<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 May 31, 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 May 31,
1995 was 1,368,721.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Quarterly Financial Statements
- ----------------------------------------
Following are three-month second quarter and six-month year-to-date (as
applicable) fiscal year 1995 consolidated financial statements (unaudited) and
accompanying notes (unaudited).
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<PAGE>
MISSION WEST PROPERTIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
May 31 November 30
ASSETS 1995 1994
------ ------------ -----------
<S> <C> <C>
Cash and cash equivalents (Note 2) $ 747,000 $ 2,192,000
Short-term investments (Note 3) 3,398,000 2,719,000
Real estate investments:
Rental Properties, less accumulated depreciation of $8,379,000 in
1995 and $7,702,000 in 1994 ($46,109,000 pledged in 1995 and
$47,428,000 in 1994) 47,590,000 48,887,000
Unimproved land ($461,000 pledged in 1995 and 1994) 725,000 725,000
----------- -----------
48,315,000 49,612,000
Less allowance for estimated losses (4,413,000) (4,413,000)
----------- -----------
Net real estate investments 43,902,000 45,199,000
Other assets, less allowances of $1,705,000 in 1995 and $2,694,000
in 1994 and accumulated depreciation of $308,000 in 1995 and
$304,000 in 1994 926,000 853,000
----------- -----------
$48,973,000 $50,963,000
=========== ===========
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S>
Notes payable (Note 4) <C> <C>
Accounts payable and accrued expenses $33,250,000 $34,382,000
1,586,000 1,861,000
----------- -----------
Total liabilities 34,836,000 36,243,000
----------- -----------
Commitments and contingencies (Note 5)
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 (5,309,000) (5,361,000)
----------- -----------
Total shareholders' equity 14,137,000 14,720,000
----------- -----------
$48,973,000 $50,963,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
MISSION WEST PROPERTIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
May 31 May 31 May 31 May 31
1995 1994 1995 1994
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Rental revenues from real estate $1,758,000 $1,571,000 $3,519,000 $3,266,000
Sales of real estate 37,000 68,000 97,000 1,628,000
Other, including interest 101,000 91,000 186,000 185,000
---------- ---------- ---------- ----------
1,896,000 1,730,000 3,802,000 5,079,000
---------- ---------- ---------- ----------
EXPENSES:
Operating expenses of real estate 374,000 526,000 775,000 1,104,000
Depreciation of real estate 347,000 380,000 677,000 753,000
Costs of real estate sold 4,000 8,000 10,000 180,000
General and administrative 228,000 256,000 471,000 558,000
Interest 903,000 744,000 1,787,000 1,443,000
---------- ---------- ---------- ----------
1,856,000 1,914,000 3,720,000 4,038,000
---------- ---------- ---------- ----------
Income (loss) before income taxes and
cumulative effect of change in accounting 40,000 (184,000) 82,000 1,041,000
Provision for (benefit from) income taxes 20,000 (74,000) 30,000 418,000
---------- ---------- ---------- ----------
Income (loss) before cumulative effect of
change in accounting 20,000 (110,000) 52,000 623,000
Cumulative effect on prior years of change
in accounting for income taxes (Note 6) - - - 440,000
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 20,000 $ (110,000) $ 52,000 $1,063,000
========== ========== ========== ==========
PER SHARE (Note 7):
Income (loss) before cumulative effect of
change in accounting $ 0.01 $ (0.07) $ 0.04 $ 0.42
Cumulative effect on prior years of change
in accounting for income taxes - - - 0.30
------ -------- ------ ------
Net income (loss) $ 0.01 $ (0.07) $ 0.04 $ 0.72
====== ======== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
MISSION WEST PROPERTIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------
May 31 May 31
1995 1994
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 52,000 $1,063,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 681,000 756,000
Cumulative effect of change in accounting for income taxes - (440,000)
Changes in assets and liabilities:
Increase in net real estate investments (15,000) (427,000)
Decrease (increase) in other assets (77,000) 460,000
Decrease in accounts payable and accrued expenses (275,000) (219,000)
Decrease in deferred income taxes - (277,000)
----------- ----------
Net cash provided by operating activities 366,000 916,000
----------- ----------
Cash flows from investing activities:
Net purchases of short-term investments (679,000) (626,000)
----------- ----------
Net cash used for investing activities (679,000) (626,000)
----------- ----------
Cash flows from financing activities:
Repayments on notes payable (1,132,000) (1,027,000)
----------- ----------
Net cash used for financing activities (1,132,000) (1,027,000)
----------- ----------
Net decrease in cash and cash equivalents (1,445,000) (737,000)
Cash and cash equivalents at beginning of period 2,192,000 806,000
----------- ----------
Cash and cash equivalents at end of period (Note 2) $ 747,000 $ 69,000
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
MISSION WEST PROPERTIES
Notes to Consolidated Financial Statements (Unaudited)
May 31, 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 six months ended May
31 for interest was $1,786,000 in 1995 and $1,473,000 in 1994. Cash paid for
income taxes during the six-month periods was $67,000 in 1995 and $331,000 in
1994.
During the first quarter of fiscal 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. Adoption of SFAS No. 115 had no effect on the Company's
financial position or results of operations.
NOTE 4 -- NOTES PAYABLE
Notes payable comprise the following:
<TABLE>
<CAPTION>
May 31 November 30
1995 1994
----------- -----------
<S> <C> <C>
Secured notes payable to banks, due 1996 through 1998, interest rates $31,700,000 $32,532,000
ranging from 10% (prime plus 1%) to 11% (prime plus 2%), principal
and interest due in monthly installments of $358,000, balance of
principal due at maturity
Unsecured note payable to bank, due 1996, interest rate of 10.5% (prime - 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 1,550,000 1,600,000
----------- -----------
$33,250,000 $34,382,000
=========== ===========
</TABLE>
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<PAGE>
Notes to Consolidated Financial Statements, continued
- -----------------------------------------------------
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
A civil claim for an unspecified amount of damages was filed on or about May 16,
1995 by residents in Kennedy Heights and ceratin nearby residential
developments, all of which are located in Houston, Texas. The suit was filed in
the 281st District Court of Harris County in Houston, Texas. The Company and 50
other parties are named as defendants. The plaintiffs' petition seeks an
unspecified amount of money damages for past, present, and future injuries to
plaintiffs' health, emotional distress, past and future medical fees and
expenses, reduction in property values, the cost of remediation of property,
attorney's fees, exemplary damages, and pre- and post-judgment interest.
Plaintiffs' petition alleges that the Kennedy Heights residential development
was constructed in an area where crude oil pits were formerly operated by
Chevron USA, Inc. or its subsidiaries and that the residents of Kennedy Heights
and nearby residential developments have been affected by chemicals arising from
the former crude oil pits. The plaintiffs' petition alleges that the Company is
liable as a "developer" of Kennedy Heights or other residential developments.
However, the Company believes, at this time, that its only involvement was with
the Kennedy Heights residential development and was in the context of certain
lending activities. The matter is currently in its pre-discovery stage; the
Company intends to defend its position vigorously and pursue any and all
appropriate defenses and remedies.
The Company is also party to other legal action arising out of its ordinary
course of business. In the opinion of management, resolution of these other
legal matters will not have a material adverse impact on the Company.
NOTE 6 -- 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 7 -- NET INCOME (LOSS) PER SHARE
Net income (loss) per share, and the cumulative effect on prior years of change
in accounting for income taxes per share, is based on 1,368,721 and 1,468,721
shares for the quarter ended May 31, and 1,417,622 and 1,468,721 for the six
months ended May 31, the weighted average number of shares outstanding during
the periods presented for 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:
Second Quarter Fiscal 1995 Compared to Second Quarter Fiscal 1994
- -----------------------------------------------------------------
Compared to the second quarter of fiscal 1994, the Company's rental revenues
from real estate increased $187,000, or 12 percent, in 1995; the related
operating expenses of real estate decreased $152,000, or 29 percent. These
improvements resulted from a decrease in current year property taxes and refunds
of prior year property taxes (successful assessment appeals), a decrease in 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), offset by an increase in repairs
expense.
Interest expense increased $159,000 between the second quarter of fiscal 1994
and the second quarter of fiscal 1995 as a result of increases in prime lending
rates (interest on most of the Company's notes is variable), offset by a
$1,661,000 reduction in outstanding notes payable. Prime rates averaged 6.54
percent during the second quarter of fiscal 1994 and remained at nine percent
during the second quarter of fiscal 1995.
First Six Months Fiscal 1995 Compared to First Six Months Fiscal 1994
- ---------------------------------------------------------------------
During the six months ended May 31, 1995, compared to 1994, rental revenues from
real estate increased $253,000, or eight percent, and the related operating
expenses of real estate decreased $329,000, or 30 percent, due to the
improvement factors identified in the second quarter results of operations
discussion above. Additionally, year-to-date repair expenditures in fiscal 1995
have been reduced from those of fiscal 1994.
For the six-month periods, sales of real estate decreased $1,531,000. 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 was $344,000 higher in 1995 than 1994, the result of factors
previously detailed in the second quarter results of operations discussion
above.
As discussed in Note 6 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 six months ended May 31, 1994.
CHANGES IN FINANCIAL POSITION:
May 31, 1995 Compared to November 30, 1994
- ------------------------------------------
During the first six months of fiscal 1995, cash and investments decreased
$766,000. These funds were used primarily for debt service ($1,132,000 in
principal amortization and paydowns) and were offset by cash inflow from
operations.
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.
Accounts payable and accrued expenses decreased $275,000, or 15 percent, during
the six months primarily as a result of the timing of payments for property
taxes, legal fees, and payroll.
-8-
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations, continued
- ---------------------
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, 89 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.
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.
During the past 15 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 had 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
- --------------------------
During the quarter ended May 31, 1995, the Company was party to certain lawsuits
and legal claims. The most significant of these is a civil claim for an
unspecified amount of damages that was filed on or about May 16, 1995 by
residents in Kennedy Heights and certain nearby residential developments, all of
which are located in Houston Texas. The suit was filed in the 281st District
Court of Harris County in Houston, Texas. The Company and 50 other parties are
named as defendants. This claim relates to environmental concerns and is more
fully described in Note 5 to the consolidated financial statements (page 7).
The Company is also party to other legal proceedings arising out of its ordinary
course of business. In the opinion of management, resolution of these other
legal matters will not have a material adverse impact on the Company.
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<PAGE>
Item 2. Changes in Securities
- ------------------------------
No changes in the rights of the Company's securities occurred during the quarter
ended May 31, 1995.
Item 3. Defaults Upon Senior Securities
- ----------------------------------------
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
The Annual Meeting of Shareholders was held March 3, 1995, at which time the
shareholders reelected all seven incumbent directors to serve for the subsequent
year.
Item 5. Other Information
- --------------------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits
--------
(27) Financial Data Schedule
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed during the quarter ended May 31,
1995.
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)
July 7, 1995
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AS OF MAY 31, 1995, AND THE RELATED
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS THEN ENDED AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH DOCUMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> MAY-31-1995
<CASH> 3,499
<SECURITIES> 0
<RECEIVABLES> 329
<ALLOWANCES> 166
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 322
<DEPRECIATION> 308
<TOTAL-ASSETS> 48,973
<CURRENT-LIABILITIES> 0
<BONDS> 33,250
<COMMON> 19,446
0
0
<OTHER-SE> (5,309)
<TOTAL-LIABILITY-AND-EQUITY> 48,973
<SALES> 0
<TOTAL-REVENUES> 3,802
<CGS> 0
<TOTAL-COSTS> 1,452
<OTHER-EXPENSES> 481
<LOSS-PROVISION> 72
<INTEREST-EXPENSE> 1,787
<INCOME-PRETAX> 82
<INCOME-TAX> 30
<INCOME-CONTINUING> 52
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 52
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
