<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 29, 1996 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
29, 1996 was 1,371,121.
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. QUARTERLY FINANCIAL STATEMENTS
Following are the first quarter fiscal year 1996 consolidated financial
statements (unaudited) and accompanying notes (unaudited).
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<PAGE>
MISSION WEST PROPERTIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
February 29 November 30
ASSETS 1996 1995
------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 1,133,000 $ 566,000
Short-term investments, held-to-maturity 2,214,000 2,528,000
Real estate investments:
Rental Properties, less accumulated depreciation of $9,396,000
in 1996 and $9,054,000 in 1995 ($45,403,000 pledged in
1996 and $45,729,000 in 1995) 46,813,000 47,136,000
Unimproved land ($461,000 pledged in 1996 and 1995) 461,000 461,000
------------ ------------
47,274,000 47,597,000
Less allowance for estimated losses (4,413,000) (4,413,000)
------------ ------------
Net real estate investments 42,861,000 43,184,000
Other assets, less allowances of $413,000 in 1996 and $541,000
in 1995 and accumulated depreciation of $314,000 in 1996 and
$312,000 in 1995 1,032,000 1,292,000
------------ ------------
$ 47,240,000 $ 47,570,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ 31,700,000 $ 31,967,000
Accounts payable and accrued expenses 1,310,000 1,466,000
------------ ------------
Total liabilities 33,010,000 33,433,000
------------ ------------
Shareholders' equity:
Common stock, no par value, 10,000,000 shares authorized;
1,371,121 shares issued and outstanding (1,368,721 in 1995) 19,456,000 19,446,000
Accumulated deficit (5,226,000) (5,309,000)
------------ ------------
Total shareholders' equity 14,230,000 14,137,000
------------ ------------
$ 47,240,000 $ 47,570,000
------------ ------------
------------ ------------
</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
--------------------------
February 29 February 28
1996 1995
----------- -----------
<S> <C> <C>
REVENUES:
Rental revenues from real estate $ 1,787,000 $ 1,762,000
Sales of real estate 35,000 60,000
Other, including interest 66,000 84,000
----------- -----------
1,888,000 1,906,000
------------ ------------
EXPENSES:
Operating expenses of real estate 371,000 407,000
Depreciation of real estate 342,000 330,000
General and administrative 265,000 243,000
Interest 771,000 884,000
------------ ------------
1,749,000 1,864,000
------------ ------------
Income before income taxes 139,000 42,000
Provision for income taxes 56,000 10,000
------------ ------------
NET INCOME $ 83,000 $ 32,000
------------ ------------
------------ ------------
NET INCOME PER SHARE $ 0.06 $ 0.02
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
MISSION WEST PROPERTIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------
February 29 February 28
1996 1995
----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 83,000 $ 32,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 344,000 332,000
Changes in assets and liabilities:
Increase in net real estate investments (19,000) (4,000)
Decrease (increase) in other assets 258,000 (43,000)
Decrease in accounts payable and accrued expenses (156,000) (251,000)
----------- -----------
Net cash provided by operating activities 510,000 66,000
----------- -----------
Cash flows from investing activities:
Net maturities of short-term investments 314,000 415,000
----------- -----------
Cash flows from financing activities:
Repayments on notes payable (267,000) (267,000)
Proceeds from stock options exercised 10,000 -
----------- -----------
Net cash used for financing activities (257,000) (267,000)
----------- -----------
Net increase in cash and cash equivalents 567,000 214,000
Cash and cash equivalents at beginning of quarter 566,000 2,192,000
----------- -----------
Cash and cash equivalents at end of quarter $ 1,133,000 $ 2,406,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
MISSION WEST PROPERTIES
Notes to Consolidated Financial Statements (Unaudited)
February 29, 1996
NOTE 1 -- BASIS OF PRESENTATION
The accompanying consolidated financial statements (unaudited) 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 preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at financial statement date, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
The operating results for the interim period are not necessarily indicative of
the results to be expected for a full fiscal year or for any future periods. 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 $738,000 in 1996 and $878,000 in 1995. Cash paid during the quarter for
income taxes was $40,000 in 1995 (none in 1996).
NOTE 3 -- NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable comprise the following: February 29 November 30
1996 1995
----------- -----------
<S> <C> <C>
Secured notes payable to banks, due April 1996 through 1998, interest $29,978,000 $30,218,000
rates ranging from 9% (fixed) to 9.75% (prime plus 1.5%), principal
and interest due in monthly installments of $306,000, balance of
principal due at maturity
Unsecured note payable to bank, due April 1996, interest rate of 9.75% 250,000 250,000
(prime 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 1,472,000 1,499,000
----------- -----------
$31,700,000 $31,967,000
----------- -----------
----------- -----------
</TABLE>
NOTE 4 -- NET INCOME PER SHARE
Net income per share is based on 1,368,747 and 1,467,610 shares, the weighted
average number of shares outstanding during the first quarters of fiscal years
1996 and 1995, respectively. The effect of stock options is not significant and
such effect is not reflected in the per share computations.
- 6 -
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
FIRST QUARTER FISCAL 1996 COMPARED TO FIRST QUARTER FISCAL 1995
Compared to the first quarter of fiscal 1995, the Company's rental revenues from
real estate remained relatively stable, increasing one percent, or $25,000, in
fiscal 1996. The related operating expenses of real estate decreased $36,000,
or nine percent, for a net operating improvement of $61,000 between years.
These improvements resulted from an increase in occupancy levels, a decrease in
bad debt expense, and a one-time property tax refund.
Sales of real estate decreased $25,000 between years due to the nature of this
item (declining balance of amounts receivable from a 1986 land sale).
General and administrative expenses increased $22,000 during the first quarter
of fiscal 1996 compared to fiscal 1995 as a result of legal fees incurred
(Kennedy Heights litigation; see Part II, Item 1, "Legal Proceedings" below) and
other individually insignificant items.
During the first quarter of fiscal 1996, interest expense decreased $113,000
compared to fiscal 1995 as a result of decreases in the Company's aggregate
borrowing rate (9.25 percent for the first quarter of fiscal 1996 compared to
10.25 percent for the first quarter of fiscal 1995), and a $2,415,000 reduction
in outstanding notes payable.
CHANGES IN FINANCIAL POSITION:
FEBRUARY 29, 1996 COMPARED TO NOVEMBER 30, 1995
During the first quarter of fiscal 1996, cash and investments increased
$253,000. This increase resulted primarily from a $118,000 bankruptcy
settlement receipt from a former tenant and cash inflow from operations. Normal
debt service (principal and interest payments) continued during the first
quarter of fiscal 1996.
Other assets decreased $260,000 during the first quarter of fiscal year 1996 due
to the bankruptcy settlement receipt and various other collections on accounts
receivable, and due to normal amortization of prepaid expenses. Accounts
payable and accrued expenses decreased $156,000, or 11 percent, during the
quarter primarily as a result of the timing of payments for property taxes,
legal and audit fees, and payroll.
LIQUIDITY AND CAPITAL RESOURCES:
Management believes that the Company continues to be in a stable and competitive
position with its current real estate portfolio. The portfolio continues to
generate sufficient rental revenue to cover real estate operating expenses and
interest expense and it is generating cash, after normal debt service (interest
and monthly principal amortization). The rental properties currently are, in
aggregate, 86 percent leased.
The Company has had no significant property sales since 1990; the occurrences of
major property sales depends on several factors, including prevailing market
conditions, available financing for potential purchasers, and the Company's
strategic plans. The Company continues to operate the portfolio and intends to
pursue all viable growth or other opportunities, which may include the sale or
redeployment of certain assets currently held in the real estate portfolio. The
Company has no projects under development and none specifically planned. Three
stabilized properties currently held have been reviewed as possible sale
candidates; acquisition candidates would be considered in light of property
sales or other available resources.
The only other capital expenditures anticipated are interior improvements to
existing buildings, which may be required as new tenants are obtained or
existing leases extended. The real estate portfolio comprises operating
properties that are either leased or partially available for lease. The Company
plans to continue to finance its general and administrative operations with
internally generated funds, including rental receipts from the rental
properties, and existing cash and investments. The need for additional
financing in the future would depend on the number and size of projects
undertaken, if any.
- 7 -
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED:
Approximately 41 percent of the Company's debt portfolio matures in April 1996.
The renewal process has begun and management anticipates completion of such
renewals (or the obtaining of replacement financing) during the second quarter
of fiscal 1996 at terms similar to those currently in effect. Due to lingering
effects of the sluggish economy and of financial institution failures (and the
resulting revisions of lending practices), management is unable to predict
whether principal paydowns will be required upon loan renewals, although none
are anticipated at this time.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is party to certain legal proceedings in its ordinary course of
business.
A civil action for an unspecified amount of damages relating to environmental
contamination was filed in May 1995 by residents in Kennedy Heights and certain
nearby residential developments located in the greater Houston, Texas, area.
The suit was filed in the 281st District Court of Harris County in Houston,
Texas. The Company and 50 other parties were named as defendants. The Company
was dismissed from the action without prejudice in December 1995 and agreed at
that time to a tolling of the statute of limitations.
ITEM 2. CHANGES IN SECURITIES
No changes in the rights of the Company's securities occurred during the quarter
ended February 29, 1996.
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 29, 1996.
ITEM 5. OTHER INFORMATION
Not applicable.
- 8 -
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(27) Financial Data Schedules
(b) REPORTS ON FORM 8-K
None
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)
March 22, 1996
- 9 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets as of February 29, 1996 and the related consolidated
statements of operations for the three months then ended and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> FEB-29-1996
<CASH> 3,347
<SECURITIES> 0
<RECEIVABLES> 362
<ALLOWANCES> 327
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 329
<DEPRECIATION> 314
<TOTAL-ASSETS> 47,240
<CURRENT-LIABILITIES> 0
<BONDS> 31,700
0
0
<COMMON> 19,456
<OTHER-SE> (5,226)
<TOTAL-LIABILITY-AND-EQUITY> 47,240
<SALES> 0
<TOTAL-REVENUES> 1,888
<CGS> 0
<TOTAL-COSTS> 713
<OTHER-EXPENSES> 265
<LOSS-PROVISION> 12
<INTEREST-EXPENSE> 771
<INCOME-PRETAX> 139
<INCOME-TAX> 56
<INCOME-CONTINUING> 83
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 83
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
