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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year Ended: December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No. 1-8383
MISSION WEST PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 95-2635431
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(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification
10050 Bandley Drive, Cupertino, CA 95014
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 725-0700
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Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, par value $.001 per share American Stock Exchange
Pacific Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, based upon the closing sale price of the Common Stock on March
15, 2000, as reported on the American Stock Exchange, was approximately $8.50.
As of March 15, 2000 there were 17,012,315 shares of the Registrant's Common
Stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
The following documents are incorporated by reference into this Form 10-K:
Form 8-K, dated March 12, 1998, to report the Company's change in independent
auditors. This Form 8-K is incorporated by reference into Part I, Item 9.
FORWARD LOOKING INFORMATION
This annual report contains forward-looking statements within the meaning of the
federal securities laws. We intend such forward-looking statements to be covered
by the safe harbor provisions for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995, and are including this
statement for purposes of complying with these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of us, are generally identifiable by
use of the words "believe," "expect," "intend," "anticipate," "estimate,"
"project" or similar expressions. Our ability to predict results or the actual
effect of future plans or strategies is inherently uncertain. Factors which
could have a material adverse effect on the operations and future prospects of
the Company include, but are not limited to, changes in: economic conditions
generally and the real estate market specifically, legislative or regulatory
provisions affecting us (including changes to laws governing the taxation of
REITs), availability of capital, interest rates, competition, supply of and
demand for office and industrial properties in our current and proposed market
areas, and general accounting principles, policies and guidelines applicable to
REITs. These risks and uncertainties, together with the other risks described
from time to time in our reports and documents filed with the Securities and
Exchange Commission, should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. See Part
I, Item 1, "Risk Factors."
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MISSION WEST PROPERTIES, INC.
1999 FORM 10-K ANNUAL REPORT
Table of Contents
PART I
Page No.
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Item 1. Business 1
Item 2. Properties 16
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for the Registrant's Common Equity and Related 22
Item 6. Selected Financial Data 23
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 26
Item 8. Financial Statements and Supplementary Data 38
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 78
PART III
Item 10. Directors and Executive Officers of the Registrant 79
Item 11. Executive Compensation 79
Item 12. Security Ownership of Certain Beneficial Owners and Management 80
Item 13. Certain Relationships and Related Transactions 80
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K 81
Signatures 83
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PART I
Item 1. Business
ORGANIZATION AND GENERAL BUSINESS DESCRIPTION
Mission West Properties, Inc. (the "Company") acquires, markets, leases and
manages R & D properties, primarily located in the Silicon Valley portion of the
San Francisco Bay Area. As of December 31, 1999, we own and managed 80
properties totaling approximately 5.3 million square feet of R & D properties.
This class of property is designed for research and development and office uses
and, in some cases, includes space for light manufacturing operations with
loading docks. We believe that we have one of the largest portfolios of R & D
properties in the Silicon Valley. The four tenants who lease the most square
footage from us are Microsoft Corporation, Amdahl Corporation (a subsidiary of
Fujitsu Limited), Apple Computer, Inc. and Cisco Systems, Inc. For the year
ended December 31, 1999, we will elect to be taxed as a real estate investment
trust ("REIT") for federal income tax purposes and will operate as a
self-managed, self-administered and fully integrated REIT.
Prior to July 1, 1998, most of our properties were under the ownership or
control of Carl E. Berg, his brother Clyde J. Berg, the members of their
respective immediate families, and certain entities in which Carl E. Berg and/or
Clyde J. Berg held controlling or other ownership interests (the "Berg Group").
In addition, we acquired ten properties with approximately 560,000 rentable
square feet from entities controlled by third parties in which Berg Group
members were significant owners.
Through various property acquisition agreements with the Berg Group, we
have the right to purchase, on pre-negotiated terms, R & D and other types of
office and light industrial properties that the Berg Group develops in the
future. With in-house development, architectural and construction personnel, the
Berg Group continues to focus on a full range of land acquisition, development
and construction activities for R&D properties, often build-to-suit, to meet the
demands of Silicon Valley information technology companies. As the developer,
the Berg Group takes on the risks of purchasing the land, obtaining regulatory
approvals and permits, financing construction and leasing the properties. Since
September 1998, we have acquired approximately 733,000 additional rentable
square feet of R&D properties from the Berg Group under these agreements.
OUR RELATIONSHIP WITH THE BERG GROUP
Through a series of transactions occurring between May 1997 and December
1998, we have become the vehicle for substantially all of the Silicon Valley R&D
property activities of the Berg Group. We are now the general partner pursuant
to the partnership agreements of the operating partnerships and, along with
members of the Berg Group and other individuals, are party to an exchange rights
agreement, the pending projects acquisition agreement and the Berg land holdings
option agreement. Each agreement defines the material rights and obligations
among us, the Berg Group members, and other parties to those agreements. Among
other things, these agreements give us rights to:
- control the operating partnerships;
- acquire, on pre-negotiated terms, existing, identified R&D properties
under development by the Berg Group;
- acquire, on pre-negotiated terms, all future R&D properties developed
by the Berg Group on land currently owned or acquired in the future;
and
- acquire R&D, office and industrial properties identified by the Berg
Group in California, Oregon and Washington.
Under these agreements, our charter or our bylaws, the Berg Group has the
right to:
- designate two of five nominees for director to be elected by our
stockholders, subject to the Berg Group's maintenance of certain
ownership interests;
- participate in our securities offerings;
- exchange their O.P. Units for our common stock;
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- vote on major transactions, subject to its maintenance of certain
ownership interests; and
- prevent us from selling properties when the sale will have adverse tax
consequences to it.
- prevent us from selling properties when the sale will have adverse
consequences to the Berg Group members.
Carl E. Berg, the Company's President and Chief Executive Officer and the
controlling member of the Berg Group, has been engaged in the development and
long-term ownership of Silicon Valley real estate for approximately 30 years,
most recently through Berg & Berg Developers ("Berg & Berg"), a general
partnership of Carl E. Berg and Clyde J. Berg. In 1969, Mr. Berg foresaw the
rising demand for efficient, multi-purpose facilities for the rapidly growing
information technology industry in the Silicon Valley. Since 1972, in addition
to his real estate activities, Mr. Berg also has been actively involved in
venture capital investments in many information technology companies in the
Silicon Valley, including such companies as Amdahl Corporation, Sun
Microsystems, Inc., and Integrated Device Technologies, Inc. He serves on the
boards of directors of numerous information technology companies. These
activities have helped Mr. Berg develop a detailed understanding of the real
estate requirements of information technology companies, acquire valuable market
information and increase his name recognition within the venture capital and
entrepreneurial communities. These activities also manifest his commitment to
the growth and success of Silicon Valley companies. We believe that Mr. Berg's
substantial knowledge of and contacts in the information technology industry
provide a significant benefit to the Company.
BUSINESS STRATEGY
Our acquisition and growth strategy incorporates the following elements:
- working with the Berg Group to take advantage of their abilities and
resources to pursue development opportunities which we have an option
to acquire, on pre-negotiated terms, upon completion and leasing;
- capitalizing on opportunistic acquisitions from third parties of
high-quality R&D properties that provide attractive initial yields and
significant potential for growth in cash-flow;
- focusing on general purpose, single-tenant Silicon Valley R&D
properties for information technology companies in order to maintain
low operating costs, reduce tenant turnover and capitalize on our
relationships with these companies and our extensive knowledge of
their real estate needs; and
- maintaining prudent financial management principles that emphasize
current cash flow while building long-term value, the acquisition of
pre-leased properties to reduce development and leasing risks and the
maintenance of sufficient liquidity to acquire and finance properties
on desirable terms.
ACQUIRING PROPERTIES DEVELOPED BY THE BERG GROUP
We anticipate that most of our growth in the foreseeable future will come
from the acquisition of new R&D properties that are either currently under
development or developed in the future by the Berg Group. These acquisitions
will be completed on pre-negotiated terms under the pending projects acquisition
agreement, as amended by the supplemental agreement, and the Berg land holdings
option agreement. During 2000, we expect to acquire a total of approximately
735,000 additional rentable square feet currently under development. In addition
to projects currently under development, the Berg Land Holdings Option Agreement
gives us the right to acquire future developments by the Berg Group on up to 137
additional acres of land currently controlled by the Berg Group, which could
support approximately 2.24 million square feet of new developments. Under the
Berg Land Holdings Option Agreement, we also have an option to purchase all land
acquired, directly or indirectly, by Carl E. Berg or Clyde J. Berg that has not
been approved with completed buildings and which is zoned for, intended for or
appropriate for research and development, office and/or industrial development
or use in the states of California, Oregon and Washington. In January 2000 the
Berg Group purchased a 50% interest in TBI-Mission West, LLC which has
approximately 62 net acres in Morgan Hill, California which may support
development of approximately 961,000 rentable square feet. In addition, Carl E.
Berg has agreed not to directly or indirectly acquire or develop any real
property zoned for office, industrial or R&D use in the state of California,
Oregon and Washington without first disclosing and making the acquisition
opportunity available to us. Our Independent Directors committee will decide
whether we will assume the opportunity presented to us by Mr. Berg. This
restriction will expire when there is no Berg Group nominee on our board of
directors and the Berg Group's fully diluted ownership percentage, which is
calculated based on all outstanding shares of common stock and all shares of
common stock that could be acquired upon the exercise of all outstanding options
to acquire our voting stock, as well as all shares of common stock issuable upon
exchange of all O.P. Units, falls below 25%.
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PENDING PROJECTS ACQUISITION AGREEMENT. In December 1998, we entered into
the Pending Projects Acquisition Agreement with members of the Berg Group, under
which we will acquire approximately 1.0 million additional rentable square feet
upon the completion and leasing of a number of pending development projects
owned by them. To date, we have acquired approximately 843,000 rentable square
feet of such properties. Based upon the agreement, when we acquire properties
from the Berg group, the Berg Group members may obtain cash or, at their option,
O.P. Units for their equity interests in the properties. We have reserved, and
our stockholders have approved, the issuance of up to 33,919,072 shares of our
common stock upon exchange of O.P. Units issuable in exchange for the pending
development projects. To date, 17,656,520 O.P. Units have been issued for new
property acquired under this agreement.
We will acquire the pending projects upon the following terms:
- The acquisition price is payable in cash or, at the option of the Berg
Group, in O.P. Units valued at $4.50 per O.P. Unit, which was the
price per share of our common stock in May 1998, when we agreed to the
terms of the Pending Projects Acquisition Agreement.
- The Berg Group will build and deliver each completed and fully-leased
R&D property in the pending development projects to the operating
partnerships at an acquisition price equal to the average monthly
rental rate per square foot over the term of the lease divided by an
agreed upon capitalization rate, which is 14%, minus the amount of
debt encumbering the property.
- The closing for the acquisition of an individual R&D property within a
project will occur only when the building has been completed and
leased, unless otherwise agreed by the parties.
- Leases will be on commercially reasonable terms and conditions.
- The Berg Group may, at its option, offer projects under this agreement
to the Company at any acquisition price with less than a
capitalization rate of 14%.
- All action taken by us under the Pending Projects Acquisition
Agreement must be approved by a majority of the members of the
independent directors committee of our board of directors.
For a discussion of risks associated with the Pending Projects Acquisition
Agreement and related transactions, see "Risk Factors -Our contractual business
relationships with the Berg Group present additional conflicts of interests
which may result in the realization of economic benefits or the deferral of tax
liabilities by the Berg Group without equivalent benefits to our stockholders."
The time required to complete the leasing of developments varies from
project to project. Generally, we will not acquire any of the above projects
until they are fully completed and leased. We cannot assure you that the
acquisition date and final cost to us as indicated above will be realized.
Although the capitalization rates have been agreed upon and will not change, the
sellers of the pending development projects may elect to receive cash or O.P.
Units at the value of $4.50 per unit, which was set in May 1998 based on the
selling price for our shares in private placement transactions with unrelated
purchasers. This valuation represents a substantial discount from the current
price of our common stock and may be substantially lower than the value of our
common stock at the future issuance dates of the O.P. Units. Under generally
accepted accounting principles, the acquisition cost in the form of O.P. Units
issued will be calculated based upon the current market value of our common
stock on the date the acquisition closes. Consequently, our actual cost of these
future acquisitions as well as the actual capitalization rate for accounting
rather than cash purposes will depend in large part on the percentage of the
fixed acquisition value paid for by the issuance of O.P. Units and the price of
the common stock on the closing of the acquisition.
BERG LAND HOLDINGS OPTION AGREEMENT. We believe that control of high
quality, developable land is an important strategic factor for continued success
in the Silicon Valley market. In December 1998, we entered into the Berg Land
Holdings Option Agreement under which we have the option to acquire any future
R&D, office and industrial property developed by the Berg Group on land
currently owned, optioned, or acquired for these purposes in the future,
directly or indirectly, by Carl E. Berg or Clyde J. Berg. As of March 15, 2000,
we have acquired two leased R&D properties totaling approximately 187,000
rentable square feet under this agreement at a cost of approximately $16.7
million, for which we issued 673,256 O.P. Units and assumed debt of
approximately $10.5 million. The principal terms of the agreement include the
following:
- So long as the Berg Group members and their affiliates own or have the
right to acquire shares representing at least 65% of our common stock
on a fully diluted basis, we will have the option to acquire any
building
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developed by any member of the Berg Group on the land subject
to the agreement at such time as the building has been leased. Upon
our exercise of the option, the option price will equal the sum of:
1. the full construction cost of the building; plus
2. 10% of the full construction cost of the building; plus
3. interest at LIBOR plus 1.65%, on the amount of the full
construction cost of the building for the period from the date
funds were disbursed by the developer to the close of escrow;
plus
4. the original acquisition cost of the parcel on which the
improvements will be constructed, which range from $8.50 to
$20.00 per square foot for land currently owned; plus
5. 10% per annum of the amount of the original acquisition cost of
the parcel from the later of January 1, 1998 and the seller's
acquisition date, to the close of escrow; minus
6. the aggregate principal amount of all debt encumbering the
acquired property.
- The acquisition cost, net of any debt, will be payable in O.P. Units
valued at the average closing price of our common stock over the
30-trading-day period preceding the acquisition or in cash, at the
option of the Berg Group.
- We also must assume all tax assessments.
- If we elect not to exercise the option with respect to any property,
the Berg Group may hold and lease the property for its own account, or
may sell it to a third party.
- All action taken by us under the Berg Land Holdings Option Agreement
must be approved by a majority of the members of the Independent
Directors committee of our board of directors.
The following table presents certain information concerning currently
identified land or projects that we have the right to acquire under the Berg
Land Holdings Option Agreement.
Approximate Anticipated
Rentable Area Acquisition Total Estimated
Property Net Acres (Square Feet) Date Acquisition Cost
- ---------------------- -------------------- ------------------- ---------------- ----------------------
(dollars in thousands)
Under Development
Hellyer IV(1) 10 160,000 Q2 $11,600 (50%)
Hellyer View 6 77,184 Q3 9,300
Hellyer III (Phase I) 7 117,740 Q4 14,800
Candescent (Phase I) 24 255,000 Q1 25,000
Hellyer Vista (Phase I) 6 125,000 Q4 15,000
-------------------- ------------------- ----------------------
Subtotal 53 734,924 $75,700
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Available Land:
Morgan Hill(2) 62 961,000 (1)
King Ranch 56 889,000
Hellyer & Piercy 47 763,000
Fremont & Cushing(3) 24 387,000
Caspian Way 10 200,000
Subtotal 199 3,200,000
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TOTAL 252 3,934,924
==================== ===================
(1) This property will be operated and managed by the Company and owned by a
partnership in which the Company will own a approximate 50% interest.
(2) The Company expects to own a approximate 50% interest in the partnership to
be formed to develop the property. That partnership will be operated and
managed by the other partner in the entity.
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(3) The Berg Group purchased this property in January 2000.
The time required to complete the leasing of developments varies from
property to property. Generally, the Company will not acquire any of the above
projects until they are fully completed and leased. There can be no assurance
that the acquisition date and final cost to the Company as indicated above will
be realized. No estimate can be given at this time as to our total cost to
acquire projects under the Berg Land Holdings Option Agreement, nor can we be
certain of the period in which we will acquire any of the projects.
Although we expect to acquire the new properties available to us under the
terms of the Pending Projects Acquisition Agreement and the Berg Land Holdings
Option Agreement, there can be no assurance that we actually will consummate any
of the intended transactions, including all of those discussed above.
Furthermore, we have not yet determined the means by which we would acquire and
pay for any such properties or the impact of any of the acquisitions on our
business, results of operations, financial condition or available cash for
distribution. See "Risk Factors -Our contractual business relationships with the
Berg Group present additional conflicts of interest which may result in the
realization of economic benefits or the deferral of tax liabilities by the Berg
Group without equivalent benefits to our stockholders."
OPPORTUNISTIC ACQUISITIONS
In addition to our principal opportunities under the Pending Projects
Acquisition Agreement and the Berg Land Holdings Option Agreement, we believe
our acquisitions experience, established network of real estate and information
technology professionals and overall financial condition will continue to
provide opportunities for external growth. In general, we will seek
opportunistic acquisitions of high quality, well located Silicon Valley R&D
properties in situations where illiquidity or inadequate management permit their
acquisition at favorable prices, and where our management skills and knowledge
of Silicon Valley submarkets may facilitate increases in cash flow and asset
value. Furthermore, our use of the operating partnership structure gives
prospective sellers the opportunity to contribute properties on a tax-deferred
basis in exchange for O.P. Units. This capacity to complete tax-deferred
transactions with sellers of real property will further enhance our ability to
acquire additional properties.
FOCUS ON SINGLE TENANT SILICON VALLEY R&D PROPERTIES
We intend to continue to emphasize the acquisition of single-tenant rather
than multi-tenant properties, a practice that has contributed to the relatively
low turnover and high occupancy rates on our properties. We believe that the
relatively small number of tenants (88) occupying our 80 properties, mostly
under the triple-net lease structure, allows us to efficiently manage the
properties and to serve our tenants' needs without extensive in-house staff or
the assistance of a third-party property management organization. In addition,
this emphasis allows us to incur less expense for tenant improvements and
leasing commissions than multi-tenant, high turnover property owners. This
strategy also reduces the time and expense associated with obtaining building
permits and other governmental approvals. We believe that the relatively stable,
extended relationships that we have developed with our key tenants are valuable
in the expansion of our business.
OPERATIONS
We operate as a self-administered, self-advised and self-managed REIT with
our own employees. Generally, as the sole general partner of the operating
partnerships, we control the business and assets of the operating partnerships
and have full and complete authority, discretion and responsibility with respect
to the operating partnerships' operations and transactions, including, without
limitation, acquiring additional properties, borrowing funds, raising new
capital, leasing buildings and selecting and supervising all agents of the
operating partnerships.
Although most of our leases are triple net and building maintenance and
tenant improvements are the responsibility of the tenants, from time to time we
may be required to undertake construction and repair work at our properties. We
will bid all major work competitively to subcontractors. Members of the Berg
Group may participate in the competitive bidding for the work.
We generally will market the properties and negotiate leases with tenants
ourselves. We make the availability of our properties known to the brokerage
community to garner their assistance in locating prospective tenants. As a
result, we expect to retain our policy of paying fixed commissions to tenants'
brokers.
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We believe that our business practices, including the following, provide us
with competitive advantages:
- EXTERNAL DEVELOPMENT AFFILIATE. The Berg Group operates as our
development entity. We have the obligation to acquire projects
developed by the Berg Group under the Pending Projects Acquisition
Agreement. We also have the option to purchase all future R&D, office,
industrial property developments of the Berg Group on land currently
held or acquired directly or indirectly by Carl E. Berg or Clyde J.
Berg that is zoned for those purposes and located in California,
Oregon and Washington following completion and lease-up of the
property. Our option will terminate when the Berg Group's ownership
percentage falls below 65% of our common stock calculated on a
fully-diluted basis. Carl E. Berg has agreed to refer to us, and not
acquire through the Berg Group, all opportunities to acquire the same
kinds of real property in these states that he identifies in the
future, until the Berg Group's fully-diluted ownership percentage
falls below 25% and there is no Berg Group nominee on our board of
directors. The acquisition terms and conditions for the existing and
identified projects have been pre-negotiated and are documented under
the Pending Project Acquisition Agreement, and the Berg Land Holdings
Option Agreement. This relationship provides us with the economic
benefits of development while eliminating development and initial
lease-up risks. It also provides us with access to one of the most
experienced development teams in the Silicon Valley without the
expense of maintaining development personnel.
- LEAN, EXPERIENCED ORGANIZATION. In part because of its primary focus
on Silicon Valley, its experience with the special real estate
requirements of information technology tenants and the long-term
triple-net structure of its leases, the Company is able to conduct and
expand its business with a small management team comprised of highly
qualified and experienced professionals working within a relatively
flat organizational structure. We believe that the leanness and our
experience will enable the Company to rapidly assess and respond to
market opportunities and tenant needs, control operating expenses and
develop and maintain excellent relationships with tenants. We further
believe that these advantages translate into significantly lower costs
for operations and give us the ability, along with the Berg Group, to
compete favorably with other R&D property developers in Silicon
Valley, especially for build-to-suit projects subject to competitive
bidding. Furthermore, a lower cost structure should allow us to
generate better returns from properties whose value can be increased
through appropriate remodeling and efficient property management.
- SOUND PROPERTY MANAGEMENT PRACTICES. For each property, the management
team, along with the Berg Group staff, develop a specific marketing
and property management program. We select vendors and subcontractors
on a competitive bid basis from a select group of highly qualified
firms with whom we maintain ongoing relationships and carefully
supervise their work.
OPERATING PARTNERSHIP AGREEMENTS
Management
The operating partnerships consist of four separate Delaware limited
partnerships engaged in the combined operation and ownership of our properties,
the operating partnership agreements are identical in all material respects for
all four of the limited partnerships. Generally, pursuant to the operating
partnership agreement, we act as the sole general partner of the operating
partnerships, in which capacity we have exclusive control of the business and
assets of the operating partnerships and full and complete authority, discretion
and responsibility with respect to the operating partnerships' operations and
transactions, including, without limitation, acquisitions of additional
properties, borrowing funds, raising new capital, leasing buildings, as well as
selecting and supervising all employees and agents of the operating
partnerships. Through our authority to manage our business and affairs, our
board of directors will direct the business of the operating partnerships.
Notwithstanding our effective control of the operating partnerships, the
consent of the limited partners holding a majority of the outstanding O.P. Units
is required with respect to certain extraordinary actions involving the
operating partnerships, including:
- the amendment, modification or termination of the operating
partnership agreements;
- a general assignment for the benefit of creditors or the appointment
of a custodian, receiver or trustee for any of the assets of the
operating partnerships;
- the institution of any proceeding for bankruptcy of the operating
partnerships;
- the transfer of any general partnership interests in the operating
partnerships, including, with certain exceptions, transfers attendant
to any merger, consolidation or liquidation of our corporation;
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- the admission of any additional or substitute general partner in the
operating partnerships; and
- a change of control of the operating partnerships.
The Berg Group holds a substantial majority of the outstanding O.P. Units.
In addition, until the ownership interest of the Berg Group and its affiliates
is less than 15% of the common stock on a fully diluted basis, which is
calculated based on all outstanding shares of common stock and all shares of
common stock that could be acquired upon the exercise of all outstanding options
to acquire our voting stock, as well as all shares of common stock issuable upon
exchange of all O.P. Units, the consent of the limited partners holding a
majority of the outstanding O.P. Units is also required with respect to:
- the liquidation of the operating partnerships;
- the sale or other transfer of all or substantially all of the assets
of the operating partnerships and certain mergers and business
combinations resulting in the complete disposition of all O.P. Units;
and
- the issuance of limited partnership interests having seniority as to
distributions, assets and voting over the O.P. Units.
TRANSFERABILITY OF O.P. UNITS
The operating partnership agreement provides that the limited partners may
transfer their O.P. Units, subject to certain limitations. Except for certain
transfers by the limited partners to or from certain of their affiliates,
however, all transfers may be made only with our prior written consent as the
sole general partner of the operating partnerships.
In addition, no transfer of O.P. Units by the limited partners may be made
in violation of certain regulatory and other restrictions set forth in the
operating partnership agreement. Except in the case of certain permitted
transfers to or from certain affiliates of the limited partners, the exchange
rights, the put rights, rights to participate in future equity financings and
provisions requiring the approval of certain limited partners for certain
matters will no longer be applicable to O.P. Units so transferred, and the
transferee will not have any rights to nominate persons to our board of
directors.
ADDITIONAL CAPITAL CONTRIBUTIONS AND LOANS
Each operating partnership agreement provides that, if the operating
partnership requires additional funds to pursue its investment objectives, we
may fund such investments by raising additional equity capital and making a
capital contribution to the operating partnerships or by borrowing such funds
and lending the net proceeds of such loans to the operating partnerships. If we
intend to provide additional funds through a contribution to capital and
purchase of units of general partnership interest, the limited partners will
have the right to participate in such funding on a pro rata, pari passu basis
and to acquire additional O.P. Units. If the limited partners do not participate
in such financing, we will acquire additional units of general partnership
interest.
In either case, the number of additional units of partnership interest will
be increased based upon the amount of the additional capital contributions and
the value of the operating partnerships as of the date such contributions are
made.
In addition, as general partner of the operating partnerships, we have the
ability to cause the operating partnerships to issue additional O.P. Units. In
the event that the operating partnerships issue new O.P. Units for cash but not
property, the limited partners will have the right to purchase new O.P. Units at
the price we offer in the transaction giving rise to such participation right in
order, and to the extent necessary, to maintain their respective percentage
interests in the operating partnerships.
EXCHANGE RIGHTS, PUT RIGHTS AND REGISTRATION RIGHTS
Under the Exchange Rights Agreement between the Company and the limited
partners, the limited partners have exchange rights, that generally became
exercisable on December 29, 1999. The Exchange Rights Agreement permits every
limited partner to tender O.P. Units to us, and, at our election, to receive
common stock on a one-for-one basis at then-current market value, an equivalent
amount of cash, or a combination of cash and common stock in exchange for the
O.P. Units tendered, subject to the ownership limit, or the Berg Group ownership
limit, as the case may be. In addition, once in each 12-month period beginning
on December 29, 1999, the limited partners, other than Mr. Berg and Clyde J.
Berg, have the right to exchange their O.P. Units for shares of common stock,
subject to the ownership limit in our charter, and to exercise a put right to
sell their O.P. Units to the operating partnerships at a price equal to the
average market price of the common stock for the 10-trading day period
immediately preceding the date of tender. Upon any exercise of the put rights,
we will have the
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opportunity for a period of 15 days to elect to fund the purchase of the O.P.
Units and purchase additional general partner interests in the operating
partnerships for cash, unless the purchase price exceeds $1 million in the
aggregate for all tendering limited partners, in which case, the operating
partnerships or we shall be entitled to reduce proportionally the number of O.P.
Units to be acquired from each tendering limited partner so that the total
purchase price is not more than $1 million.
The Exchange Rights Agreement gives the holders of O.P. Units the right to
participate in any registered public offering of the common stock initiated by
us to the extent of 25% of the total shares sold in the offering upon converting
O.P. Units to shares of common stock, but subject to the underwriters' unlimited
right to reduce the participation of all selling stockholders. The holders of
O.P. Units will be able to request resale registrations of shares of common
stock acquired on exchange of O.P. Units on a Form S-3, or any equivalent form
of registration statement. We are obligated to effect no more than two such
registrations in any 12-month period. We are obligated to assist the O.P. Unit
holders in obtaining a firm commitment underwriting agreement for such resale
from a qualified investment banking firm. If registration on Form S-3, or an
equivalent form, is not available for any reason, we will be obligated to effect
a registration of the shares to be acquired on exercise of the exchange rights
on Form S-11, or an equivalent form, in an underwritten public offering, upon
demand by the holders of no fewer than 500,000 O.P. Units. All holders of O.P.
Units will be entitled to participate in such registration. We will bear all
costs of such registrations other than selling expenses, including commissions
and separate counsels' fees of the O.P. Unit holders. We will not be required to
effect any registration for resale on Form S-3, or equivalent form of common
stock shares issuable to the holder of O.P. Units if the request is for less
than 250,000 shares.
OTHER MATTERS
The operating partnership agreements require that the operating
partnerships be operated in a manner that will enable us to satisfy the
requirements for being classified as a REIT and to avoid any federal income or
excise tax liability.
The operating partnership agreements provide that the combined net
operating cash flow from all of the operating partnerships, as well as net sales
and refinancing proceeds, will be distributed from time to time as determined by
our board of directors, but not less frequently than quarterly, pro rata in
accordance with the partners' percentage interests in the operating
partnerships, taken as a whole. This provision is intended to cause the periodic
distributions per O.P. Unit and per share of our common stock to be equal. As a
consequence of this provision, the capital interest of a partner in each of the
operating partnerships, including our capital interests, might at times differ
significantly from the partner's percentage interest in the net income and cash
flow of that operating partnership. We do not believe that such differences
would have a material impact our business, financial condition or FAD, however.
Pursuant to the operating partnership agreements, the operating
partnerships will also assume and pay when due, or reimburse us for payment of,
certain costs and expenses relating to our continuity of existence and
operations.
The operating partnership agreements provide that, upon the exercise of an
outstanding option under the 1997 option plan, we may purchase additional
general partner interests in the operating partnerships by contributing the
exercise proceeds to the operating partnerships. Our increased interest shall be
equal to the percentage of outstanding shares of common stock and O.P. Units on
an as-converted basis represented by the shares acquired upon exercise of the
option.
TERM
The operating partnerships will continue in full force and effect until
December 31, 2048 or until sooner dissolved pursuant to the terms of the
operating partnership agreement.
EMPLOYEES
As of March 15, 2000, we employed 5 people, all of whom work at our
executive offices at 10050 Bandley Drive, Cupertino, California, 95014.
FACILITIES
We sublease office space from the Berg Group at 10050 Bandley Drive and
share clerical staff and other overhead on what we consider to be very favorable
terms. The total monthly rent payable by us to the Berg Group is $6,720.
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS, TOGETHER WITH THE OTHER
INFORMATION CONTAINED IN ANNUAL REPORT ON FORM 10-K. THE FOLLOWING RISKS RELATE
PRINCIPALLY TO OUR BUSINESS AND THE INDUSTRY IN WHICH WE OPERATE. THE RISKS AND
UNCERTAINTIES CLASSIFIED BELOW ARE NOT THE ONLY ONES WE FACE.
WE ARE DEPENDENT ON CARL E. BERG, AND IF WE LOSE HIS SERVICES OUR BUSINESS MAY
BE HARMED AND OUR STOCK PRICE COULD FAll.
We are substantially dependent upon the leadership of Carl E. Berg, our
Chairman, President and Chief Executive Officer. Losing Mr. Berg's knowledge and
abilities could have a material adverse effect on our business and the value of
our common stock. Mr. Berg manages our day-to-day operations and devotes a
significant portion of his time to our affairs, but he has a number of other
business interests as well. These other activities reduce Mr. Berg's attention
to our business.
MR. BERG AND HIS AFFILIATES EFFECTIVELY CONTROL OUR CORPORATION AND THE
OPERATING PARTNERSHIPS AND MAY ACT IN WAYS THAT ARE DISADVANTAGEOUS TO
OTHER STOCKHOLDERS.
SPECIAL BOARD VOTING PROVISIONS. Our governing corporate documents, which
are our articles of amendment and restatement, or charter, and our bylaws,
provide substantial control rights for the Berg Group. The Berg Group's control
of our corporation means that the value and returns from an investment in the
Company's common stock are subject to the Berg Group's exercise of its rights.
These rights include a requirement that Mr. Berg or his designee as director
approve certain fundamental corporate actions, including amendments to our
charter and bylaws and any merger, consolidation or sale of all or substantially
all of our assets. In addition, our bylaws provide that a quorum necessary to
hold a valid meeting of the board of directors must include Mr. Berg or his
designee. The rights described in the two preceding sentences apply only as long
as the Berg Group members and their affiliates, other than us and the operating
partnerships, beneficially own, in the aggregate, at least 15% of our
outstanding shares of common stock on a fully diluted basis, which is calculated
based on all outstanding shares of common stock and all shares of common stock
that could be acquired upon the exercise of all outstanding options to acquire
our voting stock, as well as all shares of common stock issuable upon exchange
of all O.P. Units. Also, directors representing more than 75% of the entire
board of directors must approve other significant transactions, such as
incurring debt above certain amounts and conducting business other than through
the operating partnerships. Without the approval of Mr. Berg or his designee,
board of directors approval that we may need for actions that might result in a
sale of your stock at a premium or raising additional capital when needed could
be difficult or impossible to obtain.
BOARD OF DIRECTORS REPRESENTATION. The Berg Group members have the right to
designate two of the director nominees submitted by our board of directors to
stockholders for election, as long as the Berg Group members and their
affiliates, other than us and the operating partnerships, beneficially own, in
the aggregate, at least 15% of our outstanding shares of common stock on a fully
diluted basis, which is calculated based on all outstanding shares of common
stock and all shares of common stock that could be acquired upon the exercise of
all outstanding options to acquire our voting stock, as well as all shares of
common stock issuable upon exchange of all O.P. Units. If the fully diluted
ownership of the Berg Group members and their affiliates, other than us and the
operating partnerships, is less than 15% but is at least 10% of the common
stock, the Berg Group members have the right to designate one of the director
nominees submitted by our board of directors to stockholders for election. Its
right to designate director nominees affords the Berg Group substantial control
and influence over the management and direction of our corporation. The Berg
Group's interests could conflict with the interests of our stockholders, and
could adversely affect the price of our common stock.
SUBSTANTIAL OWNERSHIP INTEREST. The Berg Group currently owns O.P. Units
representing approximately 77.4% of the equity interests in the operating
partnerships and approximately 77.5% of our equity interests on a fully diluted
basis, which is calculated based on all outstanding shares of common stock and
all shares of common stock that could be acquired upon the exercise of all
outstanding options to acquire our voting stock, as well as all shares of common
stock issuable upon exchange of all O.P. Units. The O.P. Units may be converted
into shares of common stock, subject to limitations set forth in our charter and
other agreements with the Berg Group, and upon conversion would represent voting
control of our corporation. The Berg Group's ability to exchange its O.P. Units
for common stock permits it to exert substantial influence over the management
and direction of our corporation. This influence increases our dependence on the
Berg Group.
LIMITED PARTNER APPROVAL RIGHTS. Mr. Berg and other limited partners,
including other members of the Berg Group, may restrict our operations and
activities through rights provided under the terms of the amended and restated
agreement of limited partnership which governs each of the operating
partnerships and our legal relationship to each operating partnership as its
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general partner. Matters requiring approval of the holders of a majority of the
O.P. Units, which necessarily would include the Berg Group, include the
following:
- the amendment, modification or termination of any of the operating
partnership agreements;
- the transfer of any general partnership interest in the operating
partnerships, including, with certain exceptions, transfers attendant
to any merger, consolidation or liquidation of our corporation;
- the admission of any additional or substitute general partners in the
operating partnerships;
- any other change of control of the operating partnerships;
- a general assignment for the benefit of creditors or the appointment
of a custodian, receiver or trustee for any of the assets of the
operating partnerships; and
- the institution of any bankruptcy proceeding for any operating
partnership.
In addition, as long as the Berg Group members and their affiliates, other
than us and the operating partnerships, beneficially own, in the aggregate, at
least 15% of the outstanding shares of common stock on a fully diluted basis,
which is calculated based on all outstanding shares of common stock and all
shares of common stock that could be acquired upon the exercise of all
outstanding options to acquire our voting stock, as well as all shares of common
stock issuable upon exchange of all O.P. Units, the consent of the limited
partners holding the right to vote a majority of the total number of O.P. Units
outstanding is also required with respect to:
- the sale or other transfer of all or substantially all of the assets
of the operating partnerships and certain mergers and business
combinations resulting in the complete disposition of all O.P. Units;
- the issuance of limited partnership interests senior to the O.P. Units
as to distributions, assets and voting; and
- the liquidation of the operating partnerships.
The liquidity of an investment in the Company's common stock, including our
ability to respond to acquisition offers, will be subject to the exercise of
these rights.
OUR CONTRACTUAL BUSINESS RELATIONSHIPS WITH THE BERG GROUP PRESENT ADDITIONAL
CONFLICTS OF INTEREST WHICH MAY RESULT IN THE REALIZATION OF ECONOMIC
BENEFITS OR THE DEFERRAL OF TAX LIABILITIES BY THE BERG GROUP WITHOUT
EQUIVALENT BENEFITS TO OUR STOCKHOLDERS
Our contracts with the Berg Group provide it with interests that could
conflict with those of our other stockholders, including the following:
- our headquarters are leased from an entity owned by the Berg Group, to
whom we pay rent of approximately $6,700 per month;
- the Berg Group is permitted to conduct real estate and business
activities other than our business;
- if we decline an opportunity that has been offered to us, the Berg
Group may pursue it, which would reduce the amount of time that Mr.
Berg could devote to our affairs and could result in the Berg Group's
development of properties that compete with our properties for
tenants;
- in general, we have agreed to limit the liability of the Berg Group to
our corporation and our stockholders arising from the Berg Group's
pursuit of these other opportunities;
- we acquired most of our properties from the Berg Group on terms that
were not negotiated at arm's length and without many customary
representations and warranties that we would have sought in an
acquisition from an unrelated party; and
- we have assumed liability for debt to the Berg Group and debt for
which the Berg Group was liable.
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The Berg Group has agreed that the independent directors committee of our
board of directors must approve all new transactions between us and any of its
members, or between us and any entity in which it directly or indirectly owns 5%
or more of the equity interests, including the operating partnerships for this
purpose. This committee currently consists of three directors who are
independent of the Berg Group.
EXCLUDED PROPERTIES. With our prior knowledge, the Berg Group retained two
R&D properties in Scotts Valley, Santa Cruz County, California, in which we and
the operating partnerships have no ownership interest. Efforts of the Berg Group
to lease these other properties could interfere with similar efforts on our
behalf.
PENDING DEVELOPEMENT PROJECTS. We and the operating partnerships have
agreed under the terms of a Pending Projects Acquisition Agreement to acquire
from the Berg Group two additional R&D properties potentially aggregating
approximately 175,000 rentable square feet as each is completed and leased. The
purchase price for each property will be calculated based on a fixed
capitalization rate applied to actual average rental rates on the property over
the lease term. We currently estimate that the aggregate purchase price of these
two properties, assuming payment in cash and/or assumption of debt, will be
approximately $24.0 million. The Berg Group may elect to receive cash or O.P.
Units, valued at $4.50 per unit, which value was set when we entered into the
acquisition agreement with the Berg Group in May 1998. Our stock was not trading
at that time. As the market price of a share of common stock was $8.50 at March
15, 2000, this valuation represents a substantial discount from the current
market value of the common stock that may be issued in exchange for these O.P.
Units. Our issuance of O.P. Units to acquire any of these properties, instead of
paying cash, may result in a higher acquisition cost and additional depreciation
expenses that reduce our net income per share. Acquisitions of additional O.P.
Units by the Berg Group will increase the Berg Group's ownership interest in our
business and could reduce the amount of cash available for distribution per
share to our other stockholders which could cause our stock price to fall.
The Berg Group's election to receive cash in place of O.P. Units for these
properties and to place debt on the properties that we would be required to
assume would reduce our liquidity and could increase our debt to total market
capitalization ratio. These factors could harm our business and cause our stock
price to fall, while the Berg Group receives substantial benefits.
BERG LAND HOLDINGS. The Berg Group owns several parcels of unimproved land
in the Silicon Valley that we and the operating partnerships have the right to
acquire under the terms of the Berg Land Holdings Option Agreement. We have
agreed to pay a fixed amount plus additional charges for any of the properties
that we do acquire. We must pay the acquisition price in cash unless the Berg
Group elects, in its discretion, to receive O.P. Units valued at the average
market price of a share of common stock during the 30-day period preceding the
acquisition date. At the time of acquisition, which is subject to the approval
of the independent directors committee of our board of directors, these
properties may be encumbered by debt that we or the operating partnerships will
be required to assume or repay. The use of our cash or an increase in our
indebtedness to acquire these properties could have a material adverse effect on
our financial condition, results of operations and ability to make cash
distributions to our stockholders.
TAX CONSEQUENCES OF SALE OF PROPERTIES. Because many of our properties have
unrealized taxable gain, a sale of those properties could create adverse income
tax consequences for limited partners of the operating partnerships. We have
agreed with Carl E. Berg, Clyde J. Berg and John Kontrabecki, a limited partner
in some of the operating partnerships, that each can prevent us and the
operating partnerships from selling or transferring properties that were
directly or indirectly acquired from him in the UPREIT acquisition in any
taxable transaction prior to December 29, 2008. As a result, our opportunities
to sell these properties may be limited. If we need to sell any of these
properties to raise cash to service our debt, acquire new properties, pay cash
distributions to stockholders or for other working capital purposes, we may be
unable to do so. These restrictions could harm our business and cause our stock
price to fall.
TERMS OF TRANSFERS: ENFORCEMENT OF AGREEMEnT OF LIMITED PARTNERSHIP. The
terms of the Pending Projects Acquisition Agreement, the Berg Land Holdings
Option Agreement, the partnership agreement of each operating partnership and
other material agreements through which we have acquired our interests in the
operating partnerships and the properties formerly controlled by the Berg Group
were not determined through arm's-length negotiations, and could be less
favorable to us than those obtained from an unrelated party. In addition, Mr.
Berg and representatives of the Berg Group sitting on our board of directors may
be subject to conflicts of interests with respect to their obligations as our
directors to enforce the terms of the partnership agreement of each operating
partnership when such terms conflict with their personal interests. The terms of
our charter and bylaws also were not determined through arm's-length
negotiations. Some of these terms, including representations and warranties
applicable to acquired properties, are not as favorable as those that we would
have sought through arm's-length negotiations with unrelated parties. As a
result, an investment in our common stock may involve risks not found in
businesses in which the terms of material agreements have been negotiated at
arm's length.
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RELATED PARTY DEBT. As of December 31, 1999, we were liable for loans
aggregating approximately $31.2 million payable to the Berg Group. Effective
March 1, 2000, the Berg Group extended to the Company a $50.0 million line of
credit which is secured by seven of our properties and expires March 2001. We
have the right to draw on the line of credit and are liable for repayment of all
amounts owing under the line of credit. All of these loans bear interest at an
annual rate of LIBOR plus 1.30 percent. If we are unable to repay our debts to
the Berg Group when due, the Berg Group could take action to enforce our payment
obligations. Loan defaults of this type could materially adversely affect our
business, financial condition and our results of operations and cause our stock
price to fall. They also could result in a substantial reduction in the amount
of cash distributions to our stockholders. In turn, if we fail to meet the
minimum distributions test because of a loan default or another reason, we could
lose our REIT classification for federal income tax purposes. For more
information please refer to " --- --- Failure to satisfy federal income tax
requirements for REIT's could reduce our distributions, reduce our income and
cause our stock price to fall.
OUR OPTION TO ACQUIRE R&D PROPERTIES DEVELOPED ON EXISTING LAND AND LAND
ACQUIRED IN THE FUTURE BY THE BERG GROUP WILL TERMINATE WHEN THE BERG GROUP'S
OWNERSHIP INTEREST HAS BEEN REDUCED.
The Berg Land Holdings Option Agreement, as amended, which provides us with
significant benefits and opportunities to acquire additional R&D properties from
the Berg Group, will expire when the Berg Group and their affiliates (excluding
us and the operating partnerships) own less than 65% of our common stock on a
fully diluted basis, which is calculated based on all outstanding shares of
common stock and all shares of common stock that could be acquired upon the
exercise of all outstanding options to acquire our voting stock, as well as
shares of common stock issuable upon exchange of all O.P. Units. Termination of
the Berg Land Holdings Option Agreement could result in limitation of our
growth, which could cause our stock price to fall.
WE MAY CHANGE OUR INVESTMENT AND FINANCING POLICIES AND INCREASE YOUR RISK
WITHOUT STOCKHOLDER APPROVAL.
Our board of directors determines the investment and financing policies of
the operating partnerships and our policies with respect to certain other
activities, including our business growth, debt capitalization, distribution and
operating policies. Our board of directors may amend these policies at any time
without a vote of the stockholders. Changes in these policies could materially
adversely affect our financial condition, results of operations and ability to
make cash distributions to our stockholders, which could harm our business and
cause our stock price to fall. For more information please refer to "Item 7. ---
Managements Discussion and Analysis of Financial Condition and Results of
operations Policies with Respect to Certain Activities."
ANTI-TAKEOVER PROVISIONS IN OUR CHARTER COULD PREVENT ACQUISITIONS OF OUR STOCK
AT A SUBSTANTIAL PREMIUM.
Provisions of our charter and our bylaws could delay, defer or prevent a
transaction or a change in control of our corporation, or a similar transaction,
that might involve a premium price for our shares of common stock or otherwise
be in the best interests of our stockholders. Provisions of the Maryland general
corporation law, which would apply to potential business combinations with
acquirers other than the Berg Group or stockholders who invested in us in
December 1998, also could prevent the acquisition of our stock for a premium, as
discussed in "Certain Provisions of Maryland Law and of our Charter and Bylaws."
AN INVESTMENT IN OUR STOCK INVOLVES RISKS RELATED TO REAL ESTATE INVESTMENTS
THAT COULD HARM OUR BUSINESS AND CAUSE OUR STOCK PRICE TO FALL.
RENTAL INCOME VARIES. Real property investments are subject to varying
degrees of risk. Investment returns available from equity investments in real
estate depend in large part on the amount of income earned and capital
appreciation which our properties generate, as well as our related expenses
incurred. If our properties do not generate revenues sufficient to meet
operating expenses, debt service and capital expenditures, our income and
ability to make distributions to our stockholders will be adversely affected.
Income from our properties may also be adversely affected by general economic
conditions, local economic conditions such as oversupply of commercial real
estate, the attractiveness of our properties to tenants and prospective tenants,
competition from other available rental property, our ability to provide
adequate maintenance and insurance, the cost of tenant improvements, leasing
commissions and tenant inducements and the potential of increased operating
costs, including real estate taxes.
EXPENDITURES FOR PROPERTY OWNERSHIP ARE FIXED. Income from properties and
real estate values are also affected by a variety of other factors, such as
governmental regulations and applicable laws, including real estate, zoning and
tax laws, interest rate levels and the availability of financing. Various
significant expenditures associated with an investment in real estate, such as
mortgage payments, real estate taxes and maintenance expenses, generally are not
reduced when circumstances
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cause a reduction in revenue from the investment. Thus, our operating results
and our cash flow may decline materially if our rental income is reduced.
ILLIQUIDITY. Real estate investments are relatively illiquid, which limits
our ability to restructure our portfolio in response to changes in economic or
other conditions.
GEOGRAPHIC CONCENTRATION. All of our properties are located in the southern
portion of the San Francisco Bay Area commonly referred to as the "Silicon
Valley." The Silicon Valley economy has been strong for the past several years,
but future increases in values and rents for our properties depend to a
significant extent on the health of this region's economy.
LOSS OF KEY TENANTS. Most of our properties are occupied by single tenants,
many of whom are large, publicly traded information technology companies. Losing
a key tenant could adversely affect our operating results and our ability to
make distributions to stockholders if we are unable to obtain replacement
tenants promptly.
TENANT BANKRUPTCIES. Key tenants could seek the protection of the
bankruptcy laws, which could result in the rejection and termination of their
leases, thereby causing a reduction in our income.
OUR SUBSTANTIAL INDEBTEDNESS. Our properties are subject to substantial
indebtedness. If we are unable to make required mortgage payments, we could
sustain a loss as a result of foreclosure on our properties by the mortgagor.
Failure to renew or replace the Berg Group line of credit when it expires in
March 2001 would materially affect our business and affect our ability to pay
dividends to stockholders. We cannot assure you that we will be able to obtain a
replacement line of credit with terms similar to the Berg Group line of credit,
or at all. Our cost of borrowing funds could increase substantially after the
Berg Group line of credit expires. We have adopted a policy of maintaining a
consolidated ratio of debt to total market capitalization, which includes for
this purpose the market value of all shares of common stock for which
outstanding O.P. Units are exchangeable, of less than 50%. This ratio may not be
exceeded without the approval of more than 75% of our entire board of directors.
Our board of directors may vote to change this policy, however, and we could
become more highly leveraged, resulting in an increased risk of default on our
obligations and an increase in debt service requirements that could adversely
affect our financial condition, our operating results and our ability to make
distributions to our stockholders.
ENVIRONMENTAL CLEAN-UP LIABILITIES. Our properties and properties formerly
held by our subsidiaries may expose us to liabilities under applicable
environmental and health and safety laws. If these liabilities are material, our
financial condition and ability to pay cash distributions may be affected
adversely, which would cause our stock price to fall.
UNINSURED LOSSES. We may sustain uninsured losses with respect to some of
our properties. If these losses are material, our financial condition, our
operating results and our ability to make distributions to our stockholders may
be affected adversely.
EARTHQUAKE DAMAGES ARE UNINSURED. All of our properties are located in
areas that are subject to earthquake activity. Our insurance policies do not
cover damage caused by seismic activity, although they do cover losses from
fires after an earthquake. We generally do not consider such insurance coverage
to be economical. If an earthquake occurs and results in substantial damage to
our properties, we could lose our investment in those properties, which loss
would have a material adverse effect on our financial condition, our operating
results and our ability to make distributions to our stockholders.
FAILURE TO SATISFY FEDERAL INCOME TAX REQUIREMENTS FOR REIT'S COULD REDUCE OUR
DISTRIBUTIONS, REDUCE OUR INCOME AND CAUSE OUR STOCK PRICE TO FALL.
FAILURE TO QUALIFY AS A REIT. We intend to elect to be a REIT and to be
taxed as such under the federal income tax laws for the year ended December 31,
1999. Although we currently intend to operate in a manner designed to enable us
to qualify and maintain our REIT status, it is possible that economic, market,
legal, tax or other considerations may cause us to fail to qualify as a REIT or
may cause our board of directors either to refrain from making the REIT election
or to revoke that election once made. To maintain REIT status, we must meet
certain tests for income, assets, distributions to stockholders, ownership
interests and other significant conditions. If we fail to qualify as a REIT in
any taxable year, we will not be allowed a deduction for distributions to our
stockholders in computing our taxable income and would be subject to federal
income tax, including any applicable alternative minimum tax, on our taxable
income at regular corporate rates. Moreover, unless we were entitled to relief
under certain provisions of the tax laws, we would be disqualified from
treatment as a REIT for the four taxable years following the year in which our
qualification was lost. As a result, funds available for distribution to our
stockholders would be reduced for each of the years involved and, in addition,
we would no longer be required to make distributions to our stockholders.
- 13 -
REIT DISTRIBUTION REQUIREMENTS. To maintain REIT status, we must distribute
as a dividend to our stockholders at least 95% of our otherwise taxable income,
after certain adjustments, with respect to each tax year. We may also be subject
to a 4% non-deductible excise tax in the event our distributions to stockholders
fail to meet certain other requirements. Failure to comply with these
requirements could result in our income being subject to tax at regular
corporate rates and could cause us to be liable for the excise tax.
OWNERSHIP LIMIT NECESSARY TO MAINTAIN REIT QUALIFICATION. As a REIT, the
federal tax laws restrict the percentage of the total value of our stock that
may be owned by five or fewer individuals to 50% or less. Our charter generally
prohibits the direct or indirect ownership of more than 9% of our common stock
by any stockholder. This limit excludes the Berg Group, which has an aggregate
ownership limit of 20%. In addition, as permitted by our charter, our board of
directors has authorized an exception to two other stockholders that permits
them to collectively own, directly or indirectly, up to 18.5% of our common
stock on an aggregate basis, subject to the terms of an ownership limit
exemption agreement. In general, our charter prohibits the transfer of shares
which result in a loss of our REIT qualification and provides that any such
transfer or any other transfer which causes a stockholder to exceed the
ownership limit will result in the shares being automatically transferred to a
trust for the benefit of a charitable beneficiary. Accordingly, in the event
that either the Berg Group or the two stockholders increase their stock
ownership in our corporation, a stockholder who acquires shares of our common
stock, even though his, her or its aggregate ownership may be less than 9%, may
be required to transfer a portion of that stockholder's shares to such a trust
in order to preserve our status as a REIT.
STOCKHOLDERS ARE NOT ASSURED OF RECEIVING CASH DISTRIBUTION FROM US.
Our income will consist primarily of our share of the income of the
operating partnerships, and our cash flow will consist primarily of our share of
distributions from the operating partnerships. Differences in timing between the
receipt of income and the payment of expenses in arriving at our taxable income
or the taxable income of the operating partnerships and the effect of required
debt amortization payments could require us to borrow funds, directly or through
the operating partnerships, on a short-term basis to meet our intended
distribution policy.
Our board of directors will determine the amount and timing of
distributions by the operating partnerships and of distributions to our
stockholders. Our board of directors will consider many factors prior to making
any distributions, including the following:
- the amount of cash available for distribution;
- the operating partnerships' financial condition;
- whether to reinvest funds rather than to distribute such funds;
- the operating partnerships' capital expenditures;
- the effects of new property acquisitions, including acquisitions under
our existing agreements with the Berg Group;
- the annual distribution requirements under the REIT provisions of the
federal income tax laws; and
- such other factors as our board of directors deems relevant.
We cannot assure you that we will be able to meet or maintain our cash
distribution objectives.
OUR PROPERTIES COULD BE SUBJECT TO PROPERTY TAX REASSESSMENTS.
We do not believe that our acquisition of interests in the operating
partnerships in the UPREIT acquisition resulted in any statutory changes in
ownership that could give rise to a reassessment of any of the properties for
California property tax purposes. We cannot assure you, however, that county
assessors or other tax administrative agencies in California will not attempt to
assert that such a change occurred as a result of these transactions. Although
we believe that such a challenge would not be successful ultimately, we cannot
assure you regarding the outcome of any related dispute or proceeding. A
reassessment could result in increased real estate taxes on our properties that,
as a practical matter, we may be unable to pass through to our tenants in full.
This could reduce our net income and our funds available for distribution and
cause our stock price to fall.
- 14 -
OUR OBLIGATION TO PURCHASE TENDERED O.P. UNITS COULD REDUCE OUR CASH
DISTRIBUTIONS.
Each of the limited partners of the operating partnerships, other than Mr.
Berg and Clyde J. Berg, has the annual right to cause the operating partnerships
to purchase the limited partner's O.P. Units at a purchase price based on the
average market value of the common stock for the ten-trading-day period
immediately preceding the date of tender. Upon a limited partner's exercise of
any such right, we will have the option to purchase the tendered O.P. Units with
available cash, borrowed funds or the proceeds of an offering of newly issued
shares of common stock. These put rights became exercisable on December 29,
1999, and are available once during a 12-month period. If the total purchase
price of the O.P. Units tendered by all of the eligible limited partners in one
year exceeds $1 million, we or the operating partnerships will be entitled to
reduce proportionately the number of O.P. Units to be acquired from each
tendering limited partner so that the total purchase price does not exceed $1
million. The exercise of these put rights may reduce the amount of cash that we
have available to distribute to our stockholders and could cause our stock price
to fall.
In addition, after December 1999, all O.P. Unit holders may tender their
O.P. Units to us for shares of common stock on a one-for-one basis at
then-current market value or an equivalent amount in cash, at our election. If
we elect to pay cash for the O.P. Units, our liquidity may be reduced and we may
lack sufficient funds to continue paying the amount of our anticipated or
historical cash distributions. This could cause our stock price to fall.
SHARES ELIGIBLE FOR FUTURE SALE COULD AFFECT THE MARKET PRICE OF OUR STOCK.
We cannot predict the effect, if any, that future sales of shares of common
stock, or the availability of shares for future sale, could have on the market
price of the common stock. Sales of substantial amounts of common stock,
including shares issued in connection with the exercise of the exchange rights
held by the limited partners of the operating partnerships, or the perception
that such sales could occur, could adversely affect prevailing market prices for
the common stock. Additional shares of common stock may be issued to limited
partners, subject to the applicable REIT qualification ownership limit, if they
exchange their O.P. Units for shares of common stock pursuant to their exchange
rights, or may be sold by us to raise funds required to purchase such O.P. Units
if the limited partners elect to tender O.P. Units to us using their put rights.
In addition, the holders of approximately 1 million shares of common stock that
can be sold subject to Rule 144, including the volume limitation or Rule 144(k),
can resell those shares free of or Rule 144 restriction or under another
currently effective resale prospectus. We may halt offers and sales of shares
under that prospectus under certain circumstances.
MARKET INTEREST RATES MAY REDUCE THE VALUE OF THE COMMON STOCK.
One of the factors that investors consider important in deciding whether to
buy or sell shares of a REIT is the distribution rate on such shares, as a
percentage of the price of such shares, relative to market interest rates. If
market interest rates go up, prospective purchasers of REIT shares may expect a
higher distribution rate. Higher interest rates would not, however, increase the
funds available for us to distribute, and, in fact, would likely increase our
borrowing costs and decrease funds available for distribution. Thus, higher
market interest rates could cause the price of our common stock to fall.
- 15 -
Item 2. Properties
GEOGRAPHIC AND TENANT FOCUS
We focus on the facility requirements of information technology companies
in the Silicon Valley, which include space for office, research and development,
light manufacturing and assembly. With the Silicon Valley's highly educated and
skilled work force, history of numerous successful start-up companies and large
contingent of venture capital firms, we believe that this region will continue
to spawn successful new high-growth industries and entrepreneurial businesses to
an extent matched nowhere else in the United States. We believe that our focus
and thorough understanding of the Silicon Valley real estate market enable us
to:
- anticipate trends in the market;
- identify and concentrate our efforts on the most favorably located
sub-markets;
- take advantage of our experience and extensive contacts and
relationships with local government agencies, real estate brokers and
subcontractors, as well as with tenants and prospective tenants; and
- identify strong tenants
All of our properties are general purpose R&D properties, located in
desirable sub-markets of the Silicon Valley. Many of our properties have been
developed for, or leased to, single tenants, many of which are large, publicly
traded information technology companies. Most of our major tenants have occupied
our properties for many years under triple-net leases that require the tenant to
pay substantially all operating costs, including property insurance, real estate
taxes and general operating costs.
LEASING
The current leases for the properties typically have terms ranging from
three to ten years. Most of the leases provide for fixed periodic rental
increases. Substantially all of the leases are triple-net leases pursuant to
which the tenant is required to pay substantially all of the operating expenses
of the property, including all maintenance and repairs, excluding only certain
structural repairs to the building shell, property taxes and insurance. Most of
the leases contain renewal options which allow the tenant to extend the lease
based on adjustments to then prevailing market rates, or based on fixed rental
adjustments, which may be below market rates.
PROPERTY PORTFOLIO
All of our properties are R&D properties. Generally, our properties are
one- to four-story buildings of tilt-up concrete construction, have 3.5 or more
parking spaces per thousand rentable square feet, clear ceiling heights of less
than 18 feet, and range in size from 18,000 to 211,000 rentable square feet.
Most of the office space is open and suitable for configuration to meet the
tenants' requirements with the use of movable dividers.
The following table sets forth certain information relating to our
properties as of December 31, 1999.
Percentage Major
Total Leased as of Average Tenants'
No. of Rentable December 31, 1999 Rentable 1999 Annual
Location Properties Sq. Ft. 1999 Occupancy Major Tenants Sq. Ft. Base Rents (1)
- ------------------------------------------------------------------------------------------------------------------------------------
10401 Bubb(2) 1 20,330 100% 100% Celerity Systems 20,330 $ 386,255
2001 Logic 1 72,426 100% 100% Xilinx 1,477,902
45700 Northport Loop 1 47,570 100% 100% Philips Electronics 47,570 698,346
45738 Northport Loop 1 44,256 100% 100% EIC Corporation 44,256 532,643
4050 Starboard Drive 1 52,232 100% 100% Flash Electronics, Inc. 52,232 752,141
3501 W. Warren Ave.-
46600 Fremont Blvd. 1 67,864 100% 100% Alcatel Comptech, Inc 51,864 1,098,869
48800 Milmont Drive 1 53,000 100% 100% Premisys Communications 53,000 591,687
4750 Patrick Henry 1 65,780 100% 92% Intertrust Networking 65,780 1,016,301
4949 Hellyer Avenue 1 200,484 100% 100% Cisco Systems Inc. 200,484 2,033,580
- 16 -
Triangle Technology Park(3) 7 416,527 89% 97% Intevac Corporation 166,663 4,798,101
SDL, Inc. 102,150
Maxell Corporation 63,812
5850-5870 Hellyer 1 109,715 100% 100% Clear Logic, Inc. 64,805 1,322,204
Gaxzoox Networks, Inc. 44,910
2251 Lawson 1 125,000 100% 100% Amdahl Corporation 125,000 1,249,345
1230 Arques 1 60,000 100% 100% Amdahl Corporation 60,000 305,669
1250 Arques 4 200,000 100% 100% Amdahl Corporation 200,000 755,922
3120 Scott 1 75,000 100% 100% Amdahl Corporation 75,000 1,217,833
20400 Mariani 1 105,000 100% 100% Behring Diagnostics 105,000 1,008,000
10500 De Anza 1 211,000 100% 100% Apple Computer, Inc. 211,000 4,338,840
20605-705 Valley Green 2 142,000 100% 100% Apple Computer, Inc. 142,000 1,975,382
10300 Bubb 1 23,400 100% 100% Apple Computer, Inc. 23,400 393,120
10440 Bubb Road 1 19,500 100% 100% Linotext Digital Color 19,500 252,720
10460 Bubb 1 48,302 100% 100% General Surgical 48,302 579,624
Innovations, Inc.
1135 Kern Avenue 1 18,300 100% 100% Davicom Semiconductor, 18,300 244,029
1190 Morse/405 Tasman 1 28,350 100% 100% Coptec West 28,350 328,292
450 National 1 36,100 100% 100% Savi Technology, Inc. 36,100 345,756
3301 Olcott 1 64,500 100% 100% NEC Electronics, Inc. 64,500 1,103,153
2800 Bayview 1 59,736 100% 100% Concept System Design, 59,736 636,078
6850 Santa Teresa 1 30,000 0% 75% Vacant 160,146
140-150 Great Oaks-6781 2 105,300 100% 88% Atcor Corporation 52,000 746,813
Amtech Corporation 31,500
6540-6541 Via Del Oro 2 66,600 100% 100% Exsil Incorporated 20,078 613,145
Alcatel Network Systems, 17,400
Inc.
Modutek 17,400
6311-6351 San Ignacio 5 360,254 100% 100% On Command Video 131,320 3,738,213
Sequel, Inc. 66,042
Avnet, Inc. 53,494
Photon Dynamics 50,400
Teledex 30,000
6320-6360 San Ignacio 1 157,292 100% 100% Bell Sports, Inc. 63,638 1,573,237
Delrina/Symantec Corp. 45,000
- 17 -
2610 N. First St.&75 2 170,810 100% 100% Comerica Bank 93,984 2,103,850
County of Santa Clara 63,310
2033-2243 Samaritan 3 235,122 100% 100% Condor Systems 110,490 2,931,310
Texas Instrument 48,677
1170 Morse 1 34,750 100% 100% CA Parkinsons 34,750 385,064
3236 Scott 1 54,672 100% 100% Celeritek, Inc. 54,672 698,712
1212 Bordeaux 1 71,800 100% 100% ESL Incorporated 71,800 1,273,344
McCandless Technology 14 705,956 97.1% 99.7% Larscom, Inc. 118,708 8,816,272
Arrow Electronics, Inc. 104,606
Mektec Corporation 51,602
Sherpa Corporation 50,768
Chartered Semiconductor 45,312
Adaptec 42,700
Panasonic Industrial Co. 40,970
1600 Memorex Drive 1 107,500 100% 100% Sasco 107,500 714,999
1650 Richard Ave. 1 52,800 100% 100% Forward Technology 52,800 678,941
1700 Richard Ave. 1 58,783 100% 100% IXC Communications 58,783 235,130(2)
-------------------- ----------------
TOTAL 80 5,307,048 $ 69,237,107
-------------------- ----------------
(1) Annual cash rents do not include any effect for straight-lining.
(2) The property was purchased during 1999. The 1999 Annual Base Rent reflects
rent received from the date of acquisition through December 31, 1999.
We own 100% of all of the properties, except for one of the buildings in
the Triangle Technology Park, which is owned by a joint venture in which we,
through an operating partnership, own a 75% interest, and the property at 10401
Bubb Rd., which is owned by a joint venture in which we, through an operating
partnership, own an 83.33% interest.
- 18 -
LEASE EXPIRATIONS
The following table sets forth a schedule of the lease expirations for the
properties for each of the ten years beginning with 2000, assuming that none of
the tenants exercise existing renewal options or termination rights. The table
excludes 75,998 rentable square feet, that was vacant as of December 31, 1999.
Number of Percentage of Total Annual
Year of Lease Leases Rentable Square Footage 2000 Annual Base Rent Base Rent Represented By
Expiration Expiring Subject to Expiring Leases Under Expiring Leases (1) Expiring Leases (2)
- --------------------------------------------------------------------------------------------------------------------
2000 5 125,662 $ 1,176,828 1.4%
2001 19 457,087 5,135,835 6.3%
2002 20 1,122,542 15,938,232 19.7%
2003 13 542,348 6,545,823 8.1%
2004 23 1,203,949 15,499,233 19.1%
2005 12 506,651 7,284,471 9.0%
2006 4 745,321 22,496,351 27.8%
2007 5 271,281 3,001,213 3.7%
2008 1 125,000 1,384,538 1.7%
2009 2 131,209 2,577,972 3.2%
--------------------------------------------------------------------------------------------------
104 5,231,050 $81,040,496 100%
--------------------------------------------------------------------------------------------------
(1) The base rent for leases expiring in 2000 is based on January 2000 monthly
rents multiplied by 12. Base rent for all leases expiring after 2000 are
based upon scheduled 2000 annual rents.
(2) Based upon 2000 annual rents as discussed in Note (1).
RECENT DEVELOPMENTS
The Berg Group recently acquired approximately 9.5 acres of land in
Sunnyvale, California with an existing 98,500 rentable square foot shell
building and expansion space for approximately a 100,000 rentable square foot
building. This site has been leased to Global Centers, Inc. for 15 years with a
lease for the 98,500 square foot building commencing in April 2000 and a lease
for the 100,000 square foot building commencing in March 2001. The Company has
the option to acquire this project from the Berg Group upon its completion of
the 100,000 square foot building under the Berg Land Holdings Option Agreement.
The Company will receive no rents from this property prior to the exercise of
this option.
In January 2000, we acquired a newly constructed R & D property leased to
E-Tek Dynamics, Inc. on Automation Parkway in San Jose, California consisting of
80,640 square feet of rentable space. We acquired this property under the
Pending Projects Acquisition Agreement. We paid approximately $14.6 million for
this property. In connection with this acquisition, the operating partnerships
assumed total debt of approximately $5.0 million and issued a total of 1,346,480
O.P. Units to the Berg Group. The acquisition was effective as of January 5,
2000.
ENVIRONMENTAL MATTERS
To date, compliance with laws and regulations relating to the protection of
the environment, including those regarding the discharge of materials into the
environment has not had any material effects upon our capital expenditures,
earnings or competitive position.
Under various federal, state and local laws, ordinances and regulations, an
owner or operator of real property may be held liable for the costs of removal
or remediation of certain hazardous or toxic substances located on or in the
property. Such laws often impose liability on the owner and expose the owner to
governmental proceedings without regard to whether the owner knew of, or was
responsible for, the presence of the hazardous or toxic substances. The cost of
any required remediation or removal of such substances may be substantial. In
addition, the owner's liability as to any specific property is generally not
limited and could exceed the value of the property and/or the aggregate assets
of the owner. The presence of such substances, or the failure to properly remove
or remediate such substances, may also adversely affect the owner's ability to
sell or rent the
- 19 -
property or to borrow using the property as collateral. Persons who arrange for
treatment or the disposal of hazardous or toxic substances may also be liable
for the costs of any required remediation or removal of the hazardous or toxic
substances at a disposal facility, regardless of whether the facility is owned
or operated by such owner or entity. In connection with the ownership of the
properties or the treatment or disposal of hazardous or toxic substances, we may
be liable for such costs.
Some of our properties are leased, in part, to businesses, including
manufacturers, that use, store or otherwise handle hazardous or toxic substances
in their business operations. These operations create a potential for the
release of hazardous or toxic substances. In addition, ground water contaminated
by chemicals used in various manufacturing processes, including semiconductor
fabrication, underlies a significant portion of northeastern Santa Clara County,
where may of our properties are located.
Environmental laws also govern the presence, maintenance and removal of
asbestos. These laws require that owners or operators of buildings containing
asbestos properly manage and maintain the asbestos, that they adequately inform
or train those who may come into contact with asbestos and that they undertake
special precautions, including removal or other abatement in the event that
asbestos is disturbed during renovation or demolition of a building. These laws
may impose fines and penalties on building owners or operators for failure to
comply with these requirements and may allow third parties to seek recovery from
owners or operators for personal injury associated with exposure to asbestos
fibers. We are aware that there are abestos-containing materials, or ACMs,
present at several of the properties, primarily in floor coverings. We believe
that the ACMs present at these properties are generally in good condition and
that no ACMs are present at the remaining properties. We believe we are in
compliance in all material respects with all present federal, state and local
laws relating to ACMs and that if we were given limited time to remove all ACMs
present at the properties, the cost of such removal would not have a material
adverse effect on our financial condition, results of operations and ability to
make cash distributions to our stockholders.
Phase I assessments are intended to discover and evaluate information
regarding the environmental condition of the surveyed property and surrounding
properties. Phase I assessments generally include a historical review, a public
records review, an investigation of the surveyed site and surrounding properties
and the preparation and issuance of a written report, but do not include soil
sampling or sub-surface investigations and typically do not include an asbestos
survey. Environmental assessments have been conducted for about half of the
properties.
The environmental investigations that have been conducted on our properties
have not revealed any environmental liability that we believe would have a
material adverse effect on our financial condition, results of operations and
assets, and we are not aware of any such liability. Nonetheless, it is possible
that there are material environmental liabilities of which we are unaware. We
cannot assure you that future laws, ordinances, or regulations will not impose
any material environmental liability, or that the current environmental
condition of the properties has not been, or will not be, affected by tenants
and occupants of the properties, by the condition of properties in the vicinity
of the properties, or by third parties unrelated to us.
- 20 -
Item 3. Legal Proceedings
Neither we, the operating partnerships nor the properties are subject to
any material litigation nor, to our knowledge, is any material litigation
threatened against us, the operating partnerships or the properties. From time
to time, we are engaged in legal proceedings arising in the ordinary course of
our business, and we do not consider any of such proceedings to be material.
Item 4. Submission of Matters to a Vote of Security Holders
None.
- 21 -
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Our common stock is listed on the American Stock Exchange ("AMEX") and the
Pacific Exchange, Inc. and trades under the symbol "MSW." The previous halt in
trading instituted by AMEX, which began at the opening of trading on October 20,
1997, ended when trading resumed on December 8, 1998. The high and low sale
prices per share of common stock during each quarter of 1998 and 1999 were as
follows:
1999 1998
------------------------------ ------------------------------
Low High Low(1) High(1)
------------- ------------- ------------- -------------
1st Quarter 6 3/8 7 1/8 N/A N/A
2nd Quarter 7 1/16 8 7/8 N/A N/A
3rd Quarter 7 3/8 8 5/8 N/A N/A
4th Quarter(2) 7 3/16 8 5/16 6 1/2 11
(1) High and low information for the first three quarters of 1998 is not
presented because trading of the common stock was suspended during this
period.
(2) During the fourth quarter of 1998, amounts shown reflect high and low upon
commencement of trading.
As of March 15, 2000, the number of holders of record of the common stock
was 408. We declared and paid total dividends of $0.56 per share during 1999. No
dividends were declared or paid during 1998.
The closing price of our common stock on December 31, 1999 was $7.75 per
share.
- 22 -
Item 6. Selected Financial Data
The following table sets forth selected historical financial information
for Mission West Properties, Inc. See Part II - Item 7 "Management's Discussion
and Analysis of Financial Conditions and Results of Operations - Overview
"Company History" for discussion of business combinations and property
dispositions that materially affect the comparability of the selected financial
data. Selected consolidated financial data is derived from the audited financial
statements and notes thereto (see Part II - Item 8 "Consolidated Financial
Statements and Supplementary Data," below) and is as follows:
One Month Ended
Year Ended December 31, December 31, Year Ended November 30,
--------------------------------- ----------------- ----------------------------------
1999 1998 1997 1997 1996 1995
------------- ----------------- ----------------- ---------- ---------- ----------
(dollars in thousands)
OPERATING DATA:
Revenue:
Rental revenues $73,726 $27,285 $ 1,376 $ 7,065 $ 7,146
Tenant reimbursements 11,047 4,193 - - -
Other 1,220 278 $ 27 359 348 380
------------- ----------------- ----------------- ---------- ---------- ----------
Total revenues 85,993 31,756 27 1,735 7,413 7,526
------------- ----------------- ----------------- ---------- ---------- ----------
Expenses:
Property operating and
maintenance real estate taxes 11,467 4,821 - 246 1,643 1,783
Interest 11,623 4,685 - 425 3,045 3,435
Interest (related parties) 2,246 3,511 - - - -
General and administrative
expenses 1,185 1,501 139 1,467 991 945
Depreciation and amortization 13,156 5,410 - 246 1,369 1,352
------------- ----------------- ----------------- ---------- ---------- ----------
39,677 19,928 139 2,384 7,048 7,515
------------- ----------------- ----------------- ---------- ---------- ----------
Income before gain (loss) on sale
of real estate assets, minority
interest and income taxes 46,316 11,828 (112) (649) 365 11
Gain (loss) on sale - - - 4,736 (306) 76
Income (loss) before minority
interest and income taxes 46,316 11,828 (112) 4,087 59 87
Minority interest 39,785 12,049 - - - -
------------- ----------------- ----------------- ---------- ---------- ----------
Income (loss) before income taxes 6,531 (221) (112) 4,087 59 87
(Benefit) provision for income - - (38) 1,043 24 35
------------- ----------------- ----------------- ---------- ---------- ----------
Net income (loss) $ 6,531 $ (221) $ (74) $ 3,044 $ 35 $ 52
============= ================= ================= ========== ========== ==========
Basic income (loss) per share (1) $.52 $(.13) $(.05) $18.48 $.77 $1.12
Diluted income (loss) per $.52 $(.13) $(.05) $18.48 $.72 $1.06
PROPERTY AND OTHER DATA (2):
Total properties, end of period 80 71
Total square feet, end of period 5,307 4,519
Average monthly rental revenue
per square foot (3) $1.16 $0.95
Occupancy at end of period 99% 99%
FUNDS FROM OPERATIONS (2)(4): $59,079 $17,238
Cash flow from operations 60,298 $16,264 $ (46) $ (1,000) $1,221 $598
Cash flow from investing (12,084) (118) - 46,198 2,528 191
Cash flow from financing (41,907) (21,469) 150 (42,844) (1,204) (2,415)
December 31, November 30,
---------------------------------------------------- ------------------------------------
1999 1998 1997 1996 1995 1994
------------- ----------------- ----------------- ---------- ---------- ----------
(dollars in thousands)
BALANCE SHEET DATA (5)
Real estate assets, net of
accumulated depreciation $697,616 $516,029 - $46,285 $47,597 $49,612
Total assets 712,704 519,866 $ 5,763 47,570 50,963
Debt 133,952 184,389 - 31,967 34,382
Debt - related parties 31,193 20,752 - - - -
Total liabilities 215,212 213,234 552 32,142 33,433 36,243
Minority interest 396,810 273,379 - - - -
Stockholders' equity 100,682 33,253 5,211 14,182 14,137 14,720
Common stock outstanding 16,972,374 8,218,594 1,501,104 45,704 45,624 48,957
O.P. Units issued and
outstanding 76,205,789 60,151,697 - - - -
(1) As adjusted for the 1 for 30 reverse stock split in November 1997.
(2) Property and other data shown only as of December 31, 1999 and 1998.
- 23 -
(3) Average monthly rental revenue per square foot has been determined by
taking the total base rent for the period, divided by the number of months
in the period, and then divided by the total square feet of occupied space.
(4) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), FFO represents net income (loss) before minority interest of
unitholders (computed in accordance with GAAP), excluding gains (or losses)
from debt restructuring and sales of property, plus real estate related
depreciation and amortization (excluding amortization of deferred financing
costs and depreciation of non-real estate assets) and after adjustments for
unconsolidated partnerships and joint ventures. Management considers FFO an
appropriate measure of performance of an equity REIT because, along with
cash flows from operating activities, financing activities and investing
activities, it provides investors with an understanding of our ability to
incur and service debt and make capital expenditures. FFO should not be
considered as an alternative for net income as a measure of profitability
nor is it comparable to cash flows provided by operating activities
determined in accordance with GAAP. FFO is not comparable to similarly
entitled items reported by other REITs that do not define them exactly as
we define FFO. See Part II - Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Certain Policies.
(5) Balance sheet information for 1997 is shown as of December 31, 1997.
- 24 -
The following table sets forth selected historical financial information
for the Berg Properties (our accounting predecessor) as of and for the periods
indicated on an historical basis. Selected consolidated financial data is
derived from the audited financial statements and notes thereto (see Part II -
Item 8 "Consolidated Financial Statements and Supplementary Data," below) and is
as follows:
Six Months
Ended
June 30, Year Ended December 31,
------------ ------------------------------------
1998 1997 1996 1995
------------ ----------- ---------- ----------
(dollars in thousands)
OPERATING DATA:
Revenue:
Rental revenues $22,341 $40,163 $28,934 $23,064
Tenant reimbursements 3,826 6,519 3,902 4,193
------------ ----------- ---------- ----------
Total revenue 26,167 46,682 32,836 27,257
------------ ----------- ---------- ----------
Expenses:
Operating expenses 2,088 3,741 1,906 2,032
Real estate taxes 2,126 4,229 3,750 3,595
Management fee (related parties) 645 1,050 827 654
Interest (related parties) 61 248 293 357
Interest 3,044 5,919 6,090 6,190
Depreciation and amortization 3,862 7,717 6,739 6,323
------------ ----------- ---------- ----------
11,826 22,904 19,605 19,151
------------ ----------- ---------- ----------
Income before gain on sale of
real estate and extraordinary 14,341 23,778 13,231 8,106
item
Gain on sale - - - 20,779
------------ ----------- ---------- ----------
Income before extraordinary item 14,341 23,778 13,231 28,885
Extraordinary item - - 610 3,206
------------ ----------- ---------- ----------
Net income $14,341 $23,778 $13,841 $32,091
============ =========== ========== ==========
PROPERTY AND OTHER DATA:
Total properties, end of period 58 58 53 50
Total square feet, end of period 3,779 3,779 3,392 3,195
Average monthly rental revenue
per square foot (1) $0.95 $0.86 $0.78 $0.71
Occupancy at end of period 100% 97.7% 91.9% 87.4%
FUNDS FROM OPERATIONS(2) $18,203 $31,495 $19,970 $14,429
Cash flow from operations $17,798 $29,909 $20,248 $16,392
Cash flow from investing 690 (17,251) (29,275) (6,353)
Cash flow from financing (24,207) (8,432) 9,433 (10,013)
December 31,
June 30, ------------------------------------
1998 1997 1996 1995
------------ ----------- ---------- ----------
(dollars in thousands)
BALANCE SHEET DATA:
Real estate assets, net of
accumulated depreciation $95,600 $100,152 $90,710 $72,319
Total assets 104,546 113,950 97,651 73,730
Debt 37,868 76,507 73,416 69,543
Debt - related parties 156,632 1,975 2,546 3,051
Total liabilities 200,779 84,299 80,826 76,199
Partners' (deficit) / equity (96,233) 29,651 16,825 (2,469)
(1) Average monthly rental revenue per square foot has been determined by
taking the base rent for the period, divided by the number of months in the
period, and then divided by the total square feet of occupied space.
(2) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), FFO represents net income (loss) before minority interest of
unitholders (computed in accordance with GAAP), excluding gains (or losses)
from debt restructuring and sales of property, plus real estate related
depreciation and amortization (excluding amortization of deferred financing
costs and depreciation of non-real estate assets) and after adjustments for
unconsolidated partnerships and joint ventures. Management considers FFO an
appropriate measure of performance of an equity REIT because, along with
cash flows from operating activities, financing activities and investing
activities, it provides investors with an understanding of our ability to
incur and service debt and make capital expenditures. FFO should not be
considered as an alternative for net income as a measure of profitability
nor is it comparable to cash flows provided by operating activities
determined in accordance with GAAP. FFO is not comparable to similarly
entitled items reported by other REITs that do not define them exactly as
we define FFO. See Part II - Item 7 "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Certain Policies.
- 25 -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS, INCLUDING BUT NOT
LIMITED TO STATEMENTS WITH RESPECT TO THE FUTURE FINANCIAL PERFORMANCE,
OPERATING RESULTS, PLANS AND OBJECTIVES OF MISSION WEST PROPERTIES, INC.. ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED DEPENDING UPON A
VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED IN PART I - ITEM 1 "BUSINESS -
RISK FACTORS."
OVERVIEW
In May 1998, we, the Berg Group members, John Kontrabecki, and certain
other persons entered into the Acquisition Agreement providing, among other
things, for our acquisition of interests as the sole general partner in the
operating partnerships. At the time, the operating partnerships held
approximately 4.34 million rentable square feet of R&D property located in
Silicon Valley. The agreement also provided for the parties to enter into the
Pending Projects Acquisition Agreement, the Berg Land Holdings Option Agreement
and the Exchange Rights Agreement, following stockholder approval. Effective
July 1, 1998, we consummated our acquisition of the general partnership
interests in the operating partnerships. We effected our purchase of the general
partnership interests by issuing to each of the operating partnerships a demand
note bearing interest at 7.25% per annum, aggregating $35.2 million of principal
payable no later than July 1, 2000 (the `Demand Notes"). Effective July 1, 1998,
all limited partnership interests in the operating partnerships were converted
into 59,479,633 O.P. Units, representing ownership of approximately 87.89% of
the operating partnerships, upon consummation of the acquisition. Each O.P. Unit
may be exchanged for one share of common stock pursuant to certain exchange
rights and is treated as a share of common stock on a fully diluted basis and
also represents our minority ownership interests. At December 31, 1999, we owned
an 18.28% general partnership interest in the operating partnerships, taken as a
whole, on a weighted average basis.
On December 29, 1998, we sold 6,495,058 shares of common stock at a price
of $4.50 per share to a number of accredited investors to complete our May 1998
private placements. The aggregate proceeds, net of fees and offering costs, of
approximately $27.8 million were used to pay down amounts outstanding under the
Demand Notes due to the operating partnerships. Also as of December 29, 1998, we
and the limited partners in the operating partnerships entered into the Exchange
Rights Agreement, and we entered into the Pending Projects Acquisition Agreement
and the Berg Land Holdings Option Agreement with the Berg Group and other
sellers.
In April 1999, we acquired an approximately 515,700 square foot
five-building R&D complex, leased to Microsoft, on L'Avenida Avenue in Mountain
View, California by purchasing all of the interests of Baccarat Shoreline LLC,
which we have renamed Mission West Shoreline LLC, a wholly owned limited
liability company of Mission West Properties L.P. In the transaction, we assumed
debt totaling approximately $57.1 million on a consolidated basis, and the
former members of Baccarat Shoreline LLC received 13,206,629 O.P. Units, of
which various members of the Berg Group received 12,467,058 O.P. Units.
In July 1999, we completed a public offering of 8,680,000 shares of our
common stock at $8.25 per share. The net proceeds of approximately $66.9
million, after deducting underwriting discounts and other offering costs, were
used to reduce the outstanding balance on the line of credit with Wells Fargo
Bank, N.A. ("Wells Fargo line") by approximately $41.0 million and to reimburse
Microsoft Corporation for approximately $25.0 million for shell and tenant
improvements on the Microsoft project. The remaining net proceeds of
approximately $900,000 were retained for general corporate purposes.
At December 31, 1999, the outstanding balance under the Demand Notes owed
to the operating partnerships was $1.1 million. The principal of the Demand
Notes, along with the interest expense, which is interest income to the
operating partnerships, is eliminated in consolidation and is not included in
the corresponding line items within the consolidated financial statements.
However, the interest income earned by the operating partnerships, which is
interest expense to us, in connection with this debt is included in the
calculation of minority interest as reported on the consolidated statement of
operations, thereby reducing our net income by this same amount. At present, our
only means for repayment of this debt be it in this form or refinanced with
another lender, is through distributions received from the operating
partnerships in excess of the amount of dividends to be paid to our
stockholders.
We intend to elect and qualify to be taxed as a REIT for the the taxable
year ended December 31, 1999.
We have two wholly owned corporate subsidiaries, MIT Realty, Inc. and
Mission West Executive Aircraft Center. Both corporations are inactive.
- 26 -
COMPANY HISTORY
Our original predecessor was formed in 1969 as Palomar Mortgage Investors,
a California business trust. It operated as a REIT, investing primarily in
short-term and intermediate-term construction and development loans secured by
first trust deeds on real property. In 1974, Palomar Mortgage Investors
terminated new loan activity and, in 1975, changed its name to Mission
Investment Trust. In 1979, Mission Investment Trust terminated its status as a
REIT and began to develop and market the properties that it owned. In 1982,
Mission West Properties was incorporated as a successor to Mission Investment
Trust.
In January and May 1997, we sold all of our real estate assets to Spieker
Properties, L.P. for approximately $50.5 million in cash. In February 1997, we
paid a special dividend of $9.00 per share to our stockholders. After the sale
of assets and the payment of the dividend to stockholders, we retained only
nominal assets. The board of directors and management considered available
strategic alternatives for the remaining corporate entity, including possible
business or asset acquisitions or combinations, a sale of the corporate entity,
and outright liquidation.
Subsequently, we accepted a proposal by the Berg Group to acquire control
of the corporation as a vehicle to acquire R&D properties, or interests in
entities owning such properties, from the Berg Group. On May 27, 1997, we
entered into a stock purchase agreement with the Berg Group, which transferred
most of its share purchase rights to unaffiliated accredited investors. The
transaction was completed on September 2, 1997, at which time all of our
existing officers and directors resigned and the Berg Group and the other
investors acquired a 79.6% controlling ownership position as a group.
In July 1998, we acquired control of four existing limited partnerships
(referred to collectively as the "operating partnerships"), by becoming the sole
general partner in each one effective July 1, 1998 for financial accounting and
reporting purposes ("the Acquisition"). We purchased an approximate 12.11%
interest in each of the operating partnerships. We effected the purchase of our
general partnership interests by issuing to the operating partnerships separate
demand notes bearing interest at 7.25% per annum. The total principal amount of
the Demand Notes issued was $35,200. All limited partnership interests in the
operating partnerships were converted into 59,479,633 units of limited
partnership interest, which represented an ownership interest of approximately
87.89% of the operating partnerships. The operating partnerships are the
vehicles through which we will own our assets, will make our future
acquisitions, and generally conduct our business.
On October 20, 1997, we paid a further distribution of $3.30 per share to
our stockholders from available cash, including approximately $900,000 received
in the September 1997 transaction. No portion of the distribution was paid on
shares acquired by the Berg Group and its co-investors. In connection with that
distribution, the AMEX halted trading of the common stock on October 20, 1997.
Neither we nor the AMEX set a deadline for the resumption of trading, nor did
the AMEX provide guidance beyond declaring its desire that we have a firm
commitment to acquire a controlling interest in the R&D properties of the Berg
Group and to raise additional capital. On November 23, 1998, we sent to
stockholders a proxy statement/prospectus for a meeting on December 28, 1998 to
approve or ratify the transactions constituting our UPREIT acquisition, our sale
of common stock under two May 1998 private placements, the pending projects
acquisition agreement and the Berg land holdings option agreement between us and
the Berg Group, and our reincorporation in the State of Maryland. On December 8,
1998, the AMEX recommenced trading of our common stock.
On December 28, 1998, our stockholders approved and ratified the proposed
transactions, and on December 30, 1998, we reincorporated under the laws of the
State of Maryland through the merger of Mission West Properties into Mission
West Properties, Inc. Shares of the former company, Mission West Properties, a
California corporation, which were outstanding at December 30, 1998, were
converted into shares of our common stock on a one-for-one basis.
RESULTS OF OPERATIONS
Our acquisition of the general partnership interests in the operating
partnerships during the third quarter of 1998 substantially altered our
operations. As a consequence, operating results for the year ended December 31,
1999 are not meaningfully comparable to our operating results for the same
period of 1998, and operating results for the year ended December 31, 1998 are
not meaningfully comparable to operating results for the thirteen-month period
ended December 31, 1997.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1999 TO THE YEAR ENDED DECEMBER 31,
1998.
As of December 31, 1999, we owned a general partnership interest of 20.28%,
21.32%, 15.33% and 12.18% in Mission West Properties, L.P., Mission West
Properties, L.P. I, Mission West Properties, L.P. II and Mission West
Properties, L.P. III, respectively, which are the operating partnerships. We
owned an 18.28% general partnership interest in the operating
- 27 -
partnerships, taken as a whole, on a weighted average basis as of December 31,
1999. We owned a 12.02% general partnership interest in the operating
partnerships, taken as a whole, on a weighted average basis as of December 31,
1998.
The year ended December 31, 1999 was our first full year of operation with
the R & D properties acquired from the Berg Group and others in July 1998.
For the year ended December 31, 1999, rental revenues from real estate were
approximately $73.7 million, which included an increase of approximately $4.3
million over base rental revenues to reflect rental revenues on a straight-line
basis. Tenant reimbursements were approximately $11.0 million, and other income,
including interest, was approximately $1.2 million. Included in other income is
a gain of $393,000 from the sale of securities. Total expenses for the year
ended December 31, 1999, were approximately $39.7 million, of which
approximately $38.5 related directly to our real estate operations. General and
administrative expenses accounted for the remainder of the expenses.
The minority interest portion of income was approximately $46.3 million,
resulting in net income of approximately $6.5 million for the year ended
December 31, 1999. Minority interest represents the limited partners' ownership
interest of 81.72%, on a weighted average basis as of December 31, 1999, in the
operating partnerships.
COMPARISON OF THE YEAR ENDED DECEMBER 31, 1998 TO THE THIRTEEN-MONTH PERIOD
ENDED DECEMBER 31, 1997.
As of December 31, 1998, we owned a general partnership interest of 12.04%,
12.11%, 11.96% and 12.11% in Mission West Properties, L.P., Mission West
Properties, L.P. I, Mission West Properties, L.P. II and Mission West
Properties, L.P. III, respectively, which are the operating partnerships. The
acquisition of the general partnership interests in the operating partnerships
in July 1998 was accounted for as a purchase. Our consolidated operating results
for the year ended December 31, 1998 include the results of operations, assets
and other financial data for the operating partnerships from July 1, 1998
through December 31, 1998. This, the results of operations for the year ended
December 31, 1998 include only six months of activity for our current real
estate operations, and a comparison to the full year ended December 31, 1999 is
not meaningful and has been omitted.
For the year ended December 31, 1998, rental revenues from real estate were
approximately $27.3 million, which included an adjustment for straight-line
rents of approximately $1.6 million. Tenant reimbursements were $4.2 million,
and other income, including interest, totaled approximately $278,000. Total
expenses for 1998 reached almost $20.0 million, of which approximately $18.4
million related directly to newly acquired real estate operations. General and
administrative expenses accounted for the remainder of our expenses.
The minority interest's portion of income was approximately $12.0 million,
resulting in a consolidated net loss of $221,000 to us for the same period.
Minority interest represents the limited partners' ownership interest of 87.98%,
on a weighted average basis, in the operating partnerships.
During the fiscal year ended December 31, 1997, we sold our entire real
estate portfolio of 11 properties. Upon completion of the sale of nine of the
properties, we received approximately $50.5 million in cash, from which we
repaid all debt encumbering the properties, thereby eliminating all future
interest expense, and paid a majority of the related transaction costs,
including $3.0 million in "break-up" fees from previously terminated sales
transactions. We recognized a net gain of approximately $4.7 million on the
sale. In addition, we declared and paid a special dividend of $9.00 per share on
February 27, 1997 to stockholders of records on February 19, 1997 and a special
cash distribution of $3.30 per share on October 21, 1997 to stockholders of
record on August 28, 1997. Accordingly, a comparison of the operating results
for that period with the operating results for the year ended December 31, 1998
is not meaningful and has been omitted.
CHANGES IN FINANCIAL CONDITION
DECEMBER 31, 1999 COMPARED WITH DECEMBER 31, 1998
During 1999, we acquired five newly constructed R&D properties, all located
in Silicon Valley. These acquisitions added approximately 788,000 square feet of
rentable space and were acquired from the Berg Group under the Berg Land
Holdings Option Agreement and the Pending Projects Acquisition Agreement. The
total gross acquisition price for these five properties was approximately $193.6
million. We financed these acquisitions by the operating partnerships'
assumption of $36.4 million of debt due Berg & Berg Enterprises, Inc. the
assumption by the operating partnerships of other liabilities of $32.8 million
- 28 -
(including the assumption of the sellers' obligation to reimburse Microsoft
Corporation for shell and tenant improvements of $32.1 million) and, the
issuance of 16,311,232 O.P. Units, of which 15,420,564 O.P. Units were issued to
members of the Berg Group.
Michael Anderson, our former Vice President, Chief Operating Officer and a
director, resigned from the Company effective April 30, 1999. We had previously
issued 200,000 shares of our common stock to Mr. Anderson in exchange for a note
receivable payable to us for $900,000. Upon Mr. Anderson's resignation, we
purchased 117,361 of the 200,000 shares of common stock, and canceled the
related share purchase obligation representing $528,000 of the original $900,000
note receivable. We waived interest expense of approximately $32,000 due on the
portion of the note receivable relating to the canceled shares. The remaining
$372,000 of the note receivable was paid in full during the second quarter of
1999.
In July 1999, we completed a public offering of 8,680,000 shares of our
common stock at $8.25 per share. The net proceeds of approximately $66.9
million, after deducting underwriting discounts and other offering costs, were
used to reduce the outstanding balance on the Wells Fargo line by approximately
$41.0 million and to reimburse Microsoft Corporation for approximately $25.0
million for shell and tenant improvements on the Microsoft project. The
remaining net proceeds of approximately $900,000 were retained for general
corporate purposes.
During the third quarter of 1999, we entered into a new lease agreement for
2001 Logic Drive with Xilinx Incorporated ("Xilinx"). The lease agreement
includes an option granted to Xilinx to purchase the building at a predetermined
price. In September 1999, in accordance with the option provisions of the lease
agreement, Xilinx paid to us a deposit of approximately $21.6 million to secure
its option right. Xilinx can exercise the option only between April 30, 2000 and
July 31, 2000. Upon exercise of the option, the Company must refund the deposit
amount and Xilinx must deposit into escrow funds equal to the purchase price of
$21.6 million. In the event Xilinx does not exercise its option, we must refund
the deposit in full to Xilinx, without interest.
During the year ended December 31, 1999, options were exercised for a total
of 191,920 shares. The exercise price for all options exercised was $4.50 per
share and total proceeds to the Company were approximately $863,000.
DECEMBER 31, 1998 COMPARED WITH DECEMBER 31, 1997
As a result of our acquisition of the general partnership interests and
control of the operating partnerships, our financial statements consolidate the
financial position and results of the operating partnerships, effective as of
July 1, 1998. Accordingly, through our general partnership interests, as of
December 31, 1998, we owned, operated and managed 71 properties representing 4.5
million rentable square feet.
On September 23, 1998, in our capacity as the general partner of the
operating partnerships, we obtained a loan from Prudential Insurance Company of
America in the amount of $130.0 million (the "Prudential Loan"). We used the net
proceeds of the loan to repay approximately $14.2 million of mortgage notes
payable, and used the remaining amount to reduce the outstanding principal
balance owing under the mortgage notes payable to the Berg Group, which is a
related party. The loan is cross-collateralized and secured by a single deed of
trust encumbering 18 properties improved with 24 buildings and consisting of
approximately 1.7 million square feet of rentable space, all of which are owned
by the operating partnerships. The loan bears interest at a fixed rate of 6.56%
per annum, matures on October 15, 2008 and is payable in monthly installments of
approximately $827,000, which includes principal, based upon a 30-year
amortization, and interest. The Prudential Loan has a substantial prepayment
penalty. The loan is nonrecourse to the operating partnerships and us, except
with respect to certain matters such as environmental liability relating to the
encumbered properties, the payment of taxes and assessments with respect to the
encumbered properties, the responsibility to return security deposits to the
tenants of the encumbered properties, insurance or condemnation proceeds that
are not properly applied under the terms of the loan, damages that result from
early termination or amendment to specified major leases, waste of the subject
properties, bankruptcy or insolvency of any of the operating partnerships or us,
and any fraud or misrepresentations by us or the operating partnerships in
connection with the loan. In addition, some limited partners have guaranteed
portions of the loan.
On September 30, 1998, the operating partnerships assumed a $100.0 million
line of credit with Wells Fargo Bank, N.A from the Berg Group. The line of
credit was subsequently reduced to $50 million in October 1999. The Wells Fargo
line matured February 29, 2000 and bore interest at the lesser of (a) the Wells
Fargo prime rate in effect on the first day of each calendar month; (b) LIBOR
plus 1.65%; or (c) the Wells Fargo Funds Rate quoted on the first day of each
calendar month plus 1.65%. Borrowings outstanding at December 31, 1998 were
approximately $27.2 million.
- 29 -
During the fourth quarter of 1998, we closed on the acquisition of two
newly constructed R&D properties located on Richard Avenue in Santa Clara,
California and Hellyer Avenue in San Jose, California. These acquisitions added
approximately 163,000 square feet of rentable space and were acquired from the
Berg Group under the Berg Land Holdings Option Agreement and the Pending
Projects Acquisition Agreement. The total gross acquisition price for these two
properties was approximately $13.7 million. Through the operating partnerships,
we assumed approximately $9.6 million of debt due Berg & Berg Enterprises, Inc.
and issued 672,064 L.P. Units of which 618,684 were issued to various members of
the Berg Group.
On March 30, 1998, Michael J. Anderson, our former Vice President and Chief
Operating Officer, purchased 200,000 shares of common stock at $4.50 per share
in exchange for a $900,000 note payable to us and due March 30, 2003. The note
was a full recourse promissory note bearing interest at an annual rate of 5.59%
and was collateralized by a pledge of the shares. Additionally, in December
1998, Mr. Anderson acquired 25,000 shares of our common stock upon partial
exercise of his option grant. The exercise price was $4.50 per share.
On December 29, 1998, we completed the sale of 6,495,058 shares of common
stock, at a price of $4.50 per share, to a number of accredited investors in two
May 1998 private placements. The aggregate proceeds to us, net of a fee and
offering costs, was approximately $27.8 million. We used the proceeds to pay
outstanding amounts under the Demand Notes owed to the operating partnerships.
Offering costs included 200,000 shares of common stock issued for services
rendered with the placement of such shares.
Following the sale of all 11 of our properties in 1997, coupled with the
cash dividends paid to stockholders, only cash and receivables remained and,
therefore, the resulting corporate entity had insignificant revenue-generating
capabilities and cash-generating capabilities and minimal operations, aside from
interest income and general and administrative expenses.
LIQUIDITY AND CAPITAL RESOURCES
We expect our principal source of liquidity for distributions to
stockholders, debt service, leasing commissions and recurring capital
expenditures to be Funds from Operations ("FFO"), and the borrowings under the
line of credit with the Berg Group. We expect these sources of liquidity to be
adequate to meet projected distributions to stockholders and other presently
anticipated liquidity requirements in 2000. We expect to meet our long-term
liquidity requirements for the funding of property development, property
acquisitions and other material non-recurring capital improvements through
long-term secured and unsecured indebtedness and the issuance of additional
equity securities by us. We expect our FFO to be the principal source of
liquidity for distributions, debt service, leasing commissions and recurring
capital
Our $50 million Wells Fargo line of credit expired on February 29, 2000 and
was repaid with proceeds from and replaced by a $50 million line of credit from
the Berg Group. The Wells Fargo line of credit was collateralized by 14 of our
properties and was guaranteed by Mr. Berg and certain other members of the Berg
Group. The Berg Group line of credit is currently collateralized by seven
properties, bears interest at LIBOR plus 1.30 percent, and matures in March,
2001. We believe that the terms of the Berg Group line of credit were more
favorable than those available from Wells Fargo or similar lenders. See "Item 1
- -- Business -- Rish Factors -- Our contractual business realationships with the
Berg Group presents additional conflicts of interest which may result in the
realization of economic benefits or the defferal of tax liabilities by the Berg
Group without equivolent benefits to our stockholders."
At December 31, 1999, we had total indebtedness of approximately $165.1
million, including approximately $134.0 million of fixed rate mortgage debt and
approximately $31.1 million of variable rate mortgage debt due to a related
party debt. Of total fixed debt, the Prudential Secured Loan represented
approximately $128.3 million. During the year ended December 31, 1999,
distributions payable to various members of the Berg Group of approximately
$27.3 million relating to the first, second and third quarters of 1999 were
converted to related party debt, on terms identical to the Wells Fargo line of
credit.
As of December 31, 1999, our debt to total market capitalization ratio,
which is computed as our total debt outstanding divided by the sum of total debt
outstanding plus the market value of common stock (based on an $7.70 per share
price) on a fully diluted basis, including the conversion of all O.P. Units into
common stock, was approximately 18.6% based upon an estimated total market
capitalization of approximately $887.3 million.
- 30 -
The following table sets forth certain information regarding debt
outstanding as of December 31, 1999:
At December Maturity Interest
Debt Description Collateral Properties 31, 1999 Date Rate
- -------------------------------------------- -------------------------------------------- ------------- ----------- ------------
Line of Credit: ($ in
thousands)
Wells Fargo 1810 McCandless Drive, Milpitas, CA 2/00 Variable
1740 McCandless Drive, Milpitas, CA
1680 McCandless Drive, Milpitas, CA
1600 McCandless Drive, Milpitas, CA
1500 McCandless Drive, Milpitas, CA
1450 McCandless Drive, Milpitas, CA
1350 McCandless Drive, Milpitas, CA
1325 McCandless Drive, Milpitas, CA
1425 McCandless Drive, Milpitas, CA
1526 McCandless Drive, Milpitas, CA
1575 McCandless Drive, Milpitas, CA
1625 McCandless Drive, Milpitas, CA
1745 McCandless Drive, Milpitas, CA
1765 McCandless Drive, Milpitas, CA
Mortgage Notes Payable (related parties):
2033-2043 Samaritan Drive, San Jose, CA $31,193 12/00 Variable
2133 Samaritan Drive, San Jose, CA -------
2233-2243 Samaritan Drive, San Jose, CA
Mortgage Notes Payable)
Prudential Capital Group 20400 Mariani, Cupertino, CA 1,902 3/09 8.75%
New York Life Insurance Company 10440 Bubb Road, Cupertino, CA 405 8/09 9.625%
Home Savings & Loan Association 10460 Bubb Road, Cupertino, CA 477 1/07 9.5%
Mellon Mortgage Company 3530 Bassett, Santa Clara, CA 2,853 6/01 8.125%
Prudential Insurance Company of America 10300 Bubb, Cupertino, CA 128,315 10/08 6.56%
10500 N. DeAnza, Cupertino, CA
4050 Starboard, Fremont, CA
45700 Northport Loop, Fremont, CA
45738 Northport Loop, Fremont, CA
450-460 National, Mountain View, CA
4949 Hellyer, San Jose, CA
6311 San Ignacio, San Jose, CA
6321 San Ignacio, San Jose, CA
6325 San Ignacio, San Jose, CA
6331 San Ignacio, San Jose, CA
6341 San Ignacio, San Jose, CA
6351 San Ignacio, San Jose, CA
3236 Scott, Santa Clara, CA
3560 Bassett, Santa Clara, CA
3570 Santa Clara, CA
3580 Bassett, Santa Clara, CA
1135 Kern, Sunnyvale, CA
1212 Bordeaux, Sunnyvale, CA
1230 E. Arques, Sunnyvale, CA
1250 E. Arques, Sunnyvale, CA
1170 Morse, Sunnyvale, CA
3540 Bassett, Santa Clara, CA
3542 Bassett, Santa Clara, CA
3544 Bassett, Santa Clara, CA
3550 Bassett, Santa Clara, CA
-------------
Mortgage Notes Payable Subtotal 133,952
-------------
Total $165,145
-------------
- 31 -
The following table presents certain information concerning projects for
which we, through our interests in the operating partnerships, have the right to
acquire under the Pending Development Projects Acquisition Agreement or the Berg
Land Holdings Option Agreement. The table includes only those projects for which
development has commenced.
Approximate
Rentable Area Anticipated Total Estimated
Property (Square Feet) Acquisition Date Acqusition Value
- ------------------------ --------------- ------------------ ------------------
Pending Projects:
Automation (1 building) 61,056 Q2 2000 $ 6,700
Automation (1 building) 114,028 Q1 2001 12,700
--------------- ------------------
Subtotal 175,084 19,400
---------------
Berg Land Holdings:
Hellyer IV (50% JV) 160,000 Q2 2000 11,600
Hellyer View 77,184 Q3 2000 9,300
Hellyer III (Phase I) 117,740 Q4 2000 14,800
Candescent (Phase I) 255,000 Q1 2000 25,000
Hellyer Vista (Phase I) 125,000 Q4 2000 15,000
--------------- ------------------
Subtotal 734,924 75,700
--------------- ------------------
TOTAL 910,008 $95,100
HISTORICAL CASH FLOWS
Net cash provided by operating activities for the year ended December 31,
1999 was approximately $60.3 million, compared to, net cash used in operating
activities of approximately $16.3 million for the year ended December 31, 1998
and the thirteen-month period ended December 31, 1997, respectively. The change
was a direct result of our acquisition of our general partnership interests in
the operating partnerships during the third quarter of 1998.
Net cash used in investing activities was approximately $12.1 million for
the year ended December 31, 1999, compared to net cash used in investing
activities of approximately $118,000 and net cash provided by investing
activities of approximately $46.2 million for the year ended December 31, 1998
and for the thirteen-month period ended December 31, 1997, respectively. Cash
used in investing activities during 1999 related to improvements made to
existing real estate assets, as well as to payments made to Microsoft
Corporation for shell and tenant improvements, which were partially offset by
the receipt of $21.6 million for a refundable option payment. Cash used in
investing activities during 1998 related solely to improvements made to existing
real estate assets acquired as part of our investment in the operating
partnerships. Net cash provided by investing activities in 1997 related solely
to the sales proceeds realized by us on the final disposition of our real estate
holdings held prior to 1998.
Net cash used in financing activities was approximately $41.9 million for
the year ended December 31, 1999 compared to $21.5 and $42.7 million for the
year ended December 31, 1998 and for the thirteen-month period ended December
31, 1997, respectively. During 1999, we reduced debt outstanding by utilizing
net proceeds from the underwritten public offering of 8,680,000 shares of common
stock for net proceeds of $66.9 million and by utilizing cash provided by
operating activities. For the year ended December 31, 1999, we paid dividends to
our stockholders and made distributions to our O.P Unit holders totaling $6.5
million. During 1998, we reduced debt outstanding by utilizing proceeds from new
borrowings, issuing 6,495,058 shares of common stock for net proceeds of
approximately $28.1 million and utilizing cash provided by operating activities.
During the thirteen-month period ended December 31, 1997, we repaid all debt
outstanding at that time, and made dividend payments aggregating approximately
$18.9 million.
CAPITAL EXPENDITURES
The properties require periodic investments of capital for tenant-related
capital expenditures and for general capital improvements. For the years ended
December 31, 1994 through December 31, 1999, the recurring tenant improvement
costs and leasing commissions incurred with respect to new leases and lease
renewals of the properties previously owned or controlled by members of the Berg
Group averaged approximately $1.5 million annually. We will have approximately
582,749 rentable square feet under expiring leases from January 1, 2000 through
December 31, 2001. We expect that the average annual cost of recurring tenant
improvements and leasing commissions, related to these properties, will be
approximately $.75 million annually from January 1, 2000 through December 31,
2001. We believe we will recover
- 32 -
substantially all of these sums from the tenants under the new or renewed leases
through increases in rental rates. Until we actually sign the leases, however,
we cannot assure you that this will occur. We expect to meet our long-term
liquidity requirements for the funding of property acquisitions and other
material non-recurring capital improvements through long-term secured and
unsecured indebtedness and the issuance of additional equity securities by the
Company, but cannot be assumed that we will be able to meet our requirements on
favorable terms. See "----Certain Policies."
FUNDS FROM OPERATIONS
As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), FFO represents net income (loss) before minority interest of O.P
unit holders, computed in accordance with generally accepted accounting
principles, excluding gains (or losses) from debt restructuring and sales of
property, plus real estate related depreciation and amortization, excluding
amortization of deferred financing costs and depreciation of non-real estate
assets, and after adjustments for unconsolidated partnerships and joint
ventures. Management considers FFO an appropriate measure of performance of an
equity REIT because, along with cash flows from operating activities, financing
activities and investing activities, it provides investors with an understanding
of our ability to incur and service debt, and make capital expenditures. FFO
should not be considered as an alternative for net income as a measure of
profitability nor is it comparable to cash flows provided by operating
activities determined in accordance with generally accepted accounting
principles, nor is FFO necessarily indicative of funds available to meet our
cash needs, including our need to make cash distributions to satisfy REIT
requirements.
Our definition of FFO also assumes conversion at the beginning of the
period of all convertible securities, including minority interests that might be
exchanged for common stock. Our FFO does not represent the amount available for
management's discretionary use, as such funds may be needed for capital
replacement or expansion, debt service obligations or other commitments and
uncertainties.
Furthermore, FFO is not comparable to similarly entitled items reported by
other REITs that do not define FFO exactly as we do. FFO for the years ended
December 31, 1999 and 1998 is as follows:
For the Year Ended December 31,
---------------------------------------------------------
1999 1998
-------------------------- --------------------------
(dollars in thousands)
Net income (loss) $ 6,531 $ (221)
Add:
Minority Interest 39,785 12,041
Depreciation 13,156 5,410
Less:
Gain on sale of securities (393) -
-------------------------- -------------------------
FFO $59,079 $17,238
========================== ==========================
OVERVIEW OF DISTRIBUTION POLICY
We intend to make regular quarterly distributions to holders of common
stock based on our funds available for distribution ("FAD"), which is calculated
as FFO less straight-lines rents, leasing commissions paid and capital
expenditures made during the respective period. Our ability to make such
distributions will be affected by numerous factors including, most importantly,
the receipt of distributions from the operating partnerships.
FAD does not represent cash generated from operating activities in
accordance with generally accepted accounting principles and is not necessarily
indicative of cash available to fund cash needs. The actual return that we will
realize and the amount available for distributions to stockholders will be
affected by a number of factors, including the revenues received from our
properties, our operating expenses, the interest expense incurred on borrowings
and planned and unanticipated capital expenditures.
We anticipate that cash available for distribution will exceed earnings and
profits for federal income tax purposes, as the latter figure takes into account
non-cash expenses, such as depreciation and amortization, that we will incur.
Distributions, other than capital gain distributions, by us to the extent of our
current and accumulated earnings and profits for federal income tax purposes
most likely will be taxable to U.S. stockholders as ordinary dividend income
unless a stockholder is a tax-exempt entity. Distributions in excess of earnings
and profits generally will be treated as a non-taxable reduction of the U.S.
stockholder's basis in the common stock to the extent of such basis, and
thereafter as taxable gain. The percentage of such distributions in excess of
earnings and profits, if any, may vary from period to period.
- 33 -
Distributions will be determined by our board of directors and will depend
on actual FAD, our financial condition, capital requirements, the annual
distribution requirements under the REIT provisions of the Code and such other
factors as the board of directors deems relevant. For a discussion of the risk
that we will not meet our distribution objectives, see Part I - Item 1 "Business
- - Risk Factors--Stockholders are not assured of receiving cash distributions
from us." The calculation of FAD for the years ended December 31, 1999 and 1998
is as follows:
For the Year Ended December 31,
---------------------------------------------------------
1999 1998
-------------------------- --------------------------
(dollars in thousands)
FFO $59,079 $17,238
Less:
Straight-lined rents 4,340 1,624
Leasing commissions 434 140
Capital expenditures 708 118
-------------------------- --------------------------
FAD $53,597 $15,356
========================== ==========================
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
We have adopted policies with respect to investment, financing, conflicts
of interest and other activities. These policies have been formulated by our
board of directors, are set forth in our charter, bylaws, operating partnership
agreements or agreements with the Berg Group, and generally may be amended or
revised from time to time, subject to applicable agreement terms, at the
discretion of the board of directors without a vote of the stockholders. Among
other things, these policies provide that:
- so long as the Berg Group members and their affiliates, other than us
and the operating partnerships, beneficially own, in the aggregate, at
least 15% of the outstanding shares of common stock on a fully diluted
basis, which is calculated based on all outstanding shares of common
stock and all shares of common stock that could be acquired upon the
exercise of all outstanding options to acquire our voting stock, as
well as all shares of common stock issuable upon exchange of all O.P.
Units, the approval of a majority of our directors, including Carl E.
Berg or his designee as a director, and of the holders of a majority
of the O.P. Units is required for us to take title to assets, other
than temporarily in connection with an acquisition prior to
contributing such assets to the operating partnerships, or to conduct
business other than through the operating partnerships, or for us or
the operating partnerships to engage in any business other than the
ownership, construction, development and operation of real estate
properties, or for certain fundamental corporate actions, including
amendments to our charter, bylaws or any operating partnership
agreement and any merger, consolidation or sale of all or
substantially all of our assets or the assets of the operating
partnerships;
- changes in certain policies with respect to conflicts of interest must
be consistent with legal requirements;
- certain policies with respect to competition by the Berg Group are
imposed pursuant to provisions of the acquisition agreement that
cannot be amended or waived without the approval of the independent
directors committee of our board of directors;
- we cannot take any action intended to terminate our qualification as a
REIT without the approval of more than 75% of the entire board of
directors; and
- we cannot undertake certain other specified transactions, including
the issuance of debt securities, and borrowings in excess of specified
limits, or the amendment of our charter and bylaws, without the
approval of more than 75% of the entire board of directors.
INVESTMENT POLICIES
We expect to pursue our business and investment objectives principally
through the direct ownership by the operating partnerships of our properties and
future acquired properties. Development or investment activities are not limited
to any specified percentage of our assets. We may also participate with other
entities in property ownership, through joint ventures or
- 34 -
other types of co-ownership. Equity investments may be subject to existing
mortgage financing and other indebtedness which have priority over our equity
interests.
While we will emphasize equity real estate investments, we may, in our
discretion and subject to the percentage ownership limitations and gross income
tests necessary for REIT qualification, invest in mortgage and other real estate
interests, including securities of other real estate investment trusts. We have
not previously invested in mortgages or securities of other real estate
investment trusts, and we do not have any present intention to make such
investments.
FINANCING POLICIES
To the extent that our board of directors determines to seek additional
capital, we may raise such capital through additional equity offerings, debt
financing or retention of cash flow, or through a combination of these sources,
after consideration of provisions of the Code requiring the distribution by a
REIT of a certain percentage of its taxable income and taking into account taxes
that would be imposed on undistributed taxable income. It is our present
intention that any additional borrowings will be made through the operating
partnerships, although we may incur borrowings that would be reloaned to the
operating partnerships. Borrowings may be unsecured or may be secured by any or
all of our assets, the operating partnerships or any existing or new property,
and may have full or limited recourse to all or any portion of our assets, the
operating partnerships or any existing or new property.
We have not established any limit on the number or amount of mortgages that
may be placed on any single property or on our portfolio as a whole. We may also
determine to finance acquisitions through the exchange of properties or the
issuance of additional O.P. Units in the operating partnerships, shares of
common stock or other securities.
In the event that the board of directors determines to raise additional
equity capital, it has the authority, without stockholder approval, to issue
additional shares of common stock, preferred stock or other capital stock,
including securities senior to the common stock, in any manner and on such terms
and for such consideration it deems appropriate, including in exchange for
property. In the event that we issue any shares of common stock or securities
convertible into or exchangeable or exercisable for, shares of common stock,
subject to limited exceptions, such as the issuance of common stock pursuant to
any stock incentive plan adopted by us or pursuant to limited partners' exercise
of the exchange rights or the put rights, the limited partners will have the
right to purchase common stock or such securities in order to maintain their
respective percentage interests in us on a fully diluted basis. If the board of
directors determines that we will raise additional equity capital to fund
investments by the operating partnerships, we will contribute such funds to the
operating partnerships as a contribution to capital and purchase of additional
general partnership interest; however, holders of O.P. Units will have the right
to participate in such funding on a pro rata basis. In the event that holders of
O.P. Units sell their O.P. Units to us upon exercise of their put rights, we are
authorized to raise the funds for such purchase by issuing additional shares of
common stock. Alternatively, we may issue additional shares of common stock in
exchange for the tendered O.P. Units.
Our board of directors also has the authority to cause the operating
partnerships to issue additional O.P. Units in any manner and on such terms and
for such consideration, as it deems appropriate, including in exchange for
property. In the event that the operating partnerships issue new O.P. Units for
cash, but not property, the limited partners holding O.P. Units in an operating
partnership will have the right to purchase O.P. Units in order, and to the
extent necessary, to maintain their respective percentage interests in that
operating partnership. The new O.P. Units will be exchangeable for common stock
pursuant to the exchange rights or may be tendered to us pursuant to the put
rights.
DISPOSITION POLICIES
We have no current intention of disposing of any of our properties,
although we reserve the right to do so. The tax basis of the limited partners in
the properties in the operating partnerships is substantially less than current
fair market value. Accordingly, prior to the disposition of their O.P. Units,
upon a disposition of any of the properties, a disproportionately large share of
the gain for federal income tax purposes would be allocated to the limited
partners. For a more detailed discussion of these tax effects, see "Federal
Income Tax Considerations--Tax Aspects of the Operating Partnerships."
Consequently, it may be in the interests of the limited partners that we
continue to hold the properties in order to defer such taxable gain. In light of
this tax effect, the operating partnership agreements provide that, until
January 2009, or until the Berg Group members and their affiliates, other than
us and the operating partnerships, beneficially own, in the aggregate, less than
15% of the outstanding shares of common stock on a fully diluted basis, which is
calculated based on all outstanding shares of common stock and all shares of
common stock that could be acquired upon the exercise of all outstanding options
to acquire our voting stock, as well as all shares of common stock issuable upon
exchange of all O.P. Units, if earlier, Mr. Berg and Clyde J. Berg may prohibit
the operating partnerships from disposing of properties which they designate in
a taxable transaction. Mr. Kontrabecki has a similar right with respect to seven
of the properties, which right will lapse before the end of the ten-year period
if his beneficial ownership interest falls below 750,000 O.P. Units. The limited
partners may seek to cause us to retain the properties
- 35 -
even when such action may not be in the interests of some, or a majority, of our
stockholders. The operating partnerships will be able to effect "tax-free,"
like-kind exchanges under Section 1031 of the Code, or in connection with other
non-taxable transactions, such as a contribution of property to a new
partnership, without obtaining the prior written consent of these individuals.
The approval of a majority of our directors, including Mr. Berg or his designee,
will be required to sell all or substantially all of our assets. The consent of
the holders of a majority of the O.P. Units will be required to effect a sale or
sales of all, or substantially all, of the assets of any of the operating
partnerships.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
We do not believe that recently issued accounting standards will materially
impact our financial statements.
YEAR 2000
INTRODUCTION
The term "Year 2000 issue" is a general term used to describe various
problems that may result from the improper processing by computer systems of
dates after 1999. These problems could result in a system failure or
miscalculations causing disruptions of operations.
Our efforts to address Year 2000 issues consisted of reviewing our computer
information systems, evaluating other computer systems that do not relate to our
internal information systems but include embedded technology at our properties,
such as security, heating, ventilation and air conditioning, elevator, fire and
safety systems, and communicating with certain significant third-party service
providers to determine whether there will be any interruption in their systems
that could affect us.
OUR SYSTEMS
INFORMATION TECHNOLOGY SYSTEMS. We have reviewed our information technology
systems and have contacted vendors to determine whether such systems are Year
2000 compliant. Based upon our inquiries, we have determined that our primary
network operating system, Windows NT Server 4.0, and all of our desktop personal
computers are Year 2000 compliant. The vendor for our property management and
accounting software has provided us with Year 2000 compliant software upgrade.
EMBEDDED SYSTEMS. We believe that, in most cases, under the lease terms it
is the tenant's sole responsibility to ensure that the embedded systems,
providing, for example, building security, heating, ventilation, air
conditioning, fire alarms and sprinklers, and elevator service, are Year 2000
compliant. We have made limited inquiries to the vendors for some of the
embedded systems used on our properties. Although we have concluded that many of
our tenants are responsible for certain Year 2000 compliance costs, there is a
possibility that certain tenants will not agree with such conclusions. As of
March 15, 2000, we were not aware of any systems that are not Year 2000
compliant.
RISKS PRESENTED BY YEAR 2000 ISSUES
We have not budgeted any amount to address Year 2000 issues. At this time,
we have not identified any specific business functions that are likely to suffer
material disruption as a result of Year 2000-related events or that will have a
material adverse effect on our financial condition, results of operations and
ability to make cash distributions to our stockholders. Although we believe that
our estimates and expectations concerning the scope and cost of Year 2000 issues
that we may confront are based on reasonable assumptions, our actual cost,
progress and expenses with respect to our plan to address Year 2000 issues could
differ materially from those set forth in the foregoing forward-looking
statements.
- 36 -
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our exposure to market risk for changes in interest rates relates primarily
to our current and future debt obligations. We are vulnerable, however, to
significant fluctuations of interest rates on our floating rate debt, and
pricing on our future debt.
The following table provides information about our financial instruments
that are sensitive to changes in interest rates. For debt obligations, the table
presents principal cash flows and related weighted average interest rates by
expected maturity dates. Average interest rates are based on implied LIBOR for
the respective time period. Fair value approximates book value for fixed rate
debt. Of the fair value of secured notes payable, approximately $129.4 million
represents the Prudential secured loan.
2000 2001 2002 2003 2004 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(in thousands)
VARIABLE RATE DEBT:
Secured notes payable (related parties) $31,193 $ 31,193 $ 31,193
Average interest rate (7.06)
FIXED RATE DEBT:
Secured notes payable 1,890 $4,636 $2,034 $2,179 $2,333 $120,880 $133,952 $133,952
Average interest rate 6.64% 6.64% 6.64% 6.64% 6.64% 6.64%
- 37 -
Item 8. Financial Statements and Supplementary Data
MISSION WEST PROPERTIES, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
Report of Independent Accountants 39
Consolidated Balance Sheets of Mission West Properties, Inc. at December 31, 1999 and 1998 40
Consolidated Statements of Operations of Mission West Properties, Inc. for the years ended 41
December 31, 1999 and 1998, the one-month ended December 31, 1997 and the year ended
November 30, 1997
Consolidated Statements of Changes in Stockholders' Equity of Mission West Properties, Inc. 42
for the years ended December 31, 1999 and 1998, the one-month ended December 31, 1997
and the year ended November 30, 1997
Consolidated Statements of Cash Flows of Mission West Properties, Inc. for the years ended 43
December 31, 1999 and 1998, the one-month ended December 31, 1997 and the year ended
November 30, 1997
Notes to the Consolidated Financial Statements 44
Report of Independent Accountants 59
Schedule III: Real Estate and Accumulated Depreciation of Mission West Properties, Inc. as of 60
December 31, 1999
Report of Independent Accountants 64
Combined Balance Sheets of the Berg Properties (Predecessor) at June 30, 1998 and December 31, 1997 65
Combined Statement of Operations of the Berg Properties (Predecessor) for the six months ended June 30, 66
1998 and the years ended December 31, 1997 and 1996
Combined Statements of Net Equity (Deficit) of the Berg Properties (Predecessor) for the six months ended 67
June 30, 1998 and the years ended December 31, 1997 and 1996
Combined Statements of Cash Flows for the Berg Properties (Predecessor) for the six months ended June 68
30, 1998 and the years ended December 31, 1997 and 1996
Notes to the Consolidated Financial Statements 69
Report of Independent Accountants 75
Schedule III: Real Estate and Accumulated Depreciation of the Berg Properties (Predecessor) as of 76
December 31, 1997
- 38 -
Report of Independent Accountants
To the Board of Directors and Shareholders
of Mission West Properties, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Mission West
Properties, Inc. and its subsidiaries (the "Company") at December 31, 1999 and
1998, and the results of their operations and their cash flows for the years
ended December 31, 1999 and 1998 and November 30, 1997 and the one month period
ended December 31, 1997, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
January 21, 2000
- 39 -
MISSION WEST PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
ASSETS
December 31,
1999 1998
--------------------- --------------------
Real estate assets:
Land $ 149,416 $ 90,929
Buildings and improvements 566,766 430,510
--------------------- --------------------
716,182 521,439
Less accumulated depreciation (18,566) (5,410)
--------------------- --------------------
Net real estate assets 697,616 516,029
Cash and cash equivalents 6,553 246
Deferred rent 5,964 1,624
Other assets (net of accumulated amortization of
$275 and $43 at December 31, 1999 and 1998, respectively) 2,571 1,967
--------------------- --------------------
Total assets $ 712,704 $ 519,866
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Line of credit $ - $ 27,201
Mortgage notes payable 133,952 157,188
Mortgage notes payable (related parties) 31,193 20,752
Interest payable 1,005 632
Security deposits 2,335 2,061
Prepaid rental income 7,802 3,246
Dividends/distributions payable 14,019 -
Refundable option payment 21,564 -
Accounts payable and accrued expenses 3,342 2,154
--------------------- --------------------
Total liabilities 215,212 213,234
--------------------- --------------------
Commitments and contingencies (Notes 4, 6 and 17)
Minority interest 396,810 273,379
Stockholders' equity:
Preferred stock, no par value, 200,000 shares authorized,
none issued and outstanding - -
Common stock, $.001 par value and no par at December 31, 1999
and 1998, respectively, 200,000,000 shares authorized, 16,972,374
shares and 8,218,594 shares issued and outstanding at December 31, 17 8
1999 and 1998, respectively
Paid-in capital 122,746 55,528
Less amounts receivable from private placement - (900)
Accumulated deficit (22,081) (21,383)
--------------------- --------------------
Total stockholders' equity 100,682 33,253
--------------------- --------------------
Total liabilities and stockholders' equity $ 712,704 $ 519,866
===================== ====================
See notes to consolidated financial statements
- 40 -
MISSION WEST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Year Ended December 31,
------------------------------------------- One Month Ended Year Ended
1999 1998 December 31, 1997 November 30, 1997
------------------- ------------------- ------------------ -------------------
Revenue:
Rental revenues from real estate $ 73,726 $ 27,285 $ - $ 1,376
Tenant reimbursements 11,047
Other income, including interest 1,220 278 27 359
------------------- ------------------- ------------------ -------------------
85,993 31,756 27 1,735
Expenses:
Property operating, maintenance and real
taxes 11,467 246
Interest 11,623 4,685 - 425
Interest (related parties) 2,246
General and administrative expenses 1,185 139 1,467
Depreciation 13,156 5,410 - 246
------------------- ------------------- ------------------ -------------------
39,677 19,928 139 2,384
Income (loss) before gain on sale of
real estate assets, minority
interest and income taxes 46,316 11,828 (112) (649)
Gain on sale of real estate assets - - - 4,736
------------------- ------------------- ------------------ -------------------
Income (loss) before minority interest
and income taxes 46,316 11,828 (112) 4,087
Minority interest 39,785 12,049 - -
-------------------- -------------------- ------------------- -------------------
Net income (loss) before income taxes 6,531 (221) (112) 4,087
Benefit (provision) for income taxes - - 38 (1,043)
-------------------- -------------------- ------------------- -------------------
Net income (loss) $ 6,531 $ (221) $ (74) $ 3,044
==================== ==================== =================== ===================
Per share amounts:
Basic net income (loss) per share $ 0.52 $ (0.13) $ (0.05) $ 18.48
==================== ==================== =================== ===================
Diluted net income (loss) per share $ 0.52 $ (0.13) $ (0.05) $ 18.48
==================== ==================== =================== ===================
See notes to consolidated financial statements
- 41 -
MISSION WEST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)
Amounts on
Receivable Total
Shares of Common Common Paid-in Private Accumulated Stockholders'
Stock Outstanding Stock Capital Placement Deficit Equity
------------------- ----------- ------------ ------------- ------------- ---------------
Balance, November 30, 1996 45,704 $ 19,456 $ (5,274) $ 14,182
Issuance of common stock upon private
placement 200,000 900 900
Issuance of common stock upon private
placement 1,250,000 5,625 5,625
Amounts receivable on 1997 private
placements $ (484) (484)
Issuance of common stock upon option
exercise 5,400 726 726
Net income 3,044 3,044
Dividends paid (18,858) (18,858)
------------------- ----------- ------------ ------------- ------------- ---------------
Balance, November 30, 1997 1,501,104 26,707 (484) (21,088) 5,135
Amounts received from 1997 private
placements 150 150
Net (loss) (74) (74)
------------------- ----------- ------------ ------------- ------------- ---------------
Balance, December 31, 1997 1,501,104 26,707 (334) (21,162) 5,211
Issuance of common stock upon option
exercise 225,000 1,013 (900) 113
Issuance of common stock upon private
placement 6,495,058 27,827 27,827
Amounts received from 1997 private
placements 334 334
Odd lot tender offer (2,568) (11) (11)
Net (loss) (221) (221)
Reincorporation (Note 1) $ 8 (8) -
------------------- ----------- ------------ ------------- ------------- ---------------
Balance, December 31, 1998 8,218,594 8 55,528 (900) (21,383) 33,253
Issuance of common stock upon option
exercise 191,920 863 863
Issuance of common stock from public
offering 8,680,000 9 66,891 66,900
Odd lot tender offer (779) (8) (8)
Repurchase of common stock (117,361) (528) 528 -
Amounts received from 1998 private
placements 372 372
Dividends paid (7,229) (7,229)
Net income 6,531 6,531
------------------- ----------- ------------ ------------- ------------- ---------------
Balance, December 31, 1999 16,972,374 $ 17 $122,746 - $(22,081) $100,682
=================== =========== ============ ============= ============= ===============
See notes to consolidated financial statements
- 42 -
MISSION WEST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
One
Month
Year Ended December 31, Ended Year Ended
------------------------------------------ December 31, November 30,
1999 1998 1997 1997
--------------------- -------------------- ------------------ -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,531 $ (221) $ (74) $ 3,044
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Minority interest 39,785 12,049 - -
Depreciation 13,156 5,410 - 246
(Gain) on sale of real estate assets - - (4,736)
Change in operating assets and liabilities:
Deferred rent (4,340) (1,624) - -
Other assets (604) (1,594) 1,295
Interest payable 373 632
Security deposits 127 218
Prepaid rental income 4,555 812
Accounts payable and accrued expenses 714 582 28 (849)
--------------------- -------------------- ------------------ -----------------
Net cash provided by (used in) operating
activities 60,298 16,264 (46) (1,000)
--------------------- -------------------- ------------------ -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Improvements to real estate (33,648) (118)
Refundable option payment 21,564
Net proceeds from the sale of real estate assets - - - 46,198
--------------------- -------------------- ------------------ -----------------
Net cash (used in) provided by investing
activities (12,084) (118) 46,198
--------------------- -------------------- ------------------ -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments on line of credit (27,201) (11,843)
Proceeds from mortgage notes payable - 130,000
Principal payments on mortgage notes payable (23,236) (19,586) (30,753)
Principal payments on mortgage notes payable
(related parties) (53,068) (148,279)
Payments on receivable from private placements 372 - - -
Net proceeds from issuance of common stock 66,900 28,161 6,041
Net proceeds from exercise of stock options 863 113 726
Repurchase of common stock (8) (11)
Minority interest distributions (1,844) (24)
Dividends (4,685) - - (18,858)
--------------------- -------------------- ------------------ -----------------
Net cash (used in) provided by financing
activities (41,907) (21,469) 150 (42,844)
--------------------- -------------------- ------------------ -----------------
Net increase (decrease) in cash and cash
equivalents 6,307 (5,323) 104 2,354
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 246 5,569 5,465 3,111
--------------------- -------------------- ------------------ -----------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 6,553 $ 246 $ 5,569 $ 5,465
===================== ==================== ================== =================
See notes to consolidated financial statements
- 43 -
MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
1. ORGANIZATIONS AND FORMATION OF THE COMPANY
Mission West Properties, Inc. ("the Company") is a fully integrated,
self-managed real estate company that acquires and manages office/research and
development/manufacturing ("R&D") properties in the portion of the San Francisco
Bay Area commonly referred to as Silicon Valley. In July 1998, the Company
acquired control of four existing limited partnerships (referred to collectively
as the "operating partnerships"), by becoming the sole general partner in each
one effective July 1, 1998 for financial accounting and reporting purposes ("the
Acquisition"). The Company purchased an approximate 12.11% interest in each of
the operating partnerships. The Company effected the purchase of its general
partnership interests by issuing to the operating partnerships separate demand
notes bearing interest at 7.25% per annum (the "Demand Notes"). The total
principal amount of the Demand Notes issued was $35,200. All limited partnership
interests in the operating partnerships were converted into 59,479,633 units of
limited partnership interest ("O.P. Units"), which represented an ownership
interest of approximately 87.89% of the operating partnerships. The operating
partnerships are the vehicles through which the Company will own its assets,
will make its future acquisitions, and generally conduct its business.
On December 30, 1998, the Company was reincorporated under the laws of the
State of Maryland through a merger with and into Mission West Properties, Inc.
Accordingly, shares of the former company, Mission West Properties, a California
corporation (no par), which were outstanding at December 30, 1998, were
converted into shares of common stock ($.001 par value per share) on a
one-for-one basis.
As of December 31, 1999, the Company owns a general partnership interest of
20.28%, 21.32%, 15.34% and 12.18% in Mission West Properties, L.P., Mission West
Properties, L.P. I, Mission West Properties, L.P. II and Mission West
Properties, L.P. III, respectively, for a 18.28% general partnership interest in
the operating partnerships, taken as a whole, on a weighted average basis.
The Company, through the operating partnerships, owns interests in 80 R&D
properties, all of which are located in the Silicon Valley.
The Company was formerly engaged in developing, owning, operating, and
selling income-producing real estate located principally in Southern California.
As discussed in Note 15, Sale of Real Estate Investments below, the Company sold
all of its Southern California real estate holdings during 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION:
The accompanying consolidated financial statements include the accounts of
the Company and its controlled subsidiaries, including the operating
partnerships. All significant intercompany transactions have been eliminated in
consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles ("GAAP") requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
REAL ESTATE ASSETS:
Real estate assets are stated at the lower of cost or fair value. Cost
includes expenditures for improvements or replacements. Maintenance and repairs
are charged to expense as incurred. Gains and losses from sales are included in
income in accordance with Statement of Financial Accounting Standard ("SFAS")
No. 66, Accounting for Sales of Real Estate.
- 44 -
The Company reviews real estate assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If the carrying amount of the asset exceeds its estimated
undiscounted net cash flow before interest, the Company will recognize an
impairment loss equal to the difference between its carrying amount and its fair
value. If impairment is recognized, the reduced carrying amount of the asset
will be accounted for as its new cost. For a depreciable asset, the new cost
will be depreciated over the asset's remaining useful life. Generally, fair
values are estimated using discounted cash flow, replacement cost or market
comparison analyses. The process of evaluating for impairment requires estimates
as to future events and conditions, which are subject to varying market and
economic factors. Therefore, it is reasonably possible that a change in estimate
resulting from judgments as to future events could occur which would affect the
recorded amounts of the property. As of December 31, 1999, the properties'
carrying values did not exceed the estimated fair values.
DEPRECIATION:
Depreciation is computed using the straight-line method over estimated
useful lives of 40 years for buildings and improvements.
CASH AND CASH EQUIVALENTS:
The Company considers highly liquid short-term investments with initial
maturities of three months or less to be cash equivalents.
Cash and cash equivalents are primarily held in a single financial
institution, and at times, such balances may be in excess of the Federal Deposit
Insurance Corporation insurance limit.
OTHER ASSETS:
Included in other assets are costs associated with obtaining debt
financing. Such costs are being amortized over the term of the associated debt,
by a method that approximates the effective interest method.
REVENUE RECOGNITION:
Rental income is recognized on the straight-line method of accounting
required by generally accepted accounting principles under which contractual
rent payment increases are recognized evenly over the lease term. The difference
between recognized rental income and rental cash receipts is recorded as
deferred rent on the balance sheet. Certain lease agreements contain terms that
provide for additional rents based on reimbursement of certain costs. These
additional rents are reflected on the accrual basis.
INCOME TAXES:
The Company intends to elect to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended, (the "Code")
commencing with the taxable year ended December 31, 1999. In order for the
Company to qualify as a REIT, it must distribute annually at least 95% of its
REIT taxable income, as defined in the Code, to its stockholders and comply with
certain other requirements. Accordingly, for the year ended December 31, 1999,
no provision for federal income taxes has been included in the accompanying
consolidated financial statements.
For the year ended December 31, 1999, approximately 7% of the dividends
paid or payable to the Company's stockholders represent a return of capital for
income tax purposes. The 1999 distributions did not include any capital gain.
For the year ended December 31, 1998, the one-month ended December 31, 1997
and the year ended November 30, 1997, income taxes were accounted for in
accordance with SFAS No. 109, Accounting for Income Taxes. Deferred income taxes
were provided for all temporary differences and operating loss and tax credit
carry forwards. Deferred tax assets were reduced by a valuation allowance when,
in the opinion of management, it was more likely than not that some portion or
all of the deferred tax assets would not be realized. Deferred tax assets and
liabilities were adjusted for the effects of changes in tax laws and rates on
the date of enactment.
The Company had no tax liability for the year ended December 31, 1998.
- 45 -
NET INCOME PER SHARE:
The computation of net income per share is based on the weighted average
number of common shares outstanding during the period. Diluted earnings per
share amounts are based upon the weighted average of common and common
equivalent shares outstanding during the year.
ACCOUNTING FOR STOCK-BASED COMPENSATION:
SFAS 123, Accounting for Stock-Based Compensation, encourages, but does not
require companies to record compensation cost for stock-based employee
compensation plans at fair value. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and related interpretations. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of the grant over the amount an employee must pay to
acquire the stock.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's financial instruments include cash, receivables, payables and
debt. Considerable judgement is required in interpreting market data to develop
estimates of fair value. Accordingly, the estimates presented herein are not
necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Based on borrowing rates currently available to the Company, the carrying
amount of mortgage debt and the line of credit, approximate fair value. Cash,
receivables and payables are also carried at amounts that approximate fair value
due to their short-term maturities.
CONCENTRATION OF CREDIT RISK:
The Company's properties are not geographically diverse, and our tenants
operate primarily in the information technology industry. Additionally, because
the properties are leased to 89 tenants, default by any major tenant could
significantly impact the results of the consolidated total. One tenant,
Microsoft Corporation accounted for approximately 18.0% of the Company's rental
revenues for the year ended December 31, 1999, with the next largest tenant
accounting for 9.1% of total rental revenues. For the year ended December 31,
1998, one tenant, Apple Computers, Inc. accounted for approximately 12.2% of the
Company's rental revenues, with the next largest tenant accounting for 6.6% of
total rental revenues. However, management believes the risk of default is
reduced because of the critical nature of these properties for ongoing tenant
operations.
REVERSE STOCK SPLIT:
All share and per share amounts have been adjusted to reflect the 1 for 30
reverse stock split which occurred in November 1997.
FISCAL YEAR CHANGE:
In November 1997, the board of directors approved a change in the Company's
fiscal year end from November 30 to December 31, effective for the calendar year
beginning January 1, 1997. The results for the year ended November 30, 1997 and
the one month ended December 31, 1997 are presented.
- 46 -
3. ACQUISITION
The Acquisition was accounted for as a purchase with the results of the
operating partnerships included from July 1, 1998. The fair value of the assets
acquired was $507,807 and liabilities assumed totaled $239,903.
The pro forma results listed below are unaudited and assume the Acquisition
occurred at the beginning of each period presented:
Proforma Year Proforma Year
Ended December 31, Ended December 31,
1998 1997
-------------------- --------------------
Total Revenues $62,253 $ 56,120
-------------------- --------------------
Expenses:
Operating, maintenance and real estate taxes 9,251 8,511
Interest expenses (including related parties) 17,631 18,055
General and administrative expenses 1,501 1,467
Depreciation and amortization 10,781 10,6424
-------------------- --------------------
39,164 38,876
-------------------- --------------------
Income before minority interest, gain on sale
of real estate and income taxes 23,089 17,245
Minority interest 22,541 16,691
-------------------- --------------------
Income before gain on real estate and income taxes 548 554
Gain on sale of real estate - 4,736
-------------------- --------------------
Income before income taxes 548 5,290
Provision for income taxes 142 1,375
-------------------- --------------------
Net income $ 406 $ 3,915
==================== ====================
Basic and diluted net income per share $ .24 $ 23.77
==================== ====================
4. STOCK TRANSACTIONS
On May 27, 1997, the Company entered into a Stock Purchase Agreement with a
group of private investors led by Carl E. Berg, his brother Clyde J. Berg, the
members of their respective immediate families, and certain entities they
control (the "Berg Group") pursuant to which the Company agreed to sell 200,000
shares of common stock to the Berg Group for a purchase price of $900 in cash,
or $4.50 per share. On August 5, 1997, the shareholders approved the stock sale
transaction. This sale of common stock was completed on September 2, 1997, at
which time all officers and directors resigned and the Berg Group became the
controlling shareholder with an approximate 80% ownership position in the
Company.
Subsequent to the September 1997 common stock sale, a series of
transactions were approved by the Company's shareholders that included the 1 for
30 reverse stock split, a private placement of 1,250,000 shares of the Company's
common stock at $4.50 per share and the adoption of the Company's 1997 Stock
Option Plan.
On December 29, 1998, the Company completed the sale of 6,495,058 shares of
common stock, at a price of $4.50 per share to a number of accredited investors
in two separate private placements. The aggregate proceeds to the Company, net
of fees and offering costs, was $27,827. The proceeds were used to pay a portion
of the outstanding amounts under the Demand Notes due the operating
partnerships. As of December 31, 1999, $1,103 remained outstanding under the
Demand Notes. The Demand Notes, along with the interest expense (interest income
to the operating partnerships), are eliminated in consolidation and are not
included in the corresponding line items within the consolidated financial
statements.
The limited partners of the operating partnerships have the right to tender
their O.P. Units to the Company for shares of common stock or, at the Company's
election, for cash. Each of the limited partners of the operating partnerships
(other than Carl E. Berg and Clyde J. Berg) has the annual right to exercise put
rights and cause the operating partnerships to purchase a portion of the limited
partner's O.P. Units at a purchase price based on the average market value of
the common stock for the 10-trading day period immediately preceding the date of
tender, generally limited to one-third of the aggregate number of O.P. Units
owned by each limited partner. Upon the exercise of any such right by a limited
partner, the Company will have the option to purchase the tendered O.P. Units
with available cash, borrowed funds or the proceeds of an offering of newly
- 47 -
issued shares of common stock. These put rights are available once a year. If
the total purchase price of the O.P. Units tendered by all of the eligible
limited partners in one year exceeds $1 million, the Company or the operating
partnerships will be entitled to reduce proportionately the number of O.P. Units
to be acquired form each tendering limited partner so that the total purchase
price does not exceed $1 million. There were no O.P. Units tendered in 1999.
On March 30, 1998, the Company issued 200,000 shares of common stock at
$4.50 per share to Michael Anderson, Chief Operating Officer and a director of
the Company, in exchange for a $900 note receivable payable to the Company. The
note was a full recourse promissory note bearing interest at 5.59% and was
collateralized by a pledge of the shares. Effective April 30, 1999, Mr. Anderson
resigned from the Company. Upon Mr. Anderson's resignation, the Company, in
accordance with the terms of its agreements with Mr. Anderson, repurchased and
subsequently canceled 117,361 of the 200,000 shares of common stock,
representing $528 of the original $900 note receivable. The remaining portion of
the note receivable in the amount of $372 was paid in full.
During the second and fourth quarters of 1998, the Company received total
payments of $334 relating to amounts receivable from the private placements of
shares of common stock in November 1997.
In July 1999, the Company completed a public offering at 8,680,000 shares
of its common stock at $8.25 per share. The net proceeds of approximately
$66,900, after deducting underwriting discounts and other offering costs, were
used to reduce the outstanding balance on the line of credit with Wells Fargo
Bank, N.A. ("Wells Fargo line") by approximately $41,000 and to reimburse
Microsoft Corporation for approximately $25,000 for shell and tenant
improvements on the Microsoft project. The remaining net proceeds of
approximately $900 were retained for general corporate purposes.
During the year ended December 31, 1999, options were exercised for a total
of 191,920 shares. The exercise price for all options exercised was $4.50 per
share and total proceeds to the Company were $863.
5. MINORITY INTEREST
Minority interest represents the separate private ownership of the
operating partnerships, by the Berg Group and other non-affiliate interests. In
total, these interests account for 81.72% and 87.98%, on a weighted average
basis, of the ownership interests in the real estate operations of the Company
as of December 31, 1999 and 1998, respectively. Minority interest in earnings
has been calculated by taking the net income of the operating partnerships (on a
stand-alone basis) multiplied by the respective minority interest ownership
percentage.
There are two properties (owned through two separate joint ventures) for
which 100% of the ownership is not held within the operating partnerships. The
operating partnerships own a 75% interest in one of the joint ventures and an
88% interest in the other joint venture. For the year ended December 31, 1999
and the period of July 1, 1998 through December 31, 1998, income associated with
the interests held by the non-affiliated third parties of these two properties
is $113 and $42, respectively.
6. REAL ESTATE
PENDING PROJECTS ACQUISITION AGREEMENT
The Company has entered into the Pending Projects Acquisition Agreement
under which the Company will acquire, through the operating partnerships of
approximately one million additional rentable square feet upon the completion
and leasing of a number of pending development projects owned by certain members
of the Berg Group. The agreement fixes the acquisition value to be received by
the sellers based upon the capitalized rental value of the property when fully
leased or as approved by the Independent Directors committee. As of December 31,
1999, the Company has completed five acquisitions under the Pending Projects
Acquisition Agreement representing 762,920 rentable square feet (see Property
Acquisitions below). In January 2000, the Company completed one additional
acquisition representing 80,640 square feet. There are two buildings with total
rentable square feet of approximately 175,000 anticipated to be acquired in the
future under the Pending Projects Acquisition Agreement. As of December 31,
1999, the estimated acquisition cost for these remaining projects is $24
million. The Company expects to acquire these two buildings by the end of first
quarter 2001.
- 48 -
The sellers of the pending development projects may elect to receive cash
or O.P. Units at a value of $4.50 per unit, which was set in May 1998 based on
the $4.50 per share price of the Company's common stock agreed to in private
placement transactions at that time. As the current market value price of a
share of common stock exceeds the $4.50 price, this valuation represents a
substantial discount from the current market value of the common stock that may
be issued in exchange for these O.P. Units. Under GAAP, the acquisition cost in
the form of O.P. Units issued will be valued based upon the current market value
of the Company's common stock on the date the acquisition closes. Consequently,
the Company's actual accounting cost of these future acquisitions will depend in
large part on the percentage of the fixed acquisition value paid for by the
issuance of O.P. Units and the price of the Company's common stock on the
closing of the acquisition. For properties acquired during 1999 under the
Pending Projects Acquisition Agreement, the difference resulted in an increase
of $49.0 million in the acquisition cost for accounting purposes compared to the
fixed acquisition value.
BERG LAND HOLDINGS OPTION AGREEMENT
Through the operating partnerships, the Company also has the option to
acquire any future R&D property developed by the Berg Group on land currently
owned or optioned, or acquired for these purposes in the future, directly or
indirectly, by Carl E. Berg or Clyde J. Berg. The owners of the future R&D
property developments may obtain cash or, at their option, O.P. Units. To date,
the Company has completed two acquisitions under the Berg Land Holdings Option
Agreement representing approximately 187,415 rentable square feet (see Property
Acquisitions below). Upon the Company's exercise of an option to purchase any of
the future R&D property developments, the acquisition price will equal the sum
of (a) the full construction cost of the building; plus (b) 10% of the full
construction cost of the building; plus (c) interest at LIBOR (London Interbank
Offer Rate) plus 1.65% on the amount of the full construction cost of the
building for the period from the date funds were disbursed by the developer to
the close of escrow; plus (d) the original acquisition cost of the parcel on
which the improvements will be constructed, which range from $8.50 to $20.00 per
square foot for land currently owned; (e) plus 10% per annum of the amount of
the original acquisition cost of the parcel from the later of January 1, 1998
and the seller's acquisition date, to the close of escrow; minus (f); the
aggregate principal amount of all debt encumbering the acquired property.
No estimate can be given at this time as to the total cost to the Company
to acquire projects under the Berg Land Holdings Agreement, nor the timing as to
when the Company will acquire such projects. However, the Berg Group is
currently constructing 5 properties with a total of 734,924 rentable square feet
that the Company has the right to acquire under this agreement. As of December
31, 1999, the estimated acquisition value to the operating partnerships for
these 5 projects is $75.7 million dollars. The final acquisition price of these
5 properties could differ significantly from this estimate.
PROPERTY ACQUISITIONS
As of December 31, 1999, the Company has acquired a total of 7 R&D
properties under its agreements with the Berg Group. All seven of these
acquisitions are currently 100% occupied by one or more tenants.
The following table provides information as to the estimated fair market
value, calculated using an estimated capitalization rate of 10% based upon the
first year's cash rent, actual cost (to the Berg Group), which includes land and
construction costs, and the actual acquisition price paid by the operating
partnerships:
Average
Year's Rent Rentable
Per Square Square Estimated Acquisition
Property Foot Footage Fair Value Price
- ------------------------- ---------------- -------------- ---------------- -----------------
(unaudited)
1999 ACQUISITIONS
Great Oaks $1.38 54,996 $ 9,107 $ 8,558
L'Avenida $2.95 515,700 182,558 156,107
Automation Parkway $1.69 80,640 16,354 15,963
Richard Avenue $0.80 58,783 5,940 5,756
Fontanosa Avenue $1.30 77,700 12,121 7,169
-------------- ---------------- -----------------
787,820 226,080 193,553
-------------- ---------------- -----------------
1998 ACQUISITIONS
Richard Avenue $1.06 109,715 6,716 4,198
Hellyer Avenue $0.99 52,800 13,034 9,494
-------------- ---------------- -----------------
Subtotal 162,515 19,750 13,692
-------------- ---------------- -----------------
Total 950,335 $245,830 $207,245
============== ================ =================
- 49 -
During the third quarter of 1999, the Company entered into a new lease
agreement for 2001 Logic Drive with Xilinx Incorporated ("Xilinx"). The lease
agreement includes an option granted to Xilinx to purchase the building at a
predetermined price. In September 1999, in accordance with the option provisions
of the lease agreement, Xilinx paid to us a deposit of approximately $21.6
million to secure its option right. Xilinx can exercise the option only between
April 30, 2000 and July 31, 2000. Upon exercise of the option, the Company must
refund the deposit amount and Xilinx must deposit into escrow funds equal to the
purchase price of $21.6 million. In the event Xilinx does not exercise its
option, the Company must refund the deposit in full to Xilinx, without interest.
- 50 -
7. DEBT
The following table sets forth certain information regarding debt
outstanding as of December 31, 1999 and 1998:
Balance Interest
Debt Description Collateral Properties At December 31, Maturity Date Rate
- ---------------------------------- ------------------------------------- -------------------------- -------------- -------------
Line of Credit: 1999 1998
------------ ------------
Wells Fargo 1810 McCandless Drive, Milpitas, CA - $27,201(1) 2/00 (2)
1740 McCandless Drive, Milpitas, CA
1680 McCandless Drive, Milpitas, CA
1600 McCandless Drive, Milpitas, CA
1500 McCandless Drive, Milpitas, CA
1450 McCandless Drive, Milpitas, CA
1350 McCandless Drive, Milpitas, CA
1325 McCandless Drive, Milpitas, CA
1425 McCandless Drive, Milpitas, CA
1526 McCandless Drive, Milpitas, CA
1575 McCandless Drive, Milpitas, CA
1625 McCandless Drive, Milpitas, CA
1745 McCandless Drive, Milpitas, CA
1765 McCandless Drive, Milpitas, CA
Mortgage Notes Payable
(related parties):
2033-2043 Samaritan Drive, San Jose, CA 31,193(3) 20,752(3) 12/00(4) (2)
2133 Samaritan Drive, San Jose, CA
2233-2243 Samaritan Drive, San Jose, CA
Mortgage Notes Payable):(5)
Great West Life & Annuity
Insurance Company 6320 San Ignacio Ave., San Jose, CA - 7,732 2/04(6) 7.0%
Great West Life & Annuity
Insurance Company 6540 Via del Oro, San Jose, - 3,689 5/04(6) 7.0%
6385 San Ignacio Ave., San Jose, CA
Prudential Capital Group 20400 Mariani, Cupertino, CA 1,902 2,034 3/09 8.75%
New York Life Insurance Company 10440 Bubb Road, Cupertino, 405 430 8/09 9.625%
Home Savings & Loan Association 10460 Bubb Road, Cupertino, 477 525 1/07 9.5%
Amdahl Corporation 3120 Scott, Santa Clara, CA - 6,945 3/14(6) 9.42%
Citicorp U.S.A. Inc. 2800 Bayview Drive, - 3,105 4/00(6) (7)
Mellon Mortgage Company 3530 Bassett, Santa Clara, 2,853 2,961 6/01 8.125%
Prudential Insurance Company
of America(8) 10300 Bubb, Cupertino, CA 128,315 129,767 10/08 6.56%
10500 N. DeAnza, Cupertino, CA
4050 Starboard, Fremont, CA
45700 Northpoint Loop, Fremont, CA
45738 Northpoint Loop, Fremont, CA
450-460 National, Mountian View, CA
4949 Hellyer, San Jose, CA
6311 San Ignacio, San Jose, CA
6321 San Ignacio, San Jose, CA
6325 San Ignacio, San Jose, CA
6331 San Ignacio, San Jose, CA
6341 San Ignacio, San Jose, CA
6351 San Ignacio, San Jose, CA
3236 Scott, Santa Clara, CA
3560 Bassett, Santa Clara, CA
3570 Bassett, Santa Clara, CA
3580 Bassett, Santa Clara, CA
1135 Kern, Sunnyvale, CA
1212 Bordeaux, Sunnyvale, CA
1230 E. Arques, Sunnyvale, CA
1250 E. Arques, Sunnyvale, CA
1170 Morse, Sunnyvale, CA
3540 Bassett, Santa Clara, CA
3542 Bassett, Santa Clara, CA
3544 Bassett, Santa Clara, CA
3550 Bassett, Santa Clara, CA
Mortgage Notes Payable Subtotal 133,952 157,188
------------ ------------
Total $165,145 $205,141
============ ============
(1) Amounts available under the Wells Fargo line at December 31,1999 and 1998
were $50,000 and $72,799, respectively. Certain members of the Berg Group
are liable as guarantors under this line of credit.
(2) The lesser of (a) the Wells Fargo prime rate in effect on the first day of
each calendar month; (b) LIBOR plus 1.65%; or (c) the Wells Fargo Purchased
Funds Rate quoted on the first day of each calendar month plus 1.65%. The
average rate for the year ended December 31, 1999 and the three months
ended 1998 was 7.06 and 6.66%, respectively.
(3) There is no set repayment plan associated with this debt; payments are made
to Berg & Berg Enterprises, Inc. on demand.
(4) Original due date was March 1999. The Company has received an extension
from Berg & Berg Enterprises, Inc. to December 2000.
(5) Mortgage notes payable generally require monthly installments of interest
and principal over various terms extending through the year 2009. The
weighted average interest rate of mortgage notes payable was 6.64% and
6.80% at December 31, 1999 and 1998, respectively.
(6) The Company repaid this debt in full during 1999
(7) One month LIBOR plus 1.625% adjusted monthly (6.68% at December 31, 1998).
(8)The Prudential Loan is payable in monthly installments of $827, which
includes principal (based upon a 30 year amortization) and interest. John
Kontrabecki, one of the limited partners, has guaranteed approximately
$12,000 of this debt. Costs and fees incurred with obtaining this loan
aggregated approximately $900.
- 51 -
Scheduled principal payments on debt for the years ending, are as follows:
Mortgage Notes Mortgage Notes Payable
Payable (Related Parties) Total
---------------- ------------------------ -----------
December 31, 2000 1,890 $31,193 33,083
December 31, 2001 4,636 4,636
December 31, 2002 2,034 2,034
December 31, 2003 2,179 2,179
December 31, 2004 2,333 2,333
Thereafter 120,880 120,880
---------------- ------------------------ -----------
$133,952 $31,193 $165,145
================ ======================== ===========
8. OPERATING PARTNERSHIP DISTRIBUTIONS
During 1999, the Company, as general partner of the operating partnerships,
declared quarterly distributions aggregating $0.56 per O.P. Unit. for total
distributions of $47,705, including $13,975 payable in January 2000. Total
distributions attributable to O.P. Units owned by various members of the Berg
Group was $38,090. Of this amount, $27,307 was converted to related party debt
during the year ended December 31, 1999, and the remaining distributions of
$10,783 was converted to related party debt in January 2000.
On December 28, 1998, the Company, as general partner of the operating
partnerships, declared a $0.17 per O.P. Unit distribution for total
distributions of $11,633. Of this amount, $9,599 was due to various members of
the Berg Group and was converted to related party debt on December 31, 1998. The
Company received $1,408 which was used to repay amounts outstanding under the
Demand Notes owed to the operating partnerships. A distribution in the amount of
$298 was attributable to units held by John Kontrabecki and was applied against
amounts owed by him to the operating partnerships as of December 31, 1998. The
remaining amount of $328 was owed to other O.P. Unit holders and is included in
accounts payable and accrued expenses in the consolidated balance sheet as of
December 31, 1998. Such amounts were paid in January 1999.
9. STOCK-BASED COMPENSATION PLANS
The Company's 1997 Stock Option Plan was approved by the Company's
shareholders on November 10, 1997. The 1997 Stock Option Plan was adopted so
that the Company may attract and retain the high quality employees, consultants
and directors necessary to build the Company's infrastructure and to provide
ongoing incentives to the Company's employees in the form of options to purchase
the Company's common stock by enabling them to participate in the Company's
success.
The 1997 Stock Option Plan provides for the granting to employees,
including officers (whether or not they are directors) of "incentive stock
options" within the meaning of Section 422 of the Code, and for the granting of
non-statutory options to employees, consultants and directors of the Company.
Options to purchase a maximum of 5,500,000 shares of common stock may be granted
under the 1997 Stock Option Plan, subject to equitable adjustments to reflect
certain corporate events. During 1999, options were granted to three employees
totaling 237,000 which become exercisable in monthly installments equal to
1/48th of the underlying shares beginning on the first month anniversary of the
grant date. Additionally, during 1999, one employee was granted an option for
100,000 shares that become exercisable as follows: a) 10,000 shares on May 10,
2000; b) each month thereafter for 36 months, an additional 2,500 shares. All
options granted to employees in 1998 become exercisable as follows: a) six
months from date of grant, 6.25%; b) one year from date of grant, an additional
12.50%; c) each month thereafter for 36 months, an additional 2.26%. Each option
has a term of 6 years from the date of grant subject to earlier termination in
certain events related to termination of employment. Options granted to
directors will become exercisable cumulatively with respect to 1/48th of the
underlying shares on the first day of each month following the date of grant.
Generally, the options must be exercised while the optionee is a director of the
Company. The option price is equal to the fair market value of the common stock
on the date of grant.
The remaining contractual lives of unexercised options granted range from
January 2004 to July 2005. All options granted during 1999 and 1998 have a $8.25
and $4.50 option price per share, respectively.
- 52 -
The following table shows the activity and detail for the 1997 Stock Option
Plan:
1997 Stock Option Price
Option Plan Per Share
-------------- --------------
Balance, December 31, 1997 -
Options granted 905,000 $4.50
Options exercised (225,000)
--------------
Balance, December 31, 1998 680,000
Options granted 337,000 $8.25
Options exercised (191,920)
Options cancelled (299,722)
--------------
Balance, December 31, 1999 525,358
==============
As of December 31, 1999, 4,569,722 additional options were available for
grant. None of the options granted are contingent upon the attainment of
performance goals or subject to other restrictions. As of December 31, 1999,
outstanding options to purchase 64,231 shares of common stock were exercisable.
The Company applies APB 25 and related interpretations in accounting for
its stock-based compensation plans. Accordingly, no compensation expense has
been recognized for its stock-based compensation plans. Had compensation cost
for the Company's stock option plans been determined based upon the fair value
at the grant date for awards under these plans consistent with the methodology
prescribed under SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company's net income and net income per share would have been decreased by
approximately $132 or $.02 per share, resulting in a total consolidated net
income of $6,399 or $0.51 per share, for the year ended December 31, 1999. The
estimated fair value of the options granted during 1999 was $9.20 per share on
the date of grant using the Black-Scholes option pricing model with the
following assumptions: dividend yield of 8%, volatility of 24.56%, risk free
rate of 5.65% and an expected life of 5 years. For the year ended December 31,
1998, the Company's net loss and net loss per share would have been increased by
approximately $146 or $.09 per share, resulting in a total consolidated net loss
of $367 or $.21 per share. The estimated fair value of the options granted
during 1998 ranged from $4.95 to $5.01 per share on the date of grant using the
Black-Scholes option pricing model with the following assumptions: dividend
yield of 8%, volatility of 24.07%, risk free rates of 4.53% to 5.72% and an
expected life of 5 years.
Prior to the adoption of the 1997 Stock Option Plan, the Company had a
Director Stock Option Plan and an Incentive Stock Option Plan under which
non-salaried directors and officers, respectively, could purchase shares of the
Company's common stock at a minimum option price based on market value at the
date of grant. Options granted under these two plans became exercisable ratably
over five years and expired after a period not to exceed ten years. Upon the
sale of the majority of the Company's real estate assets (see Note 15) the
provisions of these two plans accelerated (unvested shares at that date were
451). All the options issued in connection with this plan were exercised or
cancelled in February 1997.
Activity in these two plans comprised the following:
December 31,
1997
---------------
Beginning share balance 2,967
Exercised (Between $90 and $292.5 per share) (2,747)
Canceled ($274 per share) (220)
---------------
Ending share balance -
===============
- 53 -
The Company has adopted an employee investment plan (the "Plan"), under
Section 401(k) of the Internal Revenue Code. Employees who are at least 21 years
old and who have completed six months of eligibility service may become
participants in the Plan. Each participant may make contributions to the Plan
through salary deferrals in amounts of at least 1% to a maximum of 15% of the
participant's compensation, subject to certain limitations imposed by the
Internal Revenue Code. The Company contributes an amount up to 15% of the
participant's compensation contributed, based upon management's discretion. A
participant's contribution to the Plan is 100% vested and nonforfeitable. A
participant will become vested in 100% of the Company's contributions after two
years of eligible service. For the years ended December 31, 1999 and 1998, the
Company recognized $46 and $22 of expense for employer contributions made in
connection with this plan, respectively.
10. NET INCOME PER SHARE
Basic net income per share is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted net
income per share is computed by dividing net income by the sum of
weighted-average number of common shares outstanding for the period plus the
assumed exercise of all dilutive securities.
The computation for weighted average shares is detailed below:
Year Ended Year Ended Month Ended Year Ended
December 31, December 31, December 31, November 30,
1999 1998 1997 1997
----------------- ------------------ ------------------ -----------------
Weighted average shares outstanding (basic) 12,553,854 1,688,059 1,501,104 164,692
Incremental shares from assumed option exercise 104,586 22,730 - -
----------------- ------------------ ------------------ -----------------
Weighted average shares outstanding (diluted) 12,658,440 1,710,789 1,501,104 164,692
================= ================== ================== =================
The outstanding O.P. Units have been excluded from the diluted net income
per share calculation as there would be no effect on the amounts since the
minority interests' share of income would also be added back to net income. O.P.
Units outstanding at December 31, 1999 and 1998 were 76,205,789 and 60,151,697,
respectively.
11. INCOME TAXES
The Company intends to elect to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended, (the "Code")
commencing with the taxable year ended December 31, 1999. In order for the
Company to qualify as a REIT, it must distribute annually at least 95% of its
REIT taxable income, as defined in the Code, to its stockholders and comply with
certain other requirements. Accordingly, for the year ended December 31, 1999,
no provision for federal income taxes has been included in the accompanying
consolidated financial statements.
Deferred tax assets (liabilities) comprise the following:
December 31,
1998
--------------------
Prepaid rent $134
--------------------
Deferred tax assets 134
====================
Deferred rental revenue (67)
--------------------
Deferred tax liabilities (67)
====================
67
Deferred tax asset valuation allowance (67)
--------------------
Net deferred taxes $ -
====================
- 54 -
The provision for (benefit from) income taxes reconciles to the statutory
rate as follows:
One month ended
December 31, December 31, November 30,
1998 1998 1997
-------------------- ----------------------------- ---------------------
Statutory federal tax rate 34.0% 34.0% 34.0%
Increase (decrease) in taxes resulting from:
Depreciation differences 6.0 - -
Change in deferred tax asset valuation allowance (34.0) - 1.6
Alternative minimum taxes - - -
State income tax, net of federal tax benefit (6.0) - (1.4)
Reconciliation of previous tax estimates - - (8.9)
Other - - -
-------------------- ----------------------------- ---------------------
0% 34.0% 25.3%
==================== ============================= =====================
The provision for (benefit from) income taxes comprises the following:
Year ended One month ended Year ended
December 31, December 31, November 30
1998 1997 1997
------------------ --------------------- -----------------
Current:
Federal - $ (38) $ 491
State - 85
------------------ --------------------- -----------------
- 576
------------------ --------------------- -----------------
Deferred:
Federal - 467
State - -
------------------ --------------------- -----------------
- 467
------------------ --------------------- -----------------
- $ (38) $1,043
================== ===================== =================
As of December 31, 1998, the Company had no deferred tax assets or
liabilities. The provision for (benefit from) income taxes reflects temporary
differences in the recognition of revenue and expense for tax and financial
reporting purposes. These temporary differences primarily arose from the
recognition of rental revenue from real estate, recognition of accrued expenses,
capitalized interest and a difference in the depreciable basis for tax than for
financial reporting purposes. The Company carried back federal net operating
losses to prior years for refunds and carried forward state net operating losses
to be applied against future operating income, if any.
Due to the uncertainty of realizing the benefit of certain deferred tax
assets given the Company's intent on electing to be taxed as a REIT, a valuation
allowance was established in 1998. The net decrease in the valuation allowance
for fiscal year 1997 was due to changes in the state loss carry forward amounts.
- 55 -
12. RELATED PARTY TRANSACTIONS
As of December 31, 1999 and 1998, the Berg Group owned 71,885,187 and
56,464,623 O.P. Units, respectively, of the total 76,205,789 and 60,151,697 O.P.
Units issued and outstanding, respectively. Along with the Company's common
shares owned by the Berg Group, the Berg Group's interest in the Company
represents 77.2% and 82.8% of the Company as of December 31, 1999 and 1998,
respectively, assuming conversion of the O.P. Units into common shares of the
Company.
In connection with the Acquisition, through the operating partnerships, the
Company assumed certain liabilities which included amounts due to the Berg Group
in the amount of $1,989 for management fees and interest expense. Such amounts
were paid as of December 31, 1998.
As of December 31, 1999 and 1998, debt in the amount of $31,193 and
$20,752, respectively, was due Berg & Berg Enterprises, Inc. This amount
includes $36,380 and $9,606 of debt assumed in connection with the acquisitions
of properties from the Berg Group in 1999 and 1998, respectively (see Note 6).
Additionally, during 1999 and 1998, the operating partnerships declared and paid
distributions of $0.41and $0.17 per O.P. Unit, respectively. The amount of these
distributions payable to various members of the Berg Group of $27,307 and $9,599
were converted to related party debt during 1999 and 1998, respectively.
Interest expense incurred in connection with debt due Berg & Berg Enterprises,
Inc. was $2,246 and $3,511 for the years ended December 31, 1999 and 1998,
respectively.
Carl E. Berg has a significant financial interest in one company that
leases space from the operating partnerships. This company occupies, in the
aggregate, 5,862 square feet at a rate of $0.92 per square foot per month. This
lease was in effect prior to the Company's acquisition of its general
partnership interests. The lease expires in 2001.
The Company currently leases space owned by Berg & Berg Enterprises, Inc.
an affiliate of Carl E. Berg and Clyde J. Berg. Rental amounts and overhead
reimbursements paid to Berg & Berg Enterprises, Inc. were $80 and $61 for the
years ended December 31, 1999 and 1998, respectively.
13. FUTURE MINIMUM RENTS
The Company, through the operating partnerships, owns interests in 80 R&D
properties that are leased to tenants under net operating leases with initial
terms extending to the year 2008, and are typically subject to fixed increases.
Generally, the leases grant tenants renewal options. Future minimum rentals
under non-cancelable operating leases, excluding tenant reimbursements of
expenses, as of December 31, 1999, are as follows:
2000 $ 80,404
2001 80,763
2002 72,158
2003 62,379
2004 52,808
Thereafter 65,886
------------
Total $ 414,398
============
Rental income from one tenant, Microsoft Corporation, was $13,249 for the
year ended December 31, 1999, or 18.0% of total rental revenues for the same
period. Future minimum rents from this tenant are $130,498. Rental income from
one tenant, Apple Computers, was $3,340 for the year ended December 31, 1998, or
12.2% of total rental revenues for the same period
14. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest was $13,406, $7,540, $0, and $410 for the years
ended December 31, 1999 and 1998, the one month ended December 31, 1997 and for
the year ended November 30, 1997, respectively. The Company received an income
tax refund of $228 in the year ended December 31, 1998 and paid income taxes,
net of refunds, of $546 for the year ended November 30, 1997.
- 56 -
In connection with the Acquisition, the Company, through the operating
partnerships, acquired assets with a fair value of $507,807 and assumed
liabilities of $239,903.
The Company assumed the Wells Fargo line of credit on September 30, 1998
from the Berg Group. As of that date, the outstanding balance on the Wells Fargo
line of credit was $39,044. In connection with this assumption, the Company
retired $39,044 of related party debt due Berg & Berg Enterprises, Inc.
In connection with the acquisitions of properties, the Company assumed
$36,380 and $9,606 of related party debt due to Berg & Berg Enterprises, Inc.,
assumed other liabilities of $126 and $0, and issued 16,311,232 and 672,064 O.P.
Units for a total acquisition value of $193,553 and $13,692 for the years ended
December 31, 1999 and 1998, respectively.
Amounts due to the Berg Group in the amount of $27,307 and $9,599 for
distributions declared to O.P. Unit holders, were converted to related party
debt due Berg & Berg Enterprises, Inc. during the years ended December 31, 1999
and 1998, respectively.
15. COMMITMENTS AND CONTINGENCIES
The Company and the operating partnerships, from time to time, are parties
to litigation arising out of the normal course of business. Management does not
expect that such matters would have a material adverse effect on the
consolidated financial position or results of operations of the Company.
Insurance policies currently maintained by the Company do not cover seismic
activity, although they do cover losses from fires after an earthquake.
16. SUBSEQUENT EVENTS (unaudited)
In January 2000 the Berg Group purchased a 50% interest in TBI-Mission
West, LLC which has approximately 62 net acres in Morgan Hill, California which
will support development of approximately 961,000 square feet. The Company has
the option to acquire the 50% interest in this project from the Berg Group upon
its completion and being fully leased pursuant to the Berg Land Holdings Option
Agreement.
In January 2000, we acquired a newly constructed R & D property leased to
E-Tek Dynamics, Inc. on Automation Parkway in San Jose, California consisting of
80,640 square feet of rentable space. We acquired this property under the
Pending Projects Acquisition Agreement. We paid approximately $14.6 million for
this property. In connection with this acquisition, the operating partnership
assumed total debt of approximately $5.0 million and issued a total of 1,346,480
O. P. Units to the Berg Group.
The Berg Group recently acquired approximately 9.5 acres of land in
Sunnyvale, California with an existing 98,500 rentable square foot shell
building and expansion space for approximately a 100,000 rentable square foot
building. This site has been leased to Global Centers, Inc. for 15 years with a
lease for the 98,500 square foot building commencing in April 2000 and a lease
for the 100,000 square foot building commencing in March 2001. The Company has
the option to acquire this project from the Berg Group upon its completion of
the 100,000 square foot building under the Berg Land Holdings Option Agreement.
The Company will receive no rents from this property prior to the exercise of
this option.
In January 2000, the Company paid dividends aggregating $2,544 to its
common stockholders which was payable as of December 31, 1999.
- 57 -
18. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly financial information for the year ended December 31, 1999 is as
follows:
First Second Third Fourth
------------ ------------- ------------- -------------
Revenue $ 14,027 $ 18,376 $ 20,517 $ 20,806
Income before minority interest $ 7,605 $ 10,552 $ 13,488 $ 14,671
Net income $ 881 $ 1,065 $ 2,178 $ 2,407
Per share data:
Basic net income per share $ 0.11 $ 0.13 $ 0.13 $ 0.15
Diluted net income per share $ 0.10 $ 0.13 $ 0.13 $ 0.15
Weighted average number of common shares
outstanding (basic) 8,227,261 8,166,977 16,715,354 16,964,086
Weighted average number of common shares
outstanding (diluted) 8,415,412 8,305,603 16,808,181 17,056,913
Quarterly financial information for the year ended December 31, 1998 is as
follows:
First Second Third Fourth
------------ ------------- ------------- -------------
Revenue $ 77 $ 64 $ 15,455 $ 16,160
(Loss) income before minority interest $ (153) $ (273) $ 5,519 $ 6,735
Net (loss) income $ (153) $ (273) $ 130 $ 75
Per share data:
Basic net (loss) per share $ (0.10) $ (0.16) $ 0.08 $ 0.05
Diluted net (loss) per share $ (0.10) $ (0.16) $ 0.08 $ 0.05
Weighted average number of common shares
outstanding (basic) 1,503,933 1,698,536 1,698,536 1,847,342
Weighted average number of common shares
outstanding (diluted) 1,503,933 1,698,536 1,698,536 1,935,936
- 58 -
Report of Independent Accountants on
Financial Statement Schedule
To the Board of Directors
of Mission West Properties, Inc.
Our audits of the consolidated financial statements referred to in our report
dated January 21, 2000 included in this Form 10-K of Mission West Properties,
Inc. also included an audit of the financial statement schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
PricewaterhouseCoopers LLP
San Francisco, California
January 21, 2000
- 59 -
MISSION WEST PROPERTIES, INC.
Schedule III
Real Estate and Accumulated Depreciation
December 31, 1999
(dollars in thousands)
Initial Cost Total Cost (A)
-------------------------- Cost -----------------------
December 31, Buildings Subsequent to Buildings
1998 and Construction\ and
Property Name City Encumbrances Land Improvements Acquisition Land Improvements Total
- ----------------------- --------------- ------------- ------------ ------------- ------------- ---------- ------------ -------------
10401-10411 Bubb Cupertino B $ 632 $ 3,078 $ 632 $ 3,078 $ 3,710
2001 Logic Cupertino 2,288 11,134 2,288 11,134 13,422
47000 Northport Fremont C 1,184 5,760 $ 7 1,184 5,767 6,951
45738 Northport Fremont C 891 4,338 5 891 4,343 5,234
4050 Starboard Fremont C 1,329 6,467 8 1,329 6,475 7,804
3501 W. Warren/Fremont Fremont 1,866 9,082 1,866 9,082 10,948
48800 Milmont Fremont 1,013 4,932 1,013 4,932 5,945
4750 Patrick Henry Santa Clara 1,604 7,805 153 1,604 7,958 9,562
4949 Hellyer San Jose C 3,593 17,484 61 3,593 17,545 21,138
3520 Bassett Santa Clara D 1,104 5,371 1,104 5,371 6,475
3530 Bassett Santa Clara D,E $ 2,853 849 4,133 849 4,133 4,982
5850-5870 Hellyer San Jose 2,787 6,502 2,787 6,502 9,289
2025 Fontanosa San Jose 2,572 4,597 2,572 4,597 7,169
2030 L' Avenida Mountain View 46,832 109,275 46,832 109,275 156,107
1750 Automation Parkway San Jose 4,789 11,174 315 4,789 11,489 16,278
2251 Lawson Lane Santa Clara 1,952 9,498 1,952 9,498 11,450
1230 E. Arques Sunnyvale 540 2,628 540 2,628 3,168
1250 E. Arques Sunnyvale 1,335 6,499 1,335 6,499 7,834
3120 Scott Blvd. Santa Clara 2,044 9,948 2,044 9,948 11,992
20400 Mariani Cupertino 1,902 1,670 8,125 1,670 8,125 9,795
10500 De Anza Cupertino C 7,666 37,304 7,666 37,304 44,970
20605-705 Valley Green Cupertino 3,490 16,984 3,490 16,984 20,474
10300 Bubb Cupertino C 635 3,090 635 3,090 3,725
10440 Bubb Cupertino 405 434 2,112 434 2,112 2,546
10460 Bubb Cupertino 477 994 4,838 30 994 4,868 5,862
1135 Kern Sunnyvale 407 1,982 407 1,982 2,389
405 Tasman Sunnyvale 550 2,676 550 2,676 3,226
450 National Mountain View C 611 2,973 611 2,973 3,584
3301 Olcott Santa Clara 1,846 8,984 1,846 8,984 10,830
2800 Bayview Fremont 1,070 5,205 1,070 5,205 6,275
6850 Santa Teresa San Jose 377 1,836 27 377 1,863 2,240
6810 Santa Teresa San Jose 2,567 5,991 47 2,567 6,038 8,605
140-160 Great Oaks San Jose 1,402 6,822 91 1,402 6,913 8,315
6541 Via del Oro/
6385-6387 San Ignacio San Jose 1,039 5,057 1,039 5,057 6,096
6311-6351 San Ignacio San Jose C 6,246 30,396 21 6,246 30,417 36,663
6320-6360 San Ignacio San Jose 2,616 12,732 197 2,616 12,929 15,545
75 E. Trimble/2610 N.
First St. San Jose 3,477 16,919 3,477 16,919 20,396
2033-2243 Samaritan San Jose 31,193 5,046 24,556 5,046 24,556 29,602
1170 Morse Sunnyvale C 658 3,201 658 3,201 3,859
3236 Scott Santa Clara C 1,234 6,005 1,234 6,005 7,239
1212 Bordeaux Sunnyvale 2,250 10,948 2,250 10,948 13,198
1325-1810 McCandless Milpitas 13,994 66,213 230 13,994 66,443 88,437
1600 Memorex Santa Clara 1,221 5,940 1,221 5,940 7,161
1688 Richard Santa Clara 1,248 2,912 7 1,248 2,919 4,167
1700 Richard Santa Clara 1,727 4,029 1,727 4,029 5,756
3506-3510 Bassett Santa Clara D 943 4,591 52 943 4,643 5,586
3540-3544 Bassett Santa Clara D C 1,565 7,615 57 1,565 7,672 9,237
3550 Bassett Santa Clara D C 1,079 5,251 1,079 5,251 6,330
3560 Bassett Santa Clara D C 1,075 5,233 1,075 5,233 6,308
3570-3580 Bassett Santa Clara D C 1,075 5,233 1,075 5,233 6,308
Prudential Capital Group Loan 128,315 C
----------- ------------ ------------- ------------- ---------- ------------- ------------
$165,415 $149,416 $565,458 $ 1,308 $149,416 $566,766 $716,182
=========== ============ ============= ============= ========== ============= ============
Accumulated Date of Depreciable
Property Name City Depreciation Acquisition Life
- ----------------------- --------------- ------------- ------------- -------------
10401-10411 Bubb Cupertino B $ 117 7/98 40 Years
2001 Logic Cupertino 419 7/98 40 Years
47000 Northport Fremont 218 7/98 40 Years
45738 Northport Fremont 165 7/98 40 Years
4050 Starboard Fremont 245 7/98 40 Years
3501 W. Warren/Fremont Fremont 343 7/98 40 Years
48800 Milmont Fremont 187 7/98 40 Years
4750 Patrick Henry Santa Clara 296 7/98 40 Years
4949 Hellyer San Jose 659 7/98 40 Years
3520 Bassett Santa Clara D 203 7/98 40 Years
3530 Bassett Santa Clara D,E 157 7/98 40 Years
5850-5870 Hellyer San Jose 192 11/98 40 Years
2025 Fontanosa San Jose 29 10/99 40 Years
2030 L' Avenida Mountain View 2,049 4/99 40 Years
1750 Automation Parkway San Jose 144 7/99 40 Years
2251 Lawson Lane Santa Clara 358 7/98 40 Years
1230 E. Arques Sunnyvale 101 7/98 40 Years
1250 E. Arques Sunnyvale 245 7/98 40 Years
3120 Scott Blvd. Santa Clara 375 7/98 40 Years
20400 Mariani Cupertino 307 7/98 40 Years
10500 De Anza Cupertino 1,401 7/98 40 Years
20605-705 Valley Green Cupertino 639 7/98 40 Years
10300 Bubb Cupertino 118 7/98 40 Years
10440 Bubb Cupertino 81 7/98 40 Years
10460 Bubb Cupertino 185 7/98 40 Years
1135 Kern Sunnyvale 77 7/98 40 Years
405 Tasman Sunnyvale 102 7/98 40 Years
450 National Mountain View 113 7/98 40 Years
3301 Olcott Santa Clara 339 7/98 40 Years
2800 Bayview Fremont 197 7/98 40 Years
6850 Santa Teresa San Jose 71 7/98 40 Years
6810 Santa Teresa San Jose 126 3/99 40 Years
140-160 Great Oaks San Jose 258 7/98 40 Years
6541 Via del Oro/
6385-6387 San Ignacio San Jose 191 7/98 40 Years
6311-6351 San Ignacio San Jose 1,142 7/98 40 Years
6320-6360 San Ignacio San Jose 479 7/98 40 Years
75 E. Trimble/2610 N.
First St. San Jose 636 7/98 40 Years
2033-2243 Samaritan San Jose 924 7/98 40 Years
1170 Morse Sunnyvale 122 7/98 40 Years
3236 Scott Santa Clara 227 7/98 40 Years
1212 Bordeaux Sunnyvale 413 7/98 40 Years
1325-1810 McCandless Milpitas 2,510 7/98 40 Years
1600 Memorex Santa Clara 199 7/98 40 Years
1688 Richard Santa Clara 108 9/98 40 Years
1700 Richard Santa Clara 42 8/99 40 Years
3506-3510 Bassett Santa Clara D 174 7/98 40 Years
3540-3544 Bassett Santa Clara D 288 7/98 40 Years
3550 Bassett Santa Clara D 199 7/98 40 Years
3560 Bassett Santa Clara D 198 7/98 40 Years
3570-3580 Bassett Santa Clara D 198 7/98 40 Years
-------------
$18,566
=============
- 61 -
(A) The aggregate cost for federal income tax purposes at December 31, 1999 is
$$132.7 million
(B) 16.67% of this property's ownership is held by unaffiliated parties outside
the operating partnerships or the Company
(C) Encumbered by the $128,315 Prudential Capital Group loan - full amount of
loan shown at the bottom of the schedule.
(D) Part of the property group referred to as Triangle Technology Park (E) 25%
of this property's ownership is held by unaffiliated parties outside the
operating partnerships or the Company.
- 62 -
MISSION WEST PROPERTIES, INC.
NOTE TO SCHEDULE III
December 31, 1999 and 1998
(Dollars in thousands)
1. Reconciliation of real estate and accumulated depreciation:
1999 1998
------------------------ ------------------------
Real estate investments:
Balance at beginning of year $ 521,439 -
Additions 194,743 $ 521,439
Dispositions - -
------------------------ ------------------------
Balance at end of year $ 716,182 $ 521,439
======================== ========================
Accumulated depreciation:
Balance at beginning of year $ 5,410 -
Additions 13,156 $ 5,410
Dispositions - -
------------------------ ------------------------
Balance at end of year $ 18,566 $ 5,410
======================== ========================
- 63 -
Report of Independent Accountants
To the members of the Berg Group
In our opinion, the accompanying combined balance sheets and the related
combined statements of operations, of net equity (deficit) and of cash flows
present fairly, in all material respects, the financial position of the Berg
Properties at June 30, 1998 and December 31, 1997, and the results of its
operations and its cash flows for the six month period ended June 30, 1998 and
each of the two years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the management of the Berg Properties; our responsibility is
to express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
San Francisco, California
January 29, 1999
- 64 -
THE BERG PROPERTIES (PREDECESSOR)
COMBINED BALANCE SHEETS
(Dollars in thousands, except per share data)
-------
ASSETS
June 30, 1998 December 31, 1997
-------------------- ---------------------
Real estate assets:
Land $ 30,426 $ 30,426
Building and improvements 61,323 61,262
Tenant improvements 85,790 86,541
-------------------- ---------------------
177,539 178,229
Less, accumulated depreciation (81,939) (78,077)
-------------------- ---------------------
Net real estate assets 95,600 100,152
Cash and cash equivalents - 5,719
Deferred rent 4,964 4,144
Deferred costs and other costs 3,982 3,935
-------------------- ---------------------
Total assets $104,546 $113,950
==================== =====================
LIABILITIES AND NET (DEFICIT) EQUITY
Liabilities:
Lines of credit - $ 37,953
Mortgage notes payable 37,868 38,554
Motgage notes payable (related parties) 156,632 -
Notes payable (related parties) - 1,975
Accounts payable and accrued expenses 2,233 2,102
Other liabilities 4,046 3,715
-------------------- ---------------------
Total liabilities 200,779 84,299
-------------------- ---------------------
Net (deficit) equity (96,233) 29,651
-------------------- ---------------------
Total liabilities and net (deficit) equity $104,546 $113,950
==================== =====================
See notes to combined financial statements
- 65 -
THE BERG PROPERTIES (PREDECESSOR)
COMBINED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
Six Months Year Ended December 31,
Ended --------------------------------------------
June 30, 1998 1997 1996
------------------- -------------------- --------------------
REVENUE:
Rental revenue from real estate $22,341 $40,163 $28,934
Tenant reimbursements 3,826 6,519 3,902
------------------- -------------------- --------------------
26,167 46,682 32,836
------------------- -------------------- --------------------
EXPENSES:
Property operating and maintenance 2,088 3,741 1,906
Real estate taxes 2,126 4,229 3,750
Interest 3,044 5,919 6,090
Interest (related parties) 61 248 293
Management fees (relates parties) 645 1,050 827
Depreciation and amortization 3,862 7,717 6,739
------------------- -------------------- --------------------
11,826 22,904 19,605
------------------- -------------------- --------------------
Income before extraordinary item 14,341 23,778 13,231
Extraordinary item - - 610
------------------- -------------------- --------------------
Net income $14,341 $23,778 $13,841
=================== ==================== ====================
See notes to combined financial statements
- 66 -
THE BERG PROPERTIES (PREDECESSOR)
COMBINED STATEMENTS OF NET EQUITY (DEFICIT)
(Dollars in thousands)
Balance (deficit), January 1, 1996 $ (2,469)
Contributions 12,299
Distributions (6,846)
Net income 13,841
-------------
Balance, December 31, 1996 $ 16,825
Contributions 755
Distributions (11,707)
Net income 23,778
-------------
Balance, December 31, 1997 $29,651
Distributions (140,225)
Net income 14,341
-------------
Balance (deficit), June 30, 1998 $(96,233)
=============
See notes to combined financial statements
- 67 -
The Berg Properties (Predecessor)
COMBINED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
Six months ended
June 30, Year Ended December 31,
----------------------- ---------------------------------------------
1998 1997 1996
----------------------- --------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 14,341 $ 23,778 $ 13,841
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,862 7,717 6,739
Loan fee amortization 6 12 10
Extraordinary gain on extinguishments of debt - - (610)
Changes in operating assets and liabilities:
Deferred rent (820) (1,330) (586)
Other assets (53) (1,221) (406)
Accounts payable and accrued expenses 131 (160) 353
Other liabilities 331 1,113 907
----------------------- --------------------- --------------------
Net cash provided by operating activities 17,798 29,909 20,248
----------------------- --------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase and improvements to real estate (132) (17,251) (29,275)
Tenant reimbursements for improvements 822 - -
----------------------- --------------------- --------------------
Net cash provided by (used in) investing
acitivities 690 (17,251) (29,275)
----------------------- --------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings on lines of credit (1,277) 2,415 6,047
Proceeds from mortgage notes payable - 3,105 -
Principal payments on mortgage notes payable (686) (2,429) (1,563)
Proceeds from mortgage notes payable (related 119,956 - -
Principal payments on notes payable (related (1,975) (571) (504)
Capital contributions - 755 12,299
Capital distributions (140,225) (11,707) (6,846)
----------------------- --------------------- --------------------
Net cash (used in) provided by financing
activities (24,207) (8,432) 9,433
----------------------- --------------------- --------------------
Net (decrease) increase in cash and cash
equivalents (5,719) 4,226 406
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,719 1,493 1,087
----------------------- --------------------- --------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ - $ 5,719 $ 1,493
======================= ===================== ====================
Supplemental information:
Cash paid for interest, net of amounts
capitalized $ 1,731 $ 6,272 $ 6,278
======================= ===================== ====================
Supplemental schedule of non-cash investing
and financing activities:
Assumption of lines of credit by Carl Berg $ 36,676 - -
======================= ===================== ====================
Non-cash transfers of construction-in-progress - $ 6,775 $ 75
======================= ===================== ====================
See notes to combined financial statements
- 68 -
THE BERG PROPERTIES (PREDECESSOR)
NOTES TO COMBINED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
1. ORGANIZATIONS AND BUSINESS
ORGANIZATION:
The Berg Properties do not constitute a legal entity, but rather, were a
combination of various research and development properties held by entities
controlled by the Carl E. Berg, Clyde J. Berg, members of their immediate
families and certain entities which they control (the "Berg Group"). The Berg
Group has historically been engaged in developing, owning, operating and selling
income-producing real estate primarily in the region surrounding San Jose,
California. In addition to its real estate operations, the Berg Group is
involved with other business pursuits including technology venture capital
funding, strategic investment and business development. The accompanying
financial statements reflect only the assets, liabilities and results of
operations of the Berg Properties.
BUSINESS:
On September 2, 1997, the Berg Group purchased 6,000,000 (200,000 giving
effect to a 1 for 30 reverse stock split in November 1997) newly issued shares
of common stock of Mission West Properties, Inc. (the "Company"), an American
Stock Exchange listed real estate company (the "Initial Investment"). Upon
consummation of the Initial Investment, the Berg Group beneficially owned 79.6%
of the voting securities of the Company. Subsequent to the Initial Investment, a
series of transactions were approved by the Company's shareholders that included
a 1 for 30 reverse stock split, a private placement of 1,250,000 shares of the
Company's common stock at $4.50 per share, and the adoption of the Company's
stock option plan, and a change in the Company's year end from November 30 to
December 31. The Company also hired a new management team and issued options
under the stock plan to key employees for the purchase of 755,000 shares at
$4.50 per share. In March 1997, one officer exercised an option for 200,000
shares of common stock at $4.50 per pursuant to a restricted stock purchase
agreement.
In May 1998, the Berg Group along with other certain parties, entered into
an acquisition agreement, providing, among other things, for the Company's
acquisition of interests as the sole general partner in four operating
partnerships which hold the Berg Properties, along with other properties
previously controlled by another Silicon Valley developer. The acquisition by
the company of its general partnership interests became effective as of July 1,
1998 for accounting and reporting purposes.
2. BASIS OF PRESENTATON AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF COMBINATION:
The financial statements have been presented on a combined basis, at
historical cost, because the Berg Properties were under the common management of
the Berg Group. All significant intergroup transactions and balances have been
eliminated in combination.
MANAGEMENT ESTIMATES:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that may affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
REVENUE RECOGNITION:
Rental income is recognized on the straight-line method of accounting
required by generally accepted accounting principles under which contractual
rent payment increases are recognized evenly over the lease term. The difference
between recognized rental income and rental cash receipts is recorded as
deferred rent on the balance sheet. Certain lease agreements contain terms that
provide for additional rents based on reimbursement of certain costs. These
additional rents are reflected on the accrual basis.
- 69 -
REAL ESTATE ASSETS:
Real estate assets are stated at the lower of cost or fair value. Cost
includes expenditures for improvements or replacements and the net amount of
interest cost associated with capital additions. Capitalized interest was $0 for
the six months ended June 30, 1998 and $257 and $459 for the years ended
December 31, 1997 and 1996 respectively. Maintenance and repairs are charged to
expense as incurred. Gains and losses from sales are included in income in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 66,
Accounting for Sales of Real Estate.
The Company reviews real estate assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. If the carrying amount of the asset exceeds its estimated
undiscounted net cash flow before interest, the Company will recognize an
impairment loss equal to the difference between its carrying amount and its fair
value. If an impairment is recognized, the reduced carrying amount of the asset
will be accounted for as its new cost. For a depreciable asset, the new cost
will be depreciated over the asset's remaining useful life. Generally, fair
values are estimated using discounted cash flow, replacement cost or market
comparison analyses. The process of evaluating for impairment requires estimates
as to future events and conditions, which are subject to varying market and
economic factors. Therefore, it is reasonably possible that a change in estimate
resulting from judgments as to future events could occur which would affect the
recorded amounts of the property. As of December 31, 1998, the properties'
carrying values did not exceed the estimated fair values.
DEPRECIATION:
Depreciation is computed using the straight-line method over estimated
useful lives of 40 years for buildings and improvements, and over the life of
lease terms which average 10 years for tenant improvements.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include all cash and liquid investments with an
original maturity date from date of purchase of three months or less.
DEFERRED COSTS AND OTHER ASSETS:
Deferred costs and other assets include external lease acquisition costs
which are capitalized and amortized over the lives of the related leases.
Accumulated amortization related to these costs aggregated $1,709, $1,353 and
$661 as of June 30, 1998, December 31, 1997 and 1996, respectively.
Also included in deferred costs and other assets are loan fees which are
stated at cost and are being amortized under a method of accounting which
approximates the effective interest method over the terms of the related notes.
Upon refinancing, property disposition or loan termination, such fees are
directly written-off. Accumulated amortization related to loan fees aggregated
$204, $198 and $186 as of June 30, 1998, December 31, 1997 and 1996,
respectively.
INCOME TAXES:
No federal or state income taxes are payable by the entities which own the
Berg Properties and none have been provided for in the accompanying financial
statements, as such properties are owned by partnerships whose partners are
required to include their respective share of profits and losses in their
individual tax returns.
CONCENTRATION OF CREDIT RISK:
The Berg Properties are not geographically diverse, and their tenants
operate primarily in the technology industry. Additionally, because the Berg
Properties are leased to 61 tenants, default by any major tenant could
significantly impact the results of the combined total. One tenant, Apple
Computers, Inc., accounted for approximately 14.9% of the Berg Properties rental
revenues for the six months ended June 30, 1998, with the next largest tenant
accounting for 7.5% of total rental revenues. However, management believes the
risk of default is reduced because of the critical nature of these properties
for ongoing tenant operations.
- 70 -
COMMITMENTS AND CONTINGENCIES:
Members of the Berg Group and the entities which hold the Berg Properties
are party to litigation arising out of the normal course of business. While the
ultimate results of any such lawsuits or other proceedings cannot be predicted
with certainty, management does not expect that these matters will have a
material adverse effect on the combined financial position or results of
operations of the Berg Properties.
Insurance policies currently maintained by the Berg Properties do not cover
damage caused by seismic activity, although they do cover losses from fires
after an earthquake.
3. DEBT
LINES OF CREDIT:
Historically, the Berg Properties have had access to credit facilities
entered into by members of the Berg Group. Generally, balances under such
facilities have been allocated to entities within the Berg Group based on
approximate use of the credit facilities. Borrowings under these credit
facilities have been used to finance various ventures including commercial real
estate development and acquisition, including assets that are included in the
Berg Properties, technology venture capital investments and other assets
unrelated to real estate which have not been included in these financial
statements.
Included in the accompanying financial statements is an allocation of
certain lines of credit with an aggregate borrowing limit of $130,000. In
September 1998, two lines of credit aggregating $30,000 were retired. The
remaining line of credit is collateralized by certain Berg Properties. Certain
members of the Berg Group are liable as guarantors under this line of credit.
On June 30, 1998, all balances under the $100,000 line of credit allocated
to the Berg Properties were assumed by Carl Berg and refinanced with proceeds
from mortgage notes payable (related parties). Aggregate borrowings outstanding
under the lines of credit facilities at December 31, 1997 totaled $99,192 with
$37,953 allocated to the Berg Properties.
MORTGAGE NOTES PAYABLE:
The Mortgage notes payable generally require monthly installments of
interest and principal over various terms extending through the year 2014.
MORTGAGE NOTES PAYABLE (RELATED PARTIES):
The Berg Properties acquired new debt from Berg & Berg Enterprises, Inc. in
June of 1998 in order to repay amounts previously allocated to the Berg
Properties under the lines of credit as well as to fund distributions to the
Berg Group. Total distributions to the Berg Group during the six months ended
June 30, 1998 were $140,225, of which $119,956 was funded with proceeds from
mortgage notes payable (related parties). Such debt was originally due March
1999, and bears interest at a rate equal to that charged on the line of credit.
The Company has received an extension from Berg & Berg Enterprises, Inc. to
December 1999.
There is no set repayment plan associated with this debt; payments are made
to Berg & Berg Enterprises, Inc. on demand.
In connection with the Company's acquisition of the sole general
partnership interests in the four operating partnerships (See Note 1), certain
mortgage notes payable and portions of mortgage notes payable (related parties)
were retired subsequent to June 30, 1998 through a combination of new debt and
equity.
- 71 -
The following table sets forth certain information regarding debt
outstanding as of June 30, 1998 and December 31, 1997:
Balance Balance
Description Collateral Properties June 30, Dec. 31, 1997 Matures Rate
- ----------------------------------- ----------------------------------------- ------------- --------------- ------------- ----------
LINES OF CREDIT:
Wells Fargo Bank 2251 Lawson Lane, Santa Clara, CA - $37,953 10/99 (1)
3301 Olcott, Santa Clara, CA
1230 & 1250 Arques, Sunnyvale, CA
1135 Kern, Sunnyvale, CA
405 Tasman, Sunnyvale, CA
1190 Morse Avenue, Sunnyvale, CA
450 National Avenue, Mountain View, CA
10300 Bubb Road, Cupertino, CA
10440 Bubb Road, Cupertino, CA
10460 Bubb Road, Cupertino, CA
20605-20705 Valley Green Dr, Cupertino, CA
20400 Mariani, Cupertino, CA
2033-2243 Samaritan Drive, San Jose, CA
10500 De Anza Boulevard, Cupertino, CA
MORTGAGE NOTES 2033-2043 Samaritan Drive, San Jose, CA 156,632 - 3/99 (1)
(Related Parties) 2133 Samaritan Drive, San Jose, CA
2233-2243 Samaritan Drive, San Jose, CA
MORTGAGE NOTES:
Great West Life & Annuity Insurance
Company 6320 San Ignacio Ave., San Jose, CA 7,804 7,872 2/04 7%
Great West Life & Annuity Insurance
Company 6385 San Ignacio Ave, San Jose, CA 3,723 3,755 5/04 7%
6540 Via del Oro, San Jose, CA
Great West Life & Annuity Insurance
Company 1170 Morse Ave., Sunnyvale, CA 1,969 1,986 5/04 7%
National Electrical Contractors
Association Pension Benefit
Trust Fund 2251 Lawson Lane, Santa Clara, CA 4,692 4,820 1/09 9.75%
Prudential Capital Group 1230 E. Arques, Sunnyvale, CA 1,110 1,147 11/07 9%
Prudential Capital Group 20605-20705 Valley Green Dr, Cupertino, CA 3,158 3,250 10/98 8.5%
Prudential Capital Group 20400 Mariani, Cupertino, CA 2,095 2,154 3/09 8.75%
Prudential Capital Group 1250 E. Arques, Sunnyvale, CA 2,184 2,312 11/99 9.5%
New York Life Insurance Company 10440 Bubb Road, Cupertino, CA 441 452 8/09 9.63%
Home Savings & Loan Association 10460 Bubb Road, Cupertino, CA 547 569 1/07 9.5%
Amdahl Corporation 3120 Scott, Santa Clara, CA 7,040 7,132 3/14 9.42%
Citicorp U.S.A. Inc. 2800 Bayview Drive, Fremont, CA 3,105 3,105 4/00 (2)
------------- ---------------
MORTGAGE NOTES TOTAL 37,868 38,554
============= ===============
(1) The lesser of (a) the Wells Fargo prime rate in effect on the first day of
each calendar month; (b) LIBOR plus 1.65%;or (c) the Wells Fargo Purchased
Funds Rate quoted on the first day of each calendar month plus 1.65%. The
average rates for the six months ended June 30, 1998 and the years ended
December 31, 1997 and 1996 were 7.24%, 7.25% and 7.04%, respectively.
(2) One month LIBOR plus 1.625% adjusted monthly.
- 72 -
Principal payments on outstanding borrowings as of June 30, 1998 are due as
follows:
Mortgage Notes
Payable Mortgage Notes
(Related Parties) Payable Total
----------------- ---------------- -------------------
1998 - $ 3,778 $ 3,778
1999 $156,632 1,325 157,957
2000 - 4,552 4,552
2001 - 1,580 1,580
2002 - 1,726 1,726
Thereafter - 24,907 24,907
----------------- ---------------- -------------------
$156,632 $37,868 $194,500
================= ================ ===================
4. FAIR VALUES OF FINANCIAL INSTRUMENTS
The Berg Properties' financial instruments include receivables, payables
and debt. Considerable judgment is required in interpreting market data to
develop estimates of fair value. Accordingly, the estimates presented herein are
not necessarily indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the estimated fair value
amounts.
Based on borrowing rates currently available to the Berg Properties,
management has estimated that mortgage notes payable with an aggregate carrying
value of $37,868 have an estimated aggregate fair value of $37,531 at June 30,
1998. Receivables and payables are carried at amounts that approximate fair
value due to their short-term maturities.
5. RELATED PARTY TRANSACTIONS
The Berg Properties are held by partnerships that have received certain
management services and financing from members of the Berg Group to the benefit
of the partnerships and the properties. Such services have included general
operating expenses, office space, and administrative and technical assistance.
The partnerships have reimbursed the Berg Group members for the cost of
providing such services and property management services on a fee basis.
Expenses related to the properties for general and property-specific services
paid to related parties aggregated $645, $1,050 and $827 for the six months
ended June 30, 1998 and for the years ended December 31, 1997 and1996,
respectively.
Included in the financing described in Note 3, certain affiliated entities
have extended funds to the partnerships which own the properties. These amounts
are included in mortgage notes payable (related parties) on the combined balance
sheet. Such amounts are due upon demand and accrue interest at a rate equal to
that charged on the credit facilities and interest incurred on such advances is
included in interest expense (related parties) in the combined statements of
operations.
6. OPERATING LEASES
The Berg Properties are leased to tenants under net operating leases with
initial terms extending to the year 2008. Future minimum rentals under
non-cancelable operating leases, excluding tenant reimbursements of expenses, as
of June 30, 1998, are approximately as follows:
1998 $ 22,065
1999 43,585
2000 38,867
2001 33,960
2002 27,296
Thereafter 41,851
-------------
$207,624
=============
- 73 -
Minimum rental revenues, as presented for the six months ended June 30,
1998 and for the years ended December 31, 1997, and 1996, contain straight-line
adjustments for rental revenue increases in accordance with generally accepted
accounting principles. The aggregate rental revenue increases resulting from the
straight-line adjustments for the six months ended June 30, 1998 and for the
years ended December 31, 1997 and 1996 were $820, $1,301 and $586, respectively.
- 74 -
Report of Independent Accountants on
Financial Statement Schedule
To members of the Berg Group
Our audits of the combined financial statements of the Berg Properties referred
to in our report dated January 29, 1999, included in this report of the Berg
Properties in this Form 10-K of Mission West Properties, Inc., also included an
audit of the combined financial statement schedule listed in Item 14(a)(2) of
this Form 10-K. In our opinion, this financial statement schedule presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related combined financial statements.
PricewaterhouseCoopers LLP
San Francisco, California
January 29, 1999
- 75 -
The Berg Properties (predecessor)
Schedule III
Real Estate and Accumulated Depreciation
December 31, 1997
-----------------
Cost
Initial Cost Capitalization
--------------------------------------- Subsequent to
Shell Tenant Acquisition/
Building Sq. Ft. Encumbrance Land Improvements Improvements Improvement
- ------------------- -------- ----------- ----------- ------------ ------------ ------------
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 $1,986,001 48,685 909,965 793,345 800,000
6540 Via Del Oro 31,800 1,877,772 80,772 334,458 303,990 0
6385-6387 San Ignacio 34,800 1,877,772 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 39,800 564,762 784,519 784,519 7,716
1740 McCandless 51,602 732,232 1,017,155 1,017,155 5,951
1680 McCandless 73,253 990,398 0 0 3,562,232
1600 McCandless 40,970 581,364 807,582 807,582 6,126
1500 McCandless 42,700 605,913 841,683 841,683 6,565
1450 McCandless 45,312 606,086 0 0 2,136,034
1350 McCandless 46,272 593,511 0 0 2,206,705
1325 McCandless 77,568 1,027,019 0 0 3,574,201
1425 McCandless 38,579 549,423 763,211 763,211 5,790
1525 McCandless 28,655 406,614 564,834 564,834 4,285
1575 McCandless 33,263 472,002 655,665 655,665 4,974
1625 McCandless 33,625 477,139 662,801 662,801 5,027
1745 McCandless 35,731 507,023 704,313 704,313 5,342
1765 McCandless 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 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 53,000 3,170,096 1,052,190 1,158,065 1,172,833 9,430
4750 Patrick Henry 65,780 2,375,884 1,163,575 1,146,854 1,147,020 0
10401 Bubb 20,330 95,966 132,403 208,010 0
2800 Bayview 59,736 3,105,000 737,855 1,734,146 0 0
--------- ----------- ----------- ------------ ------------ ------------
Subtotal 3,779,914 $76,507,501 $30,426,287 $51,806,662 $57,977,217 $38,018,786
========= =========== =========== ============ ============ ============
Gross Amount at Which
Carried at Close of Period
-----------------------------------------
Shell & Tenant Accumulated Date of
Building Land Improvements Improvements Total Depreciation Completion
- ------------------- ------------ ------------ ------------- ------------- -------------- ------------
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 564,762 787,362 789,392 2,141,516 (322,450) 1995
1740 McCandless 732,232 1,019,348 1,020,913 2,772,493 (260,940) 1995
1680 McCandless 990,398 1,721,342 1,840,890 4,552,630 (541,969) 1996
1600 McCandless 581,364 809,839 811,451 2,202,654 (266,610) 1995
1500 McCandless 605,913 844,216 845,715 2,295,844 (277,866) 1995
1450 McCandless 593,511 1,057,469 1,091,140 2,742,120 (345,049) 1995
1350 McCandless 606,086 1,079,873 1,114,257 2,800,216 (352,358) 1996
1325 McCandless 1,027,049 1,738,889 1,835,282 4,601,220 (612,079) 1997
1425 McCandless 549,423 765,344 766,868 2,081,635 (261,180) 1995
1525 McCandless 406,614 566,413 567,540 1,540,567 (193,498) 1995
1575 McCandless 472,002 657,498 658,806 1,788,306 (224,614) 1995
1625 McCandless 477,139 664,653 665,976 1,807,768 (227,058) 1995
1745 McCandless 507,023 706,281 707,687 1,920,991 (241,280) 1995
1765 McCandless 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 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 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
=========== ============= ============= ============= =============
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The Berg Properties (Predecessor)
Schedule III
Real Estate and Accumulated Depreciation
December 31, 1997
(Dollars in thousands)
----------
Summary of activity for real estate and accumulated depreciation is as follows:
December 31,
-----------------------------------------------------------
1997 1996 1995
----------------- ----------------- -----------------
Real estate:
Balance at beginning of year $154,999 $133,014 $120,382
Improvements and acquisition/development of real 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
================= ================= =================
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company changed its independent auditors on March 12, 1998 as set forth in a
report on Form 8-K dated March 13, 1998, which is incorporated herein by this
reference.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The response to this item is incorporated by reference from the sections titled
"Directors and Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the registrant's proxy statement for its 2000 Annual
Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The response to this item is incorporated by reference from the section titled
"Executive Compensation" in the registrant's proxy statement for its 2000 Annual
Meeting of Stockholders, excluding, however, the section titled "Executive
Compensation - Performance Graph," "Executive Compensation - Report on Executive
Compensation by the Compensation Committee of the Board of Directors," none of
which are incorporated by reference in response to this item.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The response to this item is incorporated by reference from the section titled
"Share Ownership" in the registrants proxy statement for its 2000 Annual Meeting
of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The response to this item is incorporated by reference from the section titled
"Certain Relationships and Related Transactions" in the registrants proxy
statement for its 2000 Annual Meeting of Stockholders.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Exhibits required by Item 601 of Regulation S-K.
EXHIBIT INDEX
3.2.1+ Articles of Amendment and Restatement of Mission West Properties, Inc.
3.2.2+ Restated Bylaws of Mission West Properties, Inc.
10.1.1** Amended and Restated Agreement of Limited Partnership of Mission West Properties, L.P.
10.1.2** Amended and Restated Agreement of Limited Partnership of Mission West Properties, L.P. I
10.1.3** Amended and Restated Agreement of Limited Partnership of Mission West Properties, L.P. II
10.1.4** Amended and Restated Agreement of Limited Partnership of Mission West Properties, L.P. III
10.2** Exchange Rights Agreement between Mission West Properties and the Limited Partners
10.3.1* 1997 Stock Option Plan
10.3.2* Form of Incentive Stock Option Agreement
10.3.3* Form of Non-statutory Stock Option Agreement
10.3.4* Form of Directors Stock Option Agreement
10.4.1* Acquisition Agreement, sated as of May 14, 1998, among Mission West Properties, certain partnerships
10.4.2* Amendment of Acquisition Agreement, dated as of July 1, 1998
10.4.3* Form of Partnership Interest Purchase Demand Note
10.5.1* Stock Purchase Agreement dated as of May 4, 1998, between Mission West Properties and the purchasers of
10.5.2* Stock Purchase Agreement dated as of May 4, 1998 between Mission West Properties and the purchasers of
10.5.3** Form of Registration Rights Agreement for purchasers, who acquired shares of Common Stock under the May
10.6** Pending Projects Acquisition Agreement among Mission West Properties, the Operating Partnership and the
10.7** Berg Land Holdings Option Agreement between Mission West Properties and certain members of the Berg
10.8* Berg & Berg Enterprises, Inc. Sublease Agreement
10.9++ Amended and Restated Stock Option Agreement fro Michael J. Anderson (200,000 shares of Common Stock)
10.10* Restricted Stock Purchase Agreement for Michael J. Anderson (200,000 shares of Common Stock)
10.11* Promissory Note from Michael J. Anderson
10.12* Lease Agreement with Apple Computer, Inc.
10.13* Lease Agreement with Cisco Systems, Inc,
10.14* Lease Agreement with Amdahl Corporation
10.15* Prudential Promissory Note
10.16* Prudential Deed of Trust
10.17* Prudential Certificate Regarding Distribution
10.18* Prudential Guaranty
10.19+ Waiver Agreement
10.20** Ownership Limit Exemption Agreement dated December 29, 1999 between Mission West Properties and Dan and
10.21x Lease Agreement with Microsoft Corporation
10.22x Contribution Agreement
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10.23xx Assumption Agreement for Wells Fargo Line of Credit
10.24xx Form of secured note payable to the Berg Group
10.25xx Form of deed of trust granted to the Berg Group
10.26xx Supplemental Agreement among Mission West Properties, Inc., Carl E. Berg and Clyde J. Berg
10.27 Revolving Credit -Secured Promissory Note
10.28 Deed of Trust Securing Promissory Note
21.1++ Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of PricewaterhouseCoopers LLP
24.1xx Powers of Attorney (included in the signature page on page ___ of this report)
27.1 Financial Data Schedule
* Incorporated herein by reference to the same-numbered exhibit to the
Company's Registration Statement on Form S-4 filed on May 15, 1998 and
declared effective on November 23, 1998.
** Incorporated herein by reference to the same-numbered exhibit to the
Company's Post-effective Amendment No. 1 to Registration Statement on Form
S-4 filed on Form S-3 on February 11, 1999. (Commission File No.
333-52835-99).
+ Incorporated herein by reference to the same-numbered exhibit to Amendment
No. 4 to the Registration Statement on Form S-4 filed on November 16, 1998
and declared effective on November 23, 1998.
++ Incorporated herein by reference to the same-numbered exhibit to the annual
report on Form 10-K for 1998 filed on March 31, 1999
x Incorporated herein by reference to the same-numbered exhibit to current
report on Form 8-K filed on May 14, 1999 (Commission File No. 000-25235)
xx Incorporated herein by reference to the same-numbered exhibit to the
Registration Statement on Form S-11 filed on June 8, 1999 (Commission File
No. 333-80203)
(b) Reports on Form 8-K.
The registrant has not filed any reports on Form 8-K during the last
quarter of the period covered by this report.
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SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant and has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MISSION WEST PROPERTIES, INC.
Date: March 30, 2000 By: /s/ CARL E. BERG
-----------------
Carl E. Berg
Chairman of the Board,
Chief Executive Officer,
President and Director
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Carl E. Berg his true and lawful attorney-in-fact
with the power of substitution, to sign any amendments to this Report on Form
10-K and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each of said attorney-in-fact, or his or her
substitute, may do or choose to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Signature Title Date
/s/ CARL E. BERG Chief Executive Officer, March 30, 2000
- ------------------------------- President and Director
Carl E. Berg (Principal Financial
and Accounting Officer)
/s/ JOHN BOLGER
- ------------------------------- Director March 30, 2000
John Bolger
/s/ WILLIAM A. HASLER Director March 30, 2000
- -------------------------------
William A. Hasler
/s/ LAWRENCE B. HELZEL Director March 30, 2000
- -------------------------------
Lawrence B. Helzel
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