all, of the assets of the Operating Partnership. For a
description of certain tax consequences arising from the disposition of a
property controlled by the Company, see "FEDERAL INCOME TAX
CONSIDERATIONS--The Aspects of The Operating Partnership."
CONFLICT OF INTEREST POLICIES
The Company has adopted certain policies and entered into certain
agreements with the Berg Group designed to eliminate or minimize potential
conflicts of interest. There can be no assurance that these policies will be
successful in eliminating the influence of such conflicts. If they are not
successful, decisions affecting the Company could be made that might fail to
reflect fully the interests of all shareholders.
In recognition of these potential conflicts of interest, the Company
and the Berg Group have agreed that any transaction between the Company and
Mr. Berg or other members of the Berg Group must be approved by the
Independent Directors Committee. The members of the Berg Group also have
agreed that all future transactions between the Company and their Affiliates
or any other entities in which they hold 5% or greater ownership interests
shall be subject to review and approval by the Independent Directors
Committee. See "THE ACQUISITION AGREEMENT--Conflict of Interest Provisions."
In addition, the Berg Group and the Company have entered into
agreements concerning the lease of office space to the Company, the
acquisition of Berg Land Holdings and of Pending Development Projects, and
the use of BBE for construction and repair work. The exercise of the
Company's rights or the waiver of any benefits to the Company under these
agreements will be subject to the approval of the Independent Directors
Committee. See "DESCRIPTION OF THE PROPERTIES--Land Holding and Development
Arrangements" and "FUTURE OPERATIONS OF THE COMPANY--Operation and
Management."
POLICIES WITH RESPECT TO OTHER ACTIVITIES
The Company has authority to offer shares of its capital stock or
other securities and to repurchase or otherwise reacquire its shares or any
other securities and may engage in such activities in the future. The Company
has no outstanding loans to other entities or persons, including its officers
and directors. The Company may in the future make loans to joint ventures in
which it participates in order to meet working capital needs.
The Company has not engaged in trading, underwriting or agency
distribution or sale of securities of other issuers, nor has the Company
invested in the securities of other issuers other than the Operating
Partnership for the purpose of exercising control, and does not intend to do
so. The Company intends to make investments in such a way that it will not be
treated as an investment company under the Investment Company Act of 1940.
-69-
<PAGE>
At all times, the Company intends to make investments in such a
manner as to be consistent with the requirements of the Code for the Company
to qualify as a REIT unless, because of changing circumstances or changes in
the Code (or in Treasury Regulations), directors representing more than 75%
of the entire board of directors determine that it is no longer in the best
interests of the Company to qualify as a REIT.
-70-
<PAGE>
THE ACQUISITION AGREEMENT
THE FOLLOWING SUMMARY OF THE ACQUISITION AGREEMENT, INCLUDING THE
DESCRIPTIONS OF CERTAIN PROVISIONS SET FORTH ELSEWHERE IN THIS PROXY
STATEMENT/PROSPECTUS, IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
ACQUISITION AGREEMENT, WHICH IS FILED AS AN EXHIBIT TO THE REGISTRATION
STATEMENT OF WHICH THIS PROXY STATEMENT/PROSPECTUS IS A PART. A COPY OF THE
AGREEMENT IS AVAILABLE FROM THE COMPANY UPON REQUEST. SEE "AVAILABLE
INFORMATION."
GENERAL
The parties to the Acquisition Agreement are MWP, MWP I, MWP II, all
members of the Berg Group, and all of the Kontrabecki Partnerships, including
MWP III. Under the terms of the Acquisition Agreement, the parties will agree
to operate MWP, MWP I, MWP II and MWP III as the Operating Partnership
subject to the terms of the Operating Partnership Agreement, the Operating
Partnership will acquire certain Berg Properties and certain Acquired
Properties, and the Company will consummate the Berg Acquisition. Pursuant to
the Acquisition Agreement, the Company will be entitled to conduct the
operations of all four limited partnerships in a consolidated manner under
the name "Mission West Properties, L.P." The Acquisition Agreement was signed
by all parties effective as of May 14, 1998.
THE CLOSING
The closing of the transactions contemplated by the Acquisition
Agreement will occur on the last business day of the month in which the
shareholders approve the Proposed Transactions at the Special Meeting. At the
closing, the existing general partners in MWP, MWP I, MWP II and MWP III will
resign, the Company will acquire its 10.91% general partner interest in
Operating Partnership, the Operating Partnership will acquire certain Berg
Properties and certain Acquired Properties in exchange for L.P. Units, and
the parties will sign and deliver the Operating Partnership Agreement, the
Exchange Rights Agreement, the Berg Land Holdings Option Agreement, the
Pending Projects Acquisition Agreement, and subject to shareholder approval
of the Reincorporation Merger, the Merger Agreement. In addition, MWP III
will convert to a Delaware limited partnership as of the closing date.
REPRESENTATIONS AND WARRANTIES
The Acquisition Agreement provides for each of the parties to make
representations and warranties customary for transactions of this nature,
which generally relate to the parties lawful organization, good standing,
authorization to enter into the agreement and effect the transactions
required under the Acquisition Agreement, title to the Properties, condition
of the Properties, effectiveness of the leases for the Properties, the
accuracy of financial information exchanged by the parties, the accredited
investor status of all limited partners, and similar matters.
CONDITIONS TO CONSUMMATION OF THE CONTEMPLATED TRANSACTIONS
The closing of the transactions contemplated under the Acquisition
Agreement is subject to satisfaction of certain conditions. The conditions
applicable to the obligations of all parties include shareholder approval of
the Berg Acquisition and the Private Placement at the Special Meeting, the
absence of any injunction or restraining order against completing any of the
Proposed Transactions, the receipt of all required third party consents, the
effectiveness of the offering of L.P. Units to the Limited Partners in a
private placement, and the execution and delivery of all related agreements.
The obligations of the Company to close the transaction will be subject to,
in addition to the preceding conditions, the accuracy of the representations
and warranties of the other parties to the agreement, the resignation of the
existing general partners of MWP, MWP I, MWP II, and MWP III, and the absence
of any material adverse effect on the Properties taken as a whole. The
obligations of the parties holding the Acquired Properties to close the
transactions contemplated under the Acquisition Agreement is subject to the
accuracy of the Company's representations and warranties and the conditions
precedent applicable to all parties. The Acquisition Agreement requires also
that all of the Properties must be owned free and clear by the existing
limited partnerships and other owners, subject only to permitted liens for
indebtedness and other normal encumbrances, and must be subject to currently
effective title insurance policies and otherwise in good condition with
leases in force and without liabilities except those incurred in the ordinary
course of business.
-71-
<PAGE>
COVENANTS
The Acquisition Agreement includes covenants pertaining to the
provision of timely and accurate financial statements as necessary in
connection with the Company's preparation of the Registration Statement and
this Proxy Statement/Prospectus, the continued conduct of each party's
business with respect to the Properties in the ordinary course, and each
party's agreement to take actions required and reasonably requested to comply
with the terms of the Acquisition Agreement and consummate the transactions
subject to that agreement.
The Acquisition Agreement requires the Company to provide Exchange
Rights to the Limited Partners with respect to their L.P. Units and to give
them certain rights to register the shares of Common Stock acquired under the
terms of the Exchange Rights Agreement. Also, the Company must take steps
necessary to preserve and list on the AMEX the shares of Common Stock
issuable in exchange for L.P. Units under the Exchange Rights Agreement.
Furthermore, the Company has agreed that each of the Limited Partners may
purchase his, her or its pro-rata share of new equity securities offered by
the Company subsequent to the closing date. Each Limited Partner's pro-rata
share will be determined based on the proportion which the Limited Partner's
number of L.P. Units bears to the total number of Outstanding Shares at the
time of the Company's proposed offering of new equity securities. The Limited
Partners will have 10 days in which to respond to the Company's offer of such
securities. Thereafter, the Company will have a period of 60 days to conclude
the sale and issuance of the new securities upon the same terms offered to
the Limited Partners. A Limited Partner may assign the right of first refusal
to any assignee of at least 500,000 L.P. Units. The right of first refusal
will terminate upon the earlier of May 14, 2003, or the written agreement of
the Company and holders of a majority of the L.P. Units.
Under the Acquisition Agreement, the Company has agreed to provide
indemnity to its officers, directors, employees, agents and certain other
parties with respect to claims brought against indemnified parties as a
result of his, her or its service to or relationship with the Company,
whether before or after the closing of the Proposed Transactions. This
indemnification is consistent with the provisions of the articles of
incorporation of the Company and the Charter. See "THE REINCORPORATION
MERGER--Comparison of Rights of Shareholders." The Company also has agreed to
take the action necessary to effect the Reincorporation Merger, subject to
shareholder approval at the Special Meeting, and to cause Mission
West-Maryland to adopt the Charter and bylaws described below. The members of
the Berg Group will have the right to nominate for election to the Board of
Directors of the Company two members of the Board of Directors (any such
person, a "Berg Group Board Representative") so long as the Berg Group and
its Affiliates beneficially own an aggregate of at least 15% of the
Fully-Diluted number of shares of Common Stock. In the event that this
ownership falls below 15% but is at least 10%, the members of the Berg Group
will have the right to nominate one person for election to the Board of
Directors. See "CERTAIN PROVISIONS OF MARYLAND LAW AND MISSION
WEST-MARYLAND'S CHARTER AND BYLAWS."
CONFLICTS OF INTEREST PROVISIONS
The Acquisition Agreement includes the undertaking of Carl E. Berg
not to directly or indirectly acquire or develop, or acquire any equity
ownership interest in any entity that has an ownership interest in any real
estate zoned or intended for use as R&D Properties or similar industrial
facilities or intends to engage in similar real estate activities (with the
exception of investments in securities of publicly traded companies, which
securities do not represent more than 10% of the outstanding voting
securities of such companies) in California, Oregon or Washington without
first disclosing such investment opportunity to the Company and making such
opportunity available to the Company subject to the approval of the
Independent Directors Committee. This restriction does not apply to any
acquisition, development or investment with respect to the Berg Land Holdings
and the Pending Development Projects. This restriction remains in effect
until the date on which both of the following conditions are satisfied: (i)
no nominee of the Berg Group is a member of the Company's board of directors
and (ii) the Berg Group and its Affiliates (other than the Company and the
Operating Partnership) beneficially own less than 25% of the outstanding
Common Stock of the Company (including for these purposes shares issuable
upon exercise of the Exchange Rights subject to the Ownership Limit). In
addition, transactions between the Company and any Berg Group member, or
entity in which a Berg Group member holds at least 5% of the equity interests
are subject to review and approval by the Independent Directors Committee.
Aside from those restrictions, Mr. Berg and other members of the Berg Group
will generally have freedom of action with respect to the conduct of their
business activities and will not be required to seek the approval of such
activities or refer business opportunities to the Company, nor will they be
subject to liability for failure to do so.
-72-
<PAGE>
TERMINATION
The Acquisition Agreement is terminable prior to the closing only by
the Company or Mr. Berg. Grounds for termination are the existence of a
non-appealable final order, decree or judgment preventing any aspect of the
Proposed Transactions, failure of parties other than Mr. Berg or other Berg
Group members to satisfy all of the conditions to the Company's obligations
to close the transactions contemplated by the Acquisition Agreement, failure
to gain the consent of any Limited Partner other than members of the Berg
Group prior to the closing, failure of the Company's shareholders to approve
the Berg Acquisition at the Special Meeting, or a material inaccuracy of any
representation or any warranty with respect to the Properties, which breach
has not been cured within 60 days of receipt of notice from the Company.
SURVIVAL AND INDEMNIFICATION MATTERS
All representations and warranties of the parties to the Acquisition
Agreement will survive the closing for a period of one year. Each party to
the Acquisition Agreement is obligated to indemnify the other parties and
their Affiliates with respect to losses and liability resulting from
inaccuracies in the representations and warranties of such party, failure by
a party to perform its obligations under the Acquisition Agreement, failure
to satisfy liabilities not assumed by the Operating Partnership or the
Company, and any claim for brokers' commissions or finder's fees.
-73-
<PAGE>
OPERATING PARTNERSHIP AGREEMENT
THE FOLLOWING SUMMARY OF THE OPERATING PARTNERSHIP AGREEMENT,
INCLUDING THE DESCRIPTIONS OF CERTAIN PROVISIONS SET FORTH ELSEWHERE IN THIS
PROXY STATEMENT/PROSPECTUS, IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE
OPERATING PARTNERSHIP AGREEMENT, WHICH IS FILED AS AN EXHIBIT TO THE
REGISTRATION STATEMENT OF WHICH THIS PROXY STATEMENT/PROSPECTUS IS A PART.
MANAGEMENT
As of the closing date of the Berg Acquisition the Operating
Partnership will consist of four separate Delaware limited partnerships
engaged in the combined operation and ownership of the Properties pursuant to
the terms of the Acquisition Agreement and the Operating Partnership
Agreement, which is identical in all material respects for all four of the
limited partnerships. Generally, pursuant to the Operating Partnership
Agreement, the Company as the sole general partner of the Operating
Partnership will exclusively control the business and assets of the Operating
Partnership and will have full and complete authority, discretion and
responsibility with respect to the Operating Partnership's 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
Partnership. Through its authority to manage the business and affairs of the
Company, the board of directors of the Company will direct the business of
the Operating Partnership. The Berg Group has the right to nominate two
individuals for election to the board of directors so long as the members of
the Berg Group and their Affiliates (other than the Company and the Operating
Partnership) beneficially own in the aggregate at least 15% of the
outstanding shares of Common Stock on a Fully-Diluted basis. If the members
of the Berg Group and such Affiliates beneficially own, in the aggregate,
less than 15% but at least 10% of the Common Stock, on a Fully-Diluted basis,
the Berg Group will have the right to nominate one individual for election to
the board of directors.
Notwithstanding the Company's effective control of the Operating
Partnership, the consent of the Limited Partners holding an L.P. Unit
Majority will be required with respect to certain extraordinary actions
involving the Operating Partnership including (i) the amendment, modification
or termination of the Operating Partnership Agreement, (ii) a general
assignment for the benefit of creditors or the appointment of a custodian,
receiver or trustee for any of the assets of the Operating Partnership, (iii)
the institution of any proceeding for bankruptcy of the Operating
Partnership, (iv) the transfer of any general partnership interests in the
Operating Partnership, including (with certain exceptions) transfers
attendant to any merger, consolidation or liquidation of the Company, (v) the
admission of any additional or substitute general partner in the Operating
Partnership; and (vi) a Change of Control of the Operating Partnership. In
addition, until the Protective Provisions Expiration Date, the consent of the
Limited Partners holding the L.P. Unit Majority will also be required with
respect to (i) the liquidation of the Operating Partnership, (ii) the sale or
other transfer of all or substantially all of the assets of the Operating
Partnership and certain mergers and business combinations resulting in the
complete disposition of all L.P. Units; and (iii) the issuance of limited
partnership interests having seniority as to distributions, assets and voting
over the L.P. Units.
Carl Berg and Clyde Berg have the right for a period of ten years,
or, if sooner, until the Protective Provisions Expiration Date, to prohibit
taxable transfers of designated Properties by the Operating Partnership
without their prior written consent. Kontrabecki has similar rights with
respect to the former Kontrabecki Properties, which expire after he owns
fewer than 750,000 L.P. Units. The Operating Partnership will be able to
effect "tax-free" like kind exchanges under Section 1031 of the Code, or in
connection with other non-taxable transactions, such as a contribution of
property to a new partnership, without obtaining the prior written consent of
these individuals. See "POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
Disposition Policy."
TRANSFERABILITY OF L.P. UNITS
The Operating Partnership Agreement provides that the Limited
Partners may transfer their L.P. Units subject to certain limitations. Except
for certain transfers by the Limited Partners to or from certain of their
affiliates, however, all transfers may be made only with the prior written
consent of the Company as the sole general partner of the Operating
Partnership.
In addition, no transfer of L.P. Units by the Limited Partners may
be made in violation of certain regulatory and other restrictions set forth
in the Operating Partnership Agreement. Except in the case of certain
permitted
-74-
<PAGE>
transfers to or from certain Affiliates of the Limited Partners, the Exchange
Rights, the Put Rights, the New Equity Financing Rights and the Protective
Provisions will no longer be applicable to L.P. Units so transferred, and the
transferee will not have any rights to nominate persons to the board of
directors of the Company.
ADDITIONAL CAPITAL CONTRIBUTIONS AND LOANS
The Operating Partnership Agreement provides that if the Operating
Partnership requires additional funds to pursue its investment objectives,
the Company may fund such investments by raising additional equity capital
and making a capital contribution to the Operating Partnership or by
borrowing such funds and lending the net proceeds thereof to the Operating
Partnership. If the Company intends to provide additional funds through a
contribution to capital and purchase of units of general partnership
interest, the Limited Partners will have the right to participate in such
funding on a pro rata, pari passu basis and to acquire additional L.P. Units
(the "New Equity Financing Rights"). If the Limited Partners do not
participate in such financing, the Company will acquire additional units of
general partnership interest. In either case, the number of additional units
of partnership interest will be increased based upon the amount of the
additional capital contributions and the value of the Operating Partnership
as of the date such contributions are made.
In addition, as general partner of the Operating Partnership, the
Company has the ability to cause the Operating Partnership to issue
additional L.P. Units. In the event that the Operating Partnership issues new
L.P. Units (for cash but not property), the Limited Partners will have the
right to purchase new L.P. Units at the price offered by the Company in the
transaction giving rise to such participation right in order, and to the
extent necessary, to maintain their respective percentage interests in the
Operating Partnership. See "POLICIES WITH RESPECT TO CERTAIN ACTIVITIES--
Financing."
EXCHANGE RIGHTS, PUT RIGHTS AND REGISTRATION RIGHTS
The Limited Partners will have the Exchange Rights, which become
exercisable after the first anniversary of the Berg Acquisition, except that
the Limited Partners may, in the aggregate, tender L.P. Units for exchange
prior to the first anniversary solely in connection with (i) the registration
of 500,000 shares of Common Stock acquired upon exercise of the Exchange
Rights for resale on a Form S-3 (or any equivalent form) and (ii) a
registered public offering of Common Stock initiated by the Company to the
extent of 25% of the total shares in the offering subject to the
underwriters' unlimited right to reduce the participation of all selling
shareholders. Once in each 12-month period beginning on the first anniversary
of the closing of the Offering, the Limited Partners (other than Carl Berg
and Clyde Berg) will have the right to exchange a portion of their L.P. Units
for shares of Common Stock (subject to the Ownership Limit) and to exercise
the Put Rights to sell a portion of their L.P. Units to the Operating
Partnership at a price equal to the average Market Price of the Common Stock
for the 10-trading day period immediately preceding the date of tender (the
"Tender Price"). Upon any exercise of the Put Rights, the Company will have
the opportunity for a period of 15 days to elect to fund the purchase of the
L.P. Units and purchase additional general partner interests in the Operating
Partnership for cash, unless the purchase price exceeds $1 million in the
aggregate for all tendering Limited Partners, in which case, the Operating
Partnership or the Company shall be entitled to reduce proportionally the
number of L.P. Units to be acquired from each tendering Limited Partner so
that the total purchase price is not more than $1 million.
The Exchange Rights Agreement permits every Limited Partner to
tender L.P. Units to the Company, and at the Company's election, to receive
cash, Common Stock, or a combination of cash and Common Stock in exchange for
the L.P. Units tendered, subject to the Ownership Limit, or the Berg Group
Ownership Limit, as the case may be. Pursuant to the Exchange Rights
Agreement, the holders of L.P. Units will have the right to participate in
any registered public offering of the Common Stock initiated by the Company
to the extent of 25% of the total shares sold in the offering upon converting
L.P. Units to shares of Common Stock, but subject to the underwriters'
unlimited right to reduce the participation of all selling shareholders. The
holders of L.P. Units will be able to request resale registrations of shares
of Common Stock acquired on exchange of L.P. Units on a Form S-3, or any
equivalent form of registration statement, and after the first year following
the closing of the Berg Acquisition, the Company will be obligated to effect
no more than two such registrations in any 12-month period. The Company is
obligated to assist the L.P. Unit holders in obtaining a firm commitment
underwriting agreement for such resale from a qualified investment banking
firm. If registration on Form S-3, or an equivalent form, is not available
for any reason, the Company will be obligated to effect a registration of the
shares to be acquired on exercise of the Exchange Rights on Form S-11, or an
equivalent form, in an underwritten public offering, upon demand by the
holders of no fewer than 500,000 L.P. Units. All holders of L.P. Units will
be entitled to participate
-75-
<PAGE>
in such registration. The Company will bear all costs of such registrations
other than selling expenses, including commissions and separate counsels'
fees of the L.P. Unit holders. The Company will not be required to effect any
registration for resale on Form S-3, or equivalent form of Common Stock
shares issuable to the holder of L.P. Units if the request is for less than
250,000 shares.
OTHER MATTERS
The Operating Partnership Agreement requires that the Operating
Partnership be operated in a manner that will enable the Company to satisfy
the requirements for being classified as a REIT and to avoid any federal
income or excise tax liability.
The Operating Partnership Agreement provides that the net operating
cash flow of the Operating Partnership, as well as net sales and refinancing
proceeds, will be distributed from time to time as determined by the board of
directors of the Company (but not less frequently than quarterly) pro rata in
accordance with the partners' percentage interests in the Operating
Partnership. See "Distribution Policy."
Pursuant to the Operating Partnership Agreement, the Operating
Partnership will also assume and pay when due, or reimburse the Company for
payment of, certain costs and expenses relating to the continuity of
existence and operations of the Company. In addition, the Operating
Partnership Agreement obligates the Operating Partnership to reimburse all
organization costs and expenses of the Proposed Transactions paid or incurred
by the Berg Group.
The Operating Partnership Agreement provides that upon the exercise
of an outstanding option under the Company's 1997 Option Plan, the Company
may purchase additional general partner interests in the Operating
Partnership by contributing the exercise proceeds to the Operating
Partnership. The increased interest of the Company shall be equal to the
percentage of Outstanding Shares represented by the shares acquired upon
exercise of the option.
TERM
The Operating Partnership will continue in full force and effect
until December 31, 2048 or until sooner dissolved pursuant to the terms of
the Operating Partnership Agreement.
-76-
<PAGE>
MANAGEMENT OF THE COMPANY
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of the Company as of May 15,
1998 are as follows:
<TABLE>
<CAPTION>
Age Position
------ ---------------------------------------------------------------
<S> <C> <C>
Carl E. Berg(1)(3) 60 Chairman of the Board, Chief Executive Officer, President and
Director
Michael J. Anderson(1) 38 Vice President, Chief Operating Officer and Director
Bradley A. Perkins 41 Vice President, General Counsel and Secretary
Marianne K. Aguiar 31 Vice President of Finance and Controller
John Bolger(2)(3) 51 Director
Roger Kirk(2) 45 Director
</TABLE>
- ----------
(1) Berg Group Board Representative
(2) Member of the Independent Director's Committee and Member of the
Compensation Committee
(3) Member of the Audit Committee
The following is a biographical summary of the experience of the
executive officers and directors of the Company:
Mr. Berg has served as Chief Executive officer, President and
Director of the Company since September of 1997. From 1979 to the present,
Mr. Berg has been a general partner of Berg & Berg Developers and a
director and officer of BBE, Inc. since its inception. Mr. Berg is also a
director of Integrated Device Technologies, Inc., Videonics, Valence
Technology and System Integrated Research.
Mr. Anderson joined the Company on January 1, 1998. On March 30,
1998, Mr. Anderson was appointed Chief Operating Officer, Vice President and
a Director. After seven years as a real estate attorney and partner at Ware &
Freidenrich, Palo Alto, California, Mr. Anderson has spent the past six years
in private real estate development with Sandhill Homes, LP and Sandhill
Property Company.
Mr. Perkins joined the Company on February 2, 1998. On March 30,
1998, Mr. Perkins was appointed Vice President, General Counsel, and
Secretary. Mr. Perkins will devote a portion of his time to the Company, a
portion to various Berg companies, and a portion of his time to Teledex
Corporation (a telephone supplier). From November 1991 to January 1998,
Mr. Perkins was with Valence Technology, Inc., where he was Vice President,
General Counsel and Secretary for the past five years. From August 1988 to
November 1991, Mr. Perkins was Assistant General Counsel and Intellectual
Property Counsel with VLSI Technology, Inc., a semiconductor manufacturer.
Ms. Aguiar joined the Company on March 29, 1998. On March 30, 1998,
Ms. Aguiar was appointed Vice President of Finance and Controller. From
June 1996 to March 1998, Ms. Aguiar was with Oasis Residential, Inc. where
she served as Vice President, Controller and Treasurer from July 1996 to
March 1998. From November 1995 to May 1996, Ms. Aguiar was employed by SBT
Accounting Systems where from April 1996 to May 1996, she served as
Acting Vice President of Finance and Controller and from November 1995 to
April 1996 she served as Assistant Controller. From November 1992 to
November 1995, Ms. Aguiar was employed by Coopers & Lybrand LLP where she
served as Audit Manager.
Mr. Bolger became a director of the Company on March 30, 1998. Mr.
Bolger is a private investor. He was Vice President of Finance and
Administration of Cisco Systems, Inc., a networking company, from May
1989 through December 1992. Mr. Bolger is a director of Integrated Device
Technology, Inc., Integrated Systems Inc., McAfee Associates, Inc.,
Sanmina Corporation, and TCSI Corporation.
Mr. Kirk initially became a director of the Company in September
1997. In May 1998, Mr. Kirk rejoined the board. Mr. Kirk is President of
Hydrodynamics, Inc., since he formed the company in 1982. Since 1988,
Mr. Kirk has been the project manager and a general partner in Isabella
Partners for Isabella Hydroelectric Project. Certain members of the Berg
Group are also general partners in Isabella Partners.
-77-
<PAGE>
NUMBER, TERMS AND ELECTION OF DIRECTORS
Following the Reincorporation Merger, the number of directors will
initially be set at five. However, the bylaws of Mission West-Maryland
provide that the number of directors may be changed from time to time by the
board of directors, provided that the number will never be less than the
minimum required by Maryland law or more than 15. The board of directors may
determine the exact number. Generally, each director will serve for a term of
one year or until the next annual meeting at which directors are elected.
CONTRACTUAL ARRANGEMENTS
In January 1998, the Company entered into an employment agreement
with Mr. Anderson, Vice President, Chief Operating Officer and Director,
providing that in the case of voluntary termination for good cause (as
defined in the agreement) or involuntary termination other than for cause,
Mr. Anderson will be entitled to a severance payment of $100,000 and a
continuation of medical and other group insurance benefits for six months. In
the event such a termination occurs more than 12 months from his hire date,
the vesting of Mr. Anderson's stock options will accelerate and options which
would have vested in the six month period following the termination date will
be vested as of the termination date. Additionally, Mr. Anderson acquired
200,000 shares of Common Stock on March 30, 1998 pursuant to the exercise of
an option. Mr. Anderson's shares are subject to repurchase by the Company.
The Company loaned Mr. Anderson $900,000 to purchase the shares.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. The Company has established an Audit Committee that
will consist of at least two Independent Directors following the consummation
of the Proposed Transactions contemplated in this Prospectus/Proxy Statement.
The Audit Committee was established to make recommendations concerning the
engagement of independent public accountants, review with the independent
public accountants the plans and results of the audit engagement, approve
professional services provided by the independent public accountants, review
the independence of the independent public accountants, consider the range of
audit and non-audit fees and review the adequacy of the Company's internal
accounting controls.
COMPENSATION COMMITTEE. The Company has established a Compensation
Committee to determine compensation for the Company's executive officers and
to implement the Company's 1997 Stock Option Plan. The Compensation Committee
currently consists of two Independent Directors and will not include any
officer of the Company.
INDEPENDENT DIRECTORS COMMITTEE. Following the consummation of the
transactions contemplated herein, the Board of Directors will establish the
Independent Directors Committee consisting of at least two Independent
Directors to approve transactions between the Company and members of the Berg
Group and their affiliates and any entity in which any of them directly or
indirectly owns at least 5% of the equity interests. In addition, the
Independent Directors Committee will determine whether to exercise the
Company's rights under the Berg Land Holdings Option Agreement.
COMPENSATION OF DIRECTORS
The Company intends to pay its directors who are not officers of the
Company fees for their services as directors. Directors will receive annual
compensation of $15,000, plus a fee of $1,000 for attendance (in person or by
telephone) at each meeting of the board of directors, but not for committee
meetings. Officers of the Company who are also directors will not be paid any
director fees.
-78-
<PAGE>
Each member of the Board of Directors who is not an employee of the
Company or any of its subsidiaries or affiliates (a "Non-Employee Director")
and who becomes a member of the Board of Directors after November 10, 1997,
the date on which the 1997 Stock Option Plan was approved by the shareholders
of the Company, will automatically receive a grant of an option to purchase
50,000 shares of Common Stock at an exercise price equal to 100% of the fair
market value of the Common Stock at the date of grant of such option upon
joining the Board of Directors. Such options will become exercisable
cumulatively with respect to 1/48th of the underlying shares on the first day
of each month following the date of grant. Generally, the options must be
exercised while the optionee is a director of the Company.
EXECUTIVE COMPENSATION
Upon the acquisition of control of the Company by the Berg Voting
Group on September 2, 1997 all former officers and directors resigned as of
the same date. The officers and directors appointed to replace them,
including Mr. Berg and Mr. Kirk, received no compensation during the 1997
fiscal year. Therefore, no officer or director who received compensation
during the fiscal year ended December 31, 1997 will receive compensation
during the fiscal year ending December 31, 1998. The following table sets
forth the annual base salary of the former chief executive officer and the
annual base salary which the Company expects to pay in 1998 to the Company's
president and four other most highly compensated executive officers whose
annualized base salary is expected to exceed $100,000 (collectively, the
"Named Executives"). The Company also may pay, subject to approval of the
board of directors, a cash bonus to each Named Executive in an amount not to
exceed such executive's base salary.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Annual Summary Compensation(1) Long-Term Compensation
----------------------------------------- ----------------------------
Other Annual Securities Underlying
Salary Bonus Compensation Options (shares)
---------- ---------- -------------- -------------------------
<S> <C> <C> <C> <C>
Michael M. Earley(2) $ 49,640 - $25,750 -
President and CEO
Carl E. Berg 100,000 - - -
Chairman, CEO and President
Michael J. Anderson 150,000 $50,000 - 600,000(3)
Vice President and COO
Bradley A. Perkins 160,000 - - 80,000(4)
Vice President and General Counsel
Marianne K. Aguiar 105,000 - - 75,000(4)
Vice President of Finance and
Controller
</TABLE>
- ----------------
(1) Compensation for Mr. Berg, Mr. Anderson, Mr. Perkins and Ms. Aguiar is
prospective. No current Executive Officer received any compensation from
the Company in 1997.
(2) Michael M. Earley served as Chief Executive Officer, President and
Director of the Company from March 7, 1997 through August 1997. Mr. Earley
received compensation for such services through the payment by the Company
to Triton Group Ltd. (of which Mr. Earley was concurrently the Chief
Executive Officer and President) in the total amount of $75,390 ($49,640
paid to the Triton Group Management for general management services,
including Mr. Earley's services, and $25,750 paid directly to Mr. Earley
as Director's fees).
(3) Mr. Anderson received a stock option to purchase 400,000 shares of stock,
which vests over four years as follows: 6.25% on the first six-month
anniversary of Mr. Anderson's date of hire, an additional 12.5% on his
one-year anniversary, and the remainder in equal amounts on a monthly
basis over the remaining three years. Mr. Anderson received a second stock
option to purchase an additional 200,000 shares which was immediately
exercisable, subject to the Company's right to repurchase (which right
decreases over time) such shares in the event Mr. Anderson leaves the
employ of the Company. Mr. Anderson exercised his option for such shares.
The Company loaned Mr. Anderson the purchase price for this stock.
(4) Stock options vest over four years as follows: 6.25% on the first
six-month anniversary of date of hire, an additional 12.5% on the one-year
anniversary, and the remainder in equal amounts on a monthly basis over
the remaining three years.
-79-
<PAGE>
BENEFIT PLANS
1997 STOCK OPTION PLAN. The Company's 1997 Stock Option Plan (the
"Option Plan") was approved by the Company's shareholders on November 10,
1997. The Option Plan was adopted so that the Company may attract and retain
the high quality employees, consultants and directors necessary to build the
Company's infrastructure and to provide ongoing incentives to the Company's
employees in the form of options to purchase the Company's Common Stock by
enabling them to participate in the Company's success. The following summary
is qualified in it entirety by reference to the full text of the Option Plan,
a copy of which was filed as an exhibit to the Company's Proxy Statement,
dated October 20, 1997, filed with the Commission on October 20, 1997.
The Option Plan provides for the granting to employees (including
officers and directors who are employees) of "incentive stock options" within
the meaning of Section 422 of the Code, and for the granting of nonstatutory
options to employees, consultants and directors, including directors who are
neither employees of, nor consultants to, the Company ("Non-Employee
Directors"). Options to purchase a maximum of 5,500,000 shares of Common
Stock may be granted under the Option Plan, subject to equitable adjustments
to reflect certain corporate events. The Option Plan will be administered by
the Compensation Committee. The interpretation and construction of any
provision of the Option Plan is within the sole discretion of the
Compensation Committee, whose determination is final and conclusive. Members
of the Board or committee receive no additional compensation for their
services in connection with the administration of the Option Plan.
The Compensation Committee selects the optionees and determines the
number of shares to be subject to each option and the time or times at which
shares become exercisable under the option, except for options granted to
Non-Employee Directors pursuant to automatic grants.
Each option granted under the Option Plan is evidenced by a written
stock option agreement between the Company and the optionee. The Option Plan
provides that options must vest and, unless otherwise decided by the
Committee become exercisable cumulatively as to 20% of the underlying shares
on each anniversary of the date of grant for so long as the optionee is
employed by or providing service to the Company.
The price per share exercise price of options granted under the
Option Plan may not be less than 100% of the fair market value on the date of
grant, except in certain specific circumstances, in which case the exercise
price may not be less than 110%. Each option may be exercised only to the
extent that it is vested. Options must generally be exercised during the
optionee's employment or within 30 days following the optionee's termination
of status as an employee, consultant or director, unless termination is due
to the death or disability of an optionee. If termination of status is due to
death or disability of the optionee, an option may be exercised within six
months.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the last completed fiscal year, no current members of the
Compensation Committee were officers of the Company. The current officers and
directors of the Company were elected or appointed during the current fiscal
year, except for Carl E. Berg. Mr. Berg became an officer and director in
September 1997, but did not serve on the Compensation Committee during the
last completed fiscal year. No officer who received compensation in the last
completed fiscal year is now an officer. The current members of the Company's
Compensation Committee were elected by the board of directors effective
during the current fiscal year and are not officers or employees of the
Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION
The MGCL permits a Maryland corporation to include in its charter a
provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages except for liability
resulting from (a) actual receipt of an improper benefit or profit in money,
property or services; or (b) active and deliberate dishonesty established by
a final judgment as being material to the cause of action. The Charter
contains such a provision which eliminates such liability to the maximum
extent permitted by the MGCL.
The Charter also authorizes Mission West-Maryland to the maximum
extent permitted by Maryland law, to obligate itself to indemnify and to pay
or reimburse reasonable expenses in advance of final disposition of a
proceeding to any present or former director or officer, or any individual
who, while a director of Mission
-80-
<PAGE>
West-Maryland and at the request of Mission West-Maryland, serves or has
served another corporation, real estate investment trust, partnership, joint
venture, trust, employee benefit plan or any other enterprise as a director,
officer, partner or trustee of such corporation, real estate investment
trust, partnership, joint venture, trust, employee benefit plan or other
enterprise from and against any claim or liability to which such person may
become subject or which such person may incur by reason of his status as a
present or former director or officer of Mission West-Maryland. The Maryland
Bylaws obligate Mission West-Maryland, to the maximum extent permitted by
Maryland law, to indemnify and to pay or reimburse reasonable expenses in
advance of final disposition of a proceeding to (i) any present or former
director or officer who is made a party to the proceeding by reason of his
service in that capacity or (ii) any individual who, while a director of
Mission West-Maryland and at the request of Mission West-Maryland, serves or
has served another corporation, real estate investment trust, partnership,
joint venture, trust, employee benefit plan or any other enterprise as a
director, officer, partner or trustee of such corporation, real estate
investment trust, partnership, joint venture, trust, employee benefit plan or
other enterprise and who is made a party to the proceeding by reason of his
service in that capacity. The Charter and bylaws also permit Mission
West-Maryland to indemnify and advance expenses to any person who served a
predecessor of Mission West-Maryland in any of the capacities described above
and any employee or agent of Mission West-Maryland or a predecessor of
Mission West-Marylad.
The MGCL requires a corporation (unless its charter provides
otherwise, which the Charter does not) to indemnify a director or officer who
has been successful, on the merits or otherwise, in the defense of any
proceeding to which he is made a party by reason of his service in that
capacity. The MGCL permits a corporation to indemnify its present and former
directors and officers, among others, against judgments, penalties, fines,
settlements and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service in those or other capacities unless it is established that (a) the
act or omission of the director or officer was material to the matter giving
rise to the proceeding and (i) was committed in bad faith or (ii) was the
result of active and deliberate dishonesty, (b) the director or officer
actually received an improper personal benefit in money, property or services
or (c) in the case of any criminal proceeding, the director or officer had
reasonable cause to believe that the act or omission was unlawful. However,
under the MGCL, a Maryland corporation may not indemnify for an adverse
judgment in a suit by or in the right of the corporation or for a judgment of
liability on the basis that personal benefit was improperly received, unless
in either case a court orders indemnification and then only for expenses. In
addition, the MGCL permits a corporation to advance reasonable expenses to a
director or officer upon the corporation's receipt of (a) a written
affirmation by the director or officer of his good faith belief that he has
met the standard of conduct necessary for indemnification by the corporation
and (b) a written undertaking by him or on his behalf to repay the amount
paid or reimbursed by the corporation if it shall ultimately be determined
that the standard of conduct was not met.
-81-
<PAGE>
CERTAIN TRANSACTIONS
PRIVATE PLACEMENT TRANSACTIONS--1997
In September and November of 1997, the Company sold Common Stock in
two private placement transactions. On September 2, 1997, the Company sold
6,000,000 shares of Common Stock at $0.15 per share prior to the Reverse
Split. On November 12, 1997, the Company sold 1,250,000 shares of Common
Stock at $4.50 per share after giving effect to the Reverse Split. The
purchasers of record of the Common Stock included, among others, the
following 5% shareholders, executive officers, directors, and affiliates of
5% shareholders, executive officers and directors:
<TABLE>
<CAPTION>
September Private November Private
Placement(1) Placement
------------------- -------------------
<S> <C> <C>
Berg & Berg Enterprises, 27,333 -
Inc.(2)
Thelmer Aalgaard(3) 12,333 70,640
Carl E. Warden(4) 12,333 105,000
John C. Bolger 12,333 9,889
Robert L. and Sharon K. Yoerg - 111,111
</TABLE>
- ---------------
(1) Reflects Reverse Split.
(2) Carl E. Berg, President, Chief Executive Officer and Director of the
Company, is also an officer and director of BBE. Clyde Berg is a director
of BBE. Carl E. Berg, Clyde J. Berg and members of their immediate
families are, directly and indirectly, the beneficial owners of all shares
of the capital stock of BBE.
(3) Mr. Aalgard is a director of BBE.
(4) As a result of the Proposed Transactions, Mr. Warden and the Yoergs will
no longer be Affiliates of the Company.
In addition, members of Mr. Aalgaard's immediate family purchased or
received as a gift from Mr. Aalgaard an aggregate of 17,772 shares of Common
Stock in connection with the November Private Placement.
In connection with the September and November private placements,
certain purchasers of Common Stock, including Mr. Aalgaard, Mr. Warden, Mr.
Bolger and the Yoergs entered into Voting Rights Agreements with BBE pursuant
to which the purchasers agreed to vote their shares of Common Stock as
directed by Carl E. Berg on behalf of BBE, on any matter submitted to a vote
of the Company's shareholders.
The Voting Rights Agreements terminate at the earliest of the
following dates: (i) upon any sale of the purchaser's shares of Common Stock
pursuant to a registration statement declared effective under the Securities
Act, but only as to the purchaser's shares of Common Stock so sold; (ii) upon
the sale of the purchaser's shares of Common Stock pursuant to Rule 144
promulgated under the Securities Act, but only as to the purchaser's shares
of Common Stock so sold; or (iii) two years after the effective date of the
Voting Rights Agreements.
PRIVATE PLACEMENT TRANSACTIONS--1998
On May 4, 1998, the Company entered into agreements with prospective
purchasers to sell and issue 6,495,058 shares of Common Stock in the Private
Placement, the terms of which are described elsewhere in this Proxy
Statement/Prospectus. See "BACKGROUND OF THE PROPOSED
TRANSACTIONS--Background--The Private Placement." The purchasers of record of
the Common Stock will include, among others, the following officers,
directors, 5% shareholders and purchasers, who by reason of the purchase of
Common Stock in the Private Placement, will become 5% shareholders:
<TABLE>
<CAPTION>
Non-Placement Agent Ingalls & Snyder
Private Placement Private Placement
--------------------- ------------------
<S> <C> <C>
Carl E. Berg 50,000 -
Thelmer Aalgaard 70,000 -
Carl E. Warden 39,609 -
Leo Helzel - 457,000
Meyer Family Trust - 1,000,000
I&S Value Partners - 1,125,067
Prism Partners I, L.P. - 450,000
</TABLE>
-82-
<PAGE>
PROPOSED TRANSACTIONS
The Proposed Transactions include transactions between the Company,
certain officers and directors of the Company and their affiliates. See
"SUMMARY OF THE PROPOSED TRANSACTIONS AND PURPOSE OF THE SPECIAL
MEETING--Private Placement/Recapitalization," "RISK FACTORS--Control of the
Company and the Operating Partnership by the Berg Group," and "--Potential
Conflicts of Interest with the Berg Group," "BACKGROUND OF THE PROPOSED
TRANSACTIONS--Benefits to the Berg Group."
PURCHASE BY MICHAEL ANDERSON
Michael J. Anderson, Vice President and Chief Operating Officer of
the Company, acquired 200,000 shares of Common Stock on March 30, 1998
pursuant to the exercise of an option. Mr. Anderson's shares are subject to
repurchase by the Company. The Company loaned Mr. Anderson $900,000 to
purchase the shares.
-83-
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth information with respect to the
beneficial ownership of the Company's Common Stock as of May 15, 1998 by (i)
each person who is a shareholder of the Company holding more than a 5% interest
in the Company, (ii) directors and Named Executives of the Company, and (iii)
the directors and officers of the Company as a group and as adjusted to reflect
the consummation of the Proposed Transactions. Unless otherwise indicated in the
footnotes to the table, all of such interests are owned directly, and the person
or entity has sole voting and investment power. The number of shares does not
reflect the number of shares of Common Stock for which L.P. Units held by the
person are exchangeable. For a description of the terms of the Exchange Rights
and the Put Rights of the Limited Partners, see "OPERATING PARTNERSHIP AGREEMENT
- --Exchange Rights, Put Rights, and Registration Rights." For a description of
the right of members of the Berg Group to nominate persons to the board of
directors of the Company, see "MANAGEMENT--Directors and Executive Officers."
<TABLE>
<CAPTION>
Common Stock
--------------------------------------------------------------------------------
Number of Shares Number of Shares
Beneficially Beneficially
Owned(1) Prior to Owned(1) After
Proposed Percent Proposed Percent
Transactions Ownership Transactions Ownership
--------------------- ------------ --------------------- ----------
<S> <C> <C> <C> <C>
Michael J. Anderson 225,000(2) 13.1% 225,000 2.7%
Vice President, Chief Operating
Officer and Director
Carl E. Warden 117,333(3) 6.9% 156,942(3) 1.9%
1516 Country Club Drive
Los Altos, CA 94024
Robert L. & Sharon K. Yoerg(4) 111,111 6.5% 111,111 1.4%
98 Melanie Lane
Atherton, CA 94027
Thelmer Aalgaard 82,973(5) 4.9% 152,973 1.9%
c/o Berg & Berg Enterprises, Inc.
10050 Bandley Drive
Cupertino, CA 95014
Roger S. Kirk, Director 34,556 2.1% 34,556 *
521 E. Peach #28
Bozeman, Montana 59771
John C. Bolger, Director 25,348(6) 1.5% 25,348 *
96 Sutherland Drive
Atherton, CA 94027
Carl E. Berg(7) 27,333(8) * 77,333 1.0%
President, Chief Executive Officer
and Director
Clyde J. Berg(7) 27,333(8) * 27,333 *
c/o Berg & Berg Enterprises, Inc.
10050 Bandley Drive
Cupertino, CA 95014
Berg & Berg Enterprises, Inc. 27,333(8) * 27,333 *
10050 Bandley Drive
Cupertino, CA 95014
Bradley A. Perkins 0(9) * 0 *
Vice President, General Counsel and
Secretary
Marianne K. Aguiar 0(10) * 0 *
Vice President of Finance and
Controller
Ingalls & Snyder Value Partners, L.P.(11) 0 * 1,125,067 13.7%
61 Broadway
New York, NY 10006
Meyer Family Trust 0 * 1,000,000 12.2%
c/o Bay Apartment Communities, Inc.
4340 Stevens Creek Blvd.
Suite 275
San Jose, CA 95129
Prism Partners I, L.P.(12) 0 * 450,000 5.5%
909 Montgomery Street, Suite 400
San Francisco, CA 94133
Leo Helzel(13) 0 * 437,000 5.3%
5550 Redwood Road, Suite 4
Oakland, CA 94619
Paul McCarthy(14) 0 * 430,000 5.2%
c/o Marquette National Corporation
6316 South Western Avenue
Chicago, IL 60636
All Directors and executive officers as a 314,321 18.2% 364,321 4.4%
group (6 persons)(15)
</TABLE>
-84-
<PAGE>
- -------------------
* Less than 1%.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting
power and/or investment power with respect to those securities and
includes securities which such person has the right to acquire
beneficial ownership within 60 days of May 15, 1998. Unless otherwise
indicated, the persons or entities identified in this table have sole
voting and investment power with respect to all shares shown as
beneficially owned by them. Percentage ownerhip calculations are based
on 1,698,536 shares outstanding as of May 15, 1998.
(2) Mr. Anderson received a stock option to purchase 400,000 shares of stock,
which vests over 4 years as follows: 6.25% on the first six-month
anniversary of Mr. Anderson's date of hire, an additional 12.5% on his
one-year anniversary, and the remainder in equal amounts on a monthly basis
over the remaining 3 years. Mr. Anderson received a second stock option to
purchase an additional 200,000 which was immediately exercisable subject to
repurchase, which Mr. Anderson exercised. The Company loaned Mr. Anderson
the purchase price for this stock.
(3) Includes (i) 9,333 shares held of record by Carl E. Warden and (ii) 39,609
held of record by Marlin Concepts, Inc. to be purchased in the Private
Placement.
(4) Includes (i) 55,556 shares held of record by Robert L. Yoerg M.D. Trustee,
Robert L. Yoerg Professional Corporation Pension Plan and (ii) 11,111
shares held of record by Sharon K. Yoerg, Custodian, Elizabeth A. Yoerg,
Under the Uniform Gifts to Minors Act.
(5) Mr. Aalgaard is a director of BBE. Includes (i) 33,400 shares held of
record by Carl E. Berg, Trustee, Berg & Berg Profit Sharing Plan FBO
Thelmer G. Aalgaard Dated 1/1/84, (ii) 4,160 shares held of record by Carl
E. Berg, Trustee, Berg & Berg Profit Sharing Plan FBO Thelmer G. Aalgaard
Dated 1/1/84, 1997 Contribution, and (iii) 2,220 shares held of record by
Thelmer G. Aalgaard, Custodian, Rachel Michaels, Under the California
Uniform Gifts to Minor Act.
(6) Includes 3,126 shares of Common Stock issuable on exercise of options.
(7) Carl E. Berg and Clyde J. Berg disclaim beneficial ownership, except to
the extent of their pecuniary interest, in the 1,097,959 shares of
Common Stock held beneficially and/or of record by Berg & Berg
Enterprises, Inc. ("BBE"). Carl E. Berg is an executive officer,
director and Clyde J. Berg is a director of BBE. With members of their
immediate families, the Messrs. Berg beneficially own, directly and
indirectly, all of the shares of Capital Stock of BBE. Carl E. Berg
disclaims beneficial ownership of 53,071 shares of Common Stock held by
him as a trustee under various pension and profit sharing plans, some of
which are subject to Voting Rights Agreements. Mr. Berg has no
investment control over such shares.
(8) Does not include 1,070,626 shares of Common Stock which are subject to
Voting Rights Agreements. BBE and the Messrs. Berg disclaim beneficial
ownership of such shares because BBE has no investment control over such
shares and no power to vote such shares. However, holders of such shares
are obligated, pursuant to Voting Rights Agreements, to vote such shares
as recommended by Carl E. Berg, as agent for BBE. Both Clyde J. Berg and
Carl E. Berg may be deemed the beneficial owner of any shares of Common
Stock beneficially owned by BBE. See Footnote (2) above.
(9) Mr. Perkins received a stock option to purchase 80,000 shares of stock,
which vests over 4 years as follows: 6.25% on the first six-month
anniversary of Mr. Perkins' date of hire, an additional 12.5% on his
one-year anniversary, and the remainder in equal amounts on a monthly basis
over the remaining 3 years.
(10) Ms. Aguiar received a stock option to purchase 75,000 shares of stock,
which vests over 4 years as follows: 6.25% on the first six-month
anniversary of Ms. Aguiar's date of hire, an additional 12.5% on her
one-year anniversary, and the remainder in equal amounts on a monthly basis
over the remaining 3 years.
(11) Thomas Boucher and Robert L. Cipson, general partners of Ingalls & Snyder
Value Partners, L.P. ("Value Partners"), have the power to vote and the
power to direct the investment of Value Partners with respect to the
Common Stock.
(12) Jerald Weintraub, managing general partner of Prism Partners I, L.P.
("Prism"), has the power to vote and the power to direct the investment
of Prism with respect to the Common Stock. Includes 31,500 shares held
of record by Legion Fund Limited, for which Mr. Weintraub also has the
power to vote and the power to direct the investment.
(13) Mr. Helzel may be deemed to be the beneficial owner of (i) 22,000 shares
held of record by Helzel Family Foundation and (ii) 415,000 shares held of
record by the Leo B. and Florence Helzel Living Trust because Mr. Helzel is
a director of the foundation, and trustee and beneficiary of the trust. Mr.
Helzel disclaims beneficial ownership of these shares except to the extent
of his pecuniary interest therein.
(14) Mr. McCarthy may be deemed to be the beneficial owner of (i) 215,000 shares
held of record by John F. McCarthy Charitable Lead Annuity Trust and (ii)
215,000 shares held of record by Marquette National Corporation, because
Mr. McCarthy is the trustee of the Trust and the Chairman, Chief Executive
Officer and beneficial owner of the Marquette National Corporation. Mr.
McCarthy disclaims beneficial ownership of these shares except to the
extent of his pecuniary interest therein.
(15) Current officers and directors include Carl E. Berg, Michael J. Anderson,
Bradley A. Perkins, Marianne K. Aguiar, John C. Bolger and Roger S. Kirk.
-85-
<PAGE>
THE REINCORPORATION MERGER
INTRODUCTION
The Company's board of directors believes that the best interests of
the Company and its shareholders will be served by changing the state of
incorporation of the Company from California to Maryland by means of the
Reincorporation Merger. The principal reason for the Reincorporation Merger is
that the MGCL contains provisions conducive to the operation of a REIT. Many
REITs have incorporated in the State of Maryland, and the board of directors
believes that this has provided state regulatory authorities and courts with a
defined body of administrative and case law concerning the governance of REITs.
The Reincorporation Merger will be effected by merging the Company into
Mission West-Maryland, a newly formed wholly-owned subsidiary of the Company,
which was incorporated for the purpose of redomiciling the Company as a Maryland
corporation and acquiring, recapitalizing and continuing the business and
operations of the Company. Upon completion of the Reincorporation Merger, the
Company will cease to exist and Mission West-Maryland will continue to operate
the business of the Company under the name Mission West Properties, Inc.
EXCHANGE OF SECURITIES
Pursuant to the Agreement and Plan of Merger, which will be in
substantially the form attached hereto as Exhibit A (the "Merger Agreement"),
each outstanding share of Common Stock will automatically be converted into one
share of New Common Stock at the effective time of the merger and outstanding
options and warrants for the purchase of Common Stock will be exchanged for
options and warrants for the purchase of the equivalent number of shares of New
Common Stock. Each stock certificate representing issued and outstanding shares
of Common Stock will continue to represent the same number of shares of New
Common Stock. Options and warrants issued and outstanding will continue to
represent the right to purchase the same number of shares of New Common Stock.
IT WILL NOT BE NECESSARY FOR SECURITYHOLDERS TO EXCHANGE THEIR EXISTING
SECURITIES FOR SECURITIES OF MISSION WEST-MARYLAND. Securityholders of the
Company may exchange their securities if they so choose, however. The Common
Stock is listed for trading on the AMEX and the PSE, and after the
Reincorporation Merger, the New Common Stock will continue to be listed on the
AMEX and the PSE without interruption under the same symbol ("MSW").
APPROVAL AND EFFECTIVENESS OF MERGER
Under California law, the affirmative vote of a majority of the
outstanding shares of Common Stock of the Company is required for approval of
the Merger Agreement and the other terms of the Reincorporation Merger. See "THE
SPECIAL MEETING - Votes Required." The Reincorporation Merger has been approved
by the Company's board of directors, which unanimously recommends a vote in
favor of the proposal. If approved by the shareholders, it is anticipated that
the merger will become effective as soon as practicable following the Meeting
(the "Effective Date"). However, pursuant to the Merger Agreement, the merger
may be abandoned or the Merger Agreement may be amended by the board of
directors (except that the principal terms may not be amended without
shareholder approval) either before or after shareholder approval has been
obtained and prior to the Effective Date of the Reincorporation Merger if, in
the opinion of the board of directors of either company, circumstances arise
which make either action advisable.
Shareholders of the Company will not have dissenters' rights of
appraisal with respect to the Reincorporation Merger.
The discussion set forth below is qualified in its entirety by
reference to the Merger Agreement, the Charter and the bylaws of Mission
West-Maryland (the "Maryland Bylaws" for purposes of this discussion), which
will be substantially in the forms attached to this Proxy Statement/Prospectus
as Exhibits A, B and C, respectively.
APPROVAL BY SHAREHOLDERS OF THE REINCORPORATION MERGER WILL CONSTITUTE
APPROVAL OF THE MERGER AGREEMENT, THE CHARTER AND THE MARYLAND BYLAWS OF MISSION
WEST-MARYLAND, WHICH WILL BE SUBSTANTIALLY IN THE FORMS SET FORTH AS EXHIBITS A,
B AND C TO THIS PROXY STATEMENT/PROSPECTUS.
-86-
<PAGE>
POSSIBLE DISADVANTAGES
Despite the unanimous belief of the board of directors that the
Reincorporation Merger is in the best interests of the Company and its
shareholders, it should be noted that California and Maryland law differ in
certain respects. Maryland law may not afford stockholders the same substantive
rights as California law. For a comparison of shareholders' rights and the
powers of management under Maryland and California law, see "--Comparison of
Rights of Shareholders of the Company and Stockholders Mission West-Maryland."
NO CHANGE IN THE NAME, BUSINESS, MANAGEMENT, LOCATION OF PRINCIPAL OFFICE OR
EMPLOYEE PLANS OF THE COMPANY
The Reincorporation Merger will effect a change in the legal
domicile of the Company and other changes of a legal nature, certain of which
are described in this Proxy Statement/Prospectus. The Reincorporation Merger
will not result in a change in the name of the Company, except to include
"Inc." at the end. The business, management, fiscal year, location of the
principal office, assets and liabilities of the Company will not change as a
result of the Reincorporation Merger, although the business, management
assets and liabilities may change as a result of certain other proposals
contained in the Proxy Statement/Prospectus. See "BACKGROUND OF THE BERG
ACQUISITION," "THE BUSINESS OF BERG & BERG," "FUTURE OPERATIONS OF COMPANY,"
AND "MANAGEMENT OF THE COMPANY UPON CONSUMMATION OF THE BERG ACQUISITION."
The individuals listed "MANAGEMENT OF THE COMPANY UPON CONSUMMATION OF THE
BERG ACQUISITION will become the directors of Mission West-Maryland. In
addition, the Company expects to add one or two individuals to the board of
directors before the end of 1998. All employee benefit, stock option and
stock purchase plans of the Company will be continued by Mission
West-Maryland, and each option or right issued pursuant to any such plan will
automatically be converted into an option or right to purchase the same
number of shares of New Common Stock, at the same price per share, upon the
same terms, and subject to the same conditions, as set forth in such plan.
Shareholders should note that approval of the Reincorporation Merger will
also constitute approval of the assumption of these plans by Mission
West-Maryland.
COMPARISON OF RIGHTS OF SHAREHOLDERS OF THE COMPANY AND STOCKHOLDERS OF MISSION
WEST-MARYLAND
The Company is organized as a corporation under the laws of the
State of California and Mission West-Maryland is organized as a corporation
under the laws of the State of Maryland. As a California corporation, the
Company is subject to the California General Corporation Law (the "CGCL"), a
general corporation statute dealing with a wide variety of matters, including
election, tenure, duties and liabilities of directors and officers; dividends
and other distributions; rights of shareholders; and extraordinary actions,
such as amendments to the articles of incorporation, mergers, sales of all or
substantially all of the Company's assets and dissolution. The Company also
is governed by its Articles of Incorporation (the "California Articles") and
its Bylaws (the "California Bylaws"), which have been adopted pursuant to the
CGCL. As a Maryland corporation, Mission West-Maryland is governed by the
Maryland General Corporation Law (the "MGCL"), a general corporation statute
covering substantially the same matters as are covered by the CGCL, and by
the Charter and Maryland Bylaws
The material differences between the CGCL and the MGCL and among these
various documents are summarized below. The CGCL refers to "shareholders" and
the MGCL refers to "stockholders." The use of either term refers to the holders
of stock of the Company or Mission West-Maryland, as the case may be.
The comparison of certain rights of the shareholders of the Company and
the stockholders of Mission West-Maryland set forth below does not purport to be
complete and is subject to and qualified in its entirety by reference to the
CGCL and the MGCL and also to the California Articles, the California Bylaws,
the Charter and the Maryland Bylaws, copies of which are available from the
Company as described under "AVAILABLE INFORMATION".
-87-
<PAGE>
CALIFORNIA
SHAREHOLDER VOTING RIGHTS
California law provides for cumulative voting in the election of directors
(which permits holders of less than a majority of the voting securities of a
corporation to cumulate their votes and elect a director or directors in
certain situations) but permits the elimination thereof in the case of a
listed corporation (which is defined as a corporation that has shares listed
on the AMEX or other national securities exchanges). The California Bylaws
specifically provide for cumulative voting.
With certain exceptions, the CGCL requires that mergers, reorganizations,
dissolution, certain sales of assets and similar transactions be approved by
the holders of a majority of each class of shares outstanding.
Under the CGCL, the articles of incorporation and bylaws may include
supermajority voting provisions. These provisions, however, must be renewed
every two years and may not require a vote in excess of two-thirds of the
outstanding shares.
MARYLAND
SHAREHOLDER VOTING RIGHTS
Under the MGCL, cumulative voting is not available unless so provided in the
corporation's charter. The Charter does not provide for cumulative voting.
As a result, holders of a majority of the shares of Maryland Common Stock
generally would be entitled to elect all of the directors of Mission
West-Maryland. Pursuant to agreement, however, the Company and the Berg Group
have agreed to take action necessary to elect the two Berg Group Board
Representatives to the board of directors.
The MGCL requires, with certain exceptions, that the holders of two-thirds of
all shares entitled to vote on the matter must approve mergers,
consolidations, share exchanges, transfers of all or substantially all of the
assets of the corporation and dissolution unless the charter provides for a
different number not less than a majority. The Charter provides that such
matters may be approved by the holders of a majority of shares entitled to
vote on the matter.
Under the MGCL, the charter of a Maryland corporation may include
supermajority voting provisions without restrictions. The Charter currently
does not contain any supermajority voting provisions.
DENIAL OF VOTING RIGHTS
Under the MGCL, holders of the outstanding shares of any class of stock may
be denied all voting rights.
-88-
<PAGE>
CALIFORNIA
DIVIDENDS AND OTHER DISTRIBUTIONS
Under the CGCL, the Company may only make a distribution to shareholders if
(a) its retained earnings immediately prior to payment of the distribution
are at least equal to the amount of the distribution, or (b) generally, its
total assets (determined on the basis of their depreciated historical cost in
accordance with GAAP and exclusive of certain intangible assets and certain
other charges and expenses) are equal to at least 1 1/4 times its total
liabilities (excluding certain deferred items) immediately after giving
effect to the distribution. The CGCL also prohibits a California corporation
from making any distribution to shareholders if the corporation is or, as a
result thereof, would be likely to be unable to meet its liabilities as they
mature. The CGCL also imposes certain further limitations on distributions on
common stock if capital stock with a preference on distributions of assets
upon liquidation is outstanding.
DISSENTING SHAREHOLDER'S APPRAISAL RIGHTS
Under California law, shareholders of a California corporation whose shares
are listed on a national securities exchange (as are the shares of the
Company) generally do not have dissenters' rights unless the holders of 5% or
more of the class of outstanding shares claim the right or unless the
corporation or any law restricts the transfer of such shares.
STANDARD OF CONDUCT FOR DIRECTORS
Section 309 of the CGCL requires that a director perform the duties of a
director in good faith in the manner such director believes to be in the best
interests of the corporation and its shareholders and with such care,
including reasonable inquiry, as an ordinarily prudent person in a like
position would use under similar circumstances.
MARYLAND
DIVIDENDS AND OTHER DISTRIBUTIONS
The MGCL allows the payment of dividends and other distributions unless,
after giving effect to the distribution, (a) the corporation would not be
able to pay its debts as they become due in the usual course of business or
(b) the corporation's total assets would be less than the sum of the
corporation's liabilities plus, unless the charter provides otherwise (which
the Charter does), the amount that would be needed upon dissolution to
satisfy the preferential rights of those stockholders whose preferential
rights upon dissolution are superior to those receiving the distribution.
DISSENTING SHAREHOLDER'S APPRAISAL RIGHTS
The MGCL does not provide appraisal rights to stockholders of a corporation
if the corporation's shares are listed on a national securities exchange,
such as the AMEX, on the record date for determining those stockholders of
the corporation entitled to vote on the merger.
STANDARD OF CONDUCT FOR DIRECTORS
Section 2-405.1 of the MGCL requires that a director of a Maryland
corporation perform his duties in good faith with a reasonable belief that
his actions are in the best interests of the corporation and with the care of
an ordinarily prudent person in a like position ... under similar
circumstances.
-89-
<PAGE>
CALIFORNIA
REMOVAL OF DIRECTORS
Under the CGCL and the California Bylaws, the entire board of directors or
any individual director may be removed from office by a vote of shareholders
holding a majority of the outstanding shares entitled to vote at an election
of directors; provided, however, that unless the entire board is removed, an
individual director shall not be removed, unless (a) the number of shares
voted against removal, or not consenting to such removal, in the case of a
written consent, would be insufficient to elect such director if voted
cumulatively at an election at which the same total number of votes were cast
and the entire number of directors authorized at the time of such director's
most recent election were then being elected or (b) holders of the shares of
any class or series entitled to elect one or more directors shall vote to
remove a director so elected by said class or series.
The CGCL also provides that the superior court of the proper county may, at
the request of shareholders holding at least 10% of the number of outstanding
shares of any class, remove any director in case of fraudulent or dishonest
acts or gross abuse of authority or discretion with reference to the
corporation and may bar from reelection any director so removed for a period
prescribed by the court.
MARYLAND
REMOVAL OF DIRECTORS
Under the MGCL, the stockholders of a corporation may remove any director,
with or without cause, by the affirmative vote of a majority of all the votes
entitled to be cast for the election of directors, unless the charter of the
corporation provides otherwise. The MGCL further states that if the
stockholders of any class or series are entitled separately to elect one or
more directors, a director elected by a class or series may not be removed
without cause except by the affirmative vote of a majority of all votes of
that class or series, unless the charter of the corporation provides
otherwise (which the Charter does not). The Charter provides that directors
may be removed only for cause (defined in the Charter to be with respect to
any particular director, conviction of a felony or a final judgment of a
court of competent jurisdiction holding that such director caused
demonstrable, material harm to Mission West-Maryland through bad faith or
active and deliberate dishonesty) and only by the affirmative vote of at
least a majority of the votes entitled to be cast in the election of
directors. The MGCL does not provide for the removal of directors by a court
upon petition of shareholders.
-90-
<PAGE>
CALIFORNIA
VACANCIES ON THE BOARD OF DIRECTORS
The California Bylaws provide that vacancies on the board of directors,
except for a vacancy created by the removal of a director, may be filled by a
majority of the remaining directors, though less than a quorum, or by a sole
remaining director. Each director so elected shall hold office until his
successor is elected at an annual or a special meeting of the shareholders.
A vacancy occurring on the board of directors of the Company created by the
removal of a director may only be filled by the vote of a majority of the
shares entitled to vote represented at a duly held meeting at which a quorum
is present, or by the unanimous written consent of the shareholders.
The California Bylaws also provide that the shareholders may elect a director
or directors at any time to fill any vacancy or vacancies not filled by the
directors. Any such election by written consent (other than to fill a
vacancy created by the removal of a director) shall require the consent of
holders a majority of the outstanding shares entitled to vote.
MARYLAND
VACANCIES ON THE BOARD OF DIRECTORS
As permitted by the MGCL, the Maryland Bylaws provide that (a) a vacancy on
the Mission West-Maryland board of directors may be filled, if caused by any
reason other than an increase in the number of directors, by a majority of
the remaining directors, even if such number is less than a quorum and (b)
any vacancy in the Mission West-Maryland board of directors caused by an
increase in the number of directors may be filled by a majority vote of the
entire Mission West-Maryland board of directors; provided that a vacancy
created by the departure of a Berg Group Representative must be filled by
another Berg Group Board Representative until the time that the right of the
Berg Group to name directors has been terminated. A director elected by the
Mission West-Maryland board of directors will hold office until the next
annual meeting of stockholders and until his or her successor is elected and
qualifies.
-91-
<PAGE>
CALIFORNIA
COMMITTEES OF BOARD OF DIRECTORS
The California Bylaws provide that the board of directors may designate
committees consisting of two or more directors. Such committees may have all
the authority of the board of directors except with respect to: (a) the approval
of any action for which the CGCL also requires shareholders' approval or
approval of the issuance of outstanding shares, (b) the filling of vacancies on
the board of directors or on any committee, (c) the fixing of compensation of
the directors for serving on the board of directors or on any committee, (d) the
amendment or repeal of bylaws or the adoption of new bylaws, (e) the amendment
or repeal of any resolution of the board of directors which by its express terms
is not so amendable or repealable, (f) a distribution to the shareholders of the
corporation (as defined in Section 166 of the CGCL), except at a rate or in the
periodic amount or within a price range determined by the board of directors and
(g) the appointment of other committees of the board of directors or the members
thereof.
SPECIAL MEETINGS OF SHAREHOLDERS
The CGCL and the California Bylaws provide that a special meeting of
shareholders may be called by the board of directors, the chairman of the board,
the president, or by the holders of shares entitled to cast not less than 10% of
the votes at the meeting.
MARYLAND
COMMITTEES OF BOARD OF DIRECTORS
The Maryland Bylaws provide that the board of directors may appoint committees
composed of one or more directors and may delegate to such committees any of the
powers of the board of directors, except as prohibited by law. The MGCL
provides that the board of directors may delegate to committees any of the
powers of the board of directors, except the power to: (a) authorize dividends
on stock, (b) issue stock (subject to certain exceptions), (c) recommend to the
stockholders any action which requires stockholder approval, (d) amend the
bylaws or (e) approve any merger or share exchange which does not require
stockholder approval.
SPECIAL MEETINGS OF SHAREHOLDERS
As permitted by the MGCL, the Maryland Bylaws provide that, a special meeting
of stockholders may be called by the chief executive officer, the president
or a majority of the board of directors and must be called by the secretary
of Mission West-Maryland at the request in writing of shareholders entitled
to cast a majority of all the votes entitled to be cast at the meeting.
-92-
<PAGE>
CALIFORNIA
ACTIONS BY WRITTEN CONSENT OF SHAREHOLDERS
The California Bylaws provide that, subject to certain notice requirements, any
action which, under any provision of the CGCL, may be taken at a meeting of
shareholders, may be taken without a meeting if a consent in writing, setting
forth the action so taken, is signed by the holders of outstanding shares having
not less than the minimum number of votes that would be necessary to authorize
or take such action at a meeting at which all shares entitled to vote thereon
were present and voted.
AMENDMENTS TO ARTICLES, CHARTER AND BYLAWS
Under the CGCL, the articles of incorporation may be amended only if such
amendment is approved by the board of directors and by the holders of a majority
of the outstanding shares of stock entitled to vote on the matter. Under the
CGCL, a corporation's bylaws may be adopted, amended or repealed by approval of
the shareholders or by the board of directors; however, the shareholders may
never be divested of the power to adopt, amend or repeal the bylaws. In
addition, the CGCL provides that a bylaw changing a fixed number of directors or
the maximum or minimum number of directors may only be adopted by the holders of
a majority of the shares entitled to vote. The California Bylaws provide that,
subject to any exception, new bylaws may be adopted or the California Bylaws may
be amended or repealed by the affirmative vote of a majority of the outstanding
shares entitled to vote, or by the written consent of shareholders entitled to
vote such shares, and the California Bylaws also provide that, subject to the
rights of shareholders set forth above and any other exceptions, bylaws other
than a bylaw or amendment thereof changing the authorized number of directors
may be adopted, amended or repealed by the California Board.
MARYLAND
ACTIONS BY WRITTEN CONSENT OF SHAREHOLDERS
The MGCL provides that any action that may be taken at a stockholder meeting may
be taken without a meeting only if (a) a unanimous written consent setting forth
the matter is signed by each stockholder entitled to vote on the matter and (b)
a written waiver of any right to dissent is signed by each stockholder entitled
to notice of the meeting but not entitled to vote at it.
AMENDMENTS TO ARTICLES, CHARTER AND BYLAWS
Under the MGCL, an amendment to the charter of a corporation must be approved by
the board of directors and the holders of two-thirds of the shares entitled to
vote on such matter unless such charter provides for a different vote not less
than a majority of such shares so entitled to vote. The Charter provides for
amendments by the affirmative vote of the holders of a majority of the shares
entitled to vote on the matter.
As permitted by the MGCL, the Maryland Bylaws provide that the Maryland board of
directors has the exclusive power to adopt, amend or repeal any provision of the
Maryland Bylaws and to make new bylaws. The Maryland Bylaws further provide
that any amendment must be approved by the Required Directors.
-93-
<PAGE>
CALIFORNIA
LIMIT ON SHARE OWNERSHIP
The California Articles contain no limitations or restrictions on ownership of
shares of the Company.
CERTAIN BUSINESS COMBINATIONS
The CGCL contains no business combination statute. However, the CGCL requires
delivery of a fairness opinion in connection with (i) a tender offer, including
a share exchange tender offer, (ii) a merger (other than a short-form merger
such as the Reincorporation Merger), (iii) the acquisition of control of the
outstanding shares or of all or substantially all of the assets of the
corporation in exchange for stock or other securities, or (iv) a sale of all or
substantially all of the corporation's assets is proposed by an interested party
(an "Interested Party") to the corporation or some or all of its shareholders.
The CGCL defines "Interested Party" to include a person who (a) directly or
indirectly controls the corporation that is the subject of the proposed
combination, (b) is directly or indirectly controlled by an officer or director
of the subject corporation or (c) is an entity in which a material financial
interest is held by any director or executive officer of the subject
corporation.
MARYLAND
LIMIT ON SHARE OWNERSHIP
As permitted by the MGCL, the Charter contains provisions limiting the ownership
and transfer of shares of stock of Mission West-Maryland which are intended to
ensure that Mission West-Maryland meets the requirements of the Code for
qualification as a REIT. See "DESCRIPTION OF MISSION WEST-MARYLAND
STOCK--Restrictions on Transfer", and "CERTAIN PROVISIONS OF MARYLAND LAW AND
MISSION WEST-MARYLAND'S CHARTER AND BYLAWS."
CERTAIN BUSINESS COMBINATIONS
The MGCL restricts certain business combinations (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and an "Interested Stockholder" or an affiliate thereof. These
provisions of Maryland law do not apply, however, to business combinations that
are approved or exempted by the board of directors of the corporation prior to
the time that the "Interested Stockholder" becomes an "Interested
Stockholder." See "CERTAIN PROVISIONS OF MARYLAND LAW AND MISSION
WEST-MARYLAND'S CHARTER AND BYLAWS."
Pursuant to the authority granted under the MGCL, the board of directors will
adopt a resolution providing that the "business combination" provisions of the
MGCL shall not apply to Mission West-Maryland.
-94-
<PAGE>
CALIFORNIA
CONTROL SHARE ACQUISITIONS
The CGCL contains no provisions governing acquisitions of control shares.
MARYLAND
CONTROL SHARE ACQUISITIONS
The MGCL eliminates the voting rights of control shares in certain
circumstances. "Control Shares" are defined in the MGCL as voting shares of
stock which, if aggregated with all other such shares of stock previously
acquired by the acquiror or in respect of which the acquiror is able to
exercise or direct the exercise of voting power (except solely by virtue of a
revocable proxy), would entitle the acquiror to exercise voting power in
electing directors within one of the following ranges of voting power: (a)
one-fifth or more but less than one-third, (b) one-third or more but less
than a majority, or (c) a majority or more of all voting power. Control
shares do not include shares the acquiring person is then entitled to vote as
a result of having previously obtained stockholder approval. See "CERTAIN
PROVISIONS OF MARYLAND LAW AND MISSION WEST-MARYLAND'S CHARTER AND BYLAWS."
The MGCL permits a Maryland corporation to opt out of the control share
acquisition statute by provision in its charter or bylaws. Mission
West-Maryland has included such a provision in the Maryland Bylaws. However,
the Mission West-Maryland board of directors may, at any time, without
stockholder approval, vote to amend the Maryland Bylaws to eliminate this
provision, which would result in Mission West-Maryland being governed by the
control share acquisition statute.
-95-
<PAGE>
CALIFORNIA
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY
Pursuant to the CGCL and the California Articles, the liability of directors of
the Company to the Company or to any shareholder of the Company for money
damages for breach of fiduciary duty has been eliminated, except for (a) acts or
omissions that involve intentional misconduct or a knowing and culpable
violation of the law, (b) acts or omissions that a director believes to be
contrary to the best interests of the Company or its shareholders or that
involve the absence of good faith on the part of the director, (c) any
transaction from which a director derived an improper personal benefit, (d) acts
or omissions that show a reckless disregard for the director's duty to the
Company or its shareholders in circumstances in which the director was aware, or
should have been aware, in the ordinary course of performing a director's
duties, of a risk of serious injury to the Company or its shareholders, (e) acts
or omissions that constitute an unexcused pattern of inattention that amounts to
an abdication of the director's duty to the Company or its shareholders, (f)
violations of the CGCL requirements governing Company contracts in which the
director has a material interest, or (g) corporate actions for which the
director and the Company are jointly and severally liable. In general, the
liability of officers may not be eliminated or limited under California law.
MARYLAND
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY
Pursuant to the MGCL and the Charter, the liability of directors and officers to
Mission West-Maryland or to any stockholder of Mission West-Maryland for money
damages has been eliminated, except for (a) actual receipt of an improper
benefit or profit in money, property or services or (b) active and deliberate
dishonesty established by a final judgment as being material to the cause of
action. Thus, the directors and officers of Mission West-Maryland may not be
liable for certain actions for which they might have otherwise been liable under
California law.
-96-
<PAGE>
CALIFORNIA
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The CGCL contains provisions authorizing corporations to indemnify an officer or
director if the officer or director acted in good faith and in a manner he or
she reasonably believed to be in the best interest of the corporation. The CGCL
also permits the corporation to advance expenses to a director or officer, if
the corporation receives an undertaking, usually in the form of a bond, by or on
behalf of the director or officer to repay any amounts advanced if it is
determined ultimately that the director or officer is not entitled to be
indemnified under the CGCL. Under the CGCL, the termination of any proceeding
by conviction or upon a plea of nolo contendere or its equivalent shall not, of
itself, create a presumption that such person failed to meet the standard of
conduct necessary to allow indemnification.
In addition, the CGCL permits indemnification for judgments of liability and
settlements in derivative actions except that (a) indemnification may only be
made with court approval when a person is adjudged liable to the corporation in
the performance of that person's duty to the corporation and its shareholders
and (b) indemnification of amounts paid to settle and/or expenses incurred to
defend a threatened or pending action shall not be made when such threatened or
pending action is settled or otherwise disposed of without court approval. No
indemnification is permitted under the CGCL for the actions for which liability
for money damages may not be limited.
The California Bylaws provide that the agents of the Company are indemnified and
held harmless from all liability arising from or related to a breach of duty to
the Company or its stockholders. The California Bylaws further provide that
such indemnification is not exclusive of any other rights the agents of the
corporation may have, including other rights pursuant to the laws of California.
MARYLAND
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The MGCL permits indemnification of officers and directors against judgments,
penalties, fines and amounts paid in settlement of a proceeding by or in the
right of a corporation, unless it is established that the act of the director
or officer was material and was committed in bad faith or was the result of
active and deliberate dishonesty, or the director or officer received an
improper personal benefit in money, property or services, or in a criminal
proceeding had reasonable cause to believe the act or omission was unlawful.
Indemnification is prohibited if the person seeking indemnification has been
found liable to the corporation in a proceeding brought by or in the right of
the corporation, unless otherwise ordered by a court and then only for
expenses. In contrast to California law, under Maryland law a termination of
a proceeding by conviction or upon a plea of nolo contendere or its equivalent
creates a rebuttable presumption that such person did not meet the requisite
standard of conduct to allow indemnification.
The Maryland Bylaws require Mission West-Maryland to indemnify, and advance
expenses to, present and former directors and officers to the maximum extent
permitted by Maryland law. For a complete description of the indemnification of
directors and officers of Mission West-Maryland required by or permitted under
the MGCL, the Charter and the Maryland Bylaws, see "CERTAIN PROVISIONS OF
MARYLAND LAW AND MISSION WEST-MARYLAND'S CHARTER AND BYLAWS."
-97-
<PAGE>
CALIFORNIA
INDEMNIFICATION OF DIRECTORS AND OFFICERS (Continued)
As used in the indemnification provisions of the California Bylaws, "agents" of
the Company include any person who is or was a director, officer, employee or
other agent of the Company, or is or was serving at the request of the Company
as a director, officer, employee or agent of another foreign or domestic
corporation, partnership, joint venture, trust or other enterprise, or was a
director, officer, employee or agent of a foreign or domestic corporation which
was a predecessor corporation of the Company or of another enterprise at the
request of such predecessor corporation.
INSPECTION OF BOOKS AND RECORDS
Under the CGCL, upon written demand for any purpose reasonably related to the
shareholder's interest as a shareholder, any shareholder of the Company may
inspect and copy the record of shareholders and inspect any other corporate
books and records. A shareholder or shareholders (a) who hold at least 5% of
the outstanding voting shares of the corporation or (b) who hold at least 1% of
those voting shares and have filed a Schedule 14A with the Securities and
Exchange Commission shall have an absolute right to inspect and copy the record
of shareholders. These rights apply both to any California corporation and any
foreign corporation that keeps such records in California or has its principal
executive office in California. Thus, the inspection rights provided by the
CGCL will be applicable to Mission West-Maryland after the Reincorporation.
MARYLAND
INSPECTION OF BOOKS AND RECORDS
The MGCL provides a right to inspect and copy the corporation's books of
account and stock ledger to persons who have been stockholders for more than
six months and own at least 5% of any class of a Maryland corporation's
outstanding shares. In addition, any stockholder of a Maryland corporation
has the right to inspect the bylaws, minutes of stockholders meetings, annual
statements of affairs and voting trust agreements and to request that the
corporation provide a sworn statement showing all stock and securities issued
and all consideration per share received therefor by the corporation within
the preceding 12 months.
-98-
<PAGE>
CALIFORNIA
INTERESTED DIRECTOR TRANSACTIONS
Under California law, certain contracts or transactions in which one or more of
a corporation's directors has an interest are not void or voidable solely
because of such interest if certain conditions are met. Under California law
(a) either the shareholders or the board of directors must approve any contract
or transaction after full disclosure of the material facts (and in the case of
board approval, the contract or transaction must also be "just and reasonable")
or (b) the contract or transaction must have been just and reasonable at the
time it was authorized or approved. California law has a more stringent
requirement than Maryland law in circumstances where board approval is sought
with respect to an interested director transaction. The contract or
transaction must be just and reasonable and must be approved by a majority
vote of a quorum of the directors, without counting the vote of any
interested directors (except that interested directors may be counted for
purposes of establishing a quorum).
The CGCL also provides that any loan or guarantee to or for the benefit of a
director or officer of the corporation or its parent requires the approval of
the shareholders unless such loan or guaranty is pursuant to a plan that has
been approved by the holders of a majority of the outstanding shares. However,
under the CGCL, the bylaws of a corporation with more than 100 shareholders may
authorize the board of directors alone to approve loans or guaranties to
directors and officers. The California Bylaws do not currently contain such a
provision allowing the directors to approve such loans or guaranties.
MARYLAND
INTERESTED DIRECTOR TRANSACTIONS
Under the MGCL, certain contracts or transactions in which one or more of a
corporation's directors has an interest are not void or voidable solely because
of such interest if the contract or transaction (a) is approved by a majority of
the disinterested directors or by a majority of votes cast by the disinterested
stockholders, in either case after full disclosure of the material facts, or (b)
is fair and reasonable to the corporation.
-99-
<PAGE>
DESCRIPTION OF MISSION WEST-MARYLAND STOCK
THE FOLLOWING SUMMARY OF THE TERMS OF THE CAPITAL STOCK OF MISSION
WEST-MARYLAND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MGCL AND TO
THE CHARTER AND BYLAWS OF MISSION WEST-MARYLAND; COPIES OF THE CHARTER AND
THE BYLAWS ARE ATTACHED AS EXHIBITS TO THIS PROXY STATEMENT/PROSPECTUS.
GENERAL
The Charter provides that Mission West-Maryland may issue up to
200,000,000 shares of New Common Stock and 20,000,000 shares of New Preferred
Stock. Upon completion of the Reincorporation Merger 8,193,594 shares of New
Common Stock will be issued and outstanding and no shares of New Preferred
Stock will be designated into series or be issued and outstanding.
NEW COMMON STOCK
All shares of New Common Stock offered hereby will be duly
authorized, fully paid and nonassessable. Subject to the preferential rights
of any other class or series of stock and to the provisions of the Charter
regarding the restrictions on transfer of stock, holders of shares of New
Common Stock are entitled to receive dividends on such stock if, as and when
authorized and declared by the board of directors out of assets legally
available therefor and to share ratably in the assets of Mission
West-Maryland legally available for distribution to its stockholders in the
event of its liquidation, dissolution or winding up after payment of or
adequate provision for all known debts and liabilities of Mission
West-Maryland.
Subject to the provisions of the Charter regarding the restrictions
on transfer of stock, each outstanding share of New Common Stock entitles the
holder to one vote on all matters submitted to a vote of stockholders,
including the election of directors and, except as provided with respect to
any other class or series of stock, the holders of such shares will possess
the exclusive voting power. There is no cumulative voting in the election of
directors, which means that the holders of a majority of the outstanding
shares of New Common Stock can elect all of the directors then standing for
election and the holders of the remaining shares will not be able to elect
any directors.
Holders of shares of New Common Stock have no preference,
conversion, exchange, sinking fund, redemption or appraisal rights and have
no preemptive rights to subscribe for any securities of Mission
West-Maryland. Subject to the provisions of the Charter regarding the
restrictions on transfer of stock, shares of New Common Stock will have equal
dividend, liquidation and other rights.
Under the MGCL, a Maryland corporation generally cannot dissolve,
amend its Charter, merge, sell all or substantially all of its assets, engage
in a share exchange or engage in similar transactions outside the ordinary
course of business unless approved by the affirmative vote of stockholders
holding at least two-thirds of the shares entitled to vote on the matter
unless a lesser percentage (but not less than a majority of all of the votes
entitled to be cast on the matter) is set forth in the corporation's Charter.
The Charter provides that the affirmative vote of a majority of all votes
entitled to be cast may approve such matters.
The Charter provides that, to the extent permitted by Maryland law
from time to time, the board of directors of Mission West-Maryland, without
any action by the stockholders of Mission West-Maryland, may amend the
Charter from time to time to increase or decrease the aggregate number of
shares of stock or the number of shares of stock of any class or series that
Mission West-Maryland has authority to issue. Such action is not presently
permitted under Maryland law, but may be permitted in the future.
NEW CLASSES OR SERIES OF STOCK
The Charter authorizes the board of directors to classify or
reclassify any unissued shares of New Preferred Stock into other classes or
series of classes of stock and to establish the number of shares in each
class or series and to set the preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends or other
distributions, qualifications or terms or conditions of redemption for each
such class or series without any action by the stockholders of Mission
West-Maryland.
-100-
<PAGE>
POWER TO ISSUE ADDITIONAL SHARES OF NEW COMMON STOCK AND NEW PREFERRED STOCK
Mission West-Maryland believes that the power of the Board of
Directors to issue additional authorized but unissued shares of New Common
Stock and New Preferred and to classify or reclassify unissued shares of New
New Preferred Stock and thereafter to cause Mission West-Maryland to issue
such classified or reclassified shares of stock will provide Mission
West-Maryland with increased flexibility in structuring possible future
financings and acquisitions and in meeting other needs which might arise. The
additional classes or series, as well as the New Common Stock and New
Preferred Stock, will be available for issuance without further action by
Mission West-Maryland's stockholders, unless such action is required by
applicable law or the rules of any stock exchange or automated quotation
system on which Mission West-Maryland's securities may be listed or traded.
Although the Board of Directors has no intention at the present time of doing
so, it could authorize Mission West-Maryland to issue a class or series that
could, depending upon the terms of such class or series, delay, defer or
prevent a transaction or a change in control of Mission West-Maryland that
might involve a premium price for holders of New Common Stock or otherwise be
in their best interest.
RESTRICTIONS ON TRANSFER
REIT RESTRICTIONS. For Mission West-Maryland to qualify as a REIT
under the Code, its shares of stock must be beneficially owned by 100 or more
persons during at least 335 days of a taxable year of 12 months or during a
proportionate part of a shorter taxable year, and the REIT may not violate
the Five or Fewer Test during the last half of a taxable year.
Because the board of directors believes it is at present essential
for Mission West-Maryland to qualify as a REIT, the Charter, subject to
certain exceptions, contains certain restrictions on the number of shares of
stock of Mission West-Maryland that a person may own. The Charter prohibits
any person from acquiring or holding, directly or indirectly, shares of New
Common Stock in excess of 9% in value of the aggregate of the outstanding
shares of stock of Mission West-Maryland except for members of the Berg Group
and their Affiliates (other than the Company and the Operating Partnership)
who, by agreement, are subject to the Berg Group Ownership Limit, which is
20%. The Charter prohibits ownership of New Common Stock by any members of
the Berg Group or any other shareholders or their pledgees or assignees,
which would cause Mission West-Maryland to violate any of the REIT
Requirements.
Mission West-Maryland's board of directors, in its sole discretion,
may exempt a person other than the Berg Group from the Ownership Limit (an
"Excepted Holder"), provided that no person may own shares of stock, directly
or indirectly, which represent 9% or more of the value of the outstanding
shares of stock of Mission West-Maryland if that would result in Mission
West-Maryland being "closely held" within the meaning of Section 856(h) of
the Code or otherwise would result in Mission West-Maryland failing to
qualify as a REIT. In order to be considered by the board of directors as an
Excepted Holder, a person also must not own, directly or indirectly, an
interest in a tenant of Mission West-Maryland (or a tenant of any entity
owned or controlled by Mission West-Maryland) that would cause Mission
West-Maryland to own, directly or indirectly, more than a 10% interest in
such a tenant. The person seeking an exemption must represent to the
satisfaction of the board of directors that it will not violate the two
aforementioned restrictions. The person also must agree that any violation or
attempted violation of any of the foregoing restrictions will result in the
automatic transfer of the shares of stock causing such violation to the
Trust. The board of directors may require a ruling from the IRS or an opinion
of counsel, in either case in form and substance satisfactory to the board of
directors in its sole discretion, in order to determine or ensure Mission
West-Maryland's status as a REIT. The management of the Company intends to
request the board of directors of Mission West-Maryland to designate as an
Excepted Holder any purchasers of shares in the Private Placement whose share
ownership as of the effective date of the Reincorporation Merger exceeds the
Ownership Limit. The designation shall not apply, however, to subsequent
purchases of shares of stock of Mission West-Maryland by such Excepted Holder
except for shares acquired pursuant to a grant or award under the Stock
Option Plan or another written compensation plan approved by the board of
directors.
The Charter further prohibits (a) any person from beneficially or
constructively owning shares of stock of Mission West-Maryland that would
result in Mission West-Maryland being "closely held" under Section 856(h) of
the Code or otherwise cause Mission West-Maryland to fail to qualify as a
REIT and (b) any person from transferring shares of stock of Mission
West-Maryland if such transfer would result in shares of stock of Mission
West-Maryland being owned by fewer than 100 persons. Any person who acquires
or attempts or intends to acquire beneficial or constructive ownership of
shares of stock of Mission West-Maryland that will or may violate
-101-
<PAGE>
any of the foregoing restrictions on transferability and ownership, or any
person who would have owned shares of the stock of Mission West-Maryland that
resulted in a transfer of shares to the Trust, is required to give notice
immediately to Mission West-Maryland and provide Mission West-Maryland with
such other information as Mission West-Maryland may request in order to
determine the effect of such transfer on Mission West-Maryland's status as a
REIT. The foregoing restrictions on transferability and ownership will not
apply if the board of directors, by affirmative vote of 75% of all directors,
determines that it is no longer in the best interests of Mission
West-Maryland to attempt to qualify, or to continue to qualify, as a REIT.
If any transfer of shares of stock of Mission West-Maryland occurs
which, if effective, would result in any person beneficially or
constructively owning shares of stock of Mission West-Maryland in excess or
in violation of the above transfer or ownership limitations, then that number
of shares of stock of Mission West-Maryland the beneficial or constructive
ownership of which otherwise would cause such person to violate such
limitations (rounded to the nearest whole share) shall be automatically
transferred to a trust for the exclusive benefit of one or more charitable
beneficiaries, and the Prohibited Owner shall not acquire any rights in such
shares. Such automatic transfer shall be deemed to be effective as of the
close of business on the Business Day prior to the date of such violative
transfer. Shares of stock held in the Trust shall be issued and outstanding
shares of stock of Mission West-Maryland. The Prohibited Owner shall not
benefit economically from ownership of any shares of stock held in the Trust,
shall have no rights to dividends and shall not possess any rights to vote or
other rights attributable to the shares of stock held in the Trust. The
trustee of the Trust shall have all voting rights and rights to dividends or
other distributions with respect to shares of stock held in the Trust, which
rights shall be exercised for the exclusive benefit of the Charitable
Beneficiary. Any dividend or other distribution paid prior to the discovery
by Mission West-Maryland that shares of stock have been transferred to the
Trustee shall be paid by the recipient of such dividend or distribution to
the Trustee upon demand, and any dividend or other distribution authorized
but unpaid shall be paid when due to the Trustee. Any dividend or
distribution so paid to the Trustee shall be held in trust for the Charitable
Beneficiary. The Prohibited Owner shall have no voting rights with respect to
shares of stock held in the Trust and, subject to Maryland law, effective as
of the date that such shares of stock hve been transferred to the Trust, the
Trustee shall have the authority (at the Trustee's sole discretion) (i) to
rescind as void any vote cast by a Prohibited Owner prior to the discovery by
Mission West-Maryland that such shares have been transferred to the Trust and
(ii) to recast such vote in accordance with the desires of the Trustee acting
for the benefit of the Charitable Beneficiary. However, if Mission
West-Maryland has already taken irreversible corporate action, then the
Trustee shall not have the authority to rescind and recast such vote.
Within 20 days of receiving notice from Mission West-Maryland that
shares of stock of Mission West-Maryland have been transferred to the Trust,
the Trustee shall sell the shares of stock held in the Trust to a person,
designated by the Trustee, whose ownership of the shares will not violate the
ownership limitations set forth in the Charter. Upon such sale, the interest
of the Charitable Beneficiary in the shares sold shall terminate and the
Trustee shall distribute the net proceeds of the sale to the Prohibited Owner
and to the Charitable Beneficiary as follows. The Prohibited Owner shall
receive the lesser of (i) the price paid by the Prohibited Owner for the
shares or, if the Prohibited Owner did not give value for the shares in
connection with the event causing the shares to be held in the Trust (e.g., a
gift, devise or other such transaction), the Market Price of such shares on
the day of the event causing the shares to be held in the Trust and (ii) the
price per share received by the Trustee from the sale or other disposition of
the shares held in the Trust. Any net sale proceeds in excess of the amount
payable to the Prohibited Owner shall be paid immediately to the Charitable
Beneficiary. If, prior to the discovery by Mission West-Maryland that shares
of stock have been transferred to the Trust, such shares are sold by a
Prohibited Owner, (i) such shares shall be deemed to have been sold on behalf
of the Trust and (ii) to the extent that the Prohibited Owner received an
amount for such shares that exceeds the amount that such Prohibited Owner was
entitled to receive pursuant to the aforementioned requirement, such excess
shall be paid to the Trustee upon demand.
In addition, shares of stock of Mission West-Maryland held in the
Trust shall be deemed to have been offered for sale to Mission West-Maryland,
or its designee, at a price per share equal to the lesser of (i) the price
per share in the transaction that resulted in such transfer to the Trust (or,
in the case of a devise or gift, the Market Price at the time of such devise
or gift) and (ii) the Market Price on the date Mission West-Maryland, or its
designee, accepts such offer. Mission West-Maryland shall have the right to
accept such offer until the Trustee has sold the shares of stock held in the
Trust. Upon such a sale to Mission West-Maryland, the interest of the
Charitable Beneficiary in the shares sold shall terminate and the Trustee
shall distribute the net proceeds of the sale to the Prohibited Owner.
-102-
<PAGE>
The foregoing restrictions do not apply to shares acquired in
original issuance by members of the Berg Group. All certificates representing
shares of New Common Stock other than such shares will bear a legend
referring to the restrictions described above.
Every owner of more than 5% (or such lower percentage as required by
the Code or the regulations promulgated thereunder) of all classes or series
of Mission West-Maryland's stock, including shares of New Common Stock,
within 30 days after the end of each taxable year, is required to give
written notice to Mission West-Maryland stating the name and address of such
owner, the number of shares of each class and series of stock of Mission
West-Maryland which the owner beneficially owns and a description of the
manner in which such shares are held. Each such owner shall provide to
Mission West-Maryland such additional information as Mission West-Maryland
may request in order to determine the effect, if any, of such beneficial
ownership on Mission West-Maryland's status as a REIT and to ensure
compliance with the Stock Ownership Limit. In addition, each shareholder
shall upon demand be required to provide to Mission West-Maryland such
information as Mission West-Maryland may request, in good faith, in order to
determine Mission West-Maryland's status as a REIT and to comply with the
requirements of any taxing authority or governmental authority or to
determine such compliance.
These ownership limits could delay, defer or prevent a transaction
or a change in control of Mission West-Maryland that might involve a premium
price for the New Common Stock or otherwise be in the best interest of the
stockholders.
SECURITIES RESTRICTIONS. Subject to the restrictions set forth above
in "--Restrictions on Transfer" and following the consummation of the
transactions contemplated herein, Mission West-Maryland will have outstanding
8,193,594 shares of New Common Stock; which will be freely transferable in
the public market without restriction or further registration under the
Securities Act, unless purchased by Affiliates of Mission West-Maryland,
whose shares will be subject to the resale limitations of Rule 144 and Rule
145(d).
In general, under Rule 144, an Affiliate of Mission West-Maryland is
subject to restrictions on the manner of resale of such Affiliate's shares.
Further, the number of shares sold by an Affiliate in any three-month period
may not exceed the greater of 1% of the shares of New Common Stock then
outstanding or the reported average weekly trading volume of the New Common
Stock during the four calendar weeks immediately preceding the date on which
notice of the sale is sent to the Commission. Any sale by an Affiliate of
Mission West-Maryland will also be subject to certain notice requirements and
availability of current public information concerning Mission West-Maryland.
REINVESTMENT AND SHARE PURCHASE PLAN
Mission West-Maryland may adopt a Distribution Reinvestment and
Share Purchase Plan that would allow stockholders to automatically reinvest
cash distributions on their outstanding shares of Common Stock and/or L.P.
Units to purchase additional shares of Common Stock at a discounted price and
without the payment of any brokerage commission or service charge.
Stockholders and Limited Partners would also have the option of investing
limited additional amounts by making cash payments. No decision has been made
yet by the Company whether or not to adopt such a plan, and there can be no
assurance that such a plan will ever be adopted by Mission West-Maryland.
-103-
<PAGE>
CERTAIN PROVISIONS OF MARYLAND LAW AND
OF MISSION WEST-MARYLAND'S CHARTER AND BYLAWS
THE FOLLOWING SUMMARY OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE CHARTER AND MARYLAND BYLAWS DOES NOT PURPORT TO BE COMPLETE AND IS
SUBJECT TO AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO MARYLAND LAW AND TO
THE CHARTER AND BYLAWS, COPIES OF WHICH ARE EXHIBITS TO THIS PROXY
STATEMENT/PROSPECTUS. SEE "ADDITIONAL INFORMATION."
THE BOARD OF DIRECTORS
The Charter provides that the number of directors of the Company
shall be five and that number may be increased or decreased pursuant to the
bylaws. As long as the Berg Group members and their Affiliates (other than
the Company and the Operating Partnership) own at least 15% of the voting
shares on a Fully-Diluted basis, at least two directors must satisfy the
qualification of being nominated by the Berg Group members. At least one
director must satisfy such qualification if Berg Group's aggregate percentage
ownership of voting shares on a Fully-Diluted basis is at least 10%, although
less than 15%. The Maryland Bylaws provide that the board of directors may
establish, increase or decrease the number of directors, provided that the
number of directors shall never be less than the minimum number required by
Maryland law, nor more than 15. In general, any vacancy will be filled, at
any regular meeting or at any special meeting called for that purpose, by a
majority of the remaining directors, except that a vacancy resulting from an
increase in the number of directors must be filled by a majority of the
entire board of directors. A vacancy created by the departure of a Berg Group
Board Representative, however, must be filled by another Berg Group Board
Representative until the date that the right of the Berg Group to name the
Berg Group Board Representatives has expired.
REMOVAL OF DIRECTORS
The Charter provides that a director may be removed only for cause
(as defined in the Charter) and only by the affirmative vote of at least a
majority of the votes entitled to be cast in the election of directors. This
provision, when coupled with the provision in the Maryland Bylaws authorizing
the board of directors to fill vacant directorships, precludes stockholders
from removing incumbent directors without cause and filling the vacancies
created by such removal with their own nominees.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between a Maryland
corporation and any person who beneficially owns 10% or more of the voting
power of the corporation's shares or an Affiliate of the corporation who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the then-outstanding
voting stock of the corporation (an "Interested Stockholder") or an Affiliate
of such an Interested Stockholder are prohibited for five years after the
most recent date on which the Interested Stockholder becomes an Interested
Stockholder. Thereafter, any such business combination must be recommended by
the board of directors of such corporation and approved by the affirmative
vote of at least (a) 80% of the votes entitled to be cast by holders of
outstanding shares of voting stock of the corporation and (b) two-thirds of
the votes entitled to be cast by holders of voting stock of the corporation
other than shares held by the Interested Stockholder with whom (or with whose
affiliate) the business combination is to be effected, unless, among other
conditions, the corporation's common stockholders receive a minimum price (as
defined in the MGCL) for their shares and the consideration is received in
cash or in the same form as previously paid by the Interested Stockholder for
its shares. These provisions of the MGCL do not apply, however, to business
combinations that are approved or exempted by the board of directors of the
corporation prior to the time that the Interested Stockholder becomes an
Interested Stockholder. After the Reincorporation Merger the Berg Group will
beneficially own more than 10% of the Company's voting shares, as will one of
the purchasers in the Private Placement. They would, therefore, be subject to
the business combination provision of the MGCL. However, pursuant to the
statute, the Company has exempted any usiness combinations involving the Berg
Group and any purchaser in the Private Placement. Consequently, the five-year
prohibition and the super-majority vote requirements will not apply to
business combinations between any of them and the Company. As a result, the
Berg Group and such purchaser may be able to enter into business combinations
with the Company that may not be in the best interest of its stockholders
without compliance by the Company with the super-majority vote requirements
and the other provisions of the statute.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of a Maryland corporation
acquired in a "control share acquisition" have no voting rights except to the
extent approved by a vote of two-thirds of the votes entitled to be
-104-
<PAGE>
cast on the matter, excluding shares of stock owned by the acquiror, by
officers or by directors who are employees of the corporation. "Control
Shares" are voting shares of stock which, if aggregated with all other such
shares of stock previously acquired by the acquiror or in respect of which
the acquiror is able to exercise or direct the exercise of voting power
(except solely by virtue of a revocable proxy), would entitle the acquiror to
exercise voting power in electing directors within one of the following
ranges of voting power: (i) one-fifth or more but less than one-third, (ii)
one-third or more but less than a majority, or (iii) a majority or more of
all voting power. Control shares do not include shares the acquiring person
is then entitled to vote as a result of having previously obtained
stockholder approval. A "control share acquisition" means the acquisition of
control shares, subject to certain exceptions.
A person who has made or proposes to make a control share
acquisition, upon satisfaction of certain conditions (including an
undertaking to pay expenses), may compel the board of directors of the
corporation to call a special meeting of stockholders to be held within 50
days of demand to consider the voting rights of the shares. If no request for
a meeting is made, the corporation may itself present the question at any
stockholders meeting.
If voting rights are not approved at the meeting or if the acquiring
person does not deliver an acquiring person statement as required by the
statute, then subject to certain conditions and limitations, the corporation
may redeem any or all of the control shares (except those for which voting
rights have previously been approved) for fair value determined, without
regard to the absence of voting rights for the control shares, as of the date
of the last control share acquisition by the acquiror or of any meeting of
stockholders at which the voting rights of such shares are considered and not
approved. If voting rights for control shares are approved at a stockholders
meeting and the acquiror becomes entitled to vote a majority of the shares
entitled to vote, all other stockholders may exercise appraisal rights. The
fair value of the shares as determined for purposes of such appraisal rights
may not be less than the highest price per share paid by the acquiror in the
control share acquisition.
The control share acquisition statute does not apply (a) to shares
acquired in a merger, consolidation or share exchange if the corporation is a
party to the transaction or (b) to acquisitions approved or exempted by the
charter or bylaws of the corporation.
The Maryland Bylaws contain a provision exempting from the control
share acquisition statute any and all acquisitions by any person of the
Company's shares of stock. There can be no assurance that such provision will
not be amended or eliminated at any time in the future.
BOARD QUORUM AND SPECIAL VOTING REQUIREMENTS
Generally, a majority of the total number of directors constitutes a
quorum for the transaction of business under the MGCL. However, the Maryland
Bylaws provide that a quorum for any meeting of the board of directors must
include the Required Directors.
The Maryland Bylaws include special voting requirements for the
board of directors, such that until the Protective Provisions Expiration
Date, the Company will not take or permit to be taken any of the following
actions without the approval of the Required Directors: (i) establishing a
quorum for a meeting which is not attended by Mr. Berg or his designee; (ii)
amending the Charter or the bylaws; (iii) merging with or into another
entity; and (iv) any sale of all or substantially all of the Company's
assets. The Maryland Bylaws also provide that the approval of more than 75%
of the entire board of directors will be required for (i) the Company's
taking title to assets or conducting business other than through the
Operating Partnership, (ii) the termination of the Company's status as a
REIT, and (iii) incurring indebtedness in excess of 50% of the Company's
Total Market Capitalization.
AMENDMENT TO THE CHARTER
The Charter, including its provisions regarding removal of
directors, may be amended only by the affirmative vote of the holders of a
majority of all of the votes entitled to be cast on the matter. In addition,
the bylaws require the approval by the Berg Group of all amendments to the
Charter.
DISSOLUTION OF THE COMPANY
The dissolution of the Company must be advised by a majority of the
entire board of directors and approved by the stockholders by the affirmative
vote of the holders of a majority of all of the votes entitled to be cast on
the matter.
-105-
<PAGE>
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The bylaws provide that (a) with respect to an annual meeting of
stockholders, nominations of persons for election to the board of directors
and the proposal of business to be considered by stockholders may be made
only (i) pursuant to Mission West-Maryland's notice of the meeting, (ii) by
or at the direction of the board of directors or (iii) by a stockholder who
is entitled to vote at the meeting and has complied with the advance notice
procedures set forth in the bylaws and (b) with respect to special meetings
of stockholders, only the business specified in Mission West-Maryland's
notice of meeting may be brought before the meeting of stockholders and
nominations of persons for election to the board of directors may be made
only (i) pursuant to Mission West-Maryland's notice of the meeting, (ii) by
or at the direction of the board of directors or (iii) provided that the
board of directors has determined that directors shall be elected at such
meeting, by a stockholder who is entitled to vote at the meeting and has
complied with the advance notice provisions set forth in the bylaws.
CONFLICT OF INTEREST
The Charter provides that no director will be prohibited from voting
or taking any action as a director because of any actual or apparent conflict
of interest between the director and the Company and that no action taken by
the board of directors will be void or voidable because a majority of
directors are affiliated with the Berg Group or that an action is beneficial
to the Berg Group, to the extent permitted by law.
ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER
AND BYLAWS
The control share acquisition provisions of the MGCL, and the
provisions of the Charter on removal of directors and the advance notice
provisions of the bylaws could delay, defer or prevent a transaction or a
change in control of Mission West-Maryland that might involve a premium price
for holders of New Common Stock or otherwise be in their best interest.
-106-
<PAGE>
ACCOUNTING TREATMENT OF THE BERG ACQUISITION AND THE REINCORPORATION MERGER
The Berg Acquisition will be accounted for as a reorganization of
entities under common control at historical cost. The Company's acquisition
of its interest in the Operating Partnership and the Acquired Properties will
be accounted for as a purchase.
Upon consummation of the Reincorporation Merger, all assets and
liabilities of the Company will be transferred to Mission West-Maryland at
book value, since the exchange of Common Stock for New Common Stock will be
accounted for in a manner similar to a pooling of interests.
FEDERAL INCOME TAX CONSIDERATIONS
The following summary of material federal income tax considerations
concerning Mission West-Maryland (referred to also as the "Company" in this
discussion) after the Reincorporation Merger and the election to become a
REIT is based on current law, is for general information only and is not tax
advice. This discussion is for general purposes only and does not purport to
deal with all aspects of taxation that may be relevant to particular
shareholders in light of their personal investment or tax circumstances, or
to certain types of shareholders (including insurance companies, tax-exempt
organizations, financial institutions or broker-dealers, foreign
corporations, persons who are not citizens or residents of the United States,
and persons who hold stock as part of a conversion transaction, as part of a
hedging transaction or as a position in a straddle for tax purposes) subject
to special treatment under the federal income tax laws.
This summary does not provide a detailed discussion of any state,
local, or foreign tax considerations. This summary is qualified in its
entirety by the applicable provisions of the Code, rules and regulations
promulgated thereunder, and administrative and judicial interpretations
thereof, all as of the date hereof and all of which are subject to change
(which change may apply retroactively). The Taxpayer Relief Act of 1997 (the
"1997 Act") was enacted on August 5, 1997. The 1997 Act contains many
provisions which generally make it easier to operate and to continue to
qualify as a REIT for taxable years beginning after the date of enactment
(which, for the Company, would be applicable commencing with its taxable year
beginning January 1, 1998).
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE COMPANY'S ELECTION TO
BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF POTENTIAL CHANGES IN APPLICABLE
TAX LAWS.
TAXATION OF THE COMPANY
GENERAL. The Company plans to elect to be taxed as a REIT under
Sections 856 through 860 of the Code and the applicable Treasury Regulations
(the "REIT Provisions") commencing with its taxable year ending December 31,
1998. The Company believes that it is organized and will be operated in such
a manner as to qualify for taxation as a REIT under the REIT Provisions and
the Company intends to continue to operate in such a manner. No assurance can
be given, however, that the Company will operate in a manner so as to qualify
or remain qualified as a REIT.
The REIT Provisions are highly technical and complex. The material
aspects of the REIT Provisions are summarized below.
In the opinion of Graham & James LLP, commencing with the Company's
taxable year ending on December 31, 1998, the Company will be organized in
conformity with the requirements for qualification and taxation as a REIT,
and its method of operation will enable it to meet the requirements for
continued qualification and taxation as a REIT. This opinion is based on
various assumptions relating to the organization and operation of the Company
and the Operating Partnership, however, and is conditioned upon certain
representations made by the Company about factual matters relating to the
organization and expected operation of the Company and the Operating
Partnership. In addition, this opinion is based upon the factual
representations of the Company concerning its business and properties as set
forth in this Proxy Statement/Prospectus and assumes that the actions
described in this Proxy Statement/Prospectus are completed as described.
Moreover, qualification and taxation as a REIT depends upon the Company's
ability to meet, through actual annual operating results, the various income,
asset, distribution, stock ownership, and other qualification tests imposed
by the REIT Provisions
-107-
<PAGE>
discussed below, the results of which will not be reviewed by nor be under
the control of Graham & James LLP. Accordingly, no assurance can be given
that the actual results of the Company's operation for any particular taxable
year will satisfy such requirements. See "Loss of REIT Qualification".
If the Company qualifies for taxation as a REIT, it generally will
not be subject to federal corporate income taxes on the portion of its net
income that is currently distributed to its shareholders. This treatment
substantially eliminates the "double taxation" (at the corporate and
shareholder levels) that generally results from investment in a corporation.
The Company may be subject to federal income and excise tax, however, as
follows:
(i) The Company will be taxed at regular corporate
rates on any undistributed REIT taxable income, including undistributed net
capital gains.
(ii) Under certain circumstances, the Company may be
subject to the "corporate alternative minimum tax" on its items of tax
preference.
(iii) If the Company has (A) net income from the sale or
other disposition of "foreclosure property" which is held primarily for sale
to customers in the ordinary course of business or (B) other nonqualifying
net income from foreclosure property, it will be subject to tax on such
income at the highest corporate rate.
(iv) If the Company has net income from "prohibited
transactions" (which are, in general, certain sales or other dispositions of
property held primarily for sale to customers in the ordinary course of
business, other than foreclosure property), such income will be subject to a
100% tax.
(v) If the Company fails to satisfy the 75% gross
income test or the 95% gross income test (as discussed below), but preserves
its qualification as a REIT because certain other requirements have been met,
it will be subject to a 100% tax on the net income attributable to the
greater of the amount by which the Company fails the 75% or 95% test,
multiplied by a fraction intended to reflect the Company's profitability.
(vi) If the Company should fail to distribute during
each calendar year at least the sum of (A) 85% of its REIT ordinary income
for such year, (B) 95% of its REIT capital gain net income for such year, and
(C) any undistributed taxable income from prior periods, the Company would be
subject to a 4% excise tax on the excess of such required distribution over
the amounts actually distributed.
(vii) If during the ten-year period (the "Recognition
Period") beginning on the first day of the first taxable year for which the
Company qualifies as a REIT, the Company recognizes gain in the disposition
of any asset held by the Company as of the beginning of such Recognition
Period, then, to the extent of the excess of (a) the fair market value of
such asset as of the beginning of such Recognition Period over (b) the
Company's adjusted basis in such asset as of the beginning of such
Recognition Period (the "Built-in Gain"), such gain will be subject to tax at
the highest regular corporate rate. The Company will not acquire any assets
until the closing of the Berg Acquisition, and they will hold no such assets
at the beginning of the Recognition Period.
(viii) If the Company subsequently acquires any asset
from a C corporation (i.e., generally a corporation subject to full
corporate-level tax) in a transaction in which the basis of the asset in the
Company's hands is determined by reference to the basis of the asset (or any
other property) in the hands of the C corporation, and the Company recognizes
gain on the disposition of such asset during the Recognition Period beginning
on the date on which such asset was acquired by the Company, then, to the
extent of the Built-in Gain, such gain will be subject to tax at the highest
regular corporate rate. The result described above with respect to the
recognition of Built-in Gain during the Recognition Period assumes the
Company will make an election in accordance with Notice 88-19 issued by the
Internal Revenue Service (the "IRS"). See "--Tax Aspects of the Operating
Partnership--Partnership Allocations" and " Tax Allocations with Respect to
Contributed Properties" below.
REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a
corporation, trust or association: (1) which is managed by one or more
trustees or directors; (2) the beneficial ownership of which is evidenced by
transferable shares, or by transferable certificates of beneficial interest;
(3) which would be taxable as a domestic corporation, but for Code sections
856 though 859; (4) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code; (5) the beneficial
ownership of which is held by 100 or more persons (determined without
reference to any rules of attribution); (6) during the last half of each
taxable year not
-108-
<PAGE>
more than 50% in value of the outstanding stock of which is owned, directly
or constructively, by "five or fewer" individuals (as defined in the Code to
include certain entities) (the "Five or Fewer Test"); (7) that makes an
election to be a REIT (or has made such election for a previous taxable year
which has not been revoked or terminated) and satisfies all relevant filing
and other administrative requirements established by the IRS that must be met
in order to elect and maintain REIT status; (8) that uses a calendar year for
federal income tax purposes and complies with the recordkeeping requirements
of the Code and Treasury Regulations promulgated thereunder; and (9) which
meets certain income and asset tests, described below. The Code provides that
conditions (1) to (4), inclusive, must be met during the entire taxable year,
that condition (5) must be met during at least 335 days of a taxable year of
12 months, or during a proportionate part of a taxable year of less than 12
months and that condition (6) must be met for the last six months of each
taxable year. As of the date of this Proxy Statement/Prospectus the Company
believes that it will satisfy conditions (5) and (6). The Charter contains
restrictions regarding transfers of shares, which are intended to assist the
Company in continuing to satisfy the share ownership requirements described
in (5) and (6). In particular,although the Berg Group may own as much as 20%
of the outstanding stock under the Berg Group Ownership Limit, which likely
represents ownership by two individuals, Carl E. Berg and Clyde J. Berg, for
Five or Fewer Test purposes, the members of the Berg Group may not acquire
any additional shares if it would result in the Company's failure to satisfy
the Test. Such transfer restrictions are described in "DESCRIPTION OF MISSION
WEST-MARYLAND STOCK--Restrictions on Transfer."
In its proposed budget for the 1999 fiscal year, the Clinton
Administration has proposed to impose an ownership requirement for REIT
qualification in addition to the Five or Fewer Test. The proposal would
create a limit of 50% of the combined voting power of all classes of voting
stock or the total value of all classes of stock any one person or entity
could own. Unlike the current Five or Fewer Test, which permits a "look
through" for certain entities to determine the number of owners, the Clinton
proposal would apply to any person (including a partnership, corporation or
trust). In addition, the proposal calls for attribution of ownership between
a partnership and its partners and a corporation and its shareholders (with a
10% threshold for attribution).
Pursuant to the 1997 Act, for the Company's taxable years commencing
on or after January 1, 1998, if the Company complies with regulatory rules
pursuant to which it is required to send annual letters to certain of its
shareholders requesting information regarding the actual ownership of its
stock, but does not know, or exercising reasonable diligence would not have
known, whether it failed to meet the requirement that it not be closely held,
the Company will be treated as having met the Five or Fewer Test. If the
Company were to fail to comply with these regulatory rules for any year, it
would be subject to a $25,000 penalty. If the Company's failure to comply was
due to intentional disregard of the requirements, the penalty would be
increased to $50,000. However, if the Company's failure to comply was due to
reasonable cause and not willful neglect, no penalty would be imposed.
Section 856(i) of the Code provides that a corporation that is a
"qualified REIT subsidiary" shall not be treated as a separate corporation,
and all assets, liabilities and items of income, deduction and credit of a
"qualified REIT subsidiary" shall be treated as assets, liabilities and items
of income, deduction and credit of the REIT. Pursuant to the 1997 Act, for
the Company's taxable years beginning on or after January 1, 1998, a
"qualified REIT subsidiary" is a corporation all of the capital stock of
which is owned by the REIT. Pursuant to this amendment, the Company will have
the ability, if it so chooses, to acquire an existing corporation that will
qualify as a "qualified REIT subsidiary", as opposed to having to form such a
subsidiary. The Company may form or acquire "qualified REIT subsidiaries" in
the future. In applying the income and asset tests described below, a
"qualified REIT subsidiary" will be ignored and all assets, liabilities and
items of income, deduction and credit of such "qualified REIT subsidiary"
will be treated as assets, liabilities and items of income, deduction and
credit of the Company. A "qualified REIT subsidiary" of the Company will not
be subject to federal corporate income taxation, although it may be subject
to state and local taxation in certain states.
In the case of a REIT such as the Company which is a partner in a
partnership, Treasury Regulations provide that the REIT will be deemed to own
its proportionate share of the assets of the partnership and will be deemed
to be entitled to the income of the partnership attributable to such share.
In addition, the character of the assets and gross income of the partnership
retain the same character in the hands of the REIT for purposes of Section
856 of the Code, including satisfying the gross income tests and the asset
tests. Thus, the Company's proportionate share of the assets, liabilities and
items of income of the Operating Partnership will be treated as assets,
liabilities and items of income of the Company for purposes of applying the
requirements described below.
-109-
<PAGE>
GROSS INCOME TESTS. In order to maintain qualification as a REIT,
the Company annually must satisfy two gross income requirements, as follows:
(i) At least 75% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must be derived directly or indirectly from investments relating to real
property or mortgages on real property (including "rents from real property"
and, in certain circumstances, interest) or from certain types of temporary
investments.
(ii) At least 95% of the Company's gross income
(excluding gross income from prohibited transactions) for each taxable year
must be derived from such real property investments and from dividends,
interest and gain from the sale or disposition of stock or securities (or
from any combination of the foregoing).
Rents received by the Company will qualify as "rents from real
property" in satisfying the gross income requirements for a REIT described
above only if several conditions are met, including the following:
(i) The amount of rent must not be based in whole or in
part on the income or profits of any person from the property. However, an
amount received or accrued generally will not be excluded from the term
"rents from real property" solely by reason of being based on a fixed
percentage or percentages of receipts or sales.
(ii) Rents received from a tenant will not qualify as
"rents from real property" in satisfying the gross income tests if the
Company, or an owner of 10% or more of the Company, directly or
constructively owns 10% or more of such tenant (a "Related Party Tenant").
Constructive ownership is determined under the attribution rules of Section
318 of the Code, as modified by Section 856(d)(5) of the Code.
(iii) If rent attributable to personal property, leased in
connection with a lease of real property, is greater than 15% of the total
rent received under the lease, then the portion of rent attributable to such
personal property will not qualify as "rents from real property."
(iv) Rents received will not qualify as "rents from real
property", unless the Company generally does not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an independent contractor from whom the REIT derives no revenue.
The Company may, however, directly perform certain services that are "usually
or customarily rendered" in connection with the rental of space for occupancy
only and are not otherwise considered "rendered to the occupant" of the
property. In addition, for its 1998 taxable year and thereafter, the Company
is permitted to receive up to 1% of its gross income from the provision of
non-customary services and still treat all other amounts received from such
property as "rents from real property."
The term "interest" generally does not include any amount received
or accrued (directly or indirectly) if the determination of such amount
depends in whole or in part on the income or profits of any person. An amount
received or accrued generally will not be excluded from the term "interest,"
however, solely by reason of being based on a fixed percentage or percentages
of receipts or sales.
The Company intends for all of its income to be derived from its
interest in the Operating Partnership, and expects that the Operating
Partnership's ownership of the Properties will give rise to income which will
enable the Company to satisfy all of the income tests described above. All of
the "rents from real property" that the Company expects to receive or expects
the Partnership to receive will satisfy the foregoing conditions. Certain
Properties or portions thereof have been leased to corporations in which
members of the Berg Group own in excess of 10% of the total number of
outstanding shares. Initially, the Berg Group will own less than 2% of the
Common Stock, and the Company is not aware of any other shareholders owning
interests in such tenants which would result in such entities being deemed
Related Party Tenants. However, the future acquisition of 10% or more of the
Company's Common Stock by the Berg Group, upon exercise of their Exchange
Rights or otherwise, could cause such entities to be treated as Related Party
Tenants. The members of the Berg Group have agreed not to acquire shares of
the Company's Common Stock if, in the sole judgment of the Independent
Directors Committee, their ownership of Common Stock would result in the loss
of the Company's status as a REIT.
-110-
<PAGE>
RELIEF PROVISIONS. Should the Company fail to satisfy one or both of
the 75% or 95% gross income tests for any taxable year, it may nevertheless
qualify as a REIT for such year by obtaining relief under certain provisions
of Section 856 of the Code. Such provisions would allow the Company to
preserve its REIT qualifications if (i) the failure to meet such tests was
due to reasonable cause and not due to willful neglect, (ii) the Company
attaches a schedule of the sources of its income to its tax return, and (iii)
any incorrect information on the schedule was not due to fraud with intent to
evade tax. There can be no assurance, however, that the Company would be
entitled to the benefit of these relief provisions in all circumstances. As
discussed above in "Taxation of the Company--General", even if these relief
provisions apply, a tax would be imposed with respect to the excess net
income.
ASSET TESTS. To maintain its status as a REIT the Company, at the
close of each quarter of its taxable year, also must satisfy the following
three asset-related tests:
(i) At least 75% of the value of the Company's total
assets must be represented by interests in real estate assets, shares in
cash, cash items and government securities (as well as certain temporary
investments in stock or debt instruments purchased with the proceeds of new
capital issued by the Company).
(ii) No more than 25% of the Company's total assets may be
represented by securities other than those in the class described in (i),
above.
(iii) With respect to the investments described in (ii)
above, the value of any one issuer's securities owned by the Company may not
exceed 5% of the value of the Company's total assets, and the Company may not
own more than 10% of any one issuer's outstanding voting securities. The
Clinton Administration's 1999 budget proposal would prohibit a REIT from
holding more than 10% of the outstanding stock of any one issuer, determined
by either vote or value.
In applying these asset-related tests the Company will be deemed to
own its proportionate share of all of the assets of the Operating
Partnership. Upon the consummation of the Berg Acquisition, more than 75% of
the value of the Operating Partnership's assets will qualify as "real estate
assets."
Having met the asset tests at the close of any quarter, the Company
will not forfeit its REIT status by failing to satisfy these tests at the end
of a later quarter solely due to fluctuations in asset values. Furthermore,
should the Company fail to satisfy the asset tests because of its acquisition
of securities or other property during a quarter, the Company can be cured of
such failure by disposing of a sufficient amount of nonqualifying assets
within 30 days after the close of that quarter. The Company intends to
maintain adequate records of the value of its assets to ensure compliance
with the asset-related tests, and to take such other action within 30-days
after the close of any quarter as may be required to cure any noncompliance.
ANNUAL DISTRIBUTION REQUIREMENTS. In order to qualify as a REIT, the
Company must distribute dividends (other than capital gains dividends) to its
shareholders in an amount at least equal to: (A) the sum of (i) 95% of the
Company's "REIT taxable income" (computed without regard to deduction for the
dividends paid and by excluding any net capital gain), and (ii) 95% of the
excess of the net income, if any, from foreclosure property (in excess of the
special tax imposed on income from foreclosure property); minus (B) the sum
of certain items of "noncash income". Such dividends must be paid in the
taxable year to which they relate, or in the following taxable year if
declared before the Company timely files its tax return for such year, and if
paid on or before the first regular dividend payment after such declaration.
To the extent that the Company does not distribute all of its net capital
gain or distributes at least 95%, but less than 100%, of its REIT taxable
income, as adjusted, it will be subject to tax on the undistributed amount of
its REIT taxable income at regular ordinary and capital gains corporate tax
rates. For the Company's taxable year beginning on January 1, 1998 and for
all taxable years thereafter, undistributed capital gains may be so
designated by the Company and in such event will be includible in the income
of the holders of shares of Common Stock. If the Company makes that election,
shareholders will be treated as having paid the capital gains tax imposed on
the Company on the designated amounts including in their income as long-term
capital gains. Such shareholders would get an increase in the basis for
income recognized and a decrease in their basis for taxes paid by the
Company. Additionally, if the Company fails to distribute at least the sum of
(i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT
capital gain income for such year, and (iii) any undistributed taxable income
from prior periods, during each calendar year the Company would be subject to
a 4% excise tax on the excess of such requied distribution over the amounts
actually distributed.
-111-
<PAGE>
The Company's REIT taxable income will consist almost entirely of
the Company's distributive share of the income of the Operating Partnership.
The Company expects generally to have adequate cash and cash equivalents to
allow liquid assets to satisfy such distribution requirements. The Company
intends to make timely distributions sufficient to satisfy the REIT annual
distribution requirements.
Nevertheless, on occasion the Company may lack sufficient cash or
cash equivalents to make timely dividend distributions in the required
amounts either because its share of the Operating Partnership's cash flow for
a particular year is inadequate or because of timing differences between the
Company's receipt of income and payment of deductible expenses, and the
inclusion of such income and the deduction of such expenses in determining
the Company's REIT taxable income. Upon the occurrence of these events, in
order to meet the 95% distribution requirements, the Company may find it
necessary to arrange for short-term, or possibly long-term, borrowings or to
pay dividends in the form of taxable stock dividends.
Certain provisions of the Code may permit the Company to remedy its
failure to meet the distribution requirements for a taxable year by paying
"deficiency dividends" to shareholders in a later year, which may be included
in the Company's deduction for dividends paid for the earlier year. The
Company then could avoid being subjected to tax on the amounts so
distributed, although the Company would be required to pay interest on the
amount of the deduction taken for the deficiency dividends.
LOSS OF REIT QUALIFICATION. If the Company fails to qualify for
taxation as a REIT in any taxable year, and the relief provisions do not
apply, the Company will be subject to tax (including any applicable corporate
alternative minimum tax) on its taxable income at regular corporate rates.
Distributions to shareholders in any year in which the Company fails to
qualify will not be deductible by the Company and need not be made. Upon such
failure to qualify, all distributions to shareholders will, to the extent of
the Company's current and accumulated earnings and profits, be taxable as
ordinary income. In addition, subject to certain limitations of the Code,
such distributions to corporate distributees may be eligible for the
dividends received deduction. Unless entitled to relief under specific
statutory provisions, the Company also will be disqualified from taxation as
a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
TAXATION OF UNITED STATES SHAREHOLDERS
GENERALLY. As used herein, the term "United States Shareholder"
means a holder of shares who is an individual who is a citizen or resident of
the United States; a corporation, partnership or other entity created or
organized in, or under the laws of, the United States or any state; an estate
the income of which from sources without the United States is includible in
gross income for United States federal income tax purposes regardless of
whether such income is effectively connected with the conduct of a trade or
business in the United States; a trust the primary supervision over the
administration of which is exercisable by a court within the United States
and having one or more United States fiduciaries with authority to control
all substantial decisions of such trust; and any other person whose income or
gain in respect of the stock is effectively connected with the conduct of a
United States trade or business.
As long as the Company qualifies as a REIT, distributions made to
the Company's United States Shareholders out of current or accumulated
earnings and profits (and not designated as capital gains dividends) will be
treated by them as ordinary income and will not be eligible for the dividends
received deduction for corporations. Distributions designated as capital
gains dividends will be taxed as long-term capital gains (to the extent they
do not exceed the Company's actual net capital gain for the taxable year)
without regard to the period for which the United States Shareholder has held
its stock. Pursuant to Section 291(d) of the Code corporate shareholders may
be required to treat up to 20% of certain capital gain dividends as ordinary
income.
On November 10, 1997, the IRS issued Notice 97-64, which provides
generally that a REIT may classify portions of its designated capital gain
dividend as (i) a 20% rate gain distribution (which would be taxed as long-term
capital gain in the 20% group), (ii) an unrecaptured Section 1250 gain
distribution (which would be taxed as long-term capital gain in the 25% group),
or (iii) a 28% rate gain distribution (which would be taxed as long-term capital
gain in the 28% group). (If no designation is made, the entire designated
capital gain divided will be treated as a 28% rate gain distribution. For a
discussion of the 20%, 25% and 28% tax rates applicable to individuals, see
"1997 Act Changes to Capital Gain Taxation" below). IRS Notice 97-64 also
provides that a REIT must determine the maximum amounts that it may designate as
20% and 25% rate capital gain dividends by performing the
-112-
<PAGE>
computation required by the Code as if the REIT were an individual whose
ordinary income were subject to a marginal tax rate of at least 28%. The
Notice further provides that designations made by the REIT will be effective
only to the extent that they comply with Revenue Ruling 89-91, which requires
that distributions made to different classes of shares be composed
proportionately of dividends of a particular type.
Distributions that exceed current and accumulated earnings and
profits will not be taxable to a United States Shareholder to the extent that
they do not exceed the adjusted basis of the shareholder's shares, but rather
will reduce the shareholder's adjusted basis in the shares. To the extent
that such distributions exceed a shareholder's adjusted basis in its shares
they will be included in income as gain realized from the sale of the shares,
assuming the shares are a capital asset in the hands of the shareholder. In
addition, any dividend declared by the Company in October, November or
December of any year payable to a United States Shareholder of record on a
specified date in any such month shall be treated as both paid by the Company
and received by the shareholder on December 31 of such year, provided that
the dividend is actually paid by the Company during January of the following
calendar year. United States Shareholders may not include in their individual
income tax returns any net operating losses or capital losses of the Company.
The Company will be treated as having sufficient earnings and
profits to treat as a dividend any distribution by the Company up to the
amount required to be distributed in order to avoid imposition of the 4%
excise tax discussed under "Taxation of the Company--General" and "Annual
Distribution Requirements" above. As a result, shareholders may be required
to treat as taxable dividends certain distributions which would otherwise
result in a tax-free return of capital. Furthermore, any "deficiency
dividend" will be treated as a "dividend" (an ordinary dividend or a capital
gain dividend, as the case may be), regardless of the Company's earnings and
profits.
United States Shareholders may not include in their individual
income tax returns any net operating losses or capital losses of the Company.
Instead, such losses would be carried over by the Company for potential
offset against future income (subject to certain limitations). Distributions
made by the Company and gain arising from the sale or exchange by a United
States Shareholder of shares will not be treated as passive activity income,
and, as a result, United States Shareholders generally will not be able to
apply any "passive losses" against such income or gain. In addition, taxable
distributions from the Company generally will be treated as investment income
for purposes of the investment interest limitations. Capital gain dividends
and capital gains from the disposition of shares (including distributions
treated as such), however, will be treated as investment income only if the
United States Shareholder so elects, in which case such capital gains will be
taxed at ordinary income rates. The Company will notify United States
Shareholders after the close of the Company's taxable year as to the portions
of distributions attributable to that year that constitute ordinary income,
return of capital and capital gain.
In general, any loss realized upon a sale or exchange of shares by a
United States Shareholder who has held such shares for six months or less
will be treated as a long-term or mid-term capital loss to the extent of
capital gains dividends received by such shareholder from the Company with
respect to such shares which were classified as long-term or mid-term capital
gains.
1997 ACT CHANGES TO CAPITAL GAIN TAXATION. The 1997 Act alters the
taxation of capital gain income. Under the 1997 Act, individuals, trusts and
estates that hold certain investments for more than eighteen months may be
taxed at a maximum long-term capital gain rate of 20% on the sale or exchange
of those investments. Individuals, trusts and estates that hold certain
assets for more than one year but not more than eighteen months may be taxed
at a maximum mid-term capital gain rate of 28% on the sale or exchange of
those investments. The 1997 Act also provides a maximum rate of 25% for
"unrecaptured Section 1250 gain" for individuals, trusts and estates, special
rules for "qualified five-year gain", and other changes to prior law. The
1997 Act allows the IRS to prescribe regulations on how the 1997 Act's new
capital gain rates will apply to sales of capital assets by "pass-through
entities", which include REITs, and to sales of interests in "pass-through
entities". Shareholders are urged to consult with their own tax advisors with
respect to the new rules contained in the 1997 Act.
TAXATION OF TAX-EXEMPT SHAREHOLDERS
Distributions from the Company to certain tax-exempt employees'
pension trusts or other domestic tax-exempt Shareholders will not constitute
"unrelated business taxable income" unless such a shareholder has borrowed to
acquire or carry its stock of the Company or the shares are used by such
shareholder in an unrelated trade or business. For taxable years beginning
after December 31, 1993, qualified trusts that hold more than 10%
-113-
<PAGE>
of the shares of the Common Stock may under certain circumstances be required
to treat a certain percentage of dividends as unrelated business taxable
income if the Company is "predominantly held" by qualified trusts. For these
purposes, a qualified trust is any trust defined under Section 401(a) of the
Code and exempt from tax under Section 501(a) of the Code. The Company would
be "predominantly held" if one or more qualified trusts, each owning more
than 10% of the shares of Common Stock were to hold more than 50% of the
shares of Common Stock in the aggregate. In such a circumstance, any
qualified trust that owned more than 10% of the shares of Common Stock might
be required to treat a certain portion of the dividends paid as unrelated
business taxable income.
TAXATION OF FOREIGN SHAREHOLDERS
The rules governing United States federal income taxation of
nonresident alien individuals, foreign corporations, foreign partnerships and
other foreign shareholders (collectively, "Foreign Shareholders") are
complex, and no attempt will be made herein to provide more than a summary of
such rules. PROSPECTIVE FOREIGN SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN
TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE AND LOCAL INCOME TAX
LAWS WITH REGARD TO AN INVESTMENT IN THE COMPANY, INCLUDING ANY REPORTING
REQUIREMENTS.
Distributions by the Company that are not attributable to gain from
sales or exchanges by the Company of United States real property interests
and not designated by the Company as capital gains dividends will be treated
as dividends of ordinary income to the extent that they are made out of
current or accumulated earnings and profits of the Company. Such
distributions ordinarily will be subject to a withholding tax equal to 30% of
the gross amount of the distribution, unless an applicable tax treaty reduces
or eliminates that tax. If income from the investment in the shares is
treated as effectively connected with the conduct by the Foreign Shareholder
of a United States trade or business, however, the Foreign Shareholder
generally will be subject to a tax at graduated rates in the same manner as
United States Shareholders are taxed with respect to such dividends (and the
income may also be subject to the 30% branch profits tax in the case of a
Foreign Shareholder that is a foreign corporation). The Company will withhold
United States income tax at the rate of 30% on the gross amount of any such
dividends made to a Foreign Shareholder unless (i) a lower treaty rate
applies, or (ii) the Foreign Shareholder files an IRS Form 4224 with the
Company certifying that the investment to which the distribution relates is
effectively connected with a United States trade or business of such Foreign
Shareholder. Lower treaty rates applicable to dividend income may not
necessarily apply to dividends from a REIT such as the Company, however.
Distributions in excess of current or accumulated earnings and profits of
the Company will not be taxable to a Foreign Shareholder to the extent that
they do not exceed the adjusted basis of the Foreign Shareholder's shares,
but rather will reduce the adjusted basis of a Foreign Shareholder's shares.
To the extent that such distributions exceed the adjusted basis of a Foreign
Shareholder's shares, they will give rise to gain from the sale or exchange
of its stock, the tax treatment of which is described below. As a result of a
legislative change made by the Small Business Job Protection Act of 1996, it
appears that the Company will be required to withhold 10% of any distribution
in excess of the Company's current and accumulated earnings and profits.
Consequently, although the Company intends to withhold at a rate of 30% on
the entire amount of any distribution (or a lower applicable treaty rate), to
the extent that the Company does not do so, any portion of a distribution not
subject to withholding at a rate of 30% (or a lower applicable treaty rate)
will be subject to withholding at a rate of 10%. However, the Foreign
Shareholder may seek a refund of such amounts from the IRS if it is
subsequently determined that such distribution was, in fact, in excess of
current or accumulated earnings and profits of the Company, and the amount
withheld exceeded the Foreign Shareholder's United States tax liability, if
any, with respect to the distribution.
Distributions that are designated by the Company at the time of
distribution as capital gains dividends (other than those arising from the
disposition of a United States real property interest) generally will not be
subject to taxation, unless (i) investment in the shares is effectively
connected with the Foreign Shareholder's United States trade or business, in
which case the Foreign Shareholder will be subject to the same treatment as
United States Shareholders with respect to such gain (except that a Foreign
Shareholder that is a foreign corporation may also be subject to the 30%
branch profits tax), or (ii) the Foreign Shareholder is a nonresident alien
individual who was present in the United States for 183 days or more during
the taxable year and has a tax home in the United States, in which case the
nonresident alien individual will be subject to a 30% tax on the capital
gains.
-114-
<PAGE>
For any year in which the Company qualifies as a REIT, distributions
that are attributable to gain from the sale or exchange by the Company of a
United States real property interest will be taxed to a Foreign Shareholder
under the provisions of the Foreign Investment in Real Property Tax Act of 1980
("FIRPTA"). Under FIRPTA, these distributions are taxed to a Foreign Shareholder
as if such gain were effectively connected with a United States trade or
business conducted by the Foreign Shareholder. Foreign Shareholders would thus
be taxed at the same capital gain rates applicable to United States Shareholders
(subject to applicable alternative minimum tax and a special alternative minimum
tax in the case of nonresident alien individuals). Also, distributions subject
to FIRPTA may be subject to a 30% branch profits tax in the hands of a foreign
corporate shareholder not entitled to treaty exemption. The Company is required
by applicable IRS regulations to withhold 35% of any distribution that could be
designated by the Company as a capital gain dividend. This amount is creditable
against the Foreign Shareholder's FIRPTA tax liability.
If the Company is a "domestically-controlled REIT," a sale of Common
Stock by a Foreign Shareholder generally will not be subject to United States
taxation. A "domestically-controlled REIT" is a REIT in which, at all times
during a particular testing period (generally five years preceding the sale
in issue), less than 50% of the value of the REIT's shares are held directly
or indirectly (taking into consideration attribution rules) by Foreign
Shareholders. Because the Common Stock will be publicly traded, no assurance
can be given that the Company will constitute a domestically-controlled REIT.
Notwithstanding the foregoing, capital gain from the sale of stock of a
domestically-controlled REIT not subject to FIRPTA will be taxable to a
Foreign Shareholder (under rules generally applicable to United States
Shareholders) if such person is in the United States for 183 days or more
during the taxable year of disposition and certain other conditions apply.
If the Company is not a domestically-controlled REIT, whether a sale
of Common Stock would be subject to tax under FIRPTA as a sale of a United
States real property interest would depend on whether the Common Stock is
"regularly traded" (as defined by applicable Treasury Regulations) on an
established securities market (e.g., the AMEX and the PSE, on which the
Common Stock is listed) and whether the selling shareholder held, directly or
indirectly, more than 5% of the Common Stock during the five-year period
ending on the date of disposition. Arguably, the applicable Treasury
Regulations defining "regularly traded" for this purpose provide that the
shares of Common Stock will not be "regularly traded" for any calendar
quarter during which 100 or fewer persons (treating related persons as one
person) in the aggregate own 50% or more of the shares of Common Stock. If
this interpretation is correct, and the Company did not at the time
constitute a domestically-controlled REIT, a Foreign Shareholder (without
regard to its ownership percentage of Common Stock) will be subject to
federal income tax with respect to gain realized on any sale or other
disposition of Common Stock that occurs within a calendar quarter during
which 50% or more of the Common Stock is so owned. If the gain on the sale of
the Common Stock is subject to taxation under FIRPTA, the Foreign Shareholder
will be subject to the same treatment as a United States Shareholder with
respect to such gain (subject to applicable alternative minimum tax and a
special alternative minimum tax in the case of nonresident alien
individuals). In any event, a purchaser of Common Stock from a Foreign
Shareholder will not be required under FIRPTA to withhold on the purchase
price if the purchased Common Stock is "regularly traded" on an established
securities market or if the Company is a domestically-controlled REIT.
Otherwise, under FIRPTA the purchaser of Common Stock may be required to
withhold 10% of the purchase price and remit such amount to the IRS.
INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX
The Company will report to its shareholders and the IRS the amount
of dividends paid or deemed paid during each calendar year, and the amount of
tax withheld, if any.
UNITED STATES SHAREHOLDERS. Under certain circumstances, United
States Shareholders owning Common Stock may be subject to backup withholding
at a rate of 31% on payments made with respect to, or cash proceeds of a sale
or exchange of, Common Stock. Backup withholding will apply only if the
shareholder (i) fails to furnish the Company with its Taxpayer Identification
Number ("TIN") which, for an individual, would be his Social Security Number,
(ii) furnishes the Company with an incorrect TIN, (iii) is notified by the
IRS that it has failed properly to report payments of interest and dividends,
or (iv) under certain circumstances, fails to certify, under penalty of
perjury, that it has furnished a correct TIN and has not been notified by the
IRS that it is subject to backup withholding for failure to report interest
and dividend payments. Backup withholding will not apply with respect to
payments made to certain exempt recipients, such as tax-exempt organizations.
United States Shareholders should consult their own tax advisors regarding
their qualification for exemption from backup withholding and the procedure
for obtaining such an exemption. Backup withholding is not an additional tax.
Rather, the amount of
-115-
<PAGE>
any backup withholding with respect to a payment to a United States
Shareholder will be allowed as a credit against such United States
Shareholder's United States federal income tax liability and may entitle such
United States Shareholder to a refund, provided that the required information
is furnished to the IRS.
FOREIGN SHAREHOLDERS. Additional issues may arise pertaining to
information reporting and backup withholding with respect to Foreign
Shareholders, and Foreign Shareholders should consult their tax advisors with
respect to any such information reporting and backup withholding
requirements. Backup withholding with respect to Foreign Shareholders is not
an additional tax. Rather, the amount of any backup withholding with respect
to a payment to a Foreign Shareholder will be allowed as a credit against any
United States federal income tax liability of such Foreign Shareholder. If
withholding results in an overpayment of taxes, a refund may be obtained
provided that the required information is furnished to the IRS.
The United States Treasury has recently finalized regulations
regarding the withholding and information reporting rules discussed above. In
general, these regulations do not alter the substantive withholding and
information reporting requirements, but unify certification procedures and
forms and clarify and modify reliance standards. These regulations generally
are effective for payments made after December 31, 1999, subject to certain
transition rules. Valid withholding certificates that are held on December
31, 1999, will remain valid until the earlier of December 31, 2000, or the
date of expiration of the certificate under rules currently in effect (unless
otherwise invalidated due to changes in the circumstances of the person whose
name is on such certificate). A Foreign Shareholder should consult its own
advisor regarding the effect of the new Treasury Regulations.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
GENERAL. Substantially all of the Company's investments will be held
indirectly through the Operating Partnership, which in turn will own the
Properties. In general, partnerships are "pass-through" entities that are not
subject to federal income tax. Instead, partners receive an allocation of the
items of income, gain, loss, deduction and credit of a partnership, and are
potentially subject to tax on their distributive shares thereof, without
regard to whether the partners actually receive a cash distribution from the
partnership. The Company will include in its income its share of the
foregoing partnership items for purposes of the various REIT income tests and
in the computation of its REIT taxable income. See: "Partnership Allocations"
below. Moreover, for purposes of the REIT asset tests, the Company will
include its proportionate share of assets held directly or indirectly by the
Operating Partnership. See "Taxation of the Company".
ENTITY CLASSIFICATION. If the Operating Partnership were treated as
an association taxable as a corporation instead of as a partnership, it would
be taxable as a corporation and therefore subject to an entity-level tax on
its income. In this event, the character of the Company's assets and items of
gross income would change and would preclude the Company from satisfying the
asset-related tests and the income tests (see "FEDERAL INCOME TAX
CONSIDERATIONS" --"Taxation of the Company--Asset Tests" and " Income Tests"),
which in turn would prevent the Company from qualifying as a REIT. See
"Failure to Qualify" above for a discussion of the effect of the Company's
failure to meet such tests for a taxable year.
The Operating Partnership has not requested, nor does it intend to
request, a ruling from the IRS that it will be treated as a partnership for
federal income tax purposes. Instead, at the closing of the Reincorporation
Merger, Graham & James LLP will deliver an opinion to the effect that, based
on the provisions of the Operating Partnership Agreement, and certain factual
assumptions and representations described in the opinion, the Operating
Partnership will be treated as a partnership for federal income tax purposes.
Unlike a private letter ruling, an opinion of counsel is not binding on the
IRS, and no assurance can be given that the IRS will not challenge the status
of the Operating Partnership as a partnership for federal income tax
purposes. If such challenges were sustained by a court, the Partnership would
be treated as a corporation for federal income tax purposes.
PARTNERSHIP ALLOCATIONS. Although the provisions of a partnership
agreement generally determine the partners' respective allocations of income
and loss, such allocations will be disregarded for tax purposes if they do
not have "substantial economic effect" under the requirements of Section
704(b) of the Code and the Treasury Regulations promulgated thereunder. If an
allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the
partners' interests in the partnership, which will be determined by taking
into account all of the facts and circumstances relating to the economic
arrangement of the partners with respect to such item. The allocations of
taxable income and loss by the
-116-
<PAGE>
Operating Partnership are intended to comply with the requirements of Section
704(b) of the Code and the Treasury Regulations promulgated thereunder.
TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTIES. Section
704(c) of the Code requires all income, gain, loss and deduction attributable
to appreciated or depreciated property that is contributed to a partnership
in exchange for an interest in the partnership to be allocated for federal
income tax purposes in a manner such that the contributor is charged with or
benefits from the unrealized gain or unrealized loss inherent in the property
at the time of the contribution. The amount of such unrealized gain or
unrealized loss is generally equal to the difference between the fair market
value of the contributed property at the time of contribution and the
adjusted tax basis of such property at the time of contribution (a "Book-Tax
Difference"). Such allocations are made solely for federal income tax
purposes and do not affect the book capital accounts or other economic
arrangements among the partners. The Partnership Agreement generally requires
such allocations to be made in a manner consistent with the provisions of
Section 704(c) of the Code.
Treasury Regulations under Section 704(c) of the Code provide
partnerships with a choice of several methods of accounting for a Book-Tax
Difference, including retention of the "traditional method" or the election
of certain alternative methods which would permit any distortions caused by a
Book-Tax Difference to be entirely rectified on an annual basis or with
respect to a specific taxable transaction such as a sale. Based on the
foregoing, in general, if any asset contributed to or revalued by the
Operating Partnership is determined to have a fair market value which is
greater than its adjusted tax basis, certain partners of the Operating
Partnership will be allocated lower amounts of depreciation deductions for
tax purposes by the Operating Partnership and increased taxable income and
gain on sale. Such allocations will tend to eliminate the Book-Tax Difference
over the life of the Operating Partnership. However, the special allocation
rules of Section 704(c) of the Code do not always entirely rectify the
Book-Tax Difference on an annual basis or with respect to a specific
transaction such as a sale. Thus, the Company may be allocated lower
depreciation and other deductions, and possibly greater amounts of taxable
income in the event of a sale of contributed assets, and such amounts may be
in excess of the economic or book income allocated to it as a result of such
sale. Such an allocation might cause the Company to recognize taxable income
in excess of cash proceeds, which might adversely affect the Company's
ability to comply with the REIT distribution requirements. See "--Requirements
for Qualification--Annual Distribution Requirements".
Any property purchased or constructed by the Operating Partnership
subsequent to the Berg Acquisition will initially have a tax basis equal to
its cost, and Section 704(c) of the Code will not apply. Depreciation with
respect to such property will be allocated for book and tax purposes pro rata
to each partner.
Upon the disposition of any Properties with a Book-Tax Difference
for an amount greater than the adjusted tax basis, book gain will be
allocated to the Limited Partners and the Company to the extent of any prior
special allocations of depreciation with respect to such Properties, then pro
rata to each Partner. In addition, tax gain with respect to such Properties
will be allocated to the Limited Partners to the extent of the remaining
Book-Tax Difference, then pro-rata to each partner. On any subsequently
purchased property, gain for tax and book purposes will be allocated pro rata
to each Partner.
BASIS IN PARTNERSHIP INTEREST. The Company's adjusted tax basis in
its interest in the Operating Partnership generally (i) will be equal to the
amount of cash and the basis of any other property contributed to the
Operating Partnership by the Company, (ii) will be increased by its allocable
share of (a) the Operating Partnership's income, and (b) the indebtedness of
the Operating Partnership, and (iii) will be reduced, but not below zero, by
the Company's allocable share of (a) the Operating Partnership's losses and
(b) the amount of cash distributed to the Company by the Operating
Partnership, and by constructive distributions resulting from a reduction in
the Company's share of indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the
Operating Partnership's loss will reduce the adjusted tax basis of the
Company's partnership interest in the Operating Partnership below zero, the
recognition of such loss will be deferred until such time as the recognition
of such loss would not reduce the Company's adjusted tax basis below zero. To
the extent that the Operating Partnership's distributions, or any decrease in
the Company's share of the nonrecourse indebtedness of the Operating
Partnership (such decreases being considered a constructive cash distribution
to the partners) exceeds the Company's adjusted tax basis, such distributions
will constitute taxable income to the Company. Such taxable income will
normally be characterized as a capital gain, and if the Company's partnership
interest in the Operating Partnership has been held for longer than the
long-term capital gain holding period, the distribution will constitute a
long-term capital gain.
-117-
<PAGE>
SALE OF THE OPERATING PARTNERSHIP'S PROPERTY. Any gain realized by
the Operating Partnership on the sale of property held for more than one year
will generally be mid-term capital gain, long-term capital gain or
unrecaptured Section 1250 gain, except for any portion of such gain that is
treated as depreciation or cost recovery recapture, in accordance with the
rules described above. See "--Taxation of United States Shareholders--1997
Act Changes to Capital Gain Taxation." The Operating Partnership intends to
hold the Properties for investment with a view to long-term appreciation, to
engage in the business of acquiring, developing, owning, and operating the
Properties and additional properties, and to sell a Property when such sale
is consistent with the Operating Partnership's investment objectives. See
"POLICIES WITH RESPECT TO CERTAIN ACTIVITIES".
FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION MERGER.
The Company has been advised by Graham & James LLP that, for federal
income tax purposes, no gain or loss will be recognized by the holders of
Common Stock or options to purchase Common Stock as a result of the
consummation of the Reincorporation Merger. Each holder of Common Stock will
have the same basis in the New Common Stock received pursuant to the
Reincorporation Merger as he had in the Common Stock held immediately prior
to the Reincorporation Merger, and his holding period with respect to the New
Common Stock will include the period during which he held the corresponding
Common Stock, so long as the Common Stock was held as a capital asset at the
time of consummation of the Reincorporation Merger.
The Company has also been advised by Graham & James LLP that the
Company will not recognize gain or loss for federal income tax purposes as a
result of the Reincorporation Merger, and that Mission West-Maryland will
succeed without adjustment to the tax attributes of the Company. The Company
is currently subject to state income taxation in California. If the
Reincorporation Merger is approved, Mission West-Maryland may be subject to
California state income tax.
OTHER TAX CONSEQUENCES
The Company and its shareholders may be subject to state or local
taxation in various state or local jurisdictions, including those in which it
or they transact business or reside. The state and local tax treatment of the
Company and its shareholders may not conform to the federal income tax
consequences discussed above. Consequently, prospective shareholders should
consult their own tax advisors regarding the effect of state and local tax
laws on an investment in the Company.
-118-
<PAGE>
ERISA CONSIDERATIONS
GENERAL
In evaluating the effect of the Proposed Transactions, a fiduciary
of a qualified profit-sharing, pension or stock bonus plan, including a plan
for self-employed individuals and their employees or any other employee
benefit plan (a "Plan") subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), should consider (a) whether the ownership
of Common Stock is in accordance with the documents and instruments governing
such Plan; (b) whether the ownership of Common Stock is consistent with the
fiduciary's responsibilities and satisfies the requirements of Part 4 of
Title I of ERISA (where applicable) and, in particular, the diversification,
prudence and liquidity requirements of Section 404 of ERISA; (c) the effect
in the unlikely event that the Company's assets are treated as assets of the
Plan; and (d) the need to value the assets of the Plan annually.
The fiduciary investment considerations summarized below provide a
general discussion that does not include all the fiduciary investment
considerations relevant to a Plan. This summary is based on the current
provisions of ERISA and the Code and regulations and rulings thereunder and
both of which may be changed (perhaps adversely and with retroactive effect)
by future legislative, administrative or judicial actions. This discussion
should not be construed as legal advice and prospective purchasers of Common
Stock should consult with and rely upon their own advisors in evaluating
these matters in light of their own personal circumstances.
PLAN ASSETS REGULATIONS
Under Department of Labor ("DOL") regulations determining the assets
of a Plan for purposes of ERISA and the related prohibited transaction excise
tax provisions of the Code (the "Plan Asset Regulation"), when a Plan makes
an equity investment in another entity, the underlying assets of that entity
will not be considered assets of the Plan if the equity interest is a
"publicly-offered security."
For purposes of the Plan Asset Regulation, a "publicly-offered
security" is a security that is (a) "freely transferable," (b) part of a
class of securities that is "widely held," and (C) part of a class of
securities that is registered under section 12(b) or 12(g) of the Securities
Exchange Act of 1934 (the "Exchange Act"). The Common Stock has been
registered under the Securities Act and the Exchange Act of 1934.
The Plan Asset Regulation provides that a security is "widely held"
only if it is a part of the class of securities that is owned by 100 or more
investors independent of the issuer and of one another. A security will not
fail to be "widely held" because the number of independent investors falls
below 100 subsequent to the offering as a result of events beyond the control
of the issuer. The Company expects the Common Stock to remain "widely held"
upon the completion of the Proposed Transactions.
The Plan Asset Regulation provides that whether a security is
"freely transferable" is a factual question to be determined on the basis of
all the relevant facts and circumstances. The Plan Asset Regulation further
provides that when a security is part of an offering in which the minimum
investment is $10,000 or less, as is the case with the offering of the Common
Stock, certain restrictions ordinarily will not, alone or in combination,
affect the finding that such securities are "freely transferable." The
Company believes that the restrictions imposed under the Charter on the
transfer of the New Common Stock are limited to the restrictions on transfer
generally permitted under the Plan Asset Regulation and are not likely to
result in the failure of the New Common Stock to be "freely transferable."
However, no assurance can be given that the DOL will not reach a contrary
conclusion.
Therefore, the Company believes that the Common Stock and the New
Common Stock should be treated as "publicly-offered securities", under the
Plan Asset Regulation and, accordingly, that the underlying assets of the
Company should not be considered to be assets of any Plan investing in the
Common Stock.
GENERAL ERISA REQUIREMENTS
ERISA generally requires that the assets of a Plan be held in trust
and that the trustee, or an investment manager (within the meaning of Section
3(38) of ERISA), have exclusive authority and discretion to manage and
control the assets of the Plan. As discussed above, under current law the
assets of the Company do not appear likely to be assets of Plans receiving
shares of Common Stock or New Common Stock as a result of the Proposed
Transactions. However, if the assets of the Company were deemed to be assets
of Plans under ERISA, the
-119-
<PAGE>
directors of the Company would likely be fiduciaries with respect to the
Plans that invest in the Company and the prudence and other fiduciary
standards set forth in ERISA would apply to the directors and to all
investments made by the Company. Plan fiduciaries who make the decision to
invest in the Common Stock could, under certain circumstances, be liable as
co-fiduciaries for actions taken by the Company or the directors that do not
conform to the ERISA standards for investments under Part 4 of Title I of
ERISA.
PROHIBITED TRANSACTIONS
Section 406 of ERISA provides that Plan fiduciaries are prohibited
from causing a Plan to engage in certain types of transactions. Section
406(a) prohibits a fiduciary from knowingly causing a Plan to engage directly
or indirectly in, among other things: (a) a sale or exchange, or leasing, of
property with a party in interest; (b) a loan or other extension of credit
with a party in interest; (c) a transaction involving the furnishing of
goods, services or facilities with a party in interest; or (d) a transaction
involving the transfer of Plan assets to, or use of Plan assets by or for the
benefit of, a party in interest. Additionally, Section 406 prohibits a Plan
fiduciary from dealing with Plan assets in his own interest or for his own
account, from acting in any capacity in any transaction involving the Plan on
behalf of a party (or representing a party) whose interests are adverse to
the interest of the Plan, and from receiving any consideration for his own
account from any party dealing with the Plan in connection with a transaction
involving Plan assets. Similar provisions in Section 4975 of the Code apply
to qualified Plans, and to certain other plans and individual retirement
arrangements not subject to ERISA.
If the assets of the Company were deemed to be assets of a Plan, a
director could be characterized as a fiduciary of the Plan under ERISA or the
Code. A director's characterization as a fiduciary would cause him to be
deemed as a "party in interest" under ERISA and a "disqualified person" under
the Code with respect to a Plan (or other plan or individual retirement
arrangement) receiving Common Stock, which could cause various transactions
between the director and the Company to constitute prohibited transactions
under ERISA and the Code. Moreover, if the assets of the Company were deemed
to be assets of the Plans, transactions between the Company and parties in
interest or disqualified persons with respect to any Plan (or other plan or
individual retirement arrangement) that has invested in the Company could be
prohibited transactions with respect to the Plan, unless a statutory or
administrative exemption is available.
If a prohibited transaction has occurred, certain of the parties
involved in the transaction could be required to (a) undo the transaction,
(b) restore to the Plan any profit realized on the transaction, (c) make good
to the Plan any loss suffered by it as a result of the transaction and (d)
pay an excise tax equal to fifteen percent of the "amount involved" in the
transaction for each year in which the transaction remains uncorrected. If
such transaction is not corrected within the "taxable period," as defined in
Section 4975(f)(2) of the Code, the parties involved in the transaction could
be required to pay an excise tax equal to 100% of the "amount involved."
If the investment constituted a prohibited transaction under Section
408(e)(2) of the Code by reason of the Company engaging in a prohibited
transaction with the individual who established an individual retirement
arrangement ("IRA") or his beneficiary, the IRA would lose its tax-exempt
status. The other penalties for prohibited transactions would not apply.
REPORTING AND DISCLOSURE
As part of the reporting and disclosure requirements applicable to
Plans under ERISA and the Code, fiduciaries of a Plan are required to
determine annually the fair market value of the assets of such Plan as of the
close of such Plan's fiscal year and to file annual reports valuing such
assets. Since the Common Stock and New Common Stock are or will be listed on
the AMEX (and that the assets of the Company will not be deemed to be assets
of the Plans) and are expected to be trading on the AMEX following
consummation of the Proposed Transactions, the requirements for valuation
should be complied with by such listing and trading.
-120-
<PAGE>
LEGAL MATTERS
The validity of the shares of New Common Stock offered hereby, as
well as certain tax matters described under "Federal Income Tax
Considerations", will be passed upon for the Company by Graham & James LLP.
Alan B. Kalin, a partner of Graham & James LLP, owns 12,333 shares of Common
Stock. Graham & James LLP will rely on the opinion of Ballard Spahr Andrews &
Ingersoll, LLP, Baltimore, Maryland, as to certain matters of Maryland law.
EXPERTS
The consolidated financial statements of the Company incorporated in
the Proxy Statement / Prospectus by reference to the Annual Report on Form
10-K for the period ended December 31, 1997 and the Combined Financial
Statements for the Berg Properties as of December 31, 1997 and 1996, and for
the three years in the period ended December 31, 1997, the Combined Statement
of Revenue and Certain Expenses of Fremont Properties for the year ended
December 31, 1997 and the Combined Statements of Revenue and Certain Expenses
for the Kontrabecki Properties for the years ended December 31, 1997, 1996
and 1995 included in this Proxy Statement / Prospectus have been audited by
Coopers & Lybrand LLP, independent accountants. Such financial statements
have been included in reliance upon the reports of Coopers & Lybrand LLP,
independent certified public accountants, given on the authority of said firm
as experts in auditing and accounting.
The financial statements as of November 30, 1996 and for each of the two
years then ended incorporated in this Prospectus by reference to Mission West
Properties' Annual Report on Form 10-K for the year ended December 31, 1997,
have been so incorporated in reliance on the report of Price Waterhouse LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
In addition, certain statistical and other information under the
captions "THE BUSINESS OF BERG & BERG--Regional Economic Profile and The
Silicon Valley R&D Property Market" has been prepared by BT Commercial Real
Estate, and is included herein in reliance upon the authority of such firm as
an expert in, among other things, real estate consulting and economics.
OTHER MATTERS
No other matters will be presented for action at the Special Meeting.
SHAREHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, the Company
shareholders may present proper proposals for inclusion in the Company's
proxy statement and for consideration at the next annual meeting of its
shareholders by submitting such proposals to the Company in a timely manner.
In order to be so included for the 1998 annual meeting, shareholder proposals
must be received by the Company no later than __________, and must otherwise
comply with the requirements of Rule 14a-8.
-121-
<PAGE>
GLOSSARY
"ACMs" means asbestos-containing materials.
"Acquired Properties" means the approximately .56 million rentable square
feet of R&D Properties, consisting of the Kontrabecki Properties and the
Fremont Properties, to be acquired by the Operating Partnership at the
closing of the Berg Acquisition.
"Acquisition Agreement" means the agreement dated as of May 14, 1998, among
the Partnership, the other partnerships comprising the Operating Partnership,
all of the partners therein, and the Company concerning the acquisition of
the Berg Properties, the Acquired Properties and the Pending Development
Projects by the Operating Partnership, the Company's investment in and
admission to the Operating Partnership as sole general partner, the rights
and options of the limited partners in the Operating Partnership to tender
L.P. Units or acquire shares of Common Stock under certain circumstances, and
the rights of the Berg Group to appoint the Berg Group Board Representatives
and receive other board of directors approval rights.
"Adjusted Pro Forma Funds from Operations" means FFO as of the date of the
Pro Forma financial statements adjusted for net increases in rental income
and tenant reimbursements from new leases and renewals that went into effect
between October 1, 1997 and March 15, 1998.
"Affiliate" means a person or entity that directly, or indirectly through one
or more intermediaries, controls, or is controlled by, or is under common
control with, another person or entity.
"Amdahl Properties" means an office complex of five buildings located in the
Oakmead Business Park in Sunnyvale, California and two additional buildings
located in Santa Clara, California leased by the Operating Partnership to
Amdahl Corporation.
"AMEX" means the American Stock Exchange.
"Annual Base Rent" means gross rent for the calendar year excluding payments
by tenants on account of real estate taxes, operating expenses and utility
expenses.
"Apple Properties" means four buildings at three locations in Cupertino,
California leased by the Operating Partnership to Apple Computer, Inc.
"Audit Committee" means the audit committee of the Board of Directors.
"BBE" means Berg & Berg Enterprises, Inc., an affiliate of Carl E. Berg and
Clyde J. Berg.
"Berg & Berg" means Berg & Berg Developers, a general partnership consisting
of Carl E. Berg and Clyde J. Berg.
"Berg Acquisition" means the series of transactions in which MWP L.P., MWP
L.P. I, MWP L.P. II, and MWP L.P. III will become the Operating Partnership,
the Operating Partnership will acquire the Acquired Properties, and the
Company will become the sole general partner of the Operating Partnership.
"Berg Group" means Carl E. Berg, Clyde J. Berg, the members of their
respective Immediate Families, and certain entities controlled by Carl E.
Berg and/or Clyde J. Berg which are BBE, Baccarat Cambrian Partnership,
Baccarat Fremont Developers LLC, and DeAnza Office Partners.
"Berg Group Board Representative(s)" means one or both of the two members of
the Company's board of directors appointed by the Berg Group pursuant to
rights acquired in connection with the Berg Acquisition.
"Berg Land Holdings" means the parcels of undeveloped land known as "King
Ranch," "Hillyer & Piercy," and "Fremont & Cushing," which certain members of
the Berg Group own or have rights to acquire.
"Berg Land Holdings Option Agreement" means the agreement pursuant to which
the Berg Group members that own or hold options to acquire the Berg Land
Holdings have granted the Company and the Operating Partnership an option to
acquire completed and fully leased buildings constructed on the Berg Land
Holdings.
-122-
<PAGE>
"Berg Properties" means complexes, including 59 separate buildings
aggregating approximately 3.78 million rentable square feet located in the
Silicon Valley and owned by the Berg Group prior to the Berg Acquisition.
"Berg Voting Group" means those shareholders of the Company who have executed
one of the Voting Rights Agreements.
"Book-Tax Difference" means the difference between the fair market value of
the contributed property at the time of contribution and the adjusted tax
basis of such property at the time of contribution.
"BT Commercial" means BT Commercial Real Estate.
"Built-in Gain" means the excess of the fair market value of assets as of the
beginning of the Recognition Period over the Company's adjusted basis in
assets as of the beginning of the Recognition Period.
"Cash Available for Distribution" means Funds from Operations (FFO) less
scheduled mortgage loan principal payments, leasing commissions paid and
capital expenditures.
"CGCL" means the California General Corporation Law.
"Change of Control Transaction" shall mean (A) any transaction or series of
transactions, in which all Limited Partners in the Operating Partnership are
legally entitled to participate and pursuant to which L.P. Units representing
more than 50% of the total outstanding L.P. Units of the Operating
Partnership are purchased by a person not controlled by, in control of or
under common control with the Company, any Affiliate of the Company or any
Affiliate of a Limited Partner, (B) the merger or consolidation of the
Partnership with another entity (other than a merger or consolidation in
which the holders of L.P. Units of the Partnership immediately before the
merger or consolidation own immediately after the merger or consolidation,
voting securities of the surviving or acquiring entity or a parent party of
such surviving or acquiring entity, possessing more than 50% of the voting
power of the surviving or acquiring entity or parent party) resulting in the
exchange of the outstanding L.P. Units of the Partnership for cash,
securities or other property, or (C) any merger, sale, lease, license,
exchange or other disposition (whether in one transaction or a series of
related transactions) of more than 50% of the assets of the Partnership.
"Charitable Beneficiary" means the beneficiary of the Trust.
"Charter" means the articles of incorporation of Mission West-Maryland.
"Cisco Properties" means two buildings, one in San Jose and one in Santa
Clara, California, leased to Cisco Systems, Inc.
"Code" means the Internal Revenue Code of 1986, as amended and in effect from
time to time, as interpreted by the applicable regulations thereunder. Any
reference herein to a specific section or sections of the Code shall be
deemed to include a reference to any corresponding provision of future law.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means common stock, no par value per share, of the Company,
and also may refer to the New Common Stock issued by Mission West-Maryland
pursuant to the Reincorporation.
"Company" means Mission West Properties, a California corporation, and any
successor to such corporation.
"Compensation Committee" means the compensation committee of the Board of
Directors.
"ERISA" means the Employee Retirement Income Security Act of 1974, as amended.
"Excepted Holder" means any person exempted from the Ownership Limit by the
board of directors, in its sole discretion, as provided in the Charter.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
-123-
<PAGE>
"Exchange Factor" has the meaning set forth in the Exchange Rights Agreement.
"Exchange Ratio" means the one-for-one basis for which shares of Common Stock
will be exchanged for shares of New Common Stock.
"Exchange Right" has the meaning set forth in the Exchange Rights Agreement.
"Exchange Rights Agreement" means the Exchange Rights Agreement among the
Company, the partnerships comprising the Operating Partnership and each of
the limited partners therein, as provided in the Acquisition Agreement.
"Excluded Properties" means certain R&D Properties that are not managed by
any member of the Berg Group or are not material to the Company which are not
being contributed to the Operating Partnership, including the Company's
headquarters located at 10050 Bandley Drive, Cupertino, California.
"FFO" means Funds from Operations defined in accordance with the resolution
adopted by the Board of Governors of NAREIT in its March 1995 White Paper,
net income (loss) computed in accordance with GAAP, excluding gains (or
losses) from debt restructuring and sales of property, plus real estate
related depreciation and amortization (excluding amortization of deferred
financing costs), and after adjustments for unconsolidated partnerships and
joint ventures.
"Five-or-Fewer Test" means the test set out in the Code which requires that
not more than 50% in value of a REIT's outstanding stock may be owned,
directly or indirectly, by five or fewer individuals in order to qualify as a
REIT.
"Foreign Stockholders" means foreign corporations, foreign partnerships and
other foreign stockholders of Mission West-Maryland.
"Fully-Diluted" means the fully diluted shares of voting stock of the Company
(including without limitation upon the exercise of all outstanding warrants,
options, convertible securities and other rights to acquire voting stock of
the Company, and all L.P. Units exchangeable or redeemable for Common Stock
or other voting stock of the Company (without regard to any Ownership Limit).
"GAAP" means United States generally accepted accounting principles, as in
effect from time to time.
"Immediate Family" means, with respect to any individual, such individual's
spouse, parents, parents-in-law, children, nephews, nieces, brothers,
sisters, brothers-in-law, sisters-in-law, stepchildren, sons-in-law and
daughters-in-law or any trust solely for the benefit of any of the foregoing
family members whose sole beneficiaries include the foregoing family members.
"Independent Director" means a director of the Company who is not an
employee, officer or affiliate of the Company or a subsidiary or division
thereof, or a relative of a principal executive officer, and who is not an
individual member of an organization acting as advisor, consultant or legal
counsel, receiving compensation on a continuing basis from the Company in
addition to directors' fees.
"Independent Directors Committee" means the committee of the Company's board
of directors comprised of the Independent Directors.
"Ingalls & Snyder" means Ingalls & Snyder, LLC, a registered broker-dealer.
"Interested Stockholder" means under the MGCL, any person who beneficially
owns ten percent or more of the voting power of the corporation's shares or
an affiliate of the corporation who, at any time within the two-year period
prior to the date in question, was the beneficial owner of ten percent or
more of the voting power of the then-outstanding voting stock of the
corporation.
"IRAs" means individual retirement accounts.
"IRS" means the Internal Revenue Service.
-124-
<PAGE>
"Kontrabecki" means John Kontrabecki, the sole general partner of the
Kontrabecki Partnerships.
"Kontrabecki Partnerships" means the three limited partnerships that own the
Kontrabecki Properties.
"Kontrabecki Properties" means the Acquired Properties to be contributed by
the Kontrabecki Partnerships.
"Limited Partner(s)" means the limited partners of the three limited
partnerships, Mission West Properties, L.P., MWP L.P. I and MWP L.P. II.
"L.P. Unit Majority" means the Limited Partners holding the right to vote, in
the aggregate, a majority of the total number of L.P. Units outstanding.
"L.P. Units" means a fractional, undivided share of the partnership interests
of all Limited Partners in the Partnership.
"Look-Through Rule" means the ERISA rule providing that in certain
circumstances where a Plan holds an interest in an entity, the assets of the
entity are deemed to be the Plan's assets.
"Market Price" means the closing price of a share of Common Stock (or other
equity security of the Company) on the AMEX or any other principal exchange
on which the Common Stock or other equity security is listed and traded.
"Maryland Bylaws" means the proposed bylaws of Mission West-Maryland to be
adopted by the stockholders pursuant to the Reincorporation Merger.
"MGCL" means the Maryland General Corporation Law.
"Merger Agreement" means the merger agreement between the Company and Mission
West-Maryland to effect the Reincorporation Merger.
"Mission West-Maryland" means the corporation formed under the laws of the
State of Maryland to facilitate the Reincorporation Merger.
"MWEAC" means Mission West Executive Aircraft Center, Inc., a wholly-owned
subsidiary of the Company which is inactive.
"MWP" means Mission West Properties, L.P., formerly known as Berg Properties,
L.P.
"MWP I" means Mission West Properties, L.P. I, formerly known as Berg & Berg
Developers, L.P.
"MWP II" means Mission West Properties, L.P. II, formerly known as Berg
Family Partners, L.P.
"Named Executives" means the Company's president and four other most highly
compensated executive officers whose annual salary is expected to exceed
$100,000.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"Net Absorption" means, with respect to a specified market area, the net
increase in occupied rentable space.
"New Common Stock" means the common stock, par value $0.001 per share, of
Mission West-Maryland.
"New Credit Line" means a line of credit facility for $50 million to be
obtained by the Company and the Operating Partnership at the closing of the
Berg Acquisition.
"New Equity Financing Rights" has the meaning set forth in Section 8.8 of the
Operating Partnership Agreement.
-125-
<PAGE>
"New Secured Loan" means a $135 million mortgage loan to be obtained by the
Operating Partnership at the closing of the Berg Group acquisition, which
will be secured by certain of the Properties and used to refinance existing
obligations.
"Office Lease" means the lease from the Berg Group to the Operating
Partnership relating to the Berg Group's headquarters located at 10050
Bandley Drive, Cupertino, California.
"Operating Partnership" means, collectively, Mission West Properties, L.P.,
Mission West Properties, L.P. I and Mission West Properties, L.P. II, and
Mission West Properties, L.P. III with offices at 10050 Bandley Drive,
Cupertino, CA 95014, through which all of the Company's interests in the
Properties will be held and real estate activities will be conducted.
"Operating Partnership Agreement" means the limited partnership agreement of
each of the limited partnerships comprising the Operating Partnership, as
amended from time to time, which is identical in all material respects for
each limited partnership.
"Option" means the option that the Company has to purchase any building
developed by the Berg Group on the Berg Land Holdings for so long as the Berg
Group owns or has the right to acquire shares representing 65% of the Common
Stock on a Fully-Diluted basis.
"Option Agreement" means the agreement pursuant to which the Company and the
Operating Partnership have an option to purchase the Berg Land Holdings, as
well as rights of first refusal and rights of first offer relating thereto.
"Option Plan" means the Company's 1997 Stock Option Plan approved by the
Company's shareholders at a special meeting held on November 10, 1997.
"Outstanding Shares" means only the total number of issued and outstanding
shares of capital stock of the Company and plus the total number of L.P.
Units of the Operating Partnership outstanding from time to time.
"Ownership Limit" means the restriction contained in the Charter of Mission
West-Maryland providing that, subject to certain exceptions, no holder may
own, or be deemed to own by virtue of the constructive ownership provisions
of the Code, more than 6% of the outstanding shares of new Common Stock.
"Partnerships" means those corporations, general and limited partnerships and
trusts affiliated with the Berg Group whose Properties were acquired by the
Operating Partnerships.
"Pending Development Projects" means four Berg Group-owned R&D Property
development projects which the Operating Partnership has agreed to acquire
upon their completion pursuant to the terms of the Acquisition Agreement and
the related Pending Projects Option Agreement.
"Pending Projects Acquisition Agreement" means an agreement pursuant to which
the Company and the Operating Partnership have an option to purchase each of
the buildings in the Pending Development Projects once completed and fully
leased.
"Plan" means employee benefit plans and IRAs.
"Plan Asset Regulations" means regulations issued by the United States
Department of Labor defining "plan assets" and the related prohibited
transaction excise tax provisions of the code.
"Private Placement" means the offer and sale of 6,295,058 shares of Common
Stock to accredited investors to be approved by shareholders at the Special
Meeting.
"Prohibited Owner" means a person, who by reason of a transfer of shares of
stock of the Company, will beneficially or constructively own shares of stock
of the Company in excess or in violation of the transfer and ownership
restrictions contained in Charter provisions of Mission West-Maryland.
"Properties" means the real property and related assets owned by the
Operating Partnership.
-126-
<PAGE>
"Proposed Transactions" means the Berg Acquisition and the Reincorporation
Merger.
"Protective Provisions Expiration Date" means the date on which the Berg
Group and their Affiliates own less than 15% of the shares of Common Stock on
a Fully-Diluted Basis.
"Proxy Statement/Prospectus" means this prospectus and proxy statement
relating to the approval by the shareholders of the Company of the Berg
Acquisition, the Private Placement, and the Reincorporation Merger.
"PSE" means the Pacific Exchange, Inc.
"Put Rights" means the right of the Limited Partners to cause the Operating
Partnership to purchase a portion of a Limited Partner's L.P. Units at a
purchase price based on the market value of the Common Stock.
"R&D Property" or "Properties" means property used primarily for office,
research and development, light manufacturing, and assembly.
"Recognition Period" means the ten-year period beginning on the first day of
the first taxable year for which the Company qualifies as a REIT.
"Reform Act" means the Private Securities Litigation Reform Act of 1995.
"Registration Statement" means the Form S-4 Registration Statement to be
filed with the Commission of which the Proxy Statement/Prospectus forms a
part.
"Regulations" means the final, temporary or proposed Income Tax Regulations
promulgated under the Code, as such regulations may be amended from time to
time (including corresponding provisions of succeeding regulations).
"Reincorporation Merger" means the merger by the Company with and into
Mission West-Maryland to effectuate a change in the Company's state of
incorporation.
"REIT" means a real estate investment trust as defined in Section 856 of the
Code which meets the requirements for qualification as a REIT described in
Sections 856 through 860 of the Code.
"REIT Provisions" means Sections 856 through 860 of the code and the
applicable Treasury Regulations.
"REIT Requirements" means all of the requirements imposed under the Code on
any entity seeking to qualify and remain qualified as a REIT.
"REIT taxable income" means taxable income of a REIT.
"Related Party Tenant" means a tenant of a REIT in which the REIT, or an
owner of 10% or more of the REIT, actually or constructively owns a 10% or
greater ownership interest.
"Rentable square feet" means a building's usable area plus common areas and
penetrations, expressed collectively in square feet which are allocated pro
rata to tenants.
"Required Directors" means a majority of the directors of the Company
including Carl E. Berg or a director designated by Mr. Berg to replace him as
a director.
"Reverse Split" means the 1-for-30 reverse split on the Common Stock
effective as of November 10, 1997.
"Rule 144" means Rule 144 promulgated under the Securities Act, and "Rule
145(d)" refers to certain resale restrictions applicable to affiliates under
Rule 145.
"San Francisco Bay Area" means nine counties, including Santa Clara, Alameda,
Contra Costa, Marin, Napa, San Francisco, San Mateo, Solano and Sonoma
Counties, covering approximately 7,200 square miles.
-127-
<PAGE>
"Securities Act" means the Securities Act of 1933, as amended.
"Silicon Valley" means the southern portion of the San Francisco Bay Area,
including portions of southeastern San Mateo County, southwestern Alameda
County and Santa Clara County.
"Silicon Valley R&D Properties" means R&D properties located in the Silicon
Valley.
"Special Meeting" means the Company's special meeting of shareholders to be
held ______, 1998, at Cupertino, California, including any adjournments.
"Stock Option Plan" means the Company's 1997 Stock Option Plan and any other
plan adopted from time to time by the Company pursuant to which shares of
Common Stock are issued, or options to acquire shares of Common Stock are
granted, to consultant, employees or directors of the Company, the Operating
Partnership or their respective Affiliates in consideration for services or
future services.
"Subsidiary" means, with respect to any Person, any corporation, partnership
or other entity of which a majority of (i) the voting power of the Voting
Securities; or (ii) the outstanding equity interests, is owned, directly or
indirectly, by such Person.
"Tender Price" means the price per share of Common Stock at which L.P. Units
have been tendered by a Limited Partner upon the exercise of its Put Rights.
"Total Market Capitalization" means the market value of the outstanding
Common Stock determined as if all outstanding L.P. Units had been converted
into Common Stock at the Exchange Factor, plus the market value of all other
publicly traded securities of the Company outstanding from time to time, plus
the total debt of the Company and the Operating Partnership.
"Treasury Regulations" means regulations of the U.S. Department of Treasury
under the Code.
"Triple net basis lease" means a lease pursuant to which a tenant is
responsible for the base rent in addition to the costs and expenses in
connection with and related to property taxes, insurance and repairs and
maintenance applicable to the leased space.
"Trust" means a charitable trust which Mission West-Maryland may create to
obtain excess shares not transferable to the Prohibited Owner.
"Trustee" means the trustee of the Trust.
"United States Shareholder" means a holder of shares who is an individual who
is a citizen or resident of the United States; a corporation, partnership or
other entity created or organized in, or under the laws of, the United States
or any State; an estate the income of which from sources without the United
States is includable in gross income for United States federal income tax
purposes; a trust the primary supervision of which is exercisable by a court
within the United States and having one or more United States fiduciaries
with authority to control all substantial decisions of such trust; and any
person whose income or gain in respect of the stock is effectively connected
with the conduct of a United States trade or business.
"Voting Rights Agreements" means the agreements covering all shares of Common
Stock acquired in the September Private Placement and certain shares of
Common Stock acquired in the November Private Placement pursuant to which the
holders agreed to vote their shares of Common Stock as directed by Carl E.
Berg on behalf of BBE, on all matters submitted to a vote of the shareholders
of the Company for up to two years.
"Xilinx Sales" means sales of two R&D Properties by Berg & Berg to Xilinx
Corporation in 1995.
-128-
<PAGE>
MISSION WEST PROPERTIES
INDEX TO FINANCIAL STATEMENTS
----------
<TABLE>
<CAPTION>
Page
---------
<S> <C> <C>
I. UNAUDITED PRO FORMA FINANCIAL STATEMENTS
Pro Forma Balance Sheet as of March 31, 1998 FS-2
Pro Forma Statement of Operations for the three months ended March 31, 1998 FS-3
Pro Forma Statement of Operations for the year ended December 31, 1997 FS-4
Notes and Management's Assumptions to Unaudited Pro Forma Financial Statements FS-5
II. COMBINED FINANCIAL STATEMENTS FOR THE BERG PROPERTIES
Report of Independent Accountants FS-8
Combined Balance Sheets as of March 31, 1998 and 1997 and as of
December 31, 1997 and 1996 FS-9
Combined Statements of Operations for the three month periods ended
March 31, 1998 and 1997 and for the years ended December 31, 1997,
1996, and 1995 FS-10
Combined Statements of Net Equity for the three month period ended
March 31, 1998 and for the years ended December 31, 1997, 1996 and 1995 FS-11
Combined Statements of Cash Flows for the three month periods ended March 31,
1998 and 1997 and for the years ended December 31, 1997, 1996 and 1995 FS-12
Notes to Combined Financial Statements FS-13
III. FREMONT PROPERTIES
Report of Independent Accountants FS-22
Combined Statement of Revenue and Certain Expenses for the year ended
December 31, 1997 FS-23
Notes to Combined Statement of Revenue and Certain Expenses FS-24
IV. KONTRABECKI PROPERTIES
Report of Independent Accountants FS-25
Combined Statements of Revenue and Certain Expenses for the years ended
December 31, 1997, 1996 and 1995 FS-26
Notes to Combined Statements of Revenue and Certain Expenses FS-27
</TABLE>
FS-1
<PAGE>
MISSION WEST PROPERTIES
PRO FORMA BALANCE SHEET
(UNAUDITED)
(IN THOUSANDS)
----------
<TABLE>
<CAPTION>
Mission West The Berg The Acquired Pro Forma
Properties Properties Properties Adjustments Pro Forma
March 31, 1998 March 31, 1998 March 31, 1998 (Note 4) March 31, 1998
-------------- -------------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Assets:
Real Estate:
Land - $30,426 $11,788 - $42,214
Building and improvements - 148,039 57,553 $1,000 206,592
-------------- -------------- --------------- ------------ --------------
- 178,465 69,341 1,000 248,806
Less, accumulated depreciation - (80,012) - - (80,012)
-------------- -------------- --------------- ------------ --------------
- 98,453 69,341 1,000 168,794
Cash and cash equivalents $5,153 14,813 - (16,994) 2,972
Deferred rent receivable - 4,365 - - 4,365
Other assets, net 329 4,898 - - 5,227
-------------- -------------- --------------- ------------ --------------
5,482 122,529 69,341 (15,994) 181,358
-------------- -------------- --------------- ------------ --------------
-------------- -------------- --------------- ------------ --------------
Liabilities and shareholders'
(deficit)/equity:
Lines of credit - 37,953 - (37,953) -
Notes payable (related parties) - 1,821 33,323 (35,144) -
Mortgage notes payable - 38,215 5,895 120,529 164,639
Accounts payable/accrued expenses 435 3,549 - - 3,984
Other liabilities - 4,257 - - 4,257
-------------- -------------- --------------- ------------ --------------
435 85,795 39,218 47,432 172,880
-------------- -------------- --------------- ------------ --------------
Minority interest - - - 7,553 7,553
Shareholders' equity:
Berg Group - 36,734 - (36,734) -
Mission West Properties 6,281 - 30,123 (34,245) 2,159
Less: amounts receivable on private
placement (1,234) - - - (1,234)
-------------- -------------- --------------- ------------ --------------
$5,482 $122,529 $69,341 $(15,994) $181,358
-------------- -------------- --------------- ------------ --------------
-------------- -------------- --------------- ------------ --------------
</TABLE>
The accompanying notes and management's assumptions are an
integral part of this statement.
FS-2
<PAGE>
MISSION WEST PROPERTIES
PRO FORMA STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
----------
<TABLE>
<CAPTION>
Mission West The Berg The Acquired Pro Forma
Properties Properties Properties Adjustments Pro Forma
March 31, 1998 March 31, 1998 March 31, 1998 (Note 4) March 31, 1998
-------------- -------------- --------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenue:
Rent - 11,073 $1,658 - $12,731
Tenant reimbursements - 2,033 64 - 2,097
Other $77 - - $(77) -
-------------- -------------- --------------- ------------ --------------
Total revenue 77 13,106 1,722 (77) 14,828
-------------- -------------- --------------- ------------ --------------
Expenses:
Operating expenses - 1,019 7 - 1,026
Real estate taxes - 1,189 23 - 1,212
General and administrative 230 - - 470 700
Management fees (related parties) - 322 - (322) -
Interest (related parties) - 61 - (61) -
Interest - 1,485 - 1,456 2,941
Depreciation and amortization - 1,935 898 - 2,833
-------------- -------------- --------------- ------------ --------------
Total expenses 230 6,011 928 1,543 8,712
-------------- -------------- --------------- ------------ --------------
Income (loss) before minority
interest (153) 7,095 794 (1,620) 6,116
Minority interest - - - 5,449 5,449
-------------- -------------- --------------- ------------ --------------
Net income (loss) $(153) $7,095 $794 $(7,069) $667
-------------- -------------- --------------- ------------ --------------
-------------- -------------- --------------- ------------ --------------
-------------- --------------
-------------- --------------
Basic and diluted earnings (loss)
per share $(0.10) $0.08
-------------- --------------
-------------- --------------
Weighted average number of common
shares outstanding 1,503,933 8,193,594
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes and management's assumptions are an
integral part of this statement.
FS-3
<PAGE>
MISSION WEST PROPERTIES
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
----------
<TABLE>
<CAPTION>
Mission West The Berg The Acquired
Properties Properties Properties Pro Forma Pro Forma
November 30, December 31, December 31, Adjustments December 31,
1997 1997 1997 (Note 4) 1997
------------ ------------ ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Revenue:
Rent $1,376 $40,163 $5,409 $(1,376) $45,572
Tenant reimbursements - 6,519 250 - 6,769
Other 359 - - (359) -
------------ ------------ ------------- ------------ -------------
Total revenue 1,735 46,682 5,659 (1,735) 52,341
------------ ------------ ------------- ------------ -------------
Expenses:
Operating expenses 246 3,741 49 (246) 3,790
Real estate taxes - 4,229 246 - 4,475
General and administrative 1,467 - - 1,283 2,750
Management fees (related parties) - 1,050 - (1,050) -
Interest (related parties) - 248 - (248) -
Interest 425 5,919 - 5,420 11,764
Depreciation and amortization 246 7,717 3,591 (246) 11,308
------------ ------------ ------------- ------------ -------------
Total expenses 2,384 22,904 3,886 4,913 34,087
------------ ------------ ------------- ------------ -------------
Income (loss) before minority
interest, gain on sale of
real estate, income taxes (649) 23,778 1,773 (6,648) 18,254
Minority interest - - - 16,262 16,262
------------ ------------ ------------- ------------ -------------
Income before gain on sale of real
estate and income taxes (649) 23,778 1,773 (22,910) 1,992
------------ ------------ ------------- ------------ -------------
Gain on sale for real estate 4,736 - - (4,736) -
(Provision) for income taxes (1,043) - - 1,043 -
------------ ------------ ------------- ------------ -------------
Net income $3,044 $23,778 $1,773 $(26,603) $1,992
------------ ------------ ------------- ------------ -------------
------------ ------------ ------------- ------------ -------------
Basic and diluted earnings per share $18.48 $0.24
------------ -------------
------------ -------------
Weighted average number of common
shares outstanding 164,692 8,193,594
------------ -------------
------------ -------------
</TABLE>
The accompanying notes and management's assumptions are an
integral part of this statement.
FS-4
<PAGE>
MISSION WEST PROPERTIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE PRO FORMA FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND FOR THE YEAR ENDED
DECEMBER 31, 1997, CONTINUED
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
----------
1. ORGANIZATION AND BASIS OF PRESENTATION:
The pro forma financial statements of Mission West Properties (the
"Company") have been prepared based on the historical financial
statements of the Company, the Berg Properties and the Acquired
Properties considering the effects of the Proposed Transactions. The
pro forma balance sheet of the Company at March 31, 1998 has been
prepared as if the Proposed Transactions had been consummated at March
31, 1998. The pro forma statements of operations for three months ended
March 31, 1998 and for the year ended December 31, 1997 have been
prepared as if the Proposed Transactions had been consummated on
January 1, 1998 and 1997, respectively. In management's opinion, all
adjustments necessary to reflect the effects of the Proposed
Transactions have been made. The pro forma financial statements should
be read in conjunction with the historical financial statements.
The unaudited pro forma financial statements are not necessarily
indicative of what the actual financial position would have been at
March 31, 1998, nor actual results of operations for three months ended
March 31, 1998 or for the year ended December 31, 1997, had the
Proposed Transactions occurred on March 31, 1998 and January 1, 1998 or
1997, respectively, nor do they purport to present the future financial
position of the Company.
In November 1997, the Board of Directors approved a change in the
Company's fiscal year end from November 30 to December 31, effective
with the calendar year beginning January 1, 1997. As the transition
period was less than one month no separate transition period statements
have been prepared.
All share and per share amounts have been adjusted to reflect the 1 for
30 reverse stock split.
2. ASSUMPTIONS:
Certain assumptions regarding the operations of the Company have been
made in connection with the preparation of the pro forma financial
statements. Those assumptions are as follows:
a. The pro forma financial statements assume that the Company has
elected to be and qualified as a real estate investment trust
("REIT") for income tax reporting purposes and has distributed
sufficient taxable income to meet the requirements of the
Internal Revenue Code and, therefore, incurred no income tax
liabilities.
b. Rent has been recognized on a straight-line method of accounting
in accordance with generally accepted accounting principles.
c. General and administrative expenses historically incurred by the
properties and the predecessor entities have been adjusted to
reflect the self-administered structure of the Company and the
additional expenses of being a public company.
d. Pro forma net income per share information is calculated using
8,193,594 shares as the average number of shares outstanding
during the pro forma periods. For the pro forma periods, no other
securities which, if converted or exercised, would have a
dilutive effect on earnings per share calculations.
3. THE ACQUISITIONS:
Concurrent with the consummation of the Proposed Transactions, the
Company will purchase the 11 Acquired Properties owned by third parties
which are subject to an option held by Carl E. Berg (the
(Continued)
FS-5
<PAGE>
"FremontProperties"). Additionally, the Company will purchase 416,000
rentable square feet consisting of properties held by limited
partnerships controlled by John Kontrabecki as general partner (the
"Kontrabecki Properties"). Certain entities related to the Berg Group
own non-controlling interests in the Kontrabecki Properties and
Fremont Properties, and/or have provided debt financing. Consideration
related to the acquisitions will take the form of partnership units
with a fair market value of $69,341. Debt collateralized by these
properties in the aggregate amount of $33,323 will be repaid.
4. PRO FORMA ADJUSTMENTS:
(1) In conjunction with the Proposed Transactions, in September and
November 1997, the Company completed the private placement of
200,000 (adjusted for the 1 for 30 reverse stock split) and
1,250,000 shares of common stock, respectively, resulting in
proceeds to the Company of $6,525. On March 30, 1998, the
Company sold 200,000 shares at $4.50 per share to an executive
officer in exchange for a note receivable payable to the
Company. Concurrent with the Proposed Transactions, the Company
will sell 6,295,058 shares at $4.50 per share to certain
accredited investors for net proceeds of $28,328. In connection
with this sale of common stock, a fee will be paid to an
individual in the form of 200,000 shares of the Company's common
stock. Operations of the Company for the year ended November 30,
1997, represent the results of its liquidation of prior holdings
and are not indicative of its future operations.
(2) The Company will repay amounts borrowed as follows:
<TABLE>
<CAPTION>
<S> <C>
Lines of credit $37,953
Mortgages notes payable 14,471
Notes payable (related parties) 35,144
---------
$87,568
---------
---------
</TABLE>
The pro forma statements of operations have been adjusted to
reflect historical interest expense to reflect such payment. The
early repayment of certain mortgages is expected to result in
prepayment penalties of $160.
(3) The Company will borrow $135,000 under a new portfolio mortgage
facility that is collateralized by certain properties owned by
the Operating Partnership controlled by the Company. This
facility will bear interest at a fixed rate of 7% over a term of
10 years. Additional interest expense associated with these
borrowings, net of the repayments discussed above, in the
amounts of $1,456 and $5,420 for the pro forma three months
ended March 31, 1998, and for the pro forma year ended December
31, 1997, respectively, has been adjusted to reflect the new
capital structure of the Company.
(4) As a result of the transfer of title from the current owners of
certain properties to the Operating Partnership, transfer taxes
approximating $1,000 will be paid. The Company does not
anticipate full reassessment for property tax purposes due to
the transactions associated with the Proposed Transactions,
however, any increases in such taxes will be passed to the
properties' tenants under such tenants' lease agreements.
(5) Associated with the recapitalization of the Company, members of
the Berg Group will receive an equity distribution aggregating
$91,594.
(6) The Company will be self-managed and will no longer pay
management fees. Therefore, the costs of managing the operations
of the Company have been included in the pro forma statement of
operations and historical management fees have been eliminated.
(7) In connection with the Proposed Transactions, the Company will
purchase an approximate 10.91% interest in the Operating
Partnership and become its sole general partner.
(8) The historical financial information for the Company has been
eliminated as it is not reflective of the future operations of
the Company.
(Continued)
FS-6
<PAGE>
MISSION WEST PROPERTIES
NOTES AND MANAGEMENT'S ASSUMPTIONS TO THE PRO
FORMA FINANCIAL STATEMENTS FOR THE THREE
MONTHS ENDED MARCH 31, 1998 AND FOR THE YEAR ENDED
DECEMBER 31, 1997, CONTINUED
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
----------
PRO FORMA ADJUSTMENT SUMMARY:
Balance Sheet - March 31, 1998:
<TABLE>
<CAPTION>
Cash and Notes Payable Mortgage Shareholders'
Pro Forma Cash Real Estate Lines of (Related Notes Minority (Deficit)/
Adjustment Equivalents Assets Credit Parties) Payable Interest Equity
- -------------- ------------- ------------- ----------- ------------------ ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1 $28,328 $(28,328)
2 (87,728) $37,953 $35,144 $14,471 160
3 135,000 (135,000)
4 (1,000) $1,000
5 (91,594) 91,594
7 $(7,553) 7,553
------------ ------------- --------- ----------------- ------------ ---------- --------------
$(16,994) $1,000 $37,953 $35,144 $(120,529) $(7,553) $70,979
------------ ------------- ---------- ----------------- ------------ ---------- --------------
------------ ------------- ---------- ----------------- ------------ ---------- --------------
</TABLE>
Statement of Operations - for the three months ended March 31, 1998:
<TABLE>
<CAPTION>
Management Fee Interest
Pro Forma General and (Related (Related Minority
Adjustment Revenue Administrative Parties) Parties) Interest Interest
- -------------- ---------- ----------------- ----------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
2 $61 $906
3 (2,362)
6 $(700) $322
7 $(5,449)
8 $(77) 230
------------ --------------- ----------------- ----------------- ------------- ------------
$(77) $(470) $322 $61 $(1,456) $(5,449)
------------ --------------- ----------------- ----------------- ------------- ------------
------------ --------------- ----------------- ----------------- ------------- ------------
</TABLE>
Statement of Operations - for the year ended December 31, 1997:
<TABLE>
<CAPTION>
Management
General Fee Interest Depreciation
Pro Forma Operating and (Related (Related and
Adjustment Revenue Other Expenses Administrative Parties) Parties) Interest Amortization
- ------------- ---------- -------- ----------- --------------- ------------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2 $248 $3,605
3 (9,450)
6 $(2,750) $1,050
7
8 $(1,376) $(359) $246 1,467 425 $246
-------- ------- --------- ------------ ------------ --------- -------- ------------
$(1,376) $(359) $246 $(1,283) $1,050 $248 $(5,420) $246
--------- ------- --------- ------------ ------------ --------- -------- ------------
--------- ------- --------- ------------ ------------ --------- -------- ------------
<CAPTION>
Provision
for
Pro Forma Minority Gain Income
Adjustment Interest on Sale Taxes
- ------------ ---------- --------- -----------
<S> <C> <C> <C>
2
3
6
7 $(16,262)
8 $(4,736) $1,043
----------- ---------- --------
$(16,262) $(4,736) $1,043
----------- ---------- --------
----------- ---------- --------
</TABLE>
FS-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Berg Group:
We have audited the combined balance sheets and the financial statement
schedule of the Berg Properties as described in Note 1 as of December 31,
1997 and 1996, and the related combined statements of operations, net equity
and cash flows for each of the three years in the period ended December 31,
1997. These financial statements and the financial statement schedule are the
responsibility of the management of the Berg Properties. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the Berg
Properties as of December 31, 1997 and 1996, and the combined results of
their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedule referred to above, when considered in relation to the basic
financial statements taken as a whole, presents fairly, in all material
respects, the information required to be included therein.
San Francisco, California
April 17, 1998 Coopers & Lybrand L.L.P.
FS-8
<PAGE>
THE BERG PROPERTIES
COMBINED BALANCE SHEETS
(IN THOUSANDS)
-------
<TABLE>
<CAPTION>
March 31, December 31,
--------------------------------------- ----------------------------------
1998 1997 1997 1996
------------------- ---------------- --------------- ---------------
ASSETS (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Real Estate, at cost:
Land $ 30,426 $ 30,426 $ 30,426 $ 30,426
Buildings and improvements 61,262 55,982 61,262 51,410
Tenant improvements 86,777 75,385 86,541 73,163
------------------- ---------------- --------------- ---------------
178,465 161,793 178,229 154,999
Less, accumulated depreciation (80,012) (72,744) (78,077) (71,064)
------------------- ---------------- --------------- ---------------
98,453 89,049 100,152 83,935
Construction-in-progress - 3,435 - 6,775
------------------- ---------------- --------------- ---------------
98,453 92,484 100,152 90,710
------------------- ---------------- --------------- ---------------
Cash and cash equivalents 14,813 2,876 5,719 1,493
Deferred rent receivable 4,365 3,169 4,144 2,843
Other assets, net 4,898 4,262 3,935 2,605
------------------- ---------------- --------------- ---------------
$122,529 $102,791 $113,950 $ 97,651
------------------- ---------------- --------------- ---------------
------------------- ---------------- --------------- ---------------
LIABILITIES AND NET EQUITY
Lines of credit $ 37,953 $ 35,538 $ 37,953 $ 35,538
Notes payable (related parties) 1,821 2,411 1,975 2,546
Mortgage notes payable 38,215 37,776 38,554 37,878
Accounts payable and accrued expenses 3,549 2,884 2,102 2,262
Other liabilities 4,257 3,300 3,715 2,602
------------------- ---------------- --------------- ---------------
85,795 81,909 84,299 80,826
Net equity 36,734 20,882 29,651 16,825
------------------- ---------------- --------------- ---------------
$122,529 $102,791 $113,950 $ 97,651
------------------- ---------------- --------------- ---------------
------------------- ---------------- --------------- ---------------
</TABLE>
The accompanying notes are an
integral part of these financial statements.
FS-9
<PAGE>
THE BERG PROPERTIES
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
----------
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
------------------------------ -------------------------------------------------
1998 1997 1997 1996 1995
-------------- ------------- -------------- ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Rent $11,073 $ 8,801 $40,163 $28,934 $23,064
Tenant reimbursements 2,033 1,226 6,519 3,902 4,193
-------------- ------------- -------------- ------------- -------------
Total revenue 13,106 10,027 46,682 32,836 27,257
-------------- ------------- -------------- ------------- -------------
Expenses:
Operating expenses 1,019 1,118 3,741 1,906 2,032
Real estate taxes 1,189 980 4,229 3,750 3,595
Management fee
(related parties) 322 240 1,050 827 654
Interest (related parties) 61 79 248 293 357
Interest 1,485 1,470 5,919 6,090 6,190
Depreciation and amortization 1,935 1,680 7,717 6,739 6,323
-------------- ------------- -------------- ------------- -------------
6,011 5,567 22,904 19,605 19,151
-------------- ------------- -------------- ------------- -------------
Income before gain on
sale of real estate
and extraordinary item 7,095 4,460 23,778 13,231 8,106
Gain on sale - - - - 20,779
-------------- ------------- -------------- ------------- -------------
Income before extraordinary item 7,095 4,460 23,778 13,231 28,885
Extraordinary item - - - 610 3,206
-------------- ------------- -------------- ------------- -------------
Net income $ 7,095 $ 4,460 $23,778 $13,841 $32,091
-------------- ------------- -------------- ------------- -------------
-------------- ------------- -------------- ------------- -------------
</TABLE>
The accompanying notes are an
integral part of these financial statements.
FS-10
<PAGE>
THE BERG PROPERTIES
COMBINED STATEMENTS OF NET EQUITY
(IN THOUSANDS)
----------
<TABLE>
<S> <C>
Balance (deficit), January 1, 1995 $(23,763)
Contributions 2,953
Distributions (13,750)
Net income 32,091
-------------
Balance (deficit), December 31, 1995 $ (2,469)
Contributions 12,299
Distributions (6,846)
Net income 13,841
-------------
Balance, December 31, 1996 $ 16,825
Contributions 755
Distributions (11,707)
Net income 23,778
-------------
Balance, December 31, 1997 29,651
Distributions (12)
Net income 7,095
-------------
Balance, March 31, 1998 (unaudited) $ 36,734
-------------
-------------
</TABLE>
The accompanying notes are an
integral part of these financial statements.
FS-11
<PAGE>
THE BERG PROPERTIES
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
--------------
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
---------------------------- ------------------------------------
1998 1997 1997 1996 1995
----------- ----------- -------- -------- --------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income 7,095 4,460 $ 23,778 $ 13,841 $ 32,091
Adjustments to reconcile net income to net
cash provided by operations:
Depreciation and amortization 1,935 1,680 7,717 6,739 6,323
Loan fee amortization 3 3 12 10 10
Gain on sale of property - - - - (20,779)
Extraordinary gain on extinguishment of debt - - - (610) (3,206)
Changes in assets and liabilities:
Deferred rent receivable (221) (326) (1,330) (586) (77)
Other assets (966) (1,660) (1,221) (406) 354
Accrued expenses 1,447 622 (160) 353 1,841
Other liabilities 542 698 1,113 907 (165)
----------- ----------- -------- -------- --------
Net cash provided by operating activities 9,835 5,477 29,909 20,248 16,392
----------- ----------- -------- -------- --------
Investing activities:
Purchase and improvements to real estate (236) (3,454) (17,251) (29,275) (35,910)
Proceeds from sale of property - - - - 29,557
----------- ----------- -------- -------- --------
Net cash (used in) investing activities (236) (3,454) (17,251) (29,275) (6,353)
----------- ----------- -------- -------- --------
Financing activities:
Borrowings on lines of credit - - 3,750 6,999 1,034
Repayments on lines of credit - - (1,335) (952) (5,978)
Borrowings on notes payable (related parties) - - - - 637
Repayments on notes payable (related parties) (154) (135) (571) (504) (474)
Borrowings on mortgage notes payable - - 3,105 - -
Repayments on mortgage notes payable (339) (102) (2,429) (1,563) (1,210)
Capital contributions - - 755 12,299 2,953
Capital distributions (12) (403) (11,707) (6,846) (6,975)
----------- ----------- -------- -------- --------
Net cash (used in) provided by financing
activities (505) (640) (8,432) 9,433 (10,013)
----------- ----------- -------- -------- --------
Increase in cash and cash equivalents 9,094 1,383 4,226 406 26
Cash and cash equivalents at the beginning of
the period 5,719 1,493 1,493 1,087 1,061
----------- ----------- -------- -------- --------
Cash and cash equivalents at the end of the
period $14,813 $ 2,876 $ 5,719 $ 1,493 $ 1,087
----------- ----------- -------- -------- --------
----------- ----------- -------- -------- --------
Noncash investing and financing activities:
Noncash transfers of construction-in-progress - $ 3,340 $ 6,775 $ 75 -
----------- ----------- -------- -------- --------
----------- ----------- -------- -------- --------
Noncash property distribution - - - - $ 6,775
----------- ----------- -------- -------- --------
----------- ----------- -------- -------- --------
Supplemental information:
Cash paid for interest, net of amounts
capitalized $ 1,485 $ 1,470 $ 6,272 $ 6,278 $ 6,243
----------- ----------- -------- -------- --------
----------- ----------- -------- -------- --------
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-12
<PAGE>
THE BERG PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
--------------
1. ORGANIZATION AND BUSINESS:
ORGANIZATION:
The Berg Properties do not constitute a legal entity, but rather are a
combination of various research and development properties held by
entities controlled by the Carl E. Berg, Clyde J. Berg, members of
their immediate families and certain entities which they control
(collective, the "Berg Group", as defined). The Berg Group has
historically been engaged in developing, owning, operating and selling
income-producing real estate primarily in the region surrounding
San Jose, California. In addition to its real estate operations, the
controlled Berg Group has been involved with other business pursuits
including technology venture capital funding, strategic investment and
business development. The accompanying financial statements reflect
only the assets, liabilities and results of operations of Berg
Properties, which will be controlled by the Company following the
consummation of the Proposed Transactions.
BUSINESS:
On September 2, 1997, the Berg Group purchased 6,000,000 (200,000
giving effect to a 1 for 30 reverse stock split in November 1997) newly
issued shares of common stock of Mission West Properties (the
"Company"), an American Stock Exchange listed real estate company that
completed the sale of all of its real estate holdings earlier in 1997
(the "Initial Investment"). Upon consummation of the Initial
Investment, the Berg Group beneficially owned 79.6% of the voting
securities of the Company. Subsequent to the Initial Investment a
series of transactions were approved by the Company's shareholders that
included a 1 for 30 reverse stock split, a private placement of
1,250,000 shares of the Company's common stock at $4.50 per share and
the adoption of the Company's stock option plan, and a change in the
Company's year end from November 30 to December 31. The Company also
hired a new management team and issued options under the stock plan to
key employees for the purchase of 755,000 shares at $4.50 per share. In
March 1997, one officer exercised an option to 200,000 shares of common
stock at $4.50 per pursuant to a restricted stock purchase agreement.
Pursuant to the Proposed Transactions (as defined in the Registration
Statement on Form S-4), the Berg Group will transfer its development
and property management business to an operating partnership of which
the Company will be the sole general partner and own a percentage of
the operating partnership, will purchase approximately $69,300 of
income producing real estate, certain outstanding indebtedness of the
Berg Properties will be repaid, a third-party investment approximating
$28,300 (net of offering costs) will be received by the Company, and
the Company will elect to be taxed as a real estate investment trust
for its fiscal year-end beginning January 1, 1998. Therefore, effective
with the transactions related to the Proposed Transactions, the
management of the historic Berg Properties and the acquisition
properties will be performed by the Company and its consolidated
operating partnership, and the Company will operate under a new capital
structure.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF COMBINATION:
The financial statements have been presented on a combined basis, at
historical cost, because the Berg Properties has been under the common
control of the Berg Group. All significant intergroup transactions and
balances have been eliminated in combination.
INTERIM UNAUDITED FINANCIAL INFORMATION:
The accompanying interim unaudited financial statements have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures
normally included in the financial statements prepared in accordance
with generally accepted accounting
(Continued)
FS-13
<PAGE>
THE BERG PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
--------------
principles may have been condensed or omitted pursuant to such rules
and regulations, although management believes that the disclosures are
adequate to make the information presented not misleading. In the
opinion of management, all adjustments and eliminations, consisting
only of normal, recurring adjustments, necessary to present fairly the
financial position of the Berg Properties as of March 31, 1998 and
1997, and the results of their operations and cash flows for the
three months ended March 31, 1998 and 1997, have been included. The
results of operations for such interim periods are not necessarily
indicative of the results of the full year.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that may affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenues
and expenses during the reporting periods. Actual results could differ
from those estimates.
REVENUE RECOGNITION:
Rental income is recognized on a straight-line method of accounting
under which contractual rent payment increases are recognized evenly
over the lease term. Certain lease agreements contain terms which
provide for additional rents based on reimbursement of certain costs.
These additional rents are reflected on the accrual basis.
PROPERTY:
Property and equipment are recorded at cost. Cost includes expenditures
for improvements or replacements and the net amount of interest cost
associated with capital additions. Capitalized interest was $257 in
1997 and $459 in 1996. Maintenance and repairs are charged to expense
as incurred. Gains and losses from sales are included in income in
accordance with Financial Accounting Standards No. 66, ACCOUNTING FOR
SALES OF REAL ESTATE.
DEPRECIATION:
Depreciation is computed using the straight-line method over estimated
useful lives of 40 years for buildings, over the life of lease terms
which average 10 years for tenant improvements, and 10 years for
furniture and equipment.
STATEMENTS OF CASH FLOWS:
Cash and cash equivalents include all cash and liquid investments with
an original maturity date from date of purchase of three months or
less.
EXTERNAL LEASE ACQUISITION COSTS:
External lease acquisition costs are capitalized and amortized over the
lives of the related leases.
LOAN FEES:
Loan fees are stated at cost and are being amortized under a method of
accounting which approximates the effective interest method over the
terms of the related notes. Upon refinancing, property disposition or
loan termination, such fees are directly written-off.
(Continued)
FS-14
<PAGE>
THE BERG PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
--------------
INCOME TAXES:
No federal or state income taxes are payable by the entities which own
the Berg Properties and none have been provided for in the accompanying
financial statements, as such properties are owned by partnerships
whose partners are required to include their respective share of
profits and losses in their individual tax returns.
CONCENTRATION OF CREDIT RISK:
Management of the Berg Properties performs ongoing credit evaluations
of their tenants. The Berg Properties are not geographically diverse,
and their tenants operate primarily in the technology industry.
Additionally, because the Berg Properties are leased to 71 tenants,
default by any major tenant could significantly impact the results of
the combined total. The largest of such tenants, calculated as a
percentage of aggregate base rent, are Apple Computers, Inc., 16.3%;
Amdahl Corporation, 8.7%; Cisco Systems, Inc., 7.2%; and nine other
tenants, approximating 24.6%. However, management believes the risk of
such a default is reduced because of the critical nature of these
properties for ongoing tenant operations.
COMMITMENTS AND CONTINGENCIES:
Members of the Berg Group and the entities which hold the Berg
Properties are party to litigation arising out of the normal course of
business. While the ultimate results of any such lawsuits or other
proceedings cannot be predicted with certainty, management does not
expect that these matters will have a material adverse effect on the
combined financial position or results of operations of the Berg
Properties.
Insurance policies currently maintained by the Berg Properties do not
cover damage caused by seismic activity, although they do cover losses
from fires after an earthquake.
3. EXTERNAL LEASE ACQUISITION COSTS:
Included in other assets are external lease acquisition costs.
Accumulated amortization related to these costs aggregated $1,353 and
$661 as of December 31, 1997 and 1996, respectively.
4. LOAN FEES:
Included in other assets are loan fees. Accumulated amortization
related to these fees aggregated $198 and $186 as of December 31, 1997
and 1996, respectively.
5. NOTES PAYABLE:
Historically, the Berg Properties have had access to credit facilities
entered into by members of the Berg Group. Balances under such
facilities have been allocated to entities within the Berg Group
generally based on approximate use of the credit facilities. Borrowings
under these credit facilities have been used to finance various
ventures including commercial real estate development and acquisition,
including assets that are included in the Berg Properties, technology
venture capital investments and other assets unrelated to real estate
not included in these financial statements.
Included in the accompanying financial statements is an allocation of
certain lines of credit with an aggregate borrowing limit of $130,000.
These lines of credit facilities are collateralized by certain Berg
Properties and other assets of the Berg Group. Among other
requirements, the credit facilities have covenants requiring the owners
to maintain certain levels of personal net worth and carry interest
rates based on the prime rate in effect on the first day of each
calendar month, less the Purchased Funds Rate quoted on the first day
of each calendar month less 1.65%, which was 7.24% at December 31,
1997. Aggregate borrowings outstanding under the lines of credit
facilities at December 31, 1997 totaled $99,192 with $37,953 allocated
to the Berg
(Continued)
FS-15
<PAGE>
THE BERG PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
--------------
Properties and included in these financial statements. Included in
the aggregate borrowing under the line of credit facilities is
approximately $12,000 related to an embezzlement by a former employee.
Amounts allocated to the Berg Properties do not include any amounts
related to the theft as such amounts have been allocated to certain
Berg Group Members.
Pursuant to the Proposed Transactions, it is anticipated that the notes
payable of the Berg Properties will be restructured and/or retired
through a combination of new debt and equity.
Principal payments on outstanding borrowings as of December 31, 1997
are due as follows:
<TABLE>
<CAPTION>
Notes Payable Mortgage Notes
Lines of Credit (Related Parties) Payable
--------------- ----------------- --------------
<S> <C> <C> <C>
1998 - $ 639 $ 4,464
1999 $37,953 607 1,325
2000 - 262 4,552
2001 - 139 1,580
2002 - 72 1,726
Thereafter - 256 24,907
------- ------ -------
$37,953 $1,975 $38,554
------- ------ -------
------- ------ -------
</TABLE>
(Continued)
FS-16
<PAGE>
THE BERG PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
-----------
<TABLE>
<CAPTION>
5. NOTES PAYABLE:
--------------
Balance Balance
Dec. 31, Dec. 31,
Description Berg Group Collateral Properties Start Date 1997 1996 Matures Rate
- ------------------ -------------------------------------- ---------- ------------- ------------- ------------ ----
<S> <C> <C> <C> <C> <C> <C>
LINES OF CREDIT:
Wells Fargo Bank 2251 Lawson Lane, Santa Clara, CA Various $37,953,115 $35,537,833 October 1999 (1)
------------- -------------
------------- -------------
3301 Olcott, Santa Clara, CA
1230 & 1250 Arques, Sunnyvale, CA
1135 Kern, Sunnyvale, CA
405 Tasman, Sunnyvale, CA
1190 Morse Avenue, Sunnyvale, CA
450 National Avenue, Mountain View, CA
10300 Bubb Road, Cupertino, CA
10440 Bubb Road, Cupertino, CA
10460 Bubb Road, Cupertino, CA
20605 - 20705 Valley Green Drive,
Cupertino, CA
20400 Mariani, Cupertino, CA
2033 - 2243 Samaritan Drive, San Jose, CA
10500 De Anza Boulevard, Cupertino, CA
MORTGAGE NOTES:
Great West Life & 6320 San Ignacio Ave, San Jose, CA January 1984 7,871,793 7,999,883 February 2004 7%
Annuity Insurance
Company
Great West Life & 6385 San Ignacio Ave, San Jose, CA April 1984 1,986,001 2,018,561 May 2004 7%
Annuity Insurance
Company 6540 Via del Oro, San Jose, CA
Great West Life & 1170 Morse Avenue, Sunnyvale, CA April 1984 3,755,444 3,817,019 May 2004 7%
Annuity Insurance
Company
National Electrical
Contractors 2251 Lawson Lane, Santa Clara, CA January 1980 4,820,216 5,058,865 January 2009 9.75%
Association
Pension Benefit
Trust Fund
Prudential Capital
Group 1230 E. Arques, Sunnyvale, CA October 1977 1,147,269 1,216,466 November 2007 9%
Prudential Capital
Group 450 National Avenue, Mountain View, CA July 1973 0 0 9.25%
Prudential Capital
Group 3301 Olcott, Santa Clara, CA July 1977 0 1,113,702 8.75%
Prudential Capital
Group 20605 - 20705 Valley Green Drive, September 1978 3,250,320 3,422,564 October 1998 8.5%
Cupertino, CA
Prudential Capital
Group 20400 Mariani, Cupertino, CA March 1979 2,153,993 2,264,142 March 2009 8.75%
Prudential Capital
Group 1250 E. Arques, Sunnyvale, CA November 1973 2,311,583 2,551,126 November 1999 9.5%
Prudential Capital
Group 10300 Bubb Road, Cupertino, CA May 1972 0 0 8.75%
New York Life 10440 Bubb Road, Cupertino, CA January 1979 452,335 472,625 August 2009 9.5/8%
Insurance Company
Home Savings & Loan 10460 Bubb Road, Cupertino, CA January 1977 568,721 608,564 January 2007 9.5%
Association
Bank of America 1135 & 1137 Kern, Sunnyvale, CA June 1973 0 0 8.5%
Amdahl Corporation 3120 Scott, Santa Clara, CA April 1984 7,131,711 7,301,659 March 31, 9.5%
2014
Great Western Bank 10401 Bubb Road, Cupertino, CA February 1973 0 33,132 8.5%
Citicorp U.S.A. Inc. 2800 Bayview Drive, Fremont, CA April 1997 3,105,000 0 April 2000 (2)
----------- --------------
Mortgage Notes total 38,554,386 37,878,308
----------- --------------
----------- --------------
</TABLE>
______________________________
(1) The lesser of Wells Fargo prime rate in effect on the first day of each
calendar month, or the LIBOR or the Wells Fargo Purchased Funds Rate
quoted on the first day of each calendar month plus 1.65%. Average rates
for the three months ended March 31, 1998 and the years ended December
31, 1997, 1996 and 1995 were 7.26%, 7.25%, 7.04% and 8.20%, respectively.
(2) One month LIBOR +1.625% adjusted monthly .
(Continued)
FS-17
<PAGE>
THE BERG PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
-------------
6. FAIR VALUES OF FINANCIAL INSTRUMENTS:
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure of fair value information about financial
instruments, whether or not recognized in the statement of financial
condition, for which it is practicable to estimate that value. In cases
where quoted market prices are not available, fair values are based
upon estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used,
including the discount rate and the estimated future cash flows. In
that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and, in many cases, could not be
realized in immediate settlement of the instrument. SFAS No. 107
excludes certain financial instruments and all non-financial
instruments from its disclosure requirements.
The following summarizes the financial instruments and the estimate of
the fair value of each class of financial instruments for which it is
practicable to estimate that value:
CASH AND CASH EQUIVALENTS:
The carrying amount of cash and cash equivalents is considered
to be a reasonable estimate of fair value.
MORTGAGE NOTES PAYABLE:
In accordance with the requirements of Statement of Financial
Accounting Standards No. 107, "Disclosures about Fair Value of
Financial Instruments," management has estimated that mortgage
notes payable with an aggregate carrying value of $38,554 have
on estimated aggregate fair value of $38,211 at December 31,
1997.
7. RELATED PARTY TRANSACTIONS:
The Berg Properties are held by partnerships that have received certain
management services and financing from members of the Berg Group to the
benefit of the partnerships and the properties. Such services have
included general operating expenses, office space, and administrative
and technical assistance. The partnerships have reimbursed the Berg
Group members for the cost of providing such services and property
management services on a fee basis. Expenses related to the properties
for general and property-specific services paid to related parties
aggregated $1,050, $827, and $654 for the years ended December 31,
1997, 1996, and 1995, respectively.
Included in the financing described in Note 5, certain affiliated
entities have extended funds to the partnerships which own the
properties. These amounts are included in notes payable (related
parties) on the combined balance sheet. Such amounts are due upon
demand and accrue interest at a rate equal to that charged on the lines
of credit facilities and interest incurred on such advances is included
in interest expense (related parties) in the combined statements of
operations.
8. OPERATING LEASES:
The Berg Properties are leased to tenants under net operating leases
with initial term expiration dates extending to the year 2008. Future
minimum rentals under noncancelable operating leases, excluding tenant
reimbursements of expenses as of December 31, 1997, are approximately
as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $41,320
1999 39,300
2000 34,379
2001 29,645
2002 22,870
Thereafter 32,940
--------
$200,454
--------
--------
</TABLE>
(Continued)
FS-18
<PAGE>
THE BERG PROPERTIES
NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED
(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
----------
Minimum rental revenues, as presented for the years ended December 31,
1997, 1996 and 1995, contain straight-line adjustments for rental
revenue increases in accordance with generally accepted accounting
principles. The aggregate rental revenue increases resulting from the
straight-line adjustments for the years ended December 31, 1997, 1996
and 1995 were $1,301, $586, and $77, respectively.
9. EXTRAORDINARY ITEMS:
In 1996 and 1995, net gains of $610 and $3,206, respectively, were
realized as a result of early extinguishment of certain debt
obligations.
FS-19
<PAGE>
THE BERG PROPERTIES
SCHEDULE III
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------------------------
Cost
Initial Cost Capitalization
---------------------------------------------- Subsequent to
Shell Tenant Acquisition/
Building Sq. Ft. Encumbrance Land Improvements Improvements Improvement
- ------------------------------ --------- ----------- ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
6850 Santa Teresa 30,000 $ 105,060 $ 317,106 $ 188,211 0
6331 San Ignacio 131,250 122,928 1,127,074 705,238 $ 3,964,830
6341 San Ignacio 95,040 122,928 1,127,074 705,238 (117,704)
75 E. Trimble 93,984 960,000 1,150,928 955,299 2,168,521
1170 Morse 34,750 3,755,444 48,685 909,965 793,345 800,000
6540 Via Del Oro 31,800 993,000 80,772 334,458 303,990 0
6385-6387 San Ignacio 34,800 993,001 88,923 365,741 332,669 0
1212 Bordeaux 71,800 4,000,000 1,102,092 46,500 180,950 5,079,735
150-160 Great Oaks 52,000 187,425 572,879 912,960 75,439
140 Great Oaks 52,259 187,425 572,879 543,286 445,113
6311 San Ignacio 30,000 60,461 289,440 274,346 2,559
6321 San Ignacio 103,894 191,461 916,560 868,761 2,233,199
6320 San Ignacio 157,092 7,871,793 178,414 1,920,012 1,062,547 1,355,351
2610 N. First St. 77,547 639,999 1,435,464 985,593 879,605
2033-43 Samaritan 75,168 409,321 912,880 2,792,320 236,712
2133 Samaritan 80,000 435,634 971,583 2,971,817 2,887
2233 - 43 Samaritan 79,924 435,220 970,640 2,968,994 2,884
3236 Scott 54,672 7,504,850 1,457,273 724,086 1,388,005 700,000
1810 McCandless Dr. 39,800 564,762 784,519 784,519 7,716
1740 McCandless Dr. 51,602 732,232 1,017,155 1,017,155 5,951
1680 McCandless Dr. 73,253 990,398 0 0 3,562,232
1600 McCandless Dr. 40,970 581,364 807,582 807,582 6,126
1500 McCandless Dr. 42,700 605,913 841,683 841,683 6,565
1450 McCandless Dr. 45,312 606,086 0 0 2,136,034
1350 McCandless Dr. 46,272 593,511 0 0 2,206,705
1325 McCandless Dr. 77,568 1,027,019 0 0 3,574,201
1425 McCandless Dr. 38,579 549,423 763,211 763,211 5,790
1525 McCandless Dr. 28,655 406,614 564,834 564,834 4,285
1575 McCandless Dr. 33,263 472,002 655,665 655,665 4,974
1625 McCandless Dr. 33,625 477,139 662,801 662,801 5,027
1745 McCandless Dr. 35,731 507,023 704,313 704,313 5,342
1765 McCandless Dr. 118,708 1,532,956 0 0 5,018,826
1600 Memorex Drive 109,666 1,000,000 875,000 875,000 559
4949 Hellyer Avenue 200,484 1,986,336 4,585,362 4,735,026 (10,000
2001 Logic 72,426 1,007,959 1,440,000 1,277,443 0
2251 Lawson 125,000 4,820,216 998,430 2,163,118 2,369,128 8,000
1230 Arques 60,000 1,147,269 49,867 721,721 624,669 156,112
450-460 National 36,100 29,161 219,655 234,550 85,347
1135 Kern Avenue 18,300 65,306 126,199 151,631 69,584
10300 Bubb 23,400 94,336 152,665 153,488 185,899
20400 Mariani 105,000 2,153,993 596,259 956,846 1,139,174 0
3301 Olcott 64,500 576,082 643,859 586,689 838,046
1250 Arques 200,000 2,311,583 413,831 1,432,307 2,359,186 366,506
10500 De Anza 211,000 16,000,000 1,498,500 5,086,027 7,200,447 0
20605-705 Valley Green 142,000 3,250,320 532,821 1,644,011 2,178,848 636,776
1190 Morse/405 Tasman 28,350 49,231 263,040 249,865 136,082
10440 Bubb 19,500 452,335 55,493 292,807 494,892 136,061
10460 Bubb 30,460 568,721 175,162 364,464 219,312 136,861
3120 Scott 75,000 7,131,711 350,574 3,387,720 3,074,872 900,100
3501 W Warren Bld 67,864 4,902,185 1,436,890 1,813,361 1,789,802 (15,482
48800 Milmont Drive 53,000 3,170,096 1,052,190 1,158,065 1,172,833 9,430
4750 Patrick Henry 65,780 2,375,984 1,163,575 1,146,854 1,147,020 0
10401 Bubb 20,330 95,966 132,403 208,010 0
2800 Bayview 59,736 3,105,000 737,855 1,734,146 0 0
--------- ----------- ----------- ------------ ------------ -------------
Subtotal 3,779,914 $76,507,501 $30,426,287 $51,806,662 $57,977,217 $38,018,786
--------- ----------- ----------- ------------ ------------ -------------
--------- ----------- ----------- ------------ ------------ -------------
<CAPTION>
December 31, 1997
--------------------------------------------------------------------------------
Gross Amount at Which Carried at Close of
Period
----------------------------------------------
Shell & Tenant Accumulated Date of
Building Land Improvements Improvements Total Depreciation Completion
- ------------------------------ ----------- ------------ ------------ ------------ ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
6850 Santa Teresa $ 105,060 $ 317,106 $ 188,211 $ 610,377 $ (509,475) 1979
6331 San Ignacio 122,928 1,356,086 4,441,056 5,920,070 (2,587,448) 1980
6341 San Ignacio 122,928 981,548 733,060 1,837,536 (1,155,158) 1980
75 E. Trimble 960,000 1,150,928 3,123,820 5,234,748 (2,054,859) 1981
1170 Morse 48,685 909,965 1,593,345 2,551,995 (1,257,784) 1980
6540 Via Del Oro 80,772 334,458 303,990 719,220 (564,532) 1980
6385-6387 San Ignacio 88,923 365,741 332,669 787,333 (617,790) 1980
1212 Bordeaux 1,102,092 530,517 4,776,668 6,409,277 (1,474,232) 1984
150-160 Great Oaks 187,425 572,879 988,399 1,748,703 (1,263,387) 1982
140 Great Oaks 187,425 572,879 988,399 1,748,703 (1,264,760) 1982
6311 San Ignacio 60,461 289,629 276,716 626,806 (494,691) 1981
6321 San Ignacio 191,461 1,120,216 2,898,304 4,209,981 (1,956,235) 1981
6320 San Ignacio 178,414 1,920,011 2,417,899 4,516,324 (2,496,504) 1982
2610 N. First St. 639,999 1,435,464 1,865,198 3,940,661 (2,344,027) 1981
2033-43 Samaritan 409,321 912,880 3,029,032 4,351,233 (2,689,750) 1984
2133 Samaritan 435,634 971,583 2,974,704 4,381,921 (2,863,030) 1984
2233 - 43 Samaritan 435,220 970,640 2,971,878 4,377,738 (2,769,310) 1984
3236 Scott 1,457,273 724,086 2,088,005 4,269,364 (2,041,780) 1981
1810 McCandless Dr. 564,762 787,362 789,392 2,141,516 (322,450) 1995
1740 McCandless Dr. 732,232 1,019,348 1,020,913 2,772,493 (260,940) 1995
1680 McCandless Dr. 990,398 1,721,342 1,840,890 4,552,630 (541,969) 1996
1600 McCandless Dr. 581,364 809,839 811,451 2,202,654 (266,610) 1995
1500 McCandless Dr. 605,913 844,216 845,715 2,295,844 (277,866) 1995
1450 McCandless Dr. 593,511 1,057,469 1,091,140 2,742,120 (345,049) 1995
1350 McCandless Dr. 606,086 1,079,873 1,114,257 2,800,216 (352,358) 1996
1325 McCandless Dr. 1,027,049 1,738,889 1,835,282 4,601,220 (612,079) 1997
1425 McCandless Dr. 549,423 765,344 766,868 2,081,635 (261,180) 1995
1525 McCandless Dr. 406,614 566,413 567,540 1,540,567 (193,498) 1995
1575 McCandless Dr. 472,002 657,498 658,806 1,788,306 (224,614) 1995
1625 McCandless Dr. 477,139 664,653 665,976 1,807,768 (227,058) 1995
1745 McCandless Dr. 507,023 706,281 707,687 1,920,991 (241,280) 1995
1765 McCandless Dr. 1,532,956 2,627,962 2,390,864 6,551,782 (812,926) 1997
1600 Memorex Drive 1,000,000 875,000 875,559 2,750,559 (704,447) 1995
4949 Hellyer Avenue 1,986,336 4,575,362 4,735,026 11,296,724 (1,399,886) 1995
2001 Logic 1,007,959 1,440,000 1,277,443 3,725,402 (779,626) 1992
2251 Lawson 998,430 2,163,118 2,377,128 5,538,676 (3,831,224) 1979
1230 Arques 49,867 805,423 697,079 1,552,369 (1,373,925) 1977
450-460 National 29,161 240,292 299,260 568,713 (568,713) 1973
1135 Kern Avenue 65,306 126,199 221,215 412,720 (391,853) 1973
10300 Bubb 94,336 152,665 339,387 586,388 (478,274) 1972
20400 Mariani 596,259 956,846 1,139,174 2,692,279 (2,060,466) 1978
3301 Olcott 576,082 633,859 1,434,735 2,644,676 (1,225,375) 1977
1250 Arques 413,831 1,570,769 2,587,230 4,571,830 (4,359,010) 1974
10500 De Anza 1,498,500 5,086,027 7,200,447 13,784,974 (13,293,962) 1981
20605-705 Valley Green 532,821 1,644,011 2,815,624 4,992,456 (3,853,122) 1975
1190 Morse/405 Tasman 49,231 327,704 321,283 698,218 (602,821) 1976
10440 Bubb 55,493 366,034 557,726 979,253 (787,043) 1979
10460 Bubb 175,162 418,778 301,859 895,799 (698,076) 1976
3120 Scott 350,574 3,377,720 3,984,972 7,713,266 (5,032,610) 1983
3501 W Warren Bld 1,436,890 1,847,476 1,740,205 5,024,571 (351,697) 1997
48800 Milmont Drive 1,052,190 1,158,065 1,182,263 3,392,518 (316,976) 1996
4750 Patrick Henry 1,163,575 1,146,854 1,147,020 3,457,449 (425,734) 1996
10401 Bubb 95,966 132,403 208,010 436,379 (405,719) 1972
2800 Bayview 737,855 1,734,146 0 2,472,001 (437,151) 1994
----------- ------------ ------------ ------------ -----------
Subtotal $30,426,317 $61,261,856 $86,540,779 $178,228,952 $78,077,441
----------- ------------ ------------ ------------ -----------
----------- ------------ ------------ ------------ -----------
</TABLE>
FS-20
<PAGE>
THE BERG PROPERTIES
SCHEDULE III
REAL ESTATE AND ACCUMULATED DEPRECIATION
DECEMBER 31, 1997
(IN THOUSANDS)
----------
Summary of activity for real estate and accumulated depreciation is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------
1997 1996 1995
----------------- ------------------ ----------------
<S> <C> <C> <C>
Real estate:
Balance at beginning of year $154,999 $133,014 $120,382
Improvements and acquisition/development
of real estate 23,230 22,775 35,910
Disposal of real estate - (790) (23,278)
----------------- ------------------ ----------------
Balance at end of year $178,229 $154,999 $133,014
----------------- ------------------ ----------------
----------------- ------------------ ----------------
Accumulated depreciation:
Balance at beginning of year $71,064 $64,857 $66,174
Depreciation expense 7,013 6,387 6,132
Disposal of real estate - (180) (7,449)
----------------- ------------------ ----------------
Balance at end of year $78,077 $71,064 $64,857
----------------- ------------------ ----------------
----------------- ------------------ ----------------
</TABLE>
FS-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Berg Group:
We have audited the accompanying combined Statement of Revenue and Certain
Expenses of the Fremont Properties as described in Note 2 for the year ended
December 31, 1997. The combined Statement of Revenue and Certain Expenses is
the responsibility of the management of the Fremont Properties. Our
responsibility is to express an opinion on the Statement of Revenue and
Certain Expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying combined Statement of Revenue and Certain Expenses was prepared
for the purpose of complying with the rules and regulations of the Securities
and Exchange Commission, for inclusion in the registration statement on Form S-4
of Mission West Properties as described in Note 1, and is not intended to be a
complete presentation of the Fremont Properties' revenue and expenses.
In our opinion, the combined Statement of Revenue and Certain Expenses
referred to above present fairly, in all material respects, the combined
revenue and certain expenses of the Fremont Properties described in Note 2
for the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
San Francisco, California
April 17, 1998 Coopers & Lybrand L.L.P.
FS-22
<PAGE>
FREMONT PROPERTIES
COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
----------
<TABLE>
<CAPTION>
Year Ended December 31, 1997
------------------------------
<S> <C>
Revenue:
Base rent $1,256
Tenant reimbursements 173
------------------------------
1,429
Expenses:
Property operating and maintenance 40
Real estate taxes 234
------------------------------
Total expenses 274
------------------------------
Revenue in excess of certain expenses $1,155
------------------------------
------------------------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-23
<PAGE>
FREMONT PROPERTIES
NOTES TO COMBINED STATEMENT OF REVENUE AND CERTAIN EXPENSES
----------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The accompanying combined Statement of Revenue and Certain
Expenses was prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange
Commission for inclusion in the registration statement on Form
S-4 of Mission West Properties. The accompanying combined
statement is not representative of the actual operations of
the Fremont Properties, as defined in Note 2, for the period
presented nor indicative of future operations. Certain
expenses, primarily depreciation, amortization and interest
expense, which may not be comparable to the expenses expected
to be incurred by Mission West Properties in future operations
of the Fremont Properties, have been excluded.
REVENUE AND EXPENSE RECOGNITION:
Revenue is recognized on a straight-line basis over the terms
of the related leases. Expenses are recognized in the period
in which they are incurred.
USE OF ESTIMATES:
The preparation of the combined Statement of Revenue and
Certain Expenses in conformity with generally accepted
accounting principles requires management to make estimates
and assumptions that affect the reported amounts of the
combined revenue and expenses during the reporting periods.
Actual results could differ from these estimates.
2. DESCRIPTION OF PROPERTIES:
The accompanying combined Statement of Revenue and Certain Expenses
relate to the combined operations of three properties at 4050
Starboard Drive, 45700 Northport Loop East and 45738 Northport Loop
West. The commercial buildings have approximately 144,000 rental
square feet and are located in Fremont, California. The Fremont
Properties have been presented on a combined basis because the
Fremont Properties were under common ownership and management of the
developer.
The Properties were developed with physical completion and lease-up
concluded in the first quarter of 1997. Therefore no prior period
information is available.
3. RENTALS:
The Properties have entered into tenant leases that provide for tenants
to share in the operating expenses and real estate taxes on a pro rata
basis, as defined.
FS-24
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Berg Group:
We have audited the accompanying combined Statements of Revenue and Certain
Expenses of the Kontrabecki Properties as described in Note 2 for the years
ended December 31, 1997, 1996 and 1995. The Statements of Revenue and Certain
Expenses are the responsibility of the management of the Kontrabecki
Properties. Our responsibility is to express an opinion on these Statements
of Revenue and Certain Expenses based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying combined Statements of Revenue and Certain Expenses were
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission, for inclusion in the registration
statement on Form S-4 of Mission West Properties as described in Note 1, and
is not intended to be a complete presentation of the Kontrabecki Properties'
revenue and expenses.
In our opinion, the combined Statements of Revenue and Certain Expenses
referred to above presents fairly, in all material respects, the combined
revenue and certain expenses of the Kontrabecki Properties described in Note
2 for the years ended December 31, 1997, 1996 and 1995, in conformity with
generally accepted accounting principles.
San Francisco, California
April 17, 1998 Coopers & Lybrand L.L.P.
FS-25
<PAGE>
KONTRABECKI PROPERTIES
COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
(IN THOUSANDS)
----------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
1997 1996 1995
----------------- ----------------- ----------------
<S> <C> <C> <C>
Revenue:
Base rent $4,153 $3,388 $3,136
Other income 77 61 58
----------------- ----------------- ----------------
4,230 3,449 3,194
----------------- ----------------- ----------------
Expenses:
Property operating and maintenance 9 170 417
Real estate taxes 12 48 11
----------------- ----------------- ----------------
Total expenses 21 218 428
----------------- ----------------- ----------------
Revenue in excess of certain expenses $4,209 $3,231 $2,766
----------------- ----------------- ----------------
----------------- ----------------- ----------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
FS-26
<PAGE>
KONTRABECKI PROPERTIES
NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES
----------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The accompanying combined Statements of Revenue and Certain
Expenses were prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange
Commission for inclusion in the registration statement on Form
S-4 of Mission West Properties. The accompanying combined
statements are not representative of the actual operations of
the Kontrabecki Properties, as defined in Note 2, for the
periods presented nor indicative of future operations. Certain
expenses, primarily depreciation, amortization and interest
expense, which may not be comparable to the expenses expected
to be incurred by Mission West Properties in future operations
of the Properties, have been excluded.
REVENUE AND EXPENSE RECOGNITION:
Revenue is recognized on a straight-line basis over the terms
of the related leases. Expenses are recognized in the period
in which they are incurred.
USE OF ESTIMATES:
The preparation of the combined Statements of Revenue and
Certain Expenses in conformity with generally accepted
accounting principles requires management to make estimates
and assumptions that affect the reported amounts of the
combined revenue and expenses during the reporting periods.
Actual results could differ from these estimates.
2. DESCRIPTION OF THE PROPERTIES:
The accompanying combined Statements of Revenue and Certain Expenses
relate to the combined operations of the Kontrabecki Properties, office
buildings with approximately 416,000 rentable square feet, located in
Santa Clara, California.
3. RENTALS:
The Kontrabecki Properties' management has entered into tenant leases
that provide for tenants to share in the operating expenses and real
estate taxes on a pro forma basis, as defined. During the fourth
quarter of 1996 and throughout 1997, occupancy increase obtained at the
Kontrabecki Properties allowed for a significant portion of such
expenses to be charged to the tenants pursuant to the lease agreements.
FS-27
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 204(a) of the California General Corporation
Law, the Registrant's articles of incorporation eliminate a director's
personal liability for monetary damages to the Registrant and its
shareholders arising from a breach or alleged breach of the director's
fiduciary duty, except for liability arising under Section 310 and 316 of the
California General Corporation Law or liability for (i) acts or omissions
that involve intentional misconduct or knowing and culpable violation of law,
(ii) acts or omissions that a director believes to be contrary to the best
interests of the Registrant or its shareholders or that involve the absence
of good faith on the part of the director, (iii) any transaction from which a
director derived an improper personal benefit, (iv) acts or omissions that
show a reckless disregard for the director's duty to the Registrant or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a
risk of serious injury to the Registrant or its shareholders and (v) acts or
omissions that constitute an unexcused pattern of inattention that amounts to
an abdication of the director's duty to the Registrant or its shareholders.
This provision does not eliminate the directors' duty of care, and in
appropriate circumstances equitable remedies such as an injunction or other
forms of non-monetary relief would remain available under California Law.
Sections 204(a) and 317 of the California General Corporation Law
authorize a corporation to indemnify its directors, officers, employees and
other agents in terms sufficiently broad to permit indemnification (including
reimbursement for expenses) under certain circumstances for liabilities
arising under the Securities Act of 1933, as amended. The Registrant's
Restated Articles of Incorporation and Bylaws contain provisions covering
indemnification of corporate directors, officers and other agents against
certain liabilities and expenses incurred as a result of proceedings
involving such persons in their capacities as directors, officers, employees
or agents, including proceedings under the Securities Act or the Securities
Exchange Act of 1934, as amended. The Company has not entered into
indemnification agreements with its directors and executive officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1.1+ Amended and Restated Articles of Incorporation of the Company
3.1.2+ Bylaws, as amended, of the Company
3.2.1* Articles of Amendment and Restatement of Mission
West-Maryland charter
3.2.2* Bylaws of Mission West-Maryland
5.1* Opinion of Graham & James LLP regarding the validity of the
securities being registered
5.2* Opinion of Ballard Spahr Andrews & Ingersoll L.L.P. regarding
merger of the Company and Mission West-Maryland
II-1
<PAGE>
8.1* Opinion of Graham & James LLP regarding certain tax matters
10.1* Form of Agreement of Limited Partnership of Operating
Partnership
10.2* Form of Exchange Rights Agreement between the Company and the
Limited Partners
10.3.1+ 1997 Stock Option Plan of the Company
10.3.2* Form of Incentive Stock Option Agreement
10.3.3* Form of Nonstatutory Stock Option Agreement
10.3.4* Form of Director's Stock Option Agreement
10.3.5* Form of Restricted Stock Purchase Agreement
10.4* Acquisition Agreement, dated as of May 14, 1998 between the
Company, MWP, MWP I, MWP II, MWP III and the Limited Partners
10.5.1* Stock Purchase Agreement, dated as of May 4, 1998 between the
Company and the purchasers of Common Stock in a private
placement of 5,800,000 shares
10.5.2* Stock Purchase Agreement, dated as of May 4, 1998 between the
Company and the purchasers of Common Stock in a private
placement of 695,058 shares
10.6* Agreement and Plan of Merger, dated as of ___________,
between the Company and Mission West-Maryland
10.7* Pending Projects Acquisition Agreement, dated as of
______________, among the Company, the Operating Partnership
and the members of the Berg Group
10.8* Berg Land Holdings Option Agreement, dated as of
______________, between the Company and certain members of
the Berg Group
10.9* Berg & Berg Enterprises, Inc. Sublease Agreement
10.10.1* Incentive Stock Option Agreement for Michael J. Anderson
(400,000 shares of Common Stock)
10.10.2* Incentive Stock Option Agreement for Michael J. Anderson
(200,000 shares of Common Stock)
II-2
<PAGE>
10.13* Incentive Stock Option Agreement for Bradley A. Perkins
10.14* Incentive Stock Option Agreement for Marianne K. Aguiar
10.15** Lease Agreement with Apple Computer, Inc.
10.16** Lease Agreement with Cisco Systems, Inc.
10.17** Lease Agreement with Amdahl Corporation
23.1* Consent of Graham & James LLP (included in the opinion filed
as Exhibit 5.1 to this Registration Statement)
23.2* Consent of Ballard Spahr Andrews & Ingersoll L.L.P. (included
in the opinion filed as Exhibit 5.2 to this Registration
Statement)
23.3 Consent of Price Waterhouse LLP
23.4 Consent of Coopers & Lybrand LLP
23.5* Consent of BT Commercial
24.1 Powers of Attorney (included in the signature page hereto)
99.1* Form of Proxy for the Company's Shareholders
99.2* Form of Letter to the Company's Shareholders
99.3 Form of Notice to the Company's Shareholders
</TABLE>
+ Incorporated by reference
* To be filed by amendment.
** Confidential Treatment Requested
II-3
<PAGE>
ITEM 22. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume and price
represent no more than a 20 percent change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
(b) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Exchange Act (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Exchange Act) that is
incorporated by reference in this Registration Statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent
or given, the latest annual report, to security holders that is incorporated
by reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act
and, where interim financial information required to be presented by Article
3 of Regulation S-X is not set forth in the prospectus, to deliver, or cause
to be delivered to each person to whom the prospectus is sent or given, the
latest quarterly report that is specifically incorporated by reference in the
prospectus to provide such interim financial information.
(d) The undersigned Registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c),
the registrant undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to
reofferings by persons who may be deemed underwriters, in addition to the
information called for by the other items of the applicable form.
II-4
<PAGE>
(e) The undersigned Registrant undertakes that every prospectus: (i) that is
filed pursuant to paragraph (d) immediately preceding, or (ii) that purports
to meet the requirements of Section 10(a)(3) of the Act and is used in
connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the registration statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial BONA FIDE offering thereof.
(f) Insofar as indemnification for liabilities under the Securities Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the provisions described in Item 15 above, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission and indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable. In the event that a
claim of indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in a successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(g) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through
the date of responding to the request.
(h) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this to registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Cupertino, State of
California on May 15, 1998.
MISSION WEST PROPERTIES
By: /s/ Carl E. Berg
---------------------------------------
Carl E. Berg
Chairman of the Board, Chief Executive
Officer and President
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Carl E. Berg and Michael J. Anderson
or either of them, each with the power of substitution, his or her
attorney-in-fact, to sign any amendments to this Registration Statement and
to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorney-in-fact, or his or her substitute,
may do or choose to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons in the
capacities indicated, effective May 15, 1998.
SIGNATURE TITLE
/s/ Carl E. Berg Chairman of the Board, Chief Executive
- -------------------------- Officer, President and Director
Carl E. Berg
/s/ Michael J. Anderson Vice President, Chief Operating Officer and
- -------------------------- Director
Michael J. Anderson
/s/ John C. Bolger Director
- --------------------------
John C. Bolger
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
3.1.1+ Amended and Restated Articles of Incorporation of the Company
3.1.2+ Bylaws, as amended, of the Company
3.2.1* Articles of Amendment and Restatement of Mission
West-Maryland charter
3.2.2* Bylaws of Mission West-Maryland
5.1* Opinion of Graham & James LLP regarding the validity of the
securities being registered
5.2* Opinion of Ballard Spahr Andrews & Ingersoll L.L.P. regarding
merger of the Company and Mission West-Maryland
8.1* Opinion of Graham & James LLP regarding certain tax matters
10.1* Form of Agreement of Limited Partnership of Operating
Partnership
10.2* Form of Exchange Rights Agreement between the Company and the
Limited Partners
10.3.1+ 1997 Stock Option Plan of the Company
10.3.2* Form of Incentive Stock Option Agreement
10.3.3* Form of Nonstatutory Stock Option Agreement
10.3.4* Form of Director's Stock Option Agreement
10.3.5* Form of Restricted Stock Purchase Agreement
10.4* Acquisition Agreement, dated as of May 14, 1998 between the
Company, MWP, MWP I, MWP II, MWP III and the Limited Partners
10.5.1* Stock Purchase Agreement, dated as of May 4, 1998 between the
Company and the purchasers of Common Stock in a private
placement of 5,800,000 shares
10.5.2* Stock Purchase Agreement, dated as of May 4, 1998 between the
Company and the purchasers of Common Stock in a private
placement of 695,058 shares
10.6* Agreement and Plan of Merger, dated as of ___________,
between the Company and Mission West-Maryland
10.7* Pending Projects Acquisition Agreement, dated as of
______________, among the Company, the Operating Partnership
and the members of the Berg Group
10.8* Berg Land Holdings Option Agreement, dated as of
______________, between the Company and certain members of
the Berg Group
10.9* Berg & Berg Enterprises, Inc. Sublease Agreement
10.10.1* Incentive Stock Option Agreement for Michael J. Anderson
(400,000 shares of Common Stock)
10.10.2* Incentive Stock Option Agreement for Michael J. Anderson
(200,000 shares of Common Stock)
10.13* Incentive Stock Option Agreement for Bradley A. Perkins
10.14* Incentive Stock Option Agreement for Marianne K. Aguiar
10.15** Lease Agreement with Apple Computer, Inc.
10.16** Lease Agreement with Cisco Systems, Inc.
10.17** Lease Agreement with Amdahl Corporation
23.1* Consent of Graham & James LLP (included in the opinion filed
as Exhibit 5.1 to this Registration Statement)
23.2* Consent of Ballard Spahr Andrews & Ingersoll L.L.P. (included
in the opinion filed as Exhibit 5.2 to this Registration
Statement)
23.3 Consent of Price Waterhouse LLP
23.4 Consent of Coopers & Lybrand LLP
23.5* Consent of BT Commercial
24.1 Powers of Attorney (included in the signature page hereto)
99.1* Form of Proxy for the Company's Shareholders
99.2* Form of Letter to the Company's Shareholders
99.3 Form of Notice to the Company's Shareholders
</TABLE>
+ Incorporated by reference
* To be filed by amendment.
** Confidential Treatment Requested
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of this Registration Statement on Form S-4 of Mission West
Properties of our report dated February 11, 1997, except as to the 1 for 30
reverse stock split discussed in Note 1, which is as of November 10, 1997,
appearing on page F-3 of Mission West Properties' Annual Report on Form 10-K
for the year ended December 31, 1997. We also consent to the reference to us
under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
San Diego, California
May 14, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-4 (File
No. ) of our report dated April 17, 1998 on our audits of the combined
financial statements and financial statement schedule of The Berg Properties
as of December 31, 1997 and 1996 and for the years ended December 31, 1997,
1996 and 1995 and our reports dated April 17, 1998 on our audits of the
Combined Statements of Revenue and Certain Expenses of the Kontrabecki
Properties for the years ended December 31, 1997, 1996 and 1995 and the
Combined Statement of Revenue and Certain Expenses of the Fremont Properties
for the year ended December 31, 1997. Additionally, we consent to the
incorporation by reference of our report dated March 20, 1998 on our audit of
the consolidated financial statements of Mission West Properties as of and
for the year ended November 30, 1997 and one month period ended December 31,
1997. We also consent to the references to our firm under the caption
"Experts".
San Francisco, California
May 14, 1998 /s/ Coopers & Lybrand L.L.P.
<PAGE>
MISSION WEST PROPERTIES
10050 Bandley Drive
Cupertino, California 95014
----------------------------------------------------
NOTICE OF SPECIAL MEETING OF
SHAREHOLDERS TO BE HELD ON
_____________
----------------------------------------------------
TO THE SHAREHOLDERS:
A special meeting (the "Meeting") of shareholders of Mission West
Properties, a California corporation (the "Company") will be held at the
Company's corporate offices, 10050 Bandley Drive, Cupertino, California 95014
on ___________, _____________, 199_ at ____ _.m., P.D.T. to consider and act
upon the following matters:
1. A proposed private placement of 6,495,058 shares of the
Company's Common Stock for $4.50 per share.
2. A proposal for the Company to (i) become the sole general
partner and acquire approximately 10.91% of the total partnership interests
in each of four existing limited partnerships (collectively the "Operating
Partnership") that will own approximately 4.34 million square feet of leased
commercial R&D buildings and the right to acquire certain commercial R&D
pending building developments consisting of approximately 1.02 million
rentable square feet (the "Pending Development Projects") from Carl E. Berg
and certain of his affiliates, and (ii) approve the issuance of up to
100,825,478 shares of Common Stock issuable upon the redemption or exchange
of 100,825,478 units of limited partnership interests (the "L.P. Units") held
by or issuable to Carl E. Berg, certain of his affiliates and other limited
partners in the Operating Partnership, including 33,919,072 L.P. Units that
may be issued upon the Operating Partnership's acquisition of the Pending
Development Projects.
3. A proposal to reincorporate the Company under the laws of the
State of Maryland through a merger with and into the Company's wholly owned
subsidiary Mission West Properties, Inc., a Maryland corporation ("Mission
West-Maryland"), which during 1998 intends to elect to become a Real Estate
Investment Trust ("REIT") for federal income tax purposes, and to approve the
adoption of the charter and bylaws of Mission West-Maryland (the
"Reincorporation Merger").
Only shareholders of record at the close of business on _________,
1998, will be entitled to vote at the meeting. Each of those shareholders is
cordially invited to be present and vote at the meeting in person.
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND DATE THE
ENCLOSED PROXY AND RETURN IT PROMPTLY. THIS IS IMPORTANT BECAUSE A MAJORITY
OF THE SHARES MUST BE REPRESENTED, EITHER IN PERSON OR BY PROXY, TO
CONSTITUTE A QUORUM. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON EVEN
THOUGH YOU HAVE PREVIOUSLY PROVIDED A PROXY.
By Order of the Directors
Bradley A. Perkins
