<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, 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 May 31,
1996 was 1,371,121.
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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 1996 consolidated financial statements (unaudited) and
accompanying notes (unaudited).
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MISSION WEST PROPERTIES
Consolidated Balance Sheets
(Unaudited)
May 31 November 30
ASSETS 1996 1995
------------ ------------
Cash and cash equivalents $ 1,139,000 $ 566,000
Short-term investments, held-to-maturity 2,168,000 2,528,000
Real estate investments:
Rental Properties, less accumulated
depreciation of $9,737,000 in 1996
and $9,054,000 in 1995 ($45,093,000
pledged in 1996 and $45,729,000
in 1995) 46,489,000 47,136,000
Unimproved land ($461,000 pledged in
1996 and 1995) 461,000 461,000
------------ ------------
46,950,000 47,597,000
Less allowance for estimated losses (4,413,000) (4,413,000)
------------ ------------
Net real estate investments 42,537,000 43,184,000
Other assets, less allowances of $417,000 in
1996 and $541,000 in 1995 and accumulated
depreciation of $317,000 in 1996 and
$312,000 in 1995 1,088,000 1,292,000
------------ ------------
$46,932,000 $47,570,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $31,451,000 $31,967,000
Accounts payable and accrued expenses 1,182,000 1,466,000
------------ ------------
Total liabilities 32,633,000 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 (5,157,000) (5,309,000)
------------ ------------
Total shareholders' equity 14,299,000 14,137,000
------------ ------------
$46,932,000 $47,570,000
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See accompanying notes to consolidated financial statements.
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MISSION WEST PROPERTIES
Consolidated Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
May 31 May 31 May 31 May 31
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Rental revenues from real estate $1,805,000 $1,758,000 $3,593,000 $3,519,000
Sales of real estate 24,000 37,000 59,000 97,000
Other, including interest 81,000 101,000 145,000 186,000
---------- ---------- ---------- ----------
1,910,000 1,896,000 3,797,000 3,802,000
---------- ---------- ---------- ----------
EXPENSES:
Operating expenses of real estate 419,000 378,000 791,000 785,000
Depreciation of real estate 342,000 347,000 683,000 677,000
General and administrative 240,000 228,000 505,000 471,000
Interest 794,000 903,000 1,564,000 1,787,000
---------- ---------- ---------- ----------
1,795,000 1,856,000 3,543,000 3,720,000
---------- ---------- ---------- ----------
Income before income taxes 115,000 40,000 254,000 82,000
Provision for income taxes 46,000 20,000 102,000 30,000
---------- ---------- ---------- ----------
NET INCOME $ 69,000 $ 20,000 $ 152,000 $ 52,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME PER SHARE $ 0.05 $ 0.01 $ 0.11 $ 0.04
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
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MISSION WEST PROPERTIES
Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended
------------------------
May 31 May 31
1996 1995
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Cash flows from operating activities:
Net income $ 152,000 $ 52,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 688,000 681,000
Changes in assets and liabilities:
Increase in net real estate investments (36,000) (15,000)
Decrease (increase) in other assets 199,000 (77,000)
Decrease in accounts payable and
accrued expenses (284,000) (275,000)
----------- -----------
Net cash provided by operating activities 719,000 366,000
----------- -----------
Cash flows from investing activities:
Net redemptions (purchases) of short-term
investments 360,000 (679,000)
----------- -----------
Cash flows from financing activities:
Repayments on notes payable (516,000) (1,132,000)
Proceeds from stock options exercised 10,000 -
----------- -----------
Net cash used for financing activities (506,000) (1,132,000)
----------- -----------
Net increase (decrease) in cash and
cash equivalents 573,000 (1,445,000)
Cash and cash equivalents at beginning
of period 566,000 2,192,000
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Cash and cash equivalents at end
of period $ 1,139,000 $ 747,000
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----------- -----------
See accompanying notes to consolidated financial statements.
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MISSION WEST PROPERTIES
Notes to Consolidated Financial Statements (Unaudited)
May 31, 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 six months ended May
31 for interest was $1,638,000 in 1996 and $1,786,000 in 1995. Cash paid for
income taxes during the six-month periods was $38,000 in 1996 and $67,000 in
1995.
NOTE 3 -- NOTES PAYABLE
Notes payable comprise the following:
May 31 November 30
1996 1995
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Secured notes payable to banks, due July $29,756,000 $30,218,000
1996 through 2001, interest rates ranging
from 9% (fixed) to 9.75% (prime plus 1.5%),
principal and interest due in monthly
installments of $285,000, balance of
principal due at maturity
Unsecured note payable to bank, due July 1996, 250,000 250,000
interest rate of 9.75% 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 $21,0000 1,445,000 1,499,00
----------- -----------
$31,451,000 $31,967,000
----------- -----------
----------- -----------
NOTE 4 -- NET INCOME PER SHARE
Net income per share is based on 1,371,121 and 1,368,721 shares for the quarter
ended May 31, and 1,369,941 and 1,417,622 for the six months ended May 31, the
weighted average number of shares outstanding during the periods presented for
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 5 -- SUBSEQUENT EVENT
Subsequent to its second quarter end, on July 1, 1996, the Company entered into
a definitive agreement to sell all its real estate assets to DMB/SVP California
Investments, LLC for $42,000,000 cash, subject to a 24-day due diligence period.
The results of the due diligence review could cause the parties to eliminate one
property from the transaction, which would reduce the proceeds realized. The
Company will satisfy the secured and unsecured indebtedness related to the
assets from the proceeds of the sale. Terms of the Agreement call for a closing
of the transaction in late August 1996, which closing is subject to extension.
The transaction will be accounted for as a sale of assets upon completion. An
estimated loss on sale of the assets, if any, and the related selling costs will
be determined and recorded at the conclusion of the due diligence period.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
SECOND QUARTER FISCAL 1996 COMPARED TO SECOND QUARTER FISCAL 1995
Compared to the second quarter of fiscal 1995, the Company's rental revenues
from real estate increased $47,000, or three percent, in 1996; the related
operating expenses of real estate increased $41,000, or 11 percent. The
increase in rental revenue primarily resulted from increased rental rates. The
increase in operating expenses primarily resulted from a $30,000 decrease in
property tax refunds (higher level of Prop. 8A refunds received in 1995 than in
1996) and an increase in certain repair and maintenance expenses, offset by a
$28,000 decrease in bad debt expense.
Interest expense decreased $109,000 between the second quarter of fiscal 1995
and the second quarter of fiscal 1996 as a result of a reduction in outstanding
notes payable ($31,451,000 outstanding at May 31, 1996 compared to $33,250,000
at May 31, 1995) and decreases in the Company's aggregate borrowing rate (9.02
percent during the second quarter of fiscal 1996 compared to 10.44 percent
during the second quarter of fiscal 1995).
FIRST SIX MONTHS FISCAL 1996 COMPARED TO FIRST SIX MONTHS FISCAL 1995
During the six months ended May 31, 1996, compared to 1995, rental revenues from
real estate increased $74,000, or two percent, and the related operating
expenses of real estate increased $6,000, or one percent. The increase in
rental revenues is primarily a result of increases in rental rates; the increase
in operating expenses resulted from a $51,000 decrease in bad debt expenses
offset by numerous individually insignificant increases.
Interest expense was $223,000 lower in 1996 than 1995, the result of factors
previously detailed in the second quarter results of operations discussion
above.
CHANGES IN FINANCIAL POSITION:
MAY 31, 1996 COMPARED TO NOVEMBER 30, 1995
During the first six months of fiscal 1996, cash and investments increased
$213,000. This increase in funds resulted from a $118,000 bankruptcy settlement
receipt (former tenant) and from normal cash inflow from operations. Normal
debt service (principal and interest payments) continued during the first six
months of fiscal 1996.
Other assets decreased a net $204,000 during the first six months of fiscal 1996
due to the bankruptcy settlement receipt and various other collections on
accounts receivable, and due to normal activity of prepaid expenses
(amortization offset by annual payments). Accounts payable and accrued expenses
decreased $284,000, or 19 percent, during the six months primarily as a result
of the timing of payments for property taxes, legal and audit fees, and payroll.
LIQUIDITY AND CAPITAL RESOURCES:
During the first six months of fiscal 1996, the Company's financial condition
and operations remained stable. Cash and investment balances increased while
notes payable continued to be amortized monthly; 30 percent of the debt
portfolio was renewed in May 1996 for a five-year period on terms comparable to
those previously in place. The rental properties continued to generate
sufficient rental revenue to cover real estate operating expenses and interest
and they generated cash, after normal debt service (interest and principal
amortization). The rental properties currently are, in aggregate, 85 percent
leased. As a result of these and other factors, Management believes that the
Company continues to be in a stable and competitive position. While the Company
continued to operate the real estate portfolio during the first half of fiscal
1996, it also continued to consider and pursue all viable growth or other
opportunities available.
Subsequent to its second quarter end, on July 1, 1996, the Company entered into
a definitive agreement to sell all its real estate assets to DMB/SVP California
Investments, LLC for $42,000,000 cash, subject to a 24-day due diligence period.
The
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES, CONTINUED:
results of the due diligence review could cause the parties to eliminate one
property from the transaction, which would reduce the proceeds realized. The
Company will repay the secured and unsecured indebtedness related to the assets
from the proceeds of the sale. Terms of the Agreement call for a closing of the
transaction in late August 1996, which closing is subject to extension. The
transaction will be accounted for as a sale of assets upon completion. An
estimated loss on sale of the assets, if any, and the related selling costs will
be determined and recorded at the conclusion of the due diligence period.
Several conditions to completion of the transaction remain to be accomplished,
including approval of the transaction by the Company's shareholders. If this
proposed transaction is completed, the Company is expected to have net
realizable assets of approximately $11,900,000 consisting almost exclusively of
cash and cash equivalents and will have no operating business. After completion
of the transaction, if it is completed, the Company intends to consider making a
substantial dividend distribution to shareholders; the Company will then review
available strategic alternatives, which may include business or asset
acquisitions or a sale of the resulting corporate shell. Concurrent with these
activities, a review of general and administrative expenses would be made; it is
likely that these expenses would be significantly reduced through staffing
reductions and other appropriate measures.
In the event the transaction is not completed, the Company anticipates
continuing normal operation of the real estate portfolio, while also considering
and pursuing other strategic alternatives. While operating the portfolio,
capital expenditures for interior improvements to existing buildings may be
required as new tenants are obtained or existing leases extended. The Company
would continue to finance its capital expenditures and general and
administrative operations with internally generated funds, including rental
receipts from the rental properties, and existing cash and investments. Eleven
percent of the debt portfolio matures in July 1996 and would require renewal or
refinancing as soon as possible if the transaction were not completed (based on
current relationships with financial institutions and the competitive nature of
the related real estate, Management anticipates the ability to renew/refinance
such debt). Any need for additional financing in the future would depend on the
strategic course of the Company.
Entering the Agreement to sell the real estate assets constitutes an event of
default under several of the Company's debt agreements; however, through the
date of this filing, none of the related financial institutions have called a
formal default of any loans.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was not involved in any material legal proceedings during the
quarter ended May 31, 1996.
ITEM 2. CHANGES IN SECURITIES
No changes in the rights of the Company's securities occurred during the quarter
ended May 31, 1996.
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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 22, 1996, at which time the
shareholders reelected all six 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, 1996.
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 15, 1996
<TABLE> <S> <C>
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets as of May 31, 1996 and the related consolidated
statements of operations for the six months then ended and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> MAY-31-1996
<CASH> 3,307
<SECURITIES> 0
<RECEIVABLES> 360
<ALLOWANCES> 332
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 334
<DEPRECIATION> 317
<TOTAL-ASSETS> 46,932
<CURRENT-LIABILITIES> 0
<BONDS> 31,451
0
0
<COMMON> 19,456
<OTHER-SE> (5,157)
<TOTAL-LIABILITY-AND-EQUITY> 46,932
<SALES> 0
<TOTAL-REVENUES> 3,797
<CGS> 0
<TOTAL-COSTS> 1,474
<OTHER-EXPENSES> 505
<LOSS-PROVISION> 20
<INTEREST-EXPENSE> 1,564
<INCOME-PRETAX> 254
<INCOME-TAX> 102
<INCOME-CONTINUING> 152
<DISCONTINUED> 0
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<EPS-PRIMARY> .11
<EPS-DILUTED> .11
</TABLE>
