UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
COMMISSION FILE NUMBER 1-8383
Mission West Properties, Inc.
(Exact name of registrant as specified in its charter)
Maryland 95-2635431
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(State or other jurisdiction of incorporation (I.R.S. Employer Identification
or orginization) Number)
10050 Bandley Drive
Cupertino, California 95014-2188
(Address of principal executive offices)
Registrant's telephone number, including area code is (408) 725-0700
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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. [X] YES [ ] NO
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
Common stock as of the latest practicable date:
16,959,874 shares outstanding as of November 8, 1999
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Mission West Properties, Inc.
FORM 10-Q
FOR THE QUARTER ENDED September 30, 1999
INDEX
<TABLE>
<CAPTION>
<S> <C> <C>
Page
PART I Financial Information
Item 1 Financial Statements:
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998...........................................3
Consolidated Statements of Operations for the three
and nine months ended September 30, 1999 and 1998...............4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998...................5
Notes to Consolidated Financial Statements......................6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations............................10
Item 3 Quanitative and Qualitative Disclosures About Market Risk......19
PART II Other Information
Item 5 Other Information..............................................21
Item 6 Exhibits and Reports on Form 8-K...............................21
SIGNATURES...................................................................22
</TABLE>
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PART I - Financial Information
Item 1 CONSOLIDATED FINANCIAL STATEMENTS
MISSION WEST PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
-----
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -----------------
(Unaudited)
ASSETS
<S> <C> <C>
Real estate assets, at cost
Land $146,844 $ 90,929
Buildings and improvements 561,333 430,510
------- -------
708,177 521,439
Less accumulated depreciation (15,022) (5,410)
------- -------
Net real estate assets 693,155 516,029
Cash and cash equivalents 8,270 246
Short-term investments 5,000 -
Deferred rent 4,707 1,624
Other assets 3,125 1,967
------- -------
Total assets $714,257 $519,866
======= =======
</TABLE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
Liabilities:
Line of credit $ 4,295 $ 27,201
Mortgage notes payable 134,405 157,188
Mortgage notes payable (related parties) 30,803 20,752
Interest payable 1,005 632
Security deposits 2,097 2,061
Prepaid rental income 6,963 3,246
Dividends/distributions payable 13,958 -
Refundable option payment 21,564 -
Accounts payable and accrued expenses 5,378 2,154
------- -------
Total liabilities 220,468 213,234
Commitments and contingencies (Note 8)
Minority interest 393,027 273,379
Stockholders' equity:
Preferred stock, $.001 par value, 20,000,000 shares
authorized, none issued and outstanding - -
Common stock, $.001 par value, 200,000,000 shares
authorized, 16,959,874 and 8,218,594 shares issued and
outstanding at September 30, 1999 and December 31, 1998,
respectively 17 8
Paid-in-capital 122,690 55,528
Less, amounts receivable on private placement - (900)
Accumulated (deficit) (21,945) (21,383)
------- -------
Total stockholders' equity 100,762 33,253
------- -------
Total liabilities and stockholders' equity $714,257 $519,866
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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MISSION WEST PROPERTIES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
---------
<TABLE>
<CAPTION>
Three months ended September 30, Nine months ended September 30,
-------------------------------- -------------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rental revenues from real estate $20,517 $13,317 $52,920 $13,317
Tenant reimbursements 3,957 2,101 8,352 2,101
Other income, including interest 136 37 578 178
------ ------ ------ ------
24,610 15,455 61,850 15,596
------ ------ ------ ------
Expenses:
Operating expenses 1,392 1,296 3,111 1,296
Real estate taxes 2,704 1,373 5,533 1,373
Depreciation of real estate 3,510 2,638 9,612 2,638
General and administrative 276 279 1,028 846
Interest 2,594 1,167 9,286 1,167
Interest (related parties) 646 3,183 1,635 3,183
------ ------ ------ ------
Total expenses 11,122 9,936 30,205 10,503
------ ------ ------ ------
Income before minority interest 13,488 5,519 31,645 5,093
Minority interest 11,310 5,389 27,521 5,389
------ ----- ------ ------
Net income (loss) $ 2,178 $ 130 $ 4,124 $ (296)
====== ====== ====== ======
Basic net income (loss) per share $ 0.13 $ 0.08 $ 0.37 $ (0.18)
====== ====== ====== ======
Diluted net income (loss) per share $ 0.13 $ 0.08 $ 0.37 $ (0.18)
====== ====== ====== ======
Weighted average number of
common shares outstanding (basic) 16,715,354 1,698,536 11,067,622 1,634,220
========== ========= ========== =========
Weighted average number of
common shares outstanidng (diluted) 16,808,181 1,698,536 11,178,229 1,634,220
========== ========= ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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MISSION WEST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Nine months ended September 30,
-------------------------------
1999 1998
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<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 4,124 $ (296)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Minority interest 27,521 5,389
Depreciation 9,612 2,638
Changes in assets and liabilities:
Deferred rent (3,083) (752)
Other assets (1,158) (2,001)
Interest payable 373 -
Interest payable (related parties) - 3,183
Security deposits (52) 52
Prepaid rental income 3,717 449
Accounts payable and accrued expenses 2,027 1,974
-------- --------
Net cash provided by operating activities 43,081 10,636
-------- --------
Cash flows from investing activities:
Improvements to real estate assets (31,376) (118)
Purchase of short-term investments (5,000) -
Deposit on sale of real estate 21,564 -
-------- --------
Net cash (used in) investing activities (14,812) (118)
-------- --------
Cash flows from financing activities:
Net repayments on line of credit (22,906) -
Proceeds from mortgage notes payable - 130,000
Principal payments on mortgage notes payable (22,783) (14,553)
Principal payments on mortgage notes payable (related parties) (39,639) (129,039)
Payments on receivable from private placements 372 -
Net proceeds from public offering of stock 66,900 -
Proceeds from stock options exercised 807 293
Repurchase of common stock (8) (11)
Minority interest distributions (846) -
Dividends paid (2,142) -
-------- --------
Net cash (used in) financing activities (20,245) (13,310)
-------- --------
Net increase (decrease) in cash and cash equivalents 8,024 (2,792)
Cash and cash equivalents, beginning 246 5,569
-------- --------
Cash and cash equivalents, ending $ 8,270 $ 2,777
======== ========
Supplemental information:
Cash paid for interest $ 10,548 $ 1,073
======== ========
Cash paid for income taxes $ - $ 115
======== ========
Supplemental schedule of non-cash investing and financing activities:
Note receivable in connection with issuance of common stock $ - $ 900
======== ========
Cancellation of note receivable in connection with repurchase of common stock $ 528 -
======== ========
Conversion of minority interest distributions payable to mortgage notes payable
(related parties) $ 16,607 -
======== ========
Assumption of lines of credit - $ 39,044
======== ========
Assumption of debt in connection with property acquisitions $ 33,083 -
======== ========
Assumption of other liabilities in connection with property acquisitions $ 1,284 -
======== ========
Issuance of limited partnership units in connection with property acquisitions $ 120,995 -
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
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MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share, square footage and limited
partnership unit amounts)
(unaudited)
-----
1. Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts
of Mission West Properties, Inc. and its controlled subsidiaries,
including the operating partnerships (the "Company"). All significant
intercompany balances have been eliminated in consolidation.
Minority interest represents the separate private ownership of the
operating partnerships by the Berg Group (defined as Carl E. Berg, his
brother Clyde J. Berg, members of their respective immediate families,
and certain entities they control) and other non-affiliate interests.
In total, these interests account for approximately 77%, taken as a
whole, of the ownership interests in the real estate operations of the
Company as of September 30, 1999. 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.
The financial statements have been prepared in accordance with
generally accepted accounting principles applicable to interim
financial information and pursuant to the rules and regulations of the
Securities and Exchange Commission. Accordingly, certain information
and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to such rules and regulations.
However, in the opinion of management, all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation have
been included. The Company presumes that users of the interim financial
information herein have read or have access to the audited financial
statements for the preceding fiscal year and that the adequacy of
additional disclosure needed for a fair presentation may be determined
in that context. The results of operations for the three and nine
months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the entire year.
The Company intends to qualify and elect to be taxed as a real estate
investment trust under the Internal Revenue Code of 1986, as amended,
commencing with the taxable year ending December 31, 1999. Accordingly,
no provision has been made for income taxes for the three and nine
months ended September 30, 1999.
2. Short-term Investments
During the third quarter of 1999, the Company invested a portion of
the cash received for the refundable option payment in short-term
securities (Note 3 Refundable Option Payment). Short- term securities
are highly liquid investments with original maturities in excess of 90
days. Short-term securities are stated at cost, which approximates
market value. Subsequent to September 30, 1999, such amounts were
utilized to reduce the Company's debt.
3. Real Estate
PENDING PROJECTS ACQUISITIONS AGREEMENT
The Company has entered into a Pending Projects Acquisition Agreement
under which the Company will acquire approximately one million rentable
square feet of R&D properties upon the completion and leasing of a
number of pending development projects owned by certain members of the
Berg Group and other sellers. The agreement fixes the acquisition value
to be received by the sellers based upon the capitalized rental value
of the property when fully leased. During the first nine months of
1999, the Company acquired eight additional properties under the
Pending Projects Acquisition Agreement representing 710,119 rentable
square feet (see Property Acquisitions below). At September 30, 1999,
there were three remaining projects comprising 255,724 rentable square
feet which the Company expects to acquire under the Pending Projects
Acquisition Agreement.
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The sellers of the pending development projects may elect to receive
cash or limited partnership units ("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 paid 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 generally accepted
accounting principles ("GAAP"), the acquisition cost in the form of
O.P. Units issued will be valued based upon the current market value of
the Company's common stock on the date the acquisition closes.
Consequently, the Company's actual cost of these future acquisitions
will depend in large part on the percentage of the fixed acquisition
value paid for by the issuance of O.P. Units and the price of the
Company's common stock on the closing date of the acquisition.
BERG LAND HOLDINGS OPTION AGREEMENT
Through the operating partnerships, the Company currently has the
option to acquire any future R&D, office and industrial property
developed by the Berg Group on land currently owned or optioned, or
acquired for these purposes in the future, directly or indirectly by
certain members of the Berg Group. At present, there are approximately
185 acres of Silicon Valley Land owned or under option by certain
members of the Berg Group under the terms of the Berg Land Holdings
Option Agreement. The owners of the future R&D property developments
may obtain cash or, at their option, O.P. Units valued at the average
closing price of shares of common stock over the 30-trading-day period
preceding the acquisition date. As of September 30, 1999, the Company
had completed one acquisition under the Berg Land Holdings Option
Agreement representing approximately 109,715 rentable square feet. Upon
the Company's exercise of an option to purchase any of the future R&D
property developments, the acquisition price will equal the sum of (a)
the full construction cost of the building; (b) 10% of the full
construction cost of the building; (c) the acquisition value of the
parcel as defined in the agreement upon which the improvements are
constructed (currently ranging from $8.00 to $20.00 per square foot);
(d) 10% per annum of the acquisition value of the parcel for the period
from January 1, 1998 to the close of escrow; and (e) interest at LIBOR
(London Interbank Offer Rate) plus 1.65% per annum on the full
construction costs of the building for the period from the date funds
were distributed by the developer to the close of escrow; less (f) any
debt encumbering the property.
No estimate can be given at this time as to the total cost to the
Company to acquire projects under the Berg Land Holdings Agreement, nor
the timing as to when the Company will acquire such projects. However,
the Berg Group is currently constructing two properties with a total of
388,000 rentable square feet that the Company has the right to acquire
under this agreement. As of September 30, 1999, the estimated
acquisition value to the operating partnerships for these two projects
is $32,226. The final acquisition price of these two properties could
differ significantly from this estimate.
PROPERTY ACQUISITIONS
Effective March 1, 1999, the Company acquired a newly constructed R&D
property located on Santa Teresa Boulevard in San Jose, California.
This acquisition added approximately 54,996 square feet of rentable
space and was acquired from the Berg Group under the Pending Projects
Acquisition Agreement. The total acquisition price for this property
was $8,558. In connection with this acquisition, the Company assumed
$3,525 of debt due Berg & Berg Enterprises, Inc., an affiliate of Carl
E. Berg and Clyde J. Berg, as well as other liabilities of $88, and
issued 694,030 O.P. Units to various members of the Berg Group.
Effective April 1, 1999, the Company acquired an approximately 515,700
square foot five-building R&D complex located on L'Avenida Avenue in
Mountain View, California (the "Microsoft project"), which has been
fully leased to Microsoft Corporation ("Microsoft") under the terms of
the Company's Pending Projects Acquisition Agreement with the Berg
Group members and other owners of projects subject to the agreement.
The total acquisition price for this property was $156,107, which was
funded by (a) assumption by the Company of $25,000 of mortgage debt due
Berg & Berg, Enterprises, Inc.; (b) assumption of the sellers'
obligation to reimburse Microsoft for shell and tenant improvements of
$32,057 and; (c) the issuance of 13,206,629 O.P. Units, including
12,467,058 O.P. Units issued to various members of the Berg Group.
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In accordance with the terms of the lease, on April 1, 1999, Microsoft
began paying monthly base rent of approximately $1,226 for the first
four buildings, which consist of approximately 415,700 rentable square
feet. In June 1999, Microsoft began paying monthly rent of
approximately $295 for the fifth building, which consists of
approximately 100,000 rentable square feet. Microsoft controls the
construction of this facility, which is currently scheduled to be
completed and ready for occupancy in phases from October 1999 thru
first quarter
2000. Microsoft has signed a seven-year lease that provides for a
first year's rent of $2.95 per square foot per month with approximately
4% annual rent increases.
In July 1999, the Company acquired two newly constructed R&D properties
located in San Jose, California. The acquisitions added 139,423 square
feet of rentable space acquired from the Berg Group under the Pending
Projects Acquisition Agreement. The total acquisition price for these
two properties was $21,719. The acquisition price was funded by the
assumption of $4,558 of debt due Berg & Berg Enterprises, Inc. and the
issuance of 2,004,215 O.P. Units to various members of the Berg Group.
REFUNDABLE OPTION PAYMENT
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 the Company a deposit of $21,564 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 will refund the
deposit amount and Xilinx will deposit into escrow funds equal to the
purchase price. In the event Xilinx does not exercise its option, the
Company must refund the deposit in full to Xilinx, without interest.
4. Stock Transactions
In July 1999, the Company completed a public offering of 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 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.
Michael Anderson, Chief Operating Officer and a director of the
Company, resigned from the Company effective April 30, 1999. The
Company had previously issued 200,000 shares of its common stock to Mr.
Anderson in exchange for a note receivable payable to the Company for
$900. Upon Mr. Anderson's resignation, the Company, in accordance with
the terms of its agreements with Mr. Anderson, repurchased and
subsequently cancelled 117,361 of the 200,000 shares of common stock,
representing $528 of the original $900 note receivable. The remaining
portion of the note receivable in the amount of $372 was paid in full.
During the nine months ended September 30, 1999, options were exercised
for a total of 179,420 shares. The exercise price for all options
exercised was $4.50 per share and total proceeds to the Company were
$807.
5. 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 the weighted-average number of common shares outstanding for the
period plus the assumed exercise of all dilutive securities.
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The computation for weighted average shares is detailed below:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ -----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted average shares outstanding (basic) 16,715,354 1,698,536 11,067,622 1,634,220
Incremental shares from assumed option 92,827 - 110,607 -
---------- --------- ---------- ---------
Weighted average shares outstanding (diluted) 16,808,181 1,698,536 11,178,229 1,634,220
========== ========= ========== =========
</TABLE>
The outstanding O.P. Units, which become exchangeable at the unit
holder's option for shares of common stock on a one-for-one basis
beginning on December 29, 1999, have been excluded from the diluted net
income per share calculation, as there would be no effect on the
amounts because the minority interests' share of income would also be
added back to net income. O.P. Units outstanding at September 30, 1999
were 75,799,431.
6. Related Party Transactions
As of September 30, 1999, the Berg Group owned 71,478,829 O.P. Units of
the total 75,799,431 O.P. Units issued and outstanding. Along with the
Company's common shares owned by the Berg Group, the Berg Group's
ownership as of September 30, 1999 represented approximately 77% of the
equity interests of the Company, assuming conversion of the 75,799,431
O.P. Units into the common stock of the Company.
As of September 30, 1999, debt in the amount of $30,803 was due Berg &
Berg Enterprises, Inc. at an interest rate equal to the rate charged
on the Wells Fargo line (6.99% at September 30, 1999). Payments are
made on a demand basis but are due no later than December 1999. During
the first nine months of 1999, the Company assumed $33,083 of debt due
Berg & Berg Enterprises, Inc. in connection with property
acquisitions. In addition, the first and second quarter 1999
distributions payable to members of the Berg Group of $16,607 were
converted to related party debt. Interest expense incurred in
connection with debt due Berg & Berg Enterprises, Inc. was $646 and
$3,183 for the three months ended September 30, 1999 and 1998,
respectively, and $1,635 and $3,183 for the nine months ended
September 30, 1999 and 1998, respectively.
Carl E. Berg has a substantial financial interest in one company that
leases space from the operating partnerships. This company occupies
5,862 square feet at $0.93 per square foot per month. This lease was
in effect prior to the Company's acquisition of its general partnership
interests in July 1998. The lease expires in 2001.
The Company currently leases space owned by Berg & Berg Enterprises,
Inc. Rental amounts and overhead reimbursements paid to Berg & Berg
Enterprises, Inc. were $20 for the three months ended September 30,
1999 and 1998, and $60 and $40 for the nine months ended September 30,
1999 and 1998, respectively.
7. Subsequent Events
On September 15, 1999, the Company declared a $0.15 per share dividend
on its common stock. The dividend was paid on October 11, 1999 to all
common stockholders of record as of September 30, 1999. At the same
time, the operating partnerships paid a distribution of $0.15 per O.P.
Unit on October 11, 1999, as well. The amount of this distribution
payable to members of the Berg Group of $9,748, was retained by the
operating partnerships and converted to related party debt as of
October 11, 1999.
The line of credit agreement between Wells Fargo Bank and the Company,
which has been guaranteed by certain members of the Berg Group, was
modified to extend the maturity date from October 1, 1999 to November
30, 1999. Additionally, the Compan reduced the line from $100,000 to
$50,000 with all other major terms (interest rate, collateral, etc.)
remaining unchanged.
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8. 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, results of
operations or cash flows 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.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the accompanying consolidated
financial statements and notes thereto contained herein and the Company's
consolidated financial statements and notes thereto contained in the Company's
Annual Report on Form 10-K as of and for the year ended December 31, 1998. The
results for the three and nine months ended September 30, 1999 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending December 31, 1999. The following discussion includes forward-looking
statements, including but not limited to statements with respect to the
Company's future financial performance, operating results, plans and objectives.
Actual results may differ materially from those currently anticipated depending
upon a variety of factors, including those described below under the
sub-heading, "Forward-Looking Information."
OVERVIEW
In May 1998, Mission West Properties, Inc. (the "Company"), the members of the
Berg Group, John Kontrabecki and certain other persons entered into an
acquisition agreement providing, among other things, for the Company's
acquisition of interests as the sole general partner of four separate
partnerships (the "operating partnerships"). At the time, the operating
partnerships held approximately 4.3 million rentable square feet of R&D property
located in the Silicon Valley. The agreement also provided for the parties to
enter into the Pending Projects Acquisition Agreement and the Berg Land Holdings
Option Agreement with the Berg Group and the exchange rights agreement with all
limited partners in the operating partnerships, following stockholder approval.
Effective July 1, 1998, the Company consummated its acquisition of the general
partnership interests in the operating partnerships. The Company effected its
purchase of the general partnership interests by issuing to each of the
operating partnerships a demand note bearing interest at 7.25% per annum,
aggregating approximately $35.2 million of principal payable no later than July
1, 2000.
Effective July 1, 1998, all limited partnership interests in the operating
partnerships were converted into 59,479,633 operating partnership units ("O.P.
Units"), representing ownership of approximately 87.89% of the operating
partnerships, upon consummation of the acquisition. Under the terms of the
exchange rights agreement, each O.P. Unit may be exchanged for one share of
common stock after December 29, 1999, subject to certain conditions. The O.P.
Units represent the minority ownership interests. At September 30, 1999, the
Company owned an 18% general partnership interest in the operating partnerships,
taken as a whole.
In December 1998, the Company sold 6,495,058 shares of common stock at a price
of $4.50 per share to a number of accredited investors to complete its 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,
the Company and the limited partners in the operating partnerships entered into
the exchange rights agreement, and the Company entered into the Pending Projects
Acquisition Agreement and the Berg Land Holdings Option Agreement with the Berg
Group and other sellers.
In April 1999, the Company acquired an approximately 515,700 square foot
five-building R&D complex located on L'Avenida Avenue in Mountain View,
California (the "Microsoft project") by purchasing all of the interests of
Baccarat Shoreline LLC, which the Company has renamed Mission West Shoreline
LLC, a wholly owned limited liability company. In the transaction, the Company
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, the Company completed a public offering of 8,680,000 shares of
common stock at $8.25 per share. The net proceeds from this offering, after
deducting underwriting discounts and other offering costs, were approximately
$66.9 million. The net proceeds were used to repay amounts outstanding under the
Company's line of credit with Wells Fargo Bank, N.A. ("Wells Fargo line") to
reimburse Microsoft Corporation for shell and tenant improvements, as well as
for general corporate purposes.
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<PAGE>
At September 30, 1999, the outstanding balance under the demand notes that the
Company owes to the operating partnerships was approximately $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 on this debt by the
operating partnerships, which is interest expense to the Company, is included in
the calculation of minority interest as reported on the consolidated statements
of operations, thereby reducing our net income by this same amount. At present,
the Company's only means for repayment of this debt, be it in this form or
refinanced with another lender, is through distributions that the Company
receives from the operating partnerships in excess of the amount of dividends to
be paid to the Company's stockholders.
The Company intends to elect and qualify to be taxed as a REIT commencing with
the taxable year ending December 31, 1999.
RESULTS OF OPERATIONS
Comparison of the three and nine months ended September 30, 1999 to the three
and nine months ended September 30, 1998.
As of September 30, 1999, the Company, through its controlling interests in the
operating partnerships, owned 79 properties totaling approximately 5.2 million
square feet compared to 69 properties totaling approximately 4.3 million square
feet owned by the Company as of September 30, 1998. This represents an increase
of approximately 21% in total rentable square footage from one year ago. The
increase resulted from the following acquisitions:
<TABLE>
<CAPTION>
Date of Rentable Square
Acquisition Address Footage
------------------ -------------------------------------- ---------------
<S> <C> <C>
10/98 1688 Richard Avenue 52,800
11/98 5850-5870 Hellyer Avenue 109,715
3/99 6810 Santa Teresa Boulevard 54,996
5/99 L'Avenida Avenue (5 buildings) 515,700
7/99 1750 Automation Parkway 80,640
8/99 1700 Richard Avenue 58,783
---------------------------------------------------------------------------------
872,634
=======
</TABLE>
The following table provides information regarding the Company's rental revenues
for the three months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------------------------------
1999 1998 $ Change % Change
-------- -------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Same Property (1) $13,945 $13,317 $ 628 4.7%
1998 Acquisitions 586 - 586 -
1999 Acquisitions 5,986 - 5,986 -
------- ------- ------
$20,517 $13,317 $7,200 54.1%
======= ======= ======
</TABLE>
(1) "Same Property" is defined as properties owned as of July 1, 1998 and still
owned as of September 30, 1999.
For the quarter ended September 30, 1999, rental revenues increased by $7.2
million from $13.3 million for the three months ended September 30, 1998 to
$20.5 million for the same period of 1999. Of the $7.2 million increase in
rental revenues, the majority of the increase, $6.0 million, was generated by
properties acquired in 1999. The remaining $1.2 million increase resulted from
an increase of $628,000 in revenues generated by the Company's "Same Property"
portfolio, as well as $586,000 generated by properties acquired in the fourth
quarter of 1998. The increase in the "Same Property" portfolio was attributable
to higher roll-over rental rates realized on the renewal and re-leasing of
space. During the period of October 1, 1998 to September 30, 1999, leases
representing approximately 760,000 square feet expired.
Base rents, on a cash basis (giving no effect to straight-lined rents), for the
Company's "Same Property" portfolio increased 5% for the three months ended
September 30, 1999 as compared to the same period of 1998.
- 12 -
<PAGE>
Tenant reimbursements increased by $1.9 million or 90%, from $2.1 million for
the three months ended September 30, 1998 to $4.0 million for the three months
ended September 30, 1999. Operating expenses and real estate taxes, on a
combined basis, increased by $1.4 million or 52%, from $2.7 million to $4.1
million for the three months ended September 30, 1998 and 1999, respectively.
The increases resulted primarily from the growth in the total rentable square
footage during the periods presented.
Depreciation expense increased by $872,000 for the three-month period ended
September 30, 1999. The increase was attributable to the ten properties acquired
since September 30, 1998.
Interest expense increased by $1.4 or 117% from $1.2 million for the three
months ended September 30, 1998 to $2.6 million for the three months ended
September 30, 1999. Interest expense (related parties) decreased by $2.5 million
or 78% from $3.2 million for the three months ended September 30, 1998 to
$646,000 for the three months ended September 30, 1999. As a result of the
Company obtaining a $130.0 million loan with Prudential Insurance Company of
America in September of 1998, of which $115.8 million was used to reduce the
outstanding principal balance owing under the mortgage notes payable (related
parties), the mix of debt has shifted from mortgage notes payable (related
parties) to mortgage notes payable. On a net basis, interest expense (including
amounts to related parties) has decreased given the decrease in overall debt
levels. As a result of proceeds received from the December 1998 private
placement, the July 1999 public offering, receipt of a refundable option
payment, as well as cash generated from operations, debt outstanding, including
amounts due related parties, has decreased by $50.5 million or 23% from $220.0
million as of September 30, 1998 to $169.5 million as of September 30, 1999.
The minority interest portion of income was $11.3 million, resulting in net
income of $2.2 million for the three months ended September 30, 1999. Minority
interest represents the limited partners' ownership interest in the operating
partnerships, which was 82% as of September 30, 1999, taken as a whole.
The Company's acquisition of the general partnership interests in the operating
partnerships during the third quarter of 1998 substantially altered the
Company's operations. For the first six months of 1998, the Company's only
assets were cash and receivables, and therefore, the Company had insignificant
revenue-generating and cash generating capabilities and minimal operations. As a
consequence, operating results for the nine months ended September 30, 1999 are
not meaningfully comparable to operating results for the same period of 1998.
CHANGES IN FINANCIAL CONDITION
During the first nine months of 1999, the Company acquired eight additional
properties representing 710,119 rentable square feet of newly constructed R&D
properties located in Silicon Valley. All these properties were acquired from
the Berg Group under the Pending Projects Acquisition Agreement. The aggregate
acquisition price for these properties was $186.4 million. The Company financed
these acquisitions by a) assumption by the Company of $33.1 million of debt due
Berg & Berg Enterprises, Inc.; b) assumption by the Company of other liabilities
of $32.2 million (including the assumption of the sellers' obligation to
reimburse Microsoft for shell and tenant improvements of $32.1 million) and; c)
the issuance of 15,904,874 O.P. Units, of which 15,166,303 O.P. Units were
issued to various members of the Berg Group.
Michael Anderson, Chief Operating Officer and a director of the Company,
resigned from the Company effective April 30, 1999. The Company had previously
issued 200,000 shares of its common stock to Mr. Anderson in exchange for a note
receivable payable to the Company for $900,000. Upon Mr. Anderson's resignation,
the Company, in accordance with the terms of its agreements with Mr. Anderson,
repurchased and subsequently cancelled 117,361 of the 200,000 shares of common
stock, representing approximately $528,000 of the original $900,000 note
receivable. The remaining portion of the note receivable in the amount of
approximately $372,000 was paid in full.
In July 1999, the Company completed a public offering of 8,680,000 shares of its
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 its Wells Fargo line by approximately $41.0
million, reimburse Microsoft approximately $25.0 million for shell and tenant
improvements on the Microsoft project property, with the remaining amount of
approximately $900,000 retained for general corporate purposes.
- 13 -
<PAGE>
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, the Xilinx paid to the Company a deposit of $21,564 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 will apply the deposit
amount to satisfy Xilinx's obligation for the purchase price. In the event
Xilinx does not exercise its option, the Company must refund the deposit in full
to lessee, without interest. A portion of the option payment received was used
to paydown outstanding debt.
During the nine months ended September 30, 1999, employee stock options were
exercised to purchase a total of 179,420 shares of common stock at $4.50 per
share. Total proceeds to the Company were approximately $807,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects its principal sources of liquidity for distributions to
stockholders, debt service, leasing commissions and recurring capital
expenditures to be Funds from Operations ("FFO"), the borrowings under the Wells
Fargo line or replacement line of credit. The Company expects these sources of
liquidity to be adequate to meet projected distributions to stockholders and
other presently anticipated liquidity requirements in 1999, assuming the renewal
or replacement of the Wells Fargo line. The Company believes it will be able to
renew or replace this line of credit on acceptable terms, although the Company
can give no assurance that it will succeed in doing so. The Company expects to
meet its long-term liquidity requirements for the funding of property
development, property acquisitions and other material non-recurring capital
improvements through long-term secured and unsecured indebtedness and the
issuance of additional equity securities by the Company.
The Wells Fargo line is currently collateralized by 14 properties and is
guaranteed by Mr. Berg and certain other members of the Berg Group. The Wells
Fargo line expired on October 1, 1999. The Company had the capacity of the line
reduced from $100.0 million to $50.0 million and Wells Fargo has extended the
maturity date to November 30, 1999. All other major terms (interest rate,
collateral, etc.) have remained unchanged. The Company is negotiating a new
$50.0 million credit facility. The Company expects to obtain this new credit
facility prior to November 30, 1999, but there can be no assurance that the
Company will be able to obtain a line of credit with terms similar to the
existing line, and its cost of borrowing could increase substantially. Failure
to obtain a new credit facility would substantially limit the Company's ability
to purchase additional properties.
At September 30, 1999, the Company had total indebtedness of $169.5 million
including $134.4 million of fixed rate mortgage debt, $30.8 million of variable
rate mortgage debt (due to related parties), and $4.3 million outstanding under
its Wells Fargo line. During the nine months ended September 30, 1999,
distributions payable to members of the Berg Group of $16,607 relating to the
first and second quarter of 1999 were converted to related party debt. As of
September 30, 1999, the Company had available borrowing capacity under the Wells
Fargo line of $95.7 million, which was reduced to $45.7 in October 1999.
As of September 30, 1999, Debt to Total Market Capitalization ratio, which is
computed as the Company's total debt outstanding divided by the sum of total
debt outstanding plus the market value of common stock (based upon an $8.00 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 $911.6 million.
- 14 -
<PAGE>
MORTGAGE DEBT
The debt owed to the Berg Group carries a variable interest rate equal to the
rate applicable to the Wells Fargo line, which was 6.99% annually at September
30, 1999 and is payable in full upon demand.
The following table sets forth certain information regarding debt
outstanding as of September 30, 1999:
<TABLE>
<CAPTION>
Maturity Interest
Debt Description Collateral Properties Balance Date Rate
- ---------------------------------- ------------------------------------ --------- ------------ ----------
<S> <C> <C> <C> <C>
LINE OF CREDIT:
Wells Fargo Bank, N.A. 1810 McCandless Drive, Milpitas, CA $ 4,295 11/99 (1)
1740 McCandless Drive, Milpitas, CA
1680 McCandless Drive, Milpitas, CA
1600 McCandless Drive, Milpitas, CA
1500 McCandless Drive, Milpitas, CA
1450 McCandless Drive, Milpitas, CA
1350 McCandless Drive, Milpitas, CA
1325 McCandless Drive, Milpitas, CA
1425 McCandless Drive, Milpitas, CA
1526 McCandless Drive, Milpitas, CA
1575 McCandless Drive, Milpitas, CA
1625 McCandless Drive, Milpitas, CA
1745 McCandless Drive, Milpitas, CA
1765 McCandless Drive, Milpitas, CA
MORTGAGE NOTES PAYABLE (related parties):
2033-2043 Samaritan Drive, San Jose, CA 30,803 12/99 (1)
2133 Samaritan Drive, San Jose, CA
2233-2243 Samaritan Drive, San Jose, CA
MORTGAGE NOTES PAYABLE:
Prudential Capital Group 20400 Mariani, Cupertino, CA 1,936 4/09 8.75%
New York Life Insurance Company 10440 Bubb Road, Cupertino, CA 412 1/09 9.625%
Home Savings & Loan Association 10460 Bubb Road, Cupertino, CA 489 12/06 9.5%
Mellon Mortgage Company 3530 Bassett, Santa Clara, CA 2,881 6/01 8.125%
Prudential Insurance Company of America 10300 Bubb, Cupertino, CA 128,687(2) 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, 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 134,405
--------
TOTAL $169,503
========
</TABLE>
(1) The lesser of (a) Wells Fargo prime rate in effect on the first day of each
calendar month; (b) LIBOR plus 1.65%; or (c) the Wells Fargo Purchased
Funds Rate quoted on the first day of each calendar month plus 1.65%. Rate
in effect as of September 30, 1999 was 6.99%.
(2) John Kontrabecki, one of the limited partners, has guaranteed approximately
$12,000 of this debt.
- 15 -
<PAGE>
In April 1999, the Company acquired the Microsoft project. Microsoft has signed
a seven-year lease that provides for a first year's rent of $2.95 per square
foot per month with annual rent increases of approximately 4%. The lease is
triple net, and the Company receives a management fee equal to 1% of the annual
base rent. In accordance with the lease terms, in April 1999, Microsoft began
paying monthly base rent of approximately $1.2 million for the first four
buildings, consisting of approximately 415,700 rentable square feet. In June
1999, Microsoft began paying monthly rent of approximately $295,000 for the
fifth building, consisting of approximately 100,000 rentable square feet.
Under the terms of the Pending Projects Acquisition Agreement, the acquisition
price of the Microsoft project was approximately $116.5 million, determined as
follows:
- assumption of $25.0 million of mortgage debt due the Berg Group
- assumption of the sellers' obligation to reimburse Microsoft for shell
and tenant improvements of approximately $32.1 million and;
- issuance of 13,206,629 O.P. Units, at the agreed value of $4.50 per
unit for a total of $59.4 million.
Under generally accepted accounting principles, the value of the O.P. Units was
equal to the closing price of the Company's common stock on the date the
acquisition closed, or $7.50 per share as reported on the AMEX, resulting in a
recorded purchase price of $156.1 million for the Microsoft project.
Additionally in July 1999, the Company acquired two newly constructed R&D
properties located in San Jose, California. These acquisitions added 139,423
square feet of rentable space and were acquired from the Berg Group under the
Pending Projects Acquisition Agreement. The aggregate acquisition price for
these two properties was $21.7 million. The acquisition price was funded by the
assumption of $4.6 million of debt due Berg & Berg Enterprises, Inc. and the
issuance of 2,004,215 O.P. Units to various members of the Berg Group.
The following table presents certain information concerning projects for which
the Company, through its interests in the operating partnerships, has the right
to acquire under the Pending Projects Acquisition Agreement or the Berg Land
Holdings Option Agreement. The table includes only those projects for which
construction has commenced.
<TABLE>
<CAPTION>
Approximate
Rentable Area Anticipated Total Estimated
Property (Square Feet) Acquisition Date Acquisition Value (1)
- --------------------------- --------------- ------------------ -----------------------
<S> <C> <C> <C>
PENDING PROJECTS
Automation (1 building) 80,640 1st Quarter 2000 8,986
Automation (1 building) 61,056 2nd Quarter 2000 6,803
Automation (1 building) 114,028 4th Quarter 2000 12,706
------- -------
Subtotal 255,724 $ 28,495
BERG LAND HOLDINGS
Fontanosa 77,000 4th Quarter 1999 $ 7,226
Hellyer/Branham 311,000 2nd Quarter 2000 25,000
------- -------
Subtotal 388,000 $ 32,226
TOTAL 643,724 $ 60,721
======= =======
</TABLE>
(1) The Estimated Acquisition Value which represents the economics for
acquiring the pending projects under the terms of the Pending Projects
Acquisition Agreement, will differ from the actual acquisition cost as
determined under GAAP.
Pursuant to the Berg Land Holdings Option Agreement between the Company and the
Berg Group, the Company currently has the option to acquire any future R&D,
office and industrial property developed by the Berg Group on land it currently
owns or has under option, or acquires for these purposes in the future, directly
or indirectly by certain members of the Berg Group, including its September 1999
acquisition of 40 acres on Piercy Avenue in South San Jose, California.
Excluding the Fontanosa and Branham/Hellyer projects, there are currently 156
acres of land which are to be developed under the Berg Land Holdings Agreement.
The Berg Group projects that it can develop approximately 2.5 million rentable
square feet on these 156 acres.
- 16 -
<PAGE>
The time required to complete the leasing of developments varies from project to
project. Generally, the Company will not acquire any of the above projects until
they are fully completed and leased. There can be no assurance that the
acquisition date and final cost to the Company as indicated above will be
realized
Although the Company expects to acquire the new properties available to it under
the terms of the Pending Projects Acquisition Agreement and the Berg Land
Holdings Option Agreement, there can be no assurance that the Company actually
will consummate any of the intended transactions, including all of those
discussed above. Furthermore, the Company has not yet determined the means by
which it would acquire and pay for any such properties or the impact of any of
the acquisitions on its business, results of operations, financial condition,
FFO or available cash for distribution.
HISTORICAL CASH FLOWS
Net cash provided by operating activities for the nine months ended September
30, 1999 was $43.1 million compared to $10.6 million for the same period in
1998. The change was a direct result of the Company's acquisition of its general
partnership interests in the operating partnerships during the third quarter of
1998.
Net cash used in investing activities was approximately $14.8 million and
$118,000 for the nine months ended September 30, 1999 and 1998, respectively.
Cash used in investing activities during the nine months ended September 30,
1999 related to improvements made to existing real estate assets acquired as
part of the Company's investment in the operating partnerships, as well as cash
used to purchase short-term securities, partially offset by cash received with
regards to a refundable option payment.
Net cash used in financing activities was $20.2 million for the nine months
ended September 30, 1999 compared to $13.3 million for the same period in 1998.
During the nine months ended September 30, 1999, the Company reduced debt
outstanding and made distributions to holders of its common stock and the O.P.
Units by utilizing net proceeds of $66.9 million from its public offering of
8,680,000 shares, cash received with regards to a refundable option payment and
by utilizing cash generated from operating activities.
CAPITAL EXPENDITURES
The properties require periodic investments of capital for tenant-related
capital expenditures and for general capital improvements. For the years ended
December 31, 1994 through December 31, 1998, the recurring tenant improvement
costs and leasing commissions incurred with respect to new leases and lease
renewals of the properties previously owned or controlled by members of the Berg
Group averaged approximately $1.5 million annually. The Company expects that the
average annual cost of recurring tenant improvements and leasing commissions,
related to the properties, will be approximately $1.5 million. The Company
believes it will recover substantially all of these sums from the tenants under
the new or renewed leases through increases in rental rates. The Company expects
to meet its long-term liquidity requirements for the funding of property
development, property acquisitions and other material non-recurring capital
improvements through long-term secured and unsecured indebtedness and the
issuance of additional equity securities by the Company.
FUNDS FROM OPERATIONS
As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), FFO represents net income (loss) before minority interest of unit
holders (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of property, plus real estate related depreciation
and amortization (excluding amortization of deferred financing costs and
depreciation of non-real estate assets) and after adjustments for unconsolidated
partnerships and joint ventures. Management considers FFO an appropriate measure
of performance of an equity REIT because, along with cash flows from operating
activities, financing activities and investing activities, it provides investors
with an understanding of the Company's ability to incur and service debt, and
make capital expenditures. FFO should not be considered as an alternative for
net income as a measure of profitability and it is not comparable to cash flows
provided by operating activities determined in accordance with GAAP, nor is FFO
necessarily indicative of funds available to meet the Company's cash needs,
including its need to make cash distributions to satisfy REIT requirements.
- 17 -
<PAGE>
The Company's 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. 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 them exactly as the Company defines FFO. FFO for the
three months ended September 30, 1999 and 1998 and the nine months ended
September 30, 1999 are summarized in the table below:
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------- Nine Months Ended
1999 1998 September 30, 1999
-------- -------- ------------------
(Dollars in thousands)
<S> <C> <C> <C>
Net income $ 2,178 $ 130 $ 4,124
Add:
Minority interest 11,310 5,389 27,521
Depreciation 3,510 2,638 9,612
------- ------ -------
FFO $16,998 $8,157 $41,257
======= ====== =======
</TABLE>
The Company intends to pay distributions to stockholders based upon total Funds
Available for Distribution ("FAD"), which is calculated as FFO less
straight-lined rents, leasing commissions paid and capital expenditures made
during the respective period. The calculations of FAD for the three months ended
September 30, 1999 and 1998 and the nine months ended September 30, 1999 are as
follows:
<TABLE>
<CAPTION>
Three Months Ended September 30,
-------------------------------- Nine Months Ended
1999 1998 September 30, 1999
-------- -------- ------------------
(Dollars in thousands)
<S> <C> <C> <C>
FFO $16,998 $8,157 $41,257
Less:
Straight-line rents 1,427 752 3,083
Leasing commissions 301 - 379
Capital expenditures 274 118 515
------- ------- -------
FAD $14,996 $7,287 $37,280
</TABLE>
The Company intends to make regular quarterly distributions to holders of common
stock based on its FAD. The Company's 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 the Company will
realize and the amount available for distributions to its stockholders will be
affected by a number of factors, including the revenues received from its
properties, its operating expenses, the interest expense incurred on borrowings
and planned and unanticipated capital expenditures.
The Company anticipates that cash available for distribution will exceed
earnings and profits for federal income tax purposes, as the latter figure is
reduced by non-cash expenses, such as depreciation and amortization, that the
Company will incur. Distributions, other than capital gain distributions, by the
Company to the extent of its 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 a taxable gain. The percentage of such
distributions in excess of earnings and profits, if any, may vary from period to
period. The Company anticipates that a substantial percentage of the
distributions to stockholders for the year ending December 31, 1999 will
constitute taxable income.
Distributions will be determined by the Company's board of directors and will
depend on actual FAD, the Company's 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. The Company expects
to pay aggregate distributions totaling $0.56 per share of common stock for the
fiscal year 1999.
- 18 -
<PAGE>
IMPACT OF RECENTLY ISSUED STANDARDS
The Company does not believe recently issued accounting standards will
materially impact the Company's financial statements.
YEAR 2000
Forward Looking Information. The statements in the following section include
Year 2000 readiness disclosure within the meaning of the Year 2000 Information
and Readiness Disclosure Act. The Company intends such statements to be covered
by the safe harbor provisions for forward-looking statements contained in the
Private Securities Reform Act of 1995, and is including this statement for
purposes of complying with these safe harbor provisions. See "Forward Looking
Information".
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.
The Company's efforts to address its Year 2000 issues consist of reviewing the
Company's computer information systems, evaluating other computer systems that
do not relate to the Company's internal information systems, but include
embedded technology at its 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 the Company.
The Company's State of Readiness
Information Technology Systems. The Company has reviewed its information
technology systems and has contacted vendors to determine whether such systems
are Year 2000 compliant. Based upon the Company's inquiries, the Company has
determined that its primary network operating system, Windows NT Server 4.0, and
all of its desktop personal computers are Year 2000 compliant. The vendor for
the Company's property management and accounting software has advised the
Company that it will provide a Year 2000 compliant software upgrade to the
Company by the end of November 1999.
Embedded Systems. The Company believes that in most cases under the lease terms
it is the tenant's sole responsibility to ensure that the embedded systems
(e.g., security, heating, ventilation and air conditioning, fire and elevator
systems) are Year 2000 compliant. The Company has made limited inquiries to
various vendors concerning embedded systems used on some of its properties.
Based upon responses to its inquiries, the Company is not aware of any systems
that are not Year 2000 compliant.
Third Party Relationships. The Company plans to contact third parties, like
utility companies, financial institutions and its transfer agent that provide
important services to the Company and will ascertain whether those third parties
are aware of Year 2000 issues that would adversely impact the Company's
operations. At this time, the Company does not intend to contact all of its
third party service providers, however.
Costs to Address the Company's Year 2000 Issues
The Company has not budgeted any amount to address Year 2000 issues. Because the
Company's Year 2000 assessment is ongoing and additional funds may be required
as a result of future findings, the Company may need to add accrual amounts as a
result of unanticipated delays or preparedness issues. While the Company's
efforts to address its Year 2000 issues may involve additional costs, the
Company believes, based on available information, that these costs will not have
a material adverse effect on its business, financial condition or results of
operations. Although the Company has concluded that many of its tenants are
responsible for certain Year 2000 compliance costs, there is a possibility that
certain tenants will not agree with such conclusions.
- 19 -
<PAGE>
Risks Presented by Year 2000 Issues and the Company's Contingency Plan
At this time, the Company has not identified any specific business functions
that are likely to suffer material disruption as a result of Year 2000-related
events. Due to the unique and pervasive nature of the Year 2000 issue, it is not
possible to anticipate each of the wide variety of Year 2000 events,
particularly outside of the Company, that might arise in a worst-case scenario
which might have a material adverse impact on the Company's business, financial
condition and results of operations.
A reasonably likely worst-case scenario might be the failure of an energy
management system in a building. Such a failure could adversely affect the
environmental conditions of the occupied space, thus creating discomfort and
inconvenience to the tenants until the condition could be manually corrected.
Persistence of this problem for a long period of time could result in an
increase in operating costs for the building until the energy management system
is restored to proper operations.
The Company utilizes computer software for its corporate and real property
accounting records and to prepare its financial statements. If necessary, the
Company could prepare all required accounting entries manually without incurring
material additional operating expenses.
Conceivably, tenants of the properties could experience delays in processing
their accounting records and making required lease payments, if they encounter
Year 2000 compliance problems. The Company does not believe that any such delays
would have a material adverse effect on the Company.
Although the Company believes that the expectations reflected in such
forward-looking statements are based on reasonable assumptions, the Company's
actual cost, progress and expenses, with respect to its plan to address Year
2000 issues could differ materially as those set forth in the forward-looking
statements. Factors which could have a material adverse effect on the Company's
results and progress include, but are not limited to, changes in the expenses or
delays in: the identification and upgrade or replacement by the Company of
computer systems that do not relate to information technology, but include
embedded technology; and the Year 2000 compliance of vendors, including vendors
of the Company's computer information systems, or third party-service providers,
including the Company's primary bank. These risks and uncertainties should be
considered in evaluating forward-looking statements and undue reliance should
not be placed on such statements.
FORWARD LOOKING INFORMATION
This quarterly report contains forward-looking statements within the meaning of
the federal securities laws. The Company intends such forward-looking statements
to be covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Reform Act of 1995, and is 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 the Company, are generally
identifiable by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. The Company's 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 the Company (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 the
Company's current and proposed market areas, and general accounting principles,
policies and guidelines applicable to REITs. In addition, the acquisition costs
of projects acquired from the Berg Group under the Pending Projects Acquisition
Agreement will vary based upon the number of O.P. Units issued in exchange for
the property and the price of common stock, which is issuable upon conversion of
O.P. Units under certain circumstances, at the time of the acquisition. These
risks and uncertainties, together with the other risks described from time to
time in the Company's reports and other 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.
Item 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISk
No material changes have occurred since our Annual Report on Form 10-K for the
year ended December 31, 1998.
- 20 -
<PAGE>
================================================================================
PART II - Other Information
Item 2
CHANGES IN SECURITIES AND USE OF PROCEEDS
The information provided in Part I, "Management's Discussion and Analysis of
Financial Condition and Results of Operations Overview" is incorporated by
reference in response to this item.
Item 6
EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.1 Financial Data Schedule
b. Reports on Form 8-K
None
================================================================================
- 21 -
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
Mission West Properties, Inc.
(Registrant)
Date: November 10, 1999 By: /s/ Marianne K. Aguiar
-----------------------
Marianne K. Aguiar
Chief Financial Officer
(Principal Accounting Officer)
- 22 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of September 30, 1999, and the Consolidated
Statement of Operations for the nine months ended September 30, 1999 of Mission
West Properties, Inc., and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,270
<SECURITIES> 5,000
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 708,177
<DEPRECIATION> (15,022)
<TOTAL-ASSETS> 714,257
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 100,745
<TOTAL-LIABILITY-AND-EQUITY> 714,257
<SALES> 0
<TOTAL-REVENUES> 61,850
<CGS> 0
<TOTAL-COSTS> 8,644
<OTHER-EXPENSES> 10,640
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,921
<INCOME-PRETAX> 4,124
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,124
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,124
<EPS-BASIC> .37
<EPS-DILUTED> .37
</TABLE>
