UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
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
-----------
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:
17,025,365 shares outstanding as of May 15, 2000
<PAGE>
Mission West Properties, Inc.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of March 31, 2000
and December 31, 1999...................................................................................3
Consolidated Statements of Operations for the three
months ended March 31, 2000 and 1999....................................................................4
Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999..............................................................5
Notes to Consolidated Financial Statements..............................................................6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................................................10
Item 3 Quantitative 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>
- 2 -
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
MISSION WEST PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
-----
<TABLE>
<CAPTION>
March 31, 2000 December 31, 1999
---------------------- ----------------------
(Unaudited)
ASSETS
<S> <C> <C>
Real estate assets, at cost
Land $159,302 $149,416
Buildings and improvements 590,733 566,766
---------------------- ----------------------
750,035 716,182
Less accumulated depreciation (22,198) (18,566)
---------------------- ----------------------
Net real estate assets 727,837 697,616
Cash and cash equivalents 13 6,553
Deferred rent 6,933 5,964
Other assets 5,560 2,571
---------------------- ----------------------
Total assets $740,343 $712,704
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Line of credit (related parties) 36,070 -
Mortgage notes payable 133,491 133,952
Mortgage notes payable (related parties) - 31,193
Interest payable 1,005 1,005
Security deposits 3,103 2,335
Prepaid rental income 6,360 7,802
Dividends/distributions payable 14,402 14,019
Refundable option payment 21,564 21,564
Accounts payable and accrued expenses 4,945 3,342
---------------------- ----------------------
Total liabilities 220,940 215,212
Commitments and contingencies (Note 8)
Minority interest 418,353 396,810
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, 17,025,365 and 16,972,374 shares issued and
outstanding at March 31, 2000 and December 31, 1999,
respectively 17 17
Paid-in-capital 123,036 122,746
Accumulated (deficit) (22,003) (22,081)
---------------------- ----------------------
Total stockholders' equity 101,050 100,682
---------------------- ----------------------
Total liabilities and stockholders' equity $740,343 $712,704
====================== ======================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 3 -
<PAGE>
MISSION WEST PROPERTIES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
---------
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------------------
2000 1999
------------------- --------------------
<S> <C> <C>
Revenues:
Rental revenues from real estate $21,235 $14,027
Tenant reimbursements 3,513 2,236
Other income, including interest 186 149
------------------- --------------------
24,934 16,412
------------------- --------------------
Expenses:
Operating expenses 1,093 782
Real estate taxes 2,374 1,529
Depreciation of real estate 3,633 2,703
General and administrative 363 406
Interest 2,257 2,971
Interest (related parties) 751 416
------------------- --------------------
Total expenses 10,471 8,807
------------------- --------------------
Income before minority interest 14,463 7,605
Minority interest 11,832 6,724
------------------- --------------------
Net income $ 2,631 $ 881
=================== ====================
Basic net income per share $ 0.15 $ 0.11
=================== ====================
Diluted net income per share $ 0.15 $ 0.10
=================== ====================
Weighted average number of
common shares outstanding (basic) 16,990,353 8,227,261
=================== ====================
Weighted average number of
common shares outstanding (diluted) 17,389,409 8,415,412
=================== ====================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 4 -
<PAGE>
MISSION WEST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,631 $ 881
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Minority interest 11,832 6,724
Depreciation 3,633 2,703
Other 17
Changes in assets and liabilities:
Deferred rent (969) (753)
Other assets (2,705) (337)
Interest payable - (174)
Interest payable (related parties) - 416
Security deposits 419 (89)
Prepaid rental income (1,707) (228)
Accounts payable and accrued expenses 774 203
--------------- ---------------
Net cash provided by operating activities 13,925 9,346
--------------- ---------------
Cash flows used in investing activities:
Improvements to real estate assets (900) (107)
--------------- ---------------
Cash flows from financing activities:
Net repayments on line of credit - (8,678)
Principal payments on mortgage notes payable (461) (532)
Principal payments on mortgage notes payable (related parties) (16,441) (196)
Proceeds from stock options exercised 290 67
Minority interest distributions (408) (12)
Dividends paid (2,545) -
--------------- ---------------
Net cash (used in) financing activities (19,565) (9,351)
--------------- ---------------
Net increase (decrease) in cash and cash equivalents (6,540) (112)
Cash and cash equivalents, beginning 6,553 246
--------------- ---------------
Cash and cash equivalents, ending $ 13 $ 134
=============== ===============
Supplemental information:
Cash paid for interest $ 2,997 $3,139
=============== ===============
Supplemental schedule of non-cash investing and financing activities:
Advances under line of credit (related parties) $10,783 $ -
=============== ===============
Assumption of debt in connection with property acquisitions $10,000 $3,525
=============== ===============
Assumption of other liabilities in connection with property acquisitions $ 1,431 $ 88
=============== ===============
Issuance of limited partnership units in connection with property acquisitions $21,637 $4,945
=============== ===============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
- 5 -
<PAGE>
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 82%, taken as a whole, of the
ownership interests in the real estate operations of the Company as of
March 31, 2000. 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 ("GAAP") 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 GAAP 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 months
ended March 31, 2000 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 ended December 31, 1999. Accordingly, no
provision has been made for income taxes for the three months ended March
31, 2000. The Company has not yet filed its December 31, 1999 tax return,
but has filed an extension.
2. Real Estate
PENDING PROJECTS ACQUISITION AGREEMENT
The Company has entered into a Pending Projects Acquisition Agreement under
which the Company has acquired or 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 three months of 2000, the
Company acquired one additional property under the Pending Projects
Acquisition Agreement, representing 80,640 rentable square feet (see
Property Acquisitions below). At March 31, 2000, there were two remaining
projects comprising 175,084 rentable square feet, which the Company expects
to acquire under the Pending Projects Acquisition Agreement.
- 6 -
<PAGE>
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 228 acres of Silicon Valley
Land owned directly or under 50% joint venture 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
March 31, 2000, the Company had completed three acquisitions under the Berg
Land Holdings Option Agreement representing approximately 426,000 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
(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 disbursed by the developer to the
close of escrow; less (f) any debt encumbering the property or a lesser
amount as approved by the independent directors committee.
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, or the timing
as to when the Company will acquire such projects. However, the Berg Group
is currently constructing four properties with a total of approximately
480,000 rentable square feet of R&D properties that the Company has the
right to acquire under this agreement, including one property potentially
representing 160,000 rentable square feet in which the Berg Group holds
only a 50% ownership interest. As of March 31, 2000, the estimated
acquisition price to the operating partnerships for these four projects is
$50.7 million. The final acquisition price of these four properties could
differ significantly from this estimate. In addition to projects currently
under development, the Berg Land Holdings Option Agreement gives the
Company the right to acquire future developments by the Berg Group on up to
137 additional acres of land currently controlled by the Berg Group, which
could support approximately 2.24 million square feet of new developments.
Under the Berg Land Holdings Option Agreement, the Company also has an
option to purchase all land acquired, directly or indirectly, by Carl E.
Berg or Clyde J. Berg that has not been approved with completed buildings
and which is zoned for, intended for or appropriate for research and
development, office and/or industrial development or use in the states of
California, Oregon, and Washington. In January 2000 the Berg Group
purchased a 50% interest in TBI-Mission West, LLC that was approximately 62
acres in Morgan Hill, California, that might support the development of
approximately 961,000 rentable square feet of R&D properties.
PROPERTY ACQUISITIONS
Effective January 5, 2000, the Company acquired a newly constructed R&D
property located on Automation Parkway in San Jose, California. This
acquisition added approximately 80,640 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 $14,594. In
connection with this acquisition, the Company assumed $5,000 of debt due
the Berg Group, an affiliate of Carl E. Berg and Clyde J. Berg, as well as
other liabilities of $100, and issued 1,346,480 O.P. Units to various
members of the Berg Group.
Effective March 1, 2000, the Company acquired an approximately 239,000
square foot R&D building located on Branham Lane East in San Jose,
California from the Berg Group under the Berg Land Holdings Option
Agreement. The total acquisition price for this property was $18,359. In
connection with this acquisition, the
- 7 -
<PAGE>
Company assumed $5,000 of debt due the Berg Group, an affiliate of Carl E.
Berg and Clyde J. Berg, as well as other liabilities of $1,331, and issued
1,438,066 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.
3. Stock Transactions
During the three months ended March 31, 2000, options were exercised for a
total of 52,991 shares; options to purchase 39,237 shares were exercised at
$4.50 per share, and options to purchase 13,754 shares were exercised at
$8.25 per share. Total proceeds to the Company were $290.
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 the 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
March 31, 2000,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Weighted average shares outstanding (basic) 16,990,353 8,227,261
Incremental shares from assumed option exercises 399,056 188,151
--------------- ---------------
Weighted average shares outstanding (diluted) 17,389,409 8,415,412
=============== ===============
</TABLE>
The outstanding O.P. Units, which are exchangeable at the unit holder's
option for shares of common stock on a one-for-one basis 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. The total number of O.P. Units
outstanding at March 31, 2000 was 78,990,335.
5. Related Party Transactions
As of March 31, 2000, the Berg Group owned 74,669,733 O.P. Units. Along
with the Company's common shares owned by the Berg Group, the Berg Group's
ownership as of March 31, 2000 represented approximately 78% of the equity
interests of the Company, assuming conversion of the 78,990,335 O.P. Units
into the common stock of the Company.
As of March 31, 2000, debt in the amount of $36,070 was due the Berg Group under
the line of credit established effectively March 1, 2000. The $50,000 Wells
Fargo line of credit expired on February 29, 2000 and was repaid with proceeds
from and replaced by a $50,000 line of credit from the Berg Group. The Berg
Group line of credit is currently collateralized by seven properties, bears
interest at LIBOR plus 1.30 percent, and matures in February 2001. The Company
believes that the terms of the Berg Group line of credit were more favorable
than those available from Wells Fargo or similar lenders. During the first three
months of 2000, the Company increased its borrowings by $10,000 in connection
with property acquisitions. Interest expense incurred in connection with debt
due the Berg Group was $751 and $416 for the three months ended March 31, 2000
and 1999, respectively.
- 8 -
<PAGE>
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 March 31, 2000 and 1999.
7. Subsequent Events
On March 20, 2000, the Company declared a $0.15 per share dividend on its
common stock. The dividend was paid on April 10, 2000 to all common
stockholders of record as of March 31, 2000. At the same time, the
operating partnerships paid a distribution of $0.15 per O.P. Unit on April
10, 2000, as well.
Effective as of April 1, 2000 the Company acquired an approximately 98,500
rentable square foot R&D property in Sunnyvale, California from the Berg
Group under the Berg Land Holdings Option Agreement. The total acquisition
price for this property was approximately $11.6 million, which was funded
through the assumption of debt and other liabilities as well as the
issuance of O.P. Units.
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.
- 9 -
<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, 1999. The
results for the three months ended March 31, 2000 are not necessarily indicative
of the results to be expected for the entire fiscal year ending December 31,
2000. 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 4.34 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 ownership7 interests. At March 31, 2000, the
Company owned a 17.7% general partnership interest in the operating
partnerships, taken as a whole, on a weighted average basis.
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 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 and were used primarily to repay indebtedness.
At March 31, 2000, the outstanding balance under the demand notes that the
Company owes to the operating partnerships was approximately $1.12 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 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 as part of the Company's 1999 income tax return to
qualify to be taxed as a REIT commencing with the taxable year ended December
31, 1999.
The Company has two wholly owned subsidiaries, MIT Realty, Inc. and Mission West
Executive Aircraft Center. Both corporations are inactive.
- 10 -
<PAGE>
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2000 TO THE THREE MONTHS ENDED
MARCH 31, 1999.
As of March 31, 2000, the Company, through its controlling interests in the
operating partnerships, owned 82 properties totaling approximately 5.63 million
square feet compared to 72 properties totaling approximately 4.57 million square
feet owned by the Company as of March 31, 1999. This represents an increase of
approximately 23% 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>
5/99 L'Avenida Avenue (5 buildings) 515,700
7/99 1750 Automation Parkway 80,640
8/99 1700 Richard Avenue 58,783
10/99 5749 Fontanosa Way 77,700
1/00 1756 Automation Parkway 80,640
3/00 800 Branham Lane East 239,000
-------------------------------------------------------------------------------
1,052,463
</TABLE>
The following table reflects the increase in the Company's rental revenues for
the three months ended March 31, 2000 over rental revenue for the comparable
three months in 1999:
<TABLE>
<CAPTION>
Three months ended March 31,
-------------------------------------------------------------------
2000 1999 $ Change % Change
------------- ------------- ------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Rental Revenues $21,235 $14,027 $7,208 51.4%
</TABLE>
Rental revenues increased by $7.2 million for the three months ended March 31,
1999 to $21.2 million for the same period of 2000 primarily as a result of the
additional 10 properties acquired since March 31, 1999, including rental
revenues of $770,000 generated from the two acquisitions in 2000.
Tenant reimbursements increased by $1.3 million or 59%, from $2.2 million for
the three months ended March 31, 1999 to $3.5 million for the three months ended
March 31, 2000. Operating expenses and real estate taxes, on a combined basis,
increased by $1.2 million or 52%, from $2.3 million to $3.5 million for the
three months ended March 31, 1999 and 2000, respectively. The increases resulted
primarily from the growth in the total rentable square footage during the
periods presented.
Depreciation expense increased by $930,000 for the three-month period ended
March 31, 2000 over the same period a year ago. The increase was attributable to
the acquisitions of properties since March 31, 1999.
Interest expense decreased by $700,000 or 23% from $3.0 million for the three
months ended March 31, 1999 to $2.3 million for the three months ended March 31,
2000. Interest expense (related parties) increased by $335,000 or 81% from
$416,000 for the three months ended March 31, 1999 to $751,000 for the three
months ended March 31, 2000. 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 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 $29.8
million or 15% from $199.3 million as of March 31, 1999 to $169.5 million as of
March 31, 2000.
The minority interest portion of income was $11.8 million, resulting in net
income to shareholders of $2.6 million for the three months ended March 31,
2000. Minority interest represents the limited partners' ownership interest in
the operating partnerships, which was 82% as of March 31, 2000, taken as a
whole.
CHANGES IN FINANCIAL CONDITION
During the first three months of 2000, the Company acquired two additional
properties representing 319,640 rentable square feet of newly constructed R&D
properties located in Silicon Valley. These properties were acquired from the
Berg Group
- 11 -
<PAGE>
under the Pending Projects Acquisition Agreement and the Berg Land
Option Agreement. The aggregate acquisition price for these properties was
$32.95 million. The Company financed these acquisitions by a) assumption by the
Company of $10 million of debt due the Berg Group; b) assumption by the Company
of other liabilities of $1.4 million; c) and the issuance of 2,784,546 O.P.
Units.
During the three months ended March 31, 2000, employee stock options were
exercised to purchase a total of 52,991 shares of common stock, consisting of
39,237 shares exercised at a price of $4.50 per share and 13,754 shares
exercised at $8.25 per share. Total proceeds to the Company were approximately
$290.
RECENT DEVELOPMENTS
Effective as of April 1, 2000 the Company acquired an approximately 98,500
rentable square foot R&D property in Sunnyvale, California from the Berg Group
under the Berg Land Holdings Option Agreement. The total acquisition price for
this property was approximately $11.6 million, which was funded through the
assumption of debt and other liabilities as well as the isuance of O.P. Units.
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"), or the Berg Group 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 2000. 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 Company has the ability to meet any
short-term obligations or other liquidity needs based on the line of credit
(related parties).
The Company's $50 million line of credit with Wells Fargo Bank expired on
February 29, 2000 and was repaid with proceeds from and replaced by a $50
million line of credit from the Berg Group. The Berg Group line of credit is
currently collateralized by seven properties, bears interest at LIBOR plus 1.30
percent, and matures in February 2001. The Company believes that the terms of
the Berg Group line of credit were more favorable than those available from
Wells Fargo or similar lenders.
At March 31, 2000, the Company had total indebtedness of $169.5 million
including $133.5 million of fixed rate mortgage debt and $36.0 million under the
Berg Group line of credit (related parties).
As of March 31, 2000, the 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 closing
price of $8.56 per share on March 31, 2000) on a fully diluted basis, including
the conversion of all O.P. Units into common stock, was approximately 17.1%
based upon an estimated Total Market Capitalization of approximately $991.4
million.
- 12 -
<PAGE>
MORTGAGE DEBT
The following table sets forth certain information regarding debt outstanding as
of March 31, 2000:
<TABLE>
<CAPTION>
Maturity Interest
Debt Description Collateral Properties Balance Date Rate
- ----------------------------------------------- -------------------------------- --------------- ----------- -----------
($ in thousands)
<S> <C> <C> <C> <C>
Line of Credit (related parties):
2033-2043 Samaritan Drive, San 36,070 2/01 (1)
Mortgage Notes Payable:
Prudential Capital Group 20400 Mariani, Cupertino, CA 1,867 3/09 8.75%
New York Life Insurance Company 10440 Bubb Road, Cupertino, CA 399 8/09 9.625%
Home Savings & Loan Association 10460 Bubb Road, Cupertino, CA 464 1/07 9.5%
Mellon Mortgage Company 3530 Bassett, Santa Clara, CA 2,825 6/01 8.125%
Prudential Insurance Company of America 10300 Bubb, Cupertino, CA 127,936(2) 10/08 6.56%
10500 N. DeAnza, Supertino, CA
4050 Starboard, Fremont, CA
45700 Northport Loop, Fremont, CA
45738 Morthport 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 133,491
----------------
TOTAL $169,561
================
</TABLE>
(1) The debt owed to the Berg Group carries a variable interest rate equal to
LIBOR plus 1.30 percent and is payable in full in February 2001.
(2) John Kontrabecki, one of the limited partners, has guaranteed approximately
$12.0 million of this debt.
- 13 -
<PAGE>
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 Berg Land Holdings Option Agreement and the Pending
Projects Acquisition Agreement.
<TABLE>
<CAPTION>
Approximate
Rentable Area Anticipated Acquisition Total Estimated
Property (Square Feet) Date Acquisition Value(1)
- ------------------------------ ------------------- ----------------------------- --------------------------
BERG LAND HOLDINGS (dollars in thousands)
<S> <C> <C> <C>
Under Development
Hellyer IV(2) 160,000 2nd Quarter 2000 11,600
Hellyer View 77,184 3rd Quarter 2000 9,300
Hellyer III (Phase I) 117,740 4th Quarter 2000 14,800
Hellyer Vista (Phase I) 125,000 4th Quarter 2000 15,000
--------- -------
Subtotal 479,924 50,700
Available Land
Morgan Hill(3) 961,000
King Ranch 889,000
Hellyer & Piercy 763,000
Fremont & Cushing(4) 387,000
Caspian Way(5) 200,000
---------
Subtotal 3,200,000
PENDING PROJECTS ACQUISITION
Pending Projects
Automation III (1 building) 61,056 2nd Quarter 2000 6,700
Automation IV (1 building) 114,028 1st Quarter 2001 12,700
--------- -------
Subtotal 175,084 19,400
--------- -------
TOTAL 3,855,008 $70,100
========= =======
</TABLE>
(1) The Estimated Acquisition Value that 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.
(2) This property will be operated and managed by the Company and owned by the
partnership in which the Company will own an approximate 50% interest.
(3) The Company expects to own an approximate 50% interest in the partnership
to be formed to develop the property. The property will be operated and
managed by the other partner in the entity.
(4) The Berg Group purchased this property in January 2000.
(5) The Company acquired Phase I of this property in April 2000 consisting of
98,500 rentable square feet.
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.
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
- 14 -
<PAGE>
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.
During the third quarter of 1999, the Company entered into a new lease agreement
for 2001 Logic Drive with Xilinx, Incorporated ("Xilinx"). The lease agreement
includes an option granted to Xilinx to purchase the building at a predetermined
price. In September 1999, in accordance with the option provisions of the lease
agreement, Xilinx paid to 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.
HISTORICAL CASH FLOWS
Net cash provided by operating activities for the three months ended March 31,
2000 was $13.9 million compared to $9.3 million for the same period in 1999. The
change was a direct result of rent increases and new acquisitions.
Net cash used in investing activities was approximately $900,000 and $107,000
for the three months ended March 31, 2000 and 1999, respectively. Cash used in
investing activities during the three months ended March 31, 2000 was related to
tenant improvements made to existing real estate assets.
Net cash used in financing activities was $19.6 million for the three months
ended March 31, 2000 compared to $9.4 million for the same period in 1999.
During the three months ended March 31, 2000, 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 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
unitholders (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of property, plus real estate related depreciation
and amortization (excluding amortization of deferred financing costs and
depreciation of non-real estate assets) and after adjustments for unconsolidated
partnerships and joint ventures. Management considers FFO an appropriate measure
of performance of an equity REIT because, along with cash flows from operating
activities, financing activities and investing activities, it provides investors
with an understanding of 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.
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.
- 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 months ended March 31, 2000 and 1999 are summarized in the table below:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Net income $2,631 $ 881
Add:
Minority interest 11,832 6,724
Depreciation 3,633 2,703
--------------- ---------------
FFO $18,096 $10,308
=============== ===============
</TABLE>
DISTRIBUTION POLICY
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
March 31, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
FFO $18,096 $10,308
Less:
Straight-line rents 969 753
Leasing commissions 150 78
Capital expenditures 900 108
--------------- ---------------
FAD $16,077 $ 9,369
=============== ===============
</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, 2000 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company does not believe recently issued accounting standards will
materially impact the Company's financial 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
- 16 -
<PAGE>
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.
- 17 -
<PAGE>
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No material changes have occurred since the Annual Report on Form 10-K for the
year ended December 31, 1999.
- 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 6
EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
27.1 Financial Data Schedule
b. Reports on Form 8-K
None
================================================================================
- 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, INC.
(Registrant)
Date: May 15, 2000 By: /s/ Carl E. Berg
--------------------------
Carl E. Berg
Chief Executive 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, 2000, and the Consolidated Statement
of Operations for the year ended March 31, 2000 of Mission West Properties,
Inc., and is qualified in its entirety by reference to such financial statements
</LEGEND>
<CIK> 0001067419
<NAME> Mission West Properties, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 13
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 750,035
<DEPRECIATION> (22,198)
<TOTAL-ASSETS> 740,343
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 17
<OTHER-SE> 101,033
<TOTAL-LIABILITY-AND-EQUITY> 740,343
<SALES> 0
<TOTAL-REVENUES> 24,934
<CGS> 0
<TOTAL-COSTS> 3,467
<OTHER-EXPENSES> 3,996
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,008
<INCOME-PRETAX> 2,631
<INCOME-TAX> 0
<INCOME-CONTINUING> 2,631
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,631
<EPS-BASIC> .15
<EPS-DILUTED> .15
</TABLE>
