<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, 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
August 31, 1996 was 1,371,121.
<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 1996 consolidated financial statements (unaudited) and
accompanying notes (unaudited).
<PAGE>
MISSION WEST PROPERTIES
Consolidated Balance Sheets
(Unaudited)
August 31 November 30
1996 1995
----------- -----------
ASSETS
Cash and cash equivalents $ 1,880,000 $ 566,000
Short-term investments, held-to-maturity 1,123,000 2,528,000
Real estate investments:
Rental Properties, less accumulated depreciation
of $10,080,000 in 1996 and $9,054,000 in 1995
($44,772,000 pledged in 1996 and $45,729,000
in 1995) 46,154,000 47,136,000
Unimproved land ($461,000 pledged in 1996 and
1995) 461,000 461,000
----------- -----------
46,615,000 47,597,000
Less allowance for estimated losses (4,413,000) (4,413,000)
----------- -----------
Net real estate investments 42,202,000 43,184,000
Other assets, less allowances of $412,000 in 1996
and $541,000 in 1995 and accumulated depreciation
of $319,000 in 1996 and $312,000 in 1995 1,168,000 1,292,000
----------- -----------
$46,373,000 $47,570,000
----------- -----------
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $30,982,000 $31,967,000
Accounts payable and accrued expenses 1,181,000 1,466,000
----------- -----------
Total liabilities 32,163,000 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 (5,246,000) (5,309,000)
----------- -----------
Total shareholders' equity 14,210,000 14,137,000
----------- -----------
$46,373,000 $47,570,000
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
<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
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
REVENUES:
Rental revenues from real estate $1,749,000 $1,801,000 $5,342,000 $5,320,000
Sales of real estate 27,000 28,000 86,000 125,000
Other, including interest 91,000 96,000 237,000 282,000
---------- ---------- ---------- ----------
1,867,000 1,925,000 5,665,000 5,727,000
---------- ---------- ---------- ----------
EXPENSES:
Operating expenses of real estate 434,000 662,000 1,224,000 1,448,000
Depreciation of real estate 342,000 334,000 1,026,000 1,011,000
General and administrative 482,000 231,000 987,000 701,000
Interest 754,000 876,000 2,319,000 2,663,000
---------- ---------- ---------- ----------
2,012,000 2,103,000 5,556,000 5,823,000
---------- ---------- ---------- ----------
Income (loss) before income taxes (145,000) (178,000) 109,000 (96,000)
Provision for (benefit from) income taxes (56,000) (70,000) 46,000 (40,000)
---------- ---------- ---------- ----------
NET INCOME (LOSS) $ (89,000) $ (108,000) $ 63,000 $ (56,000)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
NET INCOME (LOSS) PER SHARE $ (0.06) $ (0.08) $ 0.05 $ (0.04)
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MISSION WEST PROPERTIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
August 31 August 31
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 63,000 $ (56,000)
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation 1,033,000 1,016,000
Changes in assets and liabilities:
Increase in net real estate investments (44,000) (229,000)
Decrease (increase) in other assets 117,000 (287,000)
Decrease in accounts payable and accrued expenses (285,000) (330,000)
----------- -----------
Net cash provided by operating activities 884,000 114,000
----------- -----------
Cash flows from investing activities:
Net redemptions of short-term investments 1,405,000 565,000
----------- -----------
Cash flows from financing activities:
Repayments on notes payable (985,000) (1,405,000)
Proceeds from stock options exercised 10,000 -
----------- -----------
Net cash used for financing activities (975,000) (1,405,000)
----------- -----------
Net increase (decrease) in cash and cash equivalents 1,314,000 (726,000)
Cash and cash equivalents at beginning of period 566,000 2,192,000
----------- -----------
Cash and cash equivalents at end of period $ 1,880,000 $ 1,466,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MISSION WEST PROPERTIES
Notes to Consolidated Financial Statements (Unaudited)
August 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 nine months ended
August 31 for interest was $2,400,000 in 1996 and $2,656,000 in 1995. Cash paid
for income taxes during the nine-month periods was $38,000 in 1996 and $236,000
in 1995.
NOTE 3 -- NOTES PAYABLE
Notes payable comprise the following:
August 31 November 30
1996 1995
----------- -----------
Secured notes payable to banks, due 1998 through $29,565,000 $30,218,000
2001, interest rates ranging from 9% (fixed)
to 9.75% (prime plus 1.5%), principal and
interest due in monthly installments of
$283,000, balance of principal due at maturity
Unsecured note payable to bank, due July 1996, - 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 $21,000 1,417,000 1,499,000
----------- -----------
$30,982,000 $31,967,000
----------- -----------
----------- -----------
A secured loan that matured July 10, 1996 was renewed in due course during the
third quarter. The $250,000 unsecured note was paid in full during the third
quarter of 1996, upon maturity.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
NOTE 4 -- NET INCOME (LOSS) PER SHARE
Net income (loss) per share is based on 1,371,121 and 1,368,721 shares for the
quarter ended August 31, and 1,370,336 and 1,401,203 for the nine months ended
August 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.
NOTE 5 -- PENDING SALE OF REAL ESTATE ASSETS
On July 1, 1996, the Company entered into a definitive agreement to sell all its
real estate assets to DMB/SVP California Investments, LLC ("DMB/SVP") for
$42,000,000 cash. As allowed under provisions of the agreement, the transaction
was amended effective August 20, 1996 to exclude one property; the sales price
was correspondingly reduced to $38,500,000 and a special meeting of shareholders
to vote on the proposed transaction was rescheduled to October 15, 1996 (with an
anticipated closing date of October 24, 1996 if the sale is approved by
shareholders).
The Company will satisfy the indebtedness related to the assets being sold from
proceeds of the sale. The transaction will be accounted for as a sale of assets
upon completion. Estimated transaction costs approximating $250,000 were
recorded through August 31, 1996. An estimated loss on sale of the assets, if
any, and the related selling costs will be determined and recorded upon closing.
As the Company continues to perform under the terms of the agreement with
DMB/SVP, the Company has also received third party expressions of interest in
purchasing its real estate portfolio. Under the terms of the agreement with
DMB/SVP, if the Company were to receive an offer to purchase its portfolio that
the Board of Directors determined was superior to the DMB/SVP transaction, the
Company is entitled to issue a "fiduciary out" notice to DMB/SVP to terminate
that transaction and proceed with the superior transaction. In certain
circumstances a termination fee of $2,000,000 would be due DMB/SVP if the
Company were to exercise its fiduciary out rights.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS:
THIRD QUARTER FISCAL 1996 COMPARED TO THIRD QUARTER FISCAL 1995
Compared to the third quarter of fiscal 1995, the Company's rental revenues from
real estate decreased $52,000, or three percent, in 1996; the related operating
expenses of real estate decreased $228,000, or 34 percent. The decrease in
rental revenue primarily resulted from a decrease in occupancy (85 percent
average occupancy during third quarter fiscal 1996 compared to 88 percent in
fiscal 1995). The decrease in operating expenses primarily resulted from a
$185,000 decrease in building repairs/reconditioning, a $45,000 decrease in
property taxes (successful assessment appeals in Arizona), and a $32,000
decrease in bad debt expense.
General and administrative expenses for the third fiscal quarter increased
$251,000 between 1995 and 1996, primarily due to recording transaction costs
related to the pending sale of real estate assets to DMB/SVP California
Investments, LLC (see "Liquidity and Capital Resources" below).
Interest expense decreased $122,000 between the third quarter of fiscal 1995 and
the third quarter of fiscal 1996 as a result of a reduction in outstanding notes
payable ($30,982,000 outstanding at August 31, 1996 compared to $32,977,000 at
August 31, 1995) and decreases in the Company's aggregate borrowing rate (9.03
percent during the third quarter of fiscal 1996 compared to 10.19 percent during
the third quarter of fiscal 1995).
FIRST NINE MONTHS FISCAL 1996 COMPARED TO FIRST NINE MONTHS FISCAL 1995
During the nine months ended August 31, 1996, compared to 1995, rental revenues
from real estate increased $22,000 and the related operating expenses of real
estate decreased $224,000, or 15 percent. Compared to fiscal 1995, increases in
rental revenue due to higher rental rates for the first six months of fiscal
1996 were offset by a decrease in occupancy during the third quarter of 1996;
thus, no significant changes in rental revenue for the nine-month periods
occurred between years. The decrease in operating expenses was a result of the
factors discussed in the third quarter results of operations above (primarily a
decrease in building repairs/reconditioning).
Year-to-date general and administrative expenses are $286,000 higher in fiscal
1996 than 1995, primarily due to transaction costs related to the pending sale
of real estate assets.
Interest expense is $344,000 lower in 1996 than 1995, the result of factors
previously detailed in the third quarter results of operations discussion above.
CHANGES IN FINANCIAL POSITION:
AUGUST 31, 1996 COMPARED TO NOVEMBER 30, 1995
During the first nine months of fiscal 1996, cash and investments decreased a
net $91,000. Contributing to the decrease was a $250,000 payoff of an unsecured
loan upon maturity, payment of $206,000 in loans fees upon renewal of other
maturing loans, and payment of approximately $155,000 in transaction costs
related to the pending sale of real estate assets (see "Liquidity and Capital
Resources" below). These decreases in funds were offset by increases that
included a $118,000 bankruptcy settlement receipt (former tenant) and normal
cash inflow from operations. Normal debt service (principal and interest
payments) continued during the first nine months of fiscal 1996. The secured
note payable that matured July 10, 1996 was renewed with terms virtually
unchanged from those of the previous loan.
Other assets decreased a net $124,000 during the first nine 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 $285,000, or 19 percent, during the nine months primarily as a result
of the timing of payments for property taxes, legal and audit fees, and payroll.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, CONTINUED
LIQUIDITY AND CAPITAL RESOURCES:
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.
The purchaser was granted a certain amount of time to conduct a due diligence
review, which has been completed. As allowed under provisions of the agreement,
the transaction was amended effective August 20, 1996 to exclude one property,
the Company's leasehold operations at McClellan-Palomar Airport, from the sale.
The sales price was correspondingly reduced to $38,500,000 and a special meeting
of shareholders to vote on the proposed transaction was rescheduled to October
15, 1996 (with an anticipated closing date of October 24, 1996 if the sale is
approved by shareholders).
Upon completion of the proposed sale, the Company will satisfy the indebtedness
related to the assets being sold from proceeds of the sale. Entering the
agreement to sell the real estate assets constituted 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. The sale transaction will be accounted for as a sale of assets
upon completion. Estimated transaction costs approximating $250,000 were
recorded through August 31, 1996. An estimated loss on sale of the assets, if
any, and the related selling costs will be determined and recorded upon closing.
If this proposed transaction is approved by the Company's shareholders and
completed, the Company is expected to have net realizable assets of
approximately $12,500,000, consisting of cash and cash equivalents and a
leasehold interest in the airport operating property. Upon completion of the
transaction, the Company intends to consider making a substantial distribution
to shareholders; the Company will then review available strategic alternatives,
which may include business or asset acquisitions or a sale of the remaining real
estate asset and/or the Company. 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.
As the Company and the purchaser continue to perform under the terms of the
DMB/SVP agreement, the Company has received third party expressions of interest
in purchasing its real estate portfolio. Under the terms of the agreement with
DMB/SVP, if the Company were to receive an offer to purchase its portfolio that
the Board of Directors determined was superior to the DMB/SVP transaction, the
Company is entitled to issue a "fiduciary out" notice to DMB/SVP to terminate
that transaction and proceed with the superior transaction. In certain
circumstances a termination fee of $2,000,000 would be due DMB/SVP if the
Company were to exercise its fiduciary out rights.
Aside from the proposed sale transaction, during the first nine months of fiscal
1996, the Company's financial condition and operations remained stable. Cash
and investment balances decreased minimally while notes payable continued to be
amortized monthly and a $250,000 payoff of an unsecured loan was made. Forty
percent of the debt portfolio was renewed during the second and third quarters,
upon normal loan maturity dates, 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.
In the event a sale of the real estate assets 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.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was not involved in any material legal proceedings during the
quarter ended August 31, 1996.
ITEM 2. CHANGES IN SECURITIES
No changes in the rights of the Company's securities occurred during the quarter
ended August 31, 1996.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter were submitted to a vote of security holders during the quarter ended
August 31, 1996.
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, 1996.
<PAGE>
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)
October 11, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets as of August 31, 1996 and the related consolidated
statements of operations for the nine months then ended and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-END> AUG-31-1996
<CASH> 3,003
<SECURITIES> 0
<RECEIVABLES> 395
<ALLOWANCES> 337
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 334
<DEPRECIATION> 319
<TOTAL-ASSETS> 46,373
<CURRENT-LIABILITIES> 0
<BONDS> 30,982
0
0
<COMMON> 19,456
<OTHER-SE> 5,246
<TOTAL-LIABILITY-AND-EQUITY> 46,373
<SALES> 0
<TOTAL-REVENUES> 5,665
<CGS> 0
<TOTAL-COSTS> 2,250
<OTHER-EXPENSES> 987
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 2,319
<INCOME-PRETAX> 109
<INCOME-TAX> 46
<INCOME-CONTINUING> 63
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
