<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act Of 1934
For the quarterly period ended MARCH 31, 1998; 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
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
10050 BANDLEY DRIVE
CUPERTINO, CALIFORNIA 95014-2188
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code is (408) 725-0700
___________
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 Exchange, Incorporated
Securities registered pursuant to Section 12(g) of the Act:
None
___________
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.
(1) Yes X No (2) Yes X No
---- ---- ---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock no par value 1,698,536 shares
------------------------- -----------------------------
(Class) (Outstanding at May 11, 1998)
-1-
<PAGE>
MISSION WEST PROPERTIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements:
Consolidated Balance Sheets as of
March 31, 1998 and December 31, 1997 ................. 3
Consolidated Statements of Operations
for the three months ended March 31, 1998 and 1997 ... 4
Consolidated Statements of Cash Flows
for the three months ended March 31, 1998 and 1997 ... 5
Notes to Consolidated Financial Statements ........... 6
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations .................. 7
PART II OTHER INFORMATION
Item 5 Other Information .................................... 9
Item 6 Exhibits and Reports on Form 8-K ..................... 9
SIGNATURES .................................................... 10
</TABLE>
-2-
<PAGE>
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Part I - Financial Information
ITEM 1
CONSOLIDATED FINANCIAL STATEMENTS
MISSION WEST PROPERTIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
_____
<TABLE>
<CAPTION>
March 31, 1998 December 31, 1997
-------------- -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 5,153 $ 5,569
Other assets 329 194
-------- --------
Total assets $ 5,482 $ 5,763
-------- --------
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 435 $ 552
-------- --------
Total liabilities 435 552
-------- --------
Stockholders' equity:
Common stock, no par value, 200,000,000 shares
authorized 1,698,536 and 1,501,104 shares issued
and outstanding at March 31, 1998 and December 31,
1997, respectively 27,596 26,707
Less, amounts receivable on private placement (1,234) (334)
-------- --------
26,362 26,373
Accumulated deficit (21,315) (21,162)
-------- --------
Total shareholders' equity 5,047 5,211
-------- --------
Total liabilities and shareholders' equity $ 5,482 $ 5,763
-------- --------
-------- --------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-3-
<PAGE>
MISSION WEST PROPERTIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
_____
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
------------- ------------
<S> <C> <C>
Revenue:
Rental revenues from real estate $ 642
Other income, including interest $ 77 131
--------- -------
77 773
--------- -------
Expenses:
Operating expenses of real estate - 95
Depreciation of real estate - 115
General and administrative 230 248
Interest - 178
--------- -------
Total expenses 230 636
--------- -------
(Loss)/income before gain on sale of real estate
and income taxes (153) 137
Gain on sale of real estate - 4,849
--------- -------
(Loss)/income before income taxes (153) 4,986
Benefit/(provision) for income taxes - (1,651)
--------- -------
Net (loss)/income $ (153) $ 3,335
--------- -------
--------- -------
Basic net (loss)/income per share $ (0.10) $ 68.73
Diluted net (loss)/income per share $ (0.10) $ 68.73
--------- -------
--------- -------
Weighted average number of common shares 1,503,933 48,524
--------- -------
--------- -------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-4-
<PAGE>
MISSION WEST PROPERTIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except per share amounts)
(unaudited)
_____
<TABLE>
<CAPTION>
Three months ended March 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net (loss)/income $ (153) $ 3,335
Adjustments to reconcile net income to net cash
Used in operating activities:
Net gain on sale of real estate assets - (4,849)
Depreciation - 115
Changes in assets and liabilities: -
Net real estate investments - 402
Other assets (135) 599
Accounts payable and accrued expenses (117) 3
------ --------
Net cash used in operating activities (405) (395)
------ --------
Cash flows from investing activities:
Net proceeds from sales of real estate - 43,518
------ --------
Net cash provided by investing activities - 43,518
------ --------
Cash flows from financing activities:
Principal payments on mortgage notes payable - (30,753)
Proceeds from stock options exercised - 759
Repurchase of common stock (11) -
Dividends paid - (13,798)
------ --------
Net cash used in financing activities (11) (43,792)
------ --------
Net decrease in cash and cash equivalents (416) (669)
Cash and cash equivalents, beginning 5,569 3,164
------ --------
Cash and cash equivalents, ending $5,153 $ 2,495
------ --------
------ --------
Supplemental information:
Cash paid for interest $ - $ 425
------ --------
------ --------
Cash paid for income taxes $ 115 $ 219
------ --------
------ --------
Supplemental schedule of non-cash investing and
financing activities:
Note receivable in connection with the issuance
of Common Stock $ 900 $ -
------ --------
------ --------
</TABLE>
The accompanying notes are an integral part of these
condensed consolidated financial statements.
-5-
<PAGE>
MISSION WEST PROPERTIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)
(unaudited)
_____
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles applicable to
interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted pursuant to such rules and regulations. However, in the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation have been included. The Company presumes
that users of the interim financial information herein have read or have
access to the audited financial statements for the preceding fiscal year and
that the adequacy of additional disclosure needed for a fair presentation may
be determined in that context. Accordingly, footnote disclosure which would
substantially duplicate the disclosure contained in the Company's 1997 Annual
Report on Form 10-K has been omitted.
2. ISSUANCE OF COMMON STOCK
On March 30, 1998, the Company issued 200,000 shares of common stock at $4.50
per share to an executive officer of the Company in exchange for a $900,000
note receivable payable to the Company. The note is a full recourse
promissory note bearing interest at 5.59% and is secured by a pledge of the
shares. Interest is payable annually and principal is due March 30, 2003.
3. NET INCOME PER SHARE
The computation of net income per share is based on the weighted average
number of common shares outstanding during the period. Common stock options
have not been included in the computation since their inclusion would have no
effect on net income per share.
4. INCOME TAXES
The Company intends to qualify and elect to be taxed as a real estate
investment trust under the Internal Revenue Code of 1986, as amended,
commencing with the taxable year ending December 31, 1998. Accordingly, no
provision has been made for federal income taxes for the three months ended
March 31, 1998.
5. RECENT ACCOUNTING PRONOUNCEMENTS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.130, "REPORTING COMPREHENSIVE
INCOME"
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS 130). SFAS 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. Comprehensive income is defined as "the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. It includes all changes in
equity during a period except those resulting from investments by owners and
distributions to owners." SFAS 130 is effective for fiscal years beginning
after December 15, 1997, and reclassification of financial statements for
earlier periods provided for comparative purposes is required. There were no
material items that would have impacted the Company's financial position,
results of operations, or cash flows.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO.131, "DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION"
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131). SFAS 131 establishes
standards for the way that public business enterprises report information
about operating segments in annual financial statements and requires that
those enterprises report selected information about operating segments in
interim financial reports issued to shareholders. SFAS 131 generally
supersedes Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise." Under SFAS 131, operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on
the basis that is used internally. SFAS 131 is effective for financial
statements for periods beginning after December 15, 1997, and restatement of
comparative information for earlier years is required. However, SFAS 131 is
not required to be applied to interim financial statements in the initial
year of application. SFAS 131 will not have a material impact on the
Company's financial position, results of operations or cash flows.
-6-
<PAGE>
ITEM 2
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 condensed
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, 1997. The results for the three month period ended March 31,
1998 are not necessarily indicative of the results to be expected for the
entire fiscal year ending December 31, 1998.
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.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1998 TO THE THREE MONTHS ENDED
MARCH 31, 1997.
During the first quarter of 1998, the Company held minimal assets, primarily
cash and cash equivalents obtained from recent sales of common stock.
Therefore, there was minimal operating activity during this period. For the
three months ended March 31, 1998, the Company recognized interest income in
the amount of $77,000 and general and administrative costs of $230,000,
resulting in a net loss of $153,000.
During the three months ended March 31, 1997, the Company sold nine of its 11
real estate properties ("the nine properties"). 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 total building space sold
approximated 685,000 square feet. Subsequent to March 31, 1997, the
remaining two properties, consisting of leaseholds, together with hangar and
office buildings, thereon, comprising approximately 25 percent of the land at
Palomar-McClellan Airport in San Diego, California were sold. The sale of
the two remaining properties was completed in May 1997.
Upon completion of the sale of the nine properties, the Company received
$47,200,000 in cash, from which it repaid all debt encumbering the properties
(thus the elimination of all future interest expense) and paid a majority of
the related transaction and closing costs, including $3,000,000 in "break-up"
fees from previously terminated sales transactions. The Company recognized a
gain on the sale of the nine properties of $4,849,000.
The Company declared a special dividend of $9.00 per share to shareholders
during February 1997. That dividend represented the available portion of the
proceeds from the sale of the nine properties.
Following the sale of the nine properties, coupled with the cash dividends
paid to shareholders, only cash, receivables, and the two remaining
properties were left in the Company and, therefore, the resulting corporate
entity had insignificant revenue-generating and cash-generating capabilities
and minimal operations, aside from interest income and general and
administrative expenses.
CHANGES IN FINANCIAL CONDITION
There were no significant changes in financial condition during the three
months ended March 31, 1998, except for the sale of 200,000 shares of common
stock at $4.50 per share to an executive officer in exchange for a $900,000
note receivable payable to the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 1998, the Company's assets consisted principally of cash and
cash equivalents obtained from sales of common stock in September and
November 1997. Similarly, as of March 31, 1997, the Company's assets were
not generating cash to fund operations and active real estate operations had
ceased.
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 Stock
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 Chairman of the Board and CEO of the Company, which own and operate
more
-7-
<PAGE>
than 3,800,000 square feet of properties in the San Francisco Bay Area region
commonly referred to as "Silicon Valley." There can be no assurance that any
such transactions will occur, however.
On September 2, 1997, the Company affected 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 the 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 share of the common stock will cease to have value.
FORWARD LOOKING STATEMENTS
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 of the Company is traded, real estate
market conditions, stock market conditions, or other factors.
In October 1997, the AMEX halted trading of the Company's common stock.
Trading has not yet resumed. In the absence of appropriate actions by the
Company, there is a risk, therefore, that the Company's 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 Company's common stock, but does not re-enter the real estate
business during fiscal year 1998, 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 of the
Company 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 and 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 the Company's 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company does not believe recently issued accounting standards have a
current impact on the Company's financial statements.
-8-
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Part II - Other Information
ITEM 5
OTHER INFORMATION
RECENT DEVELOPMENTS
On May 15, 1998, the Company filed a Form S-4 Registration Statement with the
Securities and Exchange Commission (the "Commission") including a Proxy
Statement / Prospectus with respect to the Company's proposal to
reincorporate in the State of Maryland and elect to become a real estate
investment trust ("REIT") for federal income tax purposes for its 1998 tax
year. In addition, the Proxy Statement / Prospectus pertains to other
transactions intended to effectuate the Company's desire to become actively
engaged in the business of owning and operating real estate as a
self-administered, self-managed and fully-integrated REIT. The proposed
transactions will be submitted to the Company's shareholders at a special
meeting (the "Special Meeting") at which the shareholders will be asked to
approve the following proposals: (1) A proposed private placement of
6,495,058 shares of the Company's Common Stock for $4.50 per share to a group
of accredited investors; (2) A proposal for the Company to (i) become the
sole general partner and acquire approximately 10.91% of the total
partnership interests in each of four existing limited partnerships
(collectively the "Operating Partnership") that will own approximately 4.34
million square feet of leased commercial R&D buildings and the right to
acquire certain commercial R&D pending building developments consisting of
approximately 1.02 million rentable square feet (the "Pending Development
Projects") from Carl E. Berg and certain of his affiliates, and (ii) approve
the issuance of up to 100,825,478 shares of Common Stock issuable upon the
redemption or exchange of 100,825,478 units of limited partnership interests
(the "L.P. Units") held by or issuable to Carl E. Berg, certain of his
affiliates and other limited partners in the Operating Partnerships,
including 33,919,072 L.P. Units that may be issued upon the Operating
Partnership's acquisition of the Pending Development Projects; and (3) A
proposal to reincorporate the Company under the laws of the State of Maryland
through a merger with and into the Company's wholly owned subsidiary Mission
West Properties, Inc., a Maryland corporation ("Mission West-Maryland"),
which during 1998 intends to elect to become a REIT and to approve the
adoption of the charter and bylaws of Mission West-Maryland. The Company
intends to set the date of the Special Meeting and distribute the Proxy
Statement / Prospectus to the shareholders soon after the Commission has
declared the S-4 Registration Statement effective.
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
a. EXHIBITS
None.
b. REPORTS ON FORM 8-K
During the quarter ended March 31, 1998, the Company filed a Form 8-K
to report under Item 4 thereof that there had been a change in the
Company's certified accountant. The Form 8-K was filed on March 13,
1998.
-9-
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
MISSION WEST PROPERTIES
(Registrant)
Date: May 15, 1998 By: /s/ Marianne K. Aguiar
------------------------------
Marianne K. Aguiar
Vice President of Finance and Controller
(Principal Financial and Accounting Officer)
-10-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,153
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 5,482
<CURRENT-LIABILITIES> 435
<BONDS> 0
0
0
<COMMON> 26,362
<OTHER-SE> (21,315)
<TOTAL-LIABILITY-AND-EQUITY> 5,482
<SALES> 0
<TOTAL-REVENUES> 77
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 230
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (153)
<INCOME-TAX> 0
<INCOME-CONTINUING> (153)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (153)
<EPS-PRIMARY> (.10)
<EPS-DILUTED> (.10)
</TABLE>
