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 JUNE 30, 1999
COMMISSION FILE NUMBER 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 Identification Number)
incorporation or organization)
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. YES X 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:
16,935,732 shares outstanding as of August 3, 1999
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Mission West Properties, Inc.
FORM 10-Q
FOR THE QUARTER ENDED June 30, 1999
INDEX
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Page
PART 1 FINANCIAL INFORMATION ----
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ITEM 1 Financial Statements:
Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998..........................................3
Consolidated Statements of Operations for the three
and six months ended June 30, 1999 and 1998....................4
Consolidated Statements of Cash Flows for the
six months ended June 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......18
PART II OTHER INFORMATION
ITEM 5 Other Information..............................................19
ITEM 6 Exhibits and Reports on Form 8-K...............................19
Signatures...................................................................20
</TABLE>
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Part I - Financial Information
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
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MISSION WEST PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
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June 30, 1999 December 31, 1998
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(Unaudited)
ASSETS
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Real estate assets, at cost
Land $140,328 $90,929
Buildings and improvements 546,017 430,510
-------------------- -----------------------
686,345 521,439
Less accumulated depreciation (11,512) (5,410)
-------------------- -----------------------
Net real estate assets 674,833 516,029
Cash and cash equivalents 2,886 246
Deferred rent 3,279 1,624
Other assets 1,636 1,967
-------------------- -----------------------
Total assets $682,634 $519,866
==================== =======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Line of credit $41,871 $27,201
Mortgage notes payable 156,114 157,188
Mortgage notes payable (related parties) 20,681 20,752
Interest payable 916 632
Interest payable (related parties) 591 -
Security deposits 2,120 2,061
Prepaid rental income 5,176 3,246
Dividends/distributions payable 11,485 -
Due to Microsoft Corporation 32,057 -
Accounts payable and accrued expenses 1,449 2,154
-------------------- -----------------------
Total liabilities 272,460 213,234
Commitments and contingencies (Note 7)
Minority interest 376,055 273,379
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, 8,255,732 and 8,218,594 shares issued and
outstanding at June 30, 1999 and December 31, 1998, respectively 8 8
Paid-in-capital 55,691 55,528
Less, amounts receivable on private placement - (900)
Accumulated (deficit) in excess of dividends paid (21,580) (21,383)
-------------------- -----------------------
Total stockholders' equity 34,119 33,253
-------------------- -----------------------
Total liabilities and stockholders' equity $682,634 $519,866
==================== =======================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<TABLE>
<CAPTION>
MISSION WEST PROPERTIES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
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Three months ended June 30, Six months ended June 30,
---------------------------------------- ----------------------------------------
1999 1998 1999 1998
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Revenues:
Rental revenues from real estate $18,376 $32,403
Tenant reimbursements 2,159 4,395
Other income, including interest 293 $ 64 442 $ 141
------------------- -------------------- -------------------- -------------------
20,828 64 37,240 141
------------------- -------------------- -------------------- -------------------
Expenses:
Operating expenses 937 - 1,719 -
Real estate taxes 1,300 - 2,829 -
Depreciation of real estate 3,399 - 6,102 -
General and administrative 346 337 752 567
Interest 3,721 - 6,692 -
Interest (related parties) 573 - 989 -
------------------- -------------------- -------------------- -------------------
Total expenses 10,276 337 19,083 567
------------------- -------------------- -------------------- -------------------
Income (loss) before minority interest 10,552 (273) 18,157 (426)
Minority interest 9,487 - 16,211 -
------------------- -------------------- -------------------- -------------------
Net income (loss) $ 1,065 $ (273) $ 1,946 $ (426)
=================== ==================== ==================== ===================
Basic net income (loss) per share $ 0.13 $ (0.16) $ 0.24 $ (0.27)
=================== ==================== ==================== ===================
Diluted net income (loss) per share $ 0.13 $ (0.16) $ 0.23 $ (0.27)
=================== ==================== ==================== ===================
Weighted average number of
common shares outstanding (basic) 8,166,977 1,698,536 8,196,952 1,601,770
=================== ==================== ==================== ===================
Weighted average number of
common shares outstanding (diluted) 8,305,603 1,698,536 8,314,757 1,601,770
=================== ==================== ==================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
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<TABLE>
<CAPTION>
MISSION WEST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
(unaudited)
Six months ended June 30,
---------------------------------
1999 1998
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Cash flows from operating activities:
Net income (loss) $ 1,946 $ (426)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Minority interest 16,211 -
Depreciation 6,102 -
Changes in assets and liabilities:
Deferred rent (1,656) -
Other assets 331 (874)
Interest payable 284 -
Interest payable (related parties) 591 -
Security deposits (29) -
Prepaid rental income 1,930 -
Accounts payable and accrued expenses (704) (327)
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Net cash provided by (used in) operating activities 25,006 (1,627)
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Cash flows from investing activities:
Improvements to real estate assets (241) -
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Net cash (used in) investing activities (241) -
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Cash flows from financing activities:
Net proceeds on line of credit 14,670
Principal payments on mortgage notes payable (1,074) -
Principal payments on mortgage notes payable (related parties) (35,455) -
Payments on receivable from private placements 372 293
Proceeds from stock options exercised 699 -
Repurchase of common stock (8) (11)
Minority interest distributions (341)
Dividends paid (988) -
--------------- -----------------
Net cash (used in) provided by financing activities (22,125) 282
--------------- -----------------
Net increase (decrease) in cash and cash equivalents 2,640 (1,345)
Cash and cash equivalents, beginning 246 5,569
--------------- -----------------
Cash and cash equivalents, ending $ 2,886 $ 4,224
=============== =================
Supplemental information:
Cash paid for interest $ 6,806 -
=============== =================
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 distributions payable to mortgage notes payable (related parties) $ 6,859 -
=============== =================
Assumption of debt in connection with property acquisitions $ 28,525 -
=============== =================
Assumption of other liabilities in connection with property acquisitions $ 32,145 -
=============== =================
Issuance of limited partnership units in connection with property acquisitions $ 103,995 -
=============== =================
</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)
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1. PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts
of the Company and its controlled subsidiaries, including the operating
partnerships. 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 89.97%, on a weighted average
basis, of the ownership interests in the real estate operations of the
Company as of June 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 six months
ended June 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 six
months ended June 30, 1999.
2. REAL ESTATE
PENDING PROJECTS ACQUISITION AGREEMENT
The Company has entered into a Pending Projects Acquisition Agreement
under which the Company will acquire through the operating partnerships
approximately one million 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 six months of 1999, the Company completed two
additional acquisitions under the Pending Projects Acquisition
Agreement representing 570,696 rentable square feet (see Property
Acquisitions below). In July 1999, the Company acquired two additional
properties consisting of approximately 139,423 rentable square feet. -
See Note 6 Subsequent Events. At June 30, 1999, excluding the two
acquisitions completed in July, there were three remaining projects
comprising approximately 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 of the acquisition.
BERG LAND HOLDINGS OPTION AGREEMENT
Through the operating partnerships, the Company also has the option to
acquire any future R&D property developments on approximately 145 acres
of Silicon Valley Land owned by certain members of the Berg Group under
the terms of the Berg Land Holdings Option Agreement. The owners of the
future R&D property developments may obtain cash or, at their option,
O.P. Units valued at the average closing price of shares of common
stock over the 30-trading-day period preceding the acquisition date. As
of June 30, 1999, the Company had completed one acquisition under the
Berg Land Holdings Option Agreement representing approximately 110,000
rentable square feet. Upon the Company's exercise of an option to
purchase any of the future R&D property developments, the acquisition
price will equal the sum of (a) the full construction cost of the
building; (b) 10% of the full construction cost of the building; (c)
the acquisition value of the parcel as defined in the agreement upon
which the improvements are constructed (ranging from $8.50 to $20.00
per square foot); (d) 10% per annum of the acquisition value of the
parcel for the period from January 1, 1998 to the close of escrow; and
e) interest at LIBOR (London Interbank Offer Rate) plus 1.65% per annum
on the full construction costs of the building for the period from the
date funds were distributed by the developer to the close of escrow;
less (f) any debt encumbering the property.
No estimate can be given at this time as to the total cost to the
Company to acquire projects under the Berg Land Holdings Agreement, nor
the timing as to when the Company will acquire such projects. However,
the Berg Group is currently constructing two properties with a total of
388,000 rentable square feet that the Company has the right to acquire
under this agreement. As of June 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
("Santa Teresa"). 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 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.
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 during the second half of 1999.
Microsoft has signed a seven-year lease that provides for a first
year's rent of $2.95 per square foot per month with approximately 4%
annual rent increases.
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3. STOCK TRANSACTIONS
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.
In June 1999, Mr. Anderson purchased 140,278 shares pursuant to an
option at $4.50 per share. Total proceeds to the Company were $631.
In February 1999, a former officer of the Company purchased 15,000
shares pursuant to an option at $4.50 per share. Total proceeds to the
Company were $68.
4. 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:
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------- --------------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Weighted average shares outstanding (basic) 8,166,977 1,698,536 8,196,952 1,601,770
Incremental shares from assumed option exercise 138,626 - 117,805 -
-------------- -------------- -------------- --------------
Weighted average shares outstanding (diluted) 8,305,603 1,698,536 8,314,757 1,601,770
============== ============== ============== ==============
</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 June 30, 1999 were
74,052,356.
5. RELATED PARTY TRANSACTIONS
As of June 30, 1999, the Berg Group owned 69,625,711 O.P. Units, of the
total 74,052,356 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 June 30, 1999, represented approximately 84.6% of the
equity interests of the Company, assuming conversion of the 74,052,356
O.P. Units into the common stock of the Company.
As of June 30, 1999, debt in the amount of $20,681 was due Berg & Berg
Enterprises, Inc. During the first six months of 1999, the Company
assumed $28,525 of debt due Berg & Berg Enterprises, Inc. in connection
with the acquisition of the Santa Teresa and the Microsoft project
properties. In addition, a distribution payable to members of the Berg
Group of $6,859 relating to the first quarter of 1999 was converted to
related party debt on April 30, 1999. Interest expense incurred in
connection with debt due Berg & Berg Enterprises, Inc. was $573 and
$989 for the three and six months ended June 30, 1999, respectively.
Carl E. Berg has a substantial financial interest in two companies that
lease space from the operating partnerships. These companies occupy, in
the aggregate, 35,862 square feet at a weighted average of $.63 per
square foot per month. These leases were in effect prior to the
Company's acquisition of its general partnership interests in July
1998. The leases expire in 2001 (5,862 square feet) and 2002 (30,000
square feet).
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The Company currently leases space owned by Berg & Berg Enterprises,
Inc. Rental amounts and overhead reimbursements paid to Berg & Berg
Enterprises, Inc. were $20 and $40 for the three and six months ended
June 30, 1999, respectively.
6. SUBSEQUENT EVENTS
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 $67,000 after deducting underwriting discounts and other
offering costs, were used to reduce the outstanding balance on the
Wells Fargo line of credit 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
$1,000 are intended for general corporate purposes.
Also 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.
On June 14, 1999, the Company declared a $0.14 per share dividend on
its common stock. The dividend was paid on July 2, 1999 to all common
stockholders of record as of June 21, 1999. At the same time, the
operating partnerships paid a distribution of $0.14 per O.P. Unit on
July 2, 1999, as well. The amount of this distribution payable to
members of the Berg Group, $9,784, was retained by the operating
partnerships and converted to related party debt as of July 2, 1999.
7. 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.
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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 six months ended June 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 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. Each
O.P. Unit is treated as a share of common stock on a fully diluted basis and
also represents the minority ownership interests. At June 30, 1999, the Company
owned a 10% general partnership interest in the operating partnerships, taken
as a whole, on a weighted average basis. As a result of the public offering of
8,680,000 shares of the Company's common stock in July 1999, the Company
currently owns an 18.2% general partnership interest in the operating
partnerships, taken as a whole, on a weighted average basis.
On December 29, 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.
At June 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 received from the
operating partnerships in excess of the amount of dividends to be paid to the
Company's stockholders.
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.
The Company intends to elect and qualify to be taxed as a REIT commencing with
the taxable year ending December 31, 1999.
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As of June 30, 1999, the Company managed 77 properties totaling approximately
5.1 million square feet through its controlling interests in the operating
partnerships.
RESULTS OF OPERATIONS
Comparison of the three and six months ended June 30, 1999 to the three and six
months ended June 30, 1998.
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. As a consequence, operating results for the three and six
months ended June 30, 1999 are not meaningfully comparable to operating results
for the same periods of 1998.
For the three months ended June 30, 1999, rental revenues from real estate were
$18.4 million which included an increase of approximately $903,000 to reflect
rents on a straight-line basis. Tenant reimbursements were $2.2 million, and
other income, including interest, was $293,000. Total expenses for the three
months ended June 30, 1999, were $10.3 million, of which $9.9 million related
directly to real estate operations. General and administrative expenses
accounted for the remainder of the expenses.
For the six months ended June 30, 1999, rental revenues from real estate were
$32.4 million, which included an increase of $1.7 million to reflect rent on a
straight-line basis. Tenant reimbursements were $4.4 million, and other income,
including interest, was $442,000. Total expenses for the six months ended June
30, 1999, were $19.1 million, of which $18.3 million related directly to real
estate operations. General and administrative expenses accounted for the
remainder of the expenses.
The minority interest portion of income was $9.5 million and $16.2 million,
resulting in net income of $1.1 million and $1.9 million for the three and six
months ended June 30, 1999, respectively. Minority interest represents the
limited partners' ownership interest of 89.97%, on a weighted average basis (as
of June 30, 1999), in the operating partnerships.
During the three and six months ended June 30, 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,
aside from interest income and general and administrative expenses.
CHANGES IN FINANCIAL CONDITION
During the first six months of 1999, the Company acquired 570,696 rentable
square feet of newly constructed R&D properties located in the Silicon Valley.
These acquisitions were acquired from the Berg Group under the pending projects
acquisition agreement. The aggregate acquisition price for these properties was
$164.7 million. The Company financed these acquisitions by a) assumption by the
Company of $28.5 million of debt due Berg & Berg Enterprises, Inc.; b)
assumption by the Company of other liabilities of $32.2 million (which includes
the assumption of the sellers' obligation to reimburse Microsoft for shell and
tenant improvements of $32.1 million) and; c) the issuance of 13,900,659 O.P.
Units, of which 13,161,088 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 note receivable.
The remaining portion of the note receivable in the amount of approximately
$372,000 was paid in full.
During the six months ended June 30, 1999, a total of 155,278 employee stock
options were exercised at an option price of $4.50 per share, for total proceeds
to the Company of approximately $699,000.
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 its
credit facility debt with
- 11 -
<PAGE>
Wells Fargo Bank, N.A., (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 of credit. 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 doing so.
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 expires in October 1, 1999 and will need to be replaced. The Company
is currently evaluating alternative sources of credit. There can be no assurance
that the Company will be able to obtain a line of credit with terms similar to
the Wells Fargo line, and its cost of borrowing could increase substantially.
At June 30, 1999, the Company had total indebtedness of $218.7 million including
$153.0 million of fixed rate mortgage debt, $23.8 million of variable rate
mortgage debt (including $20.7 million of related party debt), and $41.9 million
outstanding under its Wells Fargo line. Additionally, as of June 30, 1999, the
Company had available borrowing capacity under the credit facility of $58.1
million.
As of June 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 the $8.25 per
share closing price on June 30, 1999) on a fully diluted basis, including the
conversion of all O.P. Units into common stock, was approximately 24.5% based
upon an estimated Total Market Capitalization of approximately $898.0 million.
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 $67.0 million
after deducting underwriting discounts and other offering costs were used to
reduce the outstanding balance on the Wells Fargo line of credit 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 $1.0 million maintained for general corporate
purposes.
- 12 -
<PAGE>
MORTGAGE DEBT
The debt owed to the Berg Group carries a variable interest rate equal to the
rate applicable to the Wells Fargo line, which was 6.49% annually at June 30,
1999 and is payable in full upon demand.
The following table sets forth certain information regarding debt outstanding as
of June 30, 1999:
<TABLE>
<CAPTION>
Maturity Interest
Debt Description Collateral Properties Balance Date Rate
- ----------------------------------------------- ------------------------------------------ ---------------- ---------- ----------
($ in thousands)
<S> <C> <C> <C> <C>
LINE OF CREDIT:
Wells Fargo Bank, N.A. 1810 McCandless Drive, Milpitas, CA $ 41,871 10/99 (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 20,681 12/99 (1)
2133 Samaritan Drive, San Jose, CA
2233-2243 Samaritan Drive, San Jose, CA
Mortgage Notes Payable:
Great West Life & Annuity Insurance Company 6320 San Ignacio Ave, San Jose, CA 7,660 2/04 7.0%
Great West Life & Annuity Insurance Company 6540 Via del Oro, San Jose, CA 3,654 5/04 7.0%
6385 San Ignacio Ave., San Jose, CA
Prudential Capital Group 20400 Mariani, Cupertino, CA 1,970 4/09 8.75%
New York Life Insurance Company 10440 Bubb Road, Cupertino, CA 418 1/09 9.625%
Home Savings & Loan Association 10460 Bubb Road, Cupertino, CA 501 12/06 9.5%
Amdahl Corporation 3120 Scott, Santa Clara, CA 6,845 5/14 9.42%
Citicorp U.S.A. Inc. 2800 Bayview Drive, Fremont, CA 3,105 4/00 (2)
Mellon Mortgage Company 3530 Bassett, Santa Clara, CA 2,908 6/01 8.125%
Prudential Insurance Company of America 10300 Bubb, Cupertino, CA 129,053 10/08 6.56%
10500 N. DeAnza, Cupertino, CA
4050 Starboard, Fremont, CA
45700 Northpoint Loop, Fremont, CA
45738 Northpoint Loop, Fremont, CA
450-460 National, Mountain View, CA
4949 Hellyer, San Jose, CA
6311 San Ignacio, San Jose, CA
6321 San Ignacio, San Jose, CA
6325 San Ignacio, San Jose, CA
6331 San Ignacio, San Jose, CA
6341 San Ignacio, San Jose, CA
6351 San Ignacio, San Jose, CA
3236 Scott, Santa Clara, CA
3560 Bassett, Santa Clara, CA
3570 Bassett, Santa Clara, CA
3580 Bassett, Santa Clara, CA
1135 Kern, Sunnyvale, CA
1212 Bordeaux, Sunnyvale, CA
1230 E. Arques, Sunnyvale, CA
1250 E. Arques, Sunnyvale, CA
1170 Morse, Sunnyvale, CA
3540 Bassett, Santa Clara, CA
3542 Bassett, Santa Clara, CA
3544 Bassett, Santa Clara, CA
3550 Bassett, Santa Clara, CA
---------------
Mortgage Notes Payable Subtotal 156,114
===============
Total $218,666
===============
</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 June 30, 1999 was 6.49%.
(2) One month LIBOR plus 1.625% adjusted monthly. Rate in effect at June 30,
1999 was 6.575%.
- 13 -
<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 April 30, 1999, 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. Excluding the Fontanosa and Branham/Hellyer
projects, there are still 116 acres of land which is to be developed under the
Berg Land Holdings Agreement.
<TABLE>
<CAPTION>
Approximate
Rentable Area Total Estimated
Property (Square Feet) Anticipated Acquisition Acquisition Value
Date (1)
- ------------------------------ -------------------- -------------------------- ----------------------
(dollars in thousands)
<S> <C> <C> <C>
PENDING PROJECTS
Automation (2 buildings) 141,696 4th Quarter 1999 15,789
Automation (1 building) 114,028 2nd Quarter 2000 12,706
------- -----------
Subtotal 255,724 $ 28,495
BERG LAND HOLDINGS
Fontanosa 77,000 4th Quarter 1999 $ 7,226
Hellyer/Branham 311,000 1st 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.
- 14 -
<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 six months ended June 30, 1999
was $25.0 million compared to net cash used in operating activities of $1.6
million for the same period in 1998. The change was a direct result of the
Company's acquisition of the general partnership interests in the operating
partnerships during the third quarter of 1998.
Net cash used in investing activities was approximately $241,000 and zero for
the six months ended June 30, 1999 and 1998, respectively. Cash used in
investing activities during the six months ended June 30, 1999 related solely to
improvements made to existing real estate assets acquired as part of the
Company's investment in the operating partnerships.
Net cash used in financing activities was $22.1 million for the six months ended
June 30, 1999 compared to cash provided by financing activities of approximately
$282,000 for the same period in 1998. During the six months ended June 30, 1999,
the Company reduced debt outstanding and made distributions to holders of its
common stock and the O.P. Units 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 will have
approximately 865,000 rentable square feet under expiring leases from January 1,
1999 through December 31, 2000. The Company expects that the average annual cost
of recurring tenant improvements and leasing commissions, related to the
properties, will be approximately $1.5 million. The Company believes that 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 nor is it 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.
- 15 -
<PAGE>
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 and six months ended June 30, 1999 are summarized in the table below:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
----------------------- -----------------------
(dollars in thousands)
<S> <C> <C>
Net income $1,065 $ 1,946
Add:
Minority interest 9,487 16,211
Depreciation 3,399 6,102
----------------------- -----------------------
FFO $13,951 $24,259
======================= =======================
</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 and six
months ended June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 June 30, 1999
----------------------- -----------------------
(dollars in thousands)
<S> <C> <C>
FFO $13,951 $24,259
Less:
Straight-line rents 903 1,656
Leasing commissions - 78
Capital expenditures 133 241
======================= =======================
FAD $12,915 $22,284
======================= =======================
</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 $0.55 per share of common stock for the
fiscal year 1999.
- 16 -
<PAGE>
IMPACT OF RECENTLY ISSUED ACCOUNTING 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 during third quarter 1999.
EMBEDDED SYSTEMS. The Company believes that in most cases under the lease terms
it is the tenants 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.
- 17 -
<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.
- 18 -
<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 5
OTHER INFORMATION
None
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.1 Financial Data Schedule
b. Reports on Form 8-K
During the quarter ended June 30, 1999, the Company filed a
report of Form 8-K on May 14, 1999 to report the acquisition
by the Company of the approximately 515,700 square foot
five-building R&D complex located on L'Avenida in Mountain
View, California. The pro forma financial statements for this
acquisition were subsequently filed on Form 8-KA on June 23,
1999.
================================================================================
- 19 -
<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
(Registrant)
Date: August 5, 1999 By: /s/ Marianne K. Aguiar
-------------------------------------
Marianne K. Aguiar
Chief Financial Officer
(Principal Accounting Officer)
- 20 -
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted from the
Consolidated Balance Sheet as of March 31, 1999, and the Consolidated Statement
of Operations for the three months ended March 31, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,886
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 686,345
<DEPRECIATION> (11,512)
<TOTAL-ASSETS> 682,634
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 8
<OTHER-SE> 34,111
<TOTAL-LIABILITY-AND-EQUITY> 682,634
<SALES> 0
<TOTAL-REVENUES> 37,240
<CGS> 0
<TOTAL-COSTS> 4,548
<OTHER-EXPENSES> 6,854
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,681
<INCOME-PRETAX> 1,946
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,946
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,946
<EPS-BASIC> .24
<EPS-DILUTED> .23
</TABLE>
