UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 1-8383
Mission West Properties, Inc.
(Exact name of registrant as specified in its charter)
Maryland 95-2635431
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(State or other jurisdiction of (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
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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 November 13, 2000
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Mission West Properties, Inc.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2000
INDEX
<TABLE>
<CAPTION>
Page
PART I FINANCIAL INFORMATION
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Item 1 Financial Statements (unaudited):
Consolidated Balance Sheets as of September 30, 2000
and December 31, 1999...................................................................................3
Consolidated Statements of Operations for the three
and nine months ended September 30, 2000 and 1999.......................................................4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999...........................................................5
Notes to Consolidated Financial Statements..............................................................6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................................................11
Item 3 Quantitative and Qualitative Disclosures About Market Risk.............................................19
Item 4 Submission of Matters to a Vote of Security Holders....................................................19
PART II OTHER INFORMATION
Item 5 Other Information......................................................................................19
Item 6 Exhibits and Reports on Form 8-K.......................................................................19
SIGNATURES...........................................................................................................19
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
MISSION WEST PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
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<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
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(Unaudited)
ASSETS
<S> <C> <C>
Real estate assets, at cost
Land $176,577 $149,416
Building 629,372 566,766
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805,949 716,182
Less accumulated depreciation (30,011) (18,566)
---------------------- ----------------------
Net real estate assets 775,938 697,616
Cash and cash equivalents 4,274 6,553
Deferred rent 9,238 5,964
Other assets 6,312 2,571
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Total assets $795,762 $712,704
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Line of credit (related parties) 42,654 -
Mortgage notes payable 132,542 133,952
Mortgage notes payable (related parties) 11,708 31,193
Interest payable 1,005 1,005
Security deposits 4,553 2,335
Prepaid rental income 12,447 7,802
Dividends/distributions payable 16,778 14,019
Refundable option payment 21,564 21,564
Accounts payable and accrued expenses 7,895 3,342
---------------------- ----------------------
Total liabilities 251,146 215,212
Commitments and contingencies (Note 8)
Minority interest 442,967 396,810
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 September 30, 2000 and December 31, 1999,
respectively 17 17
Paid-in-capital 123,136 122,746
Accumulated (deficit) (21,504) (22,081)
---------------------- ----------------------
Total stockholders' equity 101,649 100,682
---------------------- ----------------------
Total liabilities and stockholders' equity $795,762 $712,704
====================== ======================
The accompanying notes are an integral part of these consolidated
financial statements.
</TABLE>
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MISSION WEST PROPERTIES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
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Three months ended September 30, Nine months ended September 30,
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2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Revenues:
Rental revenues from real estate $26,822 $20,517 $71,957 $52,920
Tenant reimbursements 3,746 3,957 10,189 8,352
Other income, including interest and
gain on sale of securities 234 136 1,062 578
------------------- -------------------- -------------------- -------------------
Total 30,802 24,610 83,208 61,850
------------------- -------------------- -------------------- -------------------
Expenses:
Operating expenses 1,449 1,392 3,944 3,111
Real estate taxes 2,123 2,704 6,562 5,533
Depreciation of real estate 3,950 3,510 11,445 9,612
General and administrative 363 276 933 1,028
Interest 2,227 2,594 6,730 9,286
Interest (related parties) 1,328 646 3,213 1,635
------------------- -------------------- -------------------- -------------------
Total expenses 11,440 11,122 32,827 30,205
------------------- -------------------- -------------------- -------------------
Income before minority interest 19,362 13,488 50,381 31,645
Minority interest 16,005 11,310 41,462 27,521
------------------- -------------------- -------------------- -------------------
Net income $ 3,357 $ 2,178 $ 8,919 $ 4,124
=================== ==================== ==================== ===================
Basic net income per share $ 0.20 $ 0.13 $ 0.52 $ 0.37
=================== ==================== ==================== ===================
Diluted net income per share $ 0.20 $ 0.13 $ 0.52 $ 0.37
=================== ==================== ==================== ===================
Weighted average number of
common shares outstanding (basic) 17,025,365 16,715,354 17,013,737 11,067,622
=================== ==================== ==================== ===================
Weighted average number of
common shares outstanding (diluted) 17,191,306 16,808,181 17,129,509 11,178,229
=================== ==================== ==================== ===================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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MISSION WEST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
(unaudited)
Nine months ended September 30,
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2000 1999
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<S> <C> <C>
Cash flows from operating activities:
Net income $ 8,919 $ 4,124
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest 41,462 27,521
Depreciation 11,445 9,612
Other (364) -
Changes in assets and liabilities:
Deferred rent (3,274) (3,083)
Other assets (3,360) (1,158)
Interest payable - 373
Security deposits 1,733 (52)
Prepaid rental income 4,212 3,717
Accounts payable and accrued expenses 3,010 2,027
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Net cash provided by operating activities 63,783 43,081
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Cash flows used in investing activities:
Additions to property (581) -
Improvements to real estate assets (1,371) (31,376)
Purchase of short-term investments - (5,000)
Deposit on sale of real estate - 21,564
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Net cash used in investing activities (1,952) (14,812)
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Cash flows from financing activities:
Net repayments on line of credit - (22,906)
Principal payments on mortgage notes payable (1,410) (22,783)
Principal payments on mortgage notes payable (related parties) (64) (39,639)
Net payments under line of credit (related parties) (53,468) -
Payments on receivable from private placements - 372
Net proceeds from issuance of common stock - 66,900
Proceeds from stock options exercised 290 807
Repurchase of common stock - (8)
Minority interest distributions (1,467) (846)
Dividends paid (7,991) (2,142)
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Net cash used in financing activities (64,110) (20,245)
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Net decrease in cash and cash equivalents (2,279) 8,024
Cash and cash equivalents, beginning 6,553 246
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Cash and cash equivalents, ending $ 4,274 $ 8,270
================== ==================
Supplemental information:
Cash paid for interest $ 9,876 $ 10,548
================== ==================
Supplemental schedule of non-cash investing and financing activities:
Cancellation of note receivable in connection with repurchase of common stock - 528
================== ==================
Advances under line of credit (related parties) $ 35,053 -
================== ==================
Debt incurred in connection with property acquisitions $ 41,083 $ 33,083
================== ==================
Other liabilities in connection with property acquisitions $ 2,509 $ 1,284
================== ==================
Issuance of limited partnership units in connection with property acquisitions $ 45,049 $ 120,995
================== ==================
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
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MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except share, square footage and
limited partnership unit amounts)
(unaudited)
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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, the
operating partnerships, which include a 50% joint venture (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 83% of the ownership interests in
the real estate operations of the Company as of September 30, 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 and
nine months ended September 30, 2000 are not necessarily indicative of the
results to be expected for the entire year.
The Company has elected 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 and nine months ended September 30, 2000.
2. Real Estate
PENDING PROJECTS ACQUISITION AGREEMENT
In December 1998 the Company entered into a Pending Projects Acquisition
Agreement under which the Company agreed to acquire approximately one
million rentable square feet of R&D properties upon the completion and
leasing of a number of pending development projects owned by certain
members of the Berg Group and other sellers. The agreement fixes the
acquisition value to be received by the sellers based upon the capitalized
rental value of the property when fully leased. During the first nine
months of 2000, the Company acquired two additional properties under the
Pending Projects Acquisition Agreement, representing 141,740 rentable
square feet (see Property Acquisitions below). At September 30, 2000, there
was one remaining project comprising approximately 110,952 rentable square
feet, which the Company expects to acquire under the Pending Projects
Acquisition Agreement. 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 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.
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BERG LAND HOLDINGS OPTION AGREEMENT
Under the terms of the Berg Land Holdings Option Agreement, the Company
currently has the option to acquire any future R&D, office and industrial
buildings 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 368
acres of Silicon Valley land, including land under development, owned
directly or under 50% joint venture by certain members of the Berg Group
that are subject to the terms of the Berg Land Holdings Option Agreement.
The owners of the future R&D property developments may obtain cash or, at
their option, O.P. Units valued at the average closing price of shares of
common stock over the 30-trading-day period preceding the acquisition date.
As of September 30, 2000, the Company had completed seven acquisitions
under the Berg Land Holdings Option Agreement representing approximately
762,000 rentable square feet. Upon the Company's exercise of an option to
purchase any of the future R&D property developments under the terms of the
Berg Land Holdings Option Agreement, 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 Option Agreement, or the
timing of the Company's acquisition of any of such projects. However, the
Berg Group currently has 21 properties under development with a total of
approximately 1,809,352 rentable square feet of R&D properties that the
Company has the right to acquire under this agreement. Of the 21
properties, six are 50% joint ventures consisting of 471,000 rentable
square feet. As of September 30, 2000, the estimated acquisition price to
the operating partnerships for these 21 projects is approximately $217
million. The final acquisition price of these 21 properties could differ
significantly from this estimate. In addition to projects currently under
development, the Company has the right to acquire future developments by
the Berg Group on up to 257 additional acres of land currently controlled
by the Berg Group, which could support approximately 4.06 million square
feet of new developments. Under the Berg Land Holdings Option Agreement, as
long as the Berg Group ownership in the Company and the operating
partnerships taken as a whole is at least 65%, the Company also has an
option to purchase all land acquired, directly or indirectly, by Carl E.
Berg or Clyde J. Berg in the future which has not been improved 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.
PROPERTY ACQUISITIONS
Effective January 5, 2000, the Company acquired a newly constructed R&D
property located at 1756 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. The
Company acquired this property by borrowing $5,000 under its line of credit
from the Berg Group, issuing 1,346,480 O.P. Units to various members of the
Berg Group, and assuming other liabilities of $100.
Effective March 1, 2000, the Company acquired an approximately 239,000
square foot R&D building located at 800 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. The
Company acquired this property by borrowing $5,000 under its line of credit
from the Berg Group, issuing 1,438,066 O.P. Units to various members of the
Berg Group, and assuming other liabilities of $1,331.
Effective April 1, 2000, the Company acquired a newly constructed R&D
property located at 1762 Automation Parkway in San Jose, California. This
acquisition added approximately 61,100 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 $17,028. The
Company acquired this property by borrowing $8,458 under its line of credit
from the Berg Group and issuing 1,001,213 O.P. Units to various members of
the Berg Group.
Effective April 1, 2000, the Company acquired an approximately 98,500
square foot R&D building located at 255 Caspian Way in Sunnyvale,
California from the Berg Group under the Berg Land Holdings Option
Agreement. The total acquisition price for this property was $11,637. The
Company acquired this property by
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borrowing $6,832 under its line of credit from the Berg Group, issuing
550,079 O.P. Units to various members of the Berg Group, and assuming other
liabilities of $167.
Effective May 15, 2000, the Company acquired two R&D buildings of
approximately 160,000 square feet located at 5300 and 5350 Hellyer Avenue
in San Jose, California from the Berg Group under the Berg Land Holdings
Option Agreement. These properties are operated, managed, and owned by a
partnership in which one of the operating partnerships owns a 50% interest.
The total acquisition price for these properties was $17,184. The Company
acquired these properties by issuing an $11,792 note secured by the
property to the Berg Group, issuing 659,223 O.P. Units to various members
of the Berg Group, and assuming other liabilities of $774.
Effective July 1, 2000, the Company acquired an approximately 77,184 square
foot R&D building located at 5400 Hellyer Avenue in San Jose, California
from the Berg Group under the Berg Land Holdings Option Agreement. The
total acquisition price for this property was $8,598. The Company acquired
this property by borrowing $4,000 under its line of credit from the Berg
Group, issuing 466,377 O.P. Units to various members of the Berg Group, and
assuming other liabilities of $136.
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. Upon exercise of the option,
the Company will refund the remaining deposit amount and Xilinx will
deposit into escrow funds equal to the purchase price. In July 2000, Xilinx
and the Company agreed to extend the option period for one year until July
31, 2001. Xilinx and the Company further agreed to reduce the deposit by
$167 per month commencing August 1, 2000 until the later of: (1) the
transfer of title to the property to Xilinx or (2) July 31, 2001. In the
event Xilinx does not exercise its option, the Company must refund the
remaining deposit to Xilinx, without interest.
3. Stock Transactions
During the nine months ended September 30, 2000, stock options were
exercised for a total of 52,991 shares of common stock; 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. No stock options were exercised during the third quarter
of 2000.
4. Other Income
In May 2000, the Company entered into a ten-year lease with ONI Systems
Corporate ("ONI") for 444,500 square feet of space to be constructed by the
Berg Group on land that is subject to the Berg Land Holdings Option
Agreement. As partial consideration for the lease, the Company was allowed
to purchase 100,000 shares of ONI common stock in its initial public
offering. The Company purchased and then sold all of the shares and
realized net proceeds of $6,257. Of this amount, the Company recognized
$501 during the second quarter with the balance deferred as prepaid rent to
be amortized over the ten-year lease term.
5. Net Income Per Share
Basic net income per share is computed by dividing net income by the
weighted-average number of common shares outstanding for the period.
Diluted net income per share is computed by dividing net income by the sum
of the weighted-average number of common shares outstanding for the period
plus the assumed exercise of all dilutive securities.
The computation for weighted average shares is detailed below:
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<TABLE>
<CAPTION>
Three Months Ended Sept Nine Months Ended Sept
30, 30,
------------------------------- -------------------------------
2000 1999 2000 1999
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<S> <C> <C> <C> <C>
Weighted average shares outstanding (basic) 17,025,365 16,715,354 17,013,737 11,067,622
Incremental shares from assumed option exercise 165,941 92,827 115,772 110,607
-------------- -------------- -------------- --------------
Weighted average shares outstanding (diluted) 17,191,306 16,808,181 17,129,509 11,178,229
============== ============== ============== ==============
</TABLE>
The outstanding O.P. Units, which are exchangeable at the unit holder's
option, subject to certain conditions, 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 September 30, 2000 was
81,667,227.
6. Related Party Transactions
As of September 30, 2000, the Berg Group owned 77,346,625 O.P. Units. Along
with the Company's common shares owned by the Berg Group, the Berg Group's
ownership as of September 30, 2000 represented approximately 78% of the
equity interests of the Company, assuming conversion of the 81,667,227 O.P.
Units outstanding into the common stock of the Company.
As of September 30, 2000, debt in the amount of $42,654 was due the Berg
Group under the line of credit established 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 $50,000 line of credit from the Berg Group was increased to $75,000
effective April 1, 2000. 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. Management expects that the maturity
date for the Berg Group line of credit will be extended to February 2002.
The Company believes that the terms of the Berg Group line of credit are
more favorable than those available from Wells Fargo or similar lenders. As
of September 30, 2000, debt in the amount of $11,708 was due the Berg Group
under a mortgage note established May 15, 2000 in connection with the
acquisition of a 50% interest in Hellyer Avenue Limited Partnership, the
obligor under the mortgage note. The mortgage note bears interest at 7.65%,
and is due in 10 years with principal payments amortized over 20 years.
During the first nine months of 2000, the Company increased its borrowings
by $41,083 in connection with property acquisitions, including debt
incurred under the Berg Group line of credit and mortgage note. Interest
expense incurred in connection with debt due the Berg Group was $1,328 and
$646 for the three months ended September 30, 2000 and 1999, respectively,
and $3,213 and $1,635 for the nine months ended September 30, 2000 and
1999, respectively.
Carl E. Berg has a substantial financial interest in one company that
leases space from the operating partnerships. This company occupies 5,862
square feet at $0.93 per square foot per month. This lease was in effect
prior to the Company's acquisition of its general partnership interests in
July 1998. The lease expires in 2001.
The Company currently leases office space owned by Berg & Berg Enterprises,
Inc., an affiliate of Carl E. Berg and Clyde J. Berg. Rental amounts and
overhead reimbursements paid to Berg & Berg Enterprises, Inc. were $20 for
the three months ended September 30, 2000 and 1999, respectively, and $60
for the nine months ended September 30, 2000 and 1999, respectively.
7. Subsequent Events
On September 18, 2000, the Company declared a $0.17 per share dividend on
its common stock. The dividend was paid on October 10, 2000 to all common
stockholders of record as of September 29, 2000. On the same date, the
operating partnerships paid a distribution of $0.17 per O.P. Unit.
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8. Commitments and Contingencies
The Company and the operating partnerships are or may become, from time to
time, parties to litigation arising out of the normal course of business.
Management does not expect that such matters would have a material adverse
effect on the consolidated financial position, results of operations or
cash flows of the Company.
Insurance policies currently maintained by the Company do not cover seismic
activity, although they do cover losses from fires after an earthquake.
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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 and nine months ended September 30, 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, after December 29, 1999 each O.P. Unit may be
exchanged for one share of common stock, subject to certain conditions. The O.P.
Units represent the minority ownership interests. At September 30, 2000, the
Company owned a 17% general partnership interest in the operating partnerships.
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 September 30, 2000, the outstanding balance under the demand notes that the
Company owes to the operating partnerships was approximately $1.16 million. The
Company and the operating partnerships have extended the due date of the demand
notes until September 30, 2001. 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 has elected, under the Internal Revenue Code of 1986, as amended
(the "Code"), 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.
- 11 -
<PAGE>
RESULTS OF OPERATIONS
Comparison of the three and nine months ended September 30, 2000 to the three
and nine months ended September 30, 1999.
As of September 30, 2000, the Company, through its controlling interests in the
operating partnerships, owned 87 properties totaling approximately 6.0 million
square feet compared to 79 properties totaling approximately 5.2 million square
feet owned by the Company as of September 30, 1999. This represents an increase
of approximately 15% 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> <C>
10/99 5749 Fontanoso Way 77,700
1/00 1756 Automation Parkway 80,640
3/00 800 Branham Lane East 239,000
4/00 1762 Automation Parkway 61,100
4/00 255 Caspian Way 98,500
5/00 5300 & 5350 Hellyer Avenue 160,000
7/00 5400 Hellyer Avenue 77,184
------------------- ---------------------------------- ------------------
794,124
</TABLE>
The following tables reflect the increase in the Company's rental revenues for
the three and nine months ended September 30, 2000 over rental revenues for the
comparable three and nine months in 1999:
<TABLE>
<CAPTION>
Three months ended September 30,
-------------------------------------------------------------------
2000 1999 $ Change % Change
------------- ------------- ------------- ---------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Same Property (1) $15,338 $13,605 $ 1,733 12.7%
1998 Acquisitions 583 585 (2) -
1999 Acquisitions 6,745 6,327 418 6.6%
2000 Acquisitions 4,156 - 4,156 100.0%
------------- ------------- -------------
$26,822 $20,517 $ 6,305 30.7%
============= ============= =============
Nine months ended September 30,
-------------------------------------------------------------------
2000 1999 $ Change % Change
------------- ------------- ------------- ---------------
(Dollars in thousands)
Same Property (1) $43,762 $40,180 $ 3,582 8.9%
1998 Acquisitions 1,748 1,757 (9) (.5%)
1999 Acquisitions 18,685 10,983 7,702 70.1%
2000 Acquisitions 7,762 - 7,762 100.0%
------------- ------------- ------------
$71,957 $52,920 $19,037 36.0%
============= ============= =============
</TABLE>
(1) "Same Property" is defined as properties owned as of July 1, 1998 and still
owned as of September 30, 2000.
For the quarter ended September 30, 2000, rental revenues increased by $6.3
million from $20.5 million for the three months ended September 30, 1999 to
$26.8 million for the same period of 2000. Of the $6.3 million increase in
rental revenues, $1.7 million resulted from the Company's "Same Property"
portfolio, $0.4 million resulted from properties acquired in 1999, and $4.2
million resulted from properties acquired in 2000. Rental revenues increased by
$19.0 million from $52.9 million for the nine months ended September 30, 1999 to
$71.9 million for the same period of 2000. The $19.0 million increase in rental
revenues consisted of $3.6 million from the Company's "Same Property" portfolio,
$7.7 million from properties acquired in 1999, and $7.7 million from properties
acquired in 2000.
Tenant reimbursements decreased by $0.2 million or 5%, from $3.9 million for the
three months ended September 30, 1999 to $3.7 million for the three months ended
September 30, 2000. Operating expenses and real estate taxes, on a combined
basis, decreased by $.5 million or 12%, from $4.1 million to $3.6 million for
the three months ended September 30, 1999 and 2000, respectively. The decrease
was due to the anticipation of additional property taxes in the third quarter of
1999 for the Microsoft project at La Avenida. Tenant reimbursements increased by
$1.8 million or 21%, from $8.4 million for the nine months ended September 30,
1999 to $10.2 million for the nine months ended September 30, 2000. Operating
expenses and real estate taxes, on a combined basis, increased by $1.9 million
or 22%, from $8.6 million to $10.5 million for the nine
- 12 -
<PAGE>
months ended September 30, 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 $440 and $1,833 for the three and nine-month
period ended September 30, 2000, respectively, over the same period a year ago.
The increase was attributable to the acquisitions of eight properties since
September 30, 1999.
Interest expense decreased by $0.4 million or 15% from $2.6 million for the
three months ended September 30, 1999 to $2.2 million for the three months ended
September 30, 2000 due to debt repayment. Interest expense (related parties)
increased by $0.7 million or 116% from $0.6 million for the three months ended
September 30, 1999 to $1.3 million for the three months ended September 30, 2000
due to debt incurred under the Berg Group line of credit in connection with
property acquisitions. Interest expense decreased by $2.6 million or 28% from
$9.3 million for the nine months ended September 30, 1999 to $6.7 million for
the nine months ended September 30, 2000. Interest expense (related parties)
increased by $1.6 million or 100% from $1.6 for the nine months ended September
30, 1999 to $3.2 million for the nine months ended September 30, 2000. Total
interest expense (including amounts to related parties) has decreased due to
repayment of the Wells Fargo line of credit. As a result of eight R&D property
acquisitions since September 30, 1999, debt outstanding, including amounts due
related parties, had increased by $17.4 million, or 10%, from $169.5 million as
of September 30, 1999 to $186.9 million as of September 30, 2000. Management
expects that interest expense will increase as new debt is incurred in
connection with property acquisitions.
The minority interest portion of income was $16.0 million, resulting in net
income to stockholders of $3.4 million for the three months ended September 30,
2000. Minority interest represents the ownership interest of all limited
partners in the operating partnerships taken as a whole, which was 83% as of
September 30, 2000.
CHANGES IN FINANCIAL CONDITION
During the first nine months of 2000, the Company acquired seven additional
properties representing 716,424 rentable square feet of R&D properties located
in Silicon Valley. These properties were acquired from the Berg Group under the
Pending Projects Acquisition Agreement and the Berg Land Holdings Option
Agreement. The aggregate acquisition price for these properties was $87.4
million. The Company financed these acquisitions by a) borrowing $41.1 million
under the Berg Group line of credit; b) assumption by the Company of other
liabilities of $2.5 million; c) and the issuance of 5,461,438 O.P. Units.
During the nine months ended September 30, 2000, stock options were exercised to
purchase a total of 52,991 shares of common stock, consisting of 39,237 shares
exercised at $4.50 per share and 13,754 shares exercised at $8.25 per share.
Total proceeds to the Company were approximately $290. No stock options were
exercised during the third quarter of 2000.
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 come from 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 the last quarter of 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. On April 1, 2000, the $50 million
credit line with the Berg Group was increased to $75 million. 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 is
continually 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 Berg Group line of credit, and the Company's its cost of borrowing could
increase substantially. The Company believes that the terms of the Berg Group
line of credit are more favorable than those available from Wells Fargo or
similar lenders. On April 1, 2000, the $50 million credit line with the Berg
Group was increased to $75 million with all other terms remaining the same.
- 13 -
<PAGE>
At September 30, 2000, the Company had total indebtedness of $186.9 million,
including $132.5 million of fixed rate mortgage debt, $11.7 million under the
Berg Group mortgage note (related parties), and $42.7 million under the Berg
Group line of credit (related parties).
As of September 30, 2000, the Company's Debt to Total Market Capitalization
ratio was approximately 12.0%. The Company computed this ratio by dividing the
Company's total debt outstanding by the sum of this debt plus the market value
of common stock (based upon the closing price of $13.88 per share on September
29, 2000) on a fully diluted basis, taking into account the conversion of all
O.P. Units into common stock. On September 29, 2000, the last trading day during
the period, Total Market Capitalization was approximately $1.56 billion.
MORTGAGE DEBT
The following table sets forth certain information regarding debt outstanding as
of September 30, 2000:
<TABLE>
<CAPTION>
Maturity Interest
Debt Description Collateral Properties Balance Date Rate
------------------------------------------- -------------------------------- --------------- ----------- -----------
($ in
thousands)
<S> <C> <C> <C> <C>
LINE OF CREDIT (related parties):
2033-2043 Samaritan Drive, San Jose, CA $42,654 2/01 (1)
2133 Samaritan Drive, San Jose, CA
2233-2243 Samaritan Drive, San Jose, CA
1310-1450 McCandless Drive, Milpitas, CA
1315-1375 McCandless Drive, Milpitas, CA
1650-1690 McCandless Drive, Milpitas, CA
1795-1845 McCandless Drive, Milpitas, CA
MORTGAGE NOTES PAYABLE (related parties): 5300 & 5350 Hellyer Avenue, San Jose, CA 11,708 6/20 7.65%
MORTGAGE NOTES PAYABLE:
Prudential Capital Group 20400 Mariani, Cupertino, CA 1,794 4/09 8.75%
New York Life Insurance Company 10440 Bubb Road, Cupertino, CA 385 9/09 9.625%
Home Savings & Loan Association 10460 Bubb Road, Cupertino, CA 437 12/06 9.50%
Mellon Mortgage Company 3530 Bassett, Santa Clara, CA 2,765 6/01 8.125%
Prudential Insurance Company of America 10300 Bubb, Cupertino, CA 127,161(2) 10/08 6.56%
10500 N. DeAnza, Cupertino, CA
4050 Starboard, Fremont, CA
45700 Northport Loop, Fremont, CA
45738 Northport Loop, Fremont, CA
450-460 National, 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 132,542
---------------
TOTAL $186,904
===============
</TABLE>
(1) The debt owed to the Berg Group under the line of credit 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.
- 14 -
<PAGE>
CURRENT PROPERTIES SUBJECT TO OUR ACQUISITION AGREEMENT WITH 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 Berg Land Holdings Option Agreement and the Pending
Projects Acquisition Agreement.
<TABLE>
<CAPTION>
Approximate
Rentable Area Total Estimated
Property Building (Square Feet) Anticipated Acquisition Date Acquisition Value(1)
------------------------------ ------------ -------------------- ----------------------------- ----------------------
BERG LAND HOLDINGS (dollars in thousands)
UNDER DEVELOPMENT
<S> <C> <C> <C> <C>
Hellyer III (Phase I) 1 117,740 2nd Qtr 2001 $ 14,400
Hellyer Vista (Phase I) 1 131,500 4th Qtr 2000/1st Qtr 2001 16,500
Silver Creek 4 346,000 2nd Quarter 2001 40,500
Morgan Hill (JV I) (2) 2 211,000 1st Quarter 2001 22,000
5550 Hellyer 1 79,800 2nd Quarter 2001 10,200
5750 Hellyer 1 73,312 3rd Quarter 2001 10,100
Creekside 1 65,000 2nd Quarter 2001 9,000
Caspian (Phase II) 1 100,000 2nd Quarter 2001 14,900
Morgan Hill (JV II) (2) 1 60,000 2nd Quarter 2001 5,700
Morgan Hill (JV III) (2) 1 40,000 2nd Quarter 2001 4,000
5535 Hellyer 1 125,000 2nd Quarter 2001 15,400
Morgan Hill (JV IV) (2) 2 160,000 3rd Quarter 2001 17,500
Piercy & Hellyer 2 130,000 4th Quarter 2001 14,900
Piercy & Hellyer 1 65,000 4th Quarter 2001 8,696
Piercy & Hellyer 1 105,000 4th Quarter 2001 13,200
- --------- --------
SUBTOTAL 21 1,809,352 $216,996
AVAILABLE LAND
Morgan Hill (2) 490,000
King Ranch 248,500
Piercy & Hellyer 458,000
Fremont & Cushing 387,000
Evergreen 2,480,000
---------
SUBTOTAL 4,063,500
PENDING PROJECTS ACQUISITION
PENDING PROJECT
Automation IV 1 110,952 4th Quarter 2000 14,000
- --------- --------
TOTAL 22 5,983,804 $230,996
== ========= ========
</TABLE>
(1) The Estimated Acquisition Value represents the estimated cash price for
acquiring the pending projects under the terms of the Pending Projects
Acquisition Agreement and the Berg Land Holdings Option Agreement, which
may differ from the actual acquisition cost as determined under GAAP, if
O.P Units or any other securities based on the market value of our common
stock are issued in the transaction.
(2) The Company expects to own an approximate 50% interest in the partnership,
through its operating partnership, to be formed to develop the property.
The property will be operated and managed by the other partner in the
entity. The rentable area and estimated acquisition value shown above
reflect both the Company's and the other partner's combined interest in
these properties. The Company's actual acquisition cost will be determined
without regard to the other partner's interest in these properties,
however.
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
- 15 -
<PAGE>
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, subsequent to the approval by the independent
directors committee, there can be no assurance that the Company actually will
consummate any 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.
The minority interest in earnings for unrelated parties was deducted from total
minority interest in earnings in calculating Funds from Operation ("FFO").
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. Upon exercise of the option, the Company will refund the remaining
deposit amount and Xilinx will deposit into escrow funds equal to the purchase
price. In July 2000, Xilinx and the Company agreed to extend the option period
for one year until July 31, 2001. Xilinx and the Company further agreed to
reduce the deposit by $167 per month commencing August 1, 2000 until the later
of: (1) the transfer of title to the property to Xilinx or (2) July 31, 2001. In
the event Xilinx does not exercise its option, the Company must refund the
remaining deposit to Xilinx, without interest.
HISTORICAL CASH FLOWS
Net cash provided by operating activities for the nine months ended September
30, 2000 was $63.8 million compared to $43.0 million for the same period in
1999, a 48% increase. The change was a direct result of rent increases and new
acquisitions.
In May 2000, the Company entered into a ten-year lease with ONI Systems
Corporate ("ONI") for 444,500 square feet of space to be constructed by the Berg
Group on land that is subject to the Berg Land Holdings Option Agreement. As
partial consideration for the lease, the Company was allowed to purchase 100,000
shares of ONI common stock in its initial public offering. The Company purchased
and then sold all of the shares and realized net proceeds of $6,257. Of this
amount the Company recognized $501 during the second quarter with the balance
deferred as prepaid rent to be amortized over the ten-year lease term.
Net cash used in investing activities was approximately $2.0 million and $14.8
million for the nine months ended September 30, 2000 and 1999, respectively.
Cash used in investing activities during the nine months ended September 30,
2000 was related to tenant improvements made to existing real estate assets and
additions to property.
Net cash used in financing activities was $64.1 million for the nine months
ended September 30, 2000 compared to $20.2 million for the same period in 1999.
During the nine months ended September 30, 2000, the Company paid its 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, 1999, the recurring tenant improvement
costs and leasing commissions incurred with respect to new leases and lease
renewals of the properties previously owned or controlled by members of the Berg
Group averaged approximately $1.5 million annually. The Company expects that the
average annual cost of recurring tenant improvements and leasing commissions,
related to the properties, will be approximately $3.0 million for the year 2000.
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
- 16 -
<PAGE>
capital improvements through long-term secured and unsecured indebtedness and
the issuance of additional equity securities by the Company.
FUNDS FROM OPERATIONS
As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), FFO represents net income (loss) before minority interest of unit
holders (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of property, plus real estate related depreciation
and amortization (excluding amortization of deferred financing costs and
depreciation of non-real estate assets) and after adjustments for unconsolidated
partnerships and joint ventures. Management considers FFO an appropriate measure
of performance of an equity REIT because, along with cash flows from operating
activities, financing activities and investing activities, it provides investors
with an understanding of the Company's ability to incur and service debt, and
make capital expenditures. FFO should not be considered as an alternative for
net income as a measure of profitability and it is not comparable to cash flows
provided by operating activities determined in accordance with GAAP, nor is FFO
necessarily indicative of funds available to meet the Company's cash needs,
including its need to make cash distributions to satisfy REIT requirements.
The Company's definition of FFO also assumes conversion at the beginning of the
period of all convertible securities, including minority interests that might be
exchanged for common stock. FFO does not represent the amount available for
management's discretionary use; as such funds may be needed for capital
replacement or expansion, debt service obligations or other commitments and
uncertainties.
Furthermore, FFO is not comparable to similarly entitled items reported by other
REITs that do not define them exactly as the Company defines FFO. FFO for the
three months ended September 30, 2000 and 1999 and the nine months ended
September 30, 2000 are summarized in the table below:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
----------------------------------------- ------------------------------------------
2000 1999 2000 1999
------------------ ------------------ ------------------- -------------------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
Net income $ 3,357 $ 2,178 $ 8,919 $ 4,124
Add:
Minority interest (1) 15,894 11,310 41,284 27,521
Depreciation 3,950 3,510 11,445 9,612
Less:
Gain on sale of security - - 501 -
------------------ ------------------ ------------------- -------------------
FFO $23,201 $16,998 $61,147 $41,257
================== ================== =================== ===================
</TABLE>
(1) The minority interest for unrelated parties was deducted from total
minority interest in calculating FFO.
DISTRIBUTION POLICY
The Company intends to pay distributions to stockholders and O.P. Unit holders
based upon total funds available for distribution ("FAD"), which is calculated
as FFO less straight-lined rents, leasing commissions paid and capital
expenditures made during the respective period. The calculations of FAD for the
three months ended September 30, 2000 and 1999 and the nine months ended
September 30, 2000 are as follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
------------------------------------------ ------------------------------------------
2000 1999 2000 1999
------------------- ------------------- ------------------- -------------------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
FFO $23,201 $16,998 $61,147 $41,257
Less:
Straight-line rents 1,947 1,427 3,274 3,083
Leasing commissions 436 301 1,338 379
Capital expenditures 223 274 1,371 515
------------------- ------------------- ------------------- -------------------
FAD $20,595 $14,996 $55,164 $37,280
=================== =================== =================== ===================
</TABLE>
The Company intends to make regular quarterly distributions to holders of common
stock and O.P. Units based on its FAD. The Company's ability to make such
distributions will be affected by numerous factors, including, most
- 17 -
<PAGE>
importantly, the receipt of distributions from rental operations payable to the
Company as the sole general partner of 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 FAD 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 ordinary dividend
income to its shareholders.
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 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 actual timing of
development, construction, and leasing on the projects that the Company believes
it may acquire in the future under the Berg Land Holdings Option Agreement is
unknown presently, and reliance should not be placed on the estimates concerning
these projects set forth under the caption, "Acquiring Properties Developed by
the Berg Group," above. 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.
- 18 -
<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.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
================================================================================
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
None
================================================================================
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.
<TABLE>
<CAPTION>
Mission West Properties, Inc.
(Registrant)
<S> <C>
Date: November 13, 2000 By: /s/ Wayne N. Pham
----------------------------------
Wayne N. Pham
Vice President of Finance and Controller
(Principal Accounting Officer)
</TABLE>
- 19 -
