<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, 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 July 15,
1997 is 1,533,121.
<PAGE>
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 1997 consolidated financial statements (unaudited) and
accompanying notes.
<PAGE>
MISSION WEST PROPERTIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
May 31 November 30
ASSETS 1997 1996
------ ------------ ------------
<S> <C> <C>
Cash and cash equivalents $ 4,943,000 $ 3,111,000
Real estate investments (held-for-sale):
Rental Properties, less accumulated depreciation of $10,422,000
in 1996 ($44,455,000 pledged in 1996) - 45,824,000
Unimproved land ($461,000 pledged in 1996) - 461,000
------------ ------------
- 46,285,000
Less allowance for estimated losses - (4,413,000)
------------ ------------
Net real estate investments - 41,872,000
Other assets, less allowances of $18,000 in 1997 and $360,000
in 1996 and accumulated depreciation of $241,000 in 1997 and
$321,000 in 1996 593,000 1,341,000
------------ ------------
$ 5,536,000 $46,324,000
------------ ------------
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Notes payable $ - $30,753,000
Income taxes payable 525,000 -
Accounts payable and accrued expenses 463,000 1,389,000
------------ ------------
Total liabilities 988,000 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) 20,182,000 19,456,000
Accumulated deficit (1,836,000) (5,274,000)
Current cash dividends (13,798,000) -
------------ ------------
Total shareholders' equity 4,548,000 14,182,000
------------ ------------
$ 5,536,000 $46,324,000
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MISSION WEST PROPERTIES
Consolidated Income Statements (Unaudited)
(Discontinued Operations -- See Note 2)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
-------------------------------- --------------------------------
May 31 May 31 May 31 May 31
1997 1996 1997 1996
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES:
Sales of real estate $3,020,000 $ 24,000 $50,545,000 $ 59,000
Rental revenues from real estate 168,000 1,805,000 1,355,000 3,593,000
Other, including interest 72,000 81,000 217,000 145,000
------------ ------------ ------------ ------------
3,260,000 1,910,000 52,117,000 3,797,000
------------ ------------ ------------ ------------
EXPENSES:
Costs of real estate sold 3,142,000 3,000 45,796,000 7,000
Operating expenses of real estate 37,000 417,000 246,000 784,000
Depreciation of real estate 29,000 342,000 246,000 683,000
General and administrative 328,000 239,000 594,000 505,000
Interest - 794,000 424,000 1,564,000
------------ ------------ ------------ ------------
3,536,000 1,795,000 47,306,000 3,543,000
------------ ------------ ------------ ------------
Income (loss) before income taxes (276,000) 115,000 4,811,000 254,000
Provision for (benefit from) income taxes (318,000) 46,000 1,373,000 102,000
------------ ------------ ------------ ------------
NET INCOME $ 42,000 $ 69,000 $3,438,000 $ 152,000
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
NET INCOME PER SHARE $ 0.03 $ 0.05 $ 2.34 $ 0.11
------- ------- ------- -------
------- ------- ------- -------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MISSION WEST PROPERTIES
Consolidated Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
-------------------------------
May 31 May 31
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,438,000 $ 152,000
Adjustments to reconcile net income to net cash provided by
(used for) operating activities:
Net gain on sales of real estate (4,709,000) -
Depreciation 250,000 688,000
Tax effect of canceled stock options (33,000) -
Changes in assets and liabilities:
Decrease (increase) in net real estate investments 2,000 (36,000)
Decrease in other assets 672,000 199,000
Increase in income taxes payable 525,000 8,000
Decrease in accounts payable and accrued expenses (705,000) (292,000)
----------- -----------
Net cash provided by (used for) operating activities (560,000) 719,000
----------- -----------
Cash flows from investing activities:
Net proceeds from sales of real estate 46,184,000 -
Net maturities of short-term investments - 360,000
----------- -----------
Net cash provided by investing activities 46,184,000 360,000
----------- -----------
Cash flows from financing activities:
Repayments of notes payable (30,753,000) (516,000)
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) (506,000)
----------- -----------
Net increase in cash and cash equivalents 1,832,000 573,000
Cash and cash equivalents at beginning of period 3,111,000 566,000
----------- -----------
Cash and cash equivalents at end of period $4,943,000 $1,139,000
----------- -----------
----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
MISSION WEST PROPERTIES
Notes to Consolidated Financial Statements (Unaudited)
May 31, 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/Proposed Sale of Common Stock" below, the Company completed the sale
of its entire real estate portfolio during May 1997 and entered into an
agreement to sell the remaining corporate entity through a stock transaction.
The Company is 44-percent owned by Alarmguard Holdings, Inc. ("Alarmguard");
this investment was formerly owned by Triton Group Ltd. ("Triton"). On April
15, 1997, Triton merged with Security Holdings, Inc. of Orange, Connecticut and
was renamed Alarmguard.
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. These financial
statements have been prepared on a going concern basis assuming continuity of
operations and the realization of assets and liquidation of liabilities in the
ordinary course of business. 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/PROPOSED SALE OF COMMON STOCK
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 was completed May 6, 1997. The properties sold
consisted of occupied office, light industrial, and R&D buildings and
leaseholds, together with hangar and office buildings thereon, in San Diego and
Riverside counties, California, and occupied industrial buildings and vacant
land in Chandler, Arizona. The total building space sold approximated 815,000
square feet.
The Company received $47,500,000 in cash upon completing the sale of the first
portion of the portfolio (nine properties), from which it repaid all debt
encumbering the properties and paid the related transaction and closing costs,
including $3,000,000 in "break-up" fees from previously terminated sales
transactions. Upon completing the sale of the two remaining properties in May
1997, the Company received $2,700,000 cash, from which a majority of the related
transaction costs were paid. In accordance with the sales agreement, $300,000
was withheld from the May proceeds to allow for payment of claims relating to
representations and warranties made by the Company, as seller. After resolution
of such claims, if any, the remaining portion of the $300,000 will be released
to the Company on August 6, 1997. The costs of real estate sold reflected in
the income statement include the "break-up" fees as well as the Company's net
investment in the underlying real estate sold and all other transaction and
selling costs.
The Company declared and paid a special dividend of $9.00 per share during
February 1997. This dividend represented the available proceeds from the
portion of the real estate portfolio that was sold in January 1997.
<PAGE>
NOTE 2 -- SALE OF REAL ESTATE INVESTMENTS/PROPOSED SALE OF COMMON STOCK
(CONTINUED)
The sale of the real estate portfolio resulted in a substantial gain for the
Company. Following the sale of assets and the payment of dividend to
shareholders, only nominal assets remain in the Company and, therefore, the
resulting corporate entity has virtually no revenue-generating or
cash-generating capabilities.
On May 27, 1997, the Company entered into a Stock Purchase Agreement (the
"Agreement") with a group of private investors led by Berg & Berg Enterprises,
Inc. (collectively, the "Purchaser" or the "Berg Group") of Cupertino,
California, pursuant to which the Company will sell 6,000,000 shares of newly
issued Common Stock to the Purchaser for a purchase price of $900,000 in cash,
or $0.15 per share. The Berg Group comprises privately held firms that have
designed, developed, and leased office, R&D, and manufacturing buildings and
complexes occupied by Silicon Valley technology companies since 1969.
Currently, the Berg Group owns and operates more than 3,500,000 square feet of
property. Per terms of the Agreement, after completing the stock sale, the
Company intends to distribute cash of up to $3.30 per share to shareholders of
record, other than the Purchaser. A special shareholder meeting, scheduled for
August 5, 1997, will be held to vote on the contemplated transaction. Upon
approval of the transaction (holders of 60 percent of the outstanding shares
have agreed to vote in favor of the transaction), the stock sale will be
completed in August 1997 and the distribution to shareholders will occur in
October 1997. Following completion of the stock sale, the Purchaser will
control the Company.
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 six months ended May 31 for interest was $410,000 in 1997
and $1,638,000 in 1996. Cash paid for income taxes during the six-month periods
was $416,000 in 1997 and $38,000 in 1996.
NOTE 4 -- NOTES PAYABLE
Notes payable comprise the following:
May 31 November 30
1997 1996
-------------- ---------------
Secured notes payable to banks, due 1998 through $ - $29,365,000
2001, paid in full during first quarter fiscal
year 1997
Secured note payable to insurance company,
due April 1997, paidin full during January
1997 - 1,388,000
-------------- ---------------
$ - $30,753,000
-------------- ---------------
-------------- ---------------
NOTE 5 -- NET INCOME PER SHARE
Net income per share is based on 1,533,121 and 1,371,121 shares for the quarters
ended May 31, and 1,467,253 and 1,369,941 for the six months ended May 31, the
weighted average number of shares outstanding during the periods presented for
fiscal years 1997 and 1996, respectively. The effect of stock options is either
not applicable or is not significant and such effect is not reflected in the per
share computations.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS:
SECOND QUARTER FISCAL 1997 COMPARED TO SECOND QUARTER FISCAL 1996
As discussed in Note 2, "Sale of Real Estate Investments/Proposed Sale of Common
Stock," to the consolidated financial statements above, the Company sold a
majority of its real estate assets in January 1997 and completed the sale of its
entire real estate portfolio in May 1997; the May portion of the sale resulted
in a loss of approximately $140,000 and left the Company with no operating
assets. Prior to the sale(s), the Company had continued to operate the
portfolio in a manner consistent with prior periods. Results for the second
quarter of fiscal 1997 reflect the effect of the sale of the portfolio:
operation of two properties for approximately two months (results similar to the
prior year), loss on sale of the two properties, absence of revenue or expenses
from the nine properties sold in January 1997 (prior year results reflect full
operations for such), absence of interest expense (notes payable secured by real
estate were paid in full during the first quarter of 1997), and an increase in
general and administrative expenses due to accrual of severance payments upon
downsizing of corporate staff.
The sale of the real estate portfolio 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 was completed May 6, 1997. The properties sold
consisted of occupied office, light industrial, and R&D buildings and
leaseholds, together with hangar and office buildings thereon, in San Diego and
Riverside counties, California, and occupied industrial buildings and vacant
land in Chandler, Arizona. The total building space sold approximated 815,000
square feet.
Upon completing the sale of the two properties in May 1997, the Company received
$2,700,000 cash, from which a majority of the related transaction costs were
paid. In accordance with the sales agreement, $300,000 was withheld from the
May proceeds to allow for payment of claims relating to representations and
warranties made by the Company, as seller. After resolution of such claims, if
any, the remaining portion of the $300,000 will be released to the Company on
August 6, 1997.
FIRST SIX MONTHS FISCAL 1997 COMPARED TO FIRST SIX MONTHS FISCAL 1996
As discussed above in the second quarter results of operations, the sale of the
Company's real estate portfolio had a significant effect on the operations of
the Company during the first half of fiscal year 1997. Upon completing the sale
of the nine properties during the first quarter of 1997, the Company received
$47,500,000 in cash, from which it repaid all debt encumbering the properties
(thus eliminating future interest expense) and paid the related transaction and
closing costs, including $3,000,000 in "break-up" fees from previously
terminated sales transactions. Upon completing the sale of the remaining two
properties in May 1997, the Company received $2,700,000 cash, from which a
majority of the related transaction costs were paid. In accordance with the
sales agreement, $300,000 was withheld from the May proceeds to allow for
payment of claims relating to representations and warranties made by the
Company, as seller. After resolution of such claims, if any, the remaining
portion of the $300,000 will be released to the Company on August 6, 1997.
The Company declared and paid a special dividend of $9.00 per share during
February 1997. This dividend represented the available proceeds from the sale
of the first portion of the real estate portfolio.
The sale of the real estate portfolio resulted in a gain of approximately
$4,709,000 and, coupled with the dividend paid to shareholders, left the Company
with no operating assets and minimal cash-generating ability. Results for the
first six months of fiscal 1997 reflect the effects of the sale: gain on sale
of real estate (net of the "break-up" fees), significantly decreased revenues
and expenses from operations of real estate, decreased interest expense, and an
increase in general and administrative expenses (severance payments upon
downsizing of corporate staff). The Company will continue to incur general and
administrative expenses until it completes the stock sale as discussed in Note
2, "Sale of Real Estate Investments/Proposed Sale of Common Stock," to the
consolidated financial statements above.
<PAGE>
CHANGES IN FINANCIAL POSITION:
MAY 31, 1997 COMPARED TO NOVEMBER 30, 1996
Nearly all changes in the Company's financial position during the first half of
fiscal year 1997 resulted from the sale of the Company's real estate portfolio,
as discussed above. The real estate assets were sold, all debt encumbering the
properties was repaid, a gain on sale of approximately $4,709,000 and the
related tax liability were recorded, approximately half of the tax liability was
paid, 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.
Certain options that did not vest at this time were canceled during March 1997.
LIQUIDITY AND CAPITAL RESOURCES:
As discussed above, the Company has sold 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 available net proceeds from the
sale of the first portion of the real estate assets. Following the sale of the
portfolio and the payment of dividend to shareholders, only nominal assets
remain in the Company and, therefore, the resulting corporate entity has
virtually no revenue-generating or cash-generating capabilities. During May
1997, the Company entered into an agreement to sell 6,000,000 shares of newly
issued Common Stock for a price of $900,000 in cash, or $0.15 per share (see
Note 2, "Sale of Real Estate Investments/Proposed Sale of Common Stock," to the
consolidated financial statements above). Per terms of the Agreement, after
completing the stock sale, the Company intends to distribute cash of up to $3.30
per share to shareholders of record, other than the Purchaser. A special
meeting of the Company's shareholders to vote on the contemplated transaction is
scheduled for August 5, 1997. Upon approval of the transaction by shareholders
(holders of 60 percent of the outstanding shares have agreed to vote in favor of
the transaction), the stock sale will be completed in August 1997 and the
distribution to shareholders will occur in October 1997. Following completion
of the stock sale, the Purchaser will control the Company.
If the contemplated stock sale is not completed, the Company will reconsider and
pursue available strategic alternatives for the 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 of real estate, 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 served as executive
officers and directors of Triton and currently provide consulting services to
Alarmguard (see Note 1, "Basis of Presentation," to the consolidated financial
statements above). The net effect of the management changes further reduced G&A
expenses by 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 proposed stock sale is completed. G&A expenses and other cash needs
will be funded by current cash on hand.
The Company is 44-percent owned by Alarmguard Holdings, Inc.; this investment
was formerly owned by Triton Group Ltd. On April 15, 1997, Triton merged with
Security Holdings, Inc. of Orange, Connecticut and was renamed Alarmguard.
<PAGE>
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was not involved in any material legal proceedings during the
quarter ended May 31, 1997.
ITEM 2. CHANGES IN SECURITIES
No changes in the rights of the Company's securities occurred during the quarter
ended May 31, 1997.
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
May 31, 1997.
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
January 22, 1997 (Amended June 20, 1997) -- Filed for Item 2
Acquisition or Disposition of Assets and Item 7 Financial Statements
and Exhibits. The filing was amended to reflect the sale of the two
remaining real estate assets to Spieker Properties, L.P. in accordance
with the terms of a purchase and sale agreement. Filing included
amendment of the pro forma financial statements.
<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)
July 15, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contans summary financial information extracted from the
consolidated balance sheets as of May 31, 1997 and the related consolidated
statements of operations for the six months then ended and is qualified in its
entirley by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-END> MAY-31-1997
<CASH> 4,943
<SECURITIES> 0
<RECEIVABLES> 82
<ALLOWANCES> 16
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 247
<DEPRECIATION> 241
<TOTAL-ASSETS> 5,536
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 20,182
<OTHER-SE> (15,634)
<TOTAL-LIABILITY-AND-EQUITY> 5,536
<SALES> 0
<TOTAL-REVENUES> 52,117
<CGS> 0
<TOTAL-COSTS> 46,288
<OTHER-EXPENSES> 594
<LOSS-PROVISION> (15)
<INTEREST-EXPENSE> 424
<INCOME-PRETAX> 4,811
<INCOME-TAX> 1,373
<INCOME-CONTINUING> 3,438
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,438
<EPS-PRIMARY> 2.34
<EPS-DILUTED> 2.34
</TABLE>
