ITEM 1. BUSINESS
GENERAL:
Mission West Properties (the "Company"), with corporate offices located in San Diego, California, is a California corporation that has been engaged in developing, owning, operating, and selling income-producing commercial real estate. Since completing its most recent development projects in 1991, the Company has been involved principally in owning and operating real estate projects.
The Company was formed in 1969 as Palomar Mortgage Investors, a California business trust. It operated as a real estate investment trust ("REIT") (as defined by the Internal Revenue Code), investing primarily in short- and intermediate-term construction and development loans secured by first trust deeds on real property. In 1974, the Company terminated new loan activity except to facilitate the sale of property acquired from borrowers through foreclosure or by deed in lieu of foreclosure and, in 1975, changed its name to Mission Investment Trust. In 1979, the Company terminated its status as a REIT and began to develop and market properties it owned. Since then, the Company has acquired, developed, and sold properties in southern California and Arizona in accordance with its business strategy. In 1982 the Company incorporated under its present name.
SALE OF REAL ESTATE PORTFOLIO:
In July 1996 the Company entered into an agreement to sell all its real estate assets; this agreement was subsequently terminated and replaced, and the subsequent agreement was also terminated and replaced. On December 6, 1996, the Company entered into an agreement to sell all the real estate assets to Spieker Properties, L.P. ("Spieker"), a California limited partnership, for $50,500,000 in cash, subject to certain conditions customary in a transaction of this type. A special shareholder meeting was held December 16, 1996, at which time 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 eight of the Company's ten operating properties and a vacant land parcel were sold (also see Note 2 to the consolidated financial statements). The remaining two operating properties are anticipated to be sold within 120 days after January 22, 1997. The 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 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.
Upon completion of sale of the eight properties and land, the Company received $47,500,000 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 the terminated sales transactions. In accordance with the sales agreement, $300,000 was withheld from the proceeds to allow for satisfaction of any post-closing breaches of representations and warranties made by the Seller. If no such breaches occur, the $300,000 will be released to the Company after 90 days. Also in accordance with the sales agreement, upon completion of 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.
On February 4, 1997, the Company declared that a special dividend of $9.00 per share would be paid on February 27, 1997 to all shareholders of record as of February 19, 1997. This dividend represents the currently available portion of the proceeds from the sale of the real estate assets. The significance of the sale of assets and the subsequent payment of dividend to shareholders is that only nominal assets will remain in the Company and, therefore, the resulting corporate entity has virtually no revenue-generating or cash-generating capabilities. The Board of Directors and management currently are reviewing available strategic alternatives for the remaining corporate entity. These alternatives include a possible business or asset acquisition or combination, a sale of the corporate entity, or outright liquidation.
There is no relationship between the Company and Spieker.
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WHOLLY OWNED SUBSIDIARIES:
The Company has two wholly owned subsidiaries, MIT Realty, Inc. and Mission West Executive Aircraft Center, Inc. ("MWEAC"). MIT Realty, Inc. is an inactive entity; it has no signed contracts or commitments. MWEAC is an active subsidiary that owns and operates office buildings and aircraft hangars as part of a fixed-base operations center at the McClellan-Palomar Airport; management of this facility is provided by an independent contractor and the results of the operations of this subsidiary are included in the consolidated financial statements of the Company.
EMPLOYEES:
The Company had seven full-time employees as of November 30, 1996.
REAL ESTATE INVESTMENTS AND MARKETING:
At November 30, 1996, the Company had investments in ten real estate projects and one undeveloped parcel of land totaling $41,872,000, net of accumulated depreciation and allowance for estimated losses. The Company completed its most recent development projects in 1991 and, since that time, has principally focused on managing its real estate portfolio. Because the Company's property portfolio contained what management believed to be high-quality projects located in desirable markets, the Company historically had been successful in both leasing projects and effecting sales from time to time. Subsequent to November 30, 1996, the Company sold a majority of its real estate properties (see Part I - -- Item 1 "Business -- Sale of Real Estate Portfolio" above). The Company's properties were substantially leased, with an average portfolio occupancy of 86 percent in fiscal year 1996, and had an aggregate positive cash flow.
GOVERNMENT REGULATIONS/ENVIRONMENTAL ISSUES:
The Company's rental properties were subject to various federal, state, and local regulations such as those addressed by the American Disabilities Act and local building codes. The Company believes that the properties were in substantial compliance with all applicable regulatory requirements through the date of sale (see Part I -- Item 1 "Business -- Sale of Real Estate Portfolio" above) and, therefore, no material costs are anticipated to correct noncompliance.
ITEM 2.

ITEM 2. PROPERTIES
The Company had developed or acquired commercial properties located in southern California and Arizona. Each property was selected for its perceived potential to contribute value to the Company's real estate portfolio and ability to generate profit, typically upon sale. In the pursuit of enhancing property values and profits, the Company committed to a regular maintenance program and to providing superior property management services to its tenants.
During the year ended November 30, 1996, the Company's operating property portfolio was, on average, 86 percent leased. The rental rate for leases, exclusive of airport hangar space, in effect during the year ranged from $0.31 to $1.99 per square foot, net of concessions. The Company has negotiated each lease separately; typically, office building and airport lease rates are full- service, net of utilities, and industrial rates are triple net or modified gross. A majority of the leases contain provisions for annual cost-of-living or percentage increases. Lease terms average from one to five years, ranging up to ten years, with a few month-to-month tenancies. Cash flows from a property may vary from year to year depending on tenant turnover. Upon lease maturity, expenditures such as lease commissions, leasehold improvements, and suite refurbishments may occur.
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ITEM 2. PROPERTIES (CONTINUED)
The Company's real estate investments as of November 30, 1996, were as follows (sale of all properties except the two Airport Projects was completed January 22, 1997; see Part I -- Item 1 "Business -- Sale of Real Estate Portfolio" above):
ITEM 3.

ITEM 3. 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 through December 11, 1997.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders during the quarter ended November 30, 1996. A proposal for sale of all the Company's real estate assets was put to a vote of security holders on December 16, 1996 (see Part I -- Item 1 "Business -- Sale of Real Estate Portfolio" above); the sale was approved by approximately 88 percent.
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PART II
ITEM 5.

ITEM 5. MARKET FOR THE REGISTRANT'S SHARES OF COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Common Stock of the Company is traded on the American and Pacific Stock Exchanges under the symbol MSW. The following are the high and low sales prices, by quarter, of the Registrant's shares for the two most recent fiscal years.
1996 1995 ---------------- ------------------ High Low High Low ------ ----- ----- ------
1st Quarter 5 3/8 4 5/8 7 1/4 5 1/4 2nd Quarter 7 4 5/8 5 3/4 5 1/4 3rd Quarter 8 1/4 6 1/4 5 5/8 4 7/8 4th Quarter 9 3/4 7 1/8 5 1/2 5
As of February 19, 1997, the approximate number of holders of record of the Company's stock was 475. The Company paid no dividends during fiscal 1996 or 1995. Certain banks, through their debt agreements, had restricted the Company from paying cash dividends to shareholders; these notes payable were repaid in full upon completion of the sale of real estate in January 1997. On February 4, 1997, the Company declared a special dividend of $9.00 per share to be paid February 27, 1997 (see Part I -- Item 1 "Business -- Sale of Real Estate Portfolio" above).
ITEM 6.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Selected consolidated financial data is derived from the audited financial statements and notes thereto (see Part II -- Item 8 "Consolidated Financial Statements and Supplementary Data" below) and is as follows (in thousands, except per share data):
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ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED WITH FISCAL 1995:
During fiscal year 1996, the Company continued to focus operating efforts on managing its real estate portfolio of ten operating projects; no properties were sold and no development occurred during the year. In addition to managing the portfolio, the Company entered into an agreement to sell the portfolio in July 1996. This agreement was subsequently replaced, with a majority of the real estate being sold in January 1997 (see Part I -- Item 1 "Business -- Sale of Real Estate Portfolio" above).
During 1996 occupancy levels remained fairly stable, averaging 86 percent for the portfolio, compared to 87 percent in fiscal 1995. Compared to fiscal 1995, the Company's rental revenues from real estate decreased $81,000, or one percent, in 1996; the related operating expenses of real estate decreased $140,000, or eight percent. The decrease in rental revenue primarily resulted from the decrease in occupancy. The net decrease in operating expenses resulted from decreases in building repairs/reconditioning and property taxes that were offset by general increases in operating costs.
Sales of real estate decreased $287,000 between years, primarily the result of an unimproved parcel of land sold in 1995. The related costs of real estate sold in fiscal 1995 consist primarily of the land sale, while 1996 costs primarily consist of expenses associated with the agreements to sell the entire portfolio that were not consummated (costs associated with the sale completed in January 1997 will be recorded as a cost of sale at that time).
Interest expense decreased $390,000 between years as a result of decreases in outstanding notes payable and in prime lending rates (prime rates averaged 8.3 percent during fiscal 1996 compared to 8.8 percent during fiscal 1995).
FISCAL 1995 COMPARED WITH FISCAL 1994:
During fiscal year 1995, the Company did not engage in development activity and sold no rental properties; the Company sold one parcel of undeveloped land. The Company continued to focus operating efforts on managing its real estate portfolio of ten operating projects. During 1995 occupancy levels averaged 87 percent for the portfolio, compared to 84 percent in fiscal 1994. A $5,200,000 adjustment recorded in fiscal 1994 affected results of operations for fiscal 1995 in numerous areas, as discussed below.
Compared to fiscal 1994, the Company's rental revenues from real estate increased $509,000, or eight percent, in 1995; the related operating expenses of real estate decreased $208,000, or ten percent. The increase in rental revenue primarily resulted from effects of a $5,200,000 adjustment recorded during the fourth quarter of fiscal 1994 to real estate investments and other assets (reduced amortization of certain charges against rental revenue in 1995). The net decrease in operating expenses resulted from several factors. Increases in building repairs/reconditioning (successful leasing activity) and property taxes in Arizona were offset by decreases in bad debt expense (including $115,000 in recovery of prior bad debts), lease commission amortization (additional effect of the 1994 adjustment), refunds of prior year property taxes (successful assessment appeals), and general cost containment. Depreciation of real estate decreased $120,000 between years due to effects of the 1994 adjustment.
Sales of real estate decreased a net $1,696,000 between years. Litigation was settled during fiscal 1994 related to property sold in 1986, resulting in $1,500,000 of nonrecurring revenue in fiscal 1994. During fiscal 1995, a parcel of unimproved land was sold for $225,000. The related costs of real estate sold in fiscal 1994 consist of legal fees and distributions in accordance with the Company's Management Incentive Plan and in fiscal 1995 consist of the land sold and various related selling costs.
Due to reimbursements from tenants for interior leasehold improvements in excess of a standard allowance that were recorded in fiscal 1994 but not repeated in fiscal 1995, other revenues decreased $184,000 between 1994 and 1995.
During fiscal 1995, general and administrative expenses decreased $255,000 due to cost control and elimination of outside consultant fees recorded in fiscal 1994. Interest expense increased $347,000 between years as a result of increases in prime
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FISCAL 1995 COMPARED WITH FISCAL 1994 (CONTINUED):
lending rates, offset by a $2,415,000 reduction in notes payable. Prime rates averaged 8.8 percent during fiscal 1995 compared to 6.9 percent during fiscal 1994.
As discussed in Note 4 to the Consolidated Financial Statements, the Company adopted SFAS No. 109 effective December 1, 1993. This required change in accounting for income taxes resulted in a $440,000 cumulative effect, directly contributing net income for fiscal 1994 that was not repeated in fiscal 1995.
CHANGES IN FINANCIAL POSITION
NOVEMBER 30, 1996 COMPARED WITH NOVEMBER 30, 1995:
During fiscal year 1996, the Company's cash and investments position increased a net $17,000. Cash inflow from operations was offset by scheduled debt amortizations of $964,000, a $250,000 payoff of note payable upon maturity, normal interest expense, lease commissions payments, and payment of certain costs related to the portfolio sale. The $1,312,000 decrease in real estate investments during fiscal 1996 resulted primarily from normal depreciation.
During fiscal 1996, the Company negotiated renewals of 40 percent of its debt portfolio, extending maturities until 2001. One unsecured loan in the amount of $250,000 was paid in full during 1996 upon its maturity.
LIQUIDITY AND CAPITAL RESOURCES
As discussed in Part I -- Item 1 "Business -- Sale of Real Estate Portfolio" above and in Note 2 "Subsequent Event -- Sale of Real Estate Investments" to the consolidated financial statements below, the Company entered into an agreement to sell its entire real estate portfolio and a majority of that sale was completed in January 1997. Additionally, a special dividend to shareholders of $9.00 per share was declared in February 1997; this dividend represented the currently available portion of the net proceeds from the sale of the assets. Sale of the remainder of the portfolio is scheduled to be completed within 120 days after January 22, 1997 and payment of an additional special dividend to shareholders will be considered at that time.
The significance of the sale of assets and the subsequent payment of dividend(s) to shareholders is that only nominal assets will remain in the Company and, therefore, the resulting corporate entity has virtually no revenue-generating or cash-generating capabilities. The Board of Directors and management currently are reviewing available strategic alternatives for the remaining corporate entity. These alternatives include a possible business or asset acquisition or combination, a sale of the corporate entity, or outright liquidation.
Upon the January 1997 sale, reductions in general and administrative ("G&A") expenses of approximately $10,000 per month were made. Other G&A expenses of approximately $78,000 per month will continue until the remainder of the real estate is sold and until the future course of the Company is determined. These two items are anticipated to be achieved by the third quarter of fiscal 1997. Funding of future G&A expenses and any other items that arise will occur from current cash on hand.
IMPACT OF RECESSION ON OPERATIONS
Due to the sale of essentially all the Company's assets (see Part I -- Item 1 "Business -- Sale of Real Estate Portfolio" above), an impact from recession on the Company's operations or financial condition is not considered likely.
IMPACT OF INFLATION AND CHANGING PRICES ON OPERATIONS
Due to the sale of essentially all the Company's assets (see Part I -- Item 1 "Business -- Sale of Real Estate Portfolio" above), an impact from inflation or changing prices on the Company's operations or financial condition is not considered likely.
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Mission West Properties
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Mission West Properties and its subsidiaries (the "Company") at November 30, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended November 30, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
On January 22, 1997, the Company sold a majority of its real estate assets pursuant to an agreement, as more fully described in Note 2 to the consolidated financial statements. The pro forma balance sheet reflects the effect of this sale on the Company's financial condition at November 30, 1996, had the sale occurred at that date.
As discussed in Note 4, during fiscal year 1994 the Company changed its method of accounting for income taxes.
PRICE WATERHOUSE LLP San Diego, California February 11, 1997
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See accompanying notes to consolidated financial statements.
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See accompanying notes to consolidated financial statements.
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See accompanying notes to consolidated financial statements.
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See accompanying notes to consolidated financial statements.
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MISSION WEST PROPERTIES Notes to Consolidated Financial Statements November 30, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
GENERAL POLICIES: Mission West Properties (the "Company") has been engaged in developing, owning, operating, and selling income-producing real estate located principally in southern California. As discussed in Note 2 "Subsequent Event -- Sale of Real Estate Investments" below, the Company entered into an agreement to sell its entire real estate portfolio and a majority of that sale was completed in January 1997. The Company is 49 percent owned by Triton Group Ltd. ("Triton").
The accompanying financial statements consolidate the accounts of the Company and its wholly owned subsidiaries. All transactions between the Company and its subsidiaries have been eliminated.
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.
REAL ESTATE: The Company's real estate investments are carried at cost; an allowance for estimated losses is provided for other than temporary declines in value based on the Directors' and management's periodic evaluation of those investments. This evaluation considers recent appraised values, market conditions, and the Company's investment strategies.
Although adoption is not required until its fiscal year 1997, the Company has assessed the impact of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Based on the selling price of the real estate assets (see Note 2 "Subsequent Event -- Sale of Real Estate Investments" below), the Company does not believe there has been an impairment of the assets that would have an adverse impact on its financial position or results of operation.
Revenues from sales of real estate are reported at the time of sale or when certain financial criteria are met.
DEPRECIATION: Depreciation on rental properties is computed using the straight- line method over the estimated useful lives of the assets, generally ten to 30 years.
INCOME TAXES: Income taxes are accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred income taxes are provided for all temporary differences and operating loss and tax credit carryforwards. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
NET INCOME (LOSS) PER SHARE: Net income (loss) per share of common stock is based on 1,457,551 shares in fiscal year 1996 and 1,393,105 and 1,468,721 shares in fiscal years 1995 and 1994, respectively. The shares for 1996 include the weighted average shares outstanding for the year as well as the dilutive effect of common stock equivalents, which consist of shares subject to stock options. The effect of stock options is either immaterial or antidilutive for fiscal years 1995 and 1994; therefore, only the weighted average shares outstanding are used in those per share computations.
CASH AND CASH EQUIVALENTS: Cash and cash equivalents includes cash on hand, money market funds, U.S. Treasury Bills, and certificates of deposit with an original maturity of 90 days or less. Short-term investments include U.S. Treasury Bills and certificates of deposit.
FAIR VALUE OF FINANCIAL INSTRUMENTS: The carrying amounts of the Company's financial instruments as presented are reasonable estimates of those instruments' fair values.
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NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK: Credit risk is primarily concentrated in cash equivalents, short-term investments, and rent receivables. Cash in excess of operating requirements is invested in U.S. Treasury securities or with federally insured institutions in short-term certificates of deposit; amounts invested with a single institution are limited to minimize risk. The Company's primary operations have consisted of leasing commercial space to small and medium-sized tenants, primarily in southern California. To reduce credit risk, the Company obtains and holds security deposits from a majority of tenants and performs ongoing credit evaluations of all major tenants' financial conditions.
SHORT-TERM INVESTMENTS: Investments are accounted for in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," which requires that investments be classified as either held-to-maturity, trading, or available-for-sale. Held-to-maturity investments are carried at amortized costs; unrealized gains and losses are included in earnings for trading investments and are recorded directly to shareholders' equity for available-for-sale investments. Management determines the classification of investments at the time of purchase; the Company's short-term investments are classified as held-to-maturity and are carried at amortized cost, which approximates fair value.
NOTE 2 - SUBSEQUENT EVENT -- SALE OF REAL ESTATE INVESTMENTS PRO FORMA BALANCE SHEET AND DISCONTINUED OPERATIONS
The Pro Forma balance sheet has been prepared to show the effects that two subsequent events, a sale of the Company's real estate assets and payment of a special dividend (as discussed below), would have had on the November 30, 1996 balance sheet. Effects reflected in the Pro Forma balance sheet include cash proceeds from the sale of nine properties, repayment of debt, gain on the sale, related income tax liability, and payment of the special dividend.
During July 1996 the Company entered into an agreement to sell all its real estate assets; this agreement was subsequently terminated and replaced, and the subsequent agreement was also terminated and replaced. 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 conditions customary in a transaction of this type. A special shareholder meeting was held December 16, 1996, at which time 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 remaining two properties are anticipated to close within 120 days after January 22, 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 $47,500,000 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 the terminated sales transactions. In accordance with the sales agreement, $300,000 was withheld from the proceeds to allow for satisfaction of any post-closing breaches of representations and warranties made by the Seller. If no such breaches occur, the $300,000 will be released to the Company after 90 days. Also in accordance with the sales agreement, upon completion of 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 sale of the real estate results in a substantial gain for the Company. This sale will be recorded upon its completion in fiscal year 1997. The significance of the sale of assets and the subsequent payment of dividend(s) to shareholders is that only nominal assets will remain in the Company and, therefore, the resulting corporate entity has virtually no revenue-generating or cash- generating capabilities.
On February 4, 1997, the Company declared that a special dividend of $9.00 per share would be paid on February 27, 1997 to all shareholders of record as of February 19, 1997. This dividend represents the currently available portion of the proceeds from the sale of the real estate assets.
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NOTE 3 - NOTES PAYABLE
Aggregate principal payments required on the notes payable at November 30, 1996, are $2,230,000, $16,760,000, $298,000, $298,000, and $11,167,000 for the years 1997 through 2001. Certain of the notes payable contain financial covenants such as debt service coverage and maximum debt-to-worth ratios. Additional covenants restrict the Company from paying cash dividends and other provisions specify that a change in majority voting power of the Company's stock, either by transfer or the issuance of additional voting securities, is an event of default. All notes payable were repaid in full upon the sale of a majority of the Company's real estate assets in January 1997 (see Note 2 "Subsequent Event -- Sale of Real Estate Investments" above).
NOTE 4 - INCOME TAXES
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NOTE 4 - INCOME TAXES (CONTINUED)
The Company adopted SFAS No. 109 effective December 1, 1993. This accounting statement requires recognition of deferred tax assets and liabilities for differences between the financial statement carrying amounts and the tax basis of assets and liabilities, at anticipated tax rates. The cumulative effect of this change in the method of accounting for income taxes resulted in a $440,000 decrease in the net loss for fiscal year 1994. As of November 30, 1996, the Company's net deferred tax asset is included in other assets.
The provision for (benefit from) income taxes reflects temporary differences in the recognition of revenue and expense for tax and financial reporting purposes. These temporary differences primarily arise from the recognition of rental revenue from real estate, recognition of accrued expenses, capitalized interest, and a different depreciable basis for tax than for financial reporting purposes. The Company carries back federal net operating losses to prior years for refunds and carries forward state net operating losses to be applied against future operating income, if any.
Due to the uncertainty of realizing the benefit of certain deferred tax assets, including state loss carryforwards, a valuation allowance was established in fiscal year 1994. The net decrease in the valuation allowance during fiscal year 1996 was due to changes in the state loss carryforward amount.
NOTE 5 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the fiscal year for interest was $3,106,000, $3,566,000, and $3,102,000 in 1996, 1995, and 1994, respectively. The Company received an income tax refund, net of payments, of $17,000 in fiscal year 1996 and paid income taxes, net of refunds, of $258,000 and $145,000 in fiscal years 1995 and 1994, respectively.
During the first quarter of fiscal year 1995, in a noncash transaction, the Company reacquired and retired 100,000 shares of its common stock. This transaction was effected by a transfer of 100,000 shares of the Company's stock from Triton to an affiliated tenant, at which point Triton's investment in the Company decreased to 49 percent, and an exchange of the 100,000 shares from the affiliated tenant to the Company for real estate assets, consisting of certain tenant improvements, and a modification of lease terms, consisting of an extension of maturity and a reduction in rent.
NOTE 6 - STOCK OPTIONS AND STOCK PURCHASE PLAN
The Company has a Director Stock Option Plan and an Incentive Stock Option Plan under which non-salaried directors and officers, respectively, may purchase shares of the Company's stock at a minimum option price based on market value at the date of grant. Options granted under the plans become exercisable ratably over five years and expire after a period not to exceed ten years. At November 30, 1996, 150,000 and 200,000 shares were authorized under each plan, of which 131,600 and 163,600 were available for grant and 26,400 and 49,080 were exercisable under the Director Stock Option Plan and the
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NOTE 6-STOCK OPTIONS AND STOCK PURCHASE PLAN (CONTINUED) Incentive Stock Option Plan, respectively. Provisions of the Plans accelerate vesting of all unvested options upon the sale of a majority of the Company's real estate assets (see Note 2 "Subsequent Event -- Sale of Real Estate Investments" above); such unvested shares at November 30, 1996 totaled 13,520.
Activity in these plans comprises the following: Years Ended November 30 ---------------------------- 1996 1995 1994 -------- ------- --------
Beginning share balance 100,000 106,400 156,200 Exercised ($4.125 per share) (2,400) - - Canceled ($10.125 per share in 1996) (8,600) (6,400) (49,800) -------- ------- --------
Ending share balance ($3.25 to $9.75 per share) 89,000 100,000 106,400 -------- ------- -------- -------- ------- --------
Effective July 1, 1994, the Company granted nonqualified options to purchase 125,000 shares of its Common stock to a key executive. The exercise price of the options is $3.00 per share and the options expire ten years from the date of grant. Options to purchase 73,000 shares of the grant vested immediately; the remainder of the options become exercisable if specific financial milestones occur.
SFAS No. 123, "Accounting for Stock-Based Compensation," issued in October 1995, will require adoption during the Company's fiscal year 1997. The impact of adoption is considered to be minimal since no options have been granted in recent years.
The Company has a Stock Purchase Plan for which all directors and employees are eligible. Under terms of the plan, each eligible participant may contribute up to $3,000 per month, to be invested in shares of the Company's stock purchased on the open market. The Company contributes $0.50 to the plan for each $1.00 contributed by a participant. The total amounts expended by the Company for such contributions during the years ended November 30, 1996, 1995, and 1994 were $37,000, $31,000, and $19,000, respectively.
NOTE 7 - COMMITMENTS AND CONTINGENCIES
The Company is a lessee on two 30-year land leases at an airport in San Diego county and incurred rental expense of $189,000, $192,000, and $189,000 for fiscal years ended November 30, 1996, 1995, and 1994, respectively. The provisions of the leases require minimum lease payments of $183,000, $192,000, $201,000, $211,000, and $222,000 during the Company's fiscal years 1997 through 2001 and $6,310,000 thereafter, and contingent payments of five percent of certain sublease income. The lease amounts are subject to renegotiation to reflect cost of living increases every five years. The Company holds subleases and records sublease revenue from these two parcels; the related minimum future rentals are included in the amounts set forth below.
Minimum future rentals revenue on non-cancelable operating leases as of November 30, 1996 amount to $5,682,000, $4,331,000, $3,037,000, $2,439,000, and $1,699,000 for fiscal years 1997 through 2001, respectively, and $7,173,000 thereafter. During the years ended November 30, 1995 and 1994, rental revenue from real estate of $611,000 and $763,000, respectively, was recorded for property leased to former affiliates of Triton.
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 through December 11, 1997.
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- -------------------------- (a) A majority of the real estate investments were sold January 22, 1997. See Note 2 to the consolidated financial statements.
(b) The cost basis of real estate for federal income tax purposes approximates its gross carrying value, before accumulated depreciation and allowance for estimated losses. The allowance for estimated losses of $4,413,000 at November 30, 1996, was determined in accordance with the Company's policy as described in Note 1 to the consolidated financial statements.
(c) Rental properties are depreciated on a straight-line basis over a 10- to 30-year life. Changes in accumulated depreciation for the three years ended November 30, 1996, follows:
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no changes in, or disagreements with, independent accountants on matters of accounting principles or practices or of financial disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Director information is incorporated herein by reference to the Company's definitive Proxy Statement for the 1997 annual meeting of shareholders. There is no relationship by blood, marriage, or adoption among the officers. All officers hold office at the discretion of the Board of Directors. Executive officers of the Company are as follows:
Name Age Position ------- ----- ----------
J. Gregory Kasun 41 President, Chief Executive Officer, Director Employed by the Company since 1989; President since November 1993, previously CFO and Corporate Secretary
Harve Filuk 54 Vice President Real Estate Operations Employed by the Company since 1975; Vice President since 1978
Katrina L. Thompson 38 Chief Financial Officer, Corporate Secretary Employed by the Company since 1991; CFO and Secretary since November 1993, previously Controller.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference to the Company's definitive Proxy Statement for the 1997 annual meeting of shareholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference to the Company's definitive Proxy Statement for the 1997 annual meeting of shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference to the Company's definitive Proxy Statement for the 1997 annual meeting of shareholders.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. FINANCIAL STATEMENTS
The financial statements and financial statement schedules listed in the index under Part II -- Item 8