<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 August 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 August
31, 1995 was 1,368,721.
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Quarterly Financial Statements
- ----------------------------------------
Following are three-month third quarter and nine-month year-to-date (as
applicable) fiscal year 1995 consolidated financial statements (unaudited) and
accompanying notes (unaudited).
- 2 -
<PAGE>
MISSION WEST PROPERTIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
August 31 November 30
ASSETS 1995 1994
------ ------------ -----------
<S> <C> <C>
Cash and cash equivalents (Note 2) $ 1,466,000 $ 2,192,000
Short-term investments (Note 3) 2,154,000 2,719,000
Real estate investments:
Rental Properties, less accumulated depreciation of $8,713,000 in
1995 and $7,702,000 in 1994 ($45,972,000 pledged in 1995 and
$47,428,000 in 1994) 47,470,000 48,887,000
Unimproved land ($461,000 pledged in 1995 and 1994) 725,000 725,000
----------- -----------
48,195,000 49,612,000
Less allowance for estimated losses (4,413,000) (4,413,000)
----------- -----------
Net real estate investments 43,782,000 45,199,000
Other assets, less allowances of $1,547,000 in 1995 and $2,694,000
in 1994 and accumulated depreciation of $310,000 in 1995 and
$304,000 in 1994 1,135,000 853,000
----------- -----------
$48,537,000 $50,963,000
=========== ===========
</TABLE>
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
Notes payable (Note 4) $32,977,000 $34,382,000
Accounts payable and accrued expenses 1,531,000 1,861,000
----------- -----------
Total liabilities 34,508,000 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 (5,417,000) (5,361,000)
----------- -----------
Total shareholders' equity 14,029,000 14,720,000
----------- -----------
$48,537,000 $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 Nine Months Ended
------------------------- ------------------------
August 31 August 31 August 31 August 31
1995 1994 1995 1994
----------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Rental revenues from real estate $1,801,000 $1,550,000 $5,320,000 $4,816,000
Sales of real estate 28,000 63,000 125,000 1,691,000
Other, including interest 96,000 204,000 282,000 389,000
---------- ---------- ---------- ----------
1,925,000 1,817,000 5,727,000 6,896,000
---------- ---------- ---------- ----------
EXPENSES:
Operating expenses of real estate 659,000 567,000 1,435,000 1,672,000
Depreciation of real estate 334,000 339,000 1,011,000 1,091,000
Costs of real estate sold 3,000 7,000 13,000 188,000
General and administrative 231,000 312,000 701,000 870,000
Interest 876,000 807,000 2,663,000 2,249,000
---------- ---------- ---------- ----------
2,103,000 2,032,000 5,823,000 6,070,000
---------- ---------- ---------- ----------
Income (loss) before income taxes and
cumulative effect of change in accounting (178,000) (215,000) (96,000) 826,000
Provision for (benefit from) income taxes (70,000) (54,000) (40,000) 364,000
---------- ---------- ---------- ----------
Income (loss) before cumulative effect of
change in accounting (108,000) (161,000) (56,000) 462,000
Cumulative effect on prior years of change
in accounting for income taxes (Note 6) - - - 440,000
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (108,000) $ (161,000) $ (56,000) $ 902,000
========== ========== ========== ==========
PER SHARE (Note 7):
Income (loss) before cumulative effect of
change in accounting $ (0.08) $ (0.11) $ (0.04) $ 0.31
Cumulative effect on prior years of change
in accounting for income taxes - - - 0.30
------- ------- ------- ------
Net income (loss) $ (0.08) $ (0.11) $ (0.04) $ 0.61
======= ======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
- 4-
<PAGE>
MISSION WEST PROPERTIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
August 31 August 31
1995 1994
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (56,000) $ 902,000
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation 1,016,000 1,095,000
Cumulative effect of change in accounting for income taxes - (440,000)
Compensation expense of stock options - 82,000
Changes in assets and liabilities:
Increase in net real estate investments (229,000) (448,000)
Decrease (increase) in other assets (287,000) 557,000
Increase (decrease) in accounts payable and accrued expenses (330,000) 97,000
Decrease in deferred income taxes - (342,000)
----------- -----------
Net cash provided by operating activities 114,000 1,503,000
----------- -----------
Cash flows from investing activities:
Net redemptions (purchases) of short-term investments 565,000 (717,000)
----------- -----------
Net cash provided by (used for) investing activities 565,000 (717,000)
----------- -----------
Cash flows from financing activities:
Repayments on notes payable (1,405,000) (1,291,000)
----------- -----------
Net cash used for financing activities (1,405,000) (1,291,000)
----------- -----------
Net decrease in cash and cash equivalents (726,000) (505,000)
Cash and cash equivalents at beginning of period 2,192,000 806,000
----------- -----------
Cash and cash equivalents at end of period (Note 2) $ 1,466,000 $ 301,000
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
- 5 -
<PAGE>
MISSION WEST PROPERTIES
Notes to Consolidated Financial Statements (Unaudited)
August 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 nine months ended
August 31 for interest was $2,656,000 in 1995 and $2,272,000 in 1994. Cash paid
for income taxes during the nine-month periods was $236,000 in 1995 and $481,000
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>
August 31 November 30
1995 1994
----------- -----------
<S> <C> <C>
Secured notes payable to banks, due 1996 through 1998, interest rates $31,452,000 $32,532,000
ranging from 9.75% (prime plus 1%) to 10.75% (prime plus 2%), principal
and interest due in monthly installments of $348,000, balance of
principal due at maturity
Unsecured note payable to bank, due 1996, interest rate of 10.25% (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 1,525,000 1,600,000
----------- -----------
$32,977,000 $34,382,000
=========== ===========
</TABLE>
- 6 -
<PAGE>
Notes to Consolidated Financial Statements, continued
- -----------------------------------------------------
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
As disclosed in the second quarter fiscal 1995 Form 10-Q, the Company has been
named as one of 50 defendants in a civil claim for an unspecified amount of
damages by residents in Kennedy Heights and certain nearby residential
developments, all of which are located in Houston, Texas. No significant
developments have occurred with respect to this claim during the third quarter.
The matter is currently in its discovery stage; the Company intends to defend
its position vigorously and pursue any and all appropriate defenses and
remedies.
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 quarters ended August 31, and 1,401,203 and 1,468,721 for the
nine months ended August 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 either antidilutive or not significant; 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:
Third Quarter Fiscal 1995 Compared to Third Quarter Fiscal 1994
- ---------------------------------------------------------------
Compared to the third quarter of fiscal 1994, the Company's rental revenues from
real estate increased $251,000, or 16 percent, in 1995; the related operating
expenses of real estate increased $92,000, or 16 percent. The increase in
rental revenue resulted from 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 charges in fiscal 1995). The increase in operating
expenses resulted from an increase in building repairs/reconditioning and
property taxes (Arizona), offset by decreases in bad debt expenses and lease
commission amortization (additional effect of 1994 adjustment) and refunds of
prior year property taxes (successful assessment appeals).
Other revenue decreased $108,000 during the third quarter of fiscal 1995
compared to the third quarter of fiscal 1994. This reduction resulted from
nonrecurring excess leasehold improvement reimbursements that were recorded in
fiscal 1994.
During the third quarter fiscal 1995 compared to fiscal 1994, general and
administrative expenses decreased $81,000 due to nonrecurring outside consultant
fees recorded in fiscal 1994. Interest expense increased $69,000 between
quarters as a result of increases in prime lending rates (interest on most of
the Company's notes is variable), offset by a $1,670,000 reduction in
outstanding notes payable. Prime rates averaged 8.83 percent during the third
quarter of fiscal 1995 compared to 7.33 percent during the third quarter of
fiscal 1994.
First Nine Months Fiscal 1995 Compared to First Nine Months Fiscal 1994
- -----------------------------------------------------------------------
During the nine months ended August 31, 1995, compared to 1994, rental revenues
from real estate increased $504,000, or ten percent, and the related operating
expenses of real estate decreased $237,000, or 14 percent. These improvements
were the result of 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), a reduction in bad debt expenses,
and refunds of prior year property taxes. Offsetting these improvements was an
increase in repair/reconditioning expense.
For the nine-month periods, sales of real estate decreased $1,566,000. 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 is $414,000 higher and general and administrative expenses are
$169,000 lower in 1995 than 1994, the result of factors previously detailed in
the third 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 nine months ended August 31, 1994.
CHANGES IN FINANCIAL POSITION:
August 31, 1995 Compared to November 30, 1994
- ---------------------------------------------
During the first nine months of fiscal 1995, cash and investments decreased
$1,291,000. These funds were used primarily for debt service ($1,405,000 in
principal amortization and paydowns), tenant improvements, and income taxes.
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.
- 8 -
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
- --------------------------------------------------------------------------
Operations, continued
- ---------------------
LIQUIDITY AND CAPITAL RESOURCES:
The Company's rental properties continue to generate sufficient rental revenue
to cover real estate operating expenses and interest; they generate cash, after
normal debt service (interest and principal amortization), and contribute to
overhead, lease commission, and tenant improvement expenditures The rental
properties currently are, in aggregate, 90 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 tenant 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.
The Company's notes payable continue to be amortized monthly. During the past
18 months, as prime lending rates have increased from six percent to 8.75
percent, the Company has experienced increased interest expense (interest on
most of the Company's notes payable is variable). Management is in the process
of restructuring certain of the Company's notes payable; this restructure may
result in an additional principal reduction of as much as $1 million during the
fourth quarter of fiscal 1995. In exchange for the principal reduction, the
Company is anticipating a reduced interest rate on the notes and an extension of
maturities, among other terms.
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 economic trends in
recent years 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
- --------------------------
As disclosed in the second quarter fiscal 1995 Form 10-Q, the Company has been
named as one of 50 defendants in a civil claim for an unspecified amount of
damages by residents in Kennedy Heights and certain nearby residential
developments, all of which are located in Houston, Texas. No significant
developments have occurred with respect to this claim during the third quarter.
The matter is currently in its discovery stage; the Company intends to defend
its position vigorously and pursue any and all appropriate defenses and
remedies.
During the quarter ended August 31, 1995, the Company was also party to other
lawsuits and legal claims 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.
- 9 -
<PAGE>
Item 2. Changes in Securities
- ------------------------------
No changes in the rights of the Company's securities occurred during the quarter
ended August 31, 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 the Company's shareholders during the
quarter ended August 31, 1995.
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 August 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)
September 28, 1995
- 10 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets as of August 31, 1995, and the related consolidated
statements of operations for the nine months then ended and is qualified in its
entirety by reference to such documents.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> AUG-31-1995
<CASH> 2,970
<SECURITIES> 0
<RECEIVABLES> 346
<ALLOWANCES> 193
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 322
<DEPRECIATION> 310
<TOTAL-ASSETS> 48,537
<CURRENT-LIABILITIES> 0
<BONDS> 32,977
<COMMON> 19,446
0
0
<OTHER-SE> (5,417)
<TOTAL-LIABILITY-AND-EQUITY> 48,537
<SALES> 0
<TOTAL-REVENUES> 5,727
<CGS> 0
<TOTAL-COSTS> 2,446
<OTHER-EXPENSES> 714
<LOSS-PROVISION> 113
<INTEREST-EXPENSE> 2,663
<INCOME-PRETAX> (96)
<INCOME-TAX> (40)
<INCOME-CONTINUING> (56)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (56)
<EPS-PRIMARY> (.04)
<EPS-DILUTED> (.04)
</TABLE>
