UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
COMMISSION FILE NUMBER 1-8383
Mission West Properties, Inc.
(Exact name of registrant as specified in its charter)
Maryland 95-2635431
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
10050 Bandley Drive
Cupertino, California 95014-2188
(Address of principal executive offices)
Registrant's telephone number, including area code is (408) 725-0700
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date:
17,463,329 shares outstanding as of May 14, 2002
- 1 -
Mission West Properties, Inc.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2002
INDEX
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of March 31, 2002 (unaudited)
and December 31, 2001...................................................................................3
Consolidated Statements of Operations for the three
months ended March 31, 2002 and 2001 (unaudited)........................................................4
Consolidated Statements of Cash Flows for the
three months ended March 31, 2002 and 2001 (unaudited)..................................................5
Notes to Consolidated Financial Statements..............................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................................................................9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.............................................19
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................................................................19
SIGNATURES...........................................................................................................19
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PART I - FINANCIAL INFORMATION
ITEM 1 CONSOLIDATED FINANCIAL STATEMENTS
MISSION WEST PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
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March 31, 2002 December 31, 2001
---------------------- ----------------------
(Unaudited)
ASSETS
Real estate assets, at cost
Land $231,412 $218,058
Buildings 710,663 692,485
---------------------- ----------------------
942,075 910,543
Less accumulated depreciation (52,988) (49,608)
---------------------- ----------------------
Net real estate assets 889,087 860,935
Cash and cash equivalents 7,498 5,310
Restricted cash 2,715 15,435
Deferred rent 16,143 16,923
Other assets 15,624 11,652
---------------------- ----------------------
Total assets $931,067 $910,255
====================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Line of credit (related parties) $ 85,089 $ 79,887
Unsecured loan 20,000 -
Mortgage notes payable 126,918 127,416
Mortgage notes payable (related parties) 11,300 11,371
Interest payable 342 342
Security deposits 7,600 7,337
Prepaid rental income 13,940 12,470
Dividends/distributions payable 24,872 24,742
Refundable option payment - 18,836
Accounts payable and accrued expenses 4,980 4,367
---------------------- ----------------------
Total liabilities 295,041 286,768
Commitments and contingencies (Note 8)
Minority interest 525,173 515,063
Stockholders' equity:
Preferred stock, $.001 par value, 20,000,000 shares
authorized, none issued and outstanding - -
Common stock, $.001 par value, 200,000,000 shares
authorized, 17,463,329 and 17,329,779 shares issued and
outstanding at March 31, 2002 and December 31, 2001,
respectively 17 17
Paid-in-capital 128,046 126,626
Accumulated deficit (17,210) (18,219)
---------------------- ----------------------
Total stockholders' equity 110,853 108,424
---------------------- ----------------------
Total liabilities and stockholders' equity $931,067 $910,255
====================== ======================
The accompanying notes are an integral part of these consolidated
financial statements.
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MISSION WEST PROPERTIES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except share and per share amounts)
(Unaudited)
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Three months ended March 31,
2002 2001
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Revenues:
Rental income from real estate $32,484 $29,679
Tenant reimbursements 5,326 3,488
Other income, including interest 497 516
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Total revenues 38,307 33,683
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Expenses:
Operating expenses 2,275 1,225
Real estate taxes 3,057 2,321
Depreciation of real estate 4,356 4,102
General and administrative 434 318
Interest 2,270 2,209
Interest (related parties) 1,010 1,300
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Total expenses 13,402 11,475
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Income before minority interest and
discontinued operations 24,905 22,208
Minority interest 20,769 18,507
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Income from continuing operations 4,136 3,701
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Discontinued operations:
Gain from disposal of discontinued operations 6,103 3,101
Gain from discontinued operations 287 -
-------------------- --------------------
Net gain from discontinued operations 6,390 3,101
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Net income to minority interest $26,094 $21,090
==================== ====================
Net income to common stockholders $ 5,201 $ 4,219
==================== ====================
Income per share from continuing operations:
Basic $ 0.24 $ 0.22
==================== ====================
Diluted $ 0.23 $ 0.21
==================== ====================
Income per share from discontinued operations:
Basic - -
==================== ====================
Diluted - -
==================== ====================
Net income per share to common stockholders:
Basic $ 0.24 $ 0.22
==================== ====================
Diluted $ 0.23 $ 0.21
==================== ====================
Weighted average number of shares of
common stock outstanding (basic) 17,404,568 17,037,201
==================== ====================
Weighted average number of shares of
common stock outstanding (diluted) 17,853,809 17,242,821
==================== ====================
The accompanying notes are an integral part of these consolidated
financial statements.
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MISSION WEST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
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Three months ended March 31,
-------------------------------------
2002 2001
------------------ ------------------
Cash flows from operating activities:
Net income $ 5,201 $ 4,219
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interest 26,094 21,090
Depreciation 4,402 4,102
Gain on sales of real estate (6,103) (3,101)
Other (18) (95)
Changes in assets and liabilities:
Deferred rent 780 (2,089)
Other assets (3,972) (3,674)
Security deposits 263 294
Prepaid rental income 1,470 1,652
Accounts payable and accrued expenses 471 (90)
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Net cash provided by operating activities 28,588 22,308
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Cash flows from investing activities:
Improvements to real estate assets - (154)
Refundable option payment (18,836) (500)
Real estate purchase (31,311) -
Proceeds from sales of real estate 18,591 23,130
Restricted cash 15,435 -
Restricted cash available (2,715) (23,130)
------------------ ------------------
Net cash used in investing activities (18,836) (654)
------------------ ------------------
Cash flows from financing activities:
Principal payments on mortgage notes payable (498) (495)
Principal payments on mortgage notes payable (related parties) (71) (66)
Net payments under line of credit (related parties) (2,298) (6,737)
Proceeds from unsecured loan 20,000 -
Financing costs (52) -
Proceeds from stock options exercised 151 148
Minority interest distributions (20,637) (15,908)
Dividends paid (4,159) (3,236)
------------------ ------------------
Net cash used in financing activities (7,564) (26,294)
------------------ ------------------
Net increase/(decrease) in cash and cash equivalents 2,188 (4,640)
Cash and cash equivalents, beginning 5,310 4,691
------------------ ------------------
Cash and cash equivalents, ending $ 7,498 $ 51
================== ==================
Supplemental information:
Cash paid for interest $ 3,168 $ 3,488
================== ==================
Supplemental schedule of non-cash investing and financing activities:
Debt incurred in connection with property acquisitions (related parties) $ 7,500 $ 20,000
================== ==================
Assumption of other liabilities in connection with property acquisitions $ 398 $ -
================== ==================
Issuance of operating partnership units in connection with property acquisitions $ 6,152 $ 13,281
================== ==================
The accompanying notes are an integral part of these consolidated
financial statements.
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MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share and per share data)
(Unaudited)
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1. Principles of Consolidation and Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Mission West Properties, Inc. and its controlled subsidiaries, including
the operating partnerships (the "Company"). All significant intercompany
balances have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to the current
year's presentation.
Minority interest represents the separate private ownership of the
operating partnerships by the Berg Group (defined as Carl E. Berg, his
brother Clyde J. Berg, members of their respective immediate families, and
certain entities they control) and other non-affiliate interests. In total,
these interests account for approximately 83% of the ownership interests in
the real estate operations of the Company as of March 31, 2002. Minority
interest in earnings has been calculated by taking the net income of the
operating partnerships (on a stand-alone basis) multiplied by the
respective minority interest ownership percentage.
The financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP")
applicable to interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, certain
information and footnote disclosures normally included in financial
statements prepared in accordance with GAAP have been condensed or omitted
pursuant to such rules and regulations. However, in the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation have been included. The
Company presumes that users of the interim financial information have read
or have access to the audited financial statements for the preceding fiscal
year and that the adequacy of additional disclosure needed for a fair
presentation may be determined in that context. The results of operations
for the three months ended March 31, 2002 are not necessarily indicative of
the results to be expected for the entire year.
The Company adopted Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long Lived Assets" effective
January 1, 2002 (see note 9).
The Company has elected to be taxed as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended. Accordingly,
no provision has been made for income taxes for the three months ended
March 31, 2002.
2. Real Estate
BERG LAND HOLDINGS OPTION AGREEMENT
Under the terms of the Berg land holdings option agreement, the Company,
through the operating partnerships, has the option to acquire any future
Research & Development ("R&D"), office and industrial buildings developed
by the Berg Group on land currently owned, optioned, or acquired for these
purposes in the future, directly or indirectly by certain members of the
Berg Group. At present, there are approximately 284 acres of Silicon Valley
land, including land under development, owned directly or under 50% joint
venture entities, by certain members of the Berg Group that are subject to
the terms of the Berg land holdings option agreement. The owners of the
future R&D property developments may obtain cash or, at their option,
operating partnership interests ("O.P. Units") valued at the average
closing price of shares of common stock over the 30-trading-day period
preceding the acquisition date. As of March 31, 2002, the Company had
completed seventeen acquisitions under the Berg land holdings option
agreement representing approximately 1,699,000 rentable square feet. Upon
the Company's exercise of an option to purchase any of the future R&D
property developments under the terms of the Berg land holdings option
agreement, the acquisition price will equal the sum of (a) the full
construction cost of the building; (b) 10% of the full construction cost of
the building; (c) the acquisition value of the parcel as defined in the
agreement upon which the improvements are constructed (currently ranging
from $8.50 to $20.00 per square foot); (d) 10% per annum of the acquisition
value of the parcel for the period from January 1, 1998 to the close of
escrow; and (e) interest at LIBOR (London Interbank Offer Rate) plus 1.65%
per annum on the full construction costs of the building for the period
from the date funds were disbursed by the developer to the close of escrow;
less (f) any debt encumbering the property, or a lesser amount as approved
by the members of the independent directors committee of the Company's
board of directors.
- 6 -
No estimate can be given at this time as to the total cost to the Company
to acquire projects under the Berg land holdings option agreement, or the
timing of the Company's acquisition of any of such projects. However, the
Berg Group currently has four properties under development with a total of
approximately 476,000 rentable square feet of R&D properties that the
Company has the right to acquire under this agreement. Of the four
properties, three are joint ventures in which the Berg Group holds
approximately a 50% interest. The joint venture properties prospectively
represent a total of approximately 311,000 rentable square feet. As of
March 31, 2002, the estimated acquisition price to the operating
partnerships for these four projects would be approximately $54,600. The
final acquisition price of these four properties could differ significantly
from this estimate. In addition to projects currently under development,
the Company has the right to acquire future developments by the Berg Group
on up to 250 additional acres of land currently controlled by the Berg
Group, which could support approximately 3.9 million square feet of new
developments. Under the Berg land holdings option agreement, as long as the
Berg Group's percentage ownership interest in the Company and the operating
partnerships taken as a whole is at least 65%, the Company also has an
option to purchase all land acquired, directly or indirectly, by Carl E.
Berg or Clyde J. Berg in the future which has not been improved with
completed buildings and which is zoned for, intended for or appropriate for
research and development, office and/or industrial development or use in
the states of California, Oregon and Washington.
PROPERTY DISPOSITION
On March 6, 2002, the Company completed the sale, in a tax-deferred
exchange, of a 72,400 square foot R&D property located at 2001 Logic Drive,
San Jose, California to Xilinx, Inc., which had exercised a purchase option
in the same month. The Company realized a gain of $6,103 on the total sale
price of approximately $18,503. At March 31, 2002, the proceeds from the
sale of this property were classified as restricted cash to be used in
tax-deferred property exchanges.
PROPERTY ACQUISITIONS
Effective January 1, 2002, the Company acquired an approximately 125,000
rentable square foot newly constructed R&D building located at 5345 Hellyer
Avenue in San Jose, California from the Berg Group under the Berg land
holdings option agreement. The total acquisition price for this property
was $13,652. The Company acquired this property by borrowing $7,500 under
the Berg Group line of credit and issuing 502,805 O.P. Units to various
members of the Berg Group.
Effective March 8, 2002, the Company acquired three R&D buildings totaling
approximately 206,500 rentable square foot located at 2610 and 2630 Orchard
Parkway and 55 West Trimble Road in San Jose, California from Silicon
Valley Properties, LLC in a tax-deferred exchange transaction involving the
Company's former R&D properties located at 2001 Logic Drive and 5713-5729
Fontanoso Way, San Jose, California. The total acquisition price for the
properties acquired from Silicon Valley Properties, LLC was approximately
$31,250.
3. Restricted Cash
At March 31, 2002, restricted cash represents the remaining proceeds from a
property sale and interest income being held in a separate cash account at
a trust company in order to preserve the Company's option of receiving
replacement property on a tax-deferred basis.
4. Stock Transactions
During the three months ended March 31, 2002, stock options to purchase
33,550 shares of common stock were exercised at $4.50 per share. Total
proceeds to the Company were $151. In January 2002, a limited partner of
one of the operating partnerships exchanged 100,000 O.P. Units for 100,000
shares of the Company's common stock under the terms of the December 1998
exchange rights agreement among the Company and all limited partners of the
operating partnerships.
5. Net Income Per Share
Basic operating net income per share is computed by dividing net income,
excluding gain on sale of real estate, by the weighted-average number of
common shares outstanding for the period. Diluted operating net income per
share is computed by dividing net income, excluding gain on sale of real
estate, by the sum of the weighted-average number of common shares
outstanding for the period plus the assumed exercise of all dilutive
securities.
The computation for weighted average shares is detailed below:
Three Months Ended March 31,
-------------------------------
2002 2001
-------------- -------------
Weighted average shares outstanding (basic) 17,404,568 17,037,201
Incremental shares from assumed option exercise 449,241 205,620
-------------- -------------
Weighted average shares outstanding (diluted) 17,853,809 17,242,821
============== =============
- 7 -
The outstanding O.P. Units, which are exchangeable at the unit holder's
option, subject to certain conditions, for shares of common stock on a
one-for-one basis have been excluded from the diluted net income per share
calculation, as there would be no effect on the amounts because the
minority interests' share of income would also be added back to net income.
The total number of O.P. Units outstanding at March 31, 2002 and 2001 was
86,165,346 and 84,547,078, respectively.
6. Related Party Transactions
As of March 31, 2002, the Berg Group owned 78,133,436 O.P. Units. Combined
with shares of the Company's common stock owned by the Berg Group, the Berg
Group's ownership as of March 31, 2002 represented approximately 75% of the
equity interests of the Company, assuming conversion of the 86,165,346 O.P.
Units outstanding into the Company's common stock.
As of March 31, 2002, debt in the amount of $85,089 was due the Berg Group
under the line of credit established March 1, 2000. The Berg Group $100
million line of credit is currently collateralized by eleven properties,
bears interest at LIBOR plus 1.30%, and matures in March 2003. The Company
believes that the terms of the Berg Group line of credit are more favorable
than those available from commercial lenders. As of March 31, 2002, debt in
the amount of $11,300 was due the Berg Group under a mortgage note
established May 15, 2000 in connection with the acquisition of a 50%
interest in Hellyer Avenue Limited Partnership, the obligor under the
mortgage note. The mortgage note bears interest at 7.65%, and is due in 10
years with principal payments amortized over 20 years.
Carl E. Berg has a substantial financial interest in one company that
leases space from the operating partnerships. This company occupies 5,862
square feet at $0.93 per square foot per month. This lease was in effect
prior to the Company's acquisition of its general partnership interests in
July 1998. The lease expires in May 2003.
The Company currently leases office space owned by Berg & Berg Enterprises,
Inc., an affiliate of Carl E. Berg and Clyde J. Berg. Rental amounts and
overhead reimbursements paid to Berg & Berg Enterprises, Inc. were $23 for
each of the three-month periods ended March 31, 2002 and 2001.
7. Subsequent Events
On April 11, 2002, the Company paid dividends of $0.24 per share of common
stock to all common stockholders of record as of March 29, 2002. On the
same date, the operating partnerships paid a distribution of $0.24 per O.P.
Unit.
8. Commitments and Contingencies
The Company and the operating partnerships are or may become, from time to
time, parties to litigation arising out of the normal course of business.
Management is not aware of any litigation against the Company that would
have a material adverse effect on the consolidated financial position,
results of operations or cash flows of the Company.
Insurance policies currently maintained by the Company do not cover seismic
activity, although they do cover losses from fires after an earthquake.
9. Discontinued Operations
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144, "Accounting for the Impairment or Disposal of
Long Lived Assets" which addresses financial accounting and reporting for
the impairment and disposal of long-lived assets. In general, income or
loss attributable to the operations and sale of property, and the
operations related to property held for sale, are classified as
discontinued operations in the statements of operations. Prior period
statement of operations have been reclassified to reflect the income or
loss related to properties that were sold and presented as discontinued
operations during the three months ended March 31, 2002. Additionally, all
periods presented will likely require further reclassification in future
periods if additional property sales occur.
As of March 31, 2002, there were no properties under contract to be sold or
disposed of which would qualify as discontinued operations.
In March 2002, the Company sold one property for a gain of $6,103. Gain
from operation for this property was approximately $287 and $430 for the
three months ended March 31, 2002 and 2001, respectively. Condensed
operations for the three months ended March 31, 2002 and 2001 are as
follows:
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Three Months Ended March 31,
--------------------------------------
2002 2001
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(Dollars in thousands)
Rental income from real estate $333 $500
Tenant reimbursements 293 23
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Total revenues 626 523
Real estate taxes 293 23
Depreciation 46 70
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Total expenses 339 93
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Net income $287 $430
=============== ===================
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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 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, 2001. The
results for the three months ended March 31, 2002 are not necessarily indicative
of the results to be expected for the entire fiscal year ending December 31,
2002. The following discussion includes forward-looking statements, including
but not limited to, statements with respect to the Company's future financial
performance, operating results, plans and objectives. Actual results may differ
materially from those currently anticipated depending upon a variety of factors,
including those described below under the sub-heading, "Forward-Looking
Information."
OVERVIEW
Mission West Properties, Inc. (the "Company") acquires, markets, leases, and
manages R&D and office properties, primarily located in the Silicon Valley
portion of the San Francisco Bay Area. As of March 31, 2002, the Company owned
and managed 100 properties totaling approximately 7.0 million rentable square
feet through four limited partnerships, or operating partnerships, for which it
is the sole general partner. This class of property is designed for research and
development and office uses and, in some cases, includes space for light
manufacturing operations with loading docks. The Company believes that it has
one of the largest portfolios of R&D properties in the Silicon Valley. The four
tenants who lease the most square footage from the Company are Microsoft
Corporation, JDS Uniphase Corporation, Amdahl Corporation (a subsidiary of
Fujitsu Limited), and Apple Computer, Inc. For federal income tax purposes the
Company has operated as a self-managed, self-administered and fully integrated
real estate investment trust ("REIT") since fiscal 1999.
The Company's acquisition and growth strategy incorporates the following
elements:
- working with the Berg Group to take advantage of their abilities and
resources to pursue development opportunities which we have an option to
acquire, on pre-negotiated terms, upon completion and leasing;
- capitalizing on opportunistic acquisitions from third parties of
high-quality R&D and office properties that provide attractive initial
yields and significant potential for growth in cash-flow;
- focusing on general purpose, single-tenant Silicon Valley R&D and office
properties for information technology companies in order to maintain low
operating costs, reduce tenant turnover and capitalize on our relationships
with these companies and our extensive knowledge of their real estate
needs; and
- maintaining prudent financial management principles that emphasize current
cash flow while building long-term value, the acquisition of pre-leased
properties to reduce development and leasing risks and the maintenance of
sufficient liquidity to acquire and finance properties on desirable terms.
- 10 -
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2002 TO THE THREE MONTHS ENDED
MARCH 31, 2001.
As of March 31, 2002, the Company, through its controlling interests in the
operating partnerships, owned 100 properties totaling approximately 7.0 million
square feet compared to 90 properties totaling approximately 6.2 million square
feet owned by the Company as of March 31, 2001. This represents a net increase
of approximately 13% in total rentable square footage from one year ago. Since
March 31, 2001 the Company has acquired the properties listed below and disposed
of 77,700 rentable square feet at 5713-5729 Fontanoso Way and 72,400 rentable
square feet at 2001 Logic Drive in San Jose, California.
Rentable Square
Date of Acquisition Address Footage
--------------------- -------------------------------------- ---------------------
04/01 245 Caspian Drive (1)(3) 59,400
05/01 855 Branham Lane East (1) 67,912
06/01 5550 Hellyer Avenue 78,794
07/01 5906-65 Silver Creek Valley Rd. I (2) 247,500
08/01 5750 Hellyer Avenue 73,312
10/01 5905-65 Silver Creek Valley Rd. II 98,500
01/02 5345 Hellyer Avenue 125,000
03/02 2630 Orchard Parkway (4) 60,633
03/02 2610 Orchard Parkway (4) 54,093
03/02 55 West Trimble (4) 91,722
---------------------
956,866
=====================
(1) Acquired in a tax-deferred exchange from the sale of R&D property at 4949
Hellyer Avenue, San Jose, California.
(2) Three buildings were acquired at this location.
(3) The lessee at this location will terminate its lease effective May 2002 in
a negotiated settlement with us. The building has not been completed for
occupancy, which was at the option of the lessee.
(4) Acquired in a tax-deferred exchange from the sale of R&D properties at
5713-5729 Fontanoso Way and 2001 Logic Drive, San Jose, California.
The following tables reflect the increase in the Company's rental revenues,
excluding rental revenues from discontinued operations, for the three months
ended March 31, 2002 over rental revenues for the comparable three months in
2001:
Three Months Ended March 31,
---------------------------------
% Change by % of Total Net
2002 2001 $ Change Property Group Change
-------------- -------------- ---------------- --------------- -----------------
(Dollars in thousands)
Same Property (1) $25,910 $28,243 ($ 2,333) (8.3%) (7.9%)
2001 Acquisitions (2) 5,534 1,436 4,098 285.4% 13.8%
2002 Acquisitions 1,040 - 1,040 100.0% 3.5%
-------------- -------------- ---------------- -----------------
$32,484 $29,679 $ 2,805 9.4% 9.4%
============== ============== ================ =================
(1) "Same Property" is defined as properties owned as of July 1, 1998 and
acquired in 1998, 1999 and 2000 and still owned as of March 31, 2002.
(2) The figures for "2001 Acquisitions" in year 2001 for some properties do not
reflect a full three months of rent due to the timing of the acquisition of
the properties during 2001.
RENTAL REVENUE FROM CONTINUING OPERATIONS
For the quarter ended March 31, 2002, rental revenues increased by $2.8 million
from $29.7 million for the three months ended March 31, 2001 to $32.5 million
for the same period of 2002, which included a decrease of $1.4 million
straight-line rent adjustment. Of the $2.8 million increase in rental revenues,
($2.3) million resulted from the Company's "Same Property" portfolio, $4.1
million resulted from properties acquired in 2001 and $1.0 million resulted from
properties acquired in 2002. Approximately $0.3 million in rental revenues was
generated from a discontinued operation for the three months ended March 31,
2002. The decline in rental revenues from the "same property" portfolio was a
result from adverse market conditions and loss of seven tenants due to
bankruptcy or cease of operations. The net increase in rental revenues was
primarily attributable to new acquisitions.
OTHER INCOME FROM CONTINUING OPERATIONS
Other income, including interest, was approximately $0.5 million for each of the
three-month periods ended March 31, 2002 and 2001.
- 11 -
EXPENSES FROM CONTINUING OPERATIONS
Tenant reimbursements from continuing operations increased by $1.8 million, or
51%, from $3.5 million for the three months ended March 31, 2001 to $5.3 million
for the three months ended March 31, 2002. Operating expenses and real estate
taxes from continuing operations, on a combined basis, also increased by $1.8
million, or 51%, from $3.5 million to $5.3 million for the three months ended
March 31, 2001 and 2002, respectively. Both tenant reimbursements and operating
expenses combined with real estate taxes from a discontinued operation were
approximately $0.3 million each for the quarter ended March 31, 2002. The
increases in all categories resulted primarily from the increase in the total
rentable square footage since March 31, 2001.
Depreciation expense from continuing operations increased by $0.3 million from
$4.1 million to $4.4 million for the three months ended March 31, 2001 and 2002,
respectively. Depreciation expense from a discontinued operation was
approximately $46,000 for the quarter ended March 31, 2002. The increase was
attributable to the acquisition of twelve R&D properties since March 31, 2001.
Interest expense increased by $0.06 million, or 2.7%, from $2.21 million for the
three months ended March 31, 2001 to $2.27 million for the three months ended
March 31, 2002 from additional debt that the Company incurred under a new $20.0
million unsecured loan obtained from Citicorp during the first quarter 2002.
Interest expense (related parties) decreased by $0.29 million, or 22.3%, from
$1.30 million for the three months ended March 31, 2001 to $1.01 million for the
three months ended March 31, 2002 due to lower interest rates and repayments on
the Berg Group line of credit. As a result, overall interest expense (including
amounts to related parties) for the quarter ended March 31, 2002 decreased by
$0.23 million compared to the first quarter a year ago. The twelve R&D property
acquisitions increased total debt outstanding, including amounts due related
parties, by $36.02 million, or 17.4%, from $207.29 million as of March 31, 2001
to $243.31 million as of March 31, 2002. Management expects interest expense to
increase as new debt is incurred in connection with property acquisitions, as
the Company draws on the Berg Group line of credit, and as it seeks alternative
sources of credit.
MINORITY INTEREST AND NET INCOME
The minority interest portion of income increased by $4.99 million, or 23.6%,
from $21.10 million for the three months ended March 31, 2001 to $26.09 million
for the three months ended March 31, 2002. Net income to shareholders increased
by $0.98 million, or 23.2%, from $4.22 million for the three months ended March
31, 2001 to $5.20 million for the same period in 2002. Minority interest
represents the ownership interest of all limited partners in the operating
partnerships taken as a whole, which was approximately 83% as of March 31, 2002
and 2001.
RECENT RENTAL MARKET DEVELOPMENTS
All of the Company's properties are located in the Northern California area
known as Silicon Valley, which generally consists of portions of Santa Clara
County, Southwestern Alameda County, Southeastern San Mateo County and Eastern
Santa Cruz County. The Silicon Valley economy and business activity slowed
markedly in 2001 and in the first three months of 2002 after fast-paced growth
in 1999 and 2000. The Silicon Valley R&D property market has historically
fluctuated with the local economy. According to a recent report by BT Commercial
Real Estate, vacancy rates for Silicon Valley R&D property increased from
approximately 14.8% in late 2001 to 17.3% at the end of the first quarter 2002.
Total vacant R&D square footage in Silicon Valley at the end of the first
quarter of 2002 amounted to 26.1 million square feet, of which 44%, or 11.5
million square feet, accounted for sublease spaces. Total negative net
absorption in 2001 amounted to approximately (15.6) million square feet. During
the first three months of 2002, there was total negative net absorption of
approximately (3.5) million square feet. The impact of this decline has not been
uniform throughout the area, however. The Silicon Valley R&D property market has
been characterized by a substantial number of submarkets, with rent and vacancy
rates varying considerably by submarket and location within each submarket. The
Company's average occupancy rate for the three-month period ended March 31, 2002
was 95% with approximately 476,000 rentable square feet expiring in 2002. Key
tenants could seek the protection of the bankruptcy laws, which could result in
the rejection and termination of their leases, thereby causing a reduction in
our rental income. For example, during the last six months, six tenants
accounting for approximately 458,000 net rentable square feet of R&D properties
have either filed petitions under Chapter 11 of the Bankruptcy Code or have
discontinued operations. Under the bankruptcy laws, tenants may have the right
to reject their leases with us and our claim for rent will be limited to the
greater of one year's rent or 15% of the total amount of rent under the leases
upon default, but not to exceed three years of rent on the remaining term of the
lease following the earlier of the petition filing date or the date on which we
gained repossession of the property, as well as any rent that was unpaid on the
earlier of those dates. These properties may take anywhere from six to twelve
months or longer to re-lease. The Company anticipates its vacancy rate to range
between 12-15% by the end of 2002 and renewal rental rates to be the same as or,
perhaps, lower than current rents. The Company's operating results and ability
to pay dividends at current levels remain subject to a number of material risks,
as indicated under the caption "Forward-Looking Information" below and in the
section entitled "Risk Factors" in the Company's most recent annual report on
Form 10-K.
- 12 -
CHANGES IN FINANCIAL CONDITION
The most significant changes in the Company's financial condition during the
three months ended March 31, 2002 resulted from property acquisitions and
exchanges. In addition, debt increased from new acquisitions and stockholders'
equity increased from the exercise of stock options and the exchange of O.P.
Units for common stock.
At March 31, 2002, real estate assets increased by approximately $31.5 million
from December 31, 2001 because of new acquisitions and one disposition. During
the first three months of 2002, the Company acquired one additional property
representing approximately 125,000 rentable square feet of R&D property located
in Silicon Valley. This property was acquired from the Berg Group under the Berg
land holdings option agreement. The aggregate acquisition price for this
property was approximately $13.7 million. The Company financed this acquisition
by borrowing $7.5 million under the Berg Group line of credit and issuing
502,805 O.P. Units. In March 2002, the Company acquired three R&D properties
representing approximately 206,500 rentable square feet for approximately $31.3
million as replacement properties in a tax-deferred exchange in which the
Company disposed of former R&D properties at 5713-5729 Fontanoso Way and 2001
Logic Drive in San Jose, California. Pending the purchase of the replacement
properties, the proceeds for the Fontanoso Way and Logic Drive properties were
classified as restricted cash of which approximately $2.7 million remained in
restricted cash at March 31, 2002. No debt or O.P. Units were issued for these
acquisitions. The Company also realized a gain of $6.1 million on the
transaction.
At March 31, 2002, total liabilities increased by approximately $8.3 million
from December 31, 2001 due to mainly debt incurred in connection with R&D
property acquisitions.
At March 31, 2002, total stockholders' equity increased by approximately $2.4
million from December 31, 2001 from reduction of accumulated deficit, stock
option exercises and the exchange of O.P. Units for the Company's common stock.
During the three months ended March 31, 2002, stock options to purchase 33,550
shares of common stock were exercised at $4.50 per share. Total proceeds to the
Company were approximately $0.15 million. One limited partner of an operating
partnership exchanged 100,000 O.P. Units for 100,000 shares of the Company's
common stock under the exchange rights agreement among the Company and the
limited partners in the operating partnerships, which represented additional
paid in capital of approximately $1.3 million.
LIQUIDITY AND CAPITAL RESOURCES
The Company expects its principal sources of liquidity for distributions to
stockholders and unit holders, debt service, leasing commissions and recurring
capital expenditures to come from Funds From Operations ("FFO") and/or the Berg
Group line of credit and other credit facilities that may be established by the
Company with third party financial institutions. The Company expects these
sources of liquidity to be adequate to meet projected distributions to
stockholders and other presently anticipated liquidity requirements in 2002. The
Company expects to meet its long-term liquidity requirements for the funding of
property development, property acquisitions and other material non-recurring
capital improvements through long-term secured and unsecured indebtedness and
the issuance of additional equity securities by the Company. The Company has the
ability to meet short-term obligations or other liquidity needs based on the
line of credit (related parties). Despite the current weakness in the economy,
the Company expects interest expense to increase, but not significantly, as it
incurs debt through acquisitions of new properties and as interest rates
increase.
The Company is continually evaluating alternative sources of credit to replace
the Berg Group $100 million line of credit, which expires in March 2003. The
Company believes that the terms of the Berg Group line of credit are more
favorable than those available from institutional lenders. There can be no
assurance that the Berg Group will continue to rollover and extend this line of
credit, as it has been doing since 1999, or the Company will be able to obtain a
line of credit with terms similar to the Berg Group line of credit. Thus, the
Company's cost of borrowing could increase substantially after 2002.
On March 1, 2002, the Company obtained a $20 million unsecured loan from
Citicorp USA, Inc. with an interest rate based on LIBOR. The loan, which matures
on March 1, 2003, bears a fixed LIBOR interest rate of 4.09% for the first six
months and LIBOR plus 2.0% thereafter. The Company paid a loan fee of $50,000
and expects to use the loan for acquiring new R&D properties.
At March 31, 2002, the Company had total indebtedness of $243.3 million,
including $126.9 million of fixed rate mortgage debt, $11.3 million under the
Berg Group mortgage note (related parties), $85.1 million under the Berg Group
line of credit (related parties), and $20.0 million under the Citicorp loan.
As of March 31, 2002, the Company's Debt to Total Market Capitalization ratio
was approximately 15.1%, based upon a Total Market Capitalization of
approximately $1.6 billion. The Company computed this ratio by dividing the
Company's total debt outstanding by the sum of this debt plus the market value
of common stock (based upon the closing price of $13.10 per share on March 28,
2002) on a fully diluted basis, taking into account the conversion of all O.P.
Units into common stock.
On April 11, 2002, the Company paid dividends of $0.24 per share of common stock
to all common stockholders of record as of March 29, 2002. On the same date, the
operating partnerships paid a distribution of $0.24 per O.P. Unit.
- 13 -
MORTGAGE DEBT
The following table sets forth information regarding debt outstanding as of
March 31, 2002:
Maturity Interest
Debt Description Collateral Properties Balance Date Rate
--------------------------------------------- ------------------------------------------- -------------------- ---------- ----------
(Dollars in thousands)
Line of Credit:
Berg Group (related parties) 2033-2043 Samaritan Drive, San Jose, CA $ 85,089 3/03 (1)
2133 Samaritan Drive, San Jose, CA --------------------
2233-2243 Samaritan Drive, San Jose, CA
1310-1450 McCandless Drive, Milpitas, CA
1315-1375 McCandless Drive, Milpitas, CA
1650-1690 McCandless Drive, Milpitas, CA
1795-1845 McCandless Drive, Milpitas, CA
5325 Hellyer Avenue, San Jose, CA
5345 Hellyer Avenue, San Jose, CA
2610 N. First Street, San Jose, CA
75 E. Trimble Road, San Jose, CA
Unsecured Loan:
Citicorp USA, Inc. Not Available 20,000 3/03 (2)
--------------------
Mortgage Notes Payable (related parties): 5300 & 5350 Hellyer Avenue, San Jose, CA 11,300 6/10 7.650%
--------------------
Mortgage Notes Payable:
Prudential Capital Group 20400 Mariani Avenue, Cupertino, CA 1,555 4/09 8.750%
New York Life Insurance Company 10440 Bubb Road, Cupertino, CA 338 9/09 9.625%
Home Savings & Loan Association 10460 Bubb Road, Cupertino, CA 347 12/06 9.500%
Prudential Insurance Company of America (3) 10300 Bubb Road, Cupertino, CA 124,678 10/08 6.560%
10500 N. DeAnza Blvd, Cupertino, CA
4050 Starboard Drive, Fremont, CA
45700 Northport Loop, Fremont, CA
45738 Northport Loop, Fremont, CA
450-460 National Avenue, Mountain View, CA
6311 San Ignacio Avenue, San Jose, CA
6321 San Ignacio Avenue, San Jose, CA
6325 San Ignacio Avenue, San Jose, CA
6331 San Ignacio Avenue, San Jose, CA
6341 San Ignacio Avenue, San Jose, CA
6351 San Ignacio Avenue, San Jose, CA
3236 Scott Blvd, Santa Clara, CA
3560 Bassett Street, Santa Clara, CA
3570 Bassett Street, Santa Clara, CA
3580 Bassett Street, Santa Clara, CA
1135 Kern Avenue, Sunnyvale, CA
1212 Bordeaux Lane, Sunnyvale, CA
1230 E. Arques, Sunnyvale, CA
1250 E. Arques, Sunnyvale, CA
1170 Morse Avenue, Sunnyvale, CA
1600 Memorex Drive, Santa Clara, CA
1688 Richard Avenue, Santa Clara, CA
1700 Richard Avenue, Santa Clara, CA
3540 Bassett Street, Santa Clara, CA
3542 Bassett Street, Santa Clara, CA
3544 Bassett Street, Santa Clara, CA
3550 Bassett Street, Santa Clara, CA
--------------------
Mortgage Notes Payable Subtotal 126,918
--------------------
TOTAL $243,307
====================
(1) The debt owed to the Berg Group under the line of credit carries a variable
interest rate equal to LIBOR plus 1.30% and is payable in full in March
2003. The interest rate at March 31, 2002 was 3.632%.
(2) The unsecured loan from Citicorp USA, Inc. carries a fixed LIBOR interest
rate equal to 4.09% for the first six months and LIBOR plus 2.0% thereafter
and is payable in full in March 2003.
(3) John Kontrabecki, one of the limited partners, has guaranteed approximately
$12.0 million of this debt.
- 14 -
CURRENT PROPERTIES SUBJECT TO OUR ACQUISITION AGREEMENT WITH THE BERG GROUP
The following table presents certain projected information at March 31, 2002
concerning projects for which the Company, through its interests in the
operating partnerships, has the right to acquire under the Berg land holdings
option agreement.
Approximate
Number of Rentable Area Anticipated Total Estimated
Property Buildings (Square Feet) Acquisition Date Acquisition Value (1)
------------------------------ ------------ -------------------- ------------------------- -------------------------
BERG LAND HOLDINGS OPTION
UNDER DEVELOPMENT (dollars in thousands)
Morgan Hill (JV I) (2) 2 160,000 4th Q 2002/Q1 2003 17,500
Morgan Hill (JV II) (2) 1 151,242 4th Q 2002/Q1 2003 16,200
Piercy & Hellyer 1 165,000 3rd Q 2002 20,900
- ------- ------
Subtotal 4 476,242 54,600
AVAILABLE LAND
Piercy & Hellyer 490,000
Morgan Hill (2) 368,025
King Ranch 207,000
Fremont & Cushing 387,000
Evergreen 2,480,000
---------
Subtotal 3,932,025
TOTAL 4 4,408,267 $54,600
= ========= =======
(1) The estimated acquisition value represents the estimated cash price for
acquiring the projects under the terms of the Berg land holdings option
agreement, which may differ from the actual acquisition cost as determined
under GAAP, if O.P. Units or any other securities based on the market value
of our common stock are issued in the transaction.
(2) The Company expects to own an approximate 50% interest in the partnership
through one of its operating partnerships. The property will be operated
and managed by the other partner in the entity. The rentable area and
estimated acquisition value shown above reflect both the Company's and the
other partner's combined interest in these properties.
Pursuant to the Berg land holdings option agreement between the Company and the
Berg Group, the Company currently has the option to acquire any future R&D,
office and industrial property developed by the Berg Group on land it currently
owns or has under option, or acquires for these purposes in the future, directly
or indirectly by certain members of the Berg Group.
The time required to complete the leasing of developments varies from project to
project. The acquisition dates and acquisition costs set forth in the table are
only estimates by management. Generally, the Company will not acquire any of the
above projects until they are fully completed and leased. There can be no
assurance that the acquisition date and final cost to the Company as indicated
above would be realized. No estimate can be given at this time as to the
Company's total cost to acquire projects under the Berg land holdings option
agreement, nor can we be certain of the period in which we will acquire any of
the projects.
Although the Company expects to acquire the new properties available to it under
the terms of the Berg land holdings option agreement, subsequent to the approval
by the independent directors committee, there can be no assurance that the
Company actually will consummate any intended transactions, including all of
those discussed above. Furthermore, the Company has not yet determined the means
by which it would acquire and pay for any such properties or the impact of any
of the acquisitions on its business, results of operations, financial condition,
FFO or available cash for distribution.
Leasing activity for new build-to-suit and vacated R&D properties has slowed
considerably during the past year and the first three months of 2002.
Consequently, the Company believes that the projected acquisition dates for
other development properties subject to the Berg land holdings option agreement,
with the exception of the project at Piercy and Hellyer for approximately
165,000 rentable square feet, may be delayed for the foreseeable future. Such
delays could reduce future growth in revenues, operating income and Funds
Available for Distribution ("FAD").
- 15 -
HISTORICAL CASH FLOWS
Net cash provided by operating activities for the three months ended March 31,
2002 was $28.6 million compared to $22.3 million for the same period in 2001, a
28% increase. The change was a direct result of increased rent from newly
acquired properties.
Net cash used in investing activities was approximately $18.8 million and $0.7
million for the three months ended March 31, 2002 and 2001, respectively. Of the
$18.8 million net cash used in investing activities, $18.5 million were returned
to Xilinx, Inc. relating to the purchase option agreement between Xilinx and the
Company, and $0.3 million were applied to Xilinx's monthly rent.
Net cash used in financing activities was $7.6 million for the three months
ended March 31, 2002 compared to $26.3 million for the same period in 2001, a
71% decrease. Of the $7.6 million net cash used in financing activities, $2.9
million were used to pay outstanding debt, $20.6 million for minority interest
distributions, $4.2 million for dividend payments, net of $20.1 million received
from the Citicorp unsecured loan and the proceeds of exercised stock options.
During the three months ended March 31, 2002, the Company made payments on
outstanding debt and distributions to holders of its common stock and O.P. Units
by utilizing cash generated from operating activities.
CAPITAL EXPENDITURES
The Company's existing R&D properties require periodic investments of capital
for tenant-related capital expenditures and for general capital improvements.
For the years ended December 31, 1997 through December 31, 2001, the recurring
tenant improvement costs and leasing commissions incurred with respect to new
leases and lease renewals of the properties that were owned or controlled by
members of the Berg Group prior to July 1, 1998 averaged approximately $1.75
million annually. The Company expects that the average annual cost of recurring
tenant improvements and leasing commissions, related to the properties, will be
approximately $1.3 million during 2002. The Company believes it will recover
substantially all of these sums from the tenants under new or renewed leases
through increases in rental rates. The Company expects to meet its long-term
liquidity requirements for the funding of property development, property
acquisitions and other material non-recurring capital improvements through
long-term secured and unsecured indebtedness and the issuance of additional
equity securities by the Company.
FUNDS FROM OPERATIONS
As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), FFO represents net income (loss) before minority interest of unit
holders (computed in accordance with GAAP), excluding gains (or losses) from
debt restructuring and sales of property, plus real estate related depreciation
and amortization (excluding amortization of deferred financing costs and
depreciation of non-real estate assets) and after adjustments for unconsolidated
partnerships and joint ventures. Management considers FFO an appropriate measure
of performance of an equity REIT because, along with cash flows from operating
activities, financing activities and investing activities, it provides investors
with an understanding of the Company's ability to incur and service debt, and
make capital expenditures. With the recent emphasis on the disclosure of
operating earnings per share, we will still continue to use FFO as a measure of
the Company's performance. FFO should not be considered as an alternative for
net income as a measure of profitability and it is not comparable to cash flows
provided by operating activities determined in accordance with GAAP, nor is FFO
necessarily indicative of funds available to meet the Company's cash needs,
including its need to make cash distributions to satisfy REIT requirements.
The Company's definition of FFO also assumes conversion at the beginning of the
period of all convertible securities, including minority interests that might be
exchanged for common stock. FFO does not represent the amount available for
management's discretionary use as such funds may be needed for capital
replacement or expansion, debt service obligations or other commitments and
uncertainties.
The minority interest in earnings for unrelated parties are deducted from total
minority interest in earnings in calculating FFO.
Furthermore, FFO is not comparable to similarly entitled items reported by other
REITs that do not define them exactly as the Company defines FFO. FFO for the
three months ended March 31, 2002 and 2001 are summarized in the tables below:
Three Months Ended March 31,
-----------------------------------------
2002 2001
------------------ ------------------
(Dollars in thousands)
Net income $ 5,201 $ 4,219
Add:
Minority interest (1) 25,933 20,916
Depreciation 4,402 4,102
Less:
Gain on sale of assets 6,103 3,101
------------------ ------------------
FFO $29,433 $26,136
================== ==================
(1) The minority interest for unrelated parties was deducted from total
minority interest in calculating FFO. Distribution Policy
- 16 -
DISTRIBUTION POLICY
The Company intends to pay distributions to stockholders and O.P. unit holders
based upon total Funds Available for Distribution ("FAD"), which is calculated
as FFO less adjustment for straight-line rent included in net income, leasing
commissions paid and capital expenditures made during the respective period. The
calculations of FAD for the three months ended March 31, 2002 and 2001 are as
follows:
Three Months Ended March 31,
------------------------------------------
2002 2001
------------------- -------------------
(Dollars in thousands)
FFO $29,433 $26,136
Less:
Straight-line rents (780) 2,089
Leasing commissions 140 163
Capital expenditures - 154
------------------- -------------------
FAD $30,073 $23,730
=================== ===================
The Company's board of directors will determine the amount and timing of
distributions to our stockholders. The board of directors will consider many
factors prior to making any distributions, including the following:
- the amount of cash available for distribution;
- the Company's financial condition;
- whether to reinvest funds rather than to distribute such funds;
- the Company's committed and projected capital expenditures;
- the effects of new property acquisitions, including acquisitions under
existing agreements with the Berg Group;
- the annual distribution requirements under the REIT provisions of the
federal income tax laws; and
- such other factors as the board of directors deems relevant.
We cannot assure you that the Company will be able to meet or maintain
management's cash distribution objectives.
- 17 -
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Company does not believe recently issued accounting standards will
materially impact the Company's financial statements.
FORWARD-LOOKING INFORMATION
This quarterly report contains forward-looking statements within the meaning of
the federal securities laws. The Company intends such forward-looking statements
to be covered by the safe harbor provisions for forward-looking statements
contained in the Private Securities Reform Act of 1995, and is including this
statement for purposes of complying with these safe harbor provisions.
Forward-looking statements, which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are generally
identifiable by use of the words "believe," "expect," "intend," "anticipate,"
"estimate," "project" or similar expressions. Additionally, all disclosures
under Part I., Item 3 constitutes forward-looking statements. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain.
Factors that could have a material adverse effect on the operations and future
prospects of the Company include, but are not limited to, changes in:
- economic conditions generally and the real estate market specifically,
- legislative or regulatory provisions affecting the Company (including
changes to laws governing the taxation of REITs),
- availability of capital,
- interest rates,
- competition,
- supply of and demand for R&D, office and industrial properties in the
Company's current and proposed market areas,
- tenant defaults and bankruptcies, and
- general accounting principles, policies and guidelines applicable to REITs.
In addition, the actual timing of development, construction, and leasing on the
projects that the Company believes it may acquire in the future under the Berg
land holdings option agreement is unknown presently, and reliance should not be
placed on the estimates concerning these projects set forth under the caption,
"Current Properties Subject to Our Acquisition Agreement with the Berg Group,"
above. These risks and uncertainties, together with the other risks described
from time to time in the Company's reports and other documents filed with the
Securities and Exchange Commission, should be considered in evaluating
forward-looking statements and undue reliance should not be placed on such
statements.
- 18 -
ITEM 3
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not generally hold market risk sensitive instruments for trading purposes.
We use fixed and variable rate debt to finance our operations. Our exposure to
market risk for changes in interest rates relates primarily to our current and
future debt obligations. We are vulnerable to significant fluctuations of
interest rates on our floating rate debt, and pricing on our future debt. We
manage our market risk by monitoring interest rates where we try to recognize
the unpredictability of the financial markets and seek to reduce potentially
adverse effect on the results of our operations. This takes frequent evaluation
of available lending rates and examination of opportunities to reduce interest
expense through new sources of debt financing. By attempting to match
anticipated cash inflow from our operating and financing activities with
anticipated cash outflow to fund debt payments, distributions to shareholders
and O.P. Unit holders, capital expenditures and other cash requirements, we
expect to minimize the effects on our future earnings and cash flow where
interest rate risk is most sensitive. Several factors affecting the interest
rate risk include governmental monetary and tax policies, domestic and
international economics and other factors that are beyond our control.
The primary market risk we face is the risk of interest rate fluctuations. The
Berg Group line of credit, which is tied to a LIBOR based interest rate, was
approximately $85.1 million, or 35%, of the total $243.3 million of outstanding
debt as of March 31, 2002. As a result, we pay lower rates of interest in
periods of decreasing interest rates and higher rates of interest in periods of
increasing interest rates. At March 31, 2002, we had no interest rate caps or
interest rate swap contracts.
================================================================================
PART II - OTHER INFORMATION
ITEM 6
EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
None
b. Reports on Form 8-K
None
================================================================================
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereto duly authorized.
MISSION WEST PROPERTIES, INC.
(Registrant)
Date: May 14, 2002 By: /s/ Wayne N. Pham
----------------------------------------
Wayne N. Pham
Vice President of Finance and Controller
(Principal Accounting Officer and Duly
Authorized Officer)
- 19 -