<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10K
(Mark One)
[X] Annual report to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ______________ to ______________
Commission file number 1-8383
MISSION WEST PROPERTIES
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-2635431
------------------------------- -------------------------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
10050 Bandley Drive
Cupertino, California 95014-2188
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code is (408) 725-0700
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Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
-------------------- -----------------------------------------
Common, no par value American Stock Exchange
Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
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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 proceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on October 17,
1997, as reported on the American Stock Exchange, was approximately $4,617,107.
The AMEX halted trading on such date and trading has not yet resumed. Shares of
Common Stock held by each officer, director and holder of 5% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes.
As of March 30, 1998, there were 1,698,536 shares of the Registrant's Common
Stock outstanding.
Exhibit Index on page 19
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PART I
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from
those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in this section
as well as in the sections entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Documents Incorporated by Reference
The following documents are incorporated by reference into this Form 10-K:
Definitive Proxy Statement filed on October 21, 1997 for the special
meeting of shareholders held on November 10, 1997. This proxy statement
is incorporated by reference into Items 4, 5 and 10.
Prospectus filed on November 26, 1997 as part of a Form S-3 Registration
Statement with respect to proposed sales of Common Stock by certain
selling shareholders. This Prospectus is incorporated by reference into
Items 1, 2, 5, 7, 12, 13.
Form 8-K filed March 13, 1998 to report the Company changed accountants.
ITEM 1
BUSINESS
OVERVIEW
Mission West Properties (the "Company"), with corporate offices located in
Cupertino, California, is a California corporation that historically has been
engaged in developing, owning, operating, and selling income-producing
commercial real estate.
The Company was formed in 1969 as Palomar Mortgage Investors, a California
business trust. It operated as a real estate investment trust ("REIT") (as
defined by the Internal Revenue Code), investing primarily in short- and
intermediate-term construction and development loans secured by first trust
deeds on real property. In 1974, the Company terminated new loan activity
except to facilitate the sale of property acquired from borrowers through
foreclosure or by deed in lieu of foreclosure and, in 1975, changed its name
to Mission Investment Trust. In 1979, the Company terminated its status as a
REIT and began to develop and market properties it owned. Since then, the
Company has acquired, developed, and sold properties in southern California
and Arizona. In 1982, the Company incorporated under its present name.
SALE OF REAL ESTATE PORTFOLIO
In July 1996, the Company entered into an agreement to sell all its real
estate assets. This agreement was subsequently terminated and replaced, and
the subsequent agreement was also terminated and replaced. On December 6,
1996, the Company entered into an agreement to sell all the real estate
assets to Spieker Properties, L.P. ("Spieker"), a California limited
partnership, for $50,500,000 in cash, subject to certain conditions customary
in a transaction of this type. A special shareholder
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meeting was held December 16, 1996, at which time the Company's shareholders
approved the sale of the real estate assets to Spieker.
A majority of the sale transaction was completed on January 22, 1997, at which
time nine of the Company's eleven real estate properties were sold. The sale
of the remaining two properties was completed May 6, 1997. The properties
sold consisted of occupied office, light industrial, and R&D buildings in San
Diego and Riverside counties, California, and occupied industrial buildings
and vacant land in Chandler, Arizona.
The Company received $47,500,000 in cash upon completing the sale of the
first portion of the portfolio, from which it repaid all debt encumbering the
properties and paid a majority of the related transaction and closing costs,
including $3,000,000 in "break-up" fees from the terminated sales
transactions. Upon completing the sale of the two remaining properties in May
1997, the Company received $3,000,000 in cash, from which the related
transaction and closing costs were paid.
In February 1997, the Company declared and paid a special dividend of $9.00
per share to all shareholders of record as of February 19, 1997. The
dividend represented the available portion of the proceeds from the sale of
the real estate assets. Following the sale of assets and the subsequent
payment of dividend to shareholders, only nominal assets remained in the
Company and the corporate entity has virtually no revenue-generating or
cash-generating capabilities.
On May 27, 1997, the Company entered into a Stock Purchase Agreement (the
"Agreement") with a group of private investors led by Berg & Berg
Enterprises, Inc. (collectively, the "Purchaser" or the "Berg Group") of
Cupertino, California, pursuant to which the Company would sell 6,000,000
shares of newly issued common stock (the "Common Stock") to the Purchaser for
a purchase price of $900,000 in cash, or $0.15 per share. A special meeting
of shareholders was held August 5, 1997, at which the shareholders approved
the stock sale transaction.
This sale of Common Stock was completed September 2, 1997, at which time all
officers and directors resigned and the Berg Group became the controlling
shareholder with an 80-percent ownership position in the Company. The Berg
Group comprises individuals and privately held firms that have designed,
developed, and leased office, R&D, and manufacturing buildings and complexes
occupied by Silicon Valley technology companies since 1969. Currently, the
Berg Group owns and operates more than 3,500,000 square feet of property.
Per terms of the Agreement, the Company paid a cash distribution of $3.30 per
share to shareholders on October 21, 1997 for a total distribution of
$5,059,000 ("October Distribution"). The record date for this distribution
was August 28, 1997. In November 1997, the Company changed its fiscal year
end from November 30 to December 31.
WHOLLY OWNED SUBSIDIARIES
The Company has three wholly owned subsidiaries, MIT Realty, Inc. and Mission
West Executive Aircraft Center, Inc. ("MWEAC"). MIT Realty, Inc. and MWEAC
are inactive entities; they have no signed contracts or commitments.
EMPLOYEES
The Company had no full-time employees as of December 31, 1997. As of March
29, 1998, the Company had six employees.
REAL ESTATE INVESTMENTS AND MARKETING
At December 31, 1997, the Company had no real estate investments. The
Company completed its most recent development projects in 1991 and, since
that time, has principally focused on managing its real estate portfolio.
The Company sold its real estate properties in January and May of 1997 (see
Part I - "Business - Sale of Real Estate Portfolio").
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GOVERNMENT REGULATIONS / ENVIRONMENTAL ISSUES
The Company's rental properties were subject to various federal, state, and
local regulations such as those addressed by the Americans with Disabilities
Act and local building codes. The Company believes that the properties were
in substantial compliance with all applicable regulatory requirements through
the date of sale.
ITEM 2
PROPERTIES
The Company's corporate offices are located in Cupertino, California, in a
building owned by Berg & Berg Developers, aggregating approximately 7000
square feet at a total rental cost of approximately $5,625 per month.
ITEM 3
LEGAL PROCEEDINGS
As of March 16, 1998, there was no litigation pending to which the Company
was a party.
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's proxy statement filed with the Securities and Exchange
Commission on October 21, 1997 is incorporated herein by reference. The
Company held a special meeting of shareholders on November 10, 1997 (the
"November Special Meeting"). At the November Special Meeting, the following
matters were voted upon by the holders of the Company's outstanding Common
Stock, and with respect to each matter, the number of votes for and against
and the number of abstentions and broker non-votes are set forth below:
An amendment and restatement of the Company's Articles of Incorporation
to effectuate a 1 for 30 reverse stock split, increase the authorized
shares of Common Stock to 200,000,000, authorization of up to 20,000,000
shares of preferred stock and authorization for the Company to issue
convertible debt securities. There were 5,841,049 votes for the
proposal, 104,520 votes against the proposal, 46,406 abstentions and no
broker non-votes.
Approval of a private placement of 1,250,000 shares of the Company's
Common Stock (after taking into account the reverse stock split) for
$4.50 per share. There were 5,963,773 votes for the proposal, 24,935
votes against the proposal, 3,267 abstentions and no broker non-votes.
Approval of the Company's 1997 Stock Option Plan pursuant to which
5,560,000 shares of the Company's Common Stock were reserved for
issuance. There were 5,924,033 votes for the proposal, 63,275 votes
against the proposal, 4,667 abstentions and no broker non-votes.
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PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Common Stock is listed on the American Stock Exchange (the "AMEX") and
the Pacific Exchange, Inc. under the symbol "MSW", but is not currently
trading on either exchange. The AMEX halted trading in the Common Stock at
the opening of trading on October 20, 1997 and the AMEX has advised the
Company that it will consider a number of factors before making the decision
to resume trading.
The following are the high and low sales prices, by quarter, of the Common
Stock for the two most recent fiscal years as adjusted to give retroactive
effect to the 1 for 30 reverse stock split which was effective as of November
10, 1997:
<TABLE>
<CAPTION>
1997 1996
-------------------- --------------------
High Low High Low
------- -------- ------- -------
<S> <C> <C> <C> <C>
1st Quarter(1) 397 1/2 56 1/4(2) 161 1/4 138 3/4
2nd Quarter 112 1/2 52 1/2 210 138 3/4
3rd Quarter 153 3/4 93 3/4 247 1/2 187 1/2
4th Quarter 136 7/8 93 3/4(3) 292 1/2 213 3/4
</TABLE>
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(1) In 1997, the Company changed its fiscal year end from November 30 to
December 31. Thus, the first quarter of 1997 includes December 1996.
(2) During the first fiscal quarter in 1997 (on February 27,1997), the Company
paid a $9.00 special dividend ($270 adjusted to give retroactive effect to
the 1 for 30 reverse stock split).
(3) During the fourth fiscal quarter in 1997 (on October 21, 1997), the Company
paid a $3.30 special dividend ($99 adjusted to give retroactive effect to
the 1 for 30 reverse stock split).
As of March 30, 1998, the approximate number of holders of record of the
Common Stock was 360. The Company paid no dividends during fiscal
1996. The Company declared and paid a special dividend of $9.00 per share on
February 27, 1997. Another special dividend of $3.30 per share was paid on
October 21, 1997.
See "Item 1 - Business" and "Item 13 - Certain Transactions" for a discussion
of the Company's recent private placements.
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ITEM 6
SELECTED CONSOLIDATED FINANCIAL DATA
Selected consolidated financial data is derived from the audited financial
statements and notes thereto (see Part II - Item 8 "Consolidated Financial
Statements and Supplementary Data," below) and is as follows:
MISSION WEST PROPERTIES
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
_____
<TABLE>
<CAPTION>
One Month
ending Year Ending November 30
December 31, -------------------------------------------------------
1997 1997 1996 1995 1994 1993
------------ ---------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
RESULTS OF OPERATIONS:
Revenues $27 $52,295 $7,526 $7,926 $9,297 $7,142
Net Income (Loss) (74) 3,044 35 52 (1,943) (1,065)
Basic Income (Loss) per Share(1) (0.05) 18.48 0.77 1.12 39.69 21.73
Diluted Income (Loss) per Share(2) (0.05) 18.48 0.72 1.06 39.69 21.73
FINANCIAL CONDITION:(2)
Total Assets $5,763 - $46,324 $47,570 $50,963 $56,236
Notes Payable - - 30,753 31,976 34,382 35,938
Cash Dividend Declared per share(1) 369 - 0.00 0.00 0.00 1.58
Weighted Average Shares Outstanding(1) 1,501 - 46 46 49 49
</TABLE>
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(1) As adjusted for the 1 for 30 reverse stock split.
(2) Balance sheet information as of December 31, 1997.
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ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1997 COMPARED WITH FISCAL 1996
In November 1997, the Company changed its fiscal year end from November 30 to
December 31. Thus, fiscal year 1996 was from December 1, 1995 to November
30, 1996 and fiscal year 1997 was from December 1, 1996 to December 31, 1997.
Fiscal year 1998 will be from January 1, 1998 to December 31, 1998.
During the month ended December 31, 1997, the Company held minimal assets,
primarily cash and cash equivalents obtained from recent sales of Common Stock
and held as temporary investments. Therefore, there was minimal operating
activity. During this period, the Company recognized interest income in the
amount of $27,000 and general and administrative expenses of $139,000,
resulting in a net loss before income tax benefit of $112,000 for the month
ended December 31, 1997. Given the insignificant activity relating to the one
month ended December 31, 1997, the following discussion relating to the
results of operations and changes in financial condition for fiscal year 1997
as compared to fiscal year 1996 is not significantly impacted by the
inclusion of a thirteenth month in the fiscal 1997 results.
The sale of the Company's real estate portfolio in January and May 1997 had a
significant effect on the operations of the Company during fiscal year 1997.
The sale of the real estate portfolio was in accordance with a December 1996
agreement with Spieker Properties, L.P. ("Spieker"), a California limited
partnership, in which Spieker agreed to purchase all the Company's real
estate assets for $50,500,000 in cash, subject to certain customary
conditions. A special meeting of the Company's shareholders was held on
December 16, 1996, at which time the shareholders approved the sale. Most of
the sale transaction was completed on January 22, 1997, at which time the
Company sold nine of its eleven real estate properties. The sale of the
remaining two properties was completed on May 6, 1997. All debt encumbering
the properties and the related transaction and closing costs were paid from
the sales proceeds. The properties sold consisted of occupied office, light
industrial, and R&D buildings and leaseholds, together with hangar and office
buildings thereon, in San Diego and Riverside Counties, California, and
occupied industrial buildings and vacant land in Chandler, Arizona. The
total building space sold approximated 815,000 square feet. Upon completing
the sale of the nine properties during the first quarter of 1997, the Company
received $47,500,000 in cash, from which it repaid all debt encumbering the
properties (thus eliminating future interest expense) and paid related
transaction and closing costs, including $3,000,000 in "break-up" fees from
previously terminated sales transactions.
Upon completing the sale of the remaining two properties in May 1997, the
Company received $3,000,000 cash, from which related transaction and closing
costs also were paid.
During the third quarter of fiscal 1997, the Company's shareholders approved
a change in control of the Company, through a stock sale to a group of
private investors led by Berg & Berg Enterprises, Inc. (the "Berg Group").
The Company completed the sale of 6,000,000 newly issued shares of Common
Stock on September 2, 1997 at $0.15 per share for $900,000 at which time all
current officers and directors of the Company resigned and were replaced by
individuals recommended by the Berg Group's representative. Upon completion
of the stock sale, the Berg Group owned approximately 79.6 percent of the
outstanding shares of the Company.
The Company declared and paid a special cash distribution of $9.00 per share
to shareholders during February 1997. Additionally, in August 1997,
the Board of Directors declared a special cash distribution of $3.30 per
share that was paid to shareholders on October 21, 1997 (record date of
August 28, 1997) (the "October Distribution").
In November 1997, the Company completed a private placement of 1,250,000
newly issued shares of Common Stock for $4.50 per share to private investors
with aggregate proceeds to the Company of $5,625,000. The private placement
occurred after the Company effected a 1 for 30 reverse stock split on
November 10, 1997. In October 1997, the Board of Directors of the Company
determined that the sale of Common Stock would be at a price $4.50 per share
(effectively equivalent to the price that the Berg Group paid in September
1997 prior to the reverse stock split).
The sale of the real estate portfolio resulted in a gain of approximately
$4,676,000 and, coupled with the cash distribution paid to shareholders, left
the Company with no operating assets and minimal cash-generating ability.
Results for fiscal 1997 reflect the effects of the sale of the real estate
assets and the two private placements of Common Stock. The gain on sale of
real estate (net of the "break-up" fees) significantly decreased revenues and
expenses from operations of real estate, decreased interest expense, and
increased general and administrative expenses (primarily due to severance
payments upon downsizing of corporate staff and transaction costs associated
with the sale of Common Stock).
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During the fourth quarter of 1997, the Company had only cash and interest
income, and operating expenses related to the November private placement.
Results for fiscal 1997 reflect the fact that the Company sold all of its
real estate assets, after which it had no operations, minimal other assets,
and continued to incur overhead expenses to enable completion of the proposed
transactions. Expenses of approximately $650,000 were incurred during the
fourth quarter related to the proposed transactions. During the preceding
fiscal year, the Company had continued to operate its real estate portfolio
in the normal course, and had entered into an agreement for sale of the
portfolio to a single purchaser (which was completed in fiscal 1997 with a
different purchaser).
FISCAL 1996 COMPARED WITH FISCAL 1995
During fiscal year 1996, the Company continued to focus operating efforts on
managing its real estate portfolio of ten operating projects; no properties
were sold and no development occurred during the year. In addition to
managing the portfolio, the Company entered into an agreement to sell the
portfolio in July 1996. The agreement was subsequently replaced, a majority
of the real estate was finally sold in January 1997.
During 1996 occupancy levels remained fairly stable, averaging 86 percent for
the portfolio, compared to 87 percent in fiscal 1995. Compared to fiscal
1995, the Company's rental revenues from real estate decreased $81,000, or
one percent, in 1996; the related operating expenses of real estate decreased
$140,000, or eight percent. The decrease in rental revenue primarily
resulted from the decrease in occupancy. The net decrease in operating
expenses resulted from decreases in building repairs/reconditioning and
property taxes that were offset by general increases in operating costs.
Sales of real estate decreased $287,000 between years, primarily as a result
of an unimproved parcel of land sold in 1995. The related costs of real
estate sold in fiscal 1995 consist primarily of the land sale, while 1996
costs primarily consist of expenses associated with the agreements to sell
the entire portfolio that were not consummated (costs associated with the
sale completed in January 1997 were recorded as a cost of sale at that time).
Interest expense decreased $390,000 between years as a result of decreases in
outstanding notes payable and in prime lending rates (prime rates averaged
8.3 percent during fiscal 1996 compared to 8.8 percent during fiscal 1995).
CHANGES IN FINANCIAL CONDITION
DECEMBER 31, 1997 COMPARED WITH NOVEMBER 1996
Nearly all changes in the Company's financial position during 1997 resulted
from the sale of the Company's real estate portfolio. Proceeds from the sale
of the property were used to pay all debt and a substantial portion of all
other liabilities of the Company, as well as the special $9.00 per share
distribution to shareholders in February 1997. In addition, the Board of
Directors declared a special distribution of $3.30 per share which was paid
on October 21, 1997 to shareholders of record as of August 28, 1997.
In connection with the January 1997 sale of real estate, vesting was
accelerated to permit the exercise of stock options for the purchase of
13,520 shares. During February 1997, all vested stock options, totaling
162,000 shares, also were exercised by option holders. Total exercise
proceeds to the Company from all such option exercises were $759,000 and were
recognized on a "net exercise" basis. Certain unvested options were canceled
in March 1997.
The Company completed the sale of 6,000,000 newly issued shares of Common
Stock subsequent to August 31, 1997. The $900,000 purchase price was
received on August 5, 1997, and was initially classified as a liability until
completion of the sale, which occurred on September 2, 1997.
The Company completed the sale of 1,250,000 newly issued shares of Common
Stock on November 12, 1997, for an aggregate of $5,625,000.
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LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of fiscal 1997, the Company generated cash from
the sale of all of its real estate assets and used the proceeds from such
sales to retire outstanding debt, fund ongoing operations, pay a special
distribution to shareholders and pay tax liabilities. After payment of the
October Distribution, only nominal assets remained in the Company, which has
minimal or no revenue-generating or cash-generating capabilities.
The Company has raised capital with a view to maintaining the listing of the
Common Stock on the American Stock Exchange ("AMEX") and the Pacific Exchange
("PSE") and enabling the Company to raise more capital for the direct and
indirect acquisition of revenue-generating real estate and other assets. The
Company may acquire such properties and other assets through direct purchases
or the issuance of securities of the Company in exchange for such properties
and assets or interests in existing businesses and entities that own such
properties and assets. The Company may enter into such transactions with
affiliates of Berg & Berg Enterprises, Inc. and Carl E. Berg, the Chief
Executive Officer and a director of the Company, which own and operate more
than 3,500,000 square feet of Santa Clara County, California properties.
There can be no assurance that any such transactions will occur, however.
The Company effected a 1 for 30 reverse split of the Common Stock and sold
1,250,000 shares of Common Stock at $4.50 per share (post-split) in a private
placement to accredited investors. The Board of Directors determined that
$4.50 was approximately equivalent on a post-reverse split basis to the $0.15
per share paid by the Berg Group for shares of Common Stock in September
1997. Moreover, the Board of Directors has determined that $4.50 is an
appropriate price for all transactions involving Common Stock and Common
Stock equivalents issued by the Company until such time as the Company has
acquired revenue-generating properties and other assets, directly or
indirectly, and has funds from real estate operations. The ownership
interests in the Company held by existing shareholders will be reduced
substantially by any of such transactions, any of which may be materially
dilutive to all existing shareholders of the Company. If the Company does
not raise additional capital or acquire revenue-generating real estate or
other assets, the Company believes that the outstanding shares of Common
Stock will cease to have value.
Forward-looking statements involve a number of risks and uncertainties. Some
of the important factors that could cause actual results to differ materially
from those in the forward-looking statements include the following:
Future transactions intended to raise capital for the Company and result
in the Company's conduct of a new real estate business are subject to
applicable California and federal laws, the regulations of stock
exchanges or other markets on which the Common Stock is traded, real
estate market conditions, stock market conditions, or other factors.
In connection with the October Distribution, the AMEX halted trading of
the Common Stock. Trading has not yet resumed. In the absence of
appropriate actions by the Company, there is a risk, therefore, that the
Common Stock will be de-listed from such exchanges and there may no
longer exist a trading market for the Common Stock.
If the Company does raise sufficient capital to maintain the AMEX and
PSE listings of the Common Stock, but does not re-enter the real estate
business during the next fiscal year, the Company may become subject to
the Investment Company Act of 1940, as amended, which would entail
substantially more regulation of the Company at significant additional
expense.
At present, approximately 73.1 percent of the outstanding Common Stock
is owned by members of the Berg Group. All such shares are subject to
Voting Rights Agreements obligating those shareholders to vote their
shares in the manner recommended by Berg & Berg Enterprises, Inc. and
Carl E. Berg, who as a result, should be viewed as possessing effective
control of the Company. There can be no assurance that such control
will be exercised to cause the occurrence of any transaction described
in the forward-looking statements.
If the Company does re-enter the real estate business, there can be no
assurance that the Company's operations will be profitable. There can be no
assurance that the price of a share of Common Stock will increase as a result
of the Company's acquisition of any real estate or other assets or its future
revenue-generating activities, if any.
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ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's Consolidated Financial Statements and notes thereto appear on
pages F-1 to F-17 of this Form 10-K Annual Report.
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURES
The Company changed accountants on March 12, 1998 and filed a report on Form
8-K with the Commission to report such changes on March 13, 1998.
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PART III
ITEM 10
The directors and executive officers of the Company as of March 30, 1998 are
as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Carl E. Berg(1) 60 Chairman of the Board, Chief Executive Officer, President and Director
Michael Knapp 35 Chief Financial Officer and Secretary and Director(3)
Keith Cocita(1),(2) 53 Director(3)
Roger Kirk(1),(2) 45 Director(3)
Michael O'Rosky 37 Director(3)
Michael J. Anderson 38 Vice President, Chief Operating Officer, and Director
Bradley A. Perkins 40 Vice President, General Counsel and Secretary
Marianne K. Aguiar 31 Vice President of Finance and Controller
John Bolger(1),(2) 51 Director
</TABLE>
- ----------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Effective March 30, 1998, Messrs. Knapp, Cocita, Kirk and O'Rosky
resigned all positions with the Company and Mr. Anderson, Ms. Aguiar and
Mr. Perkins were appointed to their current offices as set forth above
and Messrs. Anderson and Bolger were appointed directors.
The following is a biographical summary of the experience of the executive
officers and directors of the Company:
Mr. Berg has served as Chief Executive officer, President and Director of the
Company since September of 1997. From 1979 to the present, Mr. Berg has been
a general partner of Berg & Berg Developers and a director and officer of
Berg & Berg Enterprises, Inc. since its inception. Mr. Berg is also a
director of Integrated Device Technologies, Inc., Videonics, Inc., Valence
Technology, Inc. and System Integrated Research, Ltd.
Mr. Anderson joined the Company on January 1, 1998. On March 30, 1998, Mr.
Anderson was appointed Chief Operating Officer, Vice President and a
Director. After seven years as a real estate attorney and partner at Ware &
Freidenrich, Palo Alto, California, Mr. Anderson has spent the past six years
in private real estate development with Sandhill Homes, LP and Sandhill
Property Company.
Mr. Perkins joined the Company on February 2, 1998. On March 30, 1998, Mr.
Perkins was appointed Vice President, General Counsel, and Secretary. Mr.
Perkins will devote a portion of his time to the Company, a portion to
various Berg companies, and a portion of his time to Teledex Corporation (a
non-competitive telephone supplier). From November 1991 to January 1998, Mr.
Perkins was with Valence Technology, Inc., where he was Vice President,
General Counsel and Secretary for the past five years. From August 1988 to
November 1991, Mr. Perkins was Assistant General Counsel and Intellectual
Property Counsel with VLSI Technology, Inc., a semiconductor manufacturer.
Ms. Aguiar joined the Company on March 29, 1998. On March 30, 1998, Ms.
Aguiar was appointed Vice President of Finance and Controller. From June
1996 to March 1998, Ms. Aguiar was with Oasis Residential, Inc. where she
served as Vice President, Controller and Treasurer from July 1996 to March
1998. From November 1995 to May 1996, Ms. Aguiar was employed by SBT
Accounting Systems where from April 1996 to June 1996, she served as Acting
Vice President of Finance and Controller and from November 1995 to April 1996
she served as Assistant Controller. From November 1992 to November 1995, Ms.
Aguiar was employed by Coopers & Lybrand LLP where she served as Audit
Manager.
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Mr. Bolger became a director of the Company on March 30, 1998. Mr. Bolger is
a private investor. He was Vice President of Finance and Administration of
Cisco Systems, Inc., a networking company, from May 1989 through December
1992. Mr. Bolger is a director of Integrated Device Technology, Inc.,
Integrated Systems Inc., McAfee Associates, Inc. Sanmina Corporation, TCSI
Corporation.
NUMBER, TERMS AND ELECTION OF DIRECTORS
The number of directors is set at five. Each director will serve for a term
of one year or until the next annual meeting at which directors are elected.
In the election of directors, each shareholder is entitled to one vote for
each share of Common Stock held by such shareholder. There are currently two
vacancies on the board of directors.
CONTRACTUAL ARRANGEMENTS
In January 1998, the Company entered into an employment agreement with Mr.
Anderson, Vice President, Chief Operating Officer and Director, providing
that in the case of voluntary termination for good cause (as defined in the
agreement) or involuntary termination other than for cause, Mr. Anderson will
be entitled to a severance payment of $100,000 and a continuation of medical
and other group insurance benefits for six months. In the event such a
termination occurs more than 12 months from his hire date, the vesting of Mr.
Anderson's stock options will accelerate and options which would have vested
in the six month period following his termination date will be vested as of the
termination date. Additionally, Mr. Anderson acquired 200,000 shares of
Common Stock on March 30, 1998 pursuant to the exercise of an option at
$4.50 per share upon delivery of a full recourse note payable in four years
or upon termination of employment. Mr. Anderson's note is secured by the
shares, which are subject to repurchase by the Company to the extent not
vested upon termination of employment.
COMPENSATION OF DIRECTORS
The Company intends to pay its directors who are not officers of the Company
fees for their services as directors. Directors will receive annual
compensation of $15,000 plus a fee of $1,000 for attendance (in person or by
telephone) at each meeting of the board of directors, but not for committee
meetings. Officers of the Company who are also directors will not be paid
any director fees.
Each member of the Board of Directors who is not an employee of the Company
or any of its subsidiaries or affiliates (a "Non-Employee Director") and who
becomes a member of the Board of Directors after November 10, 1997, the date
on which the 1997 Stock Option Plan was approved by the shareholders of the
Company, will automatically receive a grant of an option to purchase 50,000
shares of Common Stock at an exercise price equal to 100% of the fair market
value of the Common Stock at the date of grant of such option upon joining
the Board of Directors. Such options will become exercisable cumulatively
with respect to 1/48th of the underlying shares on the first day of each
month following the date of grant. Generally, the options must be exercised
while the optionee is a director of the Company.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors, executive officers and each beneficial owner of more than ten
percent of the Common Stock of the Company are required by Section 16(a) of
the Securities Exchange Act of 1934, as amended, to file reports periodically
disclosing their transactions in the Company's securities. Based on a review
of such reports, no reporting person failed to file required reports on a
timely basis during fiscal year 1997.
-12-
<PAGE>
ITEM 11
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
All directors and officers who resigned on March 30, 1998 were elected or
appointed on September 2, 1997 and all former officers and directors resigned
as of the same date. Therefore, no officer who received compensation during
the fiscal year ended December 31, 1997 will receive compensation during the
fiscal year ending December 31, 1998.
SUMMARY COMPENSATION
Michael M. Early served as Chief Executive Officer, President and Director of
the Company from March 7, 1997 through August 1997. Mr. Earley received
compensation for such services through the payment by the Company to Triton
Group Ltd. (of which Mr. Earley was concurrently the Chief Executive Officer
and President) for a total amount of $75,390 ($49,640 paid to the Triton
Group Management for general management services, including Mr. Early's
services, and $25,750 paid directly to Mr. Early as director's fees).
-13-
<PAGE>
BENEFIT PLANS
1997 STOCK OPTION PLAN.
No options were granted to any named executive officers during December 1996
or the year ended December 31, 1997.
The Company's 1997 Stock Option Plan (the "Option Plan") was approved by the
Company's shareholders on November 10, 1997. The Option Plan was adopted so
that the Company may attract and retain the high quality employees,
consultants and directors necessary to build the Company's infrastructure and
to provide ongoing incentives to the Company's employees in the form of
options to purchase the Company's Common Stock by enabling them to
participate in the Company's success.
The Option Plan provides for the granting to employees (including officers
and directors who are employees) of "incentive stock options" within the
meaning of Section 422 of the Code, and for the granting of non-statutory
options to employees, consultants and directors, including directors who are
neither employees of, nor consultants to, the Company ("Non-Employee
Directors"). Options to purchase a maximum of 5,500,000 shares of Common
Stock may be granted under the Option Plan, subject to equitable adjustments
to reflect certain corporate events.
Each option granted under the Option Plan will be evidenced by a written
stock option agreement between the Company and the optionee and generally
become exercisable cumulatively as to 20% of the underlying shares on each
anniversary of the date of grant for so long as the optionee is employed by
or providing service to the Company.
The price per share exercise price of options granted under the Option Plan
may not be less than 100% of the fair market value on the date of grant,
except in certain specific circumstances, in which case the exercise price
may not be less than 110%. Each option may be exercised only to the extent
that it is vested. Options must generally be exercised during the optionee's
employment or within 30 days following the optionee's termination of status
as an employee, consultant or director, unless termination is due to the
death or disability of an optionee. If termination of status is due to death
or disability of the optionee, an option may be exercised within no more than
six months of following the termination.
TERMINATED EMPLOYEE BENEFIT PLANS
As of October 9, 1997, and prior to the adoption of the 1997 Stock Option
Plan, the Company terminated all of its employee benefit plans, including a
1990 Director Stock Option Plan, a 1990 Incentive Stock Option Plan, the
Mission West Properties Deferred Compensation Plan, amended and restated as
of January 11, 1991, the Mission West Properties Deferred Compensation Trust,
the Mission West Properties Retirement Plan and the Mission West Properties
Stock Purchase Plan (collectively, the "Terminated Plans"). No employees or
directors were participating under any of the Terminated Plans. The Company's
Board of Directors authorized the Company's officers to take all actions
necessary to terminate the Terminated Plans.
The Company filed a Form 11-K relating to the terminated Mission West
Properties Stock Purchase Plan for the plan year end March 31, 1997. The
Company does not intend to file a Form 11-K for terminated plan this year.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the last completed fiscal year, no current members of the Compensation
Committee were officers of the Company. All former officers and directors of
the Company resigned as of September 2, 1997, at which time new officers and
directors of the Company were elected and appointed. No officer who received
compensation in the last completed fiscal year is now an officer. The
current member of the Company's Compensation Committee was appointed by the
board of directors effective as of March 30, 1998 and is not an officer or
employee of the Company.
-14-
<PAGE>
COMPARISON OF SHAREHOLDER RETURN ON INVESTMENT
The following graph compares the percentage change in the cumulative total
shareholder return on the Common Stock of the Company for fiscal years 1993
through 1997, as of each fiscal year end, with (i) the cumulative total
return (assuming reinvestment of dividends) of the Russell 2000 Index, a
broad equity market index, and (ii) the cumulative total return (assuming
reinvestment of dividends) of a peer group of real estate companies with
portfolios of income-producing industrial and office properties believed by
the Company's management to be comparable to those of the Company.
COMPARATIVE FIVE-YEAR TOTAL RETURNS*
MISSION WEST PROPERTIES, RUSSELL 2000, PEER GROUP
(Performance results through 12/31/97**)
[GRAPH]
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
MSW*** $100.00 $91.61 $173.41 $137.42 $255.21 $364.33
Russell 2000 $100.00 $118.98 $117.66 $151.17 $176.14 $215.52
Peer Group $100.00 $140.17 $147.30 $173.06 $233.23 $320.39
</TABLE>
Assumes $100 invested at the close of trading on the last trading day
preceding the first day of the fifth preceding fiscal year in MSW Common
Stock, Russell 2000, and Peer Group.
* Cumulative total return assumes reinvestment of dividends.
** Periods prior to 1997 ended November 30.
*** The last trade for MSW was 10/17/97.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to the beneficial
ownership of the Company's Common Stock by (i) each person who is a
shareholder of the Company holding more than a 5% interest in the Company,
(ii) directors and Named Executives of the Company, and (iii) the directors
and officers of the Company as a group. Unless otherwise indicated in the
footnotes to the table, all of such interests are owned directly, and the
person or entity has sole voting and investment power.
-15-
<PAGE>
BENEFICIAL OWNERSHIP
<TABLE>
<CAPTION>
COMMON STOCK
-------------------------------------------------------
NUMBER OF SHARES
NAME BENEFICIALLY OWNED(1) PERCENT OWNERSHIP(1)
- ------------------------------------ ------------------------- -----------------------
<S> <C> <C>
Carl E. Berg(2) 27,333(3) *
Chairman of the Board, President and
Chief Executive Officer
Clyde J. Berg(2) 27,333(3) *
c/o Berg & Berg Enterprises, Inc.
10050 Bandley Drive
Cupertino, CA 95014
Berg & Berg Enterprises, Inc. 27,333(3) *
10050 Bandley Drive
Cupertino, CA 95014
Michael J. Anderson 200,000(4) 11.8%
Vice President, Chief Operating Officer
and Director
Bradley A. Perkins -0-(5) *
Vice President, General Counsel and
Secretary
Marianne K. Aguiar -0-(6) *
Vice President Finance and Controller
John C. Bolger 24,305 *
Director
96 Sutherland Drive
Atherton, CA 94027
Thelmer Aalgaard 82,973(7) 4.9%
c/o Berg & Berg Enterprises, Inc.
10050 Bandley Drive
Cupertino, CA 95014
Carl E. Warden(8) 117,333 6.9%
1516 Country Club Drive
Los Altos, CA 94024
Robert L. & Sharon K. Yoerg(9) 111,111 6.5%
98 Melanie Lane
Atherton, CA 94027
All Directors and executive officers as a 253,721 14.6%
group (5 persons)(10)
</TABLE>
- ----------------------------------
* Less than one percent (1%)
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission which generally attribute beneficial
ownership of securities to persons who possess sole or shared voting
power and/or investment power with respect to those securities and
includes securities which such person has the right to acquire
beneficial ownership within 60 days. Unless otherwise indicated, the
persons or entities identified in this table have sole voting and
investment power with respect to all shares shown as beneficially owned
by them. Percentage ownership calculations are based on 1,698,536 shares,
and for optionholders the number of shares currently exercisable under
outstanding options.
(2) Carl E. Berg and Clyde J. Berg disclaim beneficial ownership, except to
the extent of their pecuniary interest, in the 1,097,959 shares of
Common Stock held beneficially and of record by Berg & Berg Enterprises,
Inc. ("BBE") of which Carl Berg is an executive officer, director and
beneficial owner and Clyde Berg is a director and which, with members of
their immediate families, they beneficially own, directly and
indirectly, all of the shares of Capital Stock of BBE. Carl E. Berg
beneficially owns 53,071 shares of Common Stock as a trustee under
various pension and profit sharing plans, some of which are subject to
Voting Rights Agreements. Mr. Berg has no investment control over such
shares.
(3) Does not include shares of Common Stock which are subject to Voting Rights
Agreements. Berg & Berg Enterprises. Inc. and Messrs. Berg disclaim
beneficial ownership of such shares because Berg & Berg Enterprises. Inc.
has no investment control over such shares and no power to vote such
shares. However, holders of such shares are obligated, pursuant to Voting
Rights Agreements, to vote such shares as recommended by Carl E. Berg, as
agent for Berg & Berg Enterprises, Inc. Both Clyde J. Berg and Carl E.
Berg may be deemed the beneficial owner of any shares of Common Stock
beneficially owned by Berg & Berg Enterprises. Inc.
(4) Mr. Anderson received a stock option to purchase 400,000 shares of stock,
which vests over 4 years as follows: 6.25% on the first six-month
anniversary of Mr. Anderson's date of hire, an additional 12.5% on his
one-year anniversary, and the remainder in equal amounts on a
-16-
<PAGE>
monthly basis over the remaining 3 years. Mr. Anderson received and
exercised a second stock option to purchase an additional 200,000
shares, which are subject to repurchase upon termination of employment
on the same vesting schedule as the underlying option. The Company
loaned Mr. Anderson the purchase price for this stock.
(5) Mr. Perkins received a stock option to purchase 80,000 shares of stock,
which vests over 4 years as follows: 6.25% on the first six-month
anniversary of Mr. Perkins' date of hire, an additional 12.5% on his
one-year anniversary, and the remainder in equal amounts on a monthly basis
over the remaining 3 years.
(6) Ms. Aguiar received a stock option to purchase 75,000 shares of stock,
which vests over 4 years as follows: 6.25% on the first six-month
anniversary of Ms. Aguiar's date of hire, an additional 12.5% on her
one-year anniversary, and the remainder in equal amounts on a monthly basis
over the remaining 3 years.
(7) Mr. Aalgaard is a director of Berg & Berg Enterprises, Inc. Includes (i)
33,400 shares held of record by Carl E. Berg, Trustee, Berg & Berg Profit
Sharing Plan FBO Thelmer G. Aalgaard Dated 1/1/84, (ii) 4,160 shares held
of record by Carl E. Berg, Trustee, Berg & Berg Profit Sharing Plan FBO
Thelmer G. Aalgaard Dated 1/1/84, 1997 Contribution, and (iii) 2,220 shares
held of record by Thelmer G. Aalgaard, Custodian, Rachel Michaels, Under
the California Uniform Gifts to Minor Act.
(8) Includes 9,333 shares held of record by Carl E. Warden SEP/IRA.
(9) Includes (i) 55,556 shares held of record by Robert L. Yoerg M.D. Trustee,
Robert L. Yoerg Professional Corporation Pension Plan and (ii) 11,111
shares held of record by Sharon K. Yoerg, Custodian, Elizabeth A. Yoerg,
Under the Uniform Gifts to Minors Act.
(10) Current officers and directors include Carl E. Berg, Michael J. Anderson,
Bradley A. Perkins, Marianne K. Aguiar and John C. Bolger.
ITEM 13
CERTAIN TRANSACTIONS
PRIVATE PLACEMENT TRANSACTIONS - COMMON STOCK
In September and November of 1997, the Company sold Common Stock in two
private placement transactions. On September 2, 1997, the Company sold
6,000,000 shares of Common Stock at $0.15 per share prior to a 1 for 30
reverse split on the Common Stock (the "Reverse Split"). On November 12,
1997, the Company sold 1,250,000 shares of Common Stock at $4.50 per share
after giving effect to the Reverse Split. The purchasers of record of the
Common Stock included, among others, the following 5% shareholders, executive
officers, directors and affiliates of 5% shareholders, executive officers and
directors:
<TABLE>
<CAPTION>
Common Stock
---------------------------------------------------
Name September Private November Private
Placement(1) Placement
---------------------- -----------------------
<S> <C> <C>
Berg & Berg
Enterprises, Inc.(2) 27,333 -
Thelmer Aalgaard(3) 12,333 70,640
Carl E. Warden 12,333 105,000
John C. Bolger 12,333 9,889
Robert L. And Sharon K. Yoerg 111,111
</TABLE>
- --------------------------
(1) Reflects post-Reverse Split shares of Common Stock.
(2) Carl E. Berg, President, Chief Executive Officer and Director of the
Company, is also an officer and director of BBE. Clyde Berg is a director
of BBE. Carl E. Berg, Clyde J. Berg and members of their immediate
families are, directly and indirectly, the beneficial owners of all
shares of the capital stock of BBE.
(3) Mr. Aalgard is a director of BBE.
-17-
<PAGE>
In addition, members of Mr. Aalgaard's immediate family purchased or received
as a gift from Mr. Aalgaard an aggregate of 17,772 shares of Common Stock in
connection the November Private Placement.
In connection with the September and November private placements, certain
purchasers of Common Stock, including Mr. Aalgaard, and Mr. Warden, entered
into Voting Rights Agreements with BBE pursuant to which the purchasers
agreed to vote their shares of Common Stock as directed by Carl E. Berg on
behalf of BBE, on any matter submitted to a vote of the Company's
shareholders.
The Voting Rights Agreements terminate at the earliest of the following
dates: (i) upon any sale of the purchaser's shares of Common Stock pursuant
to a registration statement declared effective under the Securities Act, but
only as to the purchaser's shares of Common Stock so sold; (ii) upon the sale
of the purchaser's shares of Common Stock pursuant to Rule 144 promulgated
under the Securities Act, but only as to the purchaser's shares of Common
Stock so sold; or (iii) two years after the effective date of the Voting
Rights Agreements.
ITEM 14
EXHIBITS, FINANCIAL STATEMENTS,
FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS -- See Index to Consolidated Financial
Statements on page F-1 of this Form 10-K Annual Report.
(2) REPORT OF INDEPENDENT ACCOUNTANTS -- See Index to Consolidated
Financial Statements on F-1 of this Form 10-K Annual Report.
(3) EXHIBITS -- See Exhibit Index on page 18 of this Form 10-K
Annual Report.
(b) During the last quarter of fiscal 1997, the Company filed a Form
8-K to report under Item 1 thereof that there had been a change
in control of the Company. The Form 8-K was filed on September
17, 1997.
(c) See Exhibit Index on page 19 of this Form 10-K Annual Report.
-18-
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO.
<S> <C>
3.1* Amended and Restated Articles of Incorporation of the Registrant
3.2* Bylaws of the Registrant, as amended
4.1 Reference is made to Exhibits 3.1 and 3.2
4.2* Form of Common Stock Certificate
13.1* Annual Report to Shareholders (in lieu of an Annual Report to
Shareholders, the Registrant will provide a copy of its Report on
Form 10-K to each of its shareholders)
21.1 Subsidiaries of the Registrant
23.1 Consent of Coopers and Lybrand LLP
23.2 Consent of Price Waterhouse LLP
24.1 Power of Attorney. Reference is made to page 20 of this report
27.1 Financial Data Schedule
</TABLE>
- --------------------------
* INCORPORATED BY REFERENCE.
-19-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
MISSION WEST PROPERTIES
March 31, 1998 By:/s/ Carl E. Berg
------------------------------------------
Carl E. Berg
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)
March 31, 1998 By: /s/ Marianne K. Aguiar
-------------------------------------------
Marianne K. Aguiar
Vice President of Finance and Controller
(Principal Financial and Accounting Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Carl E. Berg and Bradley A. Perkins or either
of them, his true and lawful attorneys-in-fact and agents, with full power of
substitution and re-substitution, for him and in his name, place and stead,
in any and all capacities to sign any and all amendments to this Report on
Form 10-K, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and thing
requisite and necessary to be done in connection therewith, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or either of them, or
their or his substitutes or substitute, may lawfully do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this Report on Form 10-K has been signed by the following persons on
behalf of the Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Carl E. Berg Director, Chairman of the Board, March 31, 1998
- ----------------------- President and Chief Executive
Carl E. Berg Officer (Principal Executive
Officer)
/s/ Marianne K. Aguiar Vice President of Finance and March 31, 1998
- ----------------------- Controller (Principal Financial and
Marianne K. Aguiar Accounting Officer)
/s/ Michael J. Anderson Director, Vice President, Chief March 31, 1998
- ----------------------- Operating Officer
Michael J. Anderson
/s/ John Bolger Director March 31, 1998
- -----------------------
John Bolger
</TABLE>
-20-
<PAGE>
MISSION WEST
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Pages
-----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . F-2
Report of Independent Accountants. . . . . . . . . . . . . . . . . . . . F-3
Consolidated Balance Sheets as of December 31, 1997 and November
30, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the one month period
ended December 31, 1997 and the three years in the period ended
November 30, 1997. . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Shareholders' Equity for the
one month period ended December 31, 1997 and the three years in
the period ended November 30, 1997 . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the one month period ended
December 31, 1997 and the three years in the period ended November
30, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Mission West Properties
We have audited the consolidated balance sheet of Mission West Properties as
described in Note 1 as of December 31, 1997, and the related consolidated
statements of operations, changes in shareholders' equity and cash flows for
the year ended November 30, 1997 and the one month period ended December 31,
1997. These financial statements are the responsibility of the management of
Mission West Properties. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Mission West Properties as of December 31, 1997 and the consolidated
results of their operations and their cash flows for the year ended November
30, 1997 and the one month period ended December 31, 1997, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
San Francisco, California
March 20, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Mission West Properties
In our opinion, the consolidated balance sheets and the related consolidated
statements of operations, of shareholders' equity and of cash flows as of and
for each of the two years in the period ended November 30, 1996 (appearing on
pages F3 through F6 of Mission West Properties' Annual Report on Form 10-K)
present fairly, in all material respects, the financial position, results of
operations and cash flows of Mission West Properties and its subsidiaries as
of and for each of the two years in the period ended November 30, 1996, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above. We have not audited the
consolidated financial statements of Mission West Properties for any period
subsequent to November 30, 1996.
PRICE WATERHOUSE LLP
San Diego, California
February 11, 1997, except as to the 1 for 30 reverse stock
split discussed in Note 1, which is as of November 10, 1997
F-3
<PAGE>
MISSION WEST PROPERTIES
CONSOLIDATED BALANCE SHEETS
----------
<TABLE>
<CAPTION>
DECEMBER 31,
1997 NOVEMBER 30,
ASSETS (NOTE 2) 1996
------------- -------------
<S> <C> <C>
Cash and cash equivalents $ 5,569,000 $ 3,111,000
Real estate investments (held-for-sale):
Rental properties, less accumulated depreciation of $ Nil in 1997 and
$10,422,000 in 1996 ($ Nil pledged in 1997 and $44,455,000 pledged in 1996) - 45,824,000
Unimproved land ($ Nil pledged in 1997 and $461,000 pledged in 1996) - 461,000
------------ ------------
46,285,000
Less allowance for estimated losses - (4,413,000)
------------ ------------
Net real estate investments - 41,872,000
Other assets, less allowances of $ nil in 1997 and $360,000 in 1996 and
accumulated depreciation $ nil in 1997 and $321,000 in 1996 194,000 1,341,000
------------ ------------
$ 5,763,000 $ 46,324,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ - $ 30,753,000
Accounts payable and accrued expenses 552,000 1,389,000
------------ ------------
Total liabilities 552,000 32,142,000
------------ ------------
Shareholders' equity:
Preferred stock, no par value, 20,000,000 shares authorized, none
issued and outstanding
Common stock, no par value, 200,000,000 shares authorized, 1,501,104 shares
issued and outstanding at December 31, 1997
and 45,704 (as adjusted) at November 30, 1996 26,707,000 19,456,000
Less, amounts receivable on private placement (334,000) -
------------ ------------
26,373,000 19,456,000
Accumulated deficit (21,162,000) (5,274,000)
------------ ------------
Total shareholders' equity 5,211,000 14,182,000
------------ ------------
$ 5,763,000 $ 46,324,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
MISSION WEST PROPERTIES
CONSOLIDATED STATEMENTS OF OPERATIONS
------------
<TABLE>
<CAPTION>
One Month
Ended
December 31, Years Ended November 30,
------------- -------------------------------------------
1997 1997 1996 1995
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Rental revenues from real estate - $ 1,376,000 $7,065,000 $7,146,000
Sales of real estate - 50,560,000 113,000 400,000
Other, including interest $ 27,000 359,000 348,000 380,000
---------- ------------ ---------- ----------
27,000 52,295,000 7,526,000 7,926,000
---------- ------------ ---------- ----------
EXPENSES:
Operating expenses of real estate - 246,000 1,643,000 1,783,000
Depreciation of real estate - 246,000 1,369,000 1,352,000
Costs of real estate sold - 45,824,000 419,000 324,000
General and administrative 139,000 1,467,000 991,000 945,000
Interest - 425,000 3,045,000 3,435,000
---------- ------------ ---------- ----------
139,000 48,208,000 7,467,000 7,839,000
---------- ------------ ---------- ----------
(Loss) income before income taxes (112,000) 4,087,000 59,000 87,000
Benefit/(Provision) for income taxes 38,000 (1,043,000) (24,000) (35,000)
---------- ------------ ---------- ----------
Net (loss) income $ (74,000) $ 3,044,000 $ 35,000 $ 52,000
---------- ------------ ---------- ----------
---------- ------------ ---------- ----------
Basic net (loss) income per share $ (0.05) $ 18.48 $ 0.77 $ 1.12
---------- ------------ ---------- ----------
---------- ------------ ---------- ----------
Diluted net (loss) income per share $ (0.05) $ 18.48 $ 0.72 $ 1.06
---------- ------------ ---------- ----------
---------- ------------ ---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
MISSION WEST PROPERTIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
--------------
<TABLE>
<CAPTION>
COMMON ACCUMULATED
STOCK DEFICIT TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Balance at November 30, 1994 $20,081,000 $(5,361,000) $14,720,000
Redemption and retirement of 3,333 shares (635,000) - (635,000)
Net income for 1995 - 52,000 52,000
----------- ----------- -----------
Balance at November 30, 1995 19,446,000 (5,309,000) 14,137,000
Issuance of Common Stock upon option exercise 10,000 - 10,000
Net income for 1996 - 35,000 35,000
----------- ----------- -----------
Balance at November 30, 1996 19,456,000 (5,274,000) 14,182,000
Issuance of Common Stock upon private placement after
reverse stock split 5,625,000 - 5,625,000
Issuance of Common Stock upon option exercise 726,000 - 726,000
Issuance of Common Stock upon private placement 900,000 - 900,000
Amounts receivable on private placement (334,000) - (334,000)
Dividends paid - (18,858,000) (18,858,000)
Net income for 1997 - 3,044,000 3,044,000
----------- ----------- -----------
Balance at November 30, 1997 (21,088,000) 5,285,000
Net (Loss) for December 1997 - (74,000) (74,000)
----------- ----------- -----------
Balance at December 31, 1997 $26,373,000 $(21,162,000) $5,211,000
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
MISSION WEST PROPERTIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
------------
<TABLE>
<CAPTION>
ONE
MONTH
ENDED YEARS ENDED NOVEMBER 30,
DECEMBER 31, -------------------------------------------
1997 1997 1996 1995
------------ ------------ ---------- -----------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $ (74,000) $ 3,082,000 $ 35,000 $ 52,000
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation - 246,000 1,379,000 1,360,000
Deferred income taxes - - 35,000 102,000
Gain on sale of real estate - 4,736,000 - -
Changes in assets and liabilities:
Decrease (increase) in net real estate investments - - (57,000) 28,000
Decrease (increase) in other assets - 1,295,000 (94,000) (549,000)
Increase (decrease) in accounts payable and accrued expenses 28,000 (849,000) (77,000) (395,000)
--------- ---------- ----------- ----------
Net cash (used in) provided by operating activities (46,000) 8,510,000 1,221,000 598,000
--------- ---------- ----------- ----------
Cash flows from investing activities:
Proceeds from sale of real estate - 36,688,000 - -
Net maturities of short-term investments - - 2,528,000 191,000
--------- ---------- ----------- ----------
- 36,688,000 2,528,000 191,000
--------- ---------- ----------- ----------
Cash flows from financing activities:
Repayments on notes payable - (30,753,000) (1,214,000) (2,415,000)
Proceeds from issuance of Common Stock upon option exercise - 726,000 10,000 -
Proceeds from issuance of Common Stock upon private placement 150,000 6,041,000 - -
Payment of dividends - (18,858,000) - -
--------- ---------- ----------- ----------
Net cash provided by (used for) financing activities 150,000 (42,844,000) (1,204,000) (2,415,000)
--------- ---------- ----------- ----------
Net increase (decrease) in cash and cash equivalents 104,000 2,354,000 2,545,000 (1,626,000)
Cash and cash equivalents at beginning of period 5,465,000 3,111,000 566,000 2,192,000
--------- ---------- ----------- ----------
Cash and cash equivalents at end of period $ 5,569,000 $ 5,465,000 $ 3,111,000 $ 566,000
--------- ---------- ----------- ----------
--------- ---------- ----------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
MISSION WEST PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
GENERAL POLICIES:
Mission West Properties (the Company) was engaged in developing,
owning, operating, and selling income-producing real estate located
principally in southern California. As discussed in Note 2 SALE OF REAL
ESTATE INVESTMENTS below, the Company entered into an agreement to sell
its entire real estate portfolio and a majority of that sale was
completed in January 1997, the remainder being completed in May 1997.
The accompanying financial statements consolidate the accounts of
the Company and its wholly owned subsidiaries. All transactions between
the Company and its subsidiaries have been eliminated.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at
financial statement date, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
REAL ESTATE:
The Company's real estate investments are carried at cost; an
allowance for estimated losses is provided for other than temporary
declines in value based on the Directors' and management's periodic
evaluation of those investments. This evaluation considers recent
appraised values, market conditions, and the Company's investment
strategies.
Revenues from sales of real estate are reported at the time of sale
or when certain financial criteria are met.
DEPRECIATION:
Depreciation on rental properties is computed using the straight-
line method over the estimated useful lives of the assets, generally ten
to 30 years.
INCOME TAXES:
Income taxes are accounted for in accordance with SFAS No. 109,
ACCOUNTING FOR INCOME TAXES. Deferred income taxes are provided for all
temporary differences and operating loss and tax credit carryforwards.
Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or
all of the deferred tax assets will not be realized. Deferred tax
assets and liabilities are adjusted for the effects of changes in tax
laws and rates on the date of enactment.
Continued
F-8
<PAGE>
MISSION WEST PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL POLICIES, continued:
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents includes cash on hand, money market
funds, U.S. Treasury Bills, and certificates of deposit with an original
maturity of 90 days or less.
FAIR VALUE OF FINANCIAL INSTRUMENTS:
The carrying amounts of the Company's financial instruments as
presented are reasonable estimates of those instruments' fair values.
CONCENTRATIONS OF CREDIT RISK:
Credit risk is primarily concentrated in cash equivalents, and rent
receivables. Cash in excess of operating requirements is invested in
U.S. Treasury securities or with federally insured institutions in
short-term certificates of deposit.
FISCAL YEAR CHANGE:
In November 1997, the Board of Directors approved a change in the
Company's fiscal year end from November 30 to December 31, effective the
calendar year beginning January 1, 1997. As the transition period is
less than one month no separate transition period statements have been
prepared. The results for the year ended November 30, 1997 and the one
month ended December 31, 1997 are presented.
REVERSE STOCK SPLIT:
All share and per share amounts have been adjusted to reflect the 1
for 30 reverse stock split (Note 2).
ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS:
In February 1997, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 128, EARNINGS PER
SHARE (SFAS 128). SFAS 128 establishes standards for computing and
presenting earnings per share (EPS). It amends the standards in
Accounting Principles Board Opinion (APB) No. 15 (Earnings per Share)
for computing EPS by replacing primary earnings per share with basic
earnings per share and by altering the calculation of diluted EPS, which
replaces fully diluted EPS. Basic EPS excludes potential dilution and
is calculated by dividing income available to common stockholders by the
weighted average number of outstanding common shares.
Continued
F-9
<PAGE>
MISSION WEST PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES GENERAL POLICIES, continued:
ADOPTION OF STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS, continued:
Basic and diluted EPS figures are required on the face of the
income statement for all entities with complex capital structures. In
addition, required disclosures include a reconciliation of the numerator
and denominator used to calculate basic EPS to the numerator and
denominator used to calculate diluted EPS.
SFAS 128 is effective for fiscal years ending after December 15,
1997, with earlier adoption not permitted. The Company has adopted
SFAS 128 effective for its fiscal year ending December 31, 1997.
The shares for 1996 and 1995 include the weighted average shares
outstanding for the year as well as the dilutive effect of Common Stock
equivalents, which consist of shares subject to stock options. The
computation for weighted average shares is detailed below:
<TABLE>
<CAPTION>
MONTH
ENDED YEARS ENDED NOVEMBER 30,
DECEMBER 31, ----------------------------------
1997 1997 1996 1995
------------ ------- --------- ------
<S> <C> <C> <C> <C>
Weighted average shares
outstanding 1,501,104 164,692 45,684 46,437
Incremental shares from
assumed option exercise - - 2,901 2,468
--------- ------- ------- ------
Adjusted weighted average shares 1,501,104 164,692 48,585 48,905
--------- ------- ------- ------
--------- ------- ------- ------
</TABLE>
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, REPORTING COMPREHENSIVE INCOME (SFAS 130), which is
effective for fiscal years beginning after December 15, 1997. SFAS 130
requires that certain items that qualify as part of comprehensive income
be presented in the financial statements. The Company does not expect
the impact on its financial statements, if any, to be material.
Continued
F-10
<PAGE>
MISSION WEST PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
2. SALE OF REAL ESTATE INVESTMENTS AND DISCONTINUED OPERATIONS:
During July 1996 the Company entered into an agreement to sell all its real
estate assets; this agreement was subsequently terminated and replaced, and
the subsequent agreement was also terminated and replaced. On December 6,
1996, the Company entered into an agreement to sell all its real estate
assets to Spieker Properties, L.P. (Spieker), a California limited
partnership, for $50,500,000 in cash, subject to certain conditions
customary in a transaction of this type. A special shareholder meeting was
held December 16, 1996, at which time the Company's shareholders approved
the sale of the real estate assets to Spieker.
A majority of the sale transaction was completed January 22, 1997, at which
time nine of the Company's 11 real estate properties were sold. The nine
properties sold consisted of occupied office, light industrial, and R&D
buildings in San Diego and Riverside counties, California, and occupied
industrial buildings and vacant land in Chandler, Arizona. The total
building space sold approximated 685,000 square feet. The two remaining
properties consisted of leaseholds, together with hangar and office
buildings thereon, comprising approximately 25 percent of the land at
Palomar-McClellan Airport in San Diego county, California and the sale was
completed May 6, 1997.
Upon completion of sale of the nine properties, the Company received
$47,500,000 in cash, from which it repaid all debt encumbering the
properties and paid a majority of the related transaction and closing
costs, including $3,000,000 in "break-up" fees from the terminated sales
transactions. In accordance with the sales agreement, $300,000 was
withheld from the proceeds to allow for satisfaction of any post-closing
breaches of representations and warranties made by the Seller and
released to the Company after 90 days. Also in accordance with the
sales agreement, upon completion of sale of the two leasehold
properties, the Company received $3,000,000 in cash, from which it
paid related transaction costs.
The sale of the real estate results in a substantial gain for the Company.
The significance of the sale of assets and the subsequent payment of
dividends to shareholders is that only nominal assets remain in the
Company and, therefore, the resulting corporate entity has virtually no
revenue-generating or cash-generating capabilities.
On February 4, 1997, the Company declared a special dividend of $270.00 per
share which was paid on February 27, 1997 to all shareholders of record
as of February 19, 1997. This dividend represented the currently
available portion of the proceeds from the sale of the real estate
assets.
On May 27, 1997, the Company entered into a Stock Purchase Agreement (the
Agreement) with a group of private investors led by Berg & Berg
Enterprises, Inc. (collectively, the Purchaser or the Berg Group) of
Cupertino, California, pursuant to which the Company would sell 200,000
shares of newly issued Common Stock to the Purchaser for a purchase
price of $900,000 in cash, or $4.50 per share. A special meeting of
shareholders was held August 5, 1997, at which the shareholders approved
the stock sale transaction.
Continued
F-11
<PAGE>
MISSION WEST PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
2. SALE OF REAL ESTATE INVESTMENTS AND DISCONTINUED OPERATIONS, continued:
This sale of Common Stock was completed September 2, 1997 (the Initial
Investment), at which time all officers and Directors resigned and the
Berg Group became the controlling shareholder with an 80-percent
ownership position in the Company. The Berg Group comprises individuals
and privately held firms that have designed, developed, and leased
office, R&D, and manufacturing buildings and complexes occupied by
Silicon Valley technology companies since 1969. Currently, the Berg
Group owns and operates more than 3,500,000 square feet of property.
Per terms of the Agreement, the Company paid a cash distribution of
$99.00 per share to shareholders on October 21, 1997 for a total
distribution of $5,059,000. The record date for this distribution was
August 28, 1997.
Subsequent to the Initial Investment, a series of transactions were
approved by the Company's shareholders that included the 1 for 30 reverse
stock split, a private placement of 1,250,000 shares of the Company's
Common Stock at $4.50 per share and the adoption of the Company's 1997
Stock Option Plan.
Continued
F-12
<PAGE>
3. NOTES PAYABLE:
MISSION WEST PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
Notes payable comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Collateralized notes payable to banks,
due 1998 through 2001, interest rates
ranging from 9% (fixed) to 9.75% (prime
plus 1.5%), principal and interest due
in monthly installments of $290,000, balance
of principal due at maturity - $29,365,000
Collateralized note payable to insurance company,
due 1997, interest rate of 10%, principal and
interest due in monthly installments of $21,000 - 1,388,000
------------ ------------
- $30,753,000
------------ ------------
------------ ------------
</TABLE>
Continued
F-13
<PAGE>
MISSION WEST PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
3. NOTES PAYABLE, continued:
All notes payable were repaid in full upon the sale of a majority of the
Company's real estate assets in January 1997 (see Note 2 SALE OF REAL
ESTATE INVESTMENTS above).
4. INCOME TAXES:
Deferred tax assets (liabilities) comprise the following:
<TABLE>
<CAPTION>
DECEMBER 31, NOVEMBER 30,
1997 1996
------------ ------------
<S> <C> <C>
Basis of depreciable assets $ - $ 497,000
Other - 283,000
------------ ------------
Deferred tax assets - 780,000
------------ ------------
Deferred rental revenue - (39,000)
Other - (86,000)
------------ ------------
Deferred tax liabilities - (125,000)
------------ ------------
- 655,000
Deferred tax asset valuation allowance - (188,000)
------------ ------------
$ - $467,000
------------ ------------
------------ ------------
</TABLE>
The provision for (benefit from) income taxes reconciles to the statutory
rate as follows:
<TABLE>
<CAPTION>
NOVEMBER 30,
DECEMBER 31, -----------------------
1997 1996 1995
------------ -------- --------
<S> <C> <C> <C>
Statutory federal tax rate 34.0% 34.0% 34.0%
Increase (decrease) in taxes resulting from:
Change in deferred tax asset valuation allowance 1.6 (64.2) (7.1)
Alternative minimum taxes - 60.9 -
State income tax, net of federal tax benefit (1.4) 6.1 10.6
Reconciliation of previous tax estimates (8.9) - -
Other - 3.9 2.7
----- ----- -----
25.3% 40.7% 40.2%
----- ----- -----
----- ----- -----
</TABLE>
Continued
F-14
<PAGE>
MISSION WEST PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
4. INCOME TAXES, continued:
The provision for (benefit from) income taxes comprises the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
DECEMBER 31, -----------------------
1997 1996 1995
----------- --------- --------
<S> <C> <C> <C>
Current:
Federal $ 453,000 $(21,000) $(81,000)
State 85,000 10,000 14,000
----------- --------- --------
538,000 (11,000) (67,000)
----------- --------- --------
Deferred:
Federal 467,000 35,000 102,000
State - - -
----------- --------- --------
467,000 35,000 102,000
---------- -------- --------
$1,005,000 $ 24,000 $ 35,000
---------- -------- --------
---------- -------- --------
</TABLE>
As of December 31, 1997, the Company had no deferred tax asset or
liability. The provision for (benefit from) income taxes reflects
temporary differences in the recognition of revenue and expense for tax
and financial reporting purposes. These temporary differences primarily
arise from the recognition of rental revenue from real estate,
recognition of accrued expenses, capitalized interest, and a different
depreciable basis for tax than for financial reporting purposes. The
Company carried back federal net operating losses to prior years for
refunds and carried forward state net operating losses to be applied
against future operating income, if any.
Due to the uncertainty of realizing the benefit of certain deferred tax
assets, including state loss carryforwards, a valuation allowance was
established in fiscal year 1994. The net decrease in the valuation
allowance during fiscal year 1997 was due to changes in the state loss
carryforward amount.
5. SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the fiscal year for interest was $410,000, $3,106,000 and
$3,566,000 in 1997, 1996 and 1995, respectively. The Company received an
income tax refund, net of payments, of
Continued
F-15
<PAGE>
MISSION WEST PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
5. SUPPLEMENTAL CASH FLOW INFORMATION, continued:
$17,000 in fiscal year 1996 and paid income taxes, net of refunds, of
$546,000 and $258,000 in fiscal years 1997 and 1995, respectively.
During the first quarter of fiscal year 1995, in a noncash transaction, the
Company reacquired and retired 3,333 shares of its Common Stock. This
transaction was effected by a transfer of 3,333 shares of the Company's
stock from its former majority shareholder to an affiliated tenant, at
which point the shareholder's investment in the Company decreased to 49
percent, and an exchange of the 3,333 shares from the affiliated tenant
to the Company for real estate assets, consisting of certain tenant
improvements, and a modification of lease terms, consisting of an
extension of maturity and a reduction in rent.
6. STOCK OPTIONS AND STOCK PURCHASE PLAN:
Prior to sale of real estate, the Company had a Director Stock Option Plan
and an Incentive Stock Option Plan under which non-salaried directors
and officers, respectively, could purchase shares of the Company's stock
at a minimum option price based on market value at the date of grant.
Options granted under the plans became exercisable ratably over five
years and expired after a period not to exceed ten years. At November
30, 1996, 5,000 and 6,667 shares were authorized under each plan, of
which 4,387 and 5,453 were available for grant and 880 and 1,636 were
exercisable under the Director Stock Option Plan and the Incentive Stock
Option Plan, respectively. Upon the sale of the majority of the
Company's real estate assets (see Note 2) the provisions of the Plan
accelerated. Such unvested shares at the sale of real estate totaled
451. All the options described above were exercised or cancelled in
February 1997.
Activity in these plans comprises the following:
<TABLE>
<CAPTION>
NOVEMBER 30,
DECEMBER 31, -------------------
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Beginning share balance 2,967 3,333 3,547
Exercised (Between $90 and $292.5
per share) (2,747) (80) -
Canceled ($274 per share) (220) (286) (214)
------ ----- -----
Ending share balance - 2,967 3,333
------ ----- -----
------ ----- -----
</TABLE>
Effective July 1, 1994, the Company granted nonqualified options to
purchase 4,167 shares of its Common stock to a key executive. The exercise
price of the options is $90.00 per share and the options expire ten years
from the date of grant. Options to purchase 2,433 shares of the grant
Continued
F-16
<PAGE>
MISSION WEST PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
6. STOCK OPTIONS AND STOCK PURCHASE PLAN, continued:
vested immediately; the remainder of the options become exercisable if
specific financial milestones occur. Upon the sale of the real estate
assets 2,433 shares were exercised at the $90.00 price. The remaining
options were canceled.
The Company had a Stock Purchase Plan for which all directors and employees
are eligible. Under terms of the plan, each eligible participant could
contribute up to $3,000 per month, to be invested in shares of the
Company's stock purchased on the open market. The Company contributed
$0.50 to the plan for each $1.00 contributed by a participant. The
total amounts expended by the Company for such contributions during the
years ended November 30, 1997, 1996 and 1995 were $3,000, $37,000 and
$31,000, respectively.
No options were granted under the aforementioned plans subsequent to 1994.
The Company's 1997 Stock Option Plan (the Option Plan) was approved by the
Company's shareholders on November 10, 1997. The Option Plan was
adopted so that the Company may attract and retain the high quality
employees, consultants and directors necessary to build the Company's
infrastructure and to provide ongoing incentives to the Company's
employees in the form of options to purchase the Company's Common Stock
by enabling them to participate in the Company's success.
The Option Plan provides for the granting to employees (including officers
and directors who are employees) of "incentive stock options" within the
meaning of Section 422 of the Code, and for the granting of
non-statutory options to employees, consultants and directors, including
directors who are neither employees of, nor consultants to, the Company
("Non-Employee Directors"). Options to purchase a maximum of 5,500,000
shares of Common Stock may be granted under the Option Plan, subject to
equitable adjustments to reflect certain corporate events.
Each option granted under the Option Plan will be evidenced by a written
stock option agreement between the Company and the optionee and
unless otherwise provided by the Compensation Committee generally becomes
exercisable cumulatively as to 20% of the underlying shares on
each anniversary of the date of grant for so long as the optionee
is employed by or providing service to the Company.
The price per share exercise price of options granted under the Option Plan
may not be less than 100% of the fair market value on the date of grant,
except in certain specific circumstances, in which case the exercise
price may not be less than 110%. Each option may be exercised only to
the extent that it is vested. Options must generally be exercised
during the optionee's employment or within 30 days following the
optionee's termination of status as an employee, consultant or director,
unless termination is due to the death or disability of an optionee. If
termination of status is due to death or disability of the optionee, an
option may be exercised within no more than six months of following the
termination.
Continued
F-17
<PAGE>
MISSION WEST PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------
6. STOCK OPTIONS AND STOCK PURCHASE PLAN, continued:
Each member of the Board of Directors who is not an employee of the Company
or any of its subsidiaries or affiliates (a Non-Employee Director) and
who becomes a member of the Board of Directors after November 10, 1997,
the date on which the 1997 Stock Option Plan was approved by the
shareholders of the Company, will automatically receive a grant of an
option to purchase 50,000 shares of Common Stock at an exercise price
equal to 100% of the fair market value of the Common Stock at the date
of grant of such option upon joining the Board of Directors. Such
options will become exercisable cumulatively with respect to 1/48th of
the underlying shares on the first day of each month following the date
of grant. Generally, the options must be exercised while the optionee
is a director of the Company.
No options were issued under this plan in 1997.
F-18
<PAGE>
Exhibit 21.1
LIST OF SUBSIDIARIES OF MISSION WEST PROPERTIES
MIT REALTY, INC.
California corporation wholly owned by the Company.
MISSION WEST EXECUTIVE AIRCRAFT CENTER, INC.
California corporation wholly owned by the Company.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Mission West Properties on Form S-3 (File No. 333-41203) of our report dated
March 20, 1998, on our audit of the consolidated financial statements of
Mission West Properties and its subsidiaries as of December 31, 1997, for the
year ended November 30, 1997 and for the one month period ended December 31,
1997, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
San Francisco, California
March 27, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-41203)
of Mission West Properties of our report dated February 11, 1997, except as
to the 1 for 30 reverse stock split discussed in Note 1, which is as of
November 10, 1997, appearing on page F-12 of this Form 10-K.
PRICE WATERHOUSE LLP
San Diego, California
March 27, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> DEC-31-1997
<CASH> 5,569
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,763
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 26,373
<OTHER-SE> (21,162)
<TOTAL-LIABILITY-AND-EQUITY> 5,763
<SALES> 0
<TOTAL-REVENUES> 52,322
<CGS> 0
<TOTAL-COSTS> 46,316
<OTHER-EXPENSES> 1,606
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 425
<INCOME-PRETAX> 3,975
<INCOME-TAX> 1,005
<INCOME-CONTINUING> 2,970
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,970
<EPS-PRIMARY> 18.43
<EPS-DILUTED> 18.43
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-START> DEC-01-1996 DEC-01-1996 DEC-01-1996
<PERIOD-END> FEB-28-1997 MAY-31-1997 AUG-31-1997
<CASH> 2,781 4,943 5,827
<SECURITIES> 0 0 0
<RECEIVABLES> 307 82 53
<ALLOWANCES> 211 16 12
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 0 0 0
<PP&E> 285 247 220
<DEPRECIATION> 277 241 215
<TOTAL-ASSETS> 6,704 5,536 5,989
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 0 0 0
0 0 0
0 0 0
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