UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2004
COMMISSION FILE NUMBER 1-8383
MISSION WEST PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland 95-2635431
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(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
10050 Bandley Drive
Cupertino, California 95014-2188
(Address of principal executive offices)
Registrant's telephone number, including area code is (408) 725-0700
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ ] NO [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). 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:
18,077,191 shares outstanding as of November 1, 2004
MISSION WEST PROPERTIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2004
INDEX
PAGE
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited):
Consolidated Balance Sheets as of September 30, 2004
and December 31, 2003 ..................................................................................2
Consolidated Statements of Operations for the
three and nine months ended September 30, 2004 and 2003 (As Restated)...................................3
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2004 and 2003 (As Restated).............................................4
Notes to Consolidated Financial Statements..............................................................5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................................................................10
Item 3. Quantitative and Qualitative Disclosures about Market Risk.............................................21
Item 4. Controls and Procedures................................................................................22
PART II OTHER INFORMATION
Item 1. Legal Proceedings......................................................................................23
Item 6. Exhibits and Reports on Form 8-K.......................................................................23
SIGNATURES...........................................................................................................24
Exhibit Index
Certifications
Section 1350 Certification
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PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
MISSION WEST PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share and per share amounts)
(Unaudited)
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September 30, 2004 December 31, 2003
--------------------- ----------------------
ASSETS
Real estate assets, at cost:
Land $ 275,707 $ 275,707
Buildings and improvements 779,558 779,636
Real estate related intangible assets 18,284 19,651
--------------------- ----------------------
Total investments in properties 1,073,549 1,074,994
Less accumulated depreciation and amortization (105,936) (89,243)
--------------------- ----------------------
Net investments in properties 967,613 985,751
Cash and cash equivalents 1,597 4,129
Restricted cash 1,551 -
Deferred rent receivable, net of $2,000 allowance
at September 30, 2004 and December 31, 2003 19,111 18,970
Investment in unconsolidated joint venture 2,431 2,285
Other assets (net of accumulated amortization of $6,518 and $4,211
at September 30, 2004 and December 31, 2003, respectively) 20,240 21,497
--------------------- ----------------------
Total assets $1,012,543 $1,032,632
===================== ======================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Line of credit (related parties) $ 1,105 $ 6,320
Revolving line of credit 26,492 23,965
Mortgage notes payable 295,284 299,858
Mortgage notes payable (related parties) 10,508 10,762
Interest payable 330 332
Security deposits 8,771 10,248
Deferred rental income 11,622 12,723
Dividend/distribution payable 25,076 25,031
Accounts payable and accrued expenses 8,482 5,085
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Total liabilities 387,670 394,324
Commitments and contingencies
Minority interests 511,777 524,918
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, 18,077,191 and 17,894,691 shares issued and
outstanding at September 30, 2004 and December 31, 2003, respectively 18 18
Paid-in-capital 134,348 132,136
Accumulated deficit (21,270) (18,764)
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Total stockholders' equity 113,096 113,390
--------------------- ----------------------
Total liabilities and stockholders' equity $1,012,543 $1,032,632
===================== ======================
The accompanying notes are an integral part of these consolidated
financial statements.
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MISSION WEST PROPERTIES, INC
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except share and per share amounts)
(Unaudited)
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Three months ended September 30, Nine months ended September 30,
2004 2003 2004 2003
(As Restated) (As Restated)
------------------ ------------------ ------------------ ------------------
Revenues:
Rental revenue from real estate $29,580 $33,310 $91,057 $97,464
Tenant reimbursements 3,766 4,796 11,722 14,360
Other income, including lease terminations,
settlements and interest 397 567 5,404 1,871
------------------ ------------------ ------------------ ------------------
33,743 38,673 108,183 113,695
------------------ ------------------ ------------------ ------------------
Expenses:
Property operating, maintenance and real estate taxes 4,880 5,559 15,577 15,740
Interest 4,468 4,335 13,051 12,097
Interest (related parties) 256 280 760 830
General and administrative 395 360 1,628 1,039
Depreciation and amortization of real estate 5,428 5,497 16,644 15,273
------------------ ------------------ ------------------ ------------------
15,427 16,031 47,660 44,979
------------------ ------------------ ------------------ ------------------
Income before equity in earnings of unconsolidated joint
venture and minority interests 18,316 22,642 60,523 68,716
Equity in earnings of unconsolidated joint venture,
including $1,400 gain on sale of property acquired
from related party in the nine months ended
September 30, 2003 345 599 1,564 3,358
Minority interests 15,488 19,348 51,596 60,081
------------------ ------------------ ------------------ ------------------
Net income to common stockholders $ 3,173 $ 3,893 $10,491 $11,993
================== ================== ================== ==================
Net income to minority interests $15,488 $19,348 $51,596 $60,081
================== ================== ================== ==================
Net income per share to common stockholders:
Basic $0.18 $0.22 $0.58 $0.68
================== ================== ================== ==================
Diluted $0.18 $0.22 $0.58 $0.68
================== ================== ================== ==================
Weighted average shares of
common stock outstanding (basic) 18,071,484 17,747,293 18,019,277 17,695,920
================== ================== ================== ==================
Weighted average shares of
common stock outstanding (diluted) 18,098,174 17,817,917 18,077,854 17,757,461
================== ================== ================== ==================
The accompanying notes are an integral part of these consolidated
financial statements.
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MISSION WEST PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
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Nine months ended September 30,
2004 2003
(As Restated)
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Cash flows from operating activities:
Net income $ 10,491 $ 11,993
Adjustments to reconcile net income to net cash provided by operating activities:
Minority interests 51,596 60,081
Depreciation and amortization of real estate 16,644 15,273
Amortization of above market rent intangible asset 1,416 944
Equity in earnings of unconsolidated joint venture (1,564) (3,359)
Distributions from unconsolidated joint venture 1,418 1,500
Changes in operating assets and liabilities, net of liabilities assumed:
Deferred rent receivable (141) (1,045)
Other assets 1,608 (1,018)
Interest payable (2) (2)
Security deposits (1,477) (795)
Deferred rental income (1,101) 5,127
Accounts payable and accrued expenses 3,479 3,124
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Net cash provided by operating activities 82,367 91,823
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Cash flows from investing activities:
Improvements to real estate assets (371) (1,262)
Purchase of real estate - (110,013)
Net proceeds from sale of TBI unconsolidated joint venture real estate - 1,400
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Net cash used in investing activities (371) (109,875)
------------------- ------------------
Cash flows from financing activities:
Principal payments on mortgage notes payable (4,574) (3,946)
Proceeds from mortgage loan payable - 180,000
Principal payments on mortgage notes payable (related parties) (254) (235)
Net payments under line of credit (related parties) (5,118) (58,022)
Payment on loan payable - (20,000)
Payment on revolving line of credit - (3,873)
Proceeds from revolving line of credit 2,527 -
Restricted bond (1,551) -
Financing costs - (863)
Proceeds from stock options exercised 165 683
Minority interest distributions (62,769) (62,384)
Dividends (12,954) (12,669)
------------------- ------------------
Net cash used in/provided by financing activities (84,528) 18,669
------------------- ------------------
Net decrease/increase in cash and cash equivalents (2,532) 617
Cash and cash equivalents, beginning of period 4,129 4,479
------------------- ------------------
Cash and cash equivalents, ending of period $ 1,597 $ 5,096
=================== ==================
Supplemental information:
Cash paid for interest $ 13,602 $ 12,672
=================== ==================
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock upon conversion of O.P units $ 2,047 $ 1,574
=================== ==================
Assumption of other liabilities in connection with property acquisition $ - $ 783
=================== ==================
Issuance of operating partnership units in connection with joint venture acquisition $ - $ 1,800
=================== ==================
The accompanying notes are an integral part of these consolidated
financial statements.
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MISSION WEST PROPERTIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share, per share, O.P units and per
square footage amounts)
(Unaudited)
The Company's consolidated financial statements have been prepared pursuant
to the Securities and Exchange Commission's ("SEC") rules and regulations.
The following notes, which present interim disclosures as required by the
SEC, highlight significant changes to the notes to the Company's December
31, 2003 audited consolidated financial statements and should be read
together with the financial statements and notes thereto included in the
Company's Form 10-K. The results of operations for the three and nine
months ended September 30, 2004 are not necessarily indicative of the
results to be expected for the entire year.
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 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. The Company
purchased an approximate 12.11% interest in each of the operating
partnerships. 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 September 30, 2004, the Company owns a general partnership interest
of 17.12%, 21.63%, 16.14% and 12.38% 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, for a 17.30% general
partnership interest in the operating partnerships, taken as a whole, on a
weighted average basis.
Through the operating partnerships, the Company owns interests in 109 R&D
properties, all of which are located in 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 nine months
ended September 30, 2004.
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 SFAS No. 131
purposes.
2. BASIS OF PRESENTATION
PRINCIPLES OF CONSOLIDATION AND FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements include the accounts of
Mission West Properties, Inc. and its controlled subsidiaries, including
the operating partnerships. All significant intercompany balances have been
eliminated in consolidation. The consolidated financial statements as of
and for the three and nine months ended September 30, 2004 and 2003 and
related footnote disclosures are unaudited. In the opinion of management,
such financial statements reflect all adjustments necessary for a fair
presentation of the results of the interim periods. All such adjustments
are of a normal recurring nature.
MINORITY INTERESTS
Minority interest represents 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. In total,
these interests account for approximately 83% of the ownership interests in
the real estate operations of the Company as of September 30, 2004.
Minority interest in net income is calculated by taking the net income of
the operating partnerships (on a stand-alone basis) multiplied by the
respective minority interest ownership percentage.
RECLASSIFICATIONS
Certain reclassifications have been made to the previously reported 2003
statements in order to conform to the 2004 presentation.
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ACCOUNTING FOR STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but
does not require companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees" and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at the date of
the grant over the amount an employee must pay to acquire the stock.
The following table illustrates the unaudited pro forma effect on
consolidated net income available to common shareholders and consolidated
earnings per share if the fair value method had been applied to all
outstanding and unvested stock options for the three and nine months ended
September 30, 2004 and 2003.
Three Months Ended September Nine Months Ended September 30,
30,
2004 2003 2004 2003
(As Restated) (As Restated)
--------------- --------------- --------------- ---------------
(dollars in thousands, except per share data)
Historical net income to common stockholders $3,173 $3,893 $10,491 $11,993
Deduct compensation expense for stock options
determined under fair value based method (44) (59) (132) (176)
Allocation of expense to minority interest 36 49 109 146
--------------- --------------- --------------- ---------------
Pro forma net income to common stockholders $3,165 $3,883 $10,468 $11,963
=============== =============== =============== ===============
Earnings per share - basic:
Historical net income to common stockholders $0.18 $0.22 $0.58 $0.68
Pro forma net income to common stockholders $0.18 $0.22 $0.58 $0.68
Earnings per share - diluted:
Historical net income to common stockholders $0.18 $0.22 $0.58 $0.68
Pro forma net income to common stockholders $0.17 $0.22 $0.58 $0.68
No stock options were granted during the first nine months of 2004.
3. STOCK TRANSACTIONS
During the nine months ended September 30, 2004, stock options to purchase
20,000 shares of common stock were exercised at $8.25 per share. Total
proceeds to the Company were approximately $165. In 2004, two limited
partners exchanged 104,500 O.P. units for 104,500 shares of the Company's
common stock under the terms of the December 1998 Exchange Rights Agreement
among the Company and all limited partners of the operating partnerships.
In 2004, Carl E. Berg gave 58,000 O.P. units to charitable institutions
that exchanged them for 58,000 shares of the Company's common stock
pursuant to the December 1998 Exchange Rights Agreement.
4. 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 September 30, Nine Months Ended September 30,
2004 2003 2004 2003
--------------- -------------- -------------- ---------------
Weighted average shares outstanding (basic) 18,071,484 17,747,293 18,019,277 17,695,920
Incremental shares from assumed option exercise 26,690 70,624 58,577 61,541
--------------- -------------- -------------- ---------------
Weighted average shares outstanding (diluted) 18,098,174 17,817,917 18,077,854 17,757,461
=============== ============== ============== ===============
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 minority interests' share of income back to net income. The total
number of O.P. units outstanding at September 30, 2004 and 2003 was
86,404,695 and 86,498,064, respectively.
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5. RELATED PARTY TRANSACTIONS
As of September 30, 2004, the Berg Group owned 77,577,528 O.P. units. The
Berg Group's ownership as of September 30, 2004 represented approximately
74% of the equity interests, assuming conversion of the 86,404,695 O.P.
units outstanding into the Company's common stock.
The Berg Group $20,000 line of credit bears interest at LIBOR plus 1.30%,
which was 3.47% as of September 30, 2004, and matures in March 2005. The
Company believes that the terms of the Berg Group line of credit are more
favorable than those available from commercial lenders. As of September 30,
2004, debt in the amount of $1,105 was due the Berg Group under the line of
credit, and debt in the amount of $10,508 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
June 2010 with principal payments amortized over 20 years. Interest expense
incurred in connection with the Berg Group line of credit and mortgage note
was $256 and $280 for the three months ended September 30, 2004 and 2003,
respectively, and $760 and $830 for the nine months ended September 30,
2004 and 2003, respectively.
During the first nine months of 2004 and 2003, Carl E. Berg or entities
controlled by Mr. Berg held financial interests in several companies that
lease space from the operating partnerships, which include three companies
where Mr. Berg has a greater than 10% ownership interest. These related
tenants occupy approximately 48,000 square feet and contributed $217 and
$229 in rental revenue during the three months ended September 30, 2004 and
2003, respectively, and $650 and $687 in rental revenue during the first
nine months of 2004 and 2003, respectively. Under the Company's charter,
bylaws and agreements with the Berg Group, the individual members of the
Berg Group are prohibited from acquiring 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.
The Berg Group has an approximately $2,500 commitment to complete certain
tenant improvements in connection with the Company's 2002 acquisition of
5345 Hellyer Avenue in San Jose. The Company recorded this portion of its
purchase consideration paid to the Berg Group as an Other Asset on its
Consolidated Balance Sheets. The Berg Group plans to satisfy this
commitment to complete certain tenant improvements when requested by the
Company following the approval of the Independent Directors Committee of
the Company's board of directors (the "Independent Directors Committee").
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 recorded this
portion of its purchase consideration paid to the Berg Group as an Other
Asset on its 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,
Inc., an affiliate of Carl E. Berg and Clyde J. Berg. Rental amounts and
overhead reimbursements paid to Berg & Berg Enterprises, Inc. were $23 for
each of the three-month periods ended September 30, 2004 and 2003 and $68
for each of the nine-month periods ended September 30, 2004 and 2003.
In January 2003, the Company acquired a 50% interest in an unconsolidated
joint venture from the Berg Group under the Berg Land Holdings Option
Agreement for $1,800. The Company financed this acquisition by issuing
181,032 O.P. units to various members of the Berg Group. In April 2003, the
Company, through the joint venture, acquired a property from the Berg Group
under the Berg Land Holdings Agreement and sold it to an unrelated third
party. The Company received a net distribution and recorded a gain of
$1,400 from the sale.
6. COMMITMENTS AND CONTINGENCIES
Neither the operating partnerships, the 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 or has recently concluded the following
legal proceedings, which it believes the ultimate outcome will have no
material adverse effect on its consolidated financial statements.
Republic Properties Corporation ("RPC") v. Mission West Properties, L.P.
("MWP"), in the Circuit Court of Maryland for Baltimore City Case No.
24-C-00-005675. RPC is a former partner with Mission West Properties, L.P.
in the Hellyer Avenue Limited Partnership ("Hellyer LP"). In April 2004,
the Circuit Court for Baltimore City, Maryland issued a Memorandum Opinion
in the case and awarded damages of approximately $934 to the RPC
plaintiffs, which must be paid by the Company or MWP. The court denied all
requests by MWP, including a declaration that all of RPC's interests in
Heller L.P. were validly converted to limited partnership interests and
transferred to MWP or its designee in accordance with the terms of the
Hellyer L.P. partnership agreement. The court also denied RPC's request for
an injunction ordering the reinstatement of RPC's partnership interests in
Hellyer L.P. The Company has appealed the decision to the Maryland Appeals
Court. Under the pre-appeal hearing procedures, the Maryland Appeals Court
requires a mediation hearing before the parties can appear before the
Appeals Court. No date has been set for such a
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hearing. The Company does not believe that any further court decisions in
this case, for or against it and MWP, will have a material adverse effect
on its business. The Company has a receivable from a Berg Group affiliate
for the amount of distributions it received as the successor to RPC's
interest in the Hellyer LP which exceeds the amount of the damages awarded
to the RPC parties and would be used to pay for those damages in the event
the decision of the Circuit Court is upheld ultimately. Furthermore, the
Company has never accounted for the 50% interest of RPC as its asset and if
RPC is deemed to have retained that interest or reacquires that interest,
the Company's balance sheet and financial condition would not be impacted.
In February 2001, the Company filed a suit against RPC in Superior Court of
the State of California for the County of Santa Clara Case No. CV 796249
which has been stayed pending resolution of the Maryland case. In July
2004, RPC attached the Company's bank account for approximately $1,100.
Following a July 2004 hearing in Superior Court of the State of California
for the County of Santa Clara, the Company posted a $1,551 bond in August
2004 and RPC removed the attachment on the Company's bank account until
final resolution of the appeal in Maryland.
In January 2004, the Global Crossing Estate Representative, for Itself and
the Liquidating Trustee of the Global Crossing Liquidating Trust v. Mission
West Properties filed an action in United States Bankruptcy Court Southern
District of New York Case No. 02-40188 (REG) asserting that payments of
approximately $815 made in the ordinary course of business within 90 days
of the Global Crossing bankruptcy filing were preference payments. The
Company has engaged legal counsel to defend itself in this claim and intend
to vigorously contest the matter.
In December 2003, Craig R. Jalbert Liquidating CEO, as representative of
the Estate of the Consolidated Debtors for ACT Manufacturing, Inc v.
Mission West Properties, L.P. filed an action in United States Bankruptcy
Court District of Massachusetts Case No. 01-47641 (JBR) asserting that
payments of approximately $482 made in the ordinary course of business
within 90 days of the ACT bankruptcy filing were preference payments. The
Company has engaged legal counsel to defend itself in this claim and intend
to vigorously contest the matter.
GUARANTEES
Under its certificate 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 these indemnification
agreements is minimal and has no liabilities recorded for these agreements
as of September 30, 2004.
The Company also enters into indemnification provisions under (i) its
agreements with other companies in its ordinary course of business,
typically with lenders, joint venture partners, contractors, and tenants.
Under these provisions the Company generally indemnifies and holds harmless
the indemnified party for losses suffered or incurred by the indemnified
party as a result of the Company's activities. 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. 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 no liabilities recorded for these agreements as of September
30, 2004.
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 it believes
would have a material adverse effect on its financial condition, results of
operations and assets, and it is not aware of any such liability.
Nonetheless, it is possible that there are material environmental
liabilities of which the Company is unaware. 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.
7. RESTATEMENTS
The Company has restated its previously reported quarterly information for
the three and nine months ended September 30, 2003. The restated
consolidated financial statements were reported and are further discussed
in the Company's 2003 Form 10-K filed on July 30, 2004. The items that the
Company restated for are as follows:
- The Company recorded additional amortization expense relating to
certain leasing commissions, which were originally being amortized
over a 40-year period. The additional amortization expense resulted
from changing the amortization period of commissions from 40 years to
the term of the lease and the write-off of certain unamortized leasing
commissions in connection with tenant bankruptcies.
- 8 -
- The Company corrected the purchase accounting originally applied to
its 2002 acquisition of the Orchard-Trimble property. In accordance
with Statement of Financial Accounting Standards (SFAS) No. 141,
Business Combinations, which became effective July 1, 2001, the
Company allocated a portion of the purchase price to in-place lease
intangible assets and recorded additional amortization expense from
changing the amortization period of these intangible assets from 40
years to the term of the lease.
- The Company recorded additional depreciation expense relating to the
reclassification of certain real estate assets from a 40-year
depreciable life to a 7- and 25-year depreciable life.
- The Company reclassified the amortization of the above-market lease
intangible asset relating to the 2003 acquisition of the San Thomas
Technology Park from amortization expense to an offset to rental
revenue from real estate.
The aggregate net impact of all restatement items on the Company's
Consolidated Statements of Operations for the three and nine months ended
September 30, 2003 resulted in a decrease in net income to common
stockholders compared to previously reported amounts of $50 ($0.00 per
diluted share) and $139 ($0.01 per diluted share), respectively. The
effects of the restatement items described above on the Company's net
income to common stockholders for the three and nine months ended September
30, 2003 are as follows:
Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
----------------------------------------
(dollars in thousands)
Net income to common stockholders, as previously $3,943 $12,132
reported
Impact of adjustments for:
Leasing commission amortization (128) (384)
Intangible asset amortization (137) (410)
Depreciation of real estate assets (35) (49)
-------------------- -------------------
Total adjustments (300) (843)
-------------------- -------------------
Minority interest portion of adjustments 250 704
-------------------- -------------------
Net income to common stockholders, as restated $3,893 $11,993
==================== ===================
8. SUBSEQUENT EVENTS
On October 7, 2004, the Company paid dividends of $0.24 per share of common
stock to all common stockholders of record as of September 30, 2004. On the
same date, the operating partnerships paid a distribution of $0.24 per O.P.
unit to all holders of O.P. units.
On October 14, 2004, the Company concluded the renewal and extension of its
$80,000 mortgage term loan with Citicorp USA, Inc. (the "Citicorp Loan")
for an additional two years until September 6, 2006. The Citicorp Loan
requires monthly principal payments of $215 and carries a variable interest
rate of LIBOR plus 2%. The loan fee and costs incurred in connection with
the mortgage loan extension amounted to approximately $142 and will be
amortized over the two-year term of the loan using the interest method.
Under the previous loan terms Carl E. Berg had personally guaranteed the
Company's repayment obligations and provided a personal guaranty of the
Company's obligation to indemnify the lender for certain potential
environmental liabilities with respect to the pledged properties. Those
guaranties were provided in conjunction with Citicorp's short-term loan of
$80,000 for the Company's acquisition of the San Tomas Technology Park and
were released by Citicorp as part of the loan renewal and extension. The
loan is secured by seven properties owned by the Company. The Citicorp Loan
terms require the Company to maintain a minimum excess of assets over
liabilities of $400,000.
On October 14, 2004, in connection with the Company's extension of the
Citicorp Loan, the Company retired an 8.75% mortgage loan from Prudential
Capital Group with $548 of outstanding principal, which was collateralized
by one property located at 20400 Mariani Avenue in Cupertino, California.
This property has been added as additional security for the Citicorp Loan.
- 9 -
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 consolidated
financial statements and notes thereto contained herein and our consolidated
financial statements and notes thereto contained in our Annual Report on Form
10-K as of and for the year ended December 31, 2003. The results for the three
and nine months ended September 30, 2004 are not necessarily indicative of the
results to be expected for the entire fiscal year ending December 31, 2004. The
following discussion includes forward-looking statements, including but not
limited to, statements with respect to our future financial performance,
operating results, plans and objectives. Actual results may differ materially
from those currently anticipated depending upon a variety of factors, including
those described under the sub-heading, "Forward-Looking Information."
FORWARD-LOOKING INFORMATION
This quarterly report 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 is 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 include, but are not limited to, the following:
- economic conditions generally and the real estate market specifically,
- 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, and
- general accounting principles, policies and guidelines applicable to
REITs.
In addition, the actual timing of development, construction, and leasing on any
projects that we believe we may acquire in the future under the Berg Land
Holdings Option Agreement is presently unknown, and reliance should not be
placed on the estimates concerning these projects. These risks and
uncertainties, together with the other risks described from time to time in our
reports and other documents filed with the Securities and Exchange Commission,
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 September 30,
2004, we owned and managed 109 properties totaling approximately 7.9 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 September 30, 2004, the six tenants who each leased in
excess of 300,000 rentable square feet from us were Microsoft Corporation,
Fujitsu America (a subsidiary of Fujitsu Limited), JDS Uniphase Corporation, NEC
Electronics America, Inc. (a subsidiary of NEC Electronics Corporation), Ciena
Corporation and Apple Computer, Inc. For federal income tax purposes, we have
operated as a self-managed, self-administered and fully integrated real estate
investment trust ("REIT") since 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
- 10 -
- 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
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. The Silicon Valley economy and business activity have slowed
markedly since 2001 after fast-paced growth in 1999 and 2000. The Silicon Valley
R&D property market has historically fluctuated with the local economy.
According to a recent report by BT Commercial Real Estate, vacancy rates for
Silicon Valley R&D property was approximately 22.5% in late 2003 and at the end
of the third quarter 2004. Total vacant R&D square footage in Silicon Valley at
the end of the third quarter of 2004 amounted to 34.8 million square feet, of
which 26.7%, or 9.3 million square feet, was being offered under subleases.
Total negative net absorption (which is the computation of gross square footage
leased less gross new square footage vacated for the period presented) in 2003
amounted to approximately (3.0) million square feet. During the first nine
months of 2004, there was total negative net absorption of approximately (0.7)
million square feet. Average asking market rent per square foot have decreased
from $1.00 in late 2003 to $0.91 at the end of the third quarter of 2004,
although individual properties within any particular submarket presently may be
leased above or below the current average asking market rental rates within that
submarket. The impact of the rental market decline has not been uniform
throughout the area, however. The Silicon Valley R&D property market has been
characterized by a substantial number of submarkets, with rent and vacancy rates
varying by submarket and location within each submarket.
Our physical occupancy rate at September 30, 2004 was 69%, which is a
significant decline from the occupancy rate of 78.3% at September 30, 2003. We
believe that our physical occupancy rate could decline further going forward if
key tenants seek the protection of bankruptcy laws, consolidate operations or
discontinue operations. In addition, leases with respect to approximately
140,000 rentable square feet are expiring prior to the end of 2004. The
properties subject to these leases may take anywhere from 12 to 18 months or
longer to re-lease. We believe that the average 2004 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. 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; or if we restructure existing
leases and lower existing rents in order to retain tenants for an extended term,
our results of operations and cash flows will be adversely affected.
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.
IMPACT OF RESTATEMENTS
We have restated our previously reported quarterly information for the three and
nine months ended September 30, 2003. The restated consolidated financial
statements were reported and are further discussed in our 2003 Form 10-K filed
on July 30, 2004. The items that we restated for are as follows:
- We recorded additional amortization expense relating to certain
leasing commissions, which were originally being amortized over a
40-year period. The additional amortization expense resulted from
changing the amortization period of commissions from 40 years to the
term of the lease and the write-off of certain unamortized leasing
commissions in connection with tenant bankruptcies.
- We corrected the purchase accounting originally applied to our 2002
acquisition of the Orchard-Trimble property. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations, which became effective July 1, 2001, we allocated a
portion of the purchase price to in-place lease intangible assets and
recorded additional amortization expense from changing the
amortization period of these intangible assets from 40 years to the
term of the lease.
- We recorded additional depreciation expense relating to the
reclassification of certain real estate assets from a 40-year
depreciable life to a 7- and 25-year depreciable life.
- We reclassified the amortization of the above-market lease intangible
asset relating to the 2003 acquisition of the San Thomas Technology
Park from amortization expense to an offset to rental revenue from
real estate.
The aggregate net impact of all restatement items on our Consolidated Statements
of Operations for the three and nine months ended September 30, 2003 resulted in
a decrease in net income to common stockholders compared to previously reported
amounts of $50,000 ($0.00 per diluted share) and $139,000 ($0.01 per diluted
share), respectively.
- 11 -
The effects of the restatement items described above on our net income to common
stockholders for the three and nine months ended September 30, 2003 are as
follows:
Three Months Ended Nine Months Ended
September 30, 2003 September 30, 2003
----------------------------------------
(dollars in thousands)
Net income to common stockholders, as previously reported $3,943 $12,132
Impact of adjustments for:
Leasing commission amortization (128) (384)
Intangible asset amortization (137) (410)
Depreciation of real estate assets (35) (49)
-------------------- -------------------
Total adjustments (300) (843)
-------------------- -------------------
Minority interest portion of adjustments 250 704
-------------------- -------------------
Net income to common stockholders, as restated $3,893 $11,993
==================== ===================
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare the 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 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.
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
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 No. 141
("SFAS No. 141"), Business Combinations, was effective July 1, 2001. The
acquisition costs of each property acquired prior to July 1, 2001were allocated
only to building, land and leasing commissions with building depreciation being
computed based on an estimated weighted average composite useful life of 40
years and leasing commissions amortization being computed over the term of the
lease. Acquisitions of properties made subsequent to the effective date of SFAS
No. 141 are based on an allocation of the acquisition cost to land, building,
tenant improvements, and intangibles for at market and above market in place
leases, and the determination of their useful lives are guided by a combination
of SFAS No. 141 and management's estimates. 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 Statement of Financial
Accounting Standards No. 144 ("SFAS No. 144"), Accounting for the Impairment and
Disposal of Long-Lived Assets. If the carrying amount of the asset exceeds its
estimated undiscounted net cash flow, before interest, we will recognize an
impairment loss equal to the difference between its carrying amount and its
estimated fair value. 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 conditions, which are subject to varying market factors,
such as the vacancy rates, future rental rates 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. To date we have not recognized an impairment of any long-lived assets.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND DEFERRED RENT. The preparation of the
consolidated financial statements requires us to make estimates and assumptions.
As such, we must make estimates of 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, 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.
- 12 -
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. The recognition of these properties and
their operating results are 100% reflected on our consolidated financial
statements, with appropriate allocation to minority interest, because we have
operational and financial control of the investments. We make judgments and
assumptions about the estimated monthly payments made to our minority 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, through an operating
partnership, have a 50% non-controlling limited partnership interest in one
unconsolidated joint venture. This investment is not consolidated because the we
do not exercise significant control over major operating and financial
decisions. We account for the joint venture using the equity method of
accounting.
FAIR VALUE OF FINANCIAL INSTRUMENTS. 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. The fair value of our fixed rate debt
at September 30, 2004 was approximately $234 million.
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 consolidated balance
sheets.
Certain lease agreements contain terms that provide for additional rents based
on reimbursement of certain costs. These additional rents are reflected on the
accrual basis.
Rental revenue is affected if existing tenants terminate or amend their leases.
We try to identify tenants who may be likely to declare bankruptcy or cease
operations. 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.
Lease termination fees are included in other income. These fees are paid by
tenants who want to terminate their lease obligations before the end of the
contractual term of the lease. There is no way of predicting or forecasting 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.
- 13 -
RESULTS OF OPERATIONS
COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2004 TO THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2003
As of September 30, 2004, through our controlling interests in the operating
partnerships, we owned 109 properties totaling approximately 7.9 million
rentable square feet compared to 108 properties totaling approximately 7.8
million rentable square feet owned by us as of September 30, 2003. This
represents a net increase of approximately 1% in total rentable square footage,
which is primarily attributable to our acquisition in December 2003 of one
property located in San Jose, California consisting of approximately 129,000
rentable square feet from the Berg Group.
Rental revenue from real estate for the three and nine months ended September
30, 2004 compared to the three- and nine-month periods in 2003 are as follows:
Three Months Ended September 30,
% Change by % of Total Net
2004 2003 $ Change Property Group Change
-------------- -------------- -------------- --------------- -----------------
(dollars in thousands)
Same Property (1) $26,662 $30,537 ($3,875) (12.7%) (11.6%)
2003 Acquisitions (2) 2,918 2,773 145 5.2% 0.4%
-------------- -------------- -------------- -----------------
$29,580 $33,310 ($3,730) (11.2%) (11.2%)
============== ============== ============== =================
Nine Months Ended September 30,
% Change by % of Total Net
2004 2003 $ Change Property Group Change
-------------- -------------- -------------- --------------- -----------------
(dollars in thousands)
Same Property (1) $82,303 $92,227 ($9,924) (10.8%) (10.2%)
2003 Acquisitions (2) 8,754 5,237 3,517 67.2% 3.6%
-------------- -------------- -------------- -----------------
$91,057 $97,464 ($6,407) (6.6%) (6.6%)
============== ============== ============== =================
(1) "Same Property" is defined as properties owned by us prior to 2003 that we
still owned as of September 30, 2004.
(2) Operating rental revenue for 2003 Acquisitions does not reflect a full 12
months of operations in 2003 because these properties were acquired at
various times during 2003. The 2003 acquisition amount for the three months
ended September 30, 2004 and 2003 each includes approximately $0.5 million
of above market rent amortization against rental revenue from real estate
in connection with the implementation of SFAS No. 141. The 2003 acquisition
amount for the nine months ended September 30, 2004 and 2003 includes
approximately $1.4 million and $0.9 million, respectively, of above market
rent amortization against rental revenue from real estate in connection
with the implementation of SFAS No. 141.
RENTAL REVENUE FROM REAL ESTATE
For the quarter ended September 30, 2004, rental revenue from real estate
decreased by approximately ($3.7) million, or 11.2%, from $33.3 million for the
three months ended September 30, 2003 to $29.6 million for the same period of
2004. The net decrease resulted from a decline of ($3.9) million in rental
revenue from our "Same Property" portfolio and an increase of $0.1 million from
properties acquired in 2003. Rental revenue decreased by approximately ($6.4)
million, or 6.6%, from $97.5 million for the nine months ended September 30,
2003 to $91.1 million for the same period of 2004. Of the ($6.4) million
decrease in rental revenue, ($9.9) million resulted from our "Same Property"
portfolio, which was partially offset by $3.5 million generated by properties
acquired in 2003. The overall decline in rental revenue was a result of adverse
market conditions, lower rental rate on new leases and renewals and the loss of
several tenants due to their bankruptcy, relocation or cessation of operations
since September 30, 2003. Our physical occupancy rate at September 30, 2004 was
approximately 69%, compared to approximately 78% at September 30, 2003.
EQUITY IN EARNINGS FROM UNCONSOLIDATED JOINT VENTURE
As of September 30, 2004, we had investments in four R&D buildings, totaling
593,000 rentable square feet, through an unconsolidated joint venture, TBI-MSW,
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 September 30, 2004, we
recorded equity in earnings from the unconsolidated joint venture of
approximately $0.3 million compared to $0.6 million for the same period in 2003.
Our equity in earnings from this unconsolidated joint venture declined in the
third quarter of 2004 due to a rent reduction under a lease with an existing
tenant For the nine-month periods ended September 30, 2004 and 2003, equity in
earnings from the unconsolidated joint venture was approximately $1.6 million
and $3.4 million, respectively. Included in equity in earnings of unconsolidated
joint venture for the nine-month period ended September 30, 2003 is
approximately $1.4 million relating to a gain from the sale of real estate. Our
50% interest in this property was acquired by TBI-MSW from the Berg Group and
sold to an unrelated party during the second quarter of 2003. This type of
transaction did not recur in 2004.
- 14 -
OTHER INCOME
Other income decreased to approximately $0.4 million for the three months ended
September 30, 2004 from $0.6 million for the second quarter of 2003. For the
nine months ended September 30, 2004 and 2003, other income was $5.4 million and
$1.9 million, respectively. Lease termination fees of approximately $2.6 million
and tenant bankruptcy settlement income of approximately $1.1 million
represented most of the 2004 increase. We do not consider these transactions to
be recurring items.
EXPENSES
Property operating expenses and real estate taxes during the third quarter of
2004 decreased by approximately ($0.7) million, or 12.5%, from $5.6 million to
$4.9 million for the three months ended September 30, 2003 and 2004,
respectively, due to lower property tax expense associated with reductions in
assessed property values on existing properties and lower occupancy rate on our
properties. Tenant reimbursements decreased by approximately ($1.0) million, or
20.8%, from $4.8 million for the three months ended September 30, 2003 to $3.8
million for the three months ended September 30, 2004. Property operating
expenses and real estate taxes decreased by approximately ($0.2) million, or
1.3%, from $15.7 million to $15.5 million for the nine months ended September
30, 2003 and 2004, respectively, due to lower property tax expense from the
reductions in assessed property values on existing properties. Tenant
reimbursements decreased by approximately ($2.6) million, or 18.2%, from $14.3
million for the nine months ended September 30, 2003 to $11.7 million for the
nine months ended September 30, 2004. The decrease in tenant reimbursements for
both periods ended September 30, 2004 as compared to the same periods in 2003
was due to lower occupancy in the current period. Certain expenses such as
property insurance, real estate taxes, and other fixed expenses are not
recoverable from vacant properties. General and administrative expenses remained
relatively the same at $0.4 million for the three months ended September 30,
2003 and 2004. For the nine months ended September 30, 2003 and 2004, general
and administrative expenses increased by approximately $0.6 million, or 60%,
from $1.0 million to $1.6 million, respectively. The increase in general and
administrative expenses for the nine months ended September 30, 2004 was a
result of incurring additional legal and accounting expenses in connection with
the resignation of PricewaterhouseCoopers LLP, our former independent
accountants and the need to re-audit consolidated financial statements for years
2001 and 2002 and audit 2003 results.
Depreciation and amortization expense of real estate decreased by approximately
$0.1 million, or 1.8%, from $5.5 million to $5.4 million for the three months
ended September 30, 2003 and 2004, respectively, reflecting the decrease in
amortization expense of in-place leases in connection with the write-off of
certain remaining in-place lease intangible asset due to lease termination in
the second quarter 2004. Depreciation and amortization expense of real estate
increased by approximately $1.3 million, or 8.5%, from $15.3 million to $16.6
million for the nine months ended September 30, 2003 and 2004, respectively,
because of the depreciation on the newly acquired San Tomas Technology Park and
the amortization expense of in-place leases in connection with the
implementation of SFAS No. 141. The $5.5 million and the $15.3 million of such
expense for the three and nine months ended September 30, 2003, respectively,
include $0.17 million and $0.46 million, respectively, that resulted from the
reclassification of assets and the resulting restatement described in Note 7 of
Notes to Consolidated Financial Statements in Part I, Item 1, above.
Interest expense increased by approximately $0.1 million, or 2.3%, from $4.3
million for the three months ended September 30, 2003 to $4.4 million for the
three months ended September 30, 2004. Interest expense (related parties)
remained relatively stable at approximately $0.3 million for the current
three-month period compared to the same period one year ago. Total debt
outstanding, including amounts due related parties, increased by approximately
$0.7 million, or 0.2%, from $332.7 million as of September 30, 2003 to $333.4
million as of September 30, 2004. Overall interest expense, including amounts
paid to related parties, for the quarter ended September 30, 2004 increased by
approximately $0.1 million compared to the same quarter a year ago.
Interest expense increased by approximately $1.0 million, or 8.3%, from $12.1
million for the nine months ended September 30, 2003 to $13.1 million for the
nine months ended September 30, 2004 primarily because the $80 million mortgage
loan from Citicorp USA, Inc. was outstanding for the full nine months in 2004.
Interest expense (related parties) decreased by approximately ($70,000), or
8.4%, from $830,000 for the nine months ended September 30, 2003 to $760,000 for
the nine months ended September 30, 2004 due to a lower balance owed on the Berg
Group line of credit. Overall interest expense, including amounts paid to
related parties, for the nine months ended September 30, 2004 increased by
approximately $0.9 million compared to the nine months ended September 30, 2003
principally because the Citicorp mortgage loan was outstanding for the entire
period and we substituted new debt at slightly higher rates for borrowings under
the Berg Group line of credit.
NET INCOME TO COMMON STOCKHOLDERS AND NET INCOME TO MINORITY INTEREST
Minority interest in net income has been calculated by taking the net income of
the operating partnerships (on a stand-alone basis) multiplied by the respective
minority interest ownership percentage. Minority interest represents the
ownership interest of all limited partners in the operating partnerships taken
as a whole, which was approximately 83% as of September 30, 2004 and 2003.
Net income to common stockholders decreased by approximately ($0.7) million, or
17.9%, from $3.9 million for the three months ended September 30, 2003 to $3.2
million for the same period in 2004. The minority interest portion of income
decreased by approximately ($3.8) million, or 19.7%, from $19.3 million for the
three months ended September 30, 2003 to $15.5 million for the three months
ended September 30, 2004. For the nine months ended September 30, 2004 and 2003,
the minority interest portion of income was approximately $51.6 million and
$60.1 million, respectively, resulting in net income to stockholders of
approximately $10.5 million and $12.0 million, respectively. The decline in net
income and minority interest portion of income was primarily due to reduced
rental revenue, un-reimbursed operating expenses from vacant properties and a
$1.4 million gain on sale of property by the unconsolidated joint venture in
2003 that did not recur in 2004.
- 15 -
CHANGES IN FINANCIAL CONDITION
At September 30, 2004, total stockholders' equity, net, decreased by
approximately ($0.3) million from December 31, 2003 as we obtained additional
capital from stock option exercises and the exchange of O.P. units for shares of
our common stock while incurring a deficit of approximately ($2.5) million due
to dividends declared in excess of net income for the period. During the nine
months ended September 30, 2004, stock options to purchase 20,000 shares of
common stock were exercised at $8.25 per share. Total proceeds were
approximately $0.17 million. During the first nine months of 2004, two limited
partners exchanged 104,500 O.P. units for 104,500 shares of our common stock and
Carl E. Berg gave 58,000 O.P. units to charitable institutions that exchanged
them for 58,000 shares of our common stock under the Exchange Rights Agreement
among us and the limited partners in the operating partnerships. The newly
issued shares increased additional paid in capital by approximately $2.2
million.
LIQUIDITY AND CAPITAL RESOURCES
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 and/or the borrowings
under the lines of credit with the Berg Group and Cupertino National Bank. We
expect these sources of liquidity to be adequate to meet projected distributions
to stockholders and other presently anticipated liquidity requirements in 2004.
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 long-term secured and unsecured indebtedness and
the issuance of additional equity securities by us. We have the ability to meet
short-term obligations or other liquidity needs based on lines of credit with
the Berg Group and Cupertino National Bank, assuming renewal of our existing $40
million line of credit which expires in November 2004. Despite the current
weakness in the economy, we expect our total interest expense to increase as
interest rates rise and as we incur debt through acquisitions of new properties
and financing activities. In the remainder of 2004, we will be obligated to make
payments totaling approximately $28.6 million of debt principal under mortgage
notes without regard to any debt refinancing or new debt obligations that we
might incur, or optional payments of debt principal.
DISTRIBUTIONS
On October 7, 2004, we paid dividends of $0.24 per share of common stock to all
common stockholders of record as of September 30, 2004. On the same date, the
operating partnerships paid a distribution of $0.24 per O.P. unit to all holders
of O.P. units.
CONTRACTUAL OBLIGATIONS
The following table identifies our contractual obligations as of September 30,
2004 that will impact liquidity and cash flow in future periods:
Three Months
Remaining Year Ending December 31,
-----------------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total
-------------------------------------------------------------------------------------------------
(dollars in thousands)
Debt Obligations (1) $28,565 $9,662 $82,375 $6,350 $116,674 $89,763 $333,389
Operating Lease Obligations (2) 23 90 90 23 - - 226
-------------- ------------ ------------- ------------- ------------- ------------ --------------
Total $28,588 $9,752 $82,465 $6,373 $116,674 $89,763 $333,615
============== ============ ============= ============= ============= ============ ==============
(1) Debt obligations are set forth in detail in the schedule below. The amount
due in 2004 does not reflect the planned two-year extension of the
Cupertino National Bank loan described in Liquidity and Capital Resources
above and does not take into account the Prudential Capital Group loan paid
off in October 2004.
(2) Operating lease obligations relate to a lease of our corporate office
facility from a related party.
At September 30, 2004, we had total indebtedness of $333.4 million, including
$215.9 million of fixed rate mortgage debt, $10.5 million under the Berg Group
mortgage note (related parties), $79.4 million under the Citicorp USA mortgage
loan, $26.5 million under the Cupertino National Bank line of credit, and $1.1
million under the Berg Group line of credit (related parties), as detailed in
the table below.
On October 14, 2004, we concluded the renewal and extension of our $80 million
mortgage term loan with Citicorp USA, Inc. for an additional two years until
September 6, 2006 (the "Citicorp Loan"). The Citicorp Loan requires monthly
principal payments of $215 and carries a variable interest rate of LIBOR plus
2%. The loan fee and costs incurred in connection with the mortgage loan
extension amounted to approximately $0.14 million and will be amortized over the
term of the loan. Under the previous loan terms Carl E. Berg had personally
guaranteed our repayment obligations and provided a personal guaranty of our
obligation to indemnify the lender for certain potential environmental
liabilities with respect to the pledged properties. Those guaranties were
provided in conjunction with Citicorp's short-term loan of $80 million for our
acquisition of the San Tomas Technology Park and were released by Citicorp as
part of the loan renewal and extension. The loan is secured by seven of our
properties. The Citicorp Loan terms require us to maintain a minimum excess of
assets over liabilities of $400,000, in addition to complying with other
customary loan covenants and conditions.
In July 2004, the $40 million line of credit with Cupertino National Bank was
scheduled to mature. Cupertino National Bank has granted an extension of the
loan to November 2, 2004. We are in the process of renegotiating the terms and
extending this loan for an additional two-year period. Assuming the renewal
occurs, which we anticipate, we do not believe that the terms of the extended
loan will differ
- 16 -
materially from its current terms. We are the borrower under the Cupertino
National Bank line of credit which is guaranteed by Mission West Properties,
L.P. and Mission West Properties, L.P. II. Mission West Properties, L.P. is the
borrower under the Citicorp, USA, Inc. mortgage loan which is guaranteed by
Mission West Properties, L.P. I, Mission West Properties L.P. II and Mission
West Properties L.P. III. The Cupertino National Bank line of credit and
Citicorp USA, Inc. mortgage loan contain certain loan covenants. As of September
30, 2004, we were in compliance with such loan covenants.
- 17 -
The following table sets forth information regarding debt outstanding as of
September 30, 2004:
Maturity Interest
Debt Description Collateral Properties Balance Date Rate
---------------------------------------------- ---------------------------------------- ----------------- ------------- ------------
(dollars in thousands)
Line of Credit:
Berg Group (related parties) 2033-2043 Samaritan Dr., San Jose, CA $ 1,105 3/05 (1)
2133 Samaritan Drive, San Jose, CA -----------------
2233-2243 Samaritan Dr., San Jose, CA
1310-1450 McCandless Dr., Milpitas, CA
1795-1845 McCandless Dr., Milpitas, CA
Cupertino National Bank Not Applicable 26,492 11/04 (4)
-----------------
Mortgage Notes Payable (related parties): 5300 & 5350 Hellyer Ave., San Jose, CA 10,508 6/10 7.650%
-----------------
Mortgage Notes Payable (2):
Prudential Capital Group (6) 20400 Mariani Avenue, Cupertino, CA 548 10/06 8.750%
Washington Mutual (Home Savings & Loan Assoc.) 10460 Bubb Road, Cupertino, CA 167 12/06 9.500%
Prudential Insurance Company of America (3) 10300 Bubb Road, Cupertino, CA 119,957 10/08 6.560%
10500 N. De Anza Blvd., Cupertino, CA
4050 Starboard Drive, Fremont, CA
45700 Northport Loop, Fremont, CA
45738 Northport Loop, Fremont, CA
450 National Avenue, Mountain View, CA
6311 San Ignacio Avenue, San Jose, CA
6321 San Ignacio Avenue, San Jose, CA
6325 San Ignacio Avenue, San Jose, CA
6331 San Ignacio Avenue, San Jose, CA
6341 San Ignacio Avenue, San Jose, CA
6351 San Ignacio Avenue, San Jose, CA
3236 Scott Boulevard, Santa Clara, CA
3560 Bassett Street, Santa Clara, CA
3570 Bassett Street, Santa Clara, CA
3580 Bassett Street, Santa Clara, CA
1135 Kern Avenue, Sunnyvale, CA
1212 Bordeaux Lane, Sunnyvale, CA
1230 E. Arques, Sunnyvale, CA
1250 E. Arques, Sunnyvale, CA
1170 Morse Avenue, Sunnyvale, CA
1600 Memorex Drive, Santa Clara, CA
1688 Richard Avenue, Santa Clara, CA
1700 Richard Avenue, Santa Clara, CA
3540 Bassett Street, Santa Clara, CA
3542 Bassett Street, Santa Clara, CA
3544 Bassett Street, Santa Clara, CA
3550 Bassett Street, Santa Clara, CA
Northwestern Mutual Life Insurance Company (5) 1750 Automation Parkway, San Jose, CA 95,257 1/13 5.640%
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 Ave., San Jose, CA
2251 Lawson Lane, Santa Clara, CA
1325 McCandless Drive, Milpitas, CA
1650-1690 McCandless Drive, Milpitas, CA
20605-20705 Valley Green Dr., Cupertino, CA
Citicorp USA, Inc. 2001 Walsh Avenue, Santa Clara, CA 79,355 9/06 (4)
2880 Scott Boulevard, Santa Clara, CA
2890 Scott Boulevard, Santa Clara, CA
2770-2800 Scott Boulevard, Santa Clara, CA
2300 Central Expressway, Santa Clara, CA
2220 Central Expressway, Santa Clara, CA
2330 Central Expressway, Santa Clara, CA
-----------------
Mortgage Notes Payable Subtotal 295,284
-----------------
Total $333,389
=================
(1) The debt owed to the Berg Group under the line of credit carries a variable
interest rate equal to LIBOR plus 1.30% and is payable in full in March
2005. The interest rate at September 30, 2004 was 3.47%.
(2) Mortgage notes payable generally require monthly installments of interest
and principal over various terms extending through the year 2013. The
weighted average interest rate of mortgage notes payable was 6.23% at
September 30, 2004.
(3) The Prudential Insurance loan is payable in monthly installments of $827,
which includes principal (based upon a 30-year amortization) and interest.
John Kontrabecki, one of the limited partners, has guaranteed approximately
$12,000 of this debt. Costs and fees incurred with obtaining this loan
aggregated approximately $900.
(4) Interest rate equal to LIBOR plus 2%. The interest rates for the Cupertino
National Bank ("CNB") line of credit and the Citicorp USA, Inc. mortgage
loan at September 30, 2004 were 3.67% and 4.25%, respectively. In September
2004, the line of credit with CNB was scheduled to mature. CNB has granted
an extension until November 2, 2004 while the parties finalize the terms of
the $40,000 line of credit renewal for an additional two year-period. The
Company does not believe that the terms of the extended line of credit will
differ materially from its current terms. On October 14, 2004, the Citicorp
Loan was extended for an additional two years until September 2006 as
discussed above.
(5) The Northwestern loan is payable in monthly installments of $696, which
includes principal (based upon a 20-year amortization) and interest. Costs
and fees incurred with obtaining this loan aggregated approximately $675.
(6) The Prudential Capital Group mortgage note was paid off in its entirety in
October 2004 and the 20400 Mariani Avenue property securing this loan was
added to the properties collateralizing the Citicorp USA, Inc. mortgage
loan.
- 18 -
At September 30, 2004, 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 $10.35 per share on September 30, 2004) on a fully diluted basis, including
the conversion of all O.P. units into common stock, was approximately 23.6%. On
September 30, 2004, the last trading day for the quarter, total market
capitalization was approximately $1.4 billion.
At September 30, 2004, the outstanding balance remaining under certain demand
notes that we owed to the operating partnerships was $1.6 million. The due date
of the demand notes has been extended to September 30, 2005. The principal of
the demand 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 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 minority interest as reported on the 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 raising additional equity capital.
HISTORICAL CASH FLOWS
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2004 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2003
Net cash provided by operating activities for the nine months ended September
30, 2004 was $82.4 million compared to $91.8 million for the same period in
2003. The decline resulted from the reduction in tenant expense reimbursements
and decrease in rental revenue from our current portfolio of property due to
tenant lease obligation defaults, tenant re-locations and lower rent renewal
rates during the last quarter of 2003 and the first nine months of 2004.
Net cash used in investing activities was ($0.4) million and ($109.9) million
for the nine months ended September 30, 2004 and 2003, respectively. Cash used
in investing activities during the first nine months of 2003 related principally
to the acquisition of the San Tomas Technology Park for $110 million.
Net cash used in financing activities was ($84.5) million for the nine months
ended September 30, 2004 compared to $18.7 million provided by financing
activities for the same period in 2003. During the first nine months of 2004, we
used $9.9 million to pay outstanding debt, drew an additional $2.5 million from
the Cupertino National Bank line of credit and paid $62.8 million for minority
interest distributions and $13.0 million for dividends to common stockholders.
During the nine months ended September 30, 2003, financing activities included
borrowing $180 million under two new collateralized mortgage loans, of which
$100 million was used to repay short-term debt and the Berg Group line of credit
and $80 million was used for the acquisition of the San Tomas Technology Park as
discussed above. During the same period in 2003, we used $86.1 million of cash
to repay outstanding debt, $62.4 million for minority interest distributions and
$12.7 million for 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) before minority interest of O.P. unit holders, 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 an appropriate measure of performance of
an equity REIT because, along with cash flows from operating activities,
financing activities and investing activities, it provides investors with an
understanding of our ability to incur and service debt and make capital
expenditures. With the emphasis on the disclosure of operating earnings per
share, we will still continue to use FFO as a measure of our performance. FFO
should not 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 minority interests 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.
We have revised our FFO computations for 2003 for the inclusion of the
amortization of leasing commissions in depreciation and amortization of real
estate in order to be comparable to our 2004 FFO presentation in accordance with
NAREIT guidelines and to more closely conform to the NAREIT's FFO definition.
Additionally, our FFO calculation includes our portion of the depreciation and
amortization of real estate from our unconsolidated joint venture.
- 19 -
FFO for the three and nine months ended September 30, 2004 and 2003, as
reconciled to net income to common stockholders, are summarized in the following
tables:
Three Months Ended September 30, Nine Months Ended September 30,
2004 2003 2004 2003
(As Restated) (As Restated)
------------------ ------------------ ------------------ ------------------
(dollars in thousands) (dollars in thousands)
Net income to common stockholders (1) $ 3,173 $ 3,893 $10,491 $11,993
Add:
Minority interests (2) 15,377 19,225 51,228 59,627
Depreciation & amortization of real 5,969 5,992 18,619 16,834
estate (3)
Less:
Gain on sale of unconsolidated joint - - - 1,400
venture asset
------------------ ------------------ ------------------ ------------------
FFO (4) $24,519 $29,110 $80,338 $87,054
================== ================== ================== ==================
(1) As restated for the three and nine months ended September 30, 2003
described in Note 7 of Notes to Consolidated Financial Statements under
Part I, Item 1 above.
(2) Excludes minority interest for third parties.
(3) Includes depreciation and amortization of real estate from our
unconsolidated joint venture and amortization of leasing commissions.
(4) As restated for the three and nine months ended September 30, 2003. As
originally reported for that quarter, FFO was $29,214. As originally
reported for the nine months ended September 30, 2003, FFO was $86,821.
DISTRIBUTION POLICY
Our board of directors will determine 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 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;
- prospects of tenant renewals and re-leases of properties subject to
expiring leases;
- cash required for re-leasing activities; o 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.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
We do not believe recently issued accounting standards will materially impact
our financial position, results of operations, or cash flows.
In December 2003, the FASB issued FIN 46R, "Consolidation of Variable Interest
Entities," a revision to FIN 46, which was issued in January 2003. Under FIN
46R, a variable interest entity must be consolidated by a company if that
company is subject to a majority of the entity's expected losses or entitled to
receive a majority of the entity's expected residual returns or both. 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.
The consolidation requirements apply to existing entities in the first reporting
period that ends after March 15, 2004. We adopted the consolidation requirements
of FIN 46R in the first quarter of 2004. There was no significant effect on the
consolidated financial position, results of operations or cash flows as a result
of the initial adoption of this standard in regard to existing variable interest
entities; however, newly formed entities could meet these requirements and will
be recorded as appropriate.
In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). SFAS No. 150 was effective
beginning in the third quarter of 2003. The FASB deferred the implementation of
SFAS No. 150 as applied to certain minority interests in finite life entities,
however. We adopted the requirements of SFAS No. 150 in the third quarter of
2003, and considering the aforementioned deferral, it did not impact our
financial position, results of operations or cash flows.
- 20 -
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 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
September 30, 2004. 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 variable rate debt, the table presents the assumption that the outstanding
principal balance at September 30, 2004 will be paid upon maturity.
For fixed rate debt, the table presents the assumption that the outstanding
principal balance at September 30, 2004 will be paid according to scheduled
principal payments and that we will not prepay any of the outstanding principal
balance.
Three
Months
Remaining Year Ending December 31,
----------------------------------------------
2004 2005 2006 2007 2008 Thereafter Total Fair Value
----------------------------------------------------------------------------------------------
(dollars in thousands)
Variable Rate Debt:
Secured and unsecured debt $27,137 $3,685 $76,130 - - - $106,952 $106,952
Weighted average interest rate 3.69% 4.19% 4.25%
Fixed Rate Debt:
Secured notes payable $1,428 $5,977 $6,245 $6,350 $116,674 $89,763 $226,437 $233,806
Weighted average interest rate 6.23% 6.23% 6.23% 6.23% 6.23% 6.23%
The primary market risks we face are interest rate fluctuations. Principal
amounts outstanding under the Berg Group line of credit, the Cupertino National
Bank line of credit and the Citicorp USA, Inc. mortgage loan, which are tied to
a LIBOR based interest rate, were approximately $1.1 million, $26.5 million, and
$79.4 million, or 0.3%, 7.9% and 23.8%, respectively, of the total $333.4
million of outstanding debt as of September 30, 2004. 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. All of our debt is denominated
in United States dollars. We had no interest rate caps or interest rate swap
contracts at September 30, 2004.
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 September 30, 2004, a 1%
increase or decrease in interest rates on our $107.0 million of floating rate
debt would decrease or increase, respectively, nine months earnings and cash
flows by approximately $0.8 million, 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 of such fluctuations and their possible
effects, the foregoing sensitivity analysis assumes no changes to our financial
structure.
- 21 -
ITEM 4. 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.
Until their resignation on January 26, 2004, our independent registered
accounting firm was PricewaterhouseCoopers LLP. In May 2004, we hired new
independent accountants, BDO Seidman, LLP who conducted audits of our financial
statements for 2001, 2002 and 2003. In connection with the issuance of its
report of independent registered public accounting firm, BDO Seidman, LLP
reported to our audit committee a "material weakness" under standards
established by the Public Company Accounting Oversight Board regarding some
elements of our system of internal controls. They noted a material weakness with
respect to our review and oversight of our application of purchase accounting
relating to the amortization of leasing commissions on acquired buildings, as a
result of which we amortized such commissions over the 40-year term of the
acquired building rather than the lease term. In addition, due to our total head
count of four, they have also identified certain segregation of duties issues
without compensating controls.
In the view of BDO Seidman, LLP this material weakness led to certain accounting
adjustments for 2003, principally pertaining to purchase accounting errors
related to leasing commissions and to a much smaller extent, to correct
depreciable lives for tenant improvements and base interior improvements. The
error in accounting for lease commissions necessitated a significant portion of
the restatements described elsewhere in this report and resulted in adjustments
to our 2003 financial statements upon audit. We have conducted a review of the
errors requiring restatement, including a separate review by our audit committee
to determine what remedial measures were necessary. We believe our management
has taken or is in the process of taking the steps necessary to correct the
errors and avoid similar errors in the future. One important measure is to have
our President also become involved in the review of our internal controls and
procedures.
As required by SEC Rule 13a-15(b) we conducted an evaluation as of the end of
the third quarter of 2004, 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 are effective in timely alerting them to
material information relating to us (including our subsidiaries) required to be
included in our periodic SEC filings.
While we have taken or are in the process of taking the foregoing steps in order
to address the adequacy of our disclosure controls and procedures, and, in
addition, to develop and implement a formal set of internal controls and
procedures for financial reporting in accordance with the SEC's rules to adopt
the internal control report requirements included in Section 404 of the
Sarbanes-Oxley Act of 2002, the efficacy of the steps we have taken to date and
the steps we are still in the process of completing is subject to continued
management review supported by confirmation and testing by our internal and
external auditors. As a result, it is likely that additional changes will be
made to our internal controls and procedures.
CHANGES IN INTERNAL CONTROLS
Other than the foregoing initiatives, there were no significant changes in our
internal controls or to our knowledge, in other factors that could significantly
affect such internal controls subsequent to the date of the above-described
evaluation of disclosure controls and procedures.
- 22 -
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Legal proceedings are incorporated herein by reference from Part 1 "Item 1. -
Financial Statements - Note 6 - Commitments and Contingencies."
ITEM 6. EXHIBITS AND REPORTS ON FROM 8-K
a. EXHIBITS
10.29.1 Cupertino National Bank Revolving Credit Loan Agreement Change in Terms Agreement
10.45.4 Citicorp USA, Inc. $80,000,000 Fourth Amendment to Promissory Note
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
b. REPORTS ON FORM 8-K
None
- 23 -
================================================================================
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: October 29, 2004 By: /s/ Carl E. Berg
--------------------------------------------
Carl E. Berg
Chief Executive Officer
Date: October 29, 2004 By: /s/ Wayne N. Pham
--------------------------------------------
Wayne N. Pham
Vice President of Finance and Controller
(Principal Accounting Officer and Duly
Authorized Officer)
- 24 -
EXHIBIT 10.29.1
CHANGE IN TERMS AGREEMENT
------------------------------------------------------------------------------------------------------------------------------------
Principal Loan Date Maturity Loan No Call / Coll Account Officer Initials
$40,000,000.00 08-27-2004 11-02-2004 301099227 188
------------------------------------------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of this document to
any particular loan or item. Any item above containing "***" has been omitted due to text length limitations.
------------------------------------------------------------------------------------------------------------------------------------
Borrower: Mission West Properties, Inc., A Maryland corporation Lender: Cupertino National Bank - part of Greater Bay Bank NA
10050 Bandley Drive Main Office
Cupertino, CA 95014-2244 20230 Stevens CreekBlvd.
Cupertino, CA 95014-2244
LOAN TYPE. This is a Variable Rate Nondisclosable Revolving Line of Credit Loan
to a Corporation for $40,000,000.00 due on November 2, 2004. The reference rate
(Three Month Libor Rate, as published on the first business day of each month,
currently 1.700%) is added to the margin of 2.000%, resulting in an initial rate
of 3.700. This is an unsecured renewal loan.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for (please
initial):
________________ Personal, Family, or Household Purposes or Personal Investment.
___X CEB RM_____ Business (Including Real Estate Investment).
SPECIFIC PURPOSE. The specific purpose of this loan is: Extend maturity date of
revolving line of credit.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Lender's conditions for making the loan have been
satisfied. Please disburse the loan proceeds of $40,000,000.00 as follows:
UNDISBURSED FUNDS: $10,137,437.70
AMOUNT PAID ON BORROWER'S ACCOUNT: $29,862,562.30
$29,862,562.30 Payment on Loan # 301099227 (Disbursed) _______________
NOTE PRINCIPAL: $40,000,000.00
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
PREPAID FINANCE CHARGES PAID IN CASH: $1,000.00
$1,000.00 Loan Fee
------------
TOTAL CHARGES PAID IN CASH: $1,000.00
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION
AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS
AUTHORIZATION IS DATED AUGUST 27, 2004.
BORROWER:
MISSION WEST PROPERTIES, INC., A MARYLAND CORPORATION
By: /s/ Carl E. Berg By: /s/ Raymond V. Marino
----------------------------- ------------------------------
Carl E. Berg, Chairman & CEO Raymond V. Marino, President & COO
of Mission West Properties, Inc. of Mission West Properties, Inc.
A Maryland corporation A Maryland corporation
EXHIBIT 10.45.4
FOURTH AMENDMENT TO PROMISSORY NOTE
THIS FOURTH AMENDMENT TO PROMISSORY NOTE (the "Amendment"), is made as of
August 31, 2004 by and between MISSION WEST PROPERTIES, L.P., a Delaware limited
partnership ("Borrower"), and CITICORP USA, INC., a Delaware corporation
("Lender") as follows:
RECITALS
A. In connection with a loan (the "Loan"), made by Lender to Borrower,
Borrower executed that certain Promissory Note, dated as of April 8, 2003,
payable to Lender, in the amount of $80,000,000, as amended by that certain
First Amendment to Promissory Note dated as of June 30, 2003, by that certain
Second Amendment to Promissory Note dated as of March 29, 2004, and by that
certain Third Amendment to Promissory Note dated as of June 11, 2004 (as
amended, the "Note"). Borrower's obligations under the Note are secured, among
other security, by that certain Deed of Trust, Assignment of Leases and Rents,
Security Agreement and Fixture Filing (the "Deed of Trust"), dated as of April
8, 2003 executed by Borrower, as trustor, in favor of Lender, as Beneficiary,
and recorded in the official records of Santa Clara County, California on April
8, 2003 as document number 16947181, and guaranteed by that certain Guaranty
(the "Guaranty"), dated as of April 8, 2003 executed by Carl E. Berg, an
individual ("Berg"), Mission West Properties, L.P. I, a Delaware limited
partnership ("MW I"), Mission West Properties, L.P. II, a Delaware limited
partnership ("MW II"), and Mission West Properties, L.P. III, a Delaware limited
partnership ("MW III"). Borrower, Berg, MW I, MW II and MW III have also
executed and delivered to Lender that certain Environmental Indemnity Agreement
(the "Environmental Indemnity") dated April 8, 2003. The Note, the Deed of
Trust, the Guaranty, the Environmental Indemnity and the other documents,
instruments and agreements evidencing or securing the Loan are hereinafter
referred to collectively as the "Loan Documents".
B. Borrower has requested and Lender has agreed, subject to the terms of
this Amendment, to modify the terms of the Note to extend the Maturity Date (as
defined in the Note). NOW, THEREFORE, in consideration of the foregoing and for
other good valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, Lender and Borrower hereby agree as follows:
AGREEMENT
1. DEFINITIONS. Except as modified herein, terms defined in the Note shall
have the same meaning when used in this Amendment.
2. MODIFICATIONS TO NOTE.
(a) On and after the date of this Amendment, the definition of
"Maturity Date" set forth in Paragraph 1(a) of the Note shall be amended
and modified to mean September 6, 2006.
(b) Effective as of June 1, 2004 and continuing on the first (1st) day
of each month thereafter, in addition to payments of accrued and unpaid
interest then due on the Note, Borrower shall make principal payments in
respect of the Note in the amount of $215,000.00. The entire unpaid
principal balance of the Note, together with all accrued and unpaid
interest thereon, and all other amounts then due and payable under the Note
and the other Loan Documents shall be due and payable on the Maturity Date
of September 6, 2006.
3. REAFFIRMATION OF NOTE AND OTHER LOAN DOCUMENTS. Except as modified
pursuant to Section 2 hereof, the Note is unmodified and remains in full force
and effect.
4. Conditions Precedent. Before this Amendment becomes effective, the
following conditions shall be satisfied at Borrower' sole cost and expense and
in a manner satisfactory to Lender in the exercise of its reasonable judgment:
(a) no Event of Default shall have occurred and be continuing and no other event
shall have occurred and be continuing if the event, with notice or the passage
of time or both, would be such an Event of Default; (b) if requested by Lender,
Borrower shall have provided such title endorsements as Lender may request to
insure the continuing first-lien priority of the Deed of Trust; (c) no material
adverse change shall have occurred, or be reasonably likely to occur, in the
Collateral or in Borrower's or any Guarantor's business conditions (financial or
otherwise), operations, properties or prospects, or ability to repay the Loan;
(d) MW I, MW II and MW III shall have executed the reaffirmation of its
obligations attached hereto; (e) Borrower shall have paid an extension fee to
Lender in an amount equal to $100,000.00; (f) receipt by Lender of an executed
and, where appropriate, acknowledged copies of a Deed of Trust, Assignment of
Leases and Rents, Security Agreement and Fixture Filing (the MW I Deed of
Trust"), executed by MW I and an Environmental Indemnity Agreement executed by
MW I, MW II, MW III and Mission West Properties, Inc., a Maryland corporation
("MW Inc."), and a First Amendment to Guaranty and Environmental Indemnity
Agreement executed by Berg, MW I, MW II, MW III and MW Inc.; (g)
receipt and review by Lender of all Leases (as defined in the Deed of Trust),
together with all financial statements of any tenant under such Leases as
Borrower shall have obtained in the course of its due diligence; (h) receipt and
review by Lender of a property condition report of the Land, the Real Estate and
the Improvements (as such terms are defined in the Deed of Trust); (i) receipt
and review by Lender of a phase I environmental site assessment with respect to
the Land, the Real Estate and the Improvements; (j) receipt and review by Lender
of an ALTA lender's policy of title insurance with respect to the MW I Deed of
Trust; and (k) receipt and review by Lender of an opinion of counsel to Borrower
and Guarantor opining that the Guaranty as amended by the First Amendment to
Guaranty and Environmental Indemnity Agreement has been duly authorized by all
necessary corporate and partnership action, as the case may be Lender's claim on
the assets of Guarantor is superior to the claim on the assets of Guarantor of
any partner or any holder of any operating unit of any Guarantor.
5. BORROWER'S REPRESENTATIONS AND WARRANTIES. Borrower hereby reaffirms all
of the representations and warranties set forth in the Loan Documents and
further represents and warrants that: (a) the recitals set forth above in the
Recitals are true, accurate and correct; (b) Borrower is the sole legal and
beneficial owner of the Collateral; (c) the Deed of Trust constitutes a valid,
first priority lien encumbering the Collateral and there are no other mortgages,
deeds of trust or other such liens encumbering the Collateral or any portion
thereof; (d) this Amendment constitutes the legal, valid and binding obligation
of Borrower enforceable in accordance with its terms; (e) the execution,
delivery and performance of this Amendment are within Borrower's power and
authority and have been duly authorized by all requisite partnership action, and
are not in contravention of any law, or of Borrower's certificate of limited
partnership or partnership agreement; (f) there exists no Event of Default under
the Note or any other Loan Document; and (g) there are no offsets, claims,
counterclaims, cross-claims or defenses with respect to the Loan.
6. GOVERNING LAW; SEVERABILITY. This Amendment shall be governed by and
construed under the internal laws (as opposed to the laws of conflicts) of the
State of California. In the event that any provision or clause of this Amendment
is construed by a court of competent jurisdiction to be void, invalid or
unenforceable, such construction shall not affect other provisions of this
Amendment which can be given effect without the void, invalid or unenforceable
provision, and to this end the provisions of this Amendment are declared to be
severable.
7. CAPTIONS. Titles and headings appearing in this Amendment are intended
solely for means of reference and are not intended to modify any of the
provisions of this Amendment.
8. ENTIRE AGREEMENT. This Amendment constitutes the entire agreement
between Borrower and Lender with respect to the subject matter of this Amendment
and may not be modified or amended in any manner except in writing executed and
delivered by Borrower and Lender.
9. COUNTERPARTS. This Amendment may be executed in multiple counterparts,
each of which, taken together, shall constitute one and the same agreement.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the date set
forth above.
BORROWER:
MISSION WEST PROPERTIES, L.P.,
a Delaware limited partnership
By: Mission West Properties, Inc.,
a Maryland corporation
its general partner
By: /s/ Carl E. Berg
-------------------------------
Carl E. Berg
Chief Executive Officer
LENDER:
CITICORP USA, INC.,
a Delaware corporation
By: /s/ David Taylor
--------------------------------
David Taylor
Vice President
REAFFIRMATION OF GUARANTORS
Guarantor hereby (a) represents and warrants to Lender that, if Guarantor is a
partnership, the execution, delivery, and performance of this Reaffirmation are
within its partnership powers and have been duly authorized by all necessary
partnership action; (b) represents and warrants to Lender that the execution,
delivery, and performance of this Reaffirmation shall not constitute a breach of
any other document, instrument or agreement to which it is a party or by which
its property is bound; (c) consents to the amendment of the Loan Documents
pursuant to and on the terms stated in the Amendment, including but not limited
to the extension of the Maturity Date to September 6, 2006; (d) acknowledges and
reaffirms its obligations owing to Lender under the Guaranty, the Environmental
Indemnity and any other Loan Documents to which it is a party; and (e) ratifies,
affirms, reaffirms, acknowledges, confirms agrees that each of the Guaranty, the
Environmental Indemnity and any other Loan Documents to which it is a party is
and shall remain in full force and effect and represents a valid and enforceable
obligation of the Guarantor; provided, however, with respect solely to the
obligations of Carl E. Berg, an individual ("Berg"), the Guaranty and the
Environmental Indemnity shall be null, void and of no further force and effect
with respect to events or circumstances first occurring after the date that the
conditions precedent to the effectiveness of the Fourth Amendment to Promissory
Note shall have been satisfied.
GUARANTOR:
MISSION WEST PROPERTIES, L.P. I,
a Delaware limited partnership
By: Mission West Properties, Inc.,
a Maryland corporation
its general partner
By: /s/ Carl E. Berg
----------------------------------
Carl E. Berg
Chief Executive Officer
MISSION WEST PROPERTIES, L.P. II,
a Delaware limited partnership
By: Mission West Properties, Inc.,
a Maryland corporation
its general partner
By: /s/ Carl E. Berg
----------------------------------
Carl E. Berg
Chief Executive Officer
MISSION WEST PROPERTIES, L.P. III,
a Delaware limited partnership
By: Mission West Properties, Inc.,
a Maryland corporation
its general partner
By: /s/ Carl E. Berg
----------------------------------
Carl E. Berg
Chief Executive Officer
RELEASED GUARANTOR:
/s/ Carl E. Berg
---------------------------------
CARL E. BERG, an individual
EXHIBIT 31.1
CERTIFICATE PURSUANT TO
RULE 13a-14 THE SECURITIES EXCHANGE ACT OF 1934
I, Carl E. Berg, certify that:
1. I have reviewed this Form 10-Q of Mission West Properties, Inc. for
the quarterly period ended September 30, 2004;
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 officer(s) 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)) 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) 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
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the period ended September 30, 2004 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 officer(s) 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.
Carl E. Berg
Chairman and CEO
October 29, 2004
Exhibit 31.2
CERTIFICATE PURSUANT TO
RULE 13a-14 THE SECURITIES EXCHANGE ACT OF 1934
I, Raymond V. Marino, certify that:
1. I have reviewed this Form 10-Q of Mission West Properties, Inc. for
the quarterly period ended September 30, 2004;
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 officer(s) 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)) 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) 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
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the period ended September 30, 2004 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 officer(s) 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.
Raymond V. Marino
President and Chief Operating Officer
October 29, 2004
Exhibit 31.3
CERTIFICATE PURSUANT TO
RULE 13a-14 THE SECURITIES EXCHANGE ACT OF 1934
I, Wayne N. Pham, certify that:
1. I have reviewed this Form 10-Q of Mission West Properties, Inc. for
the quarterly period ended September 30, 2004;
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 officer(s) 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)) 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) 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
(c) Disclosed in this report any change in the registrant's
internal control over financial reporting that occurred during
the period ended September 30, 2004 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 officer(s) 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.
Wayne N. Pham
Vice President of Finance and Controller
October 29, 2004
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 September 30,
2004 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, and Wayne N. Pham, Vice President of Finance and
Controller 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.
--------------------------------------------
Carl E. Berg
Chairman of the Board and Chief Executive Officer
October 29, 2004
--------------------------------------------
Wayne N. Pham
Vice President of Finance and Controller
October 29, 2004
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.