<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
------------
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended February 28, 1995 Commission File Number 1-8383
MISSION WEST PROPERTIES
Incorporated in California IRS Employer Identification Number: 95-2635431
Principal Executive Offices: Telephone: (619) 450-3135
6815 Flanders Drive, Suite 250
San Diego, California 92121-3914
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 [_]
The number of shares of the Registrant's common stock outstanding as of
February 28, 1995 was 1,368,721.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Quarterly Financial Statements
- ----------------------------------------
Following are the first quarter fiscal year 1995 consolidated financial
statements (unaudited) and accompanying notes (unaudited).
2
<PAGE>
MISSION WEST PROPERTIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
February 28 November 30
ASSETS 1995 1994
------ ------------ -----------
<S> <C> <C>
Cash and cash equivalents (Note 2) $ 2,406,000 $ 2,192,000
Short-term investments (Note 3) 2,304,000 2,719,000
Real estate investments:
Rental Properties, less accumulated depreciation of $8,032,000
in 1995 and $7,702,000 in 1994 ($46,481,000 pledged in
1995 and $47,428,000 in 1994) 47,926,000 48,887,000
Unimproved land ($461,000 pledged in 1995 and 1994) 725,000 725,000
----------- -----------
48,651,000 49,612,000
Less allowance for estimated losses (4,413,000) (4,413,000)
----------- -----------
Net real estate investments 44,238,000 45,199,000
Other assets, less allowances of $1,873,000 in 1995 and
$2,694,000 in 1994 and accumulated depreciation of $306,000
in 1995 and $304,000 in 1994 894,000 853,000
----------- -----------
$49,842,000 $50,963,000
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Notes payable (Note 4) $34,115,000 $34,382,000
Accounts payable and accrued expenses 1,610,000 1,861,000
----------- -----------
Total liabilities 35,725,000 36,243,000
----------- -----------
Shareholders' equity:
Common stock, no par value, 10,000,000 shares authorized;
1,368,721 shares issued and outstanding (1,468,721 in
1994) (Note 2) 19,446,000 20,081,000
Accumulated deficit (5,329,000) (5,361,000)
----------- -----------
Total shareholders' equity 14,117,000 14,720,000
----------- -----------
$49,842,000 $50,963,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
MISSION WEST PROPERTIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
February 28 February 28
1995 1994
------------------ -------------
<S> <C> <C>
REVENUES:
Rental revenues from real estate $1,762,000 $1,695,000
Sales of real estate 60,000 1,560,000
Other, including interest 84,000 94,000
---------- ----------
1,906,000 3,349,000
---------- ----------
EXPENSES:
Operating expenses of real estate 401,000 578,000
Depreciation of real estate 330,000 373,000
Costs of real estate sold 6,000 172,000
General and administrative 243,000 303,000
Interest 884,000 698,000
---------- ----------
1,864,000 2,124,000
---------- ----------
Income before income taxes and cumulative effect of change in
accounting 42,000 1,225,000
Provision for income taxes 10,000 492,000
---------- ----------
Income before cumulative effect of change in accounting 32,000 733,000
Cumulative effect on prior years of change in accounting for
income taxes (Note 5) - 440,000
---------- ----------
NET INCOME $ 32,000 $1,173,000
========== ==========
PER SHARE (Note 6):
Income before cumulative effect of change in accounting $0.02 $0.50
Cumulative effect on prior years of change in accounting for
income taxes - 0.30
----- -----
Net income $0.02 $0.80
===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
MISSION WEST PROPERTIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
February 28 February 28
1995 1994
------------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 32,000 $1,173,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 332,000 375,000
Cumulative effect of change in accounting for income taxes - (440,000)
Changes in assets and liabilities:
Increase in net real estate investments (4,000) (225,000)
Decrease (increase) in other assets (43,000) 231,000
Increase (decrease) in accounts payable and accrued
expenses (251,000) 389,000
Decrease in deferred income taxes - (212,000)
---------- ----------
Net cash provided by operating activities 66,000 1,291,000
---------- ----------
Cash flows from investing activities:
Net redemptions of short-term investments 415,000 318,000
---------- ----------
Net cash provided by investing activities 415,000 318,000
---------- ----------
Cash flows from financing activities:
Repayments on notes payable (267,000) (254,000)
---------- ----------
Net cash used for financing activities (267,000) (254,000)
---------- ----------
Net increase in cash and cash equivalents 214,000 1,355,000
Cash and cash equivalents at beginning of quarter 2,192,000 806,000
---------- ----------
Cash and cash equivalents at end of quarter (Note 2) $2,406,000 $2,161,000
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
MISSION WEST PROPERTIES
Notes to Consolidated Financial Statements (Unaudited)
February 28, 1995
NOTE 1 -- BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and, therefore, do not
include all the information and footnotes required by generally accepted
accounting principles for complete financial statements.
The operating results for the interim period are not necessarily indicative of
the results to be expected for a full fiscal year. In the opinion of
Management, the information furnished herein reflects all adjustments,
consisting only of normal recurring accruals, that are necessary for a fair
presentation of results for the unaudited interim period.
NOTE 2 -- CASH FLOW INFORMATION
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand, money market funds, certificates of deposit, and obligations of the U.S.
Treasury with an original maturity of 90 days or less. Short-term investments
consist of certificates of deposit and obligations of the U.S. Treasury with an
original maturity exceeding 90 days. Cash paid during the quarter for interest
was $878,000 in 1995 and $724,000 in 1994. Cash paid during the quarter for
income taxes was $40,000 in 1995 (none in 1994).
During the quarter ended February 28, 1995, in a noncash transaction, the
Company reacquired and retired 100,000 shares of its common stock and
transferred an equal value of real estate assets, consisting of certain tenant
improvements, to an affiliated tenant.
NOTE 3 -- SHORT-TERM INVESTMENTS
Effective December 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities," which requires that investments be classified as
either held-to-maturity, trading, or available-for-sale. Held-to-maturity
investments are carried at amortized costs; unrealized gains and losses are
included in earnings for trading investments and are recorded directly to
shareholders' equity for available-for-sale investments. Management determines
the classification of investments at the time of purchase; the Company's short-
term investments are classified as held-to-maturity and are carried at their
amortized costs as of February 28, 1995. Adoption of SFAS No. 115 had no effect
on the Company's financial position or results of operations.
NOTE 4 -- NOTES PAYABLE
<TABLE>
<CAPTION>
February 28 November 30
1995 1994
----------- -----------
<S> <C> <C>
Notes payable comprise the following:
Secured notes payable to banks, due 1996 through 1998, interest $32,290,000 $32,532,000
rates ranging from 10% (prime plus 1%) to 11% (prime plus 2%),
principal and interest due in monthly installments of $366,000,
balance of principal due at maturity
Unsecured note payable to bank, due 1996, interest rate of 10.5% (prime 250,000 250,000
plus 1.5%), interest only due monthly, principal due at maturity
Secured note payable to insurance company, due 1997, interest rate
of 10%, principal and interest due in monthly installments of $21,000 1,575,000 1,600,000
----------- -----------
$34,115,000 $34,382,000
=========== ===========
</TABLE>
6
<PAGE>
Notes to Consolidated Financial Statements, continued
- ------------------------------------------------------
NOTE 5 -- INCOME TAXES
The Company adopted SFAS No. 109, "Accounting for Income Taxes," on a
prospective basis, effective December 1, 1993, the beginning of its fiscal year.
SFAS No. 109 required a change from the deferral method to the asset and
liability method of accounting for income taxes. The asset and liability
approach requires recognition of deferred tax assets and liabilities for
"temporary differences" between the financial statement carrying amounts and the
tax basis of assets and liabilities, at currently enacted tax rates (the Company
had no significant permanent differences). The cumulative effect of the change
in the method of accounting, which resulted in a $440,000 increase in net
income, was reported in the consolidated statements of operations for the first
quarter of fiscal 1994.
NOTE 6 -- NET INCOME PER SHARE
Net income per share, and the cumulative effect on prior years of change in
accounting for income taxes per share, is based on 1,467,610 and 1,468,721
shares, the weighted average number of shares outstanding during the first
quarters of fiscal years 1995 and 1994, respectively. The effect of stock
options is not significant and such effect is not reflected in the per share
computations.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
- ------- -----------------------------------------------------------------------
of Operations
-------------
RESULTS OF OPERATIONS:
First Quarter Fiscal 1995 Compared to First Quarter Fiscal 1994
- ---------------------------------------------------------------
Compared to the first quarter of fiscal 1994, the Company's rental revenues from
real estate increased $67,000, or four percent, in 1995; the related operating
expenses of real estate decreased $177,000, or 31 percent. These improvements
resulted from a decrease in property taxes (successful assessment appeals), a
decrease in repairs and bad debt expenses, and the effects of the $5,200,000 in
adjustments recorded during the fourth quarter of fiscal 1994 to real estate
investments and other assets (reduces amortized expenses in fiscal 1995).
During the first quarter of fiscal 1994, the Company recorded $1,500,000 in
sales of real estate as a result of settling litigation related to property sold
by the Company in 1986. The related costs of real estate sold consists of legal
costs and distributions in accordance with the Company's Management Incentive
Plan.
Interest expense increased $186,000 between years as a result of increases in
prime lending rates (interest on most of the Company's notes is variable),
offset by a $1,569,000 reduction in outstanding notes payable. Prime rates
remained at six percent during the first quarter of fiscal 1994 and averaged
8.67 percent during the first quarter of fiscal 1995.
As discussed in Note 5 to the Consolidated Financial Statements, the Company
adopted SFAS No. 109 effective December 1, 1993. This required change in
accounting for income taxes resulted in a $440,000 cumulative effect, directly
increasing net income for the first quarter of fiscal 1994.
CHANGES IN FINANCIAL POSITION:
February 28, 1995 Compared to November 30, 1994
- -----------------------------------------------
During the first quarter of fiscal 1995, cash and cash equivalents increased
$214,000. This increase resulted primarily from redemptions of short-term
investments, offset by disbursements for scheduled debt service and normal
operations.
Accounts payable and accrued expenses decreased $251,000, or 13 percent, during
the quarter primarily as a result of the timing of payments for property taxes,
legal fees, and payroll.
During the first quarter of fiscal 1995, the Company reacquired 100,000 shares
of its common stock from its majority owner; the shares were retired. The
Company transferred real estate assets, consisting of certain tenant
improvements, to an affiliated tenant in consideration for reacquiring the
shares.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's cash and investment position has remained relatively stable; its
notes payable continue to be amortized monthly. The Company's rental properties
continue to generate sufficient rental revenue to cover real estate operating
expenses and interest and they generate cash, after normal debt service
(interest and principal amortization). The rental properties currently are, in
aggregate, 85 percent leased. Historically, the Company has experienced
significant net income and cash increases in the years properties were sold and
has experienced losses and cash decreases in the years where no property sales
occurred. The occurrences of major property sales depends on several factors,
including prevailing market conditions and available financing for potential
purchasers.
In November 1994, the Company announced it had entered into an agreement to sell
all its rental properties. In January 1995, the Company announced it had signed
the Definitive Agreement for this sale, subject to completion of standard due
diligence, satisfaction of regulatory requirements, and approval by the
Company's shareholders. This proposed sale transaction was terminated effective
February 3, 1995. Since the termination, management has concentrated on
operating the Company, has considered its future strategic course, and intends
to pursue all viable growth or other opportunities.
8
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations, continued
---------------------
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED:
The Company currently has no projects under development and none planned. The
only capital expenditures anticipated are interior improvements to existing
buildings, which may be required as new tenants are obtained or existing leases
extended. The need for additional capital financing in the future will depend
primarily on the number and size of new projects undertaken, if any. As a
result of the transfer of real estate assets to an affiliate during the quarter
(and reacquisition of 100,000 shares), the Company anticipates a restructure of
the related note payable during the second quarter of fiscal 1995. This
restructure may result in an additional principal reduction between $350,000 and
$500,000.
During the past 12 months, as prime lending rates have increased from six
percent to nine percent, the Company has experienced increased interest expense
(interest on most of the Company's notes payable is variable). Although the
rental property portfolio currently generates enough cash to cover debt service,
including the increased interest, it may be unable to do so if rates continue to
increase.
A majority of the leases between the Company and its tenants have terms from one
to five years. Management devotes a significant amount of time to renewing
leases with existing tenants and replacing tenants that vacate at lease maturity
(or sooner in the case of tenant business failures). Because recent economic
trends have placed downward pressure on market rental rates, management believes
leases may continue to be renewed or replaced at lower rental rates than those
of currently existing leases.
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
- --------------------------
The Company was not involved in any material legal proceedings during the
quarter ended February 28, 1995.
Item 2. Changes in Securities
- ------------------------------
No changes in the rights of the Company's securities occurred during the quarter
ended February 28, 1995.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
No matters were submitted to a vote of security holders during the quarter ended
February 28, 1995. Subsequent to quarter end, at the Annual Meeting of
Shareholders held March 3, 1995, the shareholders reelected all seven incumbent
directors to serve for the subsequent year.
9
<PAGE>
Item 5. Other Information
- --------------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
--------
(27) Financial Data Schedules
(b) Reports on Form 8-K
-------------------
January 9, 1995 -- Filed for Item 5, "Other Events." The Company
announced that it had signed a Definitive Agreement regarding the
sale of substantially all its real estate assets.
February 3, 1995 -- Filed for Item 5, "Other Events." The Company
announced that the proposed sale of substantially all its real
estate assets had been terminated.
February 14, 1995 -- Filed for Item 5, "Other Events." The Company
filed its Annual Report to Shareholders with the Securities and
Exchange Commission.
SIGNATURE
Pursuant to the requirements of section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Quarterly Report to be signed
on its behalf by the undersigned, thereunto duly authorized.
MISSION WEST PROPERTIES
- -----------------------
Registrant
By: /s/ Katrina L. Thompson
-------------------------------------------------------
Katrina L. Thompson
Chief Financial Officer & Secretary
(Principal Financial and Accounting Officer)
April 14, 1995
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AS OF FEBRUARY 28, 1995, AND THE RELATED
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE QUARTER THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH DOCUMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> FEB-28-1995
<CASH> 4,072
<SECURITIES> 0
<RECEIVABLES> 293
<ALLOWANCES> 139
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 322
<DEPRECIATION> 306
<TOTAL-ASSETS> 49,842
<CURRENT-LIABILITIES> 0
<BONDS> 34,115
<COMMON> 19,446
0
0
<OTHER-SE> (5,329)
<TOTAL-LIABILITY-AND-EQUITY> 49,842
<SALES> 0
<TOTAL-REVENUES> 1,906
<CGS> 0
<TOTAL-COSTS> 731
<OTHER-EXPENSES> 249
<LOSS-PROVISION> 35
<INTEREST-EXPENSE> 884
<INCOME-PRETAX> 42
<INCOME-TAX> 10
<INCOME-CONTINUING> 32
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 32
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
