-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TbsGq5b23mzyc80xqinGDTmZje7C3NbUXhsNGufsESXfu/RXSb2KMsmH3iC8vC+T 7u2XA0TpBHo9OfIfZtFbag== 0001067419-09-000027.txt : 20090807 0001067419-09-000027.hdr.sgml : 20090807 20090807145554 ACCESSION NUMBER: 0001067419-09-000027 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20090630 FILED AS OF DATE: 20090807 DATE AS OF CHANGE: 20090807 FILER: COMPANY DATA: COMPANY CONFORMED NAME: MISSION WEST PROPERTIES INC CENTRAL INDEX KEY: 0001067419 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 952635431 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-34000 FILM NUMBER: 09995094 BUSINESS ADDRESS: STREET 1: 10050 BANDLEY DRIVE CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4087250700 MAIL ADDRESS: STREET 1: 10050 BANDLEY DR CITY: CUPERTINO STATE: CA ZIP: 95014 10-Q 1 msw2ndqtr200910q.txt MSW 2ND QTR 2009 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------- Form 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES E XCHANGE ACT OF 1934 For the quarterly period ended June 30, 2009 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 1-8383 Mission West Properties, Inc. (Exact name of registrant as specified in its charter) Maryland 95-2635431 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 10050 Bandley Drive Cupertino, California 95014 (Address of principal executive offices) (Zip Code) (408) 725-0700 (Registrant's telephone number, including area code) ----------- 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. [X] Yes [ ] No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). [ ] Yes [ ] No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ] Smaller reporting company [ ] (Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of August 7, 2009, there were 21,770,211 shares of common stock outstanding, par value $.001 per share. Mission West Properties, Inc. FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2009 INDEX
PAGE PART I FINANCIAL INFORMATION ---- Item 1. Condensed Consolidated Financial Statements: Condensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008...................................................................................2 Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008 (unaudited).................................................3 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008 (unaudited).....................................................4 Notes to Condensed Consolidated Financial Statements (unaudited)........................................5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................13 Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................................23 Item 4. Controls and Procedures................................................................................24 PART II OTHER INFORMATION Item 1. Legal Proceedings......................................................................................25 Item 1A. Risk Factors...........................................................................................25 Item 4. Submission of Matters to a Vote of Security Voters.....................................................25 Item 6. Exhibits...............................................................................................25 SIGNATURES........................................................................................................26
EXHIBITS Exhibit 10.56 - Heritage Bank of Commerce Revolving Credit Loan Agreement Exhibit 10.56.1 - Heritage Bank of Commerce Revolving Credit Loan Change in Terms Agreement, dated April 17, 2008 Exhibit 10.56.2 - Heritage Bank of Commerce Revolving Credit Loan Change in Terms Agreement, dated June 5, 2009 Exhibit 10.57 - M&M Real Estate Control & Restructuring, LLC Promissory Note, dated April 14, 2009 Exhibit 10.58 - M&M Real Estate Control & Restructuring, LLC Promissory Note, dated April 21, 2009 Exhibit 10.59 - M&M Real Estate Control & Restructuring, LLC Promissory Note, dated July 1, 2009 Exhibit 31.1 - Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 Exhibit 31.2 - Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 Exhibit 31.3 - Certification Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 Exhibit 32 - Certification of CEO and CFO Pursuant to 18 U.S.C. ss. 1350, as Adopted Pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002 - 1 - PART I - FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MISSION WEST PROPERTIES, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share and per share amounts) ---------
June 30, 2009 December 31, 2008 --------------------- ---------------------- (unaudited) ASSETS Investments in real estate: Land $ 320,911 $ 320,911 Buildings and improvements 799,471 799,471 Real estate related intangible assets 3,240 3,240 --------------------- ---------------------- Total investments in properties 1,123,622 1,123,622 Accumulated depreciation and amortization (192,322) (180,043) --------------------- ---------------------- Net investments in properties 931,300 943,579 Investment in unconsolidated joint venture 3,833 3,768 --------------------- ---------------------- Net investments in real estate 935,133 947,347 Restricted cash 7,078 39,478 Restricted investment in marketable securities 6,585 - Investment in marketable securities - 3,368 Deferred rent receivables 18,401 17,841 Other assets, net 26,241 26,251 --------------------- ---------------------- Total assets $ 993,438 $1,034,285 ===================== ====================== LIABILITIES AND EQUITY Liabilities: Mortgage notes payable $ 324,941 $ 330,908 Mortgage note payable (related parties) 8,516 8,761 Revolving line of credit 3,892 13,079 Interest payable 1,556 1,596 Security deposits 5,125 5,272 Deferred rental income 6,372 3,964 Dividends and distributions payable 15,791 21,055 Accounts payable and accrued expenses 19,631 17,747 --------------------- ---------------------- Total liabilities 385,824 402,382 --------------------- ---------------------- Commitments and contingencies (Note 9) Equity: Stockholders' equity: Preferred stock, $.001 par value, 20,000,000 shares authorized, none issued and outstanding - - Common stock, $.001 par value, 200,000,000 shares authorized, 21,770,211 and 19,748,211 shares issued and outstanding at June 30, 2009 and December 31, 2008 22 20 Additional paid-in capital 169,682 154,412 Distributions in excess of accumulated earnings (24,413) (20,014) --------------------- ---------------------- Total stockholders' equity 145,291 134,418 Noncontrolling interests 462,323 497,485 --------------------- ---------------------- Total equity 607,614 631,903 --------------------- ---------------------- Total liabilities and equity $ 993,438 $1,034,285 ===================== ======================
The accompanying notes are an integral part of these condensed consolidated financial statements. - 2 - MISSION WEST PROPERTIES, INC CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except share and per share amounts) (unaudited) ---------
Three months ended June 30, Six months ended June 30, ----------------------------------- ----------------------------------- 2009 2008 2009 2008 ---------------- ------------------ ----------------- ----------------- Operating revenues: Rental revenue from real estate $20,424 $19,359 $41,080 $38,356 Tenant reimbursements 4,315 3,710 9,115 7,293 Lease termination income - - - 1,921 Other income 302 249 622 477 ---------------- ------------------ ----------------- ----------------- Total operating revenues 25,041 23,318 50,817 48,047 ---------------- ------------------ ----------------- ----------------- Operating expenses: Property operating, maintenance and real estate taxes 7,272 5,511 13,223 10,398 General and administrative 623 674 1,154 1,347 Depreciation and amortization of real estate 6,334 5,682 12,279 11,305 ---------------- ------------------ ----------------- ----------------- Total operating expenses 14,229 11,867 26,656 23,050 ---------------- ------------------ ----------------- ----------------- Operating income 10,812 11,451 24,161 24,997 Other income (expenses): Equity in earnings of unconsolidated joint venture 75 407 164 789 Interest and dividend income 1,125 215 1,065 772 Unrealized gain (loss) from investment 2,433 - (324) - Interest expense (7,085) (4,956) (11,891) (9,884) Interest expense - related parties (171) (280) (352) (716) ---------------- ------------------ ----------------- ----------------- Net income 7,189 6,837 12,823 15,958 Net income attributable to noncontrolling interests (5,404) (5,478) (9,607) (12,717) ---------------- ------------------ ----------------- ----------------- Net income attributable to common stockholders $1,785 $1,359 $3,216 $3,241 ================ ================== ================= ================= Net income per common share to common stockholders: Basic $0.08 $0.07 $0.15 $0.16 ================ ================== ================= ================= Diluted $0.08 $0.07 $0.15 $0.16 ================ ================== ================= ================= Weighted average shares of common stock outstanding (basic) 21,766,343 19,695,988 21,691,029 19,681,797 ================ ================== ================= ================= Weighted average shares of common stock outstanding (diluted) 21,899,906 19,902,304 21,835,545 19,766,535 ================ ================== ================= =================
The accompanying notes are an integral part of these condensed consolidated financial statements. - 3 - MISSION WEST PROPERTIES, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands) (unaudited) ---------
Six months ended June 30, --------------------------------------- 2009 2008 ------------------- ------------------- Cash flows from operating activities: Net income $12,823 $15,958 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization of real estate and in-place leases 12,279 11,305 Unrealized loss from restricted investment in marketable securities 324 - Dividend income from restricted investment in marketable securities (577) - Equity in earnings of unconsolidated joint venture (164) (789) Distributions from unconsolidated joint venture 100 900 Interest earned on restricted cash (74) (633) Lease termination fee related to restricted cash 10,864 4,830 Stock-based compensation expense 134 242 Other - 66 Changes in operating assets and liabilities: Deferred rent receivables (560) (1,587) Other assets 10 (588) Interest payable (40) 29 Security deposits (147) 223 Deferred rental income 2,408 2,081 Accounts payable and accrued expenses 1,884 556 ------------------- ------------------- Net cash provided by operating activities 39,264 32,593 ------------------- ------------------- Cash flows from investing activities: Improvements to real estate assets - (2,337) Purchase of real estate - (35,764) Restricted cash released for purchase of real estate - 8,082 Excess restricted cash - 7,654 Proceeds from investment in marketable securities 3,646 - ------------------- ------------------- Net cash provided by (used in) investing activities 3,646 (22,365) ------------------- ------------------- Cash flows from financing activities: Principal payments on mortgage notes payable (5,967) (5,519) Principal payments on mortgage note payable (related parties) (245) (227) Proceeds from real estate purchase financing (related parties) - 19,423 Payments on real estate purchase financing (related parties) - (17,500) Proceeds from note payable (related parties) 23,141 3,000 Payments on note payable (related parties) (23,141) (3,000) Proceeds from note payable 15,000 - Net (repayments) borrowings on revolving line of credit (9,187) 8,244 Debt issuance costs - (26) Net proceeds from exercise of stock options - 735 Distributions paid to noncontrolling interests (34,212) (31,200) Dividends paid to common stockholders (8,299) (7,080) ------------------- ------------------- Net cash used in financing activities (42,910) (33,150) ------------------- ------------------- Net decrease in cash and cash equivalents - (22,922) Cash and cash equivalents, beginning of period - 23,691 ------------------- ------------------- Cash and cash equivalents, end of period $ - $ 769 =================== =================== Supplemental information: Cash paid for interest $ 9,809 $10,572 =================== =================== Supplemental schedule of non-cash investing and financing activities: Debt from seller in connection with real estate purchase (related parties) $ - $19,068 =================== =================== Issuance of common stock upon conversion of O.P. units $15,138 $ 54 =================== ===================
The accompanying notes are an integral part of these condensed consolidated financial statements. - 4 - MISSION WEST PROPERTIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share and per square footage) (unaudited) 1. ORGANIZATION AND FORMATION OF THE COMPANY Mission West Properties, Inc. (the "Company") is a fully integrated, self-administered and self-managed real estate company that acquires and manages research and development ("R&D")/office properties in the portion of the San Francisco Bay Area commonly referred to as Silicon Valley. In July 1998, the Company purchased an approximate 12.11% of four existing limited partnerships (referred to collectively as the "operating partnerships") and obtained control of these partnerships by becoming the sole general partner in each one effective July 1, 1998 for financial accounting and reporting purposes. All limited partnership interests in the operating partnerships were converted into 59,479,633 operating partnership ("O.P.") units, which represented a limited partnership ownership interest of approximately 87.89% of the operating partnerships. The operating partnerships are the vehicles through which the Company holds its real estate investments, makes real estate acquisitions, and generally conducts its business. On December 30, 1998, the Company was reincorporated under the laws of the State of Maryland through a merger with and into Mission West Properties, Inc. Accordingly, shares of the former company, Mission West Properties, a California corporation (no par), which were outstanding at December 30, 1998, were converted into shares of common stock, $.001 par value per share, on a one-for-one basis. As of June 30, 2009, the Company owned a controlling general partnership interest of 23.95%, 21.85%, 16.31% and 12.52% in Mission West Properties, L.P., Mission West Properties, L.P. I, Mission West Properties, L.P. II and Mission West Properties, L.P. III, respectively, which represents a 20.60% general partnership interest in the operating partnerships, taken as a whole, on a consolidated weighted average basis. Through the operating partnerships, the Company owns interests in 111 R&D/office properties, all of which are located in the Silicon Valley. The Company has elected to be taxed as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended. Accordingly, no provision has been made for income taxes for the three and six months ended June 30, 2009 and 2008. BUSINESS SEGMENT INFORMATION The Company's primary business is the ownership and management of R&D/office real estate with a geographic concentration in the Silicon Valley of the San Francisco Bay Area. Accordingly, the Company has concluded it currently has a single reportable segment for Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related Information," purposes. 2. BASIS OF PRESENTATION PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The accompanying unaudited interim condensed consolidated financial statements of the Company have been prepared in accordance with Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission ("SEC") and, therefore, do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. In the opinion of the Company, however, the accompanying unaudited interim condensed consolidated financial statements contain all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the Company's consolidated financial position as of June 30, 2009, their consolidated results of operations for the three and six months ended June 30, 2009 and 2008, and their cash flows for the six months ended June 30, 2009 and 2008. All significant inter-company balances have been eliminated in consolidation. The condensed consolidated financial statements as of June 30, 2009 and for the three and six months ended June 30, 2009 and 2008 and related footnote disclosures are unaudited. The results of operations for the three and six months ended June 30, 2009 are not necessarily indicative of the results to be expected for the entire year. The December 31, 2008 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America ("GAAP"). The Company evaluates all joint venture arrangements for consolidation. The percentage interest in the joint venture, evaluation of control and whether a variable interest entity ("VIE") exists are all considered in determining if the arrangement qualifies for consolidation in accordance with FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities" ("FIN 46R"). As of June 30, 2009, the Company consolidated one VIE in the accompanying condensed consolidated balance sheets in connection with an assignment of a lease agreement with an unrelated party, M&M Real Estate Control & Restructuring, LLC. See Note 3 for further discussion of this transaction. The Company has evaluated events subsequent to June 30, 2009 through the time of the filing of this Form 10Q. - 5 - MISSION WEST PROPERTIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (dollars in thousands, except per share and per square footage) (unaudited) STOCK-BASED OPTION COMPENSATION ACCOUNTING The FASB issued SFAS No. 123R, "Share-Based Payment" ("SFAS 123R"), which addresses the accounting for stock options. SFAS 123R requires that the cost of all employee, director and consultant stock options, as well as other equity-based compensation arrangements, be reflected in the financial statements based on the estimated fair value of the awards. SFAS 123R is applicable to any award that is settled or measured in stock, including stock options, restricted stock, stock appreciation rights, stock units, and employee stock purchase plans. At June 30, 2009, the Company had one stock-based compensation plan. In the second quarter of 2009, options to purchase 375,000 shares of common stock held by an employee of the Company lapsed without exercise. The following table shows the activity and detail for the 2004 Equity Incentive Plan.
Weighted Average Options Option Price Outstanding Per Share --------------- ------------------ Balance, December 31, 2008 3,332,500 $9.62 Options granted 500,000 $5.99 Options forfeited (375,000) $11.33 Options canceled (200,000) $9.51 --------------- Balance, June 30, 2009 3,257,500 $8.87 ===============
The Company measures compensation cost for its stock options at fair value on the date of grant and recognizes compensation expense relating to the remaining unvested portion of outstanding stock options at the time of adoption ratably over the vesting period, generally four years. The fair value of the Company's stock options is determined using the Black-Scholes option pricing model. Compensation expense related to the Company's share-based awards is included in general and administrative expenses in the Company's accompanying condensed consolidated statements of operations. Under SFAS 123R, the Company recorded approximately $109 and $96 of expense for the three months ended June 30, 2009 and 2008, respectively, and approximately $134 and $242 of expense for share-based compensation relating to grants of stock options for the six months ended June 30, 2009 and 2008, respectively. As of June 30, 2009, the total amount of unrecognized compensation cost related to unvested share-based compensation arrangements granted under the compensation plan was approximately $416. This cost is expected to be recognized over a weighted-average period of 2.18 years. NONCONTROLLING INTERESTS The Company adopted the provisions of SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS 160"), effective January 1, 2009. SFAS 160 clarifies that a noncontrolling interest in a subsidiary is an ownership interest in a consolidated entity, which should be reported as equity in the parent's consolidated financial statements. SFAS 160 requires disclosure, on the face of the consolidated income statement, of those amounts of consolidated net income and other comprehensive other income attributable to controlling and noncontrolling interests, eliminating the past practice of reporting amounts of income attributable to noncontrolling interest as an adjustment in arriving at consolidated net income. In connection with the adoption of SFAS 160, the Company reclassified into the Company's condensed consolidated equity the historical balances related to noncontrolling interests in the consolidated operating partnerships. At December 31, 2008, the carrying amount of noncontrolling interests in the consolidated operating partnerships was approximately $497,485. The following table presents a reconciliation of the December 31, 2008 and June 30, 2009, carrying amounts for equity and the related amounts of equity attributable to stockholders' equity and noncontrolling interests:
Equity -------------------------------------------------------------------------------- Additional Distributions in Common Paid-in Excess of Noncontrolling Stock Capital Accumulated Earnings Interests Total ---------- ------------- --------------------- -------------------- ------------ (dollars in thousands) Balance, December 31, 2008 $20 $154,412 ($20,014) $497,485 $631,903 Net income - - 3,216 9,607 12,823 Amortization of previously granted share awards - 134 - - 134 Conversions of operating partnership units 2 15,136 - (15,138) - Cash dividends/distributions - - (7,615) (29,631) (37,246) ---------- ------------- --------------------- -------------------- ------------ Balance, June 30, 2009 $22 $169,682 ($24,413) $462,323 $607,614 ========== ============= ===================== ==================== ============
Noncontrolling interests represent the aggregate partnership interest in the operating partnership held by the operating partnership limited partner unit holders. Income allocated to noncontrolling interests is based on the unit holders' ownership percentage of the operating partnership. Because an O.P. unit is generally redeemable for cash or a share of common stock at the option of the - 6 - MISSION WEST PROPERTIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (dollars in thousands, except per share and per square footage) (unaudited) Company, it is deemed to be equivalent to a share of common stock. Therefore, such transactions are treated as capital transactions and result in an allocation between stockholders' equity and noncontrolling interests in the accompanying condensed balance sheets to account for the change in the ownership of the underlying equity in the operating partnerships. The Company's noncontrolling interests represent the separate private ownership of the operating partnerships by the Berg Group (defined as Carl E. Berg, his brother Clyde J. Berg, members of their respective immediate families, and certain entities they control) and other non-affiliate interests. As of June 30, 2009, these interests accounted for approximately 79.3% of the ownership interests in the real estate operations of the Company on a consolidated weighted average basis. The amount of noncontrolling interests in net income is calculated by taking the net income of the operating partnerships (on a stand-alone basis) multiplied by the respective weighted average noncontrolling interests' ownership percentage. Allocation of corporate general and administrative expenses to the operating partnerships is performed based upon shares and O. P. units outstanding for each operating partnership in relation to the total for all four operating partnerships. RECLASSIFICATIONS Certain reclassifications have been made to the previously reported 2008 condensed consolidated financial statements in order to conform to the 2009 presentation. The reclassifications were to reflect the retrospective adoption of SFAS 160. The reclassification resulted in (i) the reclassification of the Company's minority interests in the consolidated operating partnerships to "noncontrolling interests," a component of equity on the Company's condensed consolidated balance sheets, and (ii) the reclassification of minority interests to "net income attributable to noncontrolling interests" on the Company's condensed consolidated statements of operations. The reclassifications had no impact on previously reported net income attributable to common stockholders or net income per common share to common stockholders. The following notes, which present interim disclosures as required by the SEC, highlight significant changes to the notes to the Company's December 31, 2008 audited consolidated financial statements and should be read together with the consolidated financial statements and notes thereto included in the Company's 2008 Annual Report on Form 10-K filed on March 16, 2009. ACCOUNTING PRONOUNCEMENTS SFAS 157, "Fair Value Measurements" ("SFAS 157"), defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. SFAS 157 applies under other accounting pronouncements that require or permit fair value measurements. Accordingly, this statement does not require any new fair value measurements. This guidance was issued to increase consistency and comparability in fair value measurements and to expand disclosures about fair value measurements. SFAS establishes and requires disclosure of fair value hierarchy that distinguishes between data obtained from sources independent of the reporting entity and the reporting entity's own assumptions about market participant assumptions. The three levels of hierarchy are 1) using quoted prices in active markets for identical assets and liabilities, 2) "significant other observable inputs" and 3) "significant unobservable inputs". "Significant other observable inputs" can include quoted prices for similar assets or liabilities in active markets, as well as inputs that are observable for the asset or liability, such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. "Significant unobservable inputs" are typically based on an entity's own assumptions, as there is little, if any, related market activity. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007. Adoption on January 1, 2008 did not have a material effect on the Company's consolidated financial statements. SFAS 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS 159"), provides companies with an option to report selected financial assets and liabilities at fair value. SFAS 159's objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. SFAS 159 is effective for financial statements issued for fiscal years beginning after November 15, 2007. The Company adopted SFAS 159 on a prospective basis on January 1, 2008. The implementation of SFAS 159 did not have a material impact on the Company's consolidated financial statements. In December 2007, the FASB issued SFAS 141 (Revised 2007), "Business Combinations" ("SFAS 141R"). SFAS 141R will change the accounting for business combinations. Under SFAS 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition date fair value with limited exceptions. SFAS 141R will change the accounting treatment and disclosure for certain specific items in a business combination. SFAS 141R requires that acquisition-related costs and restructuring costs be recognized separately from the business combination and expensed as incurred. SFAS 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. Based on historical acquisition costs and activity levels, the adoption of SFAS 141R on January 1, 2009 did not have a significant impact on the Company's results of operations and financial position. In December 2007, the FASB issued SFAS 160, "Noncontrolling Interests in Consolidated Financial Statements - an amendment of ARB No. 5" ("SFAS 160"). SFAS 160 requires that noncontrolling interests (previously referred to as minority interests) be presented as a component of consolidated equity, eliminates "minority interest accounting" such that the amount of net income - 7 - MISSION WEST PROPERTIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (dollars in thousands, except per share and per square footage) (unaudited) attributable to noncontrolling interests will be presented as part of consolidated net income on the consolidated statement of operations and not as a separate component of income and expenses. SFAS 160 requires a reconciliation of equity attributable to noncontrolling interests and disclosure of those amounts of consolidated net income attributable to noncontrolling interests. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. The adoption of SFAS 160 on January 1, 2009, which required retroactive adoption of the presentation and disclosure requirements for existing minority interests, had a significant impact on the Company's computation of net income and its presentation of the balance sheet. In April 2009, the FASB issued Statement FSP No. FAS 107-1 and APB 28-1, "Interim Disclosures about Fair Value of Financial Instruments" ("FSP FAS 107-1"), which requires (i) disclosure of the fair value of all financial instruments for which it is practicable to estimate that value in interim period financial statements as well as in annual financial statements, (ii) that the fair value information be presented together with the related carrying amount of the asset or liability, and (iii) disclosure of the methods and significant assumptions used to estimate the fair value and changes, if any, to the methods and significant assumptions used during the period. The FSP is effective for interim periods ending after June 15, 2009. In May 2009, the FASB issued SFAS 165, "Subsequent Events" ("SFAS 165"). SFAS 165 sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and disclosures that an entity should make about events or transactions that occurred after the balance sheet date. SFAS 165 requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS 165 is effective for financial statements issued for fiscal years and interim periods beginning after June 15, 2009 and will be applied prospectively. The adoption of SFAS 165 did not have an impact on the Company's results of operations or financial condition. In June 2009, the FASB issued SFAS 167, "Amendments to FASB Interpretation No. 46(R)" ("SFAS 167"). SFAS 167 modifies the existing quantitative guidance used in determining the primary beneficiary of a variable interest entity ("VIE") by requiring entities to qualitatively assess whether an enterprise is a primary beneficiary, based on whether the entity has (i) power over the significant activities of the VIE, and (ii) an obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. SFAS 167 becomes effective for all new and existing VIEs on January 1, 2010. The adoption of SFAS 167 is not expected to have a material impact on the Company's results of operations or financial condition. In June 2009, the FASB issued SFAS 168, "The FASB Accounting Codification and Hierarchy of Generally Accepted Accounting Principles- a replacement of FASB No. 162" ("SFAS 168"). The FASB Accounting Standards Codification TM ("Codification") does not change U.S. GAAP, but combines all authoritative standards such as those issued by the FASB, AICPA, and EITF, into a comprehensive, topically organized online database. The Codification was released on July 1, 2009 and will become the single source of authoritative U. S. GAAP applicable for all nongovernmental entities, except for rules and interpretive releases of the SEC. The Codification is effective for all interim periods and year ends subsequent to September 15, 2009. As the Codification was not intended to change or alter existing GAAP, it will not have any impact on the Company's consolidated financial statements. 3. VARIABLE INTEREST ENTITY Under FIN 46R, a VIE must be consolidated by a company if it is subject to a majority of the entity's expected losses or is entitled to receive a majority of the entity's expected residual returns or both. In addition, FIN 46R requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. Under FIN 46R, for an entity to qualify as a VIE one or more of the following three characteristics must exist: 1. The equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support by any parties, including the equity holders. 2. The equity investors lack one or more of the following essential characteristics of a controlling financial interest: a. The direct or indirect ability to make decisions about the entity's activities through voting or similar rights. b. The obligation to absorb the expected loss of the entity. c. The right to receive the expected residual returns of the entity. 3. The equity investors have voting rights that are not proportionate to their economic interests, and the activities of the entity involve or are conducted on behalf of an investor with a disproportionately small voting interest. In August 2007, one of the Company's tenants, Ciena, entered into an assignment of lease agreement with an unrelated party, M&M Real Estate Control & Restructuring, LLC ("M&M"), in connection with leases for approximately 445,000 rentable square feet located in San Jose, California. As a result of the Assignment, M&M assumed all of Ciena's remaining obligations under these - 8 - MISSION WEST PROPERTIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (dollars in thousands, except per share and per square footage) (unaudited) leases and received a payment from Ciena of $53,000, of which $7,000 was reserved for tenant improvements. At the same time, the Company entered into a consent for assignment of lease with both parties and a mutual release agreement with Ciena, pursuant to which all of Ciena's obligations under these leases were effectively transferred to M&M. M&M is obligated to continue to perform all of the obligations under the assumed Ciena leases and has the right to sublease any or all of the 445,000 rentable square feet vacated by Ciena for the remainder of the current lease term, which expire in 2011. Under the terms of the assignment of lease agreement, the Company received monthly rent payments of approximately $789 from July 2007 through June 2008, received $818 from July 2008 through June 2009, is receiving $849 from July 2009 through June 2010, and will receive $881 from July 2010 through June 2011 and $915 from July 2011 through December 2011. Based upon the provisions of FIN 46R, the Company determined that M&M is a VIE. The Company further determined that it is the primary beneficiary of this VIE, and therefore has consolidated this entity for financial reporting purposes. Factors considered by the Company in determining whether M&M should be considered a VIE for financial reporting purposes included the following: - No equity was contributed by the partners in the formation of M&M. - At present, the assigned leases are the only properties under management by M&M. - M&M does not have an operating history that demonstrates its ability to finance its activities without additional subordinated financial support. - All revenues, other than interest income, are generated by M&M from the Company in the form of fees or commissions. The Company remains at risk with respect to the assigned leases because if M&M's operating expenses exceed its interest income, fees and commissions there would be insufficient funds to meet the assigned lease obligation without additional financial support from equity holders or other parties. The Company, which had released the original tenants from its obligations under the leases, would have to absorb the majority of any loss, making it the primary beneficiary of M&M's activities. 4. RESTRICTED CASH Restricted cash totaled approximately $7,078 on June 30, 2009. The entire amount represents cash held by M&M, a consolidated VIE. The Company does not have possession or control over these funds or any right to receive them except in accordance with the payment terms of the lease agreement that has been assigned to the VIE and any other additional agreements with the VIE. As of March 31, 2009, restricted cash totaled approximately $22,048. In April 2009, the Company issued two notes in the aggregate amount of $15,000 to M&M. The notes bear interest at LIBOR plus 2% and are due June 30, 2009 and subsequently extended to December 31, 2010. The proceeds were primarily used for quarterly distributions to the Company's noncontrolling interests and general corporate purposes. 5. RESTRICTED INVESTMENT IN MARKETABLE SECURITIES In accordance with SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities," investments in debt and equity "marketable" securities are classified at acquisition, and on subsequent reporting dates, into one of the following categories: (a) Trading Securities - debt and equity securities purchased and held principally for the purpose of selling them in the near future. (b) Available-for-Sale Securities - debt securities not classified as held-to-maturity, and debt and equity securities not classified as trading securities. (c) Held-to-Maturity Debt Securities - those debt securities for which the company has the "positive intent and ability to hold the securities to maturity." The Company's restricted investment in marketable securities on June 30, 2009 was classified as trading securities, whereas unrealized holdings gains and losses (differences between the initial cost and the fair value at the balance sheet date) are included in net income of the current period, and interest and dividend revenue, as well as realized gains and losses on sales, are included in net income of the current period. The marketable securities are classified as Level 1 of the fair value hierarchy in accordance with SFAS 157 and thus measured at fair value using quoted market prices for identical instruments in active markets from an independent third party source. See Note 2 above under Accounting Pronouncements for further discussion of SFAS 157. Restricted investment in marketable securities totaled approximately $6,585 on June 30, 2009, which was funded by the Company's restricted cash through its VIE. The amount represents an investment in marketable securities of a real estate investment trust company traded on the New York Stock Exchange Euronext. The marketable securities are adjusted to fair value at the end of each accounting period, with the corresponding loss and gain recorded in unrealized loss or gain from investment in the Company's consolidated statement of operations. For the three months ended June 30, 2009, the Company recorded net unrealized gain of approximately $2,433 related to the increase in fair value of the marketable securities. For the six months ended June 30, 2009, the Company recorded net unrealized loss of approximately $324. - 9 - MISSION WEST PROPERTIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (dollars in thousands, except per share and per square footage) (unaudited) 6. STOCK TRANSACTIONS During the six months ended June 30, 2009, one limited partner exchanged a total of 2,022,000 O.P. units for 2,022,000 shares of the Company's common stock under the terms of the Exchange Rights Agreement among the Company and all limited partners of the operating partnerships resulting in a reclassification of approximately $15,138 from noncontrolling interests to stockholders' equity. Neither the Company nor the operating partnerships received any proceeds from the issuance of the common stock in exchange for O.P. units. Under the limited partnership agreements, each exchange is treated as the purchase of additional O.P. units of the general partner interest by the Company in exchange for stock, and the contribution of additional capital to the partnership by the Company equal in amount to the value of the stock issued in exchange for the limited partnership interests. 7. NET INCOME PER SHARE Basic operating net income per share is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted operating net income per share is computed by dividing net income by the sum of the weighted-average number of common shares outstanding for the period plus the assumed exercise of all dilutive securities using the treasury stock method. The computation for weighted average shares is detailed below:
Three Months Ended June 30, Six Months Ended June 30, --------------------------------- --------------------------------- 2009 2008 2009 2008 --------------- -------------- -------------- --------------- Weighted average shares outstanding (basic) 21,766,343 19,695,988 21,691,029 19,681,797 Incremental shares from assumed option exercise 133,563 206,316 144,516 84,738 --------------- -------------- -------------- --------------- Weighted average shares outstanding (diluted) 21,899,906 19,902,304 21,835,545 19,766,535 =============== ============== ============== ===============
At June 30, 2009, outstanding options to purchase 2,052,500 shares of common stock were excluded from the computation of diluted net income per share under the treasury stock method for the three and six months ended June 30, 2009 because the option exercise price was greater than the weighted average closing price of the Company's common stock during the period. The outstanding O.P. units, which are exchangeable at the unit holder's option, subject to certain conditions, for shares of common stock on a one-for-one basis have been excluded from the diluted net income per share calculation, as there would be no effect on the calculation after adding the noncontrolling interests' share of income back to net income. The total number of O.P. units outstanding at June 30, 2009 and 2008 was 83,504,965 and 85,528,215, respectively. 8. RELATED PARTY TRANSACTIONS As of June 30, 2009, the Berg Group owned 75,880,384 O.P. units. The Berg Group's combined ownership of O.P. units and shares of common stock as of June 30, 2009 represented approximately 74% of the total equity interests, assuming conversion of all O.P. units outstanding into the Company's common stock. As of June 30, 2009, debt in the amount of approximately $8,516 was due the Berg Group under a mortgage note established May 15, 2000 in connection with the acquisition of a 50% interest in Hellyer Avenue Limited Partnership, the obligor under the mortgage note. The mortgage note bears interest at 7.65% and is due in June 2010 with principal payments amortized over 20 years. On October 1, 2008, the Company and the Berg Group agreed to extend the maturity due date to June 2013. Interest expense incurred in connection with the mortgage note was approximately $164 and $174 for the three months ended June 30, 2009 and 2008, respectively, and $331 and $349 for the six months ended June 30, 2009 and 2008, respectively. On June 11, 2009, the superior court issued a tentative decision that concluded Republic Properties Corporation is a partner in the Hellyer Avenue Limited Partnership relating to the Mission West Properties, L.P. v. Republic Properties Corporation litigation (see Note 9 below for details). Because Republic Properties Corporation's interest in the Hellyer Avenue Limited Partnership was transferred to Berg & Berg Enterprises, Inc. and past distributions from profits were paid to Berg & Berg Enterprises, Inc., the Company accrued approximately $1,000 in interest receivable due from Berg & Berg Enterprises, Inc. The $1,000 interest income accrual was calculated at an interest rate of LIBOR plus 1.25%. During the first six months of 2009, debt in the amount of approximately $23,120 was borrowed and repaid to the Berg Group under short-term notes payable in connection with the fourth quarter 2008 and first quarter 2009 dividend distributions. The notes payable interest was calculated at LIBOR plus 2%. Interest expense incurred in connection with the loans was approximately $6 and $21 for the three and six months ended June 30, 2009, respectively. During the first six months of 2009 and 2008, Carl E. Berg or entities controlled by him held financial interests in several companies that lease space from the operating partnerships, which include companies where Mr. Berg has a greater than 10% ownership - 10 - MISSION WEST PROPERTIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (dollars in thousands, except per share and per square footage) (unaudited) interest. These related tenants contributed approximately $279 and $307 in rental revenue for the three months ended June 30, 2009 and 2008, respectively, and $572 and $614 in rental revenue for the six months ended June 30, 2009 and 2008, respectively. Under the Company's charter, bylaws and agreements with the Berg Group, the individual members of the Berg Group are prohibited from acquiring or holding shares of the Company's common stock if such acquisition would result in their beneficial ownership percentage of the Company's common stock causing the Company to violate any REIT qualification requirement. Currently their share ownership is below a level at which rent from related tenants would be excluded in determining compliance with REIT qualification tests. The Berg Group has an approximately $7,500 commitment to complete an approximately 75,000 to 90,000 square foot building in connection with the Company's 2001 acquisition of 245 Caspian in Sunnyvale which is comprised of approximately three acres of unimproved land. The Company has recorded this portion of the purchase price paid to the Berg Group in "Other assets" on its condensed consolidated balance sheets. The Berg Group plans to satisfy this commitment to construct a building when requested by the Company following the approval of the Independent Directors Committee. The Company currently leases office space owned by Berg & Berg Enterprises for the Company's headquarters. Rental amounts and overhead reimbursements paid to Berg & Berg Enterprises were $30 for the three months ended June 30, 2009 and 2008, respectively, and $60 and $54 for the six months ended June 30, 2009 and 2008, respectively. 9. COMMITMENTS AND CONTINGENCIES Neither the operating partnerships, the Company's properties nor the Company are subject to any material litigation nor, to the Company's knowledge, is any material litigation threatened against the operating partnerships, the properties or the Company. From time to time, the Company is engaged in legal proceedings arising in the ordinary course of business. The Company does not expect any of such proceedings to have a material adverse effect on its cash flows, financial condition or results of operations. The Company is currently involved in the following legal proceedings and it believes that the ultimate outcome of these proceedings will not have a material adverse effect on its operating results, cash flows or financial condition. Mission West Properties, L.P. v. Republic Properties Corporation, et al. Santa Clara County Superior Court, Case No. CV 796249. Republic Properties Corporation ("RPC") is a former 50% partner with Mission West Properties, L.P. in the Hellyer Avenue Limited Partnership ("Hellyer LP"), which was formed in July 2000. Under the terms of the Hellyer LP partnership agreement and other related contracts, Mission West Properties, L.P. ("MWP") had the right to obtain RPC's entire interest in Hellyer LP in the event of certain payment defaults which occurred in August 2000. Therefore, on September 1, 2000, MWP, as the general partner of Hellyer LP, ceased all allocations of income and cash flow to RPC and exercised its right under the partnership agreement to cancel RPC's entire interest in the partnership. Following discussions with and approval by the Independent Directors Committee, the Company authorized the transfer of RPC's interest in Hellyer LP to Berg & Berg Enterprises, Inc. ("BBE"). Under the Berg Land Holdings Option Agreement and the Acquisition Agreement dated as of May 14, 1998, the Company acting through the Independent Directors Committee had the right, but not the obligation, to reacquire the property interest and the related distributions related to the property interest at any time. The transfer was effective as of September 1, 2000. On November 20, 2000, RPC commenced a lawsuit against MWP in the Circuit Court of Maryland for Baltimore City. After lengthy litigation, which included a trial on the merits and subsequent appeals, in April 2006, Maryland's highest court upheld an earlier Maryland Appeals Court ruling in favor of MWP, finding that the Circuit Court of Maryland could not assert personal jurisdiction over MWP in Maryland. The court vacated the judgment and decision in the trial court and dismissed the entire Maryland suit. In February 2001, while the Maryland case was pending, the Company filed a suit against RPC in the Superior Court of the State of California for the County of Santa Clara. The case was stayed pending resolution of the Maryland case, and the Company dismissed its suit on March 4, 2005. In April 2005, RPC submitted a motion asking the Superior Court to reinstate the case, which the Court granted on May 25, 2005. A trial in the superior court commenced in February 2009. On June 11, 2009, the superior court issued a tentative decision that concluded RPC is a partner in the Hellyer LP and is entitled to distribution of profits of the Hellyer LP in accordance with its percentage interest together with pre-judgment interest on each distribution from the date it was due and payable. The Company intends to file an appeal following the court's issuance of a final decision and entry of judgment. Pending the outcome of the appeal, the Company accrued approximately $2,300 in interest payable based on the court's tentative decision. The $2,300 interest expense accrual represents the interest owed on the amount of past distributions that would be payable to RPC by Hellyer LP based on the tentative decision determined at the legal rate of interest of 10%. In addition, the Company also accrued approximately $1,000 in interest receivable due from BBE since past distributions from Hellyer LP were paid to BBE. The $1,000 interest income accrual was calculated at an interest rate of LIBOR plus 1.25%. Since the inception of Hellyer LP, the Company has accounted for the properties owned by the partnership on a consolidated basis, with reductions for the noncontrolling interests held by the noncontrolling partner (first RPC and then BBE). In each period, the Company has accrued amounts payable by Hellyer LP to the noncontrolling interest partner, including BBE prior to payment. BBE's share of earnings allocated to its 50% noncontrolling interest was approximately $381 and $389 in the first six months of 2009 and - 11 - MISSION WEST PROPERTIES, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED (dollars in thousands, except per share and per square footage) (unaudited) 2008, respectively. As of June 30, 2009, accumulated cash flow distributions from Hellyer LP totaling approximately $5,648 were accrued and distributed to BBE. If the Company's litigation with RPC is ultimately decided in RPC's favor, the Company anticipates that BBE may be required to return RPC's former interest in Hellyer LP and all prior distributions to RPC. As a result of this uncertainty, in October 2003, the Company recorded such distributions as an account receivable from BBE, which is included in "Other assets" on the Company's consolidated balance sheets, with an offsetting account payable to BBE. The Independent Directors Committee of the Board of Directors will exercise its right to acquire on behalf of the Company the former RPC interest and related distributions from Berg & Berg Enterprises, Inc. under the terms of the Berg Land Holdings Option Agreement between the Company and the Berg Group, if the litigation is ultimately decided in favor of the Company. GUARANTEES AND INDEMNITIES Under its articles of incorporation and bylaws, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director's serving in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. The Company believes the estimated fair value of its obligations under these indemnification agreements is minimal and has recorded no liabilities for these agreements as of June 30, 2009. The Company also enters into indemnification provisions under its agreements with other companies in the ordinary course of business, typically with lenders, joint venture partners, contractors, and tenants. Under these provisions the Company typically agrees to indemnify and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of certain kinds of activities or inactions of the Company. These indemnification provisions generally survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. To date, the Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has recorded no liabilities for these agreements as of June 30, 2009. SEISMIC ACTIVITY The Company's properties are located in an active seismic area of Silicon Valley. Insurance policies currently maintained by the Company do not cover seismic activity, although they do cover losses from fires after an earthquake. ENVIRONMENTAL ISSUES The environmental investigations that have been conducted on the Company's properties have not revealed any environmental liability that the Company believes would have a material adverse effect on its financial condition, results of operations and assets, and the Company is not aware of any such liability. Nonetheless, it is possible that there are material environmental liabilities of which the Company is unaware. In addition, the Company cannot assure that future laws, ordinances, or regulations will not impose any material environmental liability, or that the current environmental condition of the properties has not been, or will not be, affected by tenants and occupants of the properties, by the condition of properties in the vicinity of the properties, or by third parties unrelated to the Company. ASSET DISPOSITIONS SUBJECT TO CERTAIN CONDITIONS The Company has entered into sales agreements with unrelated parties subject to numerous material conditions, including but not limited to re-zoning of the property and negotiating certain agreements with the local municipality acceptable to the buyer. As a result of the conditions agreed to by the Company and the respective buyers, these assets do not meet the criteria set forth in SFAS 144 to be classified as assets held for sale. The following summarizes the assets for which the Company has an executed sales contract as of June 30, 2009 that is subject to such material conditions:
Property Number of Buildings Rentable Square Feet Acres Sales Price -------- ------------------- -------------------- ----- ----------- McCandless Drive Milpitas, California 8 427,000 23.03 $76,500
10. SUBSEQUENT EVENTS On July 9, 2009, the Company paid dividends of $0.15 per share of common stock to all common stockholders of record as of June 30, 2009. On the same date, the operating partnerships paid a distribution of $0.15 per O.P. unit to all holders of O.P. units, with the exception of the Berg Group. Aggregate dividends and distributions amounted to approximately $15,791. On July 9, 2009, the Company issued a short-term note for approximately $11,517 to the Berg Group in connection with the second quarter 2009 dividend distributions. The note's interest rate is LIBOR plus 1.75%. - 12 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto under Part I, Item 1 of this Report and our audited consolidated financial statements and notes thereto contained in our Annual Report on Form 10-K as of and for the year ended December 31, 2008. The results for the three and six months ended June 30, 2009 are not necessarily indicative of the results to be expected for the entire fiscal year ending December 31, 2009. FORWARD-LOOKING INFORMATION This quarterly report on Form 10-Q contains forward-looking statements within the meaning of the federal securities laws. We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Reform Act of 1995, and are including this statement for purposes of complying with these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are generally identifiable by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. Additionally, all disclosures under Part I, Item 3 constitute forward-looking statements. Our ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors that could have a material adverse effect on our operations and future prospects or would cause actual results in the future to differ materially from any of our forward-looking statements include, but are not limited to, the following: - - the current turmoil in the credit markets could limit the demands for R&D space and affect the overall availability and cost of credit, - - economic conditions generally and the real estate market specifically, - - the occupancy rates of the properties, - - rental rates on new and renewed leases, - - legislative or regulatory provisions (including changes to laws governing the taxation of REITs), - - availability of capital, - - interest rates, - - competition, - - supply of and demand for R&D, office and industrial properties in our current and proposed market areas, - - tenant defaults and bankruptcies, - - lease term expirations and renewals, - - changes in general accounting principles, policies and guidelines applicable to REITs, and - - ability to timely refinance maturing debt obligations and the terms of any such refinancing. These risks and uncertainties, together with the other risks described under Part I, Item 1A - "Risk Factors" of our 2008 Annual Report on Form 10-K and from time to time in our other reports and documents filed with the Securities and Exchange Commission ("SEC"), should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. OVERVIEW We acquire, market, lease, and manage R&D/office properties, primarily located in the Silicon Valley portion of the San Francisco Bay Area. As of June 30, 2009, we owned and managed 111 properties totaling approximately 8.0 million rentable square feet through four limited partnerships, or operating partnerships, for which we are the sole general partner. This class of property is designed for research and development and office uses and, in some cases, includes space for light manufacturing operations with loading docks. We believe that we have one of the largest portfolios of R&D/office properties in the Silicon Valley. As of June 30, 2009, two tenants individually lease in excess of 300,000 rentable square feet from us: Microsoft Corporation and Apple, Inc. For federal income tax purposes, we have operated as a self-managed, self-administered and fully integrated real estate investment trust ("REIT") since the beginning of fiscal 1999. Our acquisition, growth and operating strategy incorporates the following elements: - - working with the Berg Group to take advantage of their abilities and resources to pursue development opportunities which we have an option to acquire, on pre-negotiated terms, upon completion and leasing; - - capitalizing on opportunistic acquisitions from third parties of high-quality R&D/office properties that provide attractive initial yields and significant potential for growth in cash-flow; - - focusing on general purpose, single-tenant Silicon Valley R&D/office properties for information technology companies in order to maintain low operating costs, reduce tenant turnover and capitalize on our relationships with these companies and our extensive knowledge of their real estate needs; and - 13 - - - maintaining prudent financial management principles that emphasize current cash flow while building long-term value, the acquisition of pre-leased properties to reduce development and leasing risks and the maintenance of sufficient liquidity to acquire and finance properties on desirable terms. CURRENT ECONOMIC ENVIRONMENT In the second quarter of 2009, the overall U.S. economy weakened further, particularly with the increased turmoil in the credit markets, the housing recession and growing unemployment. These factors have resulted in a considerable reduction in business spending. As credit requirements have tightened with many financial institutions, current tenants and prospective tenants may find it more difficult to obtain credit. In effect, this may impact the stability of our current tenants' financial condition and limit our ability to lease spaces to credit worthy prospective tenants. Given the current financial markets crisis and general economic conditions, there can be no assurances that our operating results will not decrease. We have a strong balance sheet and have maintained one of the lowest levels of leverage in the REIT industry. The current crisis in the financial markets has resulted in de-leveraging throughout the global finance system. The displacement in the current financing market has resulted in a very difficult borrowing environment. All of our properties are located in the Northern California area known as Silicon Valley, which generally consists of portions of Santa Clara County, Southwestern Alameda County, Southeastern San Mateo County and Eastern Santa Cruz County. Historically, the Silicon Valley R&D property market has fluctuated with the local economy. The Silicon Valley economy and business activity slowed markedly from 2001 through 2006 and grew slowly until the second half of 2008. Since September 2008, the impact of the worldwide recession has adversely affected the local economy. According to a recent report by NAI BT Commercial Real Estate (the "BT Report"), the vacancy rate for Silicon Valley R&D property was approximately 16.3% in late 2008 and 18.6% at the end of the second quarter of 2009. Total vacant R&D square footage in Silicon Valley at the end of the second quarter of 2009 amounted to approximately 28.9 million square feet, of which 17.4%, or 5.0 million square feet, was being offered under subleases. According to the BT Report, total negative net absorption (which is the computation of gross square footage leased less gross new square footage vacated for the period presented) in 2008 amounted to approximately 33,000 square feet, and in the first six months of 2009 there was total negative net absorption of approximately 3.9 million square feet. Also according to the BT Report, the average asking market rent per square foot at the end of the second quarter of 2009 was $1.11 compared with $1.26 in late 2008. The Silicon Valley R&D property market is characterized by a substantial number of submarkets, with rent and vacancy rates varying by submarket and location within each submarket, however, and individual properties within any particular submarket presently may be leased above or below the current average asking market rental rates within that submarket and the region as a whole. Our occupancy rate at June 30, 2009 was 66.1% compared with 64.9% at June 30, 2008. We believe that our occupancy rate could decline if key tenants seek the protection of bankruptcy laws, consolidate operations or discontinue operations. In addition, leases with respect to approximately 114,000 rentable square feet are expiring prior to the end of 2009. The properties subject to these leases may take anywhere from 24 to 40 months or longer to re-lease. We believe that the average 2009 renewal rental rates for our properties will be approximately equal to, or perhaps below, current market rents, but we cannot give any assurance that leases will be renewed or that available space will be re-leased at rental rates equal to or above the current quoted market rates. Despite our strategic focus on single tenant properties and leases, in order to meet market conditions, we have been, and expect to continue leasing less than the entire premises of some of our R&D properties to a single tenant from time to time. Leasing our R&D properties, which generally have been built for single tenant occupancy, to multiple tenants can increase our leasing costs and operating expenses and reduce the profitability of our leasing activities. If we are unable to lease a significant portion of any vacant space or space subject to expiring leases; if we experience significant tenant defaults as a result of the current economic downturn; if we are not able to lease space at or above current market rates; if we restructure existing leases and lower existing rents in order to retain tenants for an extended term; or if we increase our lease costs and operating expenses substantially to accommodate multiple tenants in our R&D properties, our results of operations and cash flows will be affected adversely. Furthermore, in this event it is probable that our board of directors will reduce the quarterly dividend on the common stock and the outstanding O.P. units. Our operating results and ability to pay dividends at current levels remain subject to a number of material risks, as indicated under the caption "Forward-Looking Information" above and in the section entitled "Risk Factors" in our most recent Annual Report on Form 10-K. CRITICAL ACCOUNTING POLICIES AND ESTIMATES We prepare the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"), which requires us to make certain estimates, judgments and assumptions that affect the reported amounts in the accompanying condensed consolidated financial statements, disclosure of contingent assets and liabilities and related footnotes. Accounting and disclosure decisions with respect to material transactions that are subject to significant management judgments or estimates include impairment of long lived assets, deferred rent reserves, and allocation of purchase price relating to property acquisitions and the related depreciable lives assigned. Actual results may differ from these estimates under different assumptions or conditions. - 14 - Critical accounting policies are defined as those that require management to make estimates, judgments and assumptions, giving due consideration to materiality, in certain circumstances that affect amounts reported in the condensed consolidated financial statements, and potentially result in materially different results under different conditions and assumptions. We believe that the following best describe our critical accounting policies: BUSINESS COMBINATIONS. Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" ("SFAS 141"), was effective July 1, 2001. We account for acquisitions of properties prior to January 1, 2009 in accordance with SFAS 141. For acquisitions consummated after January 1, 2009, we follow SFAS 141R, "Business Combinations". The fair value of the real estate acquired is allocated to acquired tangible assets, consisting of land, building and tenant improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, acquired in-place leases and the value of tenant relationships, based in each case on their fair values. The determination of the tangible and intangible assets' useful lives are guided by a combination of SFAS 141R and management's estimates. SFAS 141R requires that acquisition-related costs and restructuring costs be recognized separately from the business combination and expensed as incurred. The capitalized above-market lease values and the capitalized below-market lease values are amortized as an adjustment to rental income over the initial lease term while amortization of in-place lease value intangible asset is included in depreciation and amortization of real estate in the expense section of our condensed consolidated statements of operations. If we do not appropriately allocate these components or we incorrectly estimate the useful lives of these components, our computation of depreciation and amortization expense may not appropriately reflect the actual impact of these costs over future periods, which will affect net income. IMPAIRMENT OF LONG-LIVED ASSETS. We review real estate assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144, "Accounting for the Impairment and Disposal of Long-Lived Assets" ("SFAS 144"). We evaluate the recoverability of our investments in real estate assets to be held and used each quarter and record an impairment charge when there is an indicator of impairment and the undiscounted projected cash flows are less than the carrying amount for a particular property. If impairment is recognized, the reduced carrying amount of the asset will be accounted for as its new cost. For a depreciable asset, the new cost will be depreciated over the asset's remaining useful life. Generally, fair values are estimated using discounted cash flow, replacement cost or market comparison analyses. The process of evaluating for impairment requires estimates as to future events and the our views of market and economic conditions, which are subject to varying market factors, such as the vacancy rates, future rental rates, lease periods, deferred maintenance and operating costs for R&D facilities in the Silicon Valley area and related submarkets. Therefore, it is reasonably possible that a change in estimate resulting from judgments as to future events could occur which would affect the recorded amounts of the property. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND DEFERRED RENT. We must estimate the uncollectibility of our accounts receivable based on the evaluation of our tenants' financial position, analyses of accounts receivable and current economic trends. We also make estimates for reserves against our deferred rent receivable for existing tenants with the potential of early termination, bankruptcy or ceasing operations. We charge or credit rental income for increases or decreases to our deferred rent reserves. Our estimates are based on our review of tenants' payment histories, the remaining lease term, whether or not the tenant is currently occupying our building, publicly available financial information and such additional information about their financial condition as tenants provide to us. The information available to us might lead us to overstate or understate these reserve amounts. The use of different estimates or assumptions could produce different results. Moreover, actual future collections of accounts receivable or reductions in future reported rental income due to tenant bankruptcies or other business failures could differ materially from our estimates. CONSOLIDATED JOINT VENTURES. We, through an operating partnership, own three properties that are in joint ventures of which we have controlling interests. We manage and operate all three properties. We recognize these properties and 100% of their operating results in our condensed consolidated financial statements, with appropriate allocation to noncontrolling interests, because we have operational and financial control of the investments. We make judgments and assumptions about the estimated monthly payments made to our noncontrolling interest joint venture partners, which are reported with our periodic results of operations. Actual results may differ from these estimates under different assumptions or conditions. INVESTMENT IN UNCONSOLIDATED JOINT VENTURE. We evaluate all joint venture arrangements for consolidation. The percentage interest in the joint venture, evaluation of control and whether a variable interest entity ("VIE") exists are all considered in determining if the arrangement qualifies for consolidation in accordance with FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities". We, through an operating partnership, have a 50% non-controlling limited partnership interest in one unconsolidated joint venture. This investment is not consolidated because we do not exercise significant control over major operating and financial decisions. We account for this joint venture interest using the equity method of accounting. FAIR VALUE OF FINANCIAL INSTRUMENTS. On January 1, 2008, we adopted the provisions of SFAS 157, "Fair Value Measurements" ("SFAS 157") for our financial assets and liabilities measured at fair value on a recurring basis. SFAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. SFAS 157 also specifies a three-level hierarchy of valuation techniques based upon whether the inputs reflect assumptions other market participants would use based upon market data obtained from independent sources (observable inputs) or reflect its own assumptions of market participant valuation (unobservable inputs) and requires the use of observable inputs if such data is available without undue cost and effort. At June 30, 2009, we had approximately $6.6 million of financial assets classified as Level 1 and thus measured at fair value using quoted market prices for identical instruments in active markets from an independent third party source. - 15 - The only financial asset or liability recorded at fair value in our consolidated financial statements is the restricted investment in marketable securities. We determined the fair value for the marketable securities using quoted prices in active markets for identical securities. Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable, and debt. Considerable judgment is required in interpreting market data to develop estimates of fair value. Our estimates of fair value are not necessarily indicative of the amounts that we could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash and cash equivalents, accounts receivable, and accounts payable are carried at amounts that approximate their fair values due to their short-term maturities. The carrying amounts of our variable rate debt approximate fair value since the interest rates on these instruments are equivalent to rates currently offered to us. For fixed rate debt, we estimate fair value by using discounted cash flow analyses based on borrowing rates for similar kinds of borrowing arrangements. STOCK-BASED COMPENSATION. SFAS 123R requires that the cost of all employee, director and consultant stock options, as well as other equity-based compensation arrangements, be reflected in the financial statements based on the estimated fair value of the awards. SFAS 123R is applicable to any award that is settled or measured in stock, including stock options, restricted stock, stock appreciation rights, stock units, and employee stock purchase plans. Compensation cost under SFAS 123R may differ due to different assumptions and treatment of forfeitures. REVENUE RECOGNITION. Rental revenue is recognized on the straight-line method of accounting required by GAAP under which contractual rent payment increases are recognized evenly over the lease term, regardless of when the rent payments are received by us. The difference between recognized rental income and rental cash receipts is recorded as "Deferred rent receivable" on the condensed consolidated balance sheets. Rental revenue is affected if existing tenants terminate or amend their leases. We try to identify tenants who may be likely to declare bankruptcy, cease operations or are likely to seek a negotiated settlement of their obligation. By anticipating these events in advance, we expect to take steps to minimize their impact on our reported results of operations through lease renegotiations, reserves against deferred rent, and other appropriate measures. Our judgments and estimations about tenants' capacity to continue to meet their lease obligations will affect the rental revenue recognized. Material differences may result in the amount and timing of our rental revenue for any period if we made different judgments or estimations. SFAS No. 66, "Accounting for Sales of Real Estate" ("SFAS 66"), establishes accounting standards for recognizing profit or loss on sales of real estate. The gain on the sale is only recognized proportionately as the seller receives payments from the purchaser. Interest income is recognized on an accrual basis, when appropriate. Lease termination fees are recognized as other income when there is a signed termination letter agreement, all of the conditions of the agreement have been met, and when the tenant no longer has the right to occupy the property. These fees are paid by tenants who want to terminate their lease obligations before the end of the contractual term of the lease. We cannot predict or forecast the timing or amounts of future lease termination fees. We recognize income from rent, tenant reimbursements and lease termination fees and other income once all of the following criteria are met in accordance with SEC Staff Accounting Bulletin 104: - - the agreement has been fully executed and delivered; - - services have been rendered; - - the amount is fixed and determinable; and - - collectibility is reasonably assured. With regard to critical accounting policies, where applicable, we have explained and discussed the criteria for identification and selection, methodology in application and impact on the financial statements with the Audit Committee of our Board of Directors. The Audit Committee has reviewed the critical accounting policies we identified. - 16 - RESULTS OF OPERATIONS COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 WITH THE THREE AND SIX MONTHS ENDED JUNE 30, 2008 As of June 30, 2009 and 2008, through our controlling interests in the operating partnerships, we owned 111 properties totaling approximately 8.0 million rentable square feet. Included in the 8.0 million rentable square feet are approximately 854,000 rentable square feet (or 16 buildings) that we are seeking to have rezoned for residential development. Comparison of rental revenue from real estate for the three and six months ended June 30, 2009 and 2008 are as follows:
Three Months Ended June 30, -------------------------------- % Change by 2009 2008 $ Change Property Group ------------- -------------- --------------- --------------- (dollars in thousands) Same Property (1) $20,096 $19,031 $1,065 5.6% 2008 Acquisitions 328 328 - - ------------- -------------- --------------- Total $20,424 $19,359 $1,065 5.5% ============= ============== =============== Six Months Ended June 30, -------------------------------- % Change by 2009 2008 $ Change Property Group ------------- -------------- --------------- --------------- (dollars in thousands) Same Property (1) $40,424 $37,919 $2,505 6.6% 2008 Acquisitions 656 437 219 50.0% ------------- -------------- --------------- Total $41,080 $38,356 $2,724 7.1% ============= ============== ===============
(1) "Same Property" is defined as properties owned by us prior to 2008 that we still owned as of June 30, 2009. RENTAL REVENUE FROM REAL ESTATE OPERATIONS For the quarter ended June 30, 2009, rental revenue from real estate increased by approximately $1.1 million, or 5.5%, from $19.3 million for the three months ended June 30, 2008 to $20.4 million for the three months ended June 30, 2009. For the six months ended June 30, 2009, rental revenue from real estate increased by approximately $2.7 million, or 7.1%, from $38.4 million for the six months ended June 30, 2008 to $41.1 million for the six months ended June 30, 2009. In both periods, the increase in rental revenue resulted primarily from new leases since June 30, 2008. Our occupancy rate at June 30, 2009 was approximately 66.1%, compared with 64.9% at June 30, 2008. LEASE TERMINATION INCOME We had no lease termination fee income in the second quarter of 2009 and 2008. Lease termination fee income for the six months ended June 30, 2008 of approximately $1.9 million was paid by a tenant who terminated its lease obligations before the end of the lease term. We do not consider that transaction to be a recurring item. OTHER INCOME Other income of approximately $0.30 million for the three months ended June 30, 2009 included approximately $0.24 million from management fees and $0.06 million from an insurance claim. Other income of approximately $0.25 million for the three months ended June 30, 2008 included approximately $0.24 million from management fees and $0.01 million from miscellaneous income. For the six months ended June 30, 2009, other income of approximately $0.62 million included approximately $0.49 million from management fees, $0.06 million from an insurance claim and $0.07 million from miscellaneous income. For the six months ended June 30, 2008, other income of approximately $0.48 million included approximately $0.46 million from management fees and $0.02 million from miscellaneous income. EXPENSES FROM OPERATIONS Property operating expenses and real estate taxes during the second quarter of 2009 increased by approximately $1.8 million, or 32.0%, from $5.5 million to $7.3 million for the three months ended June 30, 2008 and 2009, respectively. The increase was primarily attributable to increases in utility usage, repair and maintenance and real estate tax expenses. Tenant reimbursements increased by approximately $0.6 million, or 16.3%, from $3.7 million for the three months ended June 30, 2008 to $4.3 million for the three months ended June 30, 2009 due to reimbursements of recurring operating expenses, including real estate taxes. The level of tenant reimbursements is affected by vacancies because certain recurring expenses such as property insurance, real estate taxes, and other fixed operating expenses are not recoverable from vacant properties. For the six months ended June 30, 2009, property operating expenses and real estate taxes increased by approximately $2.8 million, or 27.2%, from $10.4 million for the six months ended June 30, 2008 to $13.2 million for the six months ended June 30, 2009. General and administrative expenses decreased by approximately ($0.05) million, or (7.6%), from $0.67 million to $0.62 million for the three months ended June 30, 2008 and 2009, respectively. For the six months ended June 30, 2008 and 2009, general and administrative expenses decreased by approximately ($0.20) million, or (14.3%), from $1.35 million to $1.15 million, respectively. The decrease was primarily the result of higher legal fees and stock compensation expense in 2008. - 17 - Real estate depreciation and amortization expense increased by approximately $0.6 million, or 11.5%, from $5.7 million to $6.3 million for the three months ended June 30, 2008 and 2009, respectively. The increase resulted from a lease termination in the first quarter of 2009 and additional tenant improvements since June 30, 2008. Real estate depreciation and amortization expense increased by approximately $1.0 million, or 8.6%, from $11.3 million to $12.3 million for the six months ended June 30, 2008 and 2009, respectively. EQUITY IN EARNINGS FROM UNCONSOLIDATED JOINT VENTURE As of June 30, 2009, we held investments in one R&D building totaling approximately 155,500 rentable square feet through an unconsolidated joint venture, TBI-MWP, in which we acquired a 50% interest in January 2003 from the Berg Group under the Berg Land Holdings Option Agreement. We have a non-controlling limited partnership interest in this joint venture, which we account for using the equity method of accounting. For the three months ended June 30, 2009, we recorded equity in earnings from the unconsolidated joint venture of approximately $0.08 million compared with equity in earnings of $0.41 million for the same period in 2008. The decrease was attributable to the sale of two R&D properties subsequent to June 30, 2008. For the six-month periods ended June 30, 2009 and 2008, equity in earnings from the unconsolidated joint venture was approximately $0.16 million and $0.79 million, respectively. The occupancy rate for the properties owned by this joint venture at June 30, 2009 and 2008 was 100%. INTEREST AND DIVIDEND INCOME Interest and dividend income increased by approximately $0.9 million, or 423.3%, from $0.2 million to $1.1 million for the three months ended June 30, 2008 and 2009, respectively. The increase was primarily due to an accrual of approximately $1.0 million in interest income related to the Hellyer Avenue Limited Partnership litigation (see Note 9 above for further discussion of this litigation). Interest and dividend income increased by approximately $0.3 million, or 38.0%, from $0.8 million to $1.1 million for the six months ended June 30, 2008 and 2009, respectively. INTEREST EXPENSE Interest expense increased by approximately $2.1 million, or 43.0%, from $5.0 million for the three months ended June 30, 2008 to $7.1 million for the three months ended June 30, 2009 due to an accrual of approximately $2.3 million related to the Hellyer Avenue Limited Partnership litigation (see Note 9 above for details). Interest expense (related parties) decreased by approximately ($0.1) million, or (38.9%), from $0.3 million for the three months ended June 30, 2008 to $0.2 million for the three months ended June 30, 2009 due to higher related party debt incurred in the quarter ended June 30, 2008. Interest expense increased by approximately $2.0 million, or 20.3%, from $9.9 million for the six months ended June 30, 2008 to $11.9 million for the six months ended June 30, 2009. Interest expense (related parties) decreased by approximately ($0.4) million, or (50.8%), from $0.7 million for the six months ended June 30, 2008 to $0.3 million for the six months ended June 30, 2009. Total debt outstanding, including debt due related parties, decreased by approximately ($13.8) million, or (3.9%), from $351.2 million as of June 30, 2008 to $337.3 million as of June 30, 2009 because of principal repayments. NET INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS AND NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS Net income to common stockholders increased by approximately $0.4 million, or 31.3%, from $1.4 million for the three months ended June 30, 2008 to $1.8 million for the same period in 2009. The noncontrolling interests portion of income decreased by approximately ($0.07) million, or (1.4%), from $5.47 million for the three months ended June 30, 2008 to $5.40 million for the three months ended June 30, 2009. For the six months ended June 30, 2009 and 2008, net income to common stockholders was approximately $3.2 million, and the noncontrolling interests portion of income was approximately $9.6 million and $12.7 million, respectively. The amount of noncontrolling interests in net income has been calculated by multiplying the net income of the operating partnerships (on a stand-alone basis) by the respective noncontrolling interests ownership percentage. Noncontrolling interests represent the ownership interest of all limited partners in the operating partnerships taken as a whole, which was approximately 79% and 81% as of June 30, 2009 and 2008, respectively. CHANGES IN FINANCIAL CONDITION Total stockholders' equity, net, increased by approximately $10.9 million from December 31, 2008. We obtained additional capital from the issuance of 2,022,000 shares of our common stock for the exchange of O.P. units, which increased additional paid-in capital by approximately $15.1 million. Stockholders' equity was reduced during the most recent quarter by distributions in excess of accumulated earnings of approximately $4.4 million. LIQUIDITY AND CAPITAL RESOURCES We expect an increase in operating cash flows from our operating property portfolio in 2009 compared with 2008 primarily from new leases and payments from M&M Real Estate Control & Restructuring relating to the Ciena lease termination in 2007 (see Note 3 above). If we are unable to lease a significant portion of the approximately 114,000 rentable square feet scheduled to expire during the remainder of 2009 or an equivalent amount of our currently available space of approximately 2.7 million rentable square feet, however, our operating cash flows after 2009 may be affected adversely. With the expectation of higher rental revenues for the remainder of 2009, we expect our properties' operating income to show a year-over-year increase compared with 2008 driven by new leases. We are also subject to risks of decreased occupancy through tenant defaults and bankruptcies and potential reduction in rental rates upon renewal of properties, however, which could result in reduced cash flow from operations instead. Cash flows from lease terminations are non-recurring and to maintain or increase cash flows in the future we must re-lease our vacant properties. - 18 - We expect our principal source of liquidity for distributions to stockholders and O.P. unit holders, debt service, leasing commissions and recurring capital expenditures to come from cash provided by operations, as well as borrowings under our line of credit with Heritage Bank of Commerce ("HBC"). We expect these sources of liquidity to be adequate to meet projected distributions to stockholders and other presently anticipated liquidity requirements in 2009. We expect to meet our long-term liquidity requirements for the funding of property development, property acquisitions and other material non-recurring capital improvements through cash and investments, long-term secured and unsecured indebtedness, and potentially, the issuance of additional equity securities by us. As of June 30, 2009, restricted cash totaled approximately $7.1 million and restricted investment in marketable securities totaled approximately $6.6 million. The entire amount represents cash and investment held by M&M Real Estate Control & Restructuring, LLC, a consolidated VIE involving the Ciena lease termination in 2007. We do not possess or control these funds or have any rights to receive them except as provided in the applicable agreements and any other additional agreements with the VIE. We include this in our restricted cash and investment under the principles of FIN 46R. The restricted cash and investment is not available for distribution to stockholders. In April 2009, we issued two notes in the aggregate amount of $15 million to M&M Real Estate Control & Restructuring, LLC for funds borrowed from restricted cash. The notes bear interest at LIBOR plus 2% and are due June 30, 2009 and subsequently extended to December 31, 2010. The proceeds were used to pay an outstanding short-term note issued to the Berg Group and for general corporate purposes. DISTRIBUTIONS On July 9, 2009, we paid dividends of $0.15 per share of common stock to all common stockholders of record as of June 30, 2009. On the same date, the operating partnerships paid a distribution of $0.15 per O.P. unit to all holders of O.P. units, with the exception of the Berg Group. The aggregate dividends and distributions amounted to approximately $15.8 million. On July 9, 2009, we issued a short-term note for approximately $11.5 million to the Berg Group in connection with the second quarter 2009 dividend distributions. This note had an interest rate of LIBOR plus 1.75% and is due September 30, 2009. Distributions are declared at the discretion of our Board of Directors and are subject to actual cash available for distribution, our financial condition, capital requirements and such other factors, as our Board of Directors deems relevant. DEBT We currently have a $17.5 million unsecured revolving line of credit with HBC established in April 2008. The revolving line of credit carries a variable interest rate based on the one-month LIBOR plus 1.75% per annum and matures June 15, 2009. In June 2009, we executed an amendment to the terms of the line of credit that extended the maturity date to September 15, 2009. We are discussing with HBC to renew the unsecured revolving line of credit for at least 12 months. In the first six months of 2009, we issued two short-term notes for approximately $23.1 million to the Berg Group in connection with the fourth quarter 2008 and first quarter 2009 dividend distributions. The notes' interest rates were LIBOR plus 2% and were fully repaid. At June 30, 2009, we had total indebtedness of approximately $337.3 million, including $324.9 million of fixed rate mortgage debt, $3.9 million under the HBC line of credit and $8.5 million debt under the Berg Group mortgage note (related parties), as detailed in the table below. The Northwestern, Allianz, Hartford and HBC loans contain certain financial loan and reporting covenants as defined in the loan agreements. As of June 30, 2009, we were in compliance with these loan covenants. CONTRACTUAL OBLIGATIONS The following table identifies the contractual obligations with respect to the maturities and scheduled principal repayments of our secured debt, unsecured notes, credit facility and scheduled interest payments of our fixed-rate and variable-rate debt at June 30, 2009 and provides information about our operating lease obligations that will impact our liquidity and cash flow in future periods.
------------- ------------- ------------- -------------- ------------- ------------- ------------ 2009 2010 2011 2012 2013 Thereafter Total ------------- ------------- ------------- -------------- ------------- ------------- ------------ (dollars in thousands) Principal payments (1) $10,270 $13,328 $14,109 $14,935 $81,269 $203,438 $337,349 Interest payments-fixed rate debt(2) 9,502 18,433 17,652 16,825 12,820 62,288 137,520 Interest payments-variable rate debt(3) 17 - - - - - 17 Operating lease obligations (4) 60 30 - - - - 90 ------------- ------------- ------------- -------------- ------------- ------------- ------------ Total $19,849 $31,791 $31,761 $31,760 $94,089 $265,726 $474,976 ============= ============= ============= ============== ============= ============= ============
(1) As of June 30, 2009, 98.9% of our debt was contractually fixed and 1.1% of our debt bore interest at variable rates. Our debt obligations are set forth in detail in the table below. (2) The information in the table above reflects our projected interest rate obligations for the fixed-rate payments based on the contractual interest rates, interest payment dates and scheduled maturity dates. (3) The information in the table above reflects our projected interest rate obligations for the variable-rate payments based on LIBOR plus 1.75% at June 30, 2009, the scheduled interest payment dates and maturity dates. (4) Our operating lease obligations relate to a lease of our corporate office facility from a related party. - 19 - The following table and notes set forth information regarding debt outstanding as of June 30, 2009:
Maturity Interest Debt Description Collateral Properties Balance Date Rate - ---------------------------------------------- ------------------------------------------ -------------- ------------- ----------- (dollars in thousands) Line of Credit: Heritage Bank of Commerce Not Applicable $ 3,892 Sept 2009 (1) -------------- Mortgage Note Payable (related parties)(2): 5300 & 5350 Hellyer Avenue, San Jose, CA 8,516 Jun 2013 7.65% -------------- Mortgage Notes Payable(2): Hartford Life Insurance Company 5981 Optical Court, San Jose, CA 113,022 Oct 2018 6.21% Hartford Life and Accident Insurance Company 5500 Hellyer Avenue, San Jose, CA Hartford Life and Annuity Insurance Company 5550 Hellyer Avenue, San Jose, CA (collectively known as the "Hartford Loan")(3) 4050 Starboard Drive, Fremont, CA 45738 Northport Loop, Fremont, CA 233 South Hillview Drive, Milpitas, CA 10300 Bubb Road, Cupertino, CA 1230 E. Arques, Sunnyvale, CA 1250-1280 E. Arques, Sunnyvale, CA 1212 Bordeaux Lane, Sunnyvale, CA 2904 Orchard Parkway, San Jose, CA 3236 Scott Blvd, Santa Clara, CA 6311 San Ignacio Avenue, San Jose, CA 6321-6325 San Ignacio Avenue, San Jose, CA 6331 San Ignacio Avenue, San Jose, CA 6341-6351 San Ignacio Avenue, San Jose, CA 3540-3580 Bassett Street, Santa Clara, CA Northwestern Mutual Life Insurance Company(4) 1750 Automation Parkway, San Jose, CA 79,397 Jan 2013 5.64% 1756 Automation Parkway, San Jose, CA 1762 Automation Parkway, San Jose, CA 6320 San Ignacio Avenue, San Jose, CA 6540-6541 Via Del Oro, San Jose, CA 6385-6387 San Ignacio Avenue, San Jose, CA 20605-20705 Valley Green Drive, Cupertino, CA 2001 Walsh Avenue, Santa Clara, CA 2220 Central Expressway, Santa Clara, CA 2300 Central Expressway, Santa Clara, CA 2330 Central Expressway, Santa Clara, CA Allianz Life Ins. Co. (Allianz Loan I)(5) 5900 Optical Court, San Jose, CA 22,583 Aug 2025 5.56% Allianz Life Ins. Co. (Allianz Loan II)(5) 5325-5345 Hellyer Avenue, San Jose, CA 109,939 Aug 2025 5.22% 1768 Automation Parkway, San Jose, CA 2880 Scott Boulevard, Santa Clara, CA 2890 Scott Boulevard, Santa Clara, CA 2800 Scott Boulevard, Santa Clara, CA 10450-10460 Bubb Road, Cupertino, CA 6800-6810 Santa Teresa Blvd., San Jose, CA 6850 Santa Teresa Blvd., San Jose, CA 4750 Patrick Henry Drive, Santa Clara, CA -------------- 324,941 -------------- TOTAL $337,349 ==============
(1) Loan carries a variable interest rate equal to LIBOR plus 1.75%. The interest rate at June 30, 2009 was 2.09%. The Heritage Bank of Commerce line of credit contains certain financial loan and reporting covenants as defined in the loan agreements, including minimum tangible net worth and debt service coverage ratio. As of June 30, 2009, we were in compliance with these loan covenants. (2) Mortgage notes payable generally require monthly installments of principal and interest ranging from approximately $96 to $840 over various terms extending through the year 2025. The weighted average interest rate of mortgage notes payable was 5.74% at June 30, 2009. (3) The Hartford loan is payable in monthly installments of approximately $838, which includes principal (based upon a 20-year amortization) and interest. Costs and fees incurred with obtaining this loan aggregated approximately $1,058, which were deferred and amortized over the loan period. The Hartford loan contains certain customary covenants as defined in the loan agreement. As of June 30, 2009, we were in compliance with these loan covenants. (4) The Northwestern loan is payable in monthly installments of approximately $696, which includes principal (based upon a 20-year amortization) and interest. Costs and fees incurred with obtaining this loan aggregated approximately $675, which were deferred and amortized over the loan period. The Northwestern loan contains certain customary covenants as defined in the loan agreement. As of June 30, 2009, we were in compliance with these loan covenants. (5) The Allianz loans are payable in monthly aggregate installments of approximately $1,017, which includes principal (based upon a 20-year amortization) and interest. Costs and fees incurred with obtaining these loans aggregated approximately $1,089, which were deferred and amortized over the loan periods. The Allianz loans contain certain customary covenants as defined in the loan agreements. As of June 30, 2009, we were in compliance with these loan covenants. - 20 - At June 30, 2009, our debt to total market capitalization ratio, which is computed as our total debt outstanding divided by the sum of total debt outstanding plus the market value of common stock (based upon the closing price of $6.83 per share on June 30, 2009) on a fully diluted basis, including the conversion of all O.P. units into common stock, was approximately 31.9%. On June 30, 2009, the last trading day in the quarter, total market capitalization was approximately $1.06 billion. At June 30, 2009, the outstanding balance remaining under certain notes that we owed to the operating partnerships was approximately $2.2 million. The due date of these notes has been extended to September 30, 2010. The principal amount of these notes, along with the interest expense, which is interest income to the operating partnerships, is eliminated in consolidation and is not included in the corresponding line items within the condensed consolidated financial statements. However, the interest income earned by the operating partnerships, which is interest expense to us, in connection with this debt, is included in the calculation of noncontrolling interests as reported on the condensed consolidated statement of operations, thereby reducing our net income by this same amount. At present, our only means for repayment of this debt is through distributions that we receive from the operating partnerships that are in excess of the amount of dividends to be paid to our stockholders or by raising additional equity capital. HISTORICAL CASH FLOWS COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2009 WITH THE SIX MONTHS ENDED JUNE 30, 2008 Net cash provided by operating activities for the six months ended June 30, 2009 was approximately $39.3 million compared with $32.6 million for the same period in 2008. Cash flow increases came primarily from payment by our VIE of prepaid rent for one year with respect to the Ciena lease termination in 2007. See Note 3 above for further discussion of this transaction. Net cash provided by (used in) investing activities was approximately $3.6 million and ($22.4) million for the six months ended June 30, 2009 and 2008, respectively. Cash provided by investing activities during the six months ended June 30, 2009 related principally to the reimbursement of investment in marketable securities from our VIE through restricted cash. Net cash used in investing activities during the six months ended June 30, 2008 related principally to the acquisition of one R&D property at 5981 Optical Court in San Jose, California and one R&D property at 2904 Orchard Parkway in San Jose, California for approximately $35.8 million. The acquisition at 2904 Orchard Parkway was completed as a tax-deferred exchange transaction involving our former R&D property at 1170 Morse Avenue in Sunnyvale, California. The remaining excess restricted cash of approximately $7.7 million was transferred to our general cash account. Capital expenditures for real estate improvements were approximately $2.3 million. Net cash used in financing activities was approximately $42.9 million for the six months ended June 30, 2009 compared with approximately $33.1 million for the six months ended June 30, 2008. During the first six months of 2009, we financed approximately $23.1 million in short-term debt, received $15 million from a loan with our VIE, paid approximately $38.5 million towards outstanding debt, paid approximately $34.2 million of distributions to noncontrolling interests and paid approximately $8.3 million of dividends to common stockholders. During the same period in 2008, we financed approximately $22.4 million in short-term debt, received approximately $8.2 million from our line of credit, received approximately $0.7 million from stock option exercises, paid approximately $26.2 million towards outstanding debt, paid approximately $31.2 million of distributions to noncontrolling interests and paid approximately $7.0 million of dividends to common stockholders. FUNDS FROM OPERATIONS ("FFO") FFO is a non-GAAP financial measurement used by real estate investment trusts to measure and compare operating performance. As defined by NAREIT, FFO represents net income (loss), computed in accordance with GAAP, plus non-recurring events other than "extraordinary items" under GAAP, excluding gains and losses from sales of depreciable operating properties, plus real estate related depreciation and amortization, excluding amortization of deferred financing costs and depreciation of non-real estate assets, and after adjustments for unconsolidated partnerships and joint ventures. FFO does include impairment losses for properties held for sale and held for use. Management considers FFO to be an appropriate supplemental measure of our operating and financial performance because when compared year over year, it reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, general and administrative expenses and interest costs, providing a perspective not immediately apparent from net income. In addition, management believes that FFO provides useful information about our financial performance when compared with other REITs because FFO is generally recognized as the industry standard for reporting the operations of REITs. In addition to the disclosure of operating earnings per share, we will continue to use FFO as a measure of our performance. FFO should neither be considered as an alternative for net income as a measure of profitability nor is it comparable to cash flows provided by operating activities determined in accordance with GAAP, nor is FFO necessarily indicative of funds available to meet our cash needs, including the need to make cash distributions to satisfy REIT requirements. For example, FFO is not adjusted for payments of debt principal required under our debt service obligations. Our definition of FFO also assumes conversion at the beginning of the period of all convertible securities, including noncontrolling interests represented by O.P. Units that might be exchanged for common stock. FFO does not represent the amount available for management's discretionary use; as such funds may be needed for capital replacement or expansion, debt service obligations or other commitments and uncertainties. Furthermore, FFO is not comparable to similarly entitled items reported by other REITs that do not define FFO exactly as we do. - 21 - FFO for the three and six months ended June 30, 2009 and 2008, as reconciled to net income, are summarized in the following table:
Three Months Ended June 30, Six Months Ended June 30, ----------------------------------------- ----------------------------------------- 2009 2008 2009 2008 ----------------------------------------- ----------------------------------------- (dollars in thousands) (dollars in thousands) Net income $ 7,189 $ 6,837 $12,823 $15,958 Add: Depreciation and amortization of real estate(1) 7,054 6,275 13,530 12,488 Less: Noncontrolling interests in joint ventures (54) (63) (94) (174) ------------------ ------------------ ------------------ ------------------ FFO $14,189 $13,049 $26,259 $28,272 ================== ================== ================== ==================
(1) Includes our portion of depreciation and amortization of real estate and leasing commissions from our unconsolidated joint venture totaling approximately $60 and $189 for the three months ended June 30, 2009 and 2008, respectively, and $119 and $379 for the six months ended June 30, 2009 and 2008, respectively. Also includes our amortization of leasing commissions of approximately $660 and $404 for the three months ended June 30, 2009 and 2008, respectively, and $1,132 and $805 for the six months ended June 30, 2009 and 2008, respectively. Amortization of leasing commissions is included in the property operating, maintenance and real estate taxes line item in the condensed consolidated statements of operations. DISTRIBUTION POLICY Our board of directors determines the amount and timing of distributions to our stockholders. The board of directors will consider many factors prior to making any distributions, including the following: - - the amount of cash available for distribution; - - our ability to refinance maturing debt obligations; - - our financial condition; - - whether to reinvest funds rather than to distribute such funds; - - our committed and projected capital expenditures; - - the amount of cash required for new property acquisitions, including acquisitions under existing agreements with the Berg Group; - - the amount of our annual debt service requirements; - - prospects of tenant renewals and re-leases of properties subject to expiring leases; - - cash required for re-leasing activities; - - the annual distribution requirements under the REIT provisions of the federal income tax laws; and - - such other factors as the board of directors deems relevant. We cannot assure you that we will be able to meet or maintain our cash distribution objectives. - 22 - ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK We do not generally hold market risk sensitive instruments for trading purposes. We use fixed and variable rate debt to finance our operations. Our exposure to market risk for changes in interest rates relates primarily to our current variable rate debt and future debt obligations. We are vulnerable to significant fluctuations of interest rates on our floating rate debt and pricing on our future debt. We manage our market risk by monitoring interest rates where we try to recognize the unpredictability of the financial markets and seek to reduce potentially adverse effect on the results of our operations. This takes frequent evaluation of available lending rates and examination of opportunities to reduce interest expense through new sources of debt financing. Several factors affecting the interest rate risk include governmental monetary and tax policies, domestic and international economics and other factors that are beyond our control. The following table provides information about the principal cash flows, weighted average interest rates, and expected maturity dates for debt outstanding as of June 30, 2009. The current terms of this debt are described in Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." For fixed rate debt, we estimate fair value by using discounted cash flow analyses based on borrowing rates for similar kinds of borrowing arrangements. For fixed rate debt, the table presents the assumption that the outstanding principal balance at June 30, 2009 will be paid according to scheduled principal payments and that we will not prepay any of the outstanding principal balance. For variable rate debt, the table presents the assumption that the outstanding principal balance at June 30, 2009 will be paid upon maturity.
Six Months Year Ending December 31, Remaining ----------------------------------------------- 2009 2010 2011 2012 2013 Thereafter Total Fair Value ------------------------------------------------------------------------------------------------ (dollars in thousands) Fixed Rate Debt: Secured notes payable $6,378 $13,328 $14,109 $14,935 $81,269 $203,438 $333,457 $479,970 Weighted average interest rate 5.74% 5.74% 5.74% 5.74% 5.74% 5.74% Variable Rate Debt: Unsecured debt $3,892 - - - - - $3,892 $3,892 Weighted average interest rate 2.09%
The primary market risks we face are interest rate fluctuations. As a result, we pay lower rates of interest in periods of decreasing interest rates and higher rates of interest in periods of increasing interest rates. We had no interest rate caps or interest rate swap contracts at June 30, 2009. The only variable debt that we had as of June 30, 2009 was approximately $3.9 million owed to the Heritage Bank of Commerce. This represented approximately 1.1% of the total $337.3 million of outstanding debt as of June 30, 2009. All of our debt is denominated in United States dollars. The following discussion of market risk is based solely on a possible hypothetical change in future market conditions related to our variable-rate debt. It includes "forward-looking statements," as previously defined, regarding market risk, but we are not forecasting the occurrence of these market changes. Based on the amount of variable debt outstanding as of June 30, 2009, a 1% increase or decrease in interest rates on our approximately $3.9 million of floating rate debt would decrease or increase, respectively, earnings and cash flows for the six-month period then ended by approximately $20,000, as a result of the increased or decreased interest expense associated with the change in rate, and would not have an impact on the fair value of the floating rate debt. This amount is determined by considering the impact of hypothetical interest rates on our borrowing cost. Due to the uncertainty of fluctuations in interest rates and the specific actions that might be taken by us to mitigate such fluctuations and their possible effects, the foregoing sensitivity analysis assumes no changes to our financial structure. - 23 - ITEM 4. CONTROLS AND PROCEDURES DISCLOSURE CONTROLS AND PROCEDURES We strive to maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by SEC Rule 13a-15(b) we conducted an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer, President and Vice President of Finance, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer, President and Vice President of Finance concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e)) were effective as of June 30, 2009. CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING There was no material change in our internal control over financial reporting during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. - 24 - PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The discussion of legal proceedings is incorporated herein by reference from Part I "Item 1. - Notes to Condensed Consolidated Financial Statements - Note 9 - - Commitments and Contingencies." ITEM 1A. RISK FACTORS While we attempt to identify, manage and mitigate risks and uncertainties associated with our business to the extent practical under the circumstances, some level of risk and uncertainty will always be present. In addition to the other information contained in this report, you should carefully review the factors discussed under Item 1A of our annual report on Form 10-K for the year ended December 31, 2008 which describes some of the risks and uncertainties associated with our business. These risks and uncertainties have the potential to materially affect our business, financial condition, results of operations, cash flows, and future prospects. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS a) The 2009 Annual Meeting of Stockholders of the Company was held on May 20, 2009 in which proxies representing 21,020,016 shares of common stocks, or 96.7% of the total outstanding shares, were present and voted. b) At the 2009 Annual Meeting of Stockholders, Carl E. Berg, William A. Hasler, Lawrence B. Helzel, Raymond V. Marino and Martin S. Roher were elected as directors for the ensuing year, all of whom were serving on the board of directors at the time of the meeting. c) The following proposals were voted upon at the meeting: Proposal No. 1: Election of Directors
Total Vote for Each Total Vote Withheld Directors Director from Each Director Total Abstentions ---------------------------- ---------------------- ---------------------- ---------------------- Carl E. Berg 20,344,655 675,361 - William A. Hasler 19,983,900 1,036,116 - Lawrence B. Helzel 20,158,917 861,099 - Raymond V. Marino 20,551,889 468,127 - Martin S. Roher 20,105,313 914,703 -
Proposal No. 2: Ratification of the selection of the accounting firm of Burr, Pilger & Mayer, LLP as the Company's independent registered public accounting firm for the year ending December 31, 2009. There were 20,994,604 votes in favor of the proposal, 8,847 votes against the proposal and 16,565 abstentions. ITEM 6. EXHIBITS 10.56 Heritage Bank of Commerce Revolving Credit Loan Agreement 10.56.1 Heritage Bank of Commerce Revolving Credit Loan Change in Terms Agreement, dated April 17, 2008 10.56.2 Heritage Bank of Commerce Revolving Credit Loan Change in Terms Agreement, dated June 5, 2009 10.57 M&M Real Estate Control & Restructuring, LLC Promissory Note, dated April 14, 2009 10.58 M&M Real Estate Control & Restructuring, LLC Promissory Note, dated April 21, 2009 10.59 M&M Real Estate Control & Restructuring, LLC Promissory Note, dated July 1, 2009 31.1 Section 1350 Certificate of CEO 31.2 Section 1350 Certificate of President & COO 31.3 Section 1350 Certificate of Principal Financial Officer 32 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - 25 - ================================================================================ Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereto duly authorized. Mission West Properties, Inc. (Registrant) Date: August 7, 2009 By: /s/ Carl E. Berg ----------------------------------- Carl E. Berg Chief Executive Officer Date: August 7, 2009 By: /s/ Wayne N. Pham ----------------------------------- Wayne N. Pham Vice President of Finance (Principal Accounting Officer and Duly Authorized Officer) - 26 - EX-10 2 exh10_59.txt EXHIBIT 10.59 PROMISSORY NOTE $15,000,000.00 July 1, 2009 Mission West Properties, L.P. II, a Delaware limited partnership ("Mission") - ---------------------------------------------------------------------------- promises to pay to M&M Real Estate Control & Restructuring., LLC ------------------------------------------------------------- the principal sum of Fifteen Million Dollars and 00 Cents ($15,000,000.00), plus interest at the rate of 30 day LIBOR plus 2 percent per annum (compounded on the basis of a 366-day year) beginning on the 1st day of July, 2009. Should interest not so be paid, it shall thereafter bear like interest as the principal, but such unpaid interest so compounded shall not exceed an amount equal to simple interest on the unpaid principal at the maximum rate permitted by law. Should default be made in the payment of any installment of interest when due, the whole sum of principal and interest shall become immediately due and payable at the option of the holder of this note. Should suit be commenced or an attorney employed to enforce the payment of this note, we agree to pay such additional sum as the court may adjudge as reasonable attorney's fees in said suit. Principal and interest are payable in lawful money of the United States. Principal and interest are payable in lawful money of the United States no later than December 31, 2010. Notwithstanding the above, Mission shall use its best efforts to repay the loan as soon as possible using all available sources of cash, including but not limited to cash generated from operations and cash available from any other financing sources. Signed By: /s/ Raymond V. Marino 7/1/09 ----------------------------------------------- -------------- Raymond V. Marino, Pres. & COO Date Mission West Properties, Inc. Its General Partner Acknowledged: /s/ Tom Meckenstock 7/1/09 -------------------------------------------- -------------- Tom Meckenstock, Managing Member Date EX-10 3 exh10_58.txt EXHIBIT 10.58 PROMISSORY NOTE $5,000,000.00 April 21, 2009 Mission West Properties, L.P. II, a Delaware limited partnership ("Mission") - ---------------------------------------------------------------------------- promises to pay to M&M Real Estate Control & Restructuring., LLC ------------------------------------------------------------- the principal sum of Five Million Dollars and 00 Cents ($5,000,000.00), plus interest at the rate of 30 day LIBOR plus 2 percent per annum (compounded on the basis of a 366-day year) beginning on the 21st day of April, 2009. Should interest not so be paid, it shall thereafter bear like interest as the principal, but such unpaid interest so compounded shall not exceed an amount equal to simple interest on the unpaid principal at the maximum rate permitted by law. Should default be made in the payment of any installment of interest when due, the whole sum of principal and interest shall become immediately due and payable at the option of the holder of this note. Should suit be commenced or an attorney employed to enforce the payment of this note, we agree to pay such additional sum as the court may adjudge as reasonable attorney's fees in said suit. Principal and interest are payable in lawful money of the United States. Principal and interest are payable in lawful money of the United States no later than June 30, 2009. Notwithstanding the above, Mission shall use its best efforts to repay the loan as soon as possible using all available sources of cash, including but not limited to cash generated from operations and cash available from any other financing sources. Signed By: /s/ Raymond V. Marino 4/21/09 ------------------------------------------------ ------------- Raymond V. Marino, Pres. & COO Date Mission West Properties, Inc. Its General Partner Acknowledged: /s/ Tom Meckenstock 4/21/09 --------------------------------------------- ------------- Tom Meckenstock, Managing Member Date EX-10 4 exh10_57.txt EXHIBIT 10.57 PROMISSORY NOTE $10,000,000.00 April 14, 2009 Mission West Properties, L.P. II, a Delaware limited partnership ("Mission") promises to pay to M&M Real Estate Control & Restructuring., LLC ------------------------------------------------------------- the principal sum of Ten Million Dollars and 00 Cents ($10,000,000.00), plus interest at the rate of 30 day LIBOR plus 2 percent per annum (compounded on the basis of a 366-day year) beginning on the 14th day of April, 2009. Should interest not so be paid, it shall thereafter bear like interest as the principal, but such unpaid interest so compounded shall not exceed an amount equal to simple interest on the unpaid principal at the maximum rate permitted by law. Should default be made in the payment of any installment of interest when due, the whole sum of principal and interest shall become immediately due and payable at the option of the holder of this note. Should suit be commenced or an attorney employed to enforce the payment of this note, we agree to pay such additional sum as the court may adjudge as reasonable attorney's fees in said suit. Principal and interest are payable in lawful money of the United States. Principal and interest are payable in lawful money of the United States no later than June 30, 2009. Notwithstanding the above, Mission shall use its best efforts to repay the loan as soon as possible using all available sources of cash, including but not limited to cash generated from operations and cash available from any other financing sources. Signed By: /s/ Raymond V. Marino 4/14/09 ------------------------------------------------- ------------ Raymond V. Marino, Pres. & COO Date Mission West Properties, Inc. Its General Partner Acknowledged: /s/ Tom Meckenstock 4/14/09 ---------------------------------------------- ------------ Tom Meckenstock, Managing Member Date EX-10 5 exh10_56-2.txt EXHIBIT 10.56.2 CHANGE IN TERMS AGREEMENT THIS CHANGE IN TERMS AGREEMENT (this "CIT ") is made by and between Heritage Bank of Commerce, a California banking corporation ("Bank"), with its headquarters address at 150 Almaden Boulevard, San Jose, California 95113 and Mission West Properties, Inc., a Maryland corporation ("Borrower"), with its principal address at 10050 Bandley Drive, Cupertino, California 95014. This CIT is executed on June 5, 2009 and is made effective upon the satisfaction of all of the conditions precedent set forth herein (the "Effective Date") at San Jose, California. RECITALS A. As of March 4, 2008, Bank and Borrower entered into certain agreements (the "March 2008 Loan Documents") including but not limited to a Revolving Credit Loan Agreement (the "Loan Agreement"), pursuant to which Bank agreed, subject to the terms and conditions set forth therein, to lend up to the sum of Ten Million Dollars ($10,000,000.00) to Borrower, and pursuant to which Borrower agreed to repay the loan on or before June 15, 2009. B. Thereafter, pursuant to a Change in Terms Agreement dated April 17, 2008 (the "April 2008 CIT"), Bank and Borrower made certain changes to the March 2008 Loan Documents, including but not limited to revising the Loan Agreement to provide for a Commitment Amount (as defined in the April 2008 CIT), to Seventeen Million Five Hundred and 00/100 Dollars ($17,500,000.00). C. The Termination Date (as defined in the March 2008 Loan Documents), is June 15, 2009. Borrower has requested, and Bank has agreed, subject to the terms and conditions of this CIT, to extend the Termination Date to September 15, 2009. AGREEMENT In consideration of the covenants, terms and conditions set forth herein, and in consideration and for other good and valuable consideration, the parties hereto agree as set forth below. 1. INCORPORATION BY REFERENCE. The Recitals set forth above are true and correct and are incorporated herein by reference in this CIT, together with the March 2008 Loan Documents, the April 2008 CIT and any other documents executed by and between Bank and Borrower in connection with or after the March 2008 Loan Documents (sometimes, collectively, the "Loan Documents"). All capitalized terms not defined herein shall have the meaning given in the Loan Documents. 2. AMENDMENT OF DEFINITION OF TERMINATION DATE. The definition of "Termination Date" in the Loan Agreement is hereby replaced by the following: "`Termination Date' shall mean September 15, 2009." 3. CONDITIONS PRECEDENT. The effectiveness of this CIT and Bank's obligations hereunder are conditioned upon the satisfaction of each and all of the following conditions on or before June 5, 2009: (a) Borrower shall have executed and delivered this CIT to Bank; and (b) Borrower shall have paid the loan extension fee of Four Thousand Three Hundred Seventy-five and 00/100 Dollars ($4,375.00) to Bank. 4. LEGAL EFFECT. Except as specifically provided herein, all of the terms and conditions of the Loan Documents remain in full force and effect. 5. INTEGRATION. This CIT is an integrated agreement. Except as specifically set froth herein, and except for the Loan Documents as modified hereby, it supersedes all prior representations and agreements, if any, between the parties to this CIT. This CIT and the Loan Documents as modified hereby contain the entire and only understanding of the parties with respect to the subject matter hereof and thereof, and may not be altered, amended or extinguished, except by a writing signed by all parties. IN WITNESS WHEREOF, the parties hereto have executed and entered into this CIT effective as of the Effective Date first written above. Heritage Bank of Commerce a California corporation By: /s/ Roxanne Vane ---------------------------------------- Title: Senior Vice President ------------------------------------- Mission West Properties, Inc. a Maryland corporation By: /s/ Raymond V. Marino ---------------------------------------- Title: President & COO ------------------------------------- EX-10 6 exh10_56-1.txt EXHIBIT 10.56.1 CHANGE IN TERMS AGREEMENT This Change in Terms Agreement (this "CIT") is made as of and delivered on April 17, 2008, by and between Mission West Properties, Inc., a Maryland corporation ("Borrower"), and Heritage Bank of Commerce (the "Bank"). Recitals A. As of March 4, 2008, the Bank and Borrower entered into certain agreements (the "March 2008 Loan Documents") including but not limited to a Revolving Credit Loan Agreement (the "Agreement") pursuant to which the Bank agreed, subject to the terms and conditions set forth therein, to lend up to the sum of Ten Million Dollars ($10,000,000.00) to Borrower, and pursuant to which Borrower agreed to repay the loan on or before June 15, 2009. B. The Borrower now desires to borrow up to Seventeen Million Five Hundred Thousand Dollars and no cents ($17,500,000.00) from the Bank from time to time to meet the working capital needs of the Borrower; and C. The Bank is willing to provide such financing subject to the terms and conditions set forth in this Agreement. In consideration of the premises and the mutual promises herein contained, Borrower and the Bank agree as follows: Agreement 1. INCORPORATION OF RECITALS. Each of the foregoing Recitals is hereby incorporated herein by this reference as though set forth in full herein. 2. COMMITMENT AMOUNT. The definition of "Commitment Amount" in Section 1.1 of the Revolving Credit Loan Agreement is hereby replaced in full by the following: "Commitment Amount" shall mean, as of any applicable date of determination, Seventeen Million Five Hundred Thousand Dollars ($17,500,000.00)." 3. MINIMUM LOAN FEE. The first sentence in Section 2.9.1 of the Agreement is hereby deleted and replaced by the following: "The Borrower shall pay to the Bank a minimum loan fee of Seventeen Thousand Five Hundred Dollars ($17,500.00) (the "Minimum Loan Fee")." 4. CONDITIONS PRECEDENT. At the Bank's sole and absolute option and for its benefit, the effectiveness of this CIT and Bank's obligations hereunder are conditioned upon the satisfaction of each and all of the following conditions on or before April 17, 2008: (a) Borrower shall have paid to the Bank the sum of Seven Thousand Five Hundred Dollars ($7,500.00) in order to bring its currently paid Minimum Loan Fee of Ten Thousand Dollars to the required total of Seventeen Thousand Five Hundred Dollars ($17,500,000.00). (b) Borrower shall have paid one-half of Bank's attorneys' fees incurred in preparing this Agreement and any related documents in the current estimated sum of Nine Hundred Dollars ($900.00.), Borrower's share Four Hundred Fifty Dollars ($450.00) (c) Borrower shall have executed and delivered to the Bank an Amended and Restated Revolving Credit Note (the "Amended Note") in the form attached hereto as Exhibit A. All references in the Agreement to either the "Revolving Credit Note" or the "Note" shall refer to the original Revolving Credit Note until such time as Borrower executes and delivers the Amended Note, after which time all references in the Revolving Credit Loan Agreement to either the "Revolving Credit Note" or the "Note" shall refer to the Amended Note. (d) Borrower shall have provided to the Bank a copy of resolutions of the Board of Directors of the Borrower in form satisfactory to the Bank in its sole and absolute discretion authorizing the execution, delivery, and performance of this CIT, the borrowing hereunder, and the Amended Note, which shall have been certified by the Secretary or Assistant Secretary of the Borrower as of the date of delivery as being complete, accurate, and in effect by a certification in the form attached hereto as Exhibit B. 5. NO OTHER CHANGES TO MARCH 2008 LOAN DOCUMENTS. Except as expressly stated in this CIT or the Amended Note, there are no other changes or modifications to the March 2008 Loan Documents, and all terms of the March 2008 Loan Documents remain in effect. IN WITNESS WHEREOF, the Borrower and the Bank have caused this CIT to be executed by their duly authorized officers as of the day and year first written above. MISSION WEST PROPERTIES, INC. A Maryland corporation By: /s/ Raymond V. Marino ------------------------------------ Print Name: Raymond V. Marino ---------------------------- Its: President & COO ----------------------------------- HERITAGE BANK OF COMMERCE By: /s/ Roxanne Vane ------------------------------------ Its: Senior Vice President ----------------------------------- AMENDED AND RESTATED REVOLVING CREDIT NOTE $17,500,000.00 San Jose, California April 17, 2008 FOR VALUE RECEIVED, the undersigned promises to pay to the order of HERITAGE BANK OF COMMERCE (the "Bank") at 150 Almaden Boulevard, San Jose, California (or such other place as Bank may designate), on June 15, 2009 (the "Termination Date"), the principal sum or so much of the principal sum of Seventeen Million Five Hundred Thousand Dollars ($17,500,000.00) as may from time to time have been advanced and be outstanding under that certain Revolving Credit Loan Agreement dated March 4, 2008, between the undersigned and the Bank (the "Agreement") plus all accrued but unpaid interest thereon. Capitalized terms used herein without definition shall have the same meanings as in the Agreement. The unpaid principal amount of this Note shall bear interest at the rate provided in the Agreement, which Agreement, as it may be amended from time to time, is by this reference incorporated herein and made a part hereof. Interest shall be payable to the extent accrued on the first day of each consecutive calendar month, beginning March 4, 2008, with all remaining interest due and payable on the Termination Date. This Note is a Master Note under which sums must be repaid from time to time, and under which Revolving Loans may be made by the Bank up to the Commitment Amount, pursuant to the terms and conditions of the Agreement, and the books and records of the Bank shall constitute prima facie evidence of the amount of the Indebtedness at any time owing hereunder or under the Agreement, provided, however, that the failure by the Bank so to record any such amount or any error in so recording any such amount shall not limit or otherwise affect the obligations of the Borrower under this Note or the Agreement to repay the principal amount of all the Revolving Loans outstanding together with all interest accrued or accruing thereon. The unpaid principal amount of all Revolving Loans, unless accelerated in accordance with the terms of the Agreement, if not paid sooner, will be due and payable, together with all accrued and unpaid interest and all other amounts due and unpaid under the Agreement, on the Termination Date. Interest on the Revolving Loans is payable in arrears on the first day of each month during the term of the Agreement and as set forth in the Agreement. The Agreement provides for the payment by Borrower of various other charges and fees in addition to interest charges as more fully set forth in the Agreement. All payments of any amount becoming due under this Note shall be made in the manner provided in Section 2.11 of the Agreement. Reference is made to the Agreement for, among other things, the conditions under which this Note may or must be paid in whole or in part prior to the Termination Date (whether accelerated or otherwise). If an Event of Default (as defined in the Agreement) occurs and is not cured within the time provided for by the Agreement, the Bank may exercise any one or more of the rights and remedies granted by the Agreement or any of the Loan Documents or available under applicable law, including without limit the right to accelerate this Note or the Indebtedness, and may set off against the principal of and interest on this Note or against any other Indebtedness (i) any amount owing by the Bank to the undersigned, (ii) any property of the undersigned at any time in the possession of the Bank or any Affiliate (as that term is defined in the Agreement) of the Bank and (iii) any amount in any deposit or other account (including without limit an account evidenced by a certificate of deposit) of the undersigned with the Bank or any Affiliate of the Bank. The undersigned and its successors and assigns and all accommodations parties, guarantors and endorsers (i) waive presentment, demand, protest and notice of dishonor, (ii) agree that no extension or indulgence to the undersigned or release or non-enforcement of any security, with or without notice, shall affect the obligations of any accommodation party, guarantor or endorser, and (iii) agree to reimburse the holder of this Note for any and all costs and expenses incurred in collecting or attempting to collect any and all principal and interest under this Note (including, but not limited to, court costs and attorney fees, whether in-house or outside counsel is used and whether such costs and expenses are incurred in formal or informal collection actions, federal bankruptcy proceedings, appellate proceedings, probate proceedings, or otherwise, all as more specifically set forth in Sections 8.7 and 8.8 of the Agreement). This Note shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, this Note has been delivered and accepted at Cupertino, California and the undersigned has executed this Note as of the 17th day of April, 2008. MISSION WEST PROPERTIES, INC. A Maryland corporation By: /s/ Raymond V. Marino --------------------------------- Print Name: Raymond V. Marino -------------------------- Its: President & COO --------------------------------- EX-10 7 exh10_56.txt EXHIBIT 10.56 REVOLVING CREDIT LOAN AGREEMENT THIS REVOLVING CREDIT LOAN AGREEMENT (this "Agreement") is made and delivered this 4th day of March 2008, by and between Mission West Properties, Inc., a Maryland corporation ("Borrower"), and Heritage Bank of Commerce (the "Bank"). WITNESSETH WHEREAS, the Borrower desires to borrow up to Ten Million Dollars ($10,000,000.00) from the Bank from time to time to meet the working capital needs of the Borrower; and WHEREAS, the Bank is willing to provide such financing subject to the terms and conditions set forth in this Agreement; NOW, THEREFORE, in consideration of the premises and the mutual promises herein contained and in reliance upon Borrower's representations and warranties set forth herein, the Borrower and the Bank agree as follows: 1. DEFINITIONS. 1.1 DEFINED TERMS. As used in this Agreement, the following terms shall have the following respective meanings: "Affiliate" shall mean, when used with respect to any person, any other person which, directly or indirectly, controls or is controlled by or is under common control with such person. For purposes of this definition, "control" (including the correlative meanings of the terms "controlled by" and "under common control with"), with respect to any person, shall mean possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of such person, whether through the ownership of voting securities or by contract or otherwise. "Agreement" is defined in the first paragraph of this Agreement. "Average Annual Rate of Interest" is defined the weighted average of the annual interest rate on variable and fixed rate debt as reflected in the Form 10-K, Item 7A. "Bank" is defined in the first paragraph of this Agreement. "Bankruptcy Code" shall mean Title 11 of the United States Code, as amended, or any successor act or code. "Borrower" is defined in the first paragraph of this Agreement. "Business Day" shall mean a day on which the Bank is open to carry on its normal commercial lending business. "Commitment" shall mean the Bank's agreement to lend to Borrower in accordance with and subject to the terms of this Agreement. "Commitment Amount" shall mean, as of any applicable date of determination, Ten Million Dollars and no cents ($10,000,000.00). "Consolidated" or "consolidated" shall mean, when used with reference to any financial term in this Agreement, the aggregate for two or more persons of the amounts signified by such term for all such persons determined on a consolidated basis in accordance with GAAP as defined below. Unless otherwise specified herein, reference to "consolidated" financial statements or data of the Borrower includes consolidation with its Subsidiaries (as defined below) in accordance with GAAP. "Controversy" is defined in Section 8.16. "Cost Award" is defined in Section 8.16. "Cost Statement of Decision" is defined in Section 8.16. "Debt" shall mean, as of any applicable date of determination, all items of indebtedness, obligation or liability of a person, whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, joint or several, that should be classified as liabilities in accordance with GAAP. "Debt Coverage Ratio" shall mean, as of any applicable date of determination, the ratio of: (1) the sum of Borrower's Net Operating Income, divided by (2) annual debt service on total outstanding mortgage debt plus total open line of credit commitments amortized over 25 years at the "Average Annual Rate of Interest." The Debt Coverage Ratio shall be determined by the Bank as of each Fiscal Quarter (as defined below) and on the basis of the preceding twelve (12) month period (actual or based on annualized quarters) as follows: (i) as to each Fiscal Quarter ending on March 31, June 30, and September 30, from Borrower's SEC Form 10-Q filed with the Securities and Exchange Commission relating to such quarter, with such quarterly year to date results annualized; and (ii) as to each Fiscal Quarter ending on December 31, from Borrower's SEC Form 10-K relating to the year ending on such date. Notwithstanding the foregoing, the Bank may also rely on other information that Borrower is obligated to provide to the Bank pursuant to Section 5.1 of this Agreement. Exhibit C hereto includes an example of the calculation of Debt Coverage Ratio as defined herein from Borrower's SEC Form 10-K for the period ending September 30, 2007, and is provided for example purposes only. "Debt to Tangible Net Worth Ratio" shall mean, as of any applicable date of determination, the ratio of (1) Borrower's Debt, divided by (2) Borrower's Tangible Net Worth. The Debt to Tangible Net Worth Ratio shall be determined by the Bank as of each Fiscal Quarter (as defined below) and on the basis of the preceding twelve (12) month period (actual or based on annual quarters) as follows: (i) as to each Fiscal Quarter ending on March 31, June 30, and September 30, from Borrower's SEC Form 10-Q filed with the Securities and Exchange Commission relating to the quarter ending on such date; and (ii) as to each Fiscal Quarter ending on December 31, from Borrower's SEC Form 10-K relating to the year ending on such date. Notwithstanding the foregoing, the Bank may also rely on other information that Borrower is obligated to provide to the Bank pursuant to Section 6.1 of this Agreement. Exhibit C hereto includes an example of the calculation of Debt to Tangible Net Worth Ratio as defined herein from Borrower's SEC Form 10-Q for the period ending September 30, 2007, and is provided for example purposes only. "Default" shall mean a condition or event which, with the giving of notice or the passage of time, or both, would become an Event of Default as defined below. "Default Rate" shall mean, as of the applicable date or time of determination, the Variable Rate, as defined below, plus five percent (5%), or, if the Bank exercises its option under Section 2.13 of this Agreement to change the rate of interest to the Prime Variable Rate, then the Prime Variable Rate, as defined below, plus five percent (5%). "Effective Date" shall mean the date this Agreement becomes effective as set forth in Section 8.1 herein. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as amended, or any successor act or code. "Event of Default" shall mean any of those conditions or events listed in Section 7.1 of this Agreement. "Financial Statements" shall mean all those consolidated balance sheets, consolidated earnings statements and other consolidated financial data which have been furnished to the Bank for the purposes of, or in connection with, this Agreement and the transactions contemplated hereby, including without limit the following: the Borrower's SEC Form 10-K for the period ending December 31, 2007. "Fiscal Quarter" shall mean each three month period ending on March 31, June 30, September 30, and December 31 of each year. "Funding Date" shall mean, with respect to any Revolving Loan made by the Bank hereunder, the date of the funding of such Revolving Loan by Bank. "GAAP" shall mean, as of any applicable date of determination, generally accepted accounting principles consistently applied in the United States. "Indebtedness" shall mean all loans, advances, indebtedness, obligations and liabilities of Borrower to the Bank under this Agreement, together with all other indebtedness, obligations and liabilities whatsoever of the Borrower to the Bank, whether matured or unmatured, liquidated or unliquidated, direct or indirect, absolute or contingent, joint or several, due or to become due, now existing or hereafter arising. "Internal Revenue Code" shall mean the Internal Revenue Code of 1986, as amended from time to time and hereafter, and any successor statute. "Legal Rate" shall mean the maximum interest rate allowed by law to be paid by the Borrower or received by the Bank with respect to the Indebtedness represented by the Note. "Lender" shall mean any bank, financial institution, finance company, insurance or other financial institution or any other person who extends or has extended any credit or loan or line of credit to any other person. "LIBOR" shall mean the one-month London Inter-Bank Offered Rate, rounded up, if necessary, to the nearest whole 1/100 of 1%. "Loan" shall mean the Revolving Loans. "Loan Documents" shall mean this Agreement, the Note, and all other agreements, instruments and documents (together with all amendments and supplements thereto and replacements thereof) now or hereafter executed by Borrower that evidence or secure all or any portion of the Indebtedness or Borrower's obligations hereunder. "Material Adverse Effect" or "Materially Adverse Effect" shall mean, with respect to a Person, a material adverse effect upon the condition (financial or otherwise), operations, performance or properties or assets of such Person. "Net Operating Income" shall mean total revenues less expenses adding back interest expense and adding back depreciation expense. "Note" shall mean the Revolving Credit Note. "Notice of Borrowing" shall mean a notice substantially in the form of Exhibit B hereto. "PBGC" shall mean the Pension Benefit Guaranty Corporation or any person succeeding to the present powers and functions of the Pension Benefit Guaranty Corporation. "Person" or "person" shall mean any individual, corporation, partnership, joint venture, association, trust, unincorporated association, joint stock company, government, municipality, political subdivision or agency, or other entity. "Prime Variable Rate" shall mean that variable rate of interest equal to the Prime Rate as published in the Wall Street Journal minus 3/4 percent (3/4%), per annum, with the interest rate to be initially calculated by the Bank as of approximately 10:00 a.m. San Jose, California time on the date on which the Bank exercises its option under Section 2.13 if such option date is the first day of the month, or, if not, as of approximately 10:00 a.m. San Jose, California time as the first day of the month during which such option date occurs, and with the interest rate to thereafter fluctuate with changes in such Prime Rate with such fluctuations to be effective, and the interest rate to be adjusted, on the first day of each month. "Revolving Credit Note" shall mean a promissory note conforming to Section 2.4 of this Agreement and in the form and content of Exhibit A to this Agreement. "Revolving Loan" shall mean advances or loans made by the Bank to the Borrower under this Agreement. "Section" when used to refer to a portion of this Agreement shall mean the section to which reference is made plus all subparts and subsections thereof. "Solvent" shall mean, as to any person at the time of determination, that such person (a) owns property and assets the value of which (both at fair valuation and at present fair salable value) is greater than the amount required to pay all of such person's liabilities (including contingent liabilities and debts); (b) is able to pay all of its debts as such debts mature; and (c) has capital sufficient to carry on its business and transactions and all business and transactions in which it is about to engage. "Subsidiary" shall mean any corporation (whether now existing or hereafter organized or acquired) in which more than fifty percent (50%) of the outstanding securities having ordinary voting power for the election of directors, as of any applicable date of determination, shall be owned directly, or indirectly through one or more Subsidiaries, by the Borrower. "Tangible Net Worth" shall be calculated each Fiscal Quarter and shall mean, as of any applicable date of determination, Total Stockholders' Equity (but not including Minority Interest) as stated in the Consolidated Balance Sheet of Borrower in Borrower's SEC Form 10-Q or, as applicable, SEC Form 10-K (or other financial information that Bank may obtain regarding Borrower or that may be provided by Borrower to Bank in accordance with), less intangibles calculated in accordance with GAAP. "Termination Date" shall mean June 15, 2009. "Total Loans of Borrower" shall mean, as of the date of any such determination, the sum of the total outstanding principal balance of all secured loans to Borrower from any Lender plus the total amount of all the balances and the credit commitments under any and all unsecured loans, unsecured lines of credit, unsecured credit facilities of any kind (including but not limited to the Commitment Amount), and any other commitments evidencing any extension of unsecured debt to Borrower by any Lender. "UCC" shall mean Uniform Commercial Code of the State of California (approved June 8, 1968) as amended. "Variable Rate" shall mean that variable rate of interest equal to the sum of the one-month LIBOR plus 1.75 percent (1.75%), per annum, the interest rate to be initially calculated by the Bank as of approximately 10:00 a.m. San Jose, California time on the Funding Date if the Funding Date is the first day of a month, or, if not, as of approximately 10:00 a.m. San Jose, California time on the first day of the month during which the Funding Date occurs, and with the interest rate to thereafter fluctuate with changes in such LIBOR with such fluctuations to be effective, and the interest rate to be adjusted, on the first day of each month. 1.2 ACCOUNTING TERMS. All accounting terms not specifically defined in this Agreement shall be construed in accordance with GAAP. 1.3 SINGULAR AND PLURAL. Where the context herein requires, the singular number shall be deemed to include the plural, the masculine gender shall include the feminine and neuter genders, and vice versa. 2. COMMITMENT, PROCEDURES, INTEREST AND FEES. 2.1 REVOLVING CREDIT COMMITMENT. Subject to the terms and conditions of this Agreement and at any time from the Effective Date until the earlier of (a) the Termination Date, (b) such earlier date on which, pursuant to the terms of this Agreement and a result of acceleration or otherwise, the Indebtedness is fully due and payable, or (c) the termination of the Bank's Commitment pursuant to Section 7.2 of this Agreement or otherwise, the Bank agrees to make Revolving Loans to the Borrower on a revolving basis up to an aggregate principal amount outstanding at any time not to exceed the Commitment Amount. Notwithstanding the foregoing, the Bank shall not be obligated to make the Revolving Loan if: (i) any of the conditions precedent set forth in Section 3 of this Agreement shall not have been satisfied or waived by the Bank in accordance with Section 8.4 of this Agreement, or (ii) such proposed Revolving Loan would cause the aggregate unpaid principal amount of the Revolving Loans outstanding under this Agreement to exceed the Commitment Amount on the Funding Date. 2.2 INTEREST RATE. Except as otherwise provided herein (including without limitation Section 2.5 relating to the Default Rate), each Revolving Loan will bear interest on the unpaid principal amount thereof at the Variable Rate. 2.3 BORROWING PROCEDURES. 2.3.1 NOTICE OF BORROWING. Whenever Borrower desires to borrow, Borrower shall provide to the Bank at 150 Almaden Boulevard, San Jose, California 95113, Attention Roxanne Vane, or to such other persons or entities as Bank may designate, an original Notice of Borrowing. Such Notice of Borrowing shall be provided by no later than 11:00 A.M. (San Jose, California time) for each Revolving Loan requested and not less than two (2) nor more than five (5) Business Days prior to the noticed Funding Date of each such Revolving Loan. Each Notice of Borrowing shall specify (A) the Funding Date (which shall be a Business Day) in respect of the Revolving Loan, (B) the amount of the proposed Revolving Loan, (C) the deposit account number of Borrower with Bank to which the funds are to be directed, and (D) the proposed use of such Revolving Loan. Any Notice of Borrowing shall be irrevocable. At the time of execution of this Agreement and as a condition to the Bank's obligations hereunder, Borrower shall provide the Bank with written documentation satisfactory to the Bank specifying the names of those employees, officers or agents of Borrower authorized by Borrower to execute and submit Notices of Borrowing to the Bank ("Authorized Agent") and a signature exemplar of each such Authorized Agent, and the Bank shall be entitled to rely on such documentation until notified in writing by Borrower of any change(s) of the persons so authorized. Borrower agrees to indemnify, defend and hold the Bank harmless from and against any and all liabilities, out of pocket costs (including but not limited to reasonable out of pocket attorneys' fees), claims, damages and demands arising from or related to Bank's acceptance of instructions in any Notice of Borrowing executed and submitted an Authorized Agent, unless caused by the gross negligence or willful misconduct of the Person to be indemnified. 2.3.2 BANK OBLIGATIONS. Subject to the terms and conditions of this Agreement including without limitation Section 2.1 and subject to Borrower's performance of and compliance with the terms hereof including without limitation Section 2.3.1 herein, the Bank agrees to make the Revolving Loan pursuant to a Notice of Borrowing on the Funding Date established by the Notice of Borrowing by crediting the deposit account of the Borrower with the Bank specified in the Notice of Borrowing in the amount of such Revolving Loan. 2.4 REVOLVING CREDIT NOTE. The Revolving Loans shall be evidenced by the Revolving Credit Note, executed by the Borrower, dated the date of this Agreement, payable to the Bank on the Termination Date (or such earlier date as the Indebtedness is due under the terms of this Agreement whether by reason of acceleration or otherwise), and in the principal amount of the original Commitment Amount. The date and amount of each Revolving Loan made by the Bank and of each repayment of principal thereon received by the Bank shall be recorded by the Bank in its records. The aggregate unpaid principal amount so recorded by the Bank shall constitute the best evidence of the principal amount owing and unpaid on the Revolving Credit Note, provided, however, that the failure by the Bank so to record any such amount or any error in so recording any such amount shall not limit or otherwise affect the obligations of the Borrower under this Agreement or the Revolving Credit Note to repay the principal amount of all the Revolving Loans together with all interest accrued or accruing thereon. 2.5 DEFAULT INTEREST. Upon the occurrence of an Event of Default, all amounts due and owing by Borrower to the Bank shall bear interest at the Default Rate. 2.6 INTEREST PAYMENTS. Interest shall be payable by Borrower to the extent then accrued on the first day of each consecutive calendar month beginning on April 1, 2008, with all remaining interest due and payable on the Termination Date (or such earlier date as the Indebtedness is due under the terms of this Agreement whether by reason of acceleration or otherwise). Any interest not paid when due shall become part of the principal and bear interest as provided in this Agreement. 2.7 MAXIMUM RATE. At no time shall the rate of interest payable on the Revolving Loans or pursuant to the Revolving Credit Note pursuant to the terms of this Agreement be deemed to exceed the Legal Rate. In the event any interest is charged or received by the Bank in excess of the Legal Rate, the Borrower acknowledges that any such excess interest shall be the result of an accidental and bona fide error, and such excess shall first be applied to reduce the principal then unpaid hereunder (in inverse order of their maturities if principal amounts are due in installments); second, applied to reduce any obligation for other indebtedness of the Borrower to the Bank; and third, any remaining excess returned to the Borrower. 2.8 TERM. The Indebtedness and the outstanding balance of all Revolving Loans and all other accrued and unpaid interest, charges and expenses hereunder and under the Note shall be payable in full on the Termination Date or such earlier date as the Indebtedness is due under the terms of this Agreement whether by reason of acceleration pursuant to Section 7.2 or otherwise. 2.9 FEES. Borrower shall pay to Bank the fees described in this Section 2.9. All fees described herein are earned as of the date they are accrued. 2.9.1 MINIMUM ANNUAL FEE. The Borrower shall pay to the Bank a minimum annual fee of Ten Thousand Dollars and no cents ($10,000.00) (the "Minimum Annual Fee"). The Minimum Annual Fee shall be payable in advance, in the manner provided in Section 2.11 herein, on the Effective Date for the first year hereunder, and on each anniversary of the Effective Date for each subsequent year. The Minimum Annual Fee shall be pro-rated for any partial year. 2.9.2 NO FEE AFTER TERMINATION OF BANK OBLIGATIONS. Notwithstanding Section 2.9.1, the Borrower shall not be obligated to pay any Minimum Annual Fee earned by the Bank after the date which is ten (10) days after Borrower has: (i) given written notice to the Bank terminating the Bank's Commitment and any further obligation by the Bank under this Agreement; and (ii) paid the Indebtedness in full. 2.9.3 PREPARATION FEES. Simultaneously with the execution of this Agreement and as a condition to the Bank's obligations hereunder, the Borrower shall pay to the Bank the amount of the out of pocket expenses (including without limit reasonable attorneys' fees, whether of inside or outside counsel, and disbursements) incurred by the Bank in connection with the preparation of this Agreement and the Loan Documents in the amount of Nine Thousand Sixty-One Dollars ($9,061.00). 2.9.4 BASIS OF COMPUTATION. The amount of all interest and fees hereunder shall be computed for the actual number of days elapsed in the period in which interest accrues on the basis of a year consisting of three hundred sixty (360) days. 2.10 MANDATORY PAYMENTS AND PREPAYMENTS. 2.10.1 MANDATORY PAYMENTS. In addition to all other payments required to be made under the Loan Documents, Borrower shall pay to the Bank the amount, if any, by which the aggregate unpaid principal amount of all Revolving Loans from time to time exceeds the Commitment Amount, together with all interest accrued and unpaid on the amount of such excess. Such payment shall be immediately due and owing without notice or demand upon the occurrence of any such excess, provided, however, that any mandatory payment made under this Section 2.10.1 shall not reduce the Commitment Amount. 2.10.2 OPTIONAL PREPAYMENTS AND CONVERSIONS. The Borrower, at any time and from time to time, may prepay the unpaid principal amount of the Revolving Loans. Any optional prepayment made under this Section 2.10.2 shall not reduce the Commitment Amount. 2.11 BASIS OF PAYMENTS. All sums payable by the Borrower to the Bank under this Agreement or the Loan Documents shall be paid immediately by Borrower when due directly to the Bank at its principal office set forth in Section 8.12 hereof in immediately available United States funds, without condition, set off, deduction or counterclaim. In its sole discretion, the Bank may charge any and all deposit or other accounts (including without limit an account evidenced by a certificate of deposit) of the Borrower with the Bank for all or a part of any Indebtedness when due; provided, however, that this authorization shall not affect the Borrower's obligation to pay, when due, any Indebtedness whether or not account balances are sufficient to pay amounts due. Whenever any payment to be made by Borrower hereunder shall be stated to be due on a day which is not a Business Day, payments shall be made on the next succeeding Business Day and such extension of time shall be included in the computation of the payment of interest hereunder and of any of the fees specified in Section 2.9. Borrower acknowledges and agrees that the fees described in Section 2.9 represent compensation for services rendered and to be rendered separate and apart from the lending of money or the provision of credit and do not constitute compensation for the use, detention or forbearance of money, and the obligation of Borrower to pay the fees described herein shall be in addition to, and not in lieu of, the obligation of Borrower to pay interest, other fees and expenses otherwise described in this Agreement. If Borrower fails to make any payment of fees or expenses specified or referred to in this Agreement owing to Bank, including without limitation those referred to in Section 2.9, or otherwise under this Agreement, or any separate fee agreement between Borrower or Bank relating to this Agreement, when due, the amount shall bear interest until paid at the Default Rate. 2.12 RECEIPT OF PAYMENTS. Any payment of the Indebtedness made by mail will be deemed tendered and received only upon actual receipt by the Bank at the address designated for such payment, whether or not the Bank has authorized payment by mail or any other manner, and shall not be deemed to have been made in a timely manner unless received on the date due for such payment, time being of the essence. Borrower expressly assumes all risks of loss or liability resulting from non-delivery or delay of delivery of any item of payment transmitted by mail or in any other manner. Acceptance by the Bank of any payment in an amount less than the amount then due shall be deemed an acceptance on account only, and the failure to pay the entire amount then due shall be and continue to be a Default or Event of Default as provided in Section 7.1, and at any time thereafter and until the entire amount then due has been paid, the Bank shall be entitled to exercise any and all rights conferred upon it herein upon the occurrence of a Default or Event of Default as provided in Section 7.1. Borrower waives the right to direct the application of any and all payments at any time or times hereafter received by the Bank from or on behalf of the Borrower. Borrower agrees that the Bank shall have the continuing exclusive right to apply and to reapply any and all payments received at any time or times hereafter against the Indebtedness in such manner as the Bank may deem advisable, notwithstanding any entry by the Bank upon any of its books and records. Borrower expressly agrees that to the extent that the Bank receives any payment of benefit and such payment or benefit, or any part thereof, is subsequently invalidated, declared to be fraudulent or preferential, set aside or is required to be repaid to a trustee, receiver, or any other party under any bankruptcy act, state or federal law, common law or equitable cause, then to the extent of such payment or benefit, the Indebtedness or part thereof intended to be satisfied shall be revived and continued in full force and effect as if such payment or benefit had not been made and, further any such repayment by the Bank, to the extent that the Bank did not directly receive a corresponding cash payment, shall be added to and be additional Indebtedness payable upon demand by the Bank. 2.13 LIBOR UNLAWFUL OR UNAVAILABLE. Should the Bank in its sole discretion binding on Borrower determine that the introduction of or any change in any law or the interpretation of any law makes it unlawful for the Bank to make or maintain Revolving Loans bearing interest based on LIBOR or that LIBOR has become unavailable as an index, then, at the Bank's option and upon its exercise of such option, the interest rate on any outstanding Revolving Loans shall thenceforth bear interest at the Prime Variable Rate. 3. CONDITIONS TO OBLIGATIONS OF BANK. 3.1 Conditions Precedent to Effectiveness of Agreement and Obligations of Bank. At Bank's sole and absolute option and for its benefit, the effectiveness of this Agreement and Bank's obligations hereunder are conditioned upon the satisfaction of each and all of the following conditions on or before March 4, 2008: 3.1.1 BORROWER DOCUMENTS EXECUTED AND FILED AND FEES PAID. The Borrower shall have executed (or caused to be executed) and delivered to the Bank the following in form and substance acceptable to Bank: 3.1.1.1 This Agreement; 3.1.1.2 The Revolving Credit Note; 3.1.1.3 Copy of Borrower's Bylaws, including all amendments thereto and restatements thereof, which shall have been certified by the Secretary or Assistant Secretary of the Borrower as of the Funding Date first occurring as being complete, accurate and in effect; and 3.1.1.4 A copy of resolutions of the Board of Directors of the Borrower authorizing the execution, delivery and performance of this Agreement, the borrowing hereunder, the Revolving Credit Note and any other documents contemplated by this Agreement, which shall have been certified by the Secretary or Assistant Secretary of the Borrower as of the Funding Date first occurring as being complete, accurate and in effect. 3.1.2 PAYMENT OF FEES. Borrower shall have paid the Minimum Annual Fee and the Preparation Fees in accordance with Sections 2.9.1 and 2.9.3. 3.1.3 APPROVAL OF BANK COUNSEL. All actions, proceedings, instruments and documents required to carry out the transactions contemplated by this Agreement or incidental thereto and all other related legal matters shall have been satisfactory to and approved by legal counsel for the Bank, and said counsel shall have been furnished with such certified copies of actions and proceedings and such other instruments and documents as they shall have reasonably requested. 3.2 CONDITIONS PRECEDENT TO ALL DISBURSEMENTS. The obligations of the Bank to make any Revolving Loan on any Funding Date, including, but not limited to, the Funding Date first occurring, are subject to the occurrence, prior to or on the Funding Date related to such Revolving Loan, of each of the following conditions as well as other conditions set forth in this Agreement: 3.2.1 BANK SATISFACTION. The Bank shall not know or have any reason to believe that, as of such Funding Date: 3.2.1.1 Any Default or Event of Default has occurred and is continuing; 3.2.1.2 Any warranty or representation set forth in Section 4 of this Agreement shall not be true and correct; or 3.2.1.3 Any provision of law, any order of any court or any regulation, rule or interpretation thereof shall have had any Material Adverse Effect on Borrower's financial condition, or on the validity or enforceability of this Agreement, the Revolving Credit Note or any other Loan Document. 3.3 OTHER DOCUMENTS TO BE PROVIDED BY BORROWER. No later than thirty (30) days after the Effective Date, Borrower shall provide to Bank the following documents: 3.3.1 Copy of Borrower's Articles of Incorporation including all amendments thereto and restatements thereof, and all other charter documents of the Borrower, all of which shall have been certified by the Maryland Department of Corporations or similar governmental authority in the state in which Borrower is organized and incorporated, as of a date within thirty days of the Funding Date first occurring; 3.3.2 Certified copy of Borrower's Good Standing certificate from the California Secretary of State, dated as of a date within thirty days of the Funding Date first occurring. 4. WARRANTIES AND REPRESENTATIONS. On a continuing basis from the date of this Agreement until the later of (a) the Termination Date or (b) the date on which the Indebtedness is paid in full and the Borrower has performed all of its other obligations hereunder, Borrower represents and warrants to the Bank that: 4.1 CORPORATE EXISTENCE AND POWER. (a) Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Maryland and in good standing under the laws of, and is authorized to do business in, the State of California, (b) Borrower has the power and authority to own its properties and assets and to carry out its business as now being conducted and is qualified to do business and in good standing in every jurisdiction wherein such qualification is necessary, (c) Borrower has the power and authority to execute, deliver and perform this Agreement, to borrow money in accordance with its terms, to execute, deliver and perform the Revolving Credit Note and other documents contemplated hereby, and to do any and all other things required of it hereunder, (d) Borrower is a qualified real estate investment trust as defined in Section 856 of the Internal Revenue Code (or any successor provision thereto) and has no knowledge of any circumstance that is likely to lead to its failure to qualify as such a real estate investment trust; (e) the execution, delivery and performance of the Loan Documents will not result in Borrower being disqualified as such a real estate investment trust; and (f) Borrower has made and will timely make all filings with and obtained all consents of the Securities and Exchange Commission required under the Securities Act of 1933 (as amended from time to time) or the Security Exchange Act of 1934 (as amended from time to time) in connection with the execution, delivery and performance by Borrower of the Loan Documents. 4.2 AUTHORIZATION AND APPROVALS. The execution, delivery and performance of this Agreement, the borrowings hereunder and the execution, delivery and performance of the Revolving Credit Note, and other documents contemplated hereby (a) have been duly authorized by all requisite corporate action of the Borrower, (b) do not require registration with or consent or approval of, or other action by, any federal, state or other governmental authority or regulatory body, or, if such registration, consent or approval is required, the same has been obtained and disclosed in writing to the Bank, (c) will not violate any provision of law, any order of any court or other agency of government, the Articles of Incorporation and Bylaws of Borrower, any provision of any indenture, note, agreement or other instrument to which the Borrower is a party, or by which it or any of its properties or assets are bound, (d) will not be in conflict with, result in a breach of or constitute (with or without notice or passage of time) a default under any such indenture, note, agreement or other instrument, and (e) will not result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Borrower (other than in favor of the Bank and as contemplated hereby). 4.3 VALID AND BINDING AGREEMENT. This Agreement is, and the Revolving Credit Note, and all other documents contemplated hereby will be, when delivered, valid, binding, and enforceable obligations of the Borrower, in accordance with their terms. 4.4 ACTIONS, SUITS OR PROCEEDINGS. There are no actions, suits or proceedings, at law or in equity, and no proceedings before any arbitrator or by or before any governmental commission, board, bureau, or other administrative agency, pending, or, to the best knowledge of the Borrower, threatened against or affecting the Borrower or any of its Subsidiaries or any properties or rights of the Borrower or any of its Subsidiaries, which, if adversely determined, could materially impair the right of the Borrower or any of its Subsidiaries to carry on business substantially as now conducted or could have a Material Adverse Effect upon the financial condition of the Borrower or any of its Subsidiaries. 4.5 ACCOUNTING PRINCIPLES. All consolidated and consolidating balance sheets, earnings statements and other financial data furnished to the Bank for the purposes of, or in connection with, this Agreement and the transactions contemplated by this Agreement, have been prepared in accordance with GAAP, and do or will fairly present the financial condition of the Borrower and its Subsidiaries, as of the dates, and the results of their operations for the periods, for which the same are furnished to the Bank. Without limiting the generality of the foregoing, the Financial Statements have been prepared in accordance with GAAP (except as disclosed therein) and fairly present the financial condition of the Borrower and its Subsidiaries as of the dates, and the results of its operations for the fiscal periods, for which the same are furnished to the Bank. The Borrower has no material contingent obligations, liabilities for taxes, long-term leases or unusual forward or long-term commitments not disclosed by, or reserved against in, the Financial Statements. 4.6 FINANCIAL CONDITION. The Borrower is solvent, able to pay its debts as they mature, has capital sufficient to carry on its business and has assets the fair market value of which exceed its liabilities, and the Borrower will not be rendered insolvent, under-capitalized or unable to pay maturing debts by the execution or performance of this Agreement or the other documents contemplated hereby. There has been no material adverse change in the business, properties or condition (financial or otherwise) of the Borrower or any of its Subsidiaries since the date of the latest Financial Statements. 4.7 CONDITIONS PRECEDENT. As of each Funding Date, all appropriate conditions precedent referred to in Section 3 hereof have been satisfied or, alternatively, have been waived in writing by the Bank. 4.8 TAXES. Borrower and its Subsidiaries have each filed by the due date therefor (including any extensions) all federal, state and local tax returns and other reports it is required by law to file, has paid or caused to be paid all taxes, assessments and other governmental charges that are shown to be due and payable under such returns, and has made adequate provision for the payment of such taxes, assessments or other governmental charges which have accrued but are not yet payable. The Borrower has no knowledge of any material deficiency or assessment in connection with any taxes, assessments or other governmental charges not adequately disclosed in the Financial Statements. 4.9 COMPLIANCE WITH LAWS. Borrower and its Subsidiaries have each complied with all applicable laws, to the extent that failure to comply would materially interfere with the conduct of the business of the Borrower or any of its Subsidiaries. 4.10 INDEBTEDNESS. Except as disclosed in the Financial Statements or other public filings, neither Borrower nor any of its Subsidiaries has any indebtedness for money borrowed or any direct or indirect obligations under any leases (whether or not required to be capitalized under GAAP) or any agreements of guarantee or surety except for the endorsement of negotiable instruments by the Borrower and its Subsidiaries in the ordinary course of business for deposit or collection. 4.11 MATERIAL AGREEMENTS. Except as disclosed in the Financial Statements or other public filings, neither the Borrower or any of its Subsidiaries has any material leases, contracts or commitments of any kind (including, without limitation, employment agreements, collective bargaining agreements, powers of attorney, distribution contracts, patent or trademark licenses, contracts for future purchase or delivery of goods or rendering of services, bonus, pension and retirement plans, or accrued vacation pay, insurance and welfare agreements); to the best knowledge of Borrower, all parties to such agreements have complied with the provisions of such leases, contracts or commitments; and to the best knowledge of the Borrower, no party to such agreements is in default thereunder, nor has there occurred any event which with notice or the passage of time, or both, would constitute such a default. 4.12 MARGIN STOCK. Neither the Borrower nor any of its Subsidiaries is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying any "margin stock" within the meaning of Regulation U of the Board of Governors of the Federal Reserve System, and no part of the proceeds of any loan hereunder will be used, directly or indirectly, to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock or for any other purpose which might violate the provisions of Regulation G, T, U or X of the said Board of Governors. The Borrower does not own any margin stock. 4.13 PENSION FUNDING. Neither the Borrower nor any of its Subsidiaries has incurred any accumulated funding deficiency within the meaning of ERISA or incurred any liability to the PBGC in connection with any employee benefit plan established or maintained by the Borrower or any of its Subsidiaries and no reportable event or prohibited transaction, as defined in ERISA, has occurred with respect to such plans. 4.14 MISREPRESENTATION. No warranty or representation by the Borrower contained herein or in any certificate or other document furnished by the Borrower pursuant hereto contains any untrue statement of material fact or omits to state a material fact necessary to make such warranty or representation not misleading in light of the circumstances under which it was made. There is no fact which the Borrower has not disclosed to the Bank in writing which materially and adversely affects nor, so far as the Borrower can now foresee, is likely to prove to affect materially and adversely the business, operations, properties, prospects, profits or condition (financial or otherwise) of the Borrower or any of its Subsidiaries or ability of the Borrower to perform this Agreement. 4.15 NO CONFLICTING AGREEMENTS. Neither the Borrower nor any of its Subsidiaries is in default under any shareholder agreement, preferred stock agreement or any other agreement to which it is a party or by which it or any of its property is bound, the effect of which might have a Material Adverse Effect on the business or operations of the Borrower or any of its Subsidiaries. No provision of the Certificate of Incorporation, Articles of Incorporation, By-Laws or preferred stock, if any, of the Borrower, and no provision of any existing mortgage, indenture, note, contract, agreement, statute (including, without limitation, any applicable usury or similar law), rule, regulation, judgment, decree or order binding on the Borrower or affecting the property of the Borrower conflicts with, or requires any consent under, or would in any way prevent the execution, delivery or carrying out of the terms of, this Agreement and the documents contemplated hereby, and the taking of any such action will not constitute a default under, or result in the creation or imposition of, or obligation to create any lien upon the property of the Borrower pursuant to the terms of any such mortgage, indenture, note, contract or agreement. 5. AFFIRMATIVE COVENANTS. On a continuing basis from the date of this Agreement until the later of (a) the Termination Date or (b) the date on which the Indebtedness is paid in full and the Borrower has performed all of its other obligations hereunder, the Borrower covenants and agrees that it will: 5.1 FINANCIAL AND OTHER INFORMATION. Borrower shall maintain or cause to be maintained a system of accounting established and administered in accordance with sound business practices and consistent with past practice to permit preparation of quarterly and annual financial statements in conformity with GAAP, and Borrower shall deliver or cause to be delivered to Bank the following information and/or documents: 5.1.1 ANNUAL FINANCIAL REPORTS. On an annual basis (starting with the fiscal year ending December 31, 2007) and within ten (10) days after filing of the same with the Securities and Exchange Commission, furnish to the Bank a copy of Borrower's SEC Form 10-K filed or to be filed by Borrower with the Securities and Exchange Commission or, if such statement is not available for any reason, financial statements of the Borrower on a consolidated basis containing the balance sheet of the Borrower as of the close of such fiscal year, statements of income and retained earnings and a statement of cash flows for each such fiscal year, and such other comments and financial details as are usually included in SEC Form 10-K and certified by Borrower's chief financial officer or chief accounting officer. Such reports shall be prepared in accordance with GAAP by independent certified public accountants of recognized standing selected by the Borrower and shall contain unqualified opinions as to the fairness of the statements therein contained. 5.1.2 QUARTERLY FINANCIAL STATEMENTS. On a quarterly basis (starting with the quarter ending March 31, 2008) and within ten (10) days after filing of the same with the Securities and Exchange Commission, furnish to Bank a copy of Borrower's SEC Form 10-Q filed or to be filed by Borrower with the Securities and Exchange Commission or, if such statement is not available for any reason, financial statements of the Borrower on a consolidated basis containing the balance sheet of the Borrower as of the end of each such period, statements of income and retained earnings of the Borrower and a statement of cash flows of the Borrower for the portion of the fiscal year up to the end of such period, and such other comments and financial details as are usually included in SEC Form 10-Q and certified by Borrower's chief financial officer or chief accounting officer. These statements shall be prepared in accordance with GAAP and shall be in such detail as the Bank may reasonably require, and the accuracy of the statements shall be certified by the chief executive or financial officer of the Borrower. 5.1.3 ADVERSE EVENTS; LITIGATION. Promptly inform the Bank of the occurrence of any Default or Event of Default, or of any other occurrence which has or could reasonably be expected to have a Materially Adverse Effect upon the Borrower, or upon any of Borrower's Subsidiaries, or upon the Borrower's ability to comply with its obligations hereunder. Borrower shall promptly inform Bank in writing upon obtaining knowledge of (i) the institution of, or threat of, any material action, proceeding, governmental investigation or arbitration against or affecting Borrower not previously disclosed by Borrower in writing to Bank, or (ii) any material development in any action, suit, proceeding, governmental investigation or arbitration already disclosed, which has a Material Adverse Affect on Borrower, and shall provide such information as Bank may reasonably request to enable Bank and its counsel to evaluate such matters. 5.1.4 SHAREHOLDER REPORTS. Promptly furnish to the Bank upon becoming available a copy of all financial statements, reports, notices, proxy statements and other communications sent by the Borrower or any of its Subsidiaries to their stockholders, and all regular and periodic reports filed by the Borrower or any of its Subsidiaries with any securities exchange, the Securities and Exchange Commission, the Corporations and Securities Bureau of the Department of Corporations of the State of California or like agency for the State of Maryland or any governmental authorities succeeding to any or all of the functions of such Commission or Bureau. 5.1.5 MANAGEMENT LETTERS. Furnish to the Bank, promptly upon receipt thereof, copies of all management letters and other reports of substance submitted to the Borrower or any of its Subsidiaries by independent certified public accountants in connection with any annual or interim audit of the financial records of the Borrower or any of its Subsidiaries. 5.1.6 OTHER INFORMATION AS REQUESTED. Promptly furnish to the Bank such other information regarding the operations, business affairs and financial condition of the Borrower and its Subsidiaries as the Bank may reasonably request from time to time, and permit the Bank, its employees, attorneys and agents, to inspect all of the books, records and properties of the Borrower and its Subsidiaries at any reasonable time. 5.1.7 INSURANCE. Keep its insurable properties and the insurable properties of its Subsidiaries adequately insured and maintain (a) insurance against fire and other risks customarily insured against under an "all-risk" policy and such additional risks customarily insured against by companies engaged in the same or a similar business to that of the Borrower or its Subsidiaries, as the case may be, (b) necessary workers' compensation insurance, (c) public liability and product liability insurance, and (d) such other insurance as may be required by law or as may be reasonably required in writing by the Bank, all of which insurance shall be in such amounts, containing such terms, in such form, for such purposes, prepaid for such time period, and written by such companies as may be satisfactory to the Bank. Notwithstanding anything to the contrary herein, Borrower is not required, unless otherwise required by applicable law, to maintain earthquake or flood or terrorist insurance. The Borrower will promptly deliver to the Bank, at the Bank's request, evidence satisfactory to the Bank that such insurance has been so procured. If the Borrower fails to maintain satisfactory insurance as herein provided, the Bank shall have the option to do so, and the Borrower agrees to repay the Bank upon demand, with interest at the Variable Rate, all amounts so expended by the Bank. 5.2 TAXES. Pay promptly and within the time that they can be paid without late charge, penalty or interest all taxes, assessments and similar imposts and charges of every kind and nature lawfully levied, assessed or imposed upon the Borrower or its Subsidiaries, and their property, except to the extent being contested in good faith and, if requested by the Bank, bonded in an amount and manner satisfactory to the Bank. 5.3 MAINTAIN CORPORATION AND BUSINESS. Do or cause to be done all things necessary to preserve and keep in full force and effect the Borrower's and each of its Subsidiaries' corporate existence, rights and franchises and comply with all applicable laws; maintain its good standing in all states and jurisdictions in which it is currently authorized to conduct business; continue to conduct and operate its and each of its Subsidiaries' business substantially as conducted and operated during the present and preceding calendar year; at all times maintain, preserve and protect all franchises and trade names and preserve all the remainder of its and its Subsidiaries' property and keep the same in good repair, working order and condition; and from time to time make, or cause to be made, all needed and proper repairs, renewals, replacements, betterments and improvements thereto so that the business carried on in connection therewith may be properly and advantageously conducted at all times. 5.4 CONTINUED STATUS AS A REIT; PROHIBITED TRANSACTIONS. Borrower will: (i) continue to be a real estate investment trust as defined in Section 856 of the Internal Revenue Code (or any successor provision thereto), (ii) will not revoke its election to be a real estate investment trust; (iii) will not engage in any "prohibited transactions" as defined in Section 857(b) of the Internal Revenue Code (or any successor provision thereto) that the Bank reasonably believes could lead to Borrower's disqualification as a real estate investment trust as defined in Section 856 of the Internal Revenue Code (or any successor provision thereto); (iv) will continue to be entitled to a dividend paid deduction meeting the requirements of Section 857 of the Internal Revenue Code; and will otherwise comply with all provisions and requirements of Internal Revenue Code Sections 856 and 857 to maintain its real estate investment trust status under Section 856. 5.5 FAILURE OF BORROWER TO QUALIFY AS REAL ESTATE INVESTMENT TRUST. Borrower shall promptly inform Bank in writing, and in any event within forty eight (48) hours after Borrower has actual knowledge, of the following circumstances or occurrences: (i) Borrower failing to continue to qualify as a real estate investment trust as defined in Section 856 of the Internal Revenue Code (or any successor provision thereof); (ii) any act by Borrower causing or which will cause its election to be taxed as a real estate investment trust to be terminated; (iii) any act causing Borrower to be subject to the taxes imposed by Section 857(b)(6) of the Internal Revenue Code (or any successor provision thereto), or (iv) Borrower failing to be entitled to a dividends paid deduction which meets the requirements of Section 857 of the Internal Revenue Code. 5.6 AMEX LISTED COMPANY. The common stock of Borrower shall at all times be listed for trading and be traded on the American Stock Exchange or any alternative recognized stock exchange. 5.7 COMPLIANCE WITH SECURITIES LAWS. Borrower shall comply in all material respects with all rules and regulations with the Securities Exchange Commission and file all reports required by the Securities Exchange Commission relating to Borrower's publicly held securities. 5.8 MAINTAIN TANGIBLE NET WORTH. On a consolidated basis, Borrower shall maintain a Tangible Net Worth of not less than Ninety Million Dollars ($90,000,000.00), not including minority interests. 5.9 MAINTAIN DEBT COVERAGE RATIO. On a consolidated basis, Borrower shall maintain a Debt Coverage Ratio of at least 1.75 to 1.00. 5.10 MAINTAIN DEBT TO TANGIBLE NET WORTH RATIO. On a consolidated basis, Borrower shall maintain a Debt to Tangible Net Worth Ratio of no more than 5.00 to 1.00. 5.11 MAINTAIN OPERATING ACCOUNTS. Borrower shall maintain all of its operating accounts with Bank. 5.12 ERISA. (a) At all times meet and cause each of the Subsidiaries to meet the minimum funding requirements of ERISA with respect to the Borrower's and Subsidiaries' employee benefit plans subject to ERISA; (b) promptly after the Borrower knows or has reason to know (i) of the occurrence of any event, which would constitute a reportable event instituted or will institute proceedings to terminate an employee pension plan, deliver to the Bank a certificate of the chief financial officer of the Borrower setting forth details as to such event or proceedings and the action which the Borrower proposes to take with respect thereto, together with a copy of any notice of such event which may be required to be filed with the PBGC; and (c) furnish to the Bank (or cause the plan administrator to furnish the Bank) a copy of the annual return (including all schedules and attachments) for each plan covered by ERISA, and filed with the Internal Revenue Service by the Borrower not later than ten (10) days after such report has been so filed. 5.13 USE OF LOAN PROCEEDS. Use the proceeds of the Revolving Loans hereunder only for the purposes set forth in the recitals to this Agreement and as set forth in the Notice of Borrowing relating to each Revolving Loan. 6. NEGATIVE COVENANTS. On a continuing basis from the date of this Agreement until the later of (a) the Termination Date or (b) the date on which the Indebtedness is paid in full and the Borrower has performed all of its other obligations hereunder, the Borrower covenants and agrees that it will not, and will not permit any Subsidiary to: 6.1 STOCK ACQUISITION. Purchase, redeem, retire or otherwise acquire any of the shares of its capital stock, or make any commitment to do so. 6.2 EXTENSION OF CREDIT. Make loans, advances or extensions of credit to any Person, except for sales on open account and otherwise in the ordinary course of business. 6.3 SUBORDINATE INDEBTEDNESS. Subordinate any indebtedness due to Borrower from a Person to indebtedness or other creditors of such Person. 6.4 PROPERTY TRANSFER, MERGER OR LEASE-BACK. (a) Sell, transfer or otherwise dispose of properties and assets having an aggregate book value of more than Five Hundred Million Dollars ($500,000,000) (whether in one transaction or in a series of transactions) except as to the sale of inventory in the ordinary course of business; (b) change its name, consolidate with or merge into any other corporation or entity, permit another corporation or entity to merge into it, enter into any reorganization or recapitalization or reclassify its capital stock, or (c) enter into any sale-leaseback transaction where Borrower is lessee. 6.5 PENSION PLAN. (a) Allow any fact, condition or event to occur or exist with respect to any employee pension or profit sharing plans established or maintained by it which might constitute grounds for termination of any such plan or for the court appointment of a trustee to administer any such plan, or (b) permit any such plan to be the subject of termination proceedings (whether voluntary or involuntary) from which termination proceedings there may result a liability of the Borrower or any of its Subsidiaries to the PBGC which, in the opinion of the Bank, will have a materially adverse effect upon the operations, business, property, assets, financial condition or credit of the Borrower or any of its Subsidiaries. 6.6 MISREPRESENTATION. Furnish the Bank with any certificate or other document that contains any untrue statement of a material fact or omits to state a material fact necessary to make such certificate or document not misleading in light of the circumstances under which it was furnished. 6.7 MARGIN STOCK. Apply any of the proceeds of the Note or of any loan in any manner which might cause the extension of credit or the application of such proceeds to violate Regulation G, U or X (or any regulations, interpretations or rulings thereunder) or any other regulation of the Federal Reserve Board or to violate the Securities Exchange Act of 1934 (as amended to the date hereof and from time to time hereafter) or the Securities Act of 1933 (as amended to the date hereof and from time to time hereafter). 6.8 AMENDMENT OF CONSTITUENT DOCUMENTS. Amend or re-state its articles of incorporation or by-laws without the prior written consent of Bank, except (i) to increase authorized capital, (ii) as required by applicable law or applicable tax requirements, or (iii) as prudent to maintain qualification as a real estate investment trust as defined in Section 856 of the Internal Revenue Code or any successor provision thereto. 6.9 ORGANIZATION OF BORROWER. Cease to remain a Maryland corporation. 6.10 UNSECURED BORROWINGS. No additional outside unsecured loans other than trades payable incurred in the ordinary course of business. 7. EVENTS OF DEFAULT, ENFORCEMENT, APPLICATION OF PROCEEDS. 7.1 EVENTS OF DEFAULT. The occurrence of any of the following conditions or events shall constitute an Event of Default hereunder if either: (i) the condition or event is continuing for more than ten (10) days after the Bank sends written notice thereof, or (ii) the condition or event is reasonably deemed by the Bank to require immediate action to protect its rights hereunder: 7.1.1 FAILURE TO PAY MONIES DUE. If the Borrower shall fail to pay, when due, any principal or interest or other sums due under the Revolving Credit Note or this Agreement or any taxes, insurance or other amount payable by the Borrower under this Agreement or if the Borrower or any of its Subsidiaries shall fail to pay, when due, any indebtedness, obligation or liability whatsoever of the Borrower or any of its Subsidiaries to the Bank. 7.1.2 BREACH OF COVENANTS. If Borrower shall fail to satisfy or perform any of the covenants in this Agreement including without limitation Section 5 and Section 6. 7.1.3 MISREPRESENTATION. If any warranty or representation of the Borrower in connection with or contained in this Agreement or any Loan Document, or if any financial data or other information now or hereafter furnished to the Bank by or on behalf of the Borrower, shall prove to be false, incorrect or misleading in any material respect. 7.1.4 SOLVENCY; MATERIAL ADVERSE CHANGE. If Borrower shall cease to be Solvent, or there shall have occurred any Material Adverse Effect in the business, operations, properties, assets or condition (financial or otherwise) of Borrower. 7.1.5 OTHER DEFAULTS. If the Borrower or any of its Subsidiaries shall default in the payment when due of any of its indebtedness (other than to the Bank) or in the observance or performance of any term, covenant or condition in any agreement or instrument evidencing, securing or relating to such indebtedness, and such default be continued for a period sufficient to permit acceleration of the indebtedness, irrespective of whether there has been acceleration by the holder thereof. Notwithstanding the foregoing, such a default shall not constitute an Event of Default hereunder if all persons to whom the indebtedness is owed have fully and completely and in writing waived the default. In addition, if a default occurs and continues to exist on an indebtedness of the Borrower that is secured by real property and is fully non-recourse to the Borrower, such default may not represent a default under this agreement if Bank, it its sole discretion, determines that Borrower is in compliance and can maintain compliance going forward with all the financial covenants of this Agreement. 7.1.6 JUDGMENTS. If there shall be rendered against the Borrower or any of its Subsidiaries one or more judgments or decrees involving an aggregate liability of Five Million Dollars ($5,000,000.00) or more, which has or have become non-appealable and shall remain undischarged, unsatisfied by insurance, not reserved in full by the Borrower prior to the judgment or unstayed for more than thirty (30) days, whether or not consecutive; or if a writ of attachment or garnishment against the property of the Borrower or any of its Subsidiaries shall be issued and levied in an action claiming Five Million Dollars ($5,000,000.00) or more and not released or appealed and bonded in an amount and manner satisfactory to the Bank within twenty-five (25) days after such issuance and levy. 7.1.7 BUSINESS SUSPENSION, BANKRUPTCY, ETC. If the Borrower or any of its Subsidiaries shall voluntarily suspend transaction of its business; or if the Borrower or any of its Subsidiaries shall not pay its debts as they mature or shall make a general assignment for the benefit of creditors, or proceedings in bankruptcy, or for reorganization or liquidation of the Borrower or any of its Subsidiaries under the Bankruptcy Code or under any other state or federal law for the relief of debtors shall be commenced or shall be commenced against the Borrower or any of its Subsidiaries and shall not be discharged within twenty-five (25) days of commencement; or a receiver, trustee or custodian shall be appointed for the Borrower or any of its Subsidiaries or for any substantial portion of their respective properties or assets. 7.1.8 CHANGE OF MANAGEMENT OR OWNERSHIP. If the Borrower or a controlling portion of its voting stock or a substantial portion of its assets comes under the practical, beneficial or effective control of one or more persons other than Carl Berg, whether by reason of death, merger, consolidation, sale or purchase of stock or assets or otherwise; and Ray Marino, who is the President and COO of the Borrower, shall no longer remain in such offices, whether by reason of death, resignation or otherwise; and any such change of control or office holder may adversely affect, in the sole judgment of the Bank, the ability of the Borrower to carry on its business as conducted before such change. 7.1.9 INADEQUATE FUNDING OR TERMINATION OF EMPLOYEE BENEFIT PLAN(S). If the Borrower or any of its Subsidiaries shall fail to meet its minimum funding requirements under ERISA with respect to any employee benefit plan established or maintained by it, or if any such plan shall be subject of termination proceedings (whether voluntary or involuntary) and there shall result from such termination proceedings a liability of Borrower or any of its Subsidiaries to the PBGC which in the opinion of the Bank will have a materially adverse effect upon the operations, business, property, assets financial condition or credit of the Borrower or any of its Subsidiaries, as the case may be. 7.1.10 OCCURRENCE OF CERTAIN REPORTABLE EVENTS. If there shall occur, with respect to any pension plan maintained by the Borrower or any of its Subsidiaries any reportable event (within the meaning of Section 4043(b) of ERISA) which the Bank shall determine constitutes a ground for the termination of any such plan, and if such event continues for thirty (30) days after the Bank gives written notice to the Borrower, provided that termination of such plan or appointment of such trustee would, in the opinion of the Bank, have a materially adverse effect upon the operations, business, property, assets, financial condition or credit of the Borrower or any of its Subsidiaries, as the case may be. 7.2 ACCELERATION OF INDEBTEDNESS; REMEDIES. Upon the occurrence of an Event of Default, at the Bank's option, the Bank shall have no further obligation to advance funds to Borrower and the Commitment shall terminate. Upon the occurrence of an Event of Default, all Indebtedness shall be due and payable in full immediately at the option of the Bank without presentation, demand, protest, notice of dishonor or other notice of any kind, all of which are hereby expressly waived. Upon the occurrence of an Event of Default, the Bank shall have and may exercise any one or more of the rights and remedies for which provision is made hereunder or under any other document contemplated hereby or for which provision is provided by law or in equity, including, without limitation, the right to set off against the Indebtedness any amount owing by the Bank to the Borrower and/or any property of the Borrower in possession of the Bank. Any amounts collected by the Bank after an Event of Default may be applied, at the Bank's option and in any order against outstanding principal, interest, fees and/or costs. 7.3 CUMULATIVE REMEDIES. The remedies provided for herein are cumulative to the remedies for collection of the Indebtedness as provided by law, in equity or by any document contemplated hereby. Nothing herein contained is intended, nor shall it be construed, to preclude the Bank from pursuing any other remedy for the recovery of any other sum to which the Bank may be or become entitled for the breach of this Agreement by the Borrower. 8. MISCELLANEOUS. 8.1 EFFECTIVENESS. This Agreement shall become effective when Borrower and Bank have duly executed and delivered signature pages of this Agreement to each other, and, at Bank's sole and absolute option and for its benefit, all the conditions contained in Section 3.1 are satisfied. 8.2 INDEPENDENT RIGHTS. No single or partial exercise of any right, power or privilege hereunder, or any delay in the exercise thereof, shall preclude other or further exercise of the rights of the parties to this Agreement. 8.3 COVENANT INDEPENDENCE. Each covenant in this Agreement shall be deemed to be independent of any other covenant, and an exception or illegality of one covenant shall not create an exception or illegality in another covenant. 8.4 WAIVERS AND AMENDMENTS. No forbearance, delay or omission on the part of the Bank in enforcing any of its rights under this Agreement or any of the Loan Documents, nor any renewal, extension or rearrangement of any payment or covenant to be made or performed by the Borrower hereunder, shall constitute or be construed as a waiver of any of the terms of, or remedies of Bank under, this Agreement or any of the Loan Documents or of any such right. No Default or Event of Default shall be waived by the Bank except in a writing signed and delivered by an officer of the Bank, and no waiver of any other Default or Event of Default shall operate as a waiver of any Default or Event of Default or of the same Default or Event of Default on a future occasion. No other amendment, modification or waiver of, or consent with respect to, any provision of this Agreement or the Note or any other Loan Documents contemplated hereby shall be effective unless the same shall be in writing and signed and delivered by a duly authorized officer of the Bank and the President or CEO of the Borrower. 8.5 GOVERNING LAW. This Agreement, and each and every term and provision hereof, shall be governed by and construed in accordance with the internal law of the State of California. If any provisions of this Agreement shall for any reason be held invalid or unenforceable, such invalidity or unenforceability shall not affect any other provision hereof, but this Agreement shall be construed as if such invalid or unenforceable provisions had never been contained herein. 8.6 SURVIVAL OF WARRANTIES, ETC. All of the Borrower's covenants, agreements, representations and warranties made in connection with this Agreement and any document contemplated hereby shall survive the borrowing and the delivery of the Note hereunder and shall be deemed to have been relied upon by the Bank, notwithstanding any investigation heretofore or hereafter made by the Bank. All statements contained in any certificate or other document delivered to the Bank at any time by or on behalf of the Borrower pursuant hereto or in connection with the transactions contemplated hereby shall constitute representations and warranties by the Borrower in connection with this Agreement. 8.7 COSTS AND EXPENSES. The Borrower agrees that it will reimburse the Bank, upon demand, for all reasonable fees and out-of-pocket costs incurred by the Bank in connection with (i) collecting or attempting to collect the Indebtedness or any part thereof, (ii) maintaining or defending the Bank's security interests or liens, if any (or the priority thereof), (iii) the enforcement of the Bank's rights or remedies under this Agreement or the other documents contemplated hereby, (iv) the preparation or making of any amendments, modifications, waivers or consents with respect to this Agreement or the other documents contemplated hereby, and/or (v) any other matters or proceedings arising out of or in connection with any lending arrangement between the Bank and the Borrower, which costs and expenses include without limit payments made by the Bank for taxes, insurance, assessments, or other costs or expenses which the Borrower is required to pay under this Agreement or the other documents contemplated hereby; audit expenses; court costs and reasonable attorneys' fees (whether in-house or outside counsel is used, whether legal assistants are used, and whether such costs are incurred in formal or informal collection actions, federal bankruptcy proceedings, of Borrower or affecting any collateral or rights of Bank, whether an involuntary or voluntary bankruptcy case, including, without limitation, all attorneys' fees and costs incurred in connection with motions for relief from stay, cash collateral motions, nondischargeability motions, preferential liability motions, fraudulent conveyance liability motions, fraudulent transfer liability motions and all other motions brought by Borrower, Bank or third parties in any way relating to Bank's rights with respect to such Borrower or third party and/or affecting any collateral securing any obligation owed to Bank by Borrower, or any third party, probate proceedings, on appeal or otherwise); and all other costs and expenses of the Bank incurred in connection with any of the foregoing. 8.8 ATTORNEYS' FEES AND COSTS. Bank may hire or pay someone else to help collect the Note if Borrower does not pay. In such event, Borrower agrees to pay all reasonable fees and out-of-pocket costs incurred by Bank in connection with collecting the Note. In addition, the prevailing party (the "Prevailing Party") in any litigation, arbitration, bankruptcy proceeding, or other formal or informal resolution (collectively, a "Proceeding") brought by Bank or any party to this Agreement of any claims brought to enforce the terms of this Agreement or any of the Loan Documents based upon, arising from, or in any way related to this Agreement or the transactions contemplated herein, including without limitation contract claims, tort claims, breach of duty claims, and all other common law or statutory claims (collectively, the "Claims"), shall be entitled to recover from such other party all its fees and costs incurred in connection with the Proceeding, including without limitation all its attorneys' fees and costs, whether incurred by in-house counsel or outside counsel, all its expert witness and/or consultant's fees and costs, all its paralegal fees and costs, and all its other costs and expenses, regardless of whether such costs are otherwise statutorily recoverable (collectively, the "Fees and Costs"), and including without limitation all the Fees and Costs incurred by the Prevailing Party in connection with proceedings in bankruptcy for relief from and/or modification of automatic stay, for orders of nondischargeability, and/or regarding use of cash collateral, claims, and/or plans. The Prevailing Party shall also be entitled to recover from such other party all its costs incurred in enforcing the judgment or award giving rise to the Prevailing Party's status as the Prevailing Party. Each party hereto acknowledges that it is on notice that, in the event that the other party retain the services of one or more experts in connection with the Proceeding, such other party will seek to recover the fees and costs of such expert or experts hereunder, and that, if such party becomes the Prevailing Party in the Proceeding, such party shall be entitled to recover such fees and costs hereunder, whether such fees and costs are sought before trial, during trial, or by post-trial motion or memorandum of costs. The parties to this Agreement waive the provisions of Civil Code section 1717(b)(2), and agree that, in the event of a unilateral voluntary dismissal, the dismissed party shall be deemed the Prevailing Party entitled to the recovery of all of its Fees and Costs. 8.9 PAYMENTS ON SATURDAYS, ETC. Whenever any payment to be made hereunder shall be stated to be due on a Saturday, Sunday or any other day which is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension, if any, shall be included in computing interest in connection with such payment. 8.10 BINDING EFFECT. This Agreement shall inure to the benefit of and shall be binding upon the parties hereto and their respective successors and assigns; provided, however, that the Borrower may not assign or transfer its rights or obligations hereunder without the prior written consent of the Bank. Borrower authorizes Bank, without notice or demand and without affecting Borrower's liability hereunder, to assign, without notice, the Loan Documents or the Indebtedness in whole or in part and Bank's rights thereunder to anyone at any time or to transfer one or more participation interests in the Loan Documents or the Indebtedness in whole or in part to one or more purchasers and provide information to prospective purchasers relating to Borrower. The Bank agrees, upon written request by Borrower, to provide the identity of any current participants. 8.11 MAINTENANCE OF RECORDS. The Borrower will keep all of its records concerning its business operations and accounting at its principal place of business. The Borrower will give the Bank prompt written notice of any change in its principal place of business, or in the location of its records. 8.12 NOTICES. All notices and communications provided for herein or in any document contemplated hereby or required by law to be given shall be in writing and shall be served (i) personally in which case the notice or communication is effective immediately, (ii) by overnight mail by a national, reputable carrier, in which case the notice or communication is effective upon deposit with such carrier, (ii) by certified mail in which case the notice or communication is effective upon mailing, or (iv) by first class mail, postage prepaid in which case the notice or communication is effective two (2) days after mailing, with all notices or communications to be delivered, mailed, or sent as aforesaid as follows: (a) If the Borrower, to: Mission West Properties, Inc., 10050 Bandley Drive, Cupertino, CA 95014 Attention Carl E. Berg and Raymond V. Marino, and (b) if to the Bank, to: Heritage Bank of Commerce, 150 Almaden Boulevard, San Jose, CA 95113, Attention Ms. Roxanne Vane, or to such other address as a party shall have designated to the other in writing in accordance with this section. 8.13 COUNTERPARTS. This Agreement may be signed in any number of counterparts with the same effect as if the signatures were upon the same instrument. 8.14 HEADINGS. Article and section headings in this Agreement are included for the convenience of reference only and shall not constitute a part of this Agreement for any purpose. 8.15 RELEASE AND DISCHARGE. Upon full payment of the Indebtedness and performance by the Borrower of all its other obligations hereunder, except as otherwise provided in this Agreement including without limitation in Section 2.12, the parties shall thereupon automatically each be fully, finally and forever released and discharged from any claim, liability or obligation in connection with this Agreement and the Loan Documents. 8.16 JUDICIAL REFERENCE. The parties hereto agree as follows: 8.16.1 Any controversy, claim, action, or dispute (a "Controversy") arising out of or related to this Agreement or the Loan Documents, whether based on contract, tort, or otherwise, and including without limitation the determination of the prevailing party and award of fees and costs under this Agreement, shall be decided by a general reference proceeding pursuant to Code of Civil Procedure Section 638 et. seq. (All references herein to sections of the Code of Civil Procedure shall be deemed to refer to the statute, as it may be amended from time to time.) 8.16.2 Pursuant to Code of Civil Procedure Section 638(a), the referee shall hear and determine any and all of the issues relating to the Controversy, whether of fact or of law, and shall report a statement of decision. 8.16.3 The Court shall appoint a single referee and that such referee shall be selected and appointed pursuant to Code of Civil Procedure Section 640(b), subject to Code of Civil Procedure Sections 640(c) and 641. 8.16.4 Pursuant to Code of Civil Procedure Section 643(b), the referee shall report his/her statement of decision in writing to the court within twenty (20) days after the hearing, if any, has been concluded and the matter has been submitted. 8.16.5 Pursuant to Code of Civil Procedure Section 644(a), the decision of the referee upon the whole issue must stand as the decision of the court, and, upon filing of the statement of decision with the clerk of the court, or with the judge where there is no clerk, judgment (the "Judgment") may be entered thereon in the same manner as if the action had been tried by the court. 8.16.6 The referee shall retain authority and jurisdiction and shall decide all issues of fact and law relating to the awarding of fees and costs pursuant to this Agreement or otherwise, including without limitation reasonable attorneys' fees. The referee shall report his/her statement of decision relating to such issues (the "Cost Statement of Decision") in writing to the court within twenty (20) days after the hearing on such issues, if any, has been concluded and the matter has been submitted; and the Cost Statement of Decision of the referee upon the whole issue must stand as the decision of the court, and, upon filing of the Cost Statement of Decision with the clerk of the court, or with the judge where there is no clerk, fees and costs shall be awarded (the "Cost Award") in accordance with the Cost Statement of Decision by modification of the Judgment or entry of such other appropriate order. 8.16.7 Pursuant to Code of Civil Procedure Section 645.1(a), the payment of the referee's fees shall be paid as follows: 8.16.7.1 Subject to Subsection 8.16.7.2 below, the referee's fees incurred prior to the Cost Award shall be shared equally by the parties. 8.16.7.2 Upon entry of the Cost Award, the referee's fees (including without limitation those paid pursuant to Subsection 8.16.7.1 above) as well as all other awarded fees and costs shall be payable as set forth in the Judgment or order containing the Cost Award. 8.16.8 Any party may, without thereby waiving the right to general reference set forth herein, apply directly to the court for provisional relief including without limitation attachment, receivership, or injunction, and/or may file a complaint to allow the recordation of a lis pendens or a motion to expunge lis pendens. The court, at its discretion, may transfer any such proceeding for provisional relief to the referee for disposition. 8.16.9 Nothing herein shall be construed to prevent the exercise and/or enforcement of remedies that do not require the initiation and/or pendency of a civil action, including without limitation any remedy of setoff, notification of account debtors, or foreclosure under a power of sale, pursuant to the provisions of the Uniform Commercial Code, or pursuant to other applicable law. EACH PARTY TO THIS AGREEMENT HEREBY WAIVES HIS/HER/ITS RIGHT TO A JURY TRIAL IN CONNECTION WITH ANY CONTROVERSY. NOTICE: BY INITIALING IN THE SPACE BELOW, YOU ARE AGREEING TO HAVE ANY CONTROVERSY AS DEFINED ABOVE DECIDED BY A REFEREE IN A GENERAL REFERENCE PROCEEDING AS SET FORTH ABOVE, AND YOU ARE GIVING UP ANY RIGHTS YOU MIGHT POSSESS TO HAVE THE DISPUTE DECIDED BY A JURY. EACH OF THE UNDERSIGNED HAS READ AND UNDERSTANDS THE FOREGOING PROVISION, VOLUNTARILY AGREES TO EACH AND ALL OF ITS TERMS, AND EXPRESSLY AND HEREBY WAIVES A TRIAL BY JURY IN CONNECTION WITH ANY CONTROVERSY AS DEFINED ABOVE. INITIALS INITIALS INITIALS RV INITIALS RM -------- -------- --------- ---------- 8.16.10 Further Assurances. Immediately following reasonable request by the Bank, the Borrower shall provide to the Bank such further documents, instruments, and assurances as may be requested from time to time by Bank in connection with this Agreement or any documents executed in connection herewith. 8.16.11 Integrated Agreement. This is an integrated agreement. Except as set forth specifically otherwise herein and except for the Loan Documents, it supersedes all prior representations and agreements, if any, between the parties to this Agreement and other respective legal counsel relating to the subject matter hereof. This Agreement and the exhibits hereto and the other Loan Documents when executed contain the entire and only understanding between the parties, and may not be altered, amended or extinguished, except by a writing which expressly refers to this instrument and is signed subsequent to the execution of this instrument by the parties to this Agreement. The balance of this page is intentionally left blank. IN WITNESS WHEREOF, the Borrower and the Bank have caused this Agreement to be executed by their duly authorized officers as of the day and year first written above. MISSION WEST PROPERTIES, INC. A Maryland corporation By: /s/ Raymond V. Marino ------------------------------------------- Print Name: Raymond V. Marino ----------------------------------- Its: President & COO ------------------------------------------ HERITAGE BANK OF COMMERCE By: /s/ Roxanne Vane ------------------------------------------- Its: Senior Vice President ------------------------------------------ REVOLVING CREDIT NOTE $10,000,000.00 San Jose, California March 4, 2008 FOR VALUE RECEIVED, the undersigned promises to pay to the order of HERITAGE BANK OF COMMERCE (the "Bank") at 150 Almaden Boulevard, San Jose, California (or such other place as Bank may designate), on June 15, 2009 (the "Termination Date"), the principal sum or so much of the principal sum of Ten Million Dollars ($10,000,000.00) as may from time to time have been advanced and be outstanding under that certain Revolving Credit Loan Agreement dated March 4, 2008, between the undersigned and the Bank (the "Agreement") plus all accrued but unpaid interest thereon. Capitalized terms used herein without definition shall have the same meanings as in the Agreement. The unpaid principal amount of this Note shall bear interest at the rate provided in the Agreement, which Agreement, as it may be amended from time to time, is by this reference incorporated herein and made a part hereof. Interest shall be payable to the extent accrued on the first day of each consecutive calendar month, beginning March 4, 2008, with all remaining interest due and payable on the Termination Date. This Note is a Master Note under which sums must be repaid from time to time, and under which Revolving Loans may be made by the Bank up to the Commitment Amount, pursuant to the terms and conditions of the Agreement, and the books and records of the Bank shall constitute prima facie evidence of the amount of the Indebtedness at any time owing hereunder or under the Agreement, provided, however, that the failure by the Bank so to record any such amount or any error in so recording any such amount shall not limit or otherwise affect the obligations of the Borrower under this Note or the Agreement to repay the principal amount of all the Revolving Loans outstanding together with all interest accrued or accruing thereon. The unpaid principal amount of all Revolving Loans, unless accelerated in accordance with the terms of the Agreement, if not paid sooner, will be due and payable, together with all accrued and unpaid interest and all other amounts due and unpaid under the Agreement, on the Termination Date. Interest on the Revolving Loans is payable in arrears on the first day of each month during the term of the Agreement and as set forth in the Agreement. The Agreement provides for the payment by Borrower of various other charges and fees in addition to interest charges as more fully set forth in the Agreement. All payments of any amount becoming due under this Note shall be made in the manner provided in Section 2.11 of the Agreement. Reference is made to the Agreement for, among other things, the conditions under which this Note may or must be paid in whole or in part prior to the Termination Date (whether accelerated or otherwise). If an Event of Default (as defined in the Agreement) occurs and is not cured within the time provided for by the Agreement, the Bank may exercise any one or more of the rights and remedies granted by the Agreement or any of the Loan Documents or available under applicable law, including without limit the right to accelerate this Note or the Indebtedness, and may set off against the principal of and interest on this Note or against any other Indebtedness (i) any amount owing by the Bank to the undersigned, (ii) any property of the undersigned at any time in the possession of the Bank or any Affiliate (as that term is defined in the Agreement) of the Bank and (iii) any amount in any deposit or other account (including without limit an account evidenced by a certificate of deposit) of the undersigned with the Bank or any Affiliate of the Bank. The undersigned and its successors and assigns and all accommodations parties, guarantors and endorsers (i) waive presentment, demand, protest and notice of dishonor, (ii) agree that no extension or indulgence to the undersigned or release or non-enforcement of any security, with or without notice, shall affect the obligations of any accommodation party, guarantor or indorser, and (iii) agree to reimburse the holder of this Note for any and all costs and expenses incurred in collecting or attempting to collect any and all principal and interest under this Note (including, but not limited to, court costs and attorney fees, whether in-house or outside counsel is used and whether such costs and expenses are incurred in formal or informal collection actions, federal bankruptcy proceedings, appellate proceedings, probate proceedings, or otherwise, all as more specifically set forth in Sections 8.7 and 8.8 of the Agreement). This Note shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, this Note has been delivered and accepted at Cupertino, California and the undersigned has executed this Note as of the 4th day of March, 2008. MISSION WEST PROPERTIES, INC. A Maryland corporation By: /s/ Raymond V. Marino ------------------------------- Print Name: Raymond V. Marino ------------------------ Its: President & COO ------------------------------- EX-32 8 exh32.txt EXHIBIT 32 CERTIFICATION OF CEO AND CFO PURSUANT TO 18 U.S.C. ss. 1350, AS ADOPTED PURSUANT TO ss. 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report on Form 10-Q of Mission West Properties, Inc. (the "Company") for the quarterly period ended June 30, 2009 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of Carl E. Berg, Chairman of the Board and Chief Executive Officer of the Company, Raymond V. Marino, President and Chief Operating Officer of the Company and Wayne N. Pham, Vice President of Finance of the Company, hereby certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, to the best of his knowledge, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. /s/ Carl E. Berg - ----------------------------------- Carl E. Berg Chairman of the Board and Chief Executive Officer August 7, 2009 /s/ Raymond V. Marino - ----------------------------------- Raymond V. Marino President and Chief Operating Officer August 7, 2009 /s/ Wayne N. Pham - ----------------------------------- Wayne N. Pham Vice President of Finance August 7, 2009 This certification accompanies this Report pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, or otherwise required, be deemed filed by the Company for purposes of ss. 18 of the Securities Exchange Act of 1934, as amended. EX-31 9 exh31_3.txt EXHIBIT 31.3 CERTIFICATION PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934 I, Wayne N. Pham, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mission West Properties, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 7, 2009 By: /s/ Wayne N. Pham --------------------------------- Wayne N. Pham Vice President of Finance EX-31 10 exh31_2.txt EXHIBIT 31.2 CERTIFICATION PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934 I, Raymond V. Marino, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mission West Properties, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 7, 2009 By: /s/ Raymond V. Marino ----------------------------------- Raymond V. Marino President & Chief Operating Officer EX-31 11 exh31_1.txt EXHIBIT 31.1 CERTIFICATION PURSUANT TO RULE 13a-14 OF THE SECURITIES EXCHANGE ACT OF 1934 I, Carl E. Berg, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Mission West Properties, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 7, 2009 By: /s/ Carl E. Berg --------------------------------- Carl E. Berg Chairman & Chief Executive Officer -----END PRIVACY-ENHANCED MESSAGE-----