-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LnGpexd0Zr6oiYNRmcBBCP1G4oxJcOWUt5ZE8C0+v22f9JSxkKeXAvXIZuDew2FP b0c0gmKothkMkM5BRPaWHQ== 0001067419-00-000002.txt : 20000331 0001067419-00-000002.hdr.sgml : 20000331 ACCESSION NUMBER: 0001067419-00-000002 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MISSION WEST PROPERTIES INC CENTRAL INDEX KEY: 0001067419 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 952635431 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-25235 FILM NUMBER: 584033 BUSINESS ADDRESS: STREET 1: 10050 BANDLEY DRIVE CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4087250700 MAIL ADDRESS: STREET 1: 10050 BANDLEY DR CITY: CUPERTINO STATE: CA ZIP: 95014 10-K 1 FORM 10-K 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 -------- ---------- (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 --------------- 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." - i - MISSION WEST PROPERTIES, INC. 1999 FORM 10-K ANNUAL REPORT
Table of Contents PART I Page No. -------- 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
- ii - 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; - 1 - - 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%. - 2 - 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 - 3 - 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 -------------------- ------------------- 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 -------------------- ------------------- 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. - 4 - (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. - 5 - 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; - 6 - - 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 - 7 - 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. - 8 - 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 - 9 - 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. - 10 - 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. - 11 - 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 - 12 - 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 =========== ============= ============= ============= =============
- 76 - 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 ================= ================= =================
- 77 - 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. - 78 - 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. - 79 - 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. - 80 - 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 - 81 - 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. - 82 - 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 - 83 - EX-10.27 2 REVOLVING CREDIT - SECURED PROMISSORY NOTE REVOLVING CREDIT SECURED PROMISSORY NOTE ("Note") $50,000,000.00 March 1, 2000 FOR VALUE RECEIVED, Mission West Properties, L.P., a Delaware limited partnership, Mission West Properties, L.P. I, a Delaware limited partnership, Mission West Properties L.P. II, a Delaware limited partnership, and Mission West Properties, L.P. III, a Delaware limited partnership (collectively "Borrower"), promises to pay to the order of Berg & Berg Enterprises, LLC, a California limited liability company ("Lender") or its assigns, at 10050 Bandley Drive, Cupertino, California 95014, or at such other place as the holder of this Note may from time to time designate, the principal sum of Fifty Million Dollars ($50,000,000.00) (the "Credit Amount") or so much of that sum as may be advanced under this Note from time to time by any holder, plus interest as computed herein. Interest on the principal sum of this Note from time to time outstanding will be computed from the date of each advance of principal at LIBOR plus 1.30% (the "Applicable Interest Rate"). Interest will be computed on the basis of a three hundred sixty (360) day year and the actual number of days elapsed, which will result in the payment of more interest than if a 365-day year were used. All accrued and unpaid principal and interest shall be due and payable no later than February 28, 2001. Advances under this Note may be drawn by Borrower, up to the Credit Amount, upon not less than 5 days notice to Lender. Each payment shall be credited first on the interest then due and the remainder on the principal sum. The undersigned agrees that the holder of this Note may, without notice to the undersigned and without affecting the liability of the undersigned, accept additional or substitute security for this Note, or release any security or any party liable for this Note, or extend or renew this Note. If the undersigned consist of more than one person or entity, their liability and obligations under this Note will be joint and several. Borrower jointly and severally waives diligence, presentment, protest and demand, notice of protest, dishonor and non-payment of this Note, expressly agrees that this Note or any payment hereunder, may be extended from time to time, and consents to the acceptance of further security for this Note, including other types of security, all without in any way affecting the liability of the Borrower. The right to plead any and all statutes of limitations as a defense to any demand on this Note, or on any guaranty hereof, or to any agreement to pay the same, or to any demand secured by the Deed of Trust, or other security, securing this Note, against Borrower, the holder of any property encumbered by the Deed of Trust or other instrument securing this Note, and any guarantors or sureties, is expressly waived by each and all said parties. All amounts payable under this Note are payable in lawful money of the United States, free from any offset, deduction or counterclaim. Checks will constitute payment only when collected. Upon any default in the payment of any amounts due under this Note or upon any default under the Deed of Trust, the holder may, at its option and upon ten (10) days' written notice to the undersigned, declare the entire unpaid principal sum of this Note together with all accrued interest to be due and payable provided, however, that if the undersigned should cure such default under this Note or the Deed of Trust within the time period described above, the right of the holder to declare the entire unpaid principal sum of this Note together with all accrued interest immediately due and payable shall terminate as to such default as if no such default occurred. The undersigned agrees to pay all costs of collection when incurred, including but not limited to reasonable attorneys' fees. If any suit or action is instituted to enforce this Note, the undersigned promises to pay, in addition to the costs and disbursements otherwise allowed by law, such sum as the court may adjudge as reasonable attorneys' fees in such suit or action. This Note may be prepaid in whole or in part at any time without penalty. Until the maturity date, including all extensions thereof, amounts repaid may be subsequently advanced under this Note, up to the Credit Amount. This Note will be governed by the laws of the State of California. This Note is a non-recourse loan secured by a Deed of Trust and Assignment of Rents (the "Deed of Trust") executed by the undersigned in favor of Lender and covering real property located in San Jose, California. The Deed of Trust contains provisions for the acceleration of the maturity of this Note. Mission West Properties, L.P., Mission West Properties, L.P. I, Mission West Properties, L.P. II, and Mission West Properties, L.P. III By: Mission West Properties, Inc., their general partner /s/ Carl E. Berg ----------------------------------------- By: Carl E. Berg, President EX-10.28 3 DEED OF TRUST SECURING REVOLVING PROMISSORY NOTE RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO Name Berg & Berg Enterprises, LLC Street 10050 Bandley Drive Address City,State, Zip Cupertino, CA 95014 Order No. - -------------------------------------------------------------------------------- DEED OF TRUST WITH ASSIGNMENT OF RENTS (This Deed of Trust contains a "DUE-ON-SALE" clause) This DEED OF TRUST, made March 1, 2000 , between Mission West Properties, L.P. II, a Delaware limited partnership, herein called TRUSTOR, whose address is 10050 Bandley Drive, Cupertino, CA 95014 ALLIANCE TITLE COMPANY, a California Corporation, herein called TRUSTEE, and Berg & Berg Enterprises, LLC, a California limited liability company , herein called BENEFICIARY, Trustor irrevocably grants, transfers and assigns to Trustee in Trust, with Power of Sale, that property in the County of Santa Clara, State of California, described as: See Exhibits A, and B attached hereto for Legal Description If the trustor shall sell, convey or alienate said property, or any part thereof, or any interest therein, or shall be divested of his title or any interest therein in any manner or way, whether voluntarily or involuntarily, without the written consent of the beneficiary being first had and obtained, beneficiary shall have the right, at its option, to declare any indebtedness or obligations secured hereby, irrespective of the maturity date specified in any note evidencing the same, immediately due and payable. Together with the rents, issues and profits thereof, subject, however, to the right, power and authority hereinafter given to and conferred upon Beneficiary to collect and apply such rents, issues and profits. For the Purpose of Securing (1) payment of the sum of $50,000,000.00, with interest thereon according to the terms of a promissory note or notes of even date herewith made by Trustor, payable to order of Beneficiary, and extensions or renewals thereof; (2) the performance of each agreement of Trustor incorporated by reference or contained herein or reciting it is so secured; (3) Payment of additional sums and interest thereon which may hereafter be loaned to Trustor, or his successors or assigns, when evidenced by a promissory note or notes reciting that they are secured by this Deed of Trust. To protect the security of this Deed of Trust, and with respect to the property above described, Trustor expressly makes each and all of the agreements, and adopts and agrees to perform and be bound by each and all of the terms and provisions set forth in subdivision A of that certain Fictitious Deed of Trust referenced herein, and it is mutually agreed that all of the provisions set forth in subdivision B of that certain Fictitious Deed of trust recorded in the book and page of Official Records in the office of the county recorder of the county where said property is located, noted below ormopposite the name of such county, namely:
COUNTY BOOK PAGE COUNTY BOOK PAGE COUNTY BOOK PAGE COUNTY BOOK PAGE Alameda 1288 556 Kings 858 713 Placer 1028 379 Sierra 38 187 Alpine 3 130-31 Lake 437 110 Plumas 166 1307 Siskiyou 506 762 Amador 133 438 Lassen 192 367 Riverside 3788 347 Solano 1287 621 Butte 1330 513 Los Angeles T-3878 874 Sacramento 71-10-26 615 Sonoma 2067 427 Calaveras 185 338 Madera 911 136 San Benito 300 405 Stanislaus 1970 56 Colusa 323 391 Marin 1849 122 San 6213 768 Sutter 655 585 Contra Costa 4684 1 Mariposa 90 453 San Francisco A-804 596 Tehama 457 183 Del Norte 101 549 Mendocino 667 99 San Joaquin 2855 283 Trinity 108 595 El Dorado 704 635 Merced 1660 753 San Luis 1311 137 Tulare 2530 108 Fresno 5052 623 Modoc 191 93 San Mateo 4788 175 Tuolumne 177 160 Glenn 469 76 Mono 69 302 Santa Barbara 2065 881 Ventura 2607 237 Humboldt 801 83 Monterey 357 239 Santa Clara 6626 664 Yolo 769 16 Imperial 1189 701 Napa 704 742 Santa Cruz 1638 607 Yuba 398 693 Inyo 165 672 Nevada 363 94 Shasta 800 633 Kern 3756 690 Orange 7182 18 San Diego SERIES 5 Book 1964, Page 149774
Said agreements, terms and provisions contained in said subdivision A and B, (identical in all counties are printed on the reverse side hereof) are by the within reference thereto, incorporated herein and made a part of this Deed of Trust for all purposes as fully as if set forth at length herein, and Beneficiary may charge for a statement regarding the obligation secured hereby, provided the charge therefor does not exceed the maximum allowed by laws. The foregoing assignment of rents is absolute unless initialed here, in which case, the assignment serves as additional security. The undersigned Trustor, requests that a copy of any notice of default and any notice of sale hereunder be mailed to him at this address hereinbefore set forth. Dated: ------------------------------------------ STATE OF CALIFORNIA COUNTY OF S.S. --------------------------------------------------- On before me, ----------------------------------------- A Notary Public in and for said County and State, personally ---------------------------------------- ---------------------------------------- Personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies) and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s), acted, executed the instrument. WITNESS my hand and official seal. Signature ------------------------------- DO NOT RECORD The following is a copy of Subdivision A and B of the fictitious Deed of Trust recorded in each county in California as stated in the foregoing Deed of Trust and incorporated by reference is said Deed of Trust as being a part thereof as if set forth at length therein. A. To protect the security of this Deed of Trust, Trustor agrees: (1) To keep said property in good condition and repair not to remove or demolish any building thereon; to complete or restore promptly and in good and workmanlike manner any building which may be constructed, damaged or destroyed thereon and to pay when due all claims for labor performed and materials furnished therefor; to comply with all laws affecting said property or requiring any alterations or improvements to be made thereon, not to commit or permit waste thereof; not to commit, suffer or permit any act upon said property in violation of law; to cultivate, irrigate, fertilize, fumigate, prune and do all other acts which from the character or use of said property may be reasonably necessary, the specific enumerations herein not excluding the general. (2) To provide, maintain and deliver to Beneficiary fire insurance satisfactory to and with loss payable to Beneficiary. The amount collected under any fire or other insurance policy may be applied by Beneficiary upon any indebtedness secured hereby and in such order as Beneficiary may determine, or at option of Beneficiary the entire amount so collected or any part thereof may be released to Trustor. Such application or release shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice. (3) To appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee; and to pay all costs and expenses, including cost of evidence of title and attorney's fees in a reasonable sum, in any such action or proceeding in which Beneficiary or Trustee may appear, and in any suit brought by Beneficiary to foreclose this Deed. (4) To pay: at least ten days before delinquency all taxes and assessments affecting said property, including assessments on appurtenant water stock; when due, all encumbrances, charges and liens, with interest, on said property or any part thereof, which appear to be prior or superior hereto; all costs, fees and expenses of this Trust. Should Trustor fail to make any payment or to do any act as herein provided, then Beneficiary or Trustee, but without obligation so to do and without notice to or demand upon Trustor and without releasing Trustor from any obligation hereof, may: make or do the same in such manner and to such extent as either may deem necessary to protect the security hereof, Beneficiary or Trustee being authorized to enter upon said property for such purposes; appear in and defend any action or proceeding purporting to affect the security hereof or the rights or powers of Beneficiary or Trustee; pay, purchase, contest or compromise any encumbrance, charge or lien which in the judgment of either appears to be prior or superior hereto; and, in exercising any such powers, pay necessary expenses, employ counsel and pay his reasonable fees. (5) To pay immediately and without demand all sums so expended by Beneficiary or Trustee, with interest from date of expenditure at the amount allowed by law in effect at the date hereof, and to pay for any statement provided for by law in effect at the date hereof regarding the obligation secured hereby any amount demanded by the Beneficiary not to exceed the maximum allowed by law at the time when said statement is demanded. B. It is mutually agreed: (1) That any award of damages in connection with any condemnation for public use of or injury to said property or any part thereof is hereby assigned and shall be paid to Beneficiary who may apply or release such moneys received by him in the same manner and with the same effect as above provided for disposition of proceeds of fire or other insurance. (2) That by accepting payment of any sum secured hereby after its due date, Beneficiary does not waive his right either to require prompt payment when due of all other sums so secured or to declare default for failure so to pay. (3) That at any time or from time to time, without liability therefor and without notice, upon written request of Beneficiary and presentation of this Deed and said note for endorsement, and without affecting the personal liability of any person for payment of the indebtedness secured hereby, Trustee may: reconvey any part of said property; consent to the making of any map or plate thereof; join in granting any easement thereon; or join in any extension agreement or any agreement subordinating the lien or charge hereof. (4) That upon written request of beneficiary stating that all sums secured hereby have been paid, and upon surrender of this Deed and said note to Trustee for cancellation and retention or other disposition as Trustee in its sole discretion may choose and upon payment of its fees, Trustee shall reconvey, without warranty, the property then hereunder. The recitals in such reconveyance of any matter or facts shall be conclusive proof of the truthfulness thereof. The Grantee in such reconveyance may be described as "the person or persons legally entitled thereto." (5) That as additional security, Trustor hereby gives to and confers upon Beneficiary the right, power and authority, during the continuances of these Trusts, to collect the rents, issues and profits of said property, reserving unto Trustor the right, prior to any default by Trustor in payment of any indebtedness secured hereby or in performance of any agreement hereunder, to collect and retain such rents, issues and profits as they become due and payable. Upon any such default, Beneficiary may at any time without notice, either in person, by agent, or by a receiver to be appointed by a court, and without regard to the adequacy of any security for the indebtedness hereby secured, enter upon and take possession of said property or any part thereof, in his own name sue for or otherwise collect such rents, issues, and profits, including those past due and unpaid, and apply the same, less costs and expenses of operation and collection, including reasonable attorney's fees, upon any indebtedness secured hereby, and in such order as Beneficiary may determine. The entering upon and taking possession of said property, the collection of such rents, issues and profits and the application thereof as aforesaid, shall not cure or waive any default or notice of default hereunder or invalidate any act done pursuant to such notice. (6) That upon default by Trustor in payment of any indebtedness secured hereby or in performance of any agreement hereunder, Beneficiary may declare all sums secured hereby immediately due and payable by delivery to Trustee of written declaration of default and demand for sale and of written notice of default and of election to cause to be sold said property, which notice Trustee shall cause to be filed for record. Beneficiary also shall deposit with Trustee this Deed, said note and all documents evidencing expenditures secured hereby. After the lapse of such time as may then be required by law following the recordation of said notice of default, and notice of sale having been given as then required by law, Trustee, without demand on Trustor, shall sell said property at the time and place fixed by it in said notice of sale, either as a whole or in separate parcels, and in such order as it may determine, at public auction to the highest bidder for cash in lawful money of the United States, payable at time of sale, Trustee may postpone sale of all or any portion of said property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement at the time fixed by the preceding postponement. Trustee shall deliver to such purchaser its deed conveying the property so sold, but without any covenant or warranty, express or implied. The recitals in such deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Any person, including Trustor, Trustee, or Beneficiary as hereinafter defined, may purchase at such sale. After deducting all costs, fees and expenses of Trustee and of this Trust, including cost of evidence of title in connection with sale, Trustee shall apply the proceeds of sale to payment of: all sums expended under the terms hereof, not then repaid, with accrued interest at the amount allowed by law in effect at the date hereof; all other sums then secured hereby; and the remainder, if any, to the persons legally entitled thereto. (7) Beneficiary, or any successor in ownership of any indebtedness secured hereby, may from time to time, by instrument in writing, substitute a successor or successors to any Trustee named herein or acting hereunder, which instrument, executed by the Beneficiary and duly acknowledged and recorded in the office of the recorder of the county or counties where said property is situated, shall be conclusive proof of proper substitution of such successor Trustee or Trustees, who shall, without conveyance from the Trustee predecessor, succeed to all its title, estate, rights, powers and duties. Said instrument must contain the name of the original Trustor, Trustee and Beneficiary hereunder, the book and page where this Deed is recorded and the name and address of the new Trustee. (8) That this Deed applies to, insures to the benefit of, and binds all parties hereto, their heirs, legatees, devisees, administrators, executors, successors and assigns. The term Beneficiary shall mean the owner and holder, including pledges, of the note secured hereby, whether or not named as Beneficiary herein. In this Deed, whenever the context so requires, the masculine gender includes the feminine and/or neuter, and the singular number includes the plural. (9) That Trustee accepts this Trust when this Deed, duly executed and acknowledged, is made a public record as provided by law. Trustee is not obligated to notify any party hereto of pending sale under any other Deed of Trust or of any action or proceeding in which Trustor, Beneficiary or Trustee shall be a party unless brought by Trustee. REQUEST FOR FULL RECONVEYANCE TO Alliance Title Company, TRUSTEE: The undersigned is the legal owner and holder of the note or notes, and of all other indebtedness secured by the foregoing Deed of Trust. Said note or notes, together with all other indebtedness secured by said Deed of Trust, have been fully paid and satisfied; and you are hereby requested and directed, on payment to you of any sums owing to you under the terms of said Deed of Trust, to cancel said note or notes above mentioned, and all other evidences of indebtedness secured by said Deed of Trust delivered to you herewith, together with the said Deed of Trust, and to reconvey, without warranty, to the parties designated by the terms of said Deed of Trust, all the estate now held by you under the same. Dated ---------------------------------- ------------------------------------- Signature must be notarized ------------------------------------- Please mail Deed of Trust, Note and Reconveyance to ------------------------------------------------------- Do not lose or destroy this Deed of Trust OR THE NOTE which it secures. Both must be delivered to the Trustee for cancellation before reconveyance will be made. Exhibit A Legal Description All that real property situated in the City of Milpitas, County of Santa Clara, State of California, described as follows: Parcels 3, 6, 7 and 13, as shown on that Parcel Map filed for record in the office of the Recorder of the County of Santa Clara, State of California on December 5, 1984, in Book 536 of Maps, page(s) 41,42, and 43. Exhibit B Legal Description All that real property situated in the City of San Jose, County of Santa Clara, State of California, described as follows: Parcel One: Lot 1, as shown on that certain Map of Tract No. 7502, which Map was filed for record in the Office of the Recorder of the County of Santa Clara, State of California on April 19, 1984 in book 527 of Maps, pages 39, 40 and 41. Parcel Two: All that certain Parcel of Land lying Westerly of the most Westerly line of Lot 1, Tract No. 7502, filed April 19, 1984 in Book 527 of Maps, pages 39, 40 and 41, shown on Plat Map of Parcel Three in Resolution No. 59585, recorded April 16, 1987 in book K 112, Page 1927, Official Records. EX-23.1 4 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Post-Effective Amendment No. 1 to Form S-4 on Form S-3 (File No. 333-52835) and Form S-3 (File No. 333-41203) and Form S-8 (File No. 333-80369) of our reports dated January 21, 2000, on our audits of the consolidated financial statements and financial statement schedule of Mission West Properties, Inc. as of December 31, 1999 and 1998, and for the years ended December 31, 1999 and 1998, November 30, 1997 and the one month period ended December 31, 1997, which are incorporated by reference in such registration statements. We also consent to the reference to us under the heading "Experts" in such registration statements. PRICEWATERHOUSECOOPERS LLP San Francisco, California March 29, 2000 EX-23.2 5 CONSENT OF INDEPENDENT ACCOUNTANTS EXHIBIT 23.2 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Post-Effective Amendment No. 1 to Form S-4 on Form S-3 (File No. 333-52835) and Form S-3 (File No. 333-41203) and Form S-8 (File No. 333-80369) of our reports dated January 29, 1999, on our audits of the combined financial statements of the Berg Properties (Predecessor) as of June 30, 1998 and December 31, 1997, and for the six months ended June 30, 1998 and each of the two years in the period ended December 31, 1997, which are incorporated by reference in such registration statements. We also consent to the reference to us under the heading "Experts" in such registration statements. PRICEWATERHOUSECOOPERS LLP San Francisco, California March 29, 2000 EX-27 6 FINANCIAL DATA SCHEDULE
5 The schedule contains summary financial information extracted from the Consolidated Balance Sheet as of December 31, 1999, and the Consolidated Statement of Operations for the year ended December 31, 1999 of Mission West Properties, Inc., and is qualified in its entirety by reference to such financial statements 0001067419 Mission West Properties, Inc. 1,000 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 6,553 0 0 0 0 0 716,182 (18,566) 712,704 0 0 0 0 17 100,665 712,704 0 85,993 0 11,467 14,341 0 13,869 6,531 0 6,531 0 0 0 6,531 .52 .52
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