<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 28, 1997 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 April
14, 1997 is 1,533,121.
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. QUARTERLY FINANCIAL STATEMENTS
Following are the first quarter fiscal year 1997 consolidated financial
statements (unaudited) and accompanying notes.
-2-
<PAGE>
<TABLE>
<CAPTION>
MISSION WEST PROPERTIES
Consolidated Balance Sheets
(Unaudited)
February 28 November 30
ASSETS 1997 1996
----------- ------------
<S> <C> <C>
Cash and cash equivalents $ 2,781,000 $ 3,111,000
Real estate investments (held-for-sale):
Rental Properties, less accumulated depreciation of $1,241,000
in 1997 and $10,422,000 in 1996 ($44,455,000
pledged in 1996) 3,684,000 45,824,000
Unimproved land ($461,000 pledged in 1996) - 461,000
----------- ------------
3,684,000 46,285,000
Less allowance for estimated losses (661,000) (4,413,000)
----------- ------------
Net real estate investments 3,023,000 41,872,000
Other assets, less allowances of $244,000 in 1997 and $360,000
in 1996 and accumulated depreciation of $277,000 in 1997 and
$321,000 in 1996 900,000 1,341,000
----------- ------------
$ 6,704,000 $ 46,324,000
----------- ------------
----------- ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Notes payable $ - $ 30,753,000
Income taxes payable 1,450,000 -
Accounts payable and accrued expenses 715,000 1,389,000
----------- ------------
Total liabilities 2,165,000 32,142,000
----------- ------------
Shareholders' equity:
Common stock, no par value, 10,000,000 shares authorized;
1,533,121 shares issued and outstanding (1,371,121 in 1996) 20,215,000 19,456,000
Accumulated deficit (1,878,000) (5,274,000)
Current cash dividends (13,798,000) -
----------- ------------
Total shareholders' equity 4,539,000 14,182,000
----------- ------------
$ 6,704,000 $ 46,324,000
----------- ------------
----------- ------------
</TABLE>
See accompanying notes to consolidated financial statements.
-3-
<PAGE>
MISSION WEST PROPERTIES
Consolidated Income Statements (Unaudited)
(Discontinued Operations -- See Note 2)
Three Months Ended February 28
1997 1996
----------- -----------
REVENUES:
Sales of real estate $47,525,000 $ 35,000
Rental revenues from real estate 1,187,000 1,787,000
Other, including interest 145,000 66,000
----------- -----------
48,857,000 1,888,000
----------- -----------
EXPENSES:
Costs of real estate sold 42,653,000 4,000
Operating expenses of real estate 209,000 367,000
Depreciation of real estate 217,000 342,000
General and administrative 267,000 265,000
Interest 424,000 771,000
----------- -----------
43,770,000 1,749,000
----------- -----------
Income before income taxes 5,087,000 139,000
Provision for income taxes 1,691,000 56,000
----------- -----------
NET INCOME $ 3,396,000 $ 83,000
----------- -----------
----------- -----------
NET INCOME PER SHARE $ 2.43 $ 0.06
----------- -----------
----------- -----------
See accompanying notes to consolidated financial statements.
-4-
<PAGE>
MISSION WEST PROPERTIES
Consolidated Statements of Cash Flows (Unaudited)
Three Months Ended February 28
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,396,000 $ 83,000
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Net gain on sales of real estate (4,849,000) -
Depreciation 219,000 344,000
Changes in assets and liabilities:
Decrease (increase) in net real estate investments 2,000 (19,000)
Decrease in other assets 143,000 258,000
Increase in income taxes payable 1,450,000 33,000
Decrease in accounts payable and accrued expenses (417,000) (189,000)
------------ ------------
Net cash provided by (used for) operating activities (56,000) 510,000
------------ ------------
Cash flows from investing activities:
Net proceeds from sales of real estate 43,518,000 -
Net maturities of short-term investments - 314,000
------------ ------------
Net cash provided by investing activities 43,518,000 314,000
------------ ------------
Cash flows from financing activities:
Repayments of notes payable (30,753,000) (267,000)
Proceeds from stock options exercised 759,000 10,000
Payment of cash dividends (13,798,000) -
------------ ------------
Net cash used for financing activities (43,792,000) (257,000)
------------ ------------
Net increase (decrease) in cash and cash equivalents (330,000) 567,000
Cash and cash equivalents at beginning of quarter 3,111,000 566,000
------------ ------------
Cash and cash equivalents at end of quarter $ 2,781,000 $ 1,133,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
-5-
<PAGE>
MISSION WEST PROPERTIES
Notes to Consolidated Financial Statements (Unaudited)
February 28, 1997
NOTE 1 -- BASIS OF PRESENTATION
Mission West Properties (the "Company") has historically been engaged in
developing, owning, operating, and selling income-producing real estate
located principally in southern California. As discussed in Note 2 "Sale of
Real Estate Investments" below, the Company completed the sale of a majority
of its real estate portfolio in January 1997, with sale of the remainder of
the assets expected to occur in May 1997. The Company is 44-percent owned by
Triton Group Ltd. ("Triton"); on April 14, 1997 Triton's shareholders
approved a merger agreement between Triton and Security Holdings, Inc. of
Orange, Connecticut.
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 -- SALE OF REAL ESTATE INVESTMENTS
On December 6, 1996, the Company entered into an agreement to sell all its
real estate assets to Spieker Properties, L.P. ("Spieker"), a California
limited partnership, for $50,500,000 in cash, subject to certain customary
conditions. A special shareholder meeting was held December 16, 1996, at
which the Company's shareholders approved the sale of the real estate assets
to Spieker.
A majority of the sale transaction was completed January 22, 1997, at which
time nine of the Company's 11 real estate properties were sold. The sale of
the remaining two properties is anticipated to close during May 1997. The
nine properties sold consisted of occupied office, light industrial, and R&D
buildings in San Diego and Riverside counties, California, and occupied
industrial buildings and vacant land in Chandler, Arizona. The total
building space sold approximated 685,000 square feet. The two remaining
properties consist of leaseholds, together with hangar and office buildings
thereon, comprising approximately 25 percent of the land at Palomar-McClellan
Airport in San Diego county, California.
Upon completion of sale of the nine properties, the Company received
$47,200,000 in cash, from which it repaid all debt encumbering the properties
and paid a majority of the related transaction and closing costs, including
$3,000,000 in "break-up" fees from previously terminated sales transactions.
The costs of real estate sold reflected in the income statement includes the
$3,000,000 in "break-up" fees as well as the Company's net investment in the
underlying real estate sold and all other transaction and selling costs. In
accordance with the sales agreement, $300,000 was withheld from the proceeds
to allow for payment of claims relating to representations and warranties
made by the Seller. After resolution of such claims, if any, the remaining
portion of the $300,000 will be released to the Company on April 22, 1997.
Also per terms of the sales agreement, upon completing the sale of the two
leasehold properties, the Company will receive $3,000,000 in cash, subject to
an additional $300,000 representation and warranty holdback (for 90 days),
from which it will pay related transaction costs.
The Company declared a special dividend of $9.00 per share to shareholders of
record on February 19, 1997, which was paid on February 27, 1997. This
dividend represented the currently available portion of the proceeds from the
sale of the real estate assets.
-6-
<PAGE>
NOTE 2 -- SALE OF REAL ESTATE INVESTMENTS (CONTINUED)
The sale of the real estate portfolio results in a substantial gain for the
Company. Following the sale of assets and the payment of dividend(s) to
shareholders, only nominal assets will remain in the Company and, therefore,
the resulting corporate entity will have virtually no revenue-generating or
cash-generating capabilities.
NOTE 3 -- CASH FLOW INFORMATION
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, money market funds, certificates of deposit, commercial paper, and
obligations of the U.S. Treasury with an original maturity of 90 days or
less. Cash paid during the quarter for interest was $410,000 in 1997 and
$738,000 in 1996. No amounts were paid during the quarter for income taxes
in either 1997 or 1996.
NOTE 4 -- NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable comprise the following:
February 28 November 30
1997 1996
------------ ------------
<S> <C> <C>
Secured notes payable to banks, due 1998 through 2001, paid in
full during January and February 1997 $ - $ 29,365,000
Secured note payable to insurance company, due April 1997, paid
in full during January 1997 - 1,388,000
------------ ------------
$ - $ 30,753,000
------------ ------------
------------ ------------
</TABLE>
NOTE 5 -- NET INCOME PER SHARE
Net income per share is based on 1,399,921 and 1,368,747 shares, the weighted
average number of shares outstanding during the first quarters of fiscal
years 1997 and 1996, 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:
FIRST QUARTER FISCAL 1997 COMPARED TO FIRST QUARTER FISCAL 1996
As discussed in Note 2, "Sale of Real Estate Investments," to the
consolidated financial statements, the Company completed the sale of a
majority of its real estate assets in January 1997, resulting in a gain of
approximately $4,849,000 and significantly curtailing the operations of the
Company. Prior to the January sale, the Company had continued to operate the
properties in a manner consistent with prior periods. Results for the period
of operation reflect an occupancy increase from 87 percent during the first
quarter of 1996 to approximately 90 percent at January 21, 1997, and
corresponding increases in rental revenues and operating expenses; general
and administrative expenses were virtually unchanged from the prior year.
The Company will continue to operate its leasehold properties until sold.
The sale of the real estate assets was in accordance with a December 1996
agreement with Spieker Properties, L.P. ("Spieker"), a California limited
partnership, in which Spieker agreed to purchase all the Company's real
estate assets for $50,500,000 in cash, subject to certain customary
conditions. A special shareholder meeting was held December 16, 1996, at
which the Company's shareholders approved the sale.
A majority of the sale transaction was completed January 22, 1997, at which
time nine of the Company's 11 real estate properties were sold. The sale of
the remaining two properties is anticipated to close during May 1997. The
nine properties sold consisted of occupied office, light industrial, and R&D
buildings in San Diego and Riverside counties, California, and occupied
industrial buildings and vacant land in Chandler, Arizona. The total
building space sold approximated 685,000 square feet. The two remaining
properties consist of leaseholds, together with hangar and office buildings
thereon, comprising approximately 25 percent of the land at Palomar-McClellan
Airport in San Diego county, California.
Upon completion of sale of the nine properties, the Company received
$47,200,000 in cash, from which it repaid all debt encumbering the properties
(thus eliminating future interest expense) and paid a majority of the related
transaction and closing costs, including $3,000,000 in "break-up" fees from
previously terminated sales transactions. In accordance with the sales
agreement, $300,000 was withheld from the proceeds to allow for satisfaction
of claims relating to representations and warranties made by the Seller.
After resolution of such claims, if any, the remaining portion of the
$300,000 will be released to the Company on April 22, 1997. Also in
accordance with the sales agreement, upon completing the sale of the two
leasehold properties, the Company will receive $3,000,000 in cash, subject to
an additional $300,000 representation and warranty holdback (for 90 days),
from which it will pay related transaction costs.
The Company declared a special dividend of $9.00 per share to shareholders of
record on February 19, 1997, which was paid on February 27, 1997. This
dividend represented the currently available portion of the proceeds from the
sale of the real estate assets. Following the sale of assets and the payment
of dividend(s) to shareholders, only nominal assets will remain in the
Company and, therefore, the resulting corporate entity will have virtually no
revenue-generating or cash-generating capabilities and no results of
operations, other than general and administrative expenses.
CHANGES IN FINANCIAL POSITION:
FEBRUARY 28, 1997 COMPARED TO NOVEMBER 30, 1996
Nearly all changes in the Company's financial position during the first
quarter of fiscal year 1997 resulted from the sale of real estate assets, as
discussed above. A majority of the real estate portfolio was sold, all debt
encumbering the properties was repaid, a gain on sale of approximately
$4,849,000 and the related tax liability were recorded, and a $9.00 per share
dividend was paid to shareholders.
Upon the January 1997 sale of real estate, vesting of 13,520 stock options
was accelerated. During February 1997 all vested stock options, which
totaled 162,000 shares, were exercised by the option holders. Total exercise
proceeds to the Company were $759,000, which were recognized on a "net
exercise" basis.
-8-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES:
As discussed above, the Company has sold, or is in the process of selling,
its entire real estate portfolio. Additionally, a special dividend to
shareholders of $9.00 per share was paid in February 1997; this dividend
represented the currently available portion of the net proceeds from the sale
of the assets. Upon completion of sale of the remaining real estate assets
(scheduled for May 1997), payment of an additional special dividend to
shareholders will be considered.
Following the sale of assets and the subsequent payment of dividend(s) to
shareholders, only nominal assets will remain in the Company and, therefore,
the resulting corporate entity will have virtually no revenue-generating or
cash-generating capabilities. The Board of Directors and management
currently are reviewing and pursuing available strategic alternatives for the
remaining corporate entity. These alternatives include a sale of the
corporate entity, a possible business or asset acquisition or combination, or
an outright liquidation.
Following the January 1997 sale, reductions in general and administrative
("G&A") expenses of approximately $10,000 per month were made. Effective
March 7, 1997, J. Gregory Kasun (President, Chief Executive Officer, and a
Director), Harve Filuk (Vice President), and Richard R. Tartre (Director)
resigned all positions with the Company. Directors Michael M. Earley and
Mark G. Foletta were appointed to the positions of Chief Executive Officer
and Vice President, respectively. Messrs. Earley and Foletta also serve as
executive officers and directors of Triton Group Ltd. The net effect of
these management changes will be a further reduction of G&A expense of
approximately $15,000 per month. It is anticipated that G&A expenses will
continue at a reduced level of approximately $65,000 per month until the
remainder of the real estate is sold and until the future course of the
Company is determined. G&A expenses and other cash needs will be funded by
current cash on hand or cash to be realized from the remaining net assets of
the Company.
Triton Group Ltd. owns 44 percent of Mission West Properties. Triton is an
operating/holding company that has entered into an agreement to merge with
Security Holdings, Inc. of Orange, Connecticut; such merger was approved by
Triton shareholders on April 14, 1997. Previously, Triton had been disposing
of its subsidiaries and other investments in accordance with an announced
plan to realize value. Mission West Properties was one of Triton's few
remaining investments.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was not involved in any material legal proceedings during the
quarter ended February 28, 1997.
ITEM 2. CHANGES IN SECURITIES
No changes in the rights of the Company's securities occurred during the
quarter ended February 28, 1997.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
-9-
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The proposal for sale of all the Company's real estate assets to Spieker
Properties, L.P. (see "Management's Discussion and Analysis of Financial
Condition and Results of Operation" above) was put to a vote of security
holders on December 16, 1996; the sale was approved by approximately 88
percent.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
(27) Financial Data Schedules
(b) REPORTS ON FORM 8-K
December 6, 1996 -- Filed for Item 5 Other Events. The Company
terminated the agreement to sell its real estate assets to
Lincoln Property Company N.C., Inc. and replaced it with an
agreement to sell the real estate assets to Spieker Properties,
L.P. A special meeting of shareholders scheduled for December
7, 1996 was adjourned to December 16, 1996.
January 22, 1997 -- Filed for Item 2 Acquisition or Disposition
of Assets and Item 7 Financial Statements and Exhibits. The
Company completed a sale of a majority of its assets to Spieker
Properties, L.P. in accordance with the terms of a related
purchase and sale agreement. Filing included pro forma
financial statements.
February 4, 1997 -- Filed for Item 5 Other Events. The Company
announced a special dividend of $9.00 per share to be paid
February 27, 1997 to shareholders of record on February 19,
1997.
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)
April 14, 1997
-10-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets as of February 28, 1997 and the related consolidated
statements of operations for the three months then ended and is qualified in its
entirely by reference to such financial statements.
</LEGEND>
<MULTIPLIER>1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> FEB-28-1997
<CASH> 2,781
<SECURITIES> 0
<RECEIVABLES> 307
<ALLOWANCES> 211
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 285
<DEPRECIATION> 277
<TOTAL-ASSETS> 6,704
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 20,215
<OTHER-SE> (15,676)
<TOTAL-LIABILITY-AND-EQUITY> 6,704
<SALES> 0
<TOTAL-REVENUES> 48,857
<CGS> 0
<TOTAL-COSTS> 43,079
<OTHER-EXPENSES> 267
<LOSS-PROVISION> (10)
<INTEREST-EXPENSE> 424
<INCOME-PRETAX> 5,087
<INCOME-TAX> 1,691
<INCOME-CONTINUING> 3,396
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,396
<EPS-PRIMARY> 2.43
<EPS-DILUTED> 2.43
</TABLE>
