-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, P9APmTQ0WGFggTnM8qcfQtEeZzjKB/vcjgtShtvlOoRKr0y0oz7zF7QwZshEGlPs yaJCvbxZqtFBhZ8K1yoddQ== 0000704874-98-000014.txt : 19981029 0000704874-98-000014.hdr.sgml : 19981029 ACCESSION NUMBER: 0000704874-98-000014 CONFORMED SUBMISSION TYPE: S-4/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19981027 SROS: AMEX SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: MISSION WEST PROPERTIES/NEW/ CENTRAL INDEX KEY: 0000704874 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF NONRESIDENTIAL BUILDINGS [6512] IRS NUMBER: 952635431 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-4/A SEC ACT: SEC FILE NUMBER: 333-52835 FILM NUMBER: 98731618 BUSINESS ADDRESS: STREET 1: 10050 BANDLEY DR CITY: CUPERTINO STATE: CA ZIP: 95014 BUSINESS PHONE: 4087250700 MAIL ADDRESS: STREET 1: 10050 BANDLEY DRIVE STREET 2: SUITE 250 CITY: CUPERTINO STATE: CA ZIP: 95014 S-4/A 1 FORM S-4 AMENDMENT NO. 3 As filed with the Securities and Exchange Commission on October 27, 1998. Registration Statement No. 333-52835 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- AMENDMENT NO. 3 TO FORM S-4* REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------------- MISSION WEST PROPERTIES, INC. (Exact name of registrant as specified in its charter) MARYLAND 95-2635431 6798 (State or other (I.R.S. Employee (Primary Standard jurisdiction incorporation Identification No.) Industrial Classification or organization) Code Number) 10050 Bandley Drive, Cupertino, California 95014 (408) 725-0700 (Address, including ZIP Code and telephone number of registrant's principal executive offices) MR. CARL E. BERG 10050 Bandley Drive Cupertino, California 95014 ---------------------- (Name, address and telephone number of agent for service) ---------------------- Copies to: ALAN B. KALIN KATHI A. RAWNSLEY Graham & James LLP 600 Hansen Way Palo Alto, California 94304 Tel: (650) 856-6500 Fax: (650) 856-3619 Approximate date of commencement of proposed sale of the securities to the public: AS SOON AS PRACTICABLE FOLLOWING THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ______________ If this form is a post-effective amendment filed pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] ___________________1 ---------------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - -------------- * Filing fee previously paid under registrant name Mission West Properties. Information contained herein is subject to completion or amendment. A registration statement relating to these securities has been filed with the Securities and Exchange Commission. These securities may not be sold nor may offers to buy be accepted prior to the time the registration statement becomes effective. The prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State. Subject to Completion, October 27, 1998 PROXY STATEMENT/PROSPECTUS MISSION WEST PROPERTIES MISSION WEST PROPERTIES, INC. 102,197,299 Shares of Common Stock This proxy statement/prospectus (the "Proxy Statement/Prospectus") is the proxy statement of Mission West Properties, a California corporation (the "Company"). This proxy statement is being furnished to holders of common stock, no par value (the "Common Stock"), of the Company in connection with the solicitation of proxies by the board of directors of the Company for use at a special meeting of shareholders to be held at ____ a.m., on _____________, 1998, at _______________, ________________, _________________, California, including any adjournments ("Special Meeting"). In December 1996, shareholders approved the sale of substantially all of the Company's assets and the distribution of the net proceeds on a pro rata basis. Subsequent to the sale of the assets, a group of investors led by Carl E. Berg approached the Company with a proposal to recapitalize the Company and, rather than dissolve the Company, continue the business of the Company under the control of Mr. Berg with a portfolio of new investment properties. Following the initial investment in the Company by the Berg-led investment group and the final distribution of the proceeds of the asset sales to shareholders, the American Stock Exchange ("AMEX") halted trading of the Company's Common Stock. Thereafter, Mr. Berg proposed that the Company undertake several transactions intended to provide the Company with additional capital and control of substantial real estate holdings of Mr. Berg, members of his immediate family and certain entities which they control (the "Berg Group"). In July 1998, the Company acquired the sole general partner interest in each of four limited partnerships holding properties previously controlled by the Berg Group and certain other persons. The board of directors believes that the proposals and related transactions are in the best interests of the Company, and has approved the transactions described below. At the Special Meeting, shareholders will be asked to consider and vote on the following proposals: 1. Pursuant to rules of the AMEX, the shareholders of the Company will be asked to approve the sale and issuance by the Company at $4.50 per share of 6,495,058 shares of Common Stock to accredited investors pursuant to binding subscription agreements, which are subject to such shareholder approval (the "Private Placement"). 2. The Company will apply the proceeds from the Private Placement, existing cash and other working capital sources to fund the payment of $33.9 million under 7.25% interest demand notes ("Demand Notes") issued by the Company for the acquisition of the sole general partner interests representing approximately 12.11% of the total partnership interests in each of four existing limited partnerships (collectively the "Operating Partnerships") owning approximately 4.34 million square feet of leased buildings used for offices, research and development, light manufacturing, and assembly ("R&D Property") under the terms of an agreement among the Company, the Berg Group and certain other persons (the "Acquisition Agreement"). The Acquisition Agreement also provides for the Company to acquire, through the Operating Partnerships, approximately 1.02 million rentable square feet of R&D Property to be constructed and leased prior to acquisition by the Operating Partnerships (the "Pending Development Projects") from certain members of the Berg Group, and an option to acquire future building developments on land currently held by certain members of the Berg Group. Collectively, these transactions (the "Berg Acquisition") allow the Company to acquire control of approximately 5.4 million rentable square feet of R&D Property previously controlled principally by the Berg Group. To enable the Company to begin reporting financial data for the Operating Partnerships with the Company's consolidated financial statements as of July 1, 1998, the Company, the Berg Group and the other parties to the Acquisition Agreement executed an amendment providing for the Company's acquisition of its general partner interest in each of the Operating Partnerships, and the contribution of certain properties to one of the Operating Partnerships, effective as of that date (the "Partnership Closing"). At the Special Meeting, the Company's shareholders will be asked to ratify the Partnership Closing and to approve the other transactions comprising the Berg Acquisition and related matters. 3. Pursuant to AMEX rules, the Company also seeks shareholder approval of the issuance of up to 93,398,705 shares of Common Stock upon the future redemption or exchange of 100,825,478 units of limited partnership interest in the Operating Partnerships ("L.P. Units"), including 33,919,072 L.P. Units issuable upon the Operating Partnerships' acquisition of the Pending Development Projects from members of the Berg Group pursuant to the terms of an Exchange Rights Agreement among the company, the Operating Partnerships and the Limited Partners (the "Exchange Rights Agreement"). 4. Shareholders are asked also to approve a proposal to reincorporate the Company under the laws of the State of Maryland through a merger (the "Reincorporation Merger") with and into Mission West Properties, Inc., a Maryland corporation ("Mission West-Maryland"), a newly formed wholly owned subsidiary of the Company. Mission West-Maryland will be the surviving corporation with articles of incorporation (the "Charter") and bylaws which differ materially from those of the Company. Mission West-Maryland was formed for the purpose of redomiciling the Company as a Maryland corporation and acquiring, recapitalizing and continuing the business and operations of the Company. In the Reincorporation Merger, shares of the Company's Common Stock outstanding at the effective time of the merger will be converted into shares of common stock, $0.001 par value per share of Mission West-Maryland ("New Common Stock") on a one-for-one basis (the "Exchange Ratio"). Unexercised employee and consultant stock options to purchase 605,000 shares of Common Stock will be exchanged for new stock options to purchase the same number of shares of New Common Stock at the Exchange Ratio. Following the Reincorporation Merger, Mission West-Maryland expects to qualify as a Real Estate Investment Trust ("REIT") for federal income tax purposes and conduct its business on a self-administered, self-managed, and fully integrated basis going forward. The Charter and bylaws will include provisions related to the preservation of Mission West-Maryland's status as a REIT. As used in this Proxy Statement/Prospectus the term "Company" may refer to both the Company and Mission West-Maryland unless the discussion concerns the Reincorporation Merger, the Charter, or the Mission West-Maryland bylaws. If the shareholders approve the Private Placement, the acquisition of the Pending Development Projects and other future Berg Developments, the Exchange Rights Agreement, and authorize all shares of Common Stock to be issued pursuant to any of these transactions, an additional closing will occur on the last business day of the month in which the Special Meeting is held (referred to in this Proxy Statement/Prospectus as "the final closing date for the Berg Acquisition"). This Proxy Statement/Prospectus is also the prospectus of the Company's successor, Mission West-Maryland, to be delivered to the shareholders of the Company in connection with the Reincorporation Merger and the exchange with existing equity holders of (i) 1,698,536 shares of Common Stock for New Common Stock, (ii) the exchange of outstanding employee stock options issued by the Company for identical employee stock options of Mission West-Maryland, and (iii) the reservation of 93,398,705 shares of New Common Stock for issuance upon any future exchange of L.P. Units as a result of the Reincorporation Merger. This Proxy Statement/Prospectus is also the prospectus of Mission West-Maryland for the reoffer and resale of up to 6,495,058 shares of New Common Stock to be delivered in exchange for shares of Common Stock acquired in the Private Placement by the purchasers of such shares. The Company has filed a Registration Statement on Form S-4 with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended with respect securities to be issued in connection with the Reincorporation Merger. The Common Stock is traded on the AMEX and the Pacific Exchange, Inc. ("PCX") under the symbol "MSW." On ______ __, 199_, the last reported sale price of the Common Stock on the AMEX was $_____________. See "INFORMATION WITH RESPECT TO THE COMPANY--Price Range of the Shares and Distribution History." Based on that price and assuming approval of all proposals and the consummation of the contemplated transactions, the total market value of the Company and the Operating Partnerships would be approximately $__________. SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF MATERIAL RISKS THAT SHOULD BE CONSIDERED IN EVALUATING THE PROPOSALS. THESE SHARES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE The date of this Prospectus is _____________, 1998 TABLE OF CONTENTS
PAGE ---- FORWARD-LOOKING INFORMATION...............................................................................................1 AVAILABLE INFORMATION.....................................................................................................1 INFORMATION INCORPORATED BY REFERENCE.....................................................................................2 SUMMARY OF THE UPREIT TRANSACTIONS AND PURPOSE OF THE SPECIAL MEETING....................................................3 Background.......................................................................................................3 Parties to and Terms of the Berg Acquisition.....................................................................3 Private Placement/Recapitalization...............................................................................3 Reincorporation Merger...........................................................................................4 Structure of the UPREIT Transactions.............................................................................4 Reasons for the Berg Acquisition.................................................................................4 Description of the Properties....................................................................................4 Business Objectives and Strategy.................................................................................5 Operations of the Company after the Berg Acquisition, Reincorporation Merger and the REIT Election...............5 Distributions....................................................................................................5 Reasons for the Reincorporation Merger...........................................................................5 Conditions to Consummation.......................................................................................5 Board of Directors; Management...................................................................................5 Conflicts of Interest............................................................................................5 Required Approval................................................................................................6 Dissenters' Rights...............................................................................................6 Accounting Treatment.............................................................................................6 Tax Consequences of the UPREIT Transactions......................................................................6 New Common Stock.................................................................................................6 SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA................................................................................7 SUMMARY SELECTED FINANCIAL DATA...........................................................................................8 RISK FACTORS..............................................................................................................9 No Independent Appraisal; No Arm's Length Negotiations with Affiliates...........................................9 Dependence on Mr. Berg...........................................................................................9 Control of the Company and the Operating Partnerships by the Berg Group..........................................9 Potential Conflicts of Interest with the Berg Group.............................................................10 Changes in Policies Without Shareholder Approval................................................................12 Anti-Takeover Provisions........................................................................................12 Real Estate Investment Considerations...........................................................................12 Federal Income Tax Risks........................................................................................15 Uncertainties Regarding Distributions to Shareholders...........................................................16 Potential Property Tax Reassessments............................................................................17 Market for Common Stock.........................................................................................17 The Company's Obligation to Purchase Tendered L.P. Units........................................................17 Shares Eligible for Future Sale.................................................................................17 THE SPECIAL MEETING......................................................................................................19 Parties to the Berg Acquisition.................................................................................19 Parties to the Reincorporation Merger...........................................................................19 General Information Concerning Solicitation and Voting..........................................................19 Record Date, Voting Rights and Outstanding Shares...............................................................20 Revocability of Proxies.........................................................................................20
-i- TABLE OF CONTENTS (Continued)
PAGE ---- Solicitation....................................................................................................20 Votes Required..................................................................................................20 Consequences if the Proposals Are Not Approved..................................................................20 Dissenters' Rights..............................................................................................21 Recommendation of the Board of Directors........................................................................21 BACKGROUND OF THE UPREIT TRANSACTIONS....................................................................................22 Introduction....................................................................................................22 Background......................................................................................................22 Reasons for the Private Placement and the Berg Acquisition......................................................24 Summary of the Transactions.....................................................................................24 Consequences of the Berg Acquisition and the Private Placement..................................................25 Benefits to the Berg Group......................................................................................26 Valuation of Interests..........................................................................................26 Pro Forma Capitalization........................................................................................27 Included Information............................................................................................28 Price Range of the Common Stock and Distribution History........................................................28 THE COMPANY'S PRO FORMA DATA.............................................................................................29 THE BUSINESS OF BERG & BERG..............................................................................................30 History Of Berg & Berg..........................................................................................30 Regional Economic Profile.......................................................................................31 The Silicon Valley R&D Property Market..........................................................................32 The Silicon Valley..............................................................................................32 Unemployment Rate...............................................................................................33 Silicon Valley R&D Property Market..............................................................................33 Berg & Berg Business Strategy...................................................................................34 BERG PROPERTIES SUMMARY SELECTED FINANCIAL DATA..........................................................................36 SELECTED COMBINED HISTORICAL FINANCIAL DATA FOR THE ACQUIRED PROPERTIES..................................................37 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION FOR THE PROPERTIES..................38 Overview........................................................................................................38 Results of Operations...........................................................................................39 Pro Forma Liquidity and Capital Resources.......................................................................42 Historical Cash Flows...........................................................................................43 Inflation.......................................................................................................44 DESCRIPTION OF THE PROPERTIES............................................................................................45 General.........................................................................................................45 Overview of the Berg Properties.................................................................................45 Average Occupancy and Rental Rates..............................................................................45 Leasing Activity................................................................................................46 Lease Expirations...............................................................................................46 Significant Properties and Tenants..............................................................................47 Other Major Tenants.............................................................................................49 The Berg Properties.............................................................................................50 Standard Berg & Berg Lease Terms................................................................................53 Overview of the Acquired Properties.............................................................................53 Average Occupancy and Rental Rates..............................................................................53 Lease Expirations...............................................................................................54 Acquired Properties.............................................................................................55
-ii- TABLE OF CONTENTS (Continued)
PAGE ---- The Pending Development Projects................................................................................55 Land Holding and Development Arrangements.......................................................................57 Mortgage Debt and Credit Lines..................................................................................59 Property Tax Information........................................................................................60 Environmental Matters...........................................................................................60 Legal Proceedings...............................................................................................61 Employees.......................................................................................................61 FUTURE OPERATIONS OF THE COMPANY.........................................................................................61 Overview........................................................................................................61 Operating and Growth Strategy...................................................................................61 Operations and Management.......................................................................................62 Acquisitions....................................................................................................62 Line of Credit..................................................................................................63 Mortgage Indebtedness Outstanding after Berg Acquisition........................................................63 Overview........................................................................................................64 Distribution Table..............................................................................................64 POLICIES WITH RESPECT TO CERTAIN ACTIVITIES..............................................................................67 Investment Policies.............................................................................................67 Financing Policies..............................................................................................67 Disposition Policy..............................................................................................69 Conflict of Interest Policies...................................................................................69 Policies with Respect to Other Activities.......................................................................69 THE ACQUISITION AGREEMENT................................................................................................71 General.........................................................................................................71 The Closing.....................................................................................................71 Representations and Warranties..................................................................................71 Conditions to Consummation of the Contemplated Transactions.....................................................71 Covenants.......................................................................................................72 Conflicts of Interest Provisions................................................................................72 Termination.....................................................................................................73 Survival and Indemnification Matters............................................................................73 OPERATING PARTNERSHIP AGREEMENT..........................................................................................74 Management......................................................................................................74 Transferability of L.P. Units...................................................................................74 Additional Capital Contributions and Loans......................................................................75 Exchange Rights, Put Rights and Registration Rights.............................................................75 Other Matters...................................................................................................76 Term 76 MANAGEMENT OF THE COMPANY................................................................................................77 Directors and Executive Officers................................................................................77 Number, Terms and Election of Directors.........................................................................78 Contractual Arrangements........................................................................................78 Committees of the Board of Directors............................................................................78 Compensation of Directors.......................................................................................78 Executive Compensation..........................................................................................79 Summary Compensation Table......................................................................................79 Benefit Plans...................................................................................................80 1997 Stock Option Plan..........................................................................................80 Compensation Committee Interlocks and Insider Participation.....................................................80 Limitation of Liability and Indemnification.....................................................................80
-iii- TABLE OF CONTENTS (Continued)
PAGE ---- CERTAIN TRANSACTIONS.....................................................................................................82 Private Placement Transactions--1997............................................................................82 Private Placement Transactions--1998............................................................................82 UPREIT Transactions.............................................................................................83 Purchase by Michael Anderson....................................................................................83 PRINCIPAL SHAREHOLDERS...................................................................................................84 THE REINCORPORATION MERGER...............................................................................................86 Introduction....................................................................................................86 Exchange of Securities..........................................................................................86 Approval and Effectiveness of Merger............................................................................86 Possible Disadvantages..........................................................................................87 No Change in the Name, Business, Management, Location of Principal Office or Employee Plans of the Company....................................................................................................87 Comparison Of Rights of Shareholders of the Company and Stockholders of Mission West-Maryland...................87 DESCRIPTION OF MISSION WEST - MARYLAND STOCK............................................................................100 General........................................................................................................100 New Common Stock...............................................................................................100 New Classes or Series of Stock.................................................................................100 Power to Issue Additional Shares of New Common Stock and New Preferred Stock...................................101 Restrictions on Transfer.......................................................................................101 Reinvestment and Share Purchase Plan...........................................................................103 CERTAIN PROVISIONS OF MARYLAND LAW AND OF MISSION WEST-MARYLAND'S CHARTER AND BYLAWS...................................104 The Board of Directors.........................................................................................104 Removal of Directors...........................................................................................104 Business Combinations..........................................................................................104 Control Share Acquisitions.....................................................................................104 Board Quorum and Special Voting Requirements...................................................................105 Amendment to the Charter.......................................................................................105 Dissolution of the Company.....................................................................................105 Advance Notice of Director Nominations and New Business........................................................106 Conflict of Interest...........................................................................................106 Anti-takeover Effect of Certain Provisions of Maryland Law and of the Charter and bylaws.......................106 ACCOUNTING TREATMENT OF THE BERG ACQUISITION AND THE REINCORPORATION MERGER.............................................107 FEDERAL INCOME TAX CONSIDERATIONS.......................................................................................107 Taxation of the Company........................................................................................107 Taxation of United States Shareholders.........................................................................112 Taxation of Tax-Exempt Shareholders............................................................................113 Taxation of Foreign Shareholders...............................................................................114 Information Reporting Requirements and Backup Withholding Tax..................................................115 Tax Aspects of the Operating Partnerships......................................................................116 Federal Income Tax Consequences of the Reincorporation Merger..................................................118 Other Tax Consequences.........................................................................................118 ERISA CONSIDERATIONS....................................................................................................119 General........................................................................................................119 Plan Assets Regulations........................................................................................119
-iv- TABLE OF CONTENTS (Continued)
PAGE ---- General ERISA Requirements.....................................................................................119 Prohibited Transactions........................................................................................120 Reporting and Disclosure.......................................................................................120 THE SELLING SHAREHOLDERS................................................................................................121 PLAN OF DISTRIBUTION....................................................................................................123 LEGAL MATTERS...........................................................................................................124 EXPERTS.................................................................................................................124 OTHER MATTERS...........................................................................................................124 SHAREHOLDER PROPOSALS...................................................................................................124
-v- FORWARD-LOOKING INFORMATION Statements contained in or delivered in connection with this Proxy Statement/Prospectus may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve a number of risks and uncertainties. Set forth under "RISK FACTORS," below, and elsewhere in this Proxy Statement/Prospectus are cautionary statements that accompany those forward-looking statements. Those cautionary statements identify important factors that could cause actual results to differ materially from those in the forward-looking statements and from historical trends. Such factors include general economic conditions, stock market fluctuations, changes in yields of fixed income securities, risks associated with the ownership of industrial and office buildings and with real estate, generally, conditions in the local real estate market where the properties are located, and the substantial control rights of the Berg Group with respect to the Company. AVAILABLE INFORMATION The Company is subject to the informational requirements of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and files all required reports, proxy statements and other information with the Securities and Exchange Commission ("Commission"). Reports, proxy statements and other information filed by the Company may be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commission's regional offices located at 7 World Trade Center, 13th floor, New York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and copies of such material may be obtained from the Public Reference Section of the Commission, Washington, D.C. 20549, at prescribed rates. In addition, the Commission maintains a web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission on EDGAR. The Commission's web site address is http:\\www.sec.gov. These documents may also be inspected at the office of the American Stock Exchange, 86 Trinity Place, New York, New York, and the Pacific Exchange, Inc., 115 Sansome Street, 8th Floor, San Francisco, California. This Proxy Statement/Prospectus is part of a registration statement on Form S-4 (together with all amendments and exhibits, the "Registration Statement") filed by Mission West-Maryland with the Commission pursuant to the Securities Act of 1933, as amended (the "Securities Act"). This Proxy Statement/Prospectus does not contain all of the information set forth in the Registration Statement, certain parts of which are omitted in accordance with the rules of the Commission. For further information, reference is made to the Registration Statement. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS, AND IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON. THIS PROXY STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES, NOR DOES IT CONSTITUTE AN OFFER TO OR SOLICITATION OF ANY PERSON IN ANY JURISDICTION TO WHOM IT WOULD BE UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. -1- INFORMATION INCORPORATED BY REFERENCE The following documents filed by the Company with the Commission are incorporated by reference in this Proxy Statement/Prospectus: 1. The Company's Annual Report on Form 10-K for the fiscal year and one-month transition period ended December 31, 1997. 2. All other reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act since December 31, 1997, including all such reports filed after the date of the initial Registration Statement and prior to the effectiveness of the Registration Statement. 3. The description of the Company's Common Stock contained in the Company's registration statement on Form S-8 filed with the Commission on May 17, 1991 (Registration #33-40664). Any statement contained herein or in a document incorporated or deemed to be incorporated by reference herein shall be deemed to be modified or superseded for purposes of this Proxy Statement/Prospectus to the extent that a statement contained herein, or in any subsequently filed document which also is or is deemed to be incorporated by reference herein, modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of this Proxy Statement/Prospectus. Documents (except for certain exhibits to such documents, unless exhibits are specifically incorporated by reference herein) incorporated by reference in this Proxy Statement/Prospectus are available on oral or written request from the Secretary of the Company at: Mission West Properties, 10050 Bandley Drive, Cupertino, California 95014; telephone: (408) 725-0700. This Proxy Statement/Prospectus is accompanied by a form of proxy for use at the Special Meeting, a copy of the Company's latest Annual Report on Form 10-K, and a copy of Part I of the Company's latest Quarterly Report on Form-10Q. -2- SUMMARY OF THE UPREIT TRANSACTIONS AND PURPOSE OF THE SPECIAL MEETING THE FOLLOWING BRIEFLY SUMMARIZES THE PROPOSALS TO BE VOTED UPON. BACKGROUND Shareholders previously approved the sale of substantially all of the assets of the Company and the distribution of the net proceeds of sale on a pro rata basis. Subsequent to the distribution, Carl E. Berg approached the Company with a proposal to recapitalize the Company, and, rather than dissolve the Company, continue the business of the Company under the control of the Berg Group with a portfolio of new investment properties. After the purchase of shares representing a controlling interest in the Company by certain members of the Berg Group and other accredited investors and the final distribution to all previous shareholders in October 1997, the AMEX halted trading of the Company's Common Stock because the Company no longer met AMEX minimum listing requirements. PARTIES TO AND TERMS OF THE BERG ACQUISITION In May 1998, the Company, the Berg Group and certain other persons entered into an agreement (the "Acquisition Agreement") providing, among other things, for the Company's acquisition of interests as the sole general partner in the four existing limited partnerships (referred to collectively as the "Operating Partnerships"), which hold approximately 4.34 million rentable square feet of office/research and development/manufacturing space ("R&D Property") located in the portion of the San Francisco Bay Area known as "Silicon Valley," as well as rights to acquire additional R&D Properties, and related transactions, as described below. In July 1998, the Company and all parties to the Acquisition Agreement signed an Amendment to Acquisition Agreement under which they agreed to consummate the Company's acquisition of the general partner interests in the Operating Partnerships (the "Partnership Closing") effective for financial and income accounting and reporting purposes as of July 1, 1998 to enable the Company to include results of operations, assets and other financial data for the Operating Partnerships with the Company's consolidated financial statements for the second half of 1998. The Company effected the Partnership Closing by issuing to the Operating Partnerships separate Demand Notes bearing interest at 7.25% per annum equal to the purchase price of the Company's general partner interest in each such partnership. Each Demand Note is payable no later than July 1, 2000. The total principal amount of the Demand Notes issued in connection with the Partnership Closing was $35.2 million, of which $33.9 million is presently outstanding. As a consequence of the Partnership Closing, the Company now controls the Operating Partnerships, which are governed by the Delaware Revised Uniform Limited Partnership Act ("DRULPA"). The individual Operating Partnerships are named Mission West Properties, L.P. ("MWP"), Mission West Properties, L.P. I ("MWP I"), Mission West Properties, L.P. II ("MWP II") and Mission West Properties, L.P. III ("MWP III"). MWP was organized under the DRULPA in 1995; MWP I and MWP II were general partnerships formed more than 15 years ago which converted to limited partnerships under the DRULPA in December 1997; and MWP III was formed in 1983 as a California limited partnership and converted to a Delaware limited partnership under the DRULPA at the Partnership Closing. No new entity has been created in connection with the Partnership Closing, and the Company does not intend to create a new entity to conclude any aspect of the Berg Acquisition. All limited partnership interests in the Operating Partnerships were converted into 59,479,633 units of limited partnership interest ("L.P. Units") in connection with the Partnership Closing. In the aggregate those L.P. Units represent ownership of approximately 87.89% of the Operating Partnerships. Under the Acquisition Agreement, all L.P. Units in the Operating Partnerships may be exchanged for shares of Common Stock of the Company pursuant to the terms of an Exchange Rights Agreement (the "Exchange Rights Agreement"), which is subject to approval by the Company's shareholders. Prior to the Partnership Closing, MWP, MWP I and MWP II were controlled by Carl E. Berg and his brother Clyde J. Berg, who have been engaged in developing, owning, operating, acquiring and selling Silicon Valley R&D Properties under the name "Berg & Berg Developers" ("Berg & Berg") for nearly 30 years. Another Silicon Valley developer, John T. Kontrabecki ("Kontrabecki") controlled MWP III as its sole general partner prior to the Partnership Closing, and Carl and Clyde Berg owned 50% of that partnership as limited partners. Prior to the Partnership Closing, certain members of the Berg Group held R&D Properties outside of MWP, MWP I and MWP II, and Mr. Kontrabecki was a general partner in two other partnerships (in which members of the Berg Group held substantial limited partner interests). To consolidate title to those R&D Properties in a single entity, the parties agreed pursuant to the Acquisition Agreement to contribute their respective R&D Properties to MWP in exchange for L.P. Units. Under the Amendment to Acquisition Agreement, all the proposed transfers to MWP occurred at the Partnership Closing, except for the conveyance of certain R&D Properties representing approximately 0.144 million rentable square feet (the "Fremont Properties"), which was consummated on September 17, 1998. All of the individuals and entities transferring R&D Properties to MWP pursuant to their obligations under the Acquisition Agreement are accredited investors within the meaning of the federal securities laws, and all such entities are privately owned. Of the total R&D Property rentable square footage owned and operated by the Operating Partnerships following the Partnership Closing, properties representing approximately 3.78 million rentable square feet were owned or controlled by members of the Berg Group and constitute the historical properties managed by Berg & Berg (the "Berg Properties"). Other R&D Properties, consisting of approximately 0.56 million rentable square feet, (the "Acquired Properties") represent the Fremont Properties, and certain R&D Properties (the "Kontrabecki Properties") held by the three limited partnerships (the "Kontrabecki Partnerships") previously controlled by John Kontrabecki. Under the terms of the Acquisition Agreement, the Operating Partnerships and the Company also agreed, subject to shareholder approval, to enter into a Pending Projects Acquisition Agreement (the "Pending Projects Acquisition Agreement"), which permits the acquisition by the Operating Partnerships of approximately one million additional rentable square feet upon the completion and leasing of a number of the Pending Development Projects owned by certain members of the Berg Group and under current development by Berg & Berg Enterprises, Inc. ("BBE"). The owners of the Pending Development Projects may obtain cash, or at their option, L.P. Units. A total of 33,919,072 L.P. Units may be issued in exchange for the Pending Development Projects. Subject to shareholder approval of the Pending Projects Acquisition Agreement, those units may be exchanged for 33,919,072 shares of Common Stock pursuant to the Exchange Rights Agreement. On August 6, 1998, Berg & Berg and Microsoft Corporation ("Microsoft") signed a lease with respect to an approximate 515,000 square foot property to be constructed by Microsoft on L'Avenida in Mountain View, California, one of the sites comprising the Pending Development Projects. Microsoft controls the construction of this facility, which is scheduled to be completed in phases between March and May 1999. The Company will acquire the R&D Properties to be built on the L'Avenida site when and if construction has been completed and the buildings have been fully leased. Upon any acquisition by the Company of the Pending Development Projects, their owners may elect to receive cash or L.P. Units from the Operating Partnerships. The Acquisition Agreement also gives the Company an option to acquire, through the Operating Partnerships, any future R&D Property developments on approximately 162 net acres of Silicon Valley land owned by certain members of the Berg Group (the "Berg Land Holdings") under the terms of the Berg Land Holdings Option Agreement (the "Option Agreement"). The owners of the Berg Land Holdings may elect to receive cash or L.P. Units. The Company will not acquire any properties directly. The Company will enter into the Pending Projections Acquisition Agreement and the Option Agreement only following shareholder approval at the Special Meeting. See "Background of the UPREIT transactions," and "THE ACQUISITION AGREEMENT." PRIVATE PLACEMENT The Company also has entered into binding agreements, subject to certain conditions, to sell 6,495,058 shares of Common Stock at $4.50 per share to accredited investors in the Private Placement, following shareholder approval required by the AMEX. Of the total number of shares to be sold in the Private Placement, 5,800,000 shares were offered in a placement managed by Ingalls & Snyder LLC ("Ingalls & Snyder"). The -3- purchasers of such shares have agreed to pay a placement fee of $0.05 per share to Ingalls & Snyder, for which the company has no liability. CAPITALIZATION Taking into account the shares issued in the Private Placement and L.P. Units to be outstanding immediately after the closing of the Berg Acquisition, the total number of L.P. Units and shares of Common Stock entitled to receive distributions of cash flow from the Operating Partnerships directly, or indirectly through dividends paid by the Company, (collectively the "Outstanding Shares") will be 67,673,227. See "BACKGROUND OF THE UPREIT TRANSACTIONS -- Summary of the Transactions" and "-- Pro Forma Capitalization." REINCORPORATION MERGER Pursuant to a merger agreement ("Merger Agreement") between the Company and its wholly owned subsidiary, Mission West-Maryland, the Company will merge into Mission West-Maryland following shareholder approval and the consummation of the Berg Acquisition and the Private Placement. Following these transactions, Mission West-Maryland intends to elect to become a REIT. In approving the Reincorporation Merger, the shareholders also will approve the Charter and the bylaws of Mission West-Maryland. See "THE REINCORPORATION MERGER." STRUCTURE OF THE UPREIT TRANSACTIONS The Limited Partners' ownership of interest prior to the UPREIT Transactions and their respective L.P. Unit allocations are as follows: [GRAPHIC] The UPREIT Transactions are illustrated as follows: [GRAPHIC] REASONS FOR THE BERG ACQUISITION The board of directors of the Company believes that the Berg Acquisition and the Private Placement will provide the Company with substantial working capital, a strong real property portfolio and an effective real estate operation. The board of directors further believes that these transactions provide an opportunity for the Company to significantly enhance shareholder value. See "BACKGROUND OF THE UPREIT TRANSACTIONS--Reasons for the Berg Acquisition and Private Placement." DESCRIPTION OF THE PROPERTIES All of the Berg Properties are located in Silicon Valley. All together the Operating Partnerships will own 69 R&D Properties located on 61 separate sites. As of September 30, 1998, the Berg Properties were 100% occupied, with a total of 73 tenants principally engaged in the technology business, and the Acquired Properties were 100% occupied by a total of 10 tenants. On September 23, 1998, the Company obtained $130 million of new secured debt financing from The Prudential Insurance Company of America ("Prudential") (the "Prudential Secured Loan") at a rate of 6.56% per annum, which is secured by 18 Properties consisting of 24 buildings and six of the Acquired Properties. The proceeds of the Prudential Secured Loan were used to repay existing debt secured by the Berg Properties and the Acquired Properties, incurred prior to the Partnership Closing, including debt incurred to fund substantially all of a distribution of approximately $138.7 million to members of the Berg Group. Effective September 30, 1998, the Company and Operating Partnerships assumed a $100 million line of credit with Wells Fargo Bank N.A. (the "Wells Fargo Line") provided to the Berg Group members and secured by certain of the Berg Properties. Approximately $39 million of debt was outstanding as of September 30, 1998 under the Wells Fargo Line, which is secured by 14 properties. See "BACKGROUND OF THE UPREIT TRANSACTIONS--Consequences of the Berg Acquisition and the Private Placement" and "DESCRIPTION OF THE PROPERTIES--Mortgage Debt and Credit Lines." -4- BUSINESS OBJECTIVES AND STRATEGY After completing the UPREIT Transactions, the Company will operate as a self-managed, self-administered and fully integrated REIT. The Company will operate the Berg Properties and may acquire additional R&D Properties from the Berg Group under the terms of the Pending Projects Acquisition Agreement and the "Option Agreement." The Company may also seek to acquire other R&D properties and other real estate assets in Silicon Valley and parts of the West Coast. See "FUTURE OPERATIONS." OPERATIONS OF THE COMPANY AFTER THE BERG ACQUISITION, REINCORPORATION MERGER AND THE REIT ELECTION Following the completion of the UPREIT Transactions, the Company will occupy the same offices as BBE in a building owned by Berg & Berg. BBE is a member of the Berg Group and currently provides real estate development services for the Berg Group and their affiliates, as well as the Berg Properties. Several current employees of BBE, including Carl E. Berg, will be employees of the Company. The Company will lease space from Berg & Berg and will reimburse BBE for a portion of the office overhead. See "FUTURE OPERATIONS--Operations and Management." DISTRIBUTIONS As a REIT, the Company will pay distributions based upon an estimate of cash available for distribution to shareholders ("Cash Available for Distribution") with total annual dividends expected to equal at least 95% of the Company's annual taxable income in accordance with applicable REIT requirements. The Company expects to pay quarterly distributions of approximately $0.085 per share of Common Stock of record prior to the ex-dividend date with respect to the third and fourth quarters of 1998. See "DISTRIBUTION POLICY." REASONS FOR THE REINCORPORATION MERGER The board of directors believes that the Maryland General Corporation Law ("MGCL") contains provisions conducive to the operation of a REIT. Many REITs have incorporated in the State of Maryland, and the board of directors believes that this has provided state regulatory authorities and courts in Maryland with substantial experience in the administration and governance of REITs. See "REINCORPORATION MERGER." CONDITIONS TO CONSUMMATION The Berg Acquisition (other than the Partnership Closing) and the Private Placement are subject to shareholder approval and such customary closing conditions as the accuracy of representations and warranties, the absence of material adverse changes, and the absence of litigation to enjoin the consummation of any of the UPREIT Transactions. The Reincorporation Merger is subject to similar closing conditions and the effectiveness of the Registration Statement. See "THE ACQUISITION AGREEMENT," and "THE REINCORPORATION MERGER." BOARD OF DIRECTORS; MANAGEMENT In general, the board of directors and management of the Company will remain the same after the Reincorporation Merger. The Company expects to add one or two additional directors before the end of 1998. See "MANAGEMENT OF THE COMPANY UPON CONSUMMATION OF THE BERG ACQUISITION". CONFLICTS OF INTEREST The UPREIT Transactions entail a number of conflicts of interest. The Operating Partnerships and the Company currently are controlled by Carl E. Berg and other Berg Group members. After the UPREIT Transactions, the Berg Group members will have two representatives on the board of directors (the "Berg Group Board Representatives"), at least one of whom will be required to approve certain material transactions involving the Company (the "Required Directors Approval"). In addition, Berg Group members, in the aggregate, will own, or have the right under certain circumstances to acquire, shares of Common Stock representing 82.73% of the total number of the Outstanding Shares (assuming the exchange of all outstanding L.P. Units for Common Stock), subject to an aggregate ownership limit of 20% (the "Berg Group Ownership Limit"), as provided in the Aquisition Agreement. Consent of the Limited Partners holding a majority of outstanding L.P. Units (the "L.P. Unit Majority"), principally the Berg Group members, will be required for certain major transactions involving the Operating -5- Partnerships. Furthermore, the Company and the Operating Partnerships will, or may, acquire certain additional R&D Properties from members of the Berg Group under the terms of the Pending Projects Acquisition Agreement and the Option Agreement. Although Mr. Berg will be the Company's President and Chief Executive Officer, he will remain involved in many other real estate and venture capital activities. Transactions between the Company or the Operating Partnerships and members of the Berg Group, or their affiliates, will be subject to approval by a committee of directors who are independent of the Berg Group (the "Independent Directors Committee"). Additionally, Mr. Berg and certain other members of the Berg Group could cause the Operating Partnerships to call the notes issued by the Company at the Partnership Closing if they have not been repaid prior to the second anniversary of their issuance. See "RISK FACTORS--Control of the Company and the Operating Partnerships by the Berg Group and Mr. Berg--Potential Conflicts of Interest with the Berg Group" and "DELAY IN CLOSING PRIVATE PLACEMENT." REQUIRED APPROVAL Only holders of Common Stock of record on _________ __, 1998 will be entitled to vote at the Special Meeting. The affirmative vote of the holders of a majority of the outstanding shares of record is needed to ratify or approve each of the UPREIT Transactions. Broker non-votes and abstentions will be counted as votes against the UPREIT Transactions. DISSENTERS' RIGHTS Statutory dissenters' rights under the California General Corporation Law (the "CGCL") are not available with respect to any of the Proposals to be voted upon at the Special Meeting. ACCOUNTING TREATMENT The UPREIT Transactions have been accounted for as a purchase. Accordingly, the costs of the acquisition were allocated to the assets and liabilities purchased based upon their respective fair values at the effective date of the acquisition. See "ACCOUNTING TREATMENT OF THE BERG ACQUISITION AND THE REINCORPORATION MERGER." TAX CONSEQUENCES OF THE UPREIT TRANSACTIONS The Berg Acquisition and the Private Placement will not result in the recognition of gain or loss by the Company or its shareholders for federal income tax purposes. The Reincorporation Merger is expected to be a tax-free reincorporation transaction within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code of 1986, as amended (the "Code"). Accordingly, it will not result in taxable income or result in the recognition of gain or loss by the Company, its shareholders, or the holders of options to purchase Common Stock. Once the Company elects REIT status following the Reincorporation Merger, the Company generally may avoid income tax with respect to its income, and the shareholders will be subject to income taxation with respect to certain distributions from the Company. Graham & James LLP will provide a federal income tax opinion to the Company in connection with the Reincorporation Merger to the effect, that for the Company's taxable year ending December 31, 1998, it will be organized and able to operate in conformity with the REIT qualification requirements under the Code. See "FEDERAL INCOME TAX CONSIDERATIONS--Taxation of the Company." NEW COMMON STOCK In connection with the Reincorporation Merger, the Company is exchanging previously issued and outstanding securities of the Company for new securities of Mission West-Maryland. The New Common Stock exchanged for Old Common Stock in connection with the Reincorporation Merger will continue to be listed on the AMEX. Shares of New Common Stock acquired by affiliates of the Company will be subject to manner of sale, volume restrictions, and other requirements (aside from holding period) imposed by Rule 144 and Rule 145(d) promulgated by the Commission. See "DESCRIPTION OF MISSION WEST-MARYLAND STOCK--Restrictions on Transfer." Shares of New Common Stock acquired by the purchasers in exchange for their shares of Common Stock acquired in the Private Placement may be sold pursuant to Rule 144 after one year or pursuant to the Registration Statement, as amended, at the option of the Company, to permit continued resales by the holders thereof, subject to certain limitations. See "RISK FACTORS--Shares Eligible for Future Sale" and "THE SELLING SHAREHOLDERS." The Company intends to file with the Commission a registration statement on Form S-8 to register shares of Common Stock which have been reserved for issuance for future option grants under the Company's employee benefit plans and resales of any Common Stock issued under such employee benefit plans. -6- SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA Set forth below are summary unaudited pro forma combined financial information and other data for the Company as of and for the periods indicated, prepared on the assumption that the Private Placement and the Berg Acquisition had occurred at September 30, 1998 for balance sheet data and property and other data. The pro forma operating data further assumes that such transactions had occurred as of January 1, 1997. This data should be read in conjunction with the Selected Financial Data and the historical and pro forma financial statements included elsewhere in this Proxy Statement/Prospectus.
Pro Forma Pro Forma Nine Months Ended Year Ended September 30, 1998 December 31, 1997 ------------------ ------------------- (in thousands) OPERATING DATA: Revenue: Rent $39,558 $48,992 Tenant reimbursements 6,357 6,769 Other income 178 359 ================== =================== Total revenue 46,093 56,120 ------------------ ------------------- Expenses: Operating expenses 3,403 4,036 Real estate taxes 3,696 4,475 General and administrative 2,100 2,750 Interest (related parties) 1,022 1,362 Interest 10,660 14,639 Depreciation and amortization 7,936 10,842 ------------------ ------------------- Total Expenses 28,817 38,104 ------------------ ------------------- Income before minority interest 17,276 18,016 Minority Interest 15,325 16,021 ------------------ ------------------- Income before gain on sale of real estate 1,951 1,995 Gain on sale of real estate - 4,736 ------------------ ------------------- Net income 1,951 6,731 ================== =================== Basic and Diluted Earnings Per Share (1) $0.24 $0.82 ================== =================== Weighted average number of common shares outstanding 8,193,594 8,193,594 ================== =================== PROPERTY AND OTHER DATA: Total properties, end of period 69 69 Total square feet, end of period 4,340,569 4,340,569 Average monthly rental revenue per square foot(2) $1.01 $0.87 Average occupancy - stabilized 100% 97% FUNDS FROM OPERATIONS: (3) $25,212 $28,858 BALANCE SHEET DATA: Real estate assets, net of accumulated depreciation $506,120 Total assets 543,477 Debt 204,207 Debt (related parties) 18,780 Total liabilities 234,465 Minority Interest 273,740 Shareholders' equity 35,272
- ------------------- (1) Per share calculations do not consider the dilutive effect of (i) 59,479,633 L.P. Units that may become exchangeable for shares of Common Stock; and (ii) 605,000 shares of Common Stock issuable in connection with options outstanding under the 1997 Stock Option Plan. For purposes of the pro forma per share calculation, these securities if converted or exercised, would have no effect on per share calculations. (2) Average monthly rental revenue per square foot has been determined by taking the base rent for the period, divided by the number of months in the period, and then divided by the total square feet of occupied space. (3) As defined by the National Association of Real Estate Investment Trusts ("NAREIT"), FFO represents net income (loss) before minority interest of unitholders (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, 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. 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 the Company's ability to incur and service debt and make capital expenditures. 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. FFO is not comparable to similarly entitled items reported by other REITs that do not define them exactly as the Company defines FFO. See "Distribution Policy." -7- SUMMARY SELECTED FINANCIAL DATA Set forth below are Summary Combined Financial Data for the Berg Properties as of and for the periods indicated on an historical basis. This data should be read in conjunction with the Selected Financial Data and the historical financial statements included elsewhere in this Proxy Statement/Prospectus.
Six Months Ended June 30, Year Ended December 31, -------------------------- ------------------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ------------ ------------ ----------- ---------- ---------- ---------- ---------- ($ in thousands) (Unaudited) (Unaudited) OPERATING DATA: Revenue: Rent $21,962 $18,848 $40,163 $28,934 $23,064 $25,186 $25,620 Tenant reimbursements 4,038 3,094 6,519 3,902 4,193 3,190 3,486 ------------ ------------ ----------- ---------- ---------- ---------- ---------- Total revenue 26,000 21,942 46,682 32,836 27,257 28,376 29,106 ------------ ------------ ----------- ---------- ---------- ---------- ---------- Expenses: Operating expenses 2,088 2,150 $ 3,741 $ 1,906 $ 2,032 $ 1,355 1,129 Real estate taxes 2,126 2,006 4,229 3,750 3,595 2,716 3,116 Management fee (related parties) 645 498 1,050 827 654 739 994 Interest (related parties) 61 135 248 293 357 329 45 Interest 3,044 3,338 5,919 6,090 6,190 8,222 9,054 Depreciation and amortization 3,862 3,351 7,717 6,739 6,323 6,851 7,156 ------------ ------------ ----------- ---------- ---------- ---------- ---------- 11,826 11,478 22,904 19,605 19,151 20,212 21,494 ------------ ------------ ----------- ---------- ---------- ---------- ---------- Income before gain on sale of real estate and extraordinary item 14,174 10,464 23,778 13,231 8,106 8,164 7,612 Gain on sale - - - - 20,779 - - ------------ ------------ ----------- ---------- ---------- ---------- ---------- Income before extraordinary item 14,174 10,464 23,778 13,231 28,885 8,164 7,612 Extraordinary item - - - 610 3,206 - 1,766 ------------ ------------ ----------- ---------- ---------- ---------- ---------- ------------ ------------ ----------- ---------- ---------- ---------- ---------- Net income $14,174 $10,464 $23,778 $13,841 $32,091 $ 8,164 $ 9,378 ------------ ------------ ----------- ---------- ---------- ---------- ---------- ------------ ------------ ----------- ---------- ---------- ---------- ---------- PROPERTY AND OTHER DATA: Total properties, end of period 58 56 58 53 50 41 40 Total square feet, end of period 3,779 3,593 3,779 3,392 3,195 2,856 2,796 Average monthly rental revenue per square foot(1) $ 0.95 $ 0.85 $ 0.86 $0.78 $0.71 $ 0.96 $0.84 Occupancy at end of period 100% 96.9% 97.7% 91.9% 87.4% 80.3% 89.6% FUNDS FROM OPERATIONS(2)(3) $18,036 $13,815 $31,495 $19,970 $14,429 $15,015 $14,768 Cash flow from operations $17,356 $13,709 $29,909 $20,248 $16,392 $16,518 $18,480 Cash flow from investing 690 (9,831) (17,251) (29,275) (6,353) (5,003) (3,248) Cash flow from financing (23,765) 5 (8,432) 9,433 (10,013) (12,093) (13,599) June 30, December 31, -------------------------- ------------------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ------------ ------------ ----------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: ($ in thousands) (Unaudited) (Unaudited) Real estate assets, net of accumulated depreciation $95,600 $97,190 $100,15 $90,710 $72,319 $62,450 $61,610 Total assets 104,280 109,525 113,950 97,651 73,730 59,957 64,516 Debt 37,868 78,353 76,507 73,416 69,543 79,594 100,126 Debt - related parties 156,632 2,252 1,975 2,546 3,051 2,889 1,433 Total liabilities 200,238 86,874 84,299 80,826 76,199 83,720 104,117 Partners' (deficit)/ equity (95,958) 22,651 29,651 16,825 (2,469) (23,763) (39,601)
- ------------------- (1) Average monthly rental revenue per square foot has been determined by taking the base rent for the period, divided by the number of months in the period, and then divided by the total square feet of occupied space. (2) As defined by the National Association of Real Estate Investment Trusts ("NAREIT"), FFO represents net income (loss) before minority interest of unitholders (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, 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. 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 the Company's ability to incur and service debt and make capital expenditures. 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. FFO is not comparable to similarly entitled items reported by other REITs that do not define them exactly as the Company defines FFO. See "Distribution Policy." (3) Non-cash adjustments to FFO were as follows: in all periods, depreciation and amortization; in 1996, 1995 and 1993, gains on extinguishment of debt; and in 1995, gain on sale of property. -8- RISK FACTORS PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS IN EVALUATING THE PROPOSALS. THIS PROXY STATEMENT/PROSPECTUS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF THE COMPANY'S PLANS, OBJECTIVES, EXPECTATIONS, BELIEFS AND INTENTIONS. THE CAUTIONARY STATEMENTS MADE IN THIS PROXY STATEMENT/PROSPECTUS SHOULD BE READ AS BEING APPLICABLE TO ALL RELATED FORWARD-LOOKING STATEMENTS WHEREVER THEY APPEAR IN THIS PROXY STATEMENT/PROSPECTUS. THE COMPANY'S ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THIS PROXY STATEMENT/PROSPECTUS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE THOSE DISCUSSED BELOW AND IN OTHER PLACES INCLUDING THE "THE BUSINESS OF BERG & BERG," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION FOR THE PROPERTIES," AND "DISTRIBUTION POLICY." NO INDEPENDENT APPRAISAL; NO ARM'S LENGTH NEGOTIATIONS WITH AFFILIATES There has been no independent valuation of the Company, nor have there been any discussions or negotiations between the Berg Group and independent representatives of the Company concerning obtaining an independent valuation. In October 1997, the board of directors of the Company determined that future transactions involving equity securities of the Company would be priced at $4.50 per share, or the equivalent thereof, until the Company had acquired assets and generated revenues and FFO. That price was not determined by independent valuation and no third party appraisals of the Properties were obtained for purposes of the Private Placement, or the Berg Acquisition, nor has a fairness opinion been obtained. The valuation of the Company implied by the Company's purchase of the 12.11% general partner interests in the Operating Partnerships for $35.2 million ( approximately $4.30 per share), and the value of the L.P. Units to be held by the Limited Partners, may not accurately reflect the value of the Properties in the Operating Partnerships prior to the consummation of the Berg Acquisition. See "BACKGROUND OF THE UPREIT TRANSACTIONS--Valuation of Interests." SUBSTANTIAL BENEFITS TO MR. BERG AND OTHER BERG GROUP MEMBERS As a result of the Berg Acquisition, the Company has acquired control of the Berg Properties, which had a total fair value of $439 million and book value of $178 million at the date of the acquisition, and all but approximately $57.8 million of debt owed to or guaranteed by Mr. Berg and other members of the Berg Group has been repaid with the proceeds of the Prudential Secured Loan, including debt incurred by the Operating Partnerships to fund substantially all of a $138.7 million distribution to members of the Berg Group prior to the Partnership Closing. Carl E. Berg, Clyde J. Berg and the other Berg Group members own, in the aggregate, 55,845,938 L.P. Units, valued at approximately $251.3 million (at $4.50 per L.P. Unit). DEPENDENCE ON MR. BERG The Company is substantially dependent upon the leadership of Mr. Berg, its Chairman and Chief Executive Officer. See "THE BUSINESS OF BERG & BERG--History of Berg & Berg." Mr. Berg will be managing the day-to-day operations of the Company as Chairman and Chief Executive Officer and will devote a significant portion of his time to the affairs of the Company, including the formulation and execution of the Company's growth and business development strategies. Mr. Berg has a number of other business interests to which he devotes a portion of his time, however. See "POTENTIAL CONFLICTS OF INTEREST." In particular, Mr. Berg is an investor in a number of technology companies in the Silicon Valley, including tenants of a few of the Berg Properties, and serves on the board of directors of six such technology companies. The Company believes that his active involvement in the technology industry provides the Company with valuable information regarding the business and operations of its tenants and their present and future space requirements, as well as valuable industry contacts and tenant referral sources. The Company believes that the loss of these benefits, through the loss of Mr. Berg's knowledge and abilities and their benefits, could have a material adverse effect on the Company. CONTROL OF THE COMPANY AND THE OPERATING PARTNERSHIPS BY THE BERG GROUP Following the completion of the UPREIT Transactions, the Berg Group, and Mr. Berg who controls the Berg Group, will exercise significant control over the operations and affairs of the Company, and therefore, indirectly, the Operating Partnerships. OWNERSHIP INTEREST. Following the completion of the UPREIT Transactions, members of the Berg Group will hold L.P. Units representing an aggregate 82.52% limited partnership interest in the Operating Partnerships, and an aggregate of 82.73% of the Outstanding Shares, (without regard to the Berg Group Ownership Limit) taking into account their existing share ownership and their right to exchange L.P. Units for Common Stock under certain circumstances. Notwithstanding the Berg Group Ownership Limit, these exchange rights will give the members of the Berg Group substantial influence over the management and direction of the Company. Moreover, the Berg Group members also will possess the following material rights with respect to the governance of the Company and the Operating Partnerships. See "PRINCIPAL SHAREHOLDERS" and " -- Shares Eligible for Future Sale." -9- BOARD OF DIRECTORS REPRESENTATION. Pursuant to the UPREIT Transactions the Berg Group will acquire the right to nominate two directors for election to the board of directors (the "Berg Group Board Representatives") so long as the members of the Berg Group together with their Affiliates (other than the Company and the Operating Partnerships) own at least 15% of the total number of shares of voting stock of the Company taking into account the conversion, exchange or exercise of all outstanding warrants, options, convertible securities and other rights to acquire voting stock of the Company and all L.P. Units exchangeable or redeemable for Common Stock or other voting stock of the Company (without regard to any Ownership Limit) (the "Fully-Diluted" number of shares). In the event such ownership falls below 15% but is at least 10%, the Berg Group will have the right to nominate one person for election to the board of directors. Mr. Berg and Michael Anderson, Vice President and Chief Operating Officer of the Company, will constitute the initial Berg Group Board Representatives. The other two directors on the current four-person board of directors will be unaffiliated with the Berg Group (the "Independent Directors") and, together, will constitute the Independent Directors Committee of the board of directors. See "MANAGEMENT OF THE COMPANY UPON CONSUMMATION OF THE BERG ACQUISITION--Directors and Executive Officers," "OPERATING PARTNERSHIP AGREEMENT--Management," and "CERTAIN PROVISIONS OF MARYLAND LAW AND OF MISSION WEST-MARYLAND'S CHARTER AND BYLAWS--The Board of Directors." SPECIAL BOARD VOTING PROVISIONS. The Charter will provide that, until such time as the Berg Group and their Affiliates (other than the Company and the Operating Partnerships) own less than 15% of the Fully-Diluted number of shares of Common Stock (the "Protective Provisions Expiration Date"), the vote of a majority of the directors including Mr. Berg or someone he has designated to replace him as a director (the "Required Directors") shall be required to approve certain fundamental corporate actions, including amendments to the Charter or bylaws, and any merger, consolidation or sale of all or substantially all of the assets of the Company or the Operating Partnerships. In addition, the Mission West-Maryland bylaws will provide that a quorum must include the Required Directors for any action at a meeting. Also, the approval of more than 75% of the entire board of directors will be required to approve other significant transactions such as certain borrowings in excess of 50% of the sum of (i) the total number of Outstanding Shares multiplied by the market price (the "Market Price") of the Common Stock plus (ii) the Company's total debt ("Total Market Capitalization"); and the conduct of business by the Company other than through the Operating Partnerships. Accordingly, under certain circumstances the Berg Group or Mr. Berg could prevent the Company or the Operating Partnerships from taking any of such actions. See "CERTAIN PROVISIONS OF MARYLAND LAW AND OF MISSION WEST-MARYLAND'S CHARTER AND BYLAWS--Board Quorum and Special Voting Requirements." LIMITED PARTNER APPROVAL RIGHTS. Under the Operating Partnership Agreement, the consent of holders of the L.P. Unit Majority also is required with respect to a number of significant actions, including amendments to the Operating Partnership Agreement and the issuance of limited partnership interests having senior rights with respect to the L.P. Units. In addition, until the Protective Provisions Expiration Date, the consent of the L.P. Unit Majority will be required with respect to other matters, including actions and transactions similar to those requiring the approval of the Required Directors. See "OPERATING PARTNERSHIP AGREEMENT--Management." Taxable sales of certain Properties are subject to the consent, under certain circumstances, of Mr. Berg and Clyde J. Berg, or Kontrabecki, as well. See "--Tax Consequences of Sale of Properties." POTENTIAL CONFLICTS OF INTEREST WITH THE BERG GROUP Mr. Berg and other members of the Berg Group, who will possess significant rights in the Company and the Operating Partnerships, have a variety of interests which may not be consistent with the interests of the other shareholders of the Company. One such conflict arises because the Company has agreed to pay overhead reimbursements and rent to BBE and Berg & Berg totaling approximately $15,000 per month. The Acquisition Agreement specifies that any increase in rent and overhead allocations and all other transactions between the Company and Mr. Berg or other members of the Berg Group, or between the Company and any entity in which Berg Group members own directly or indirectly 5% or more of the equity interests including the Operating Partnerships, must be approved by the Independent Directors Committee, and provides additional restrictions summarized below relating to specific matters where conflicts may arise. Mr. Berg also has agreed to refer all his prospective R&D Property development and acquisition activities in Washington, Oregon and California to the Company for initial consideration. There can be no assurance that these restrictions will be successful in eliminating the influence of such conflicts. If these restrictions are not successful, decisions could be made that might fail to protect fully the interests of all shareholders of the Company. Aside from these restrictions, Mr. Berg and the other members of the Berg Group are entitled to freedom of action under the terms of the Acquisition Agreement. -10- EXCLUDED PROPERTIES. Although the Company is succeeding to most of the R&D Properties in which the Berg Group holds interests, certain properties that are not managed by any member of the Berg Group or are not material to the Company (the "Excluded Properties") are not being contributed to the Operating Partnerships. Members of the Berg Group will continue to hold ownership interests in the Excluded Properties that are not contributed to the Operating Partnerships. One such Excluded Property is the Company's headquarters at 10050 Bandley Drive, Cupertino, California, which is owned by Berg & Berg, and used by Mr. Berg as his principal office and the principal office of other Affiliates besides the Company. The other Excluded Properties (representing an aggregate of approximately 270,000 rentable square feet) are located in the Silicon Valley and cannot be made available to the Company by any of the Berg Group members as part of the Berg Acquisition because no Berg Group member has the power to include such property in the Berg Acquisition, or because the property is subject to obligations that render transfer to the Operating Partnerships impractical. The Company does not expect that these Excluded Properties will compete with any of the Properties, and none of them involve any common tenants or common financing arrangements with the Properties. PENDING DEVELOPMENT PROJECTS. There are four Pending Development Projects which represent a potential total of 12 R&D Properties agregating approximately one million rentable square feet. Under the Acquisition Agreement, the Company and the owners of these Projects have agreed that the Company or the Operating Partnerships will acquire each developed R&D Property as it is completed and leased. Under the terms of the Pending Projects Acquisition Agreement the sellers of these Properties may elect to receive cash or L.P. Units at a value of $4.50 per unit. The purchase price for each Property will be adjusted at the time of transfer based upon the ratio of the actual monthly rental rate per square foot to the projected rental rate per square foot set forth in the Pending Projects Acquisition Agreement. The Berg Group members who own the Pending Development Projects, including Carl E. Berg, will determine the terms of the leases for each Property prior to its transfer to the Company. Berg & Berg has signed a lease with Microsoft for an approximately 515,000 square feet facility to be constructed by Microsoft at L'Avenida with a triple net rental rate of $2.95 per square foot if and when the lease takes effect. In each case the sellers' determination of acceptable terms may differ materially from those sought by an independent party. See "DESCRIPTION OF THE PROPERTIES -- The Pending Development Projects. BERG LAND HOLDINGS. The Berg Land Holdings will not be contributed to the Operating Partnerships. The Company and the Operating Partnerships have an option to purchase properties developed on the Berg Land Holdings, as well a right of first offer relating thereto, pursuant to the terms of the Option Agreement. See "DESCRIPTION OF PROPERTIES--Land Holding and Development Arrangements." If the Independent Directors Committee does not elect to exercise its rights with respect to some or all of the Berg Land Holdings and the Berg Group subsequently determines to develop such Holdings, Carl E. Berg and other members of the Berg Group may devote a substantial amount of their time to such development activities, and the developed Berg Land Holdings may compete for available tenants with certain of the Properties. TAX CONSEQUENCES OF SALE OF PROPERTIES. Since most of the Properties have unrealized gain attributable to the difference between fair market value and adjusted tax basis in such Properties prior to the Company's purchase of its general partner's interest, the sale of any of such Properties may cause adverse tax consequences to the Limited Partners. As a result, the Limited Partners might not favor a sale of a Property even though such a sale could be beneficial to other shareholders of the Company. Furthermore, until the Protective Provisions Expiration Date, the Operating Partnership Agreement provides that for a period of ten years following the closing of the Berg Acquisition, the Operating Partnerships may not sell or otherwise transfer any Property designated by Mr. Berg or Clyde J. Berg in a taxable transaction. In addition, Mr. Kontrabecki may designate that the Kontrabecki Properties may not be sold or transferred in a taxable transaction. See "FEDERAL INCOME TAX CONSIDERATIONS-- Tax Aspects of the Operating Partnerships," "CERTAIN PROVISIONS OF MARYLAND LAW AND MISSION WEST-MARYLAND'S CHARTER AND BYLAWS" and "OPERATING PARTNERSHIP AGREEMENT--Management." TERMS OF TRANSFERS; ENFORCEMENT OF PARTNERSHIP AGREEMENT. Neither the terms of transfers of the Berg Properties to the Operating Partnerships by the Limited Partners nor the terms of the Operating Partnership Agreement were determined through arm's-length negotiation. Some Berg Group members in their capacity as beneficial owners of the Acquired Properties also had a substantial interest in determining the terms and conditions of the transfers of the Acquired Properties and the Pending Development Projects to the Operating Partnerships. The Berg Group Board Representatives also may be subject to a conflict of interest with respect to their obligations as directors of the Company to enforce the terms of the Operating Partnership Agreement. RELATED PARTY DEBT. The Company is liable under loans payable to Berg Group members or that may be otherwise declared in default by Carl E. Berg or other Berg Group members in the event the loans are not paid when due. These loans include the Demand Notes and a loan of approximately $19 million payable to BBE, which is secured by three properties and matures in March 1999. See "DESCRIPTIONS OF THE PROPERTIES -- Mortgage Debt and Credit Lines." The Company believes that it will be able to repay all such loans with proceeds from the Wells Fargo Line, the Private Placement or other sources of working capital. There can be no assurance that such proceeds will be available when the related party debt is due, however, and Mr. Berg or other Berg Group members could take action to enforce the Company's repayment obligations. -11- DELAY IN CLOSING PRIVATE PLACEMENT The purchasers in the Private Placement agreed to purchase shares of Common Stock in early May 1998. The Company cannot close the purchase transactions until it has received shareholder authorization for the issuance of the shares at the Special Meeting in ___________, 1998, however. Due to the substantial delay in closing the transactions, the Company believes that some purchasers may be unwilling to pay for their shares at the scheduled closing date because they may no longer have adequate available funds, may not consider the purchase of the shares to be a desirable investment at that time, or for some other reason. In September 1998, the trustees of a trust which had agreed to purchase 1,000,000 shares of Common Stock sent a letter to the Company stating that because the trust had not received a copy of the signed stock purchase agreement was withdrawing its offer to purchase the 1,000,000 shares. The Company has a signed stock purchase agreement with the trust that the Company considers to be a binding agreement. Nevertheless, the Company's management views that letter as an indication that recent broad-based declines in stock values, including most publicly-traded REIT shares, may have caused investors to re-evaluate previous investment decisions. Although the Company believes it can enforce all of the stock purchase agreements executed by the purchasers in the Private Placement, the Company's management may decide not to pursue claims against defaulting purchasers. In that event, the Company would need to find additional sources of capital to pay the Demand Notes. Currently, the Company's management intends to use proceeds of the Wells Fargo Line, if available, to pay the balance of the Demand Notes remaining after the final closing date for the Berg Acquisition. Mr. Berg and members of the Berg Group who control an L.P. Unit Majority in three of the Operating Partnerships may call the Demand Notes to the extent not retired at the date. However, if funds from the Wells Fargo Line are not available for this purpose, Carl E. Berg and other Berg Group members who are Limited Partners have agreed not to demand payment in excess of the Company's available funds at the closing of the Private Placement, notwithstanding provisions of the Demand Note to the contrary. CHANGES IN POLICIES WITHOUT SHAREHOLDER APPROVAL The Company's board of directors will determine the investment and financing policies of the Operating Partnerships and its policies with respect to certain other activities, including its growth, debt capitalization, distribution and operating policies. See "POLICIES WITH RESPECT TO CERTAIN INVESTMENT ACTIVITIES." The board of directors has no present intention to amend or revise these policies. However, the board of directors may do so at any time without a vote of the Company's shareholders. A change in these policies could adversely affect the Company's financial condition or results of operations. ANTI-TAKEOVER PROVISIONS Provisions of the Charter and bylaws of Mission West-Maryland could delay, defer or prevent a transaction or a change in control of Mission West-Maryland (or other transaction) that might involve a premium price for holders of Common Stock or otherwise be in their best interest. See "CERTAIN PROVISIONS OF MARYLAND LAW AND OF MISSION WEST-MARYLAND'S CHARTER AND BYLAWS." REAL ESTATE INVESTMENT CONSIDERATIONS GENERAL. Real property investments are subject to varying degrees of risk. The investment returns available from equity investments in real estate depend in large part on the amount of income earned and capital appreciation generated by the Properties as well as the related expenses incurred. If the Properties do not generate revenue sufficient to meet operating expenses, debt service and capital expenditures, the Company's income and ability to make distributions to its shareholders will be adversely affected. Income from the Properties may also be adversely affected by general economic conditions, local economic conditions such as oversupply of commercial real estate, the attractiveness of the Properties to tenants, competition from other available rental property, the ability of the Company to provide adequate maintenance and insurance, the costs of tenant improvements, leasing commissions and tenant inducements and the potential of increased operating costs (including real estate taxes). Various significant expenditures associated with an investment in real estate (such as mortgage payments, real estate taxes and maintenance expenses) generally are not reduced when circumstances cause a reduction in revenue from the investment. Income from properties and real estate values also are affected by a variety of other factors, such as governmental regulations and applicable laws (including real estate, zoning and tax laws), interest rate levels and the availability of financing. ILLIQUIDITY OF REAL ESTATE INVESTMENTS. Real estate investments are relatively illiquid, which limits the ability of the Operating Partnerships (and, therefore, the Company) to restructure its portfolio in response to changes in economic or other conditions. See "OPERATING PARTNERSHIP AGREEMENT-- Management." In addition, the Properties are subject to fixed expenditures, such as debt service, real estate taxes, and expenses for repairs, maintenance, and operations that do not decline with reductions in income. Such illiquidity and fixed expenditures, together with other factors might impede the Company's ability to respond to adverse conditions. The Company's ability to make expected distributions to shareholders also could be adversely effected as a result. GEOGRAPHIC AND INDUSTRY CONCENTRATION; DEPENDENCE UPON SILICON VALLEY ECONOMY AND THE ELECTRONICS INDUSTRY. All of the Properties are located in the southern portion of the San Francisco Bay Area commonly referred to as "Silicon Valley." Following a recessionary period which ended in 1993, the Silicon Valley economy has grown robustly and the reported unemployment rate for Santa Clara County was 3.1% as of December 31, 1997. See "THE BUSINESS OF BERG & BERG-- Regional Economic Profile." As a result of the strong Silicon Valley economy, values for the Properties and rents payable under new leases have increased substantially since 1995. Future increases in values and rents for the Properties depend to a significant extent on the health of the Silicon Valley economy. All of the Properties are subject to existing leases with fixed rental rates, and a material downturn in the Silicon Valley economy, or in the commercial real estate market in Silicon Valley, will not immediately reduce revenues but could have a material adverse impact on the value of the Company's Common Stock and on the Company's financial condition. Following the completion of UPREIT Transactions, the Company will consider expansion into other regions of the West Coast with concentrations of technology companies if R&D Properties of good quality can be obtained on reasonable terms. See "FUTURE OPERATIONS OF THE COMPANY--Acquisitions." -12- RISK OF LOSS OF KEY TENANTS. Most of the Properties are occupied by single tenants, many of whom are large, publicly-traded electronics companies. The Company's three largest tenants, Apple Computer Inc. ("Apple"), Amdahl Corporation ("Amdahl"), and Cisco Systems, Inc. ("Cisco") accounted for approximately 16.25%, 8.67%, and 7.17%, respectively, of the aggregate Annual Base Rent from the Berg Properties for the year ended December 31, 1997. The Operating Partnerships' 12 largest tenants for the Berg Properties represent at least 56.8% of such Annual Base Rent. Eight of these tenants have occupied their respective Properties for periods ranging from five to 22 years and have renewed one or more leases. The Company believes that Berg & Berg's practice of emphasizing the development of single-tenant, rather than multi-tenant, Properties has contributed to its relatively high occupancy rates. Apple has announced operating losses, internal reorganizations, and layoffs in each of its last two fiscal years. To date, Apple has not defaulted in the payment of rent under any of its three leases with the Operating Partnerships, nor has Apple, Amdahl or Cisco notified the Operating Partnerships of an intention to vacate, reduce its occupancy at, or relocate from any of their respective properties. However, there can be no assurance that Apple, Amdahl, Cisco or other key tenants will renew their leases. The Company believes that it would be able to relet Properties of its other key tenants should they be vacated and that some of such Properties are currently leased at below market rental rates. However, if the Company is unable to relet properties as leases terminate or if Apple, Amdahl, Cisco or another key tenant were to terminate their tenancy, and the Company were unable to relet such Properties within a reasonable period of time and at comparable rental rates, the Company's operating results and its ability to make distributions could be adversely affected. See "DESCRIPTION OF THE PROPERTIES--the Berg Properties." RISK OF BANKRUPTCY OF KEY TENANTS. At any time, a tenant of the Properties may seek the protection of the bankruptcy laws which could result in the rejection and termination of such tenant's lease and thereby cause a reduction in the Company's income. Although the Operating Partnerships' predecessors have experienced losses from tenant bankruptcies of less than $25,000 since 1987, no assurance can be given that tenants will not file for bankruptcy protection in the future or, if a tenant makes such a filing, that it will affirm its lease and continue to make rental payments in a timely manner. In addition, from time to time a tenant may experience a downturn in its business which may weaken its financial condition and result in its failure to make rental payments when due. If a tenant's lease is not affirmed following a bankruptcy filing, or if a tenant's financial condition weakens, the Company's income may be adversely affected. The bankruptcy of one or more of the Company's key tenants could have a material adverse effect on the Company's operating results and its ability to make distributions. ADDITIONAL RISKS OF REAL ESTATE ACQUISITION AND DEVELOPMENT. A focus of the Company will be the acquisition of additional properties in selected geographical areas and the renovation and reletting of such properties. The Company may also undertake the development of new buildings on sites acquired from the Berg Group or from third parties. See "DESCRIPTION OF THE PROPERTIES - -Land Holding and Development Arrangements." Real estate acquisition and development involves significant risks in addition to those relating to the ownership and operation of existing, fully-leased properties, including the risks that required approvals may not be obtained or may take more time and resources to obtain than expected, that construction may not be completed on schedule or on budget and that the properties may not achieve anticipated rent or occupancy levels. In addition, if permanent debt or equity financing is not available on acceptable terms to refinance new development activities or acquisitions undertaken without permanent financing, further development activities or acquisitions could be curtailed and the Company's operating results and its ability to make distribution could be adversely affected. DEBT FINANCING; RISK OF INABILITY TO SERVICE DEBT. On a pro forma basis as of September 30, 1998, after giving effect to the Berg Acquisition, 45 of the Properties are mortgaged to secure payment of debt, and the Company expects to have outstanding approximately $223 million of debt secured by such Properties. If the Operating Partnerships were unable to meet their mortgage payments, a loss could be sustained as a result of foreclosure on its Property by the mortgagee. Such a loss could reduce the value of the Company's investment in the Operating Partnerships. See "DESCRIPTION OF THE PROPERTIES -- Mortgage Debt and Wells Fargo Line" for information regarding the terms of the mortgages encumbering the Properties. As part of its current business strategy, the Company has adopted a policy of maintaining a consolidated ratio of Debt to Total Market Capitalization of less than 50%, which may not be exceeded without the approval of more than 75% of the entire board of directors. The Company's pro forma ratio of Debt to Total Market Capitalization would have been approximately 42% at September 30, 1998, assuming the occurrence of the UPREIT Transactions, a Market Price of $4.50 price per share, and 67,673,227 Outstanding Shares issued and outstanding on that date. Within the prescribed limit, the board of directors of the Company may, from time to time, modify its debt policy and may increase or decrease its ratio of Debt to Total Market Capitalization. If the Company were to change its debt policy, the Company could become more highly leveraged, resulting in an increased risk of default on its obligations and an increase in debt service requirements that could adversely affect the Company's financial condition, its operating results and its ability to make distributions. -13- POTENTIAL ENVIRONMENTAL LIABILITY. Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may be held liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in the property. Such laws often impose liability and expose the owner to governmental proceedings without regard to whether the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. The cost of any required remediation or removal of such substances may be substantial. In addition, the owner's liability as to any specific property is generally not limited and could exceed the value of the property and/or the aggregate assets of the owner. The presence of such substances, or the failure to properly remove or remediate such substances, may also adversely affect the owner's ability to sell or rent the property or to borrow using the property as collateral. Persons who arrange for treatment or the disposal of hazardous or toxic substances may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at a disposal facility, regardless of whether the facility is owned or operated by such owner or entity. In connection with the ownership of the Properties or the treatment or disposal of hazardous or toxic substances, the Company may be liable for such costs. Other federal, state and local laws impose liability for the release of asbestos-containing materials ("ACMs") into the air and require the removal of damaged ACMs in the event of remodeling or renovation. The Company is aware that there are ACMs present at several of the Properties, primarily in floor coverings. The Company believes that the ACMs present at these Properties are generally in good condition and that no ACMs are present at the remaining Properties. The Company believes it is in compliance in all material respects with all present federal, state and local laws relating to ACMs and that if it were given limited time to remove all ACMs present at the Properties, the cost of such removal would not have a material adverse effect on its financial condition, operating results or ability to make distributions. The Company is not aware of any environmental liability relating to the Properties that it believes would have a material adverse effect on its financial condition, its operating results or its ability to make distributions and has not been notified by any governmental authority or any other person of any material noncompliance, liability or other claim in connection with any of the Properties. Groundwater contaminated by chemicals used in various manufacturing processes, including semiconductor fabrication, underlies a significant portion of northeastern Santa Clara County, where many of the Properties are located, however. Environmental assessments have not been conducted for most of the Properties and none since 1995. Phase I environmental assessments and some soil and water sampling as recommended by the environmental consultant have been obtained on each of the Pending Development Projects. No assurance can be given that future uses and conditions (including changes in applicable environmental laws and regulations, the uses and conditions of properties in the vicinity of the Properties, such as leaking underground storage tanks and the current and future activities of tenants) will not result in the imposition of environmental liability and the costs attendant thereto. GENERAL UNINSURED LOSSES. The Operating Partnerships will carry comprehensive liability, fire, extended coverage and rental loss insurance covering all of the Properties, with policy specifications and insured limits which the Company believes are adequate and appropriate under the circumstances. There are, however, certain types of extraordinary losses that are not generally insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, the Operating Partnerships could lose their capital invested in a Property, as well as the anticipated future revenues from the Property, and, in the case of debt which is recourse to the Operating Partnerships, would remain obligated for any mortgage debt or other financial obligations related to the Property. The Company does not intend to obtain owner's title insurance policies for any of the Properties, but pursuant to the Acquisition Agreement certain members of the Berg Group and other Limited Partners have agreed to indemnify the Company for any losses attributable to defects in title existing prior to the closing of the Berg Acquisition. If a loss occurs resulting from a title defect with respect to a Property in excess of insured limits, or the Company cannot obtain full recovery though the Berg Group's indemnification where applicable, the Company could lose all or part of its investment in, and anticipated profits and cash flows from, such Property. -14- POTENTIAL UNINSURED LOSSES FROM SEISMIC ACTIVITY. All the Properties are located in areas that are subject to earthquake activity. In light of such earthquake risk, since the early 1970's, California building codes have established construction standards for all newly built and renovated buildings, the current and most strict construction standards having been adopted in 1994. Most of the Properties were completed prior to the adoption of more stringent building codes in 1994. The Company believes that all Properties were constructed in full compliance with applicable laws and construction standards existing at the time of construction. The Operating Partnerships' insurance policies for the Berg Properties do not cover damage caused by seismic activity, although they do cover losses from fires after an earthquake. The Operating Partnership have not obtained earthquake insurance for the Properties, and the Company believes that such insurance coverage is generally not economical. Following the October 17, 1989 Loma Prieta earthquake in the San Francisco Bay Area, which had a magnitude of approximately 7.1 on the Richter scale, Berg & Berg observed, and its tenants reported, only minimal damage to the Properties. Should an earthquake occur that results in substantial damage to the existing Properties, or properties subsequently acquired by the Company, the Company could lose its investment in such properties and its financial condition, operating results and ability to make distributions could be adversely affected. FEDERAL INCOME TAX RISKS FAILURE TO QUALIFY AS A REIT. The Company intends to elect to be taxed as a REIT under the Code for its taxable year ending December 31, 1998, and to operate in a manner designed to achieve and maintain qualification as a REIT. Although the Company expects that it will be organized and will operate in conformity with the requirements for qualification as a REIT, no assurance can be given that the Company will so qualify or that it will continue to qualify in the future. Qualification as a REIT involves the application of highly technical and complex Code provisions for which there are only limited judicial and administrative interpretations. The Company's ability to qualify and maintain its status as a REIT will depend on the Company's ability to meet various requirements. For example, at least 95% of the Company's gross income in any year must be derived from dividends, interest, rents from real property, certain capital gains and other qualified sources, and the Company must make annual distributions to shareholders totaling at least 95% of its REIT taxable income (excluding net capital gains). See "FEDERAL INCOME TAX CONSIDERATIONS." These and various other factual matters and circumstances not entirely within the Company's control may affect its ability to qualify or maintain its status as a REIT. In addition, no assurance can be given that new legislation, regulations, administrative interpretations or court decisions will not significantly change the tax laws with respect to qualification as a REIT or the federal income tax consequences of such qualification. See "FEDERAL INCOME TAX CONSIDERATIONS--Requirements for Qualification." If the Company were to fail to qualify as a REIT in any taxable year, it would not be allowed a deduction for distributions to its shareholders in computing its taxable income, and it would be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate rates. Unless entitled to relief under certain Code provisions, the Company would also be disqualified from treatment as a REIT for the four taxable years following the year during which REIT qualification was lost. As a result of the loss of REIT status, funds available for distribution to the Company's shareholders would be reduced for each of the years involved and, in addition, the Company would no longer be required to make distributions to its shareholders. Although the Company currently intends to operate in a manner designed to enable it to qualify and maintain its status as a REIT, it is possible that economic, market, legal, tax or other considerations may cause the Company to fail to qualify as a REIT or may cause the Company's board of directors either to refrain from making the REIT election or to revoke the REIT election once made. REIT DISTRIBUTION REQUIREMENTS. To obtain and maintain favorable tax treatment as a REIT, the Company generally will be required each year to distribute as a dividend to its shareholders at least 95% of its otherwise taxable income (after certain adjustments). In addition, the Company will be subject to a 4% nondeductible excise tax on the amount, if any, by which certain distributions paid by it with respect to any calendar year are less than the sum of 85% of its ordinary income for the calendar year, 95% of its capital gain income for the calendar year and any undistributed taxable income from prior periods. Failure to comply with these requirements would result in the Company's income being subject to tax at regular corporate rates. -15- OWNERSHIP LIMIT NECESSARY TO MAINTAIN REIT QUALIFICATION. In order for the Company to maintain its qualification as a REIT, not more than 50% in value of its outstanding stock may be owned, directly or indirectly, by five or fewer individuals, as defined in the Code (the "Five or Fewer Test"). For the purposes of preserving the Company's qualification as a REIT, the Charter generally prohibits ownership (the "Ownership Limit") of more than 9% of the Common Stock by any shareholder (other than limits set by agreements with the Berg Group, for which the aggregate Ownership Limit is 20% (the "Berg Group Ownership Limit")). The Charter mandates the aggregation of stock owned by affiliated owners for purposes of the Ownership Limit. Individuals owning a percentage of the Common Stock outstanding that exceeds the Ownership Limit at the time of the Reincorporation Merger will not be required to reduce their stock holdings but will be subject to the Ownership Limit with respect to the acquisition of additional shares of Common Stock (other than shares acquired pursuant to board-approved stock option and other compensation plans). Following consummation of the UPREIT Transactions, the Berg Group initially will own less than two percent of the issued and outstanding Common Stock. One current legislative proposal of the Clinton administration would amend the "closely held" requirement for REIT qualification. See "FEDERAL INCOME TAX CONSIDERATIONS--Requirements for Qualification." The constructive ownership rules of the Code are complex and may cause Common Stock owned, directly or indirectly, by a group of related individuals and/or entities to be deemed to be constructively owned by one individual or entity. As a result, the acquisition of less than 9% of the Common Stock (or the acquisition of an interest in an entity which owns Common Stock) by an individual or entity could cause that individual or entity (or another individual or entity) to own constructively in excess of 9% of the Common Stock, and thus subject such stock to the Ownership Limit. The Charter provides that any transfer of shares by members of the Berg Group or other shareholders that would result in direct or constructive ownership in excess of the applicable Ownership Limit would be void, and the intended transferee of such shares, including any pledgee, will be deemed never to have had an interest in such shares. Further, if, in the opinion of the board of directors (i) a transfer or repurchase of shares would result in any shareholder or group of shareholders acting together owning in excess of the Ownership Limit, or (ii) a proposed transfer or repurchase of shares may jeopardize the qualification of the Company as a REIT under the Code, under the Charter the board of directors may, in its sole discretion, refuse to allow the shares to be transferred to the proposed transferee. If any transfer or repurchase of shares of Common Stock occurs which, if effective, would result in any person beneficially or constructively owning shares of Stock of the Company in excess or in violation of the above transfer or ownership limitations (a "Prohibited Owner"), then that number of shares shall be automatically transferred to a trust (the "Trust") for the exclusive benefit of one or more charitable beneficiaries (the "Charitable Beneficiary"), and the Prohibited Owner shall not acquire any rights in such shares. The Prohibited Owner shall not benefit economically from ownership of any shares of stock held in the Trust, shall have no rights to dividends and shall not possess any rights to vote or other rights attributable to the shares of stock held in the Trust. The trustee of the Trust (the "Trustee") shall have all voting rights and rights to dividends or other distributions with respect to shares of stock held in the Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. The shares or L.P. Units held by the Berg Group members are not subject to automatic transfer to the Trust, however, as their shares will be subject to the prohibitions associated with the applicable Berg Group Ownership Limit, as well as restrictions on any exchanges of L.P. Units and share purchases, repurchases and transfers of any kind that would result in a violation of the Five or Fewer Test. See "FEDERAL INCOME TAX CONSIDERATIONS--Requirements for Qualification." UNCERTAINTIES REGARDING DISTRIBUTIONS TO SHAREHOLDERS The Company's income will consist primarily of the Company's share of the income of the Operating Partnerships, and the Company's cash flow will consist primarily of its share of distributions from the Operating Partnerships. Differences in timing between the receipt of income and the payment of expenses in arriving at taxable income (of the Company or the Operating Partnerships) and the effect of required debt amortization payments could require the Company directly, or through the Operating Partnerships, to borrow funds on a short-term basis to meet its intended distribution policy. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PROPERTIES--Liquidity and Capital Resources" and "DISTRIBUTION POLICY" for information concerning the Company's expected cash flow. -16- The amount and timing of distributions by the Operating Partnerships will be determined by the board of directors of the Company as the sole general partner of the Operating Partnerships and will be dependent on a number of factors, including the amount of cash available for distribution, the Operating Partnerships' financial condition, any decision by the Board of Directors to reinvest funds rather than to distribute such funds, the Operating Partnerships' capital expenditures, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Company's Board of Directors deems relevant. See "FEDERAL INCOME TAX CONSIDERATIONS--Taxation of the Company--Requirements for Qualification" and "--Annual Distribution Requirements." Accordingly, there is no assurance that the Company will be able to meet or maintain its intended distribution policy. POTENTIAL PROPERTY TAX REASSESSMENTS The Company does not believe that its acquisition of interests in the Operating Partnerships will result in a statutory change in ownership giving rise to a reassessment of any of the Properties for California property tax purposes. There can be no assurance, however, that county assessors or other tax administrative agencies in California will not attempt to assert that such a change occurred as a result of the transactions related to the Berg Acquisition. Although the Company believes that such a challenge would not be successful ultimately, there can be no assurance regarding the outcome of any such dispute or proceeding. Such a reassessment could result in increased real estate taxes on the Properties. Substantially all of the leases for the Properties contain provisions requiring the tenants to pay their proportionate share of any property tax increases. As a practical matter, the Company may be unable to pass through to its tenants the full amount of the increased taxes resulting from a reassessment, however, the Company believes that any amount not passed through to tenants will not have a material effect on the Company's operating results. See "THE COMPANY'S PRO FORMA DATA." MARKET FOR COMMON STOCK The AMEX halted trading of the Common Stock at the opening of trading on October 20,1997. The last day of trading prior to the halt was October 17, 1997. The closing price of the Common Stock on October 17, 1997 was $3.38. On _____________, 1998, the last trading day immediately preceding the date of this Proxy Statement/Prospectus, the closing price of the Common Stock on the AMEX was $________. THE COMPANY'S OBLIGATION TO PURCHASE TENDERED L.P. UNITS Each of the Limited Partners (other than Carl E. Berg and Clyde J. Berg) will have the annual right to exercise their Put Rights and cause the Operating Partnerships to purchase a portion of their L.P. Units at a purchase price based on the average market value of the Common Stock for the 10-trading day period immediately preceding the date of tender. Upon the exercise of this put right by a Limited Partner the Company will have the option to purchase the tendered L.P. Units with available cash, borrowed funds, or the proceeds of an offering of newly issued shares of Common Stock. The Limited Partners' Put Rights generally commence one year after the completion of the Berg Acquisition, and are available once a year for a maximum of one-third of the Limited Partner's L.P. Units. If the total purchase price of the L.P. Units tendered by all Limited Partners in one year exceeds $1 million, the Operating Partnerships or the Company shall be entitled to reduce proportionally the number of L.P. Units to be acquired from each tendering Limited Partner so that the total purchase price is not more than $1 million. The exercise by Limited Partners of their Put Rights may reduce the amount of Cash Available for Distribution to shareholders of the Company. See "OPERATING PARTNERSHIP AGREEMENT--Exchange Rights, Put Rights and Registration Rights." RISK OF POTENTIAL SECURITIES LAW VIOLATIONS The offer and sale of L.P. Units by the Operating Partnerships has not been registered under the Securities Act, in reliance upon the exemption from registration provided by Section 4(2) of the Securities Act for "transactions by an issuer not involving any public offering." Although the Acquisition Agreement contemplating the issuance of the L.P. Units and Common Stock of the Company issuable on conversion of the L.P. Units after one year pursuant to the Acquisition Agreement was entered into by the Company, the Operating Partnerships and the Limited Partners prior to the filing of the Registration Statement with the Commission, the closing of the transactions comprising the Berg Acquisition had not occurred prior to such filing. Accordingly, an issue may arise under the federal securities laws as to whether the offer and sale of L.P. Units to the Limited Partners should be integrated with the offering contemplated in connection with the Reincorporation Merger with the effect that the exemption afforded by Section 4(2) of the Securities Act would be unavailable, and the offer and sale of L.P. Units to the Limited Partners should have been registered under the Securities Act. If it were ultimately determined that the offer and sale of L.P. Units to the Limited Partners should have been registered under the Securities Act, the holders of L.P. Units might have the right under the federal securities laws to rescind the sales of these securities and contributions of certain R&D Properties by such Limited Partners; or, theoretically, even to seek rescission of the Company's acquisition of its general partner interests in the Operating Partnerships. As Carl E. Berg has agreed with the Company that neither he nor any other Berg Group member will take any such action against the Operating Partnerships or the Company, the Company believes that any claim of non-compliance with the registration provisions of the Securities Act with respect to the offer and sale of the L.P. Units is unlikely and does not believe that any such potential securities laws violations will materially adversely affect the Company's financial position, results of operations or ability to make distributions to stockholders. In addition, the Company has received the opinion of counsel to the Company that such offers and sales were exempt from the registration provisions of the Securities Act. -17- SHARES ELIGIBLE FOR FUTURE SALE No prediction can be made as to the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of the Common Stock. Sales of substantial amounts of Common Stock (including shares issued in connection with the Exchange Rights) or the perception that such sales could occur, could adversely affect prevailing market prices for the Common Stock. Additional shares of Common Stock may be issued to the Limited Partners (subject to the Ownership Limit) if they exchange their L.P. Units for shares of Common Stock pursuant to the Exchange Rights or may be sold by the Company to raise funds to acquire such L.P. Units if the Limited Partners elect to tender L.P. Units to the Company pursuant to the Put Rights. Such Exchange Rights and Put Rights, however, generally are not available during the first 12 months following the Berg Acquisition. During that period, the Limited Partners will be allowed to seek one registration of not more than 500,000 shares of Common Stock for resale (on SEC Form S-3 or the equivalent) and will have "piggyback registration" rights for not more than 25% of the total number of shares proposed for a public offering of Common Stock by the Company. Following the first anniversary of the Berg Acquisition, the exercise of the Exchange Rights generally is limited to the exchange or sale once during any 12-month period by each Limited Partner of up to one-third of the aggregate number of L.P. Units owned by such Limited Partner. The Company has granted certain "demand," "resale" and "piggyback" registration rights with respect to shares of Common Stock acquired by the Limited Partners and their Affiliates pursuant to the Exchange Rights. All registrations of Berg Group shares are subject to underwriters' requirements for offering size reduction, and the right of the board of directors to restrict or delay registrations for limited periods. Purchasers of 6,495,058 shares of Common Stock in the Private Placement will be permitted to sell from time to time the shares of New Common Stock issued in exchange for those shares in the Reincorporation Merger pursuant to the Registration Statement and any post-effective amendment to the Registration Statement, which the Company will try to keep effective for one year, until those shares become eligible for sale pursuant to Rule 144. Their ability to sell those shares pursuant to the Registration Statement will be subject to certain restrictions, including the Company's right to require the holders of the shares to halt further offers and sales during periods when the Company has determined that the continued offer and sale of those shares pursuant to the Registration Statement would be detrimental to the Company or its stockholders. The Company may decide not to maintain the effectiveness of the Registration Statement during the first year following the final closing date for the Berg Acquisition. See "BACKGROUND OF THE UPREIT TRANSACTIONS -- Background" and "THE SELLING STOCKHOLDERS." Sales of shares acquired by members of the Berg Group and other Limited Partners through the exercise of their Exchange Rights and registration rights and fluctuations in resales pursuant to the Registration Statement may adversely impact the price and trading volume of the Common Stock from time to time to the detriment of other stockholders. -18- THE SPECIAL MEETING At the Special Meeting, the board of directors seeks shareholder approval or ratification of the following six proposals pertaining to the UPREIT Transactions. Each of the transactions is subject to distinct terms and conditions. The parties to the Berg Acquisition have completed the Partnership Closing portion of the transaction, and the Company seeks shareholder ratification of the Berg Acquisition is conditioned upon the completion of the Private Placement. None of such transactions is subject to the occurrence of the Reincorporation Merger. The board of directors intends for the shareholders to consider all six proposals at once, and this Proxy Statement/Prospectus describes the UPREIT Transactions and their material consequences based on the assumption that all of the UPREIT Transactions will be approved by the shareholders and consummated by the parties to each transaction. PROPOSAL 1 APPROVAL OF SALE OF 6,495,058 SHARES OF COMMON STOCK AT $4.50 PER SHARE PROPOSAL 2 RATIFICATION OF THE COMPANY'S ACQUISITION OF THE SOLE GENERAL PARTNER INTEREST IN EACH OF THE OPERATING PARTNERSHIPS PROPOSAL 3 APPROVAL OF THE COMPANY'S ACQUISITION OF THE PENDING DEVELOPMENT PROJECTS FROM CARL E. BERG AND CERTAIN OTHER MEMBERS OF THE BERG GROUP PROPOSAL 4 APPROVAL OF THE COMPANY'S ACQUISITION OF AN OPTION TO ACQUIRE FUTURE R&D PROPERTIES BUILT ON LAND OWNED BY CARL E. BERG AND CERTAIN OTHER MEMBERS OF THE BERG GROUP PROPOSAL 5 APPROVAL OF THE ISSUANCE OF UP TO 93,398,705 SHARES OF COMMON STOCK IN EXCHANGE FOR LIMITED PARTNERSHIP INTERESTS HELD BY OR ISSUABLE TO CARL E.BERG AND CERTAIN OTHER MEMBERS OF THE BERG GROUP AND OTHER LIMITED PARTNERS PROPOSAL 6 REINCORPORATION OF THE COMPANY AS A MARYLAND REIT PROPOSALS 1, 2, 3, 4 AND 5 PERTAIN TO THE BERG ACQUISITION AND THE COMPANY'S FORMATION OF AN UPREIT. PROPOSAL 6 CONCERNS THE MERGER OF THE COMPANY INTO MISSION WEST-MARYLAND, WHICH THE COMPANY ANTICIPATES WILL ELECT REIT STATUS IN 1998. PARTIES TO THE BERG ACQUISITION The Berg Group consists of Carl E. Berg and his wife, Clyde J. Berg, certain trusts for their respective children, BBE, and certain other entities which they control. See "PRINCIPAL SHAREHOLDERS." The members of the Berg Group currently own 55,845,938 L.P. Units, or approximately 82.52% of the Operating Partnerships. The remaining 3,633,695 L.P. Units are owned directly, or indirectly, by Mr. Kontrabecki and other non-Affiliates of the Berg Group. All the individuals and entities actually holding or acquiring record ownership of the L.P. Units pursuant to the Acquisition Agreement have represented to the Company that they are accredited investors within the meaning of Rule 501(a) of Regulation D promulgated by the Commission under the Securities Act. The Berg Acquisition will provide material benefits to the members of the Berg Group. See "BACKGROUND OF THE UPREIT TRANSACTIONS--Benefits to the Berg Group," and "Description of the Properties -- Overview of the Acquired Properties." PARTIES TO THE REINCORPORATION MERGER The Reincorporation Merger will be effected through the merger of the Company with and into Mission West-Maryland pursuant to Section 1110 of the California General Corporation Law (the "CGCL") and Sections 3-101 et seq. of the Maryland General Corporation Law (the "MGCL"). Mission West-Maryland was incorporated in Maryland on March 20, 1998. See "THE REINCORPORATION MERGER." GENERAL INFORMATION CONCERNING SOLICITATION AND VOTING The enclosed proxy is solicited on behalf of the board of directors of the Company for use at the Special Meeting to be held on, or at any adjournment or postponement thereof, for the purposes set forth herein and in the -19- accompanying Notice of Special Meeting of Shareholders. The Special Meeting will be held at 10050 Bandley Drive, Cupertino, California 95014. The mailing of this Prospectus/Proxy Statement and the accompanying form of proxy to shareholders of the Company entitled to vote at the Special Meeting is expected to commence on or about ______________, 1998. RECORD DATE, VOTING RIGHTS AND OUTSTANDING SHARES The outstanding securities of the Company at October 15, 1998 consisted of 1,698,536 shares of Common Stock. Each shareholder of record at the close of business on ___________, 1998 is entitled to one vote for each share of Common Stock then held. The shares represented by any proxy in the enclosed form will be voted in accordance with the instructions given on the proxy if the proxy is properly executed and is received by the Company prior to the close of voting at the meeting or any adjournment or postponement thereof. REVOCABILITY OF PROXIES A shareholder giving a proxy has the power to revoke it at any time before it is exercised. A proxy may be revoked by filing with the Secretary of the Company at the Company's principal executive office at 10050 Bandley Drive, Cupertino, California 95014, a written notice or revocation or a duly executed proxy bearing a later date, or it may be revoked by attending the meeting and voting in person. SOLICITATION The cost of soliciting proxies in the enclosed form will be borne by the Company. Solicitation will be made primarily by mail but shareholders may be solicited by telephone, telegraph, or personal contact. The board of directors may retain the services of a proxy-soliciting firm for soliciting proxies from those entities holding shares in street name. VOTES REQUIRED The affirmative vote of the holders of a majority of the outstanding shares of the Common Stock, either voting in person or by proxy, is necessary to approve Proposal 6, the Reincorporation Merger. The remaining proposals require only approval of the shareholders, which is defined under California law to mean the affirmative vote of a majority of the shares represented and voting at the Special Meeting. Section 310(a) of the CGCL provides that a contract or transaction between a director or directors of the corporation and the corporation, or between the corporation and another organization in which the director has a material financial interest, is not void or voidable if (1) the facts relating to the interests of a director or directors are fully disclosed or known to shareholders and the contract or agreement is approved or identified by a majority of the shareholders with the shares owned by the interested director not being entitled to vote on the matter, or (2) the facts are fully disclosed or known to the board of directors, and the board of directors authorizes, approves or ratifies the contract or transaction in good faith without counting the vote of the interested director or directors and the contract or transaction is just and reasonable as to the corporation at the time it is authorized, approved or ratified. The Berg Acquisition, which is subject to approval or ratification pursuant to Proposals 2, 3 4 and 5 involves contracts between the Company and Carl E. Berg, members of his Immediate Family and his Affiliates. Shareholder approval of the Reincorporation Merger will include adoption of the Charter and the Mission West-Maryland by laws which include provisions that benefit Mr. Berg, members of his Immediate Family and his Affiliates. The Company believes that the approval by the Company's board of directors of the Berg Acquisition and the Reincorporation Merger in May 1998 satisfied the requirements of Section 310(a). The Company also seeks ratification of the Berg Acquisition and the Reincorporation, however, by the holders of a majority of the outstanding shares of Common Stock exclusive of the 48,133 shares held in the aggregate by members of the Berg Group. CONSEQUENCES IF THE PROPOSALS ARE NOT APPROVED The board of directors adopted resolutions approving the contracts and transactions comprising the Berg Acquisition and the Reincorporation Merger on May 14, 1998, subject to shareholder approval or ratification, as the case may be. AMEX rules or the CGCL require shareholder approval only of Proposals 1, 5 and 6, but the board of directors has determined to seek shareholder approval of all the UPREIT Transactions due to the materiality of such transactions and the potential conflicts of interests between the Company and the Berg Group. Management and the board of directors of the Company believe that such contracts and transactions are and have been carried out in the best interests of the Company. As the Company and other parties to the Acquisition Agreement did complete the Partnership Closing in July 1998, the failure of the shareholders to approve the transaction would not render it ineffective between the parties. Similarly, the Company already has entered into binding agreements to sell 6,495,058 shares of Common Stock in the Private Placement. Within two years from the date of the Partnership Closing the holders of a majority of the L.P. Units in each Operating Partnership may call the Demand Notes issued at the Partnership Closing and upon acquisition of the Fremont Properties, which currently total approximately $33.9 million and which the Company will need to finance by July 2000. If the shareholders do not approve the Private Placement at the Special Meeting, the Company will seek to obtain the amount of funds to be provided by the Private Placement in the same or another manner, including through borrowings under the Wells Fargo Line. The failure of the shareholders to approve Proposals 3 and 4 would deprive the Company of the right to acquire the Pending Development Projects and developments constructed on the Berg Land Holdings. The Company believes this would materially diminish its ability to increase revenues and expand its real estate holdings within the next two years. If the shareholders do not approve Proposal 5, the limited partners will not be able to exchange L.P. Units for Common Stock, and the Company's Total Market Capitalization would be much lower. Additionally, the Company would be unable to meet its obligations to the sellers under the Pending Projects Acquisition Agreement, and thus, unable to enter into that agreement. The Company and all other parties are obligated under the terms of the Acquisition Agreement as amended to use their ultimate best efforts to obtain shareholder approval of the UPREIT Transactions. Therefore, if the shareholders fail to ratify the Partnership Closing transactions and/or the other transactions comprising the Berg Acquisition by failing to approve Proposals 2, 3 and 4, the Company intends to call another special meeting of shareholders at which the Company again would seek such ratification and approval. In any event, the Company's management does not intend to recommend the dissolution and liquidation of the Company even though the shareholders fail to approve any or all of the Proposals. Under the CGCL, however, the holders of at least one-half of the Company's voting shares could vote in favor of dissolution, or the holders of at least one-third of the voting shares could initiate an action in Superior Court for involuntary dissolution of the Company. -20- The Berg Acquisition and the Private Placement may be consummated upon shareholder approval irrespective of whether the shareholders approve the Reincorporation Merger. If the shareholders fail to adopt Proposal 6, the Company nevertheless intends to elect to become a REIT in 1998, but it will remain subject to the CGCL, and will not have adopted the Charter or the proposed bylaws of Mission West-Maryland. The Company's articles of incorporation and bylaws do not contain share ownership limits and other restrictions contained in the Charter or proposed bylaws that are intended to help maintain REIT qualification, however. Therefore the Company would face a greater risk of ceasing to qualify as a REIT if the shareholders do not approve the Reincorporation Merger.See "COMPARISON OF SHAREHOLDERS RIGHTS" and "FEDERAL INCOME TAX CONSIDERATIONS -- Taxation of the Company -- Requirements for Qualification." DISSENTERS' RIGHTS Under California law, none of the shareholders of the Company will be entitled to exercise dissenters' rights with respect to any of the Proposals. See "THE REINCORPORATION MERGER--Approval and Effectiveness of Merger." RECOMMENDATION OF THE BOARD OF DIRECTORS The board of directors of the Company unanimously recommends votes "FOR" Proposals 1 through 6. -21- BACKGROUND OF THE UPREIT TRANSACTIONS INTRODUCTION Following the sale of all of its properties in the first half of 1997, the Company considered several strategic alternatives and decided in May 1997 to enter into a Stock Purchase Agreement for the sale of 200,000 shares of newly issued Common Stock for $900,000, or $4.50 per share, to BBE and other investors designated by BBE. At that time, BBE and the Company contemplated that the Company would become a vehicle to acquire office/R&D real estate, or interests in entities owning such real estate, from Carl E. Berg and his affiliates. Since then, the Company has been engaged in raising capital through private placements of Common Stock, and Mr. Berg and his affiliates have been reorganizing the Operating Partnerships' predecessors, making arrangements to acquire additional R&D Properties and refinancing indebtedness secured by some of the Properties to obtain more favorable loan terms. Pursuant to the Acquisition Agreement signed in May 1998 and amended in July 1998, the Company acquired an approximate 12.11% interest as the sole general partner in each of the Operating Partnerships. The Operating Partnerships now own all of the Berg Properties and the Acquired Properties, representing a total of approximately 4.34 million rentable square feet of R&D Properties. In addition, the Company has agreed to acquire the approximately 1.02 million rentable square feet of Pending Development Projects, after they have been constructed and leased, including an approximate 0.5 million square foot project expected to be occupied by Microsoft. The Berg Group owns L.P. Units representing approximately 82.52% and non-Berg Group parties own approximately 5.37% of the interests in the Operating Partnerships prior to the acquisition of any Pending Development Projects by the Operating Partnerships. In November 1997, the Company effected a 1-for-30 reverse stock split of the Common Stock (the "Reverse Split"). All share and per share figures stated in this Proxy Statement/Prospectus give effect to the Reverse Split. BACKGROUND THE COMPANY. Until recently, the Company was engaged in developing, owning, operating, and selling income-producing commercial real estate. Since completing its most recent development projects in 1991, the Company has been involved principally in owning and operating real estate projects. In January and May 1997, the Company completed the sale of its entire real estate portfolio held prior to the Company's purchase of a 12.11% general partnership interest in the Operating Partnerships. The Company was formed in 1969 as Palomar Mortgage Investors, a California business trust. It operated as a REIT, investing primarily in short and intermediate-term construction and development loans secured by first trust deeds on real property. In 1974, the Company terminated new loan activity except to facilitate the sale of property acquired from borrowers through foreclosure or by deed in lieu of foreclosure and, in 1975, changed its name to Mission Investment Trust. In 1979, the Company terminated its status as a REIT and began to develop and market the properties it owned. In 1982, the Company incorporated under its present name. The Company has two wholly owned subsidiaries, MIT Realty, Inc. and Mission West Executive Aircraft Center, Inc. ("MWEAC"). MIT Realty, Inc. and MWEAC are both inactive. In July 1996, the Company entered into an agreement to sell all of its real estate assets. That agreement was subsequently terminated and replaced, as was a subsequent agreement. On December 6, 1996, the Company entered into an agreement to sell all of its real estate assets to Spieker Properties, L.P. for $50.5 million in cash. Upon completion of the sale of eight properties and one parcel of land, the Company received $47.5 million in cash, from which it repaid all debt encumbering the properties and paid a majority of the related transaction and closing costs, including $3 million in "break-up" fees from the terminated sales transactions. On February 4, 1997, the Company declared a special dividend of $9.00 per share payable on February 27, 1997 to all shareholders of record as of February 19, 1997. After the sale of assets and the payment of the dividend to shareholders, only nominal assets remained in the Company. The board of directors and management considered available strategic alternatives for the remaining corporate entity. Those alternatives included possible business or asset acquisitions or combinations, a sale of the corporate entity, and outright liquidation. On May 27, 1997, the Company entered into the Stock Purchase Agreement with BBE, which transferred most of its share purchase rights to unaffiliated accredited investors as of August 4, 1997. All such investors signed a Voting Rights Agreement requiring them to vote their shares as recommended by Carl E. Berg on behalf of BBE. A special meeting of shareholders was on held August 5, 1997, at which the shareholders of the Company approved the transaction. The transaction was completed on September 2, 1997, at which time all officers and directors of the Company resigned, and BBE and the other investors acquired a 79.6% controlling ownership position in the Company as a group. On October 20, 1997, the Company paid a further distribution of $3.30 per share to shareholders of record as of August 28, 1997, from available cash including $900,000 received in the September 1997 transaction. No portion of the distribution was paid on shares acquired by BBE and its co-investors. In connection with that distribution, the AMEX halted trading of the Common Stock at the opening of trading on October 20, 1997. -22- To increase the price per share of the Common Stock, raise funds and increase assets and shareholders' equity, at a special meeting of shareholders held on November 10, 1997, the shareholders of the Company approved the Reverse Split, and the sale of 1,250,000 newly issued shares of Common Stock at $4.50 per share in a private placement offering. The Company completed that transaction as of November 12, 1997. Certain purchasers of Common Stock in the November transaction also signed a Voting Rights Agreement requiring them to vote their shares as recommended by Carl E. Berg on behalf of BBE. Including such purchasers, holders of more than 60% of the outstanding shares of Common Stock were subject to one of the Voting Rights Agreements. Also in November 1997, the Company changed its fiscal year to December 31. The August and November 1997 private placements and the Reverse Stock Split were intended to increase the likelihood of the resumption of AMEX trading. However, neither the Company nor the AMEX set a deadline for the resumption of trading, nor did AMEX provided guidance beyond declaring its desire that there be a firm commitment for the Company to acquire a controlling general partner interest in the partnerships holding the Berg Properties and to raise additional capital. In addition, the Company did not want trading to resume until (i) audited financial statements were available, (ii) the Company had adequately disclosed the contemplated UPREIT Transactions, (iii) the terms of all the transactions had been settled, and (iv) the Registration Statement had been declared effective by the Commission, or it became apparent that such declaration was imminent. In September 1998, BBE elected to relinquish the potential voting control of the Company represented by the Voting Rights Agreements and unilaterally terminated them with notice to affected parties. As a result, neither Carl E. Berg nor any other member of the Berg Group has any right to cause a majority of the shares of Common Stock to be voted in favor of proposals desired by him or others in the Berg Group, including Proposals 1 through 6. THE OPERATING PARTNERSHIPS. The Company has acquired control of the four Operating Partnerships by becoming the sole general partner in each one effective as of July 1, 1998 for financial statement, income tax and reporting purposes by purchasing an approximate 12.11% interest in each of the Operating Partnerships through the issuance of Demand Notes of approximately $8.9 million, $6.9 million, $18.3 million, and $1.1 million to MWP, MWP I, MWP II and MWP III, respectively. Interest on the Demand Notes is computed at the rate of 7.25% per annum. Payment demands under each Demand Note may be made by action of the holders of a majority of the outstanding L.P. Units in the Operating Partnership only upon the earlier of the closing of the Private Placement, or two years from the of issuance date of the Demand Note. Mr. Berg and other members of the Berg Group control such a majority in each Operating Partnership other than MWP III and would be able to place the Company in default upon a timely demand that the Company cannot honor. The Company believes that all of the Demand Notes will be repaid within two years after their original issuance date. If the proceeds of the Private Placement and other funds of the Company are insufficient to retire the Demand Notes in full at the closing of the Private Placement, the Company intends to borrow funds under the Wells Fargo Line to repay the balance of the demand Notes. The Operating Partnerships hold R&D Properties with an aggregate book value as of September 30, 1998, of $506 million (including accumulated depreciation of $2.6 million), subject to total debt of $220 million. The total amount of collateralized indebtedness of the Operating Partnerships is $220 million. In connection with the Partnership Closing, each of the Operating Partnerships and their limited partners entered into an Agreement for Assumption and Allocation of Liabilities, under which the Limited Partners agreed to assume personal liability for a certain percentage of recourse indebtedness under the Wells Fargo Line, in the event of payment default by the Operating Partnerships, as well as other indebtedness of such partnerships in order to preserve basis for federal income tax purposes. Effective September 30, 1998, the Company and the Operating Partnerships become parties to the Wells Fargo Line and some Limited Partners have guaranteed similar amounts of indebtedness under that line of credit. In addition, certain Limited Partners have guaranteed a portion of the Prudential Secured Loan to preserve tax basis. The Acquisition Agreement provides that Limited Partners are entitled to assume or guaranty indebtedness of the Operating Partnerships in such proportions as they request. The Operating Partnerships have been maintained as separate entities to avoid unnecessary transfers of real estate interests and maintain favorable tax depreciation methods and periods for the benefit of the current Limited Partners. At present, the Company has no intention of merging or combining any of the Operating Partnerships. The Acquisition Agreement does provide, however, that the Company may operate the four limited partnerships for some purposes as if they were a single enterprise. The Company may commingle the funds and cash flow of the partnerships, and, generally, will make them joint obligors for all recourse indebtedness of the Partnership and secure mortgage debt in proportion to the Properties held by the respective partnerships. Operating cash flow shall be distributed based upon the total partnership interests in the Operating Partnerships, and the Company's total share of distributions from the Operating Partnerships will be equal to its overall percentage interest in the Operating Partnerships from time to time. The Acquisition Agreement contemplates that all financing, investing, property acquisitions and dispositions, and all business expansion activities of the Company and the Operating Partnerships will be undertaken through the Operating Partnerships in a manner intended to maintain a ratio of net equity value for each of the four limited partnerships to the total net equity value of the Operating Partnerships as a whole that is similar to such ratio as of the July 1, 1998 effective date of the Partnership Closing. See "THE ACQUISITION AGREEMENT." The Acquisition Agreement provides for reallocations of interests and adjustments in the amounts payable by the Company to each Operating Partnership in exchange for its general partnership interest based upon differences between the amount of debt encumbering the Properties of an Operating Partnership as of the effective date of the Partnership Closing and the amount of such debt on May, 14, 1998. In conjunction with the Partnership Closing and the Prudential Secured Loan refinancing, final closing accounting entries and adjustments as of June 30, 1998 were made on the books of the predecessors of the four Operating Partnerships. Due to higher than estimated closing debt balances, the total number of L.P. Units was reduced by 7,426,773 from 66,906,406 L.P. Units to 59,479,633 L.P. Units to reflect the number of L.P. Units properly outstanding as of July 1, 1998, computed with reference to the agreed upon valuation of $4.50 per Outstanding Share and the net equity value of $267,658,348 determined for the predecessors of the Operating Partnerships as of June 30, 1998. Due to the reduction in total L.P. Units, the Company's recomputed interest in the Operating Partnerships increased automatically to 12.11%. The Operating Partnerships now have an aggregate of 59,479,633 L.P. Units outstanding, of which 55,845,938 L.P. Units are held by Carl E. Berg and other members of the Berg Group. All of the Operating Partnerships are governed by the terms of the Operating Partnership Agreement. Upon the final closing date for the Berg Acquisition and shareholder approval at the Special Meeting, the Operating Partnerships also will be subject to the terms of the Exchange Rights Agreement, the Pending Projects Acquisition Agreement and the Option Agreement. All holders of L.P. Units (other than Carl Berg and Clyde Berg) may put their L.P. Units for redemption by the Operating Partnerships not more than once each year, subject to the Company's right to purchase such units with funds raised through an offering of new shares of Common Stock, and subject to an aggregate annual limitation of $1 million for the total purchase price, unless the Company otherwise elects. Upon the exercise of such put rights, the holder of the L.P. Units will receive cash. In addition, the holders of the L.P. Units may exchange their L.P. Units for shares of Common Stock under certain circumstances. See "OPERATING PARTNERSHIP AGREEMENT--Exchange Rights, Put Rights and Registration Rights." THE PRIVATE PLACEMENT. To partially finance its acquisition of the general partner interests in the Operating Partnerships, the Company has agreed to sell 6,495,058 shares of Common Stock at a price of $4.50 per share to a number of accredited investors in two separate private placements. In one of the transactions, Ingalls & Snyder has acted as the placement agent for the sale of 5,800,000 shares of Common Stock for a total cash purchase price of $26,100,000. Ingalls & Snyder is entitled to receive a commission of $0.05 per share from each of the purchasers payable at the closing for the purchase of the shares. The Company is not obligated to pay these commissions. The Ingalls & Snyder private placement was offered through a Private Placement Memorandum dated as of April 27, 1998 and was fully subscribed on May 4, 1998. At the same time, the Company effected an additional private placement for the offer and sale of 695,058 shares of Common Stock at a price of $4.50 per share to a separate group of investors, including Mr. Berg and consisting primarily of friends and relatives of the Company's senior management. In the transaction, John Moran, a principal of Ingalls & Snyder, will receive 200,000 shares of Common Stock at the closing in payment for services rendered related to the Company's recent capital formation efforts in assisting the Company to obtain its financing. The other 495,058 shares will be sold for cash. The Private Placement is expected to close on the final closing date for the Berg Acquisition but only upon shareholder approval at the Special Meeting. All of the purchasers in both transactions have signed a stock purchase agreement which constitutes their irrevocable commitment to purchase the shares of Common Stock, subject only to customary closing conditions such as the accuracy of the Company's representations and warranties, in addition to the approval of the Private Placement by the shareholders at the Special Meeting. All of the purchasers have represented to the Company that they are accredited investors. The Company believes that some of the investors who have agreed to purchase shares in the Private Placement may fail to close because they will not have available funds that they possessed in May 1998, may no longer view the purchase of shares of Common Stock as a desirable investment, or for some other reason, may refuse to perform their obligations under the stock purchase agreement. If this occurs, the Company will seek to enforce those agreements, or, if management decides not to sue defaulting investors, the Company intends to replace lost purchase proceeds by selling the authorized shares of Common Stock to other investors at $4.50 per share or other available price, or by borrowing the funds under the Wells Fargo Line. The Commission has advised the Company that it does not believe that the shares of New Common Stock to be issued in the Reincorporation Merger in exchange for the shares of Common Stock purchased in the Private Placement will be subject to resale under Rule 145(d). Accordingly, although the Company has no contractual obligation to do so, the Company has registered such shares under the Registration Statement for reoffer and resale by the holders during periods that the Registration Statement remains effective under the Securities Act. The Company presently intends to maintain the effectiveness of the Registration Statement, or a successor registration statement, for this purpose for a period of one year after the closing date for the Private Placement, but is not obligated to do so. Furthermore, the Company has reserved the right to require the selling stockholders to refrain from making offers and sales pursuant to such Registration Statement for any period in which the Company has determined that it would be detrimental to the Company or its stockholders to continue offering or selling shares under the Registration Statement. Principally, this would occur at times when the Company had declined to disclose material nonpublic information. See "THE SELLING STOCKHOLDERS." -23- REASONS FOR THE PRIVATE PLACEMENT AND THE BERG ACQUISITION The board of directors believes that the Private Placement and the Berg Acquisition represent effective means for rapidly acquiring (i) a substantial portfolio of Silicon Valley R&D Properties, (ii) a strong and effective real estate management operation, and (iii) a substantial presence in the REIT industry for future acquisitions and raising capital to finance the Company's operations. Except for the Excluded Properties, the Properties in the Company's initial portfolio include all of the Silicon Valley R&D Properties owned by any of the Berg Group members prior to the Partnership Closing. Moreover, the acquisition of a controlling interest in the Operating Partnerships rather than the direct acquisition of any of the Properties enhances the Company's acquisition and development strategy by providing several alternatives (e.g., cash, Common Stock or L.P. Units) for acquiring the Pending Development Projects and one or more of the Berg Land Holdings from the Berg Group or acquiring additional properties from third parties. The Company believes that these alternative currencies will enable it to acquire desirable buildings or sites from sellers (including the Berg Group) who seek the liquidity provided by shares of Common Stock, or to offer L.P. Units to sellers (including the Berg Group) interested in deferring potential taxable gain. Furthermore, it will allow the Company the flexibility to acquire significant properties without using cash or issuing Common Stock to sellers whose ownership thereof would cause them to exceed the Ownership Limit. By completing the Partnership Closing effective as of July 1, 1998 and in advance of the Special Meeting, the Company is able to consolidate the balance sheets and operating results of the Operating Partnerships with its own financial statements for the entire second half of the current fiscal year. The Company believes that this has simplified the accounting procedures associated with recording the associated transactions, has permitted clearer financial statement presentation, reduced the risk that the Company might fail to meet the 75% gross income test for REIT qualification in 1998, and will help the Company to avoid regulation under the Investment Company Act of 1940. SUMMARY OF THE TRANSACTIONS The Berg Acquisition and Private Placement transactions include the following events: - - The Company will sell 6,495,058 shares of Common Stock for net proceeds of $28.3 million, including 200,000 shares of Common Stock valued at $4.50 per share to John Moran as consideration for consulting services related to the Company's recent capital formation efforts. - - The former general partners in each of the four limited partnerships comprising the Operating Partnerships have resigned. BBE and Kontrabecki have become limited partners in MWP and MWP III, respectively. Berg & Berg Developers LLC and Berg Family Partners LLC were owned by the limited partners in MWP I and MWP II in identical proportions to their respective interests in such partnerships and were dissolved simultaneously with the Partnership Closing. - - The Company has become the sole general partner of the Operating Partnerships by acquiring an approximate 12.11% interest in the capital and profits of the Operating Partnerships for $35.2 million. - - Existing Limited Partnership interests have been converted into 46,832,260 L.P. Units and a total of 12,647,373 L.P. Units have been issued in exchange for R&D Properties contributed to MWP by Carl E. Berg, certain other Berg Group members, and two of the Kontrabecki Partnerships. -24- - - The Limited Partners will obtain the right to exchange each of their L.P. Units for one share of Common Stock upon certain circumstances. - - Certain Limited Partners have the right to put their L.P. Units to the Operating Partnerships once each year for cash at a price equal to the 10-day average trading price for the Common Stock, and by agreement with the Company, it will have the option to purchase the tendered units for cash or shares of Common Stock at the same price. The total annual purchase price of the tendered L.P. Units may not exceed $1 million without the Company's consent. - - Certain Berg Group members have agreed with the Company that the Operating Partnerships will have the right to acquire each of the Pending Development Projects in exchange for a specified number of L.P. Units (estimated to be a total of 33,919,072 L.P. Units) when each such Project has been completed and leased. The number of L.P. Units to be issued will be adjusted if the Property's first-year monthly rental rate per square foot differs from the amount projected under the Pending Project Acquisition Agreement. - - The Berg Group will grant to the Company and the Operating Partnerships the right to purchase the Berg Land Holdings at a fixed formula pursuant to the Option Agreement as long as the Berg Group holds, or has the right to acquire, shares representing 65% of the Common Stock on a Fully-Diluted basis. In addition, the Berg Group will provide certain rights of first offer to the Company and the Operating Partnerships in the event the Berg Group exercises any reserved rights to develop the Berg Land Holdings. - - Berg & Berg has transferred its property management business to the Company and has leased a portion of its Bandley Drive headquarters to the Company pursuant to the Office Lease. - For income tax reasons certain Limited Partners have assumed secondary personal liability of some existing debt, and some of those Limited Partners have guarantied a portion of the Prudential Secured Loan and the Wells Fargo Line. The liability assumption and allocation agreements and guaranties obligate those Limited Partners to repay the debt to the extent the lender is unable to receive payment through recourse to the Operating Partnerships and their assets. CONSEQUENCES OF THE BERG ACQUISITION AND THE PRIVATE PLACEMENT The Berg Acquisition and the Private Placement have or will have the following consequences: - - The existing shareholders of the Company will own approximately 20.73% of the outstanding Common Stock of the Company, and after this transaction, the purchasers of Common Stock in the Private Placement will own approximately 79.27% of the outstanding voting securities of the Company. - - The Company is the sole general partner of, and owns an approximate 12.11% interest in, the Operating Partnerships. - - The members of the Berg Group beneficially own 55,845,938 L.P. Units representing in the aggregate an approximate 82.52% limited partnership interest in the Operating Partnerships. - - Individuals and entities, other than members of the Berg Group, directly and indirectly own 3,633,695 L.P. Units representing in the aggregate an approximate 5.37% limited partnership interest in the Operating Partnerships. - - The Operating Partnerships will own the fee interest in all of the Properties. -25- - - The proceeds of the Prudential Secured Loan along with the proceeds of the Company's purchase of its interest in the Operating Partnerships and cash on hand prior to the Partnership Closing of the Berg Acquisition have been used to repay existing debt secured by the Properties, including debt effectively incurred prior to the effective date of the Partnership Closing to fund substantially all of a distribution of $138.7 million to Carl E. Berg and Clyde J. Berg. BENEFITS TO THE BERG GROUP The members of the Berg Group, and to a lesser extent the non-affiliated Limited Partners in the Operating Partnerships, will realize benefits from the Berg Acquisition. These benefits include: - - All of the L.P. Units in the Operating Partnerships will be exchangeable for shares of Common Stock pursuant to the Exchange Rights Agreement (subject to the Ownership Limit). L.P. Units held by other than Carl E. Berg and Clyde J. Berg may be tendered to the Operating Partnerships pursuant to the Put Rights. Under certain circumstances, the holders of the L.P. Units also may require the Company to register the shares of Common Stock received upon conversion of the L.P. Units. Accordingly, after the expiration of certain restrictions upon the exercise of these liquidity rights, the Berg Group's ownership interest in the Operating Partnerships will be more liquid than its ownership interest in the Berg Properties, and the partnership interests beneficially owned by the partners in the Operating Partnerships will be more liquid than their current ownership interests in each of the four limited partnerships that will comprise the Operating Partnerships. - - Carl E. Berg and Clyde J. Berg received distributions totaling $138.7 million from MWP I and MWP II prior to the effective date of the Partnership Closing. - - Certain debt relating to the Properties was refinanced, including debt owed under the Wells Fargo Line for which members of the Berg Group are personally liable. However, members of the Berg Group and other Limited Partners in the Operating Partnerships have provided personal guaranties with respect to all or some portion of the debt for income tax reasons. - - Carl E. Berg will receive an annual salary of approximately $100,000 plus additional benefits as the Chief Executive Officer of the Company. See "MANAGEMENT--Executive Compensation." VALUATION OF INTERESTS BERG ACQUISITION. Pursuant to the Berg Acquisition, the Company has succeeded to the Silicon Valley R&D Property ownership and management business of the Berg Group through the Company's general partnership interest in the Operating Partnerships. In October 1997, the board of directors of the Company determined that, until such time as the Company had acquired operating properties or other assets which would generate reportable income and funds from operations, all issuances of Common Stock and transactions involving the actual or contingent issuance of equity securities of the Company would be effected at a price of $4.50 per share, or the equivalent thereof. The Company sold shares of Common Stock at that price in a private placement in September 1997 and in another private placement in November 1997. The closing price of the Common Stock, as quoted on the AMEX, was $3.38 on October 17, 1997, the last trading date prior to the halt in trading declared by the AMEX effective as of October 20, 1997. On October 21, 1997, a special distribution of $3.30 per share of Common Stock was paid to shareholders of record as of August 28, 1997. Upon approval of the shareholders and filing an amendment to the articles of incorporation of the Company on November 10, 1997, the Company effected Reverse Split, which the board of directors expected to result in each outstanding share of Common Stock having a value approximately equal to the $4.50 price which investors had paid in the private placement transaction on November 12, 1997. In May 1998, the Company agreed to sell shares of Common Stock to the purchasers in the Private Placement at $4.50 per share. Pursuant to the Acquisition Agreement, the Company agreed to acquire its approximately 12.11% general partner interest in the Operating Partnerships for $35.2 million, which (assuming 67,673,227 Outstanding Shares) equates to a price of approximately $4.30 per share of Common Stock. The Company and the Berg Group have used a price of $4.50 to determine the value of each L.P. Unit as well as the number of L.P. Units issuable in connection with the Operating Partnerships' acquisition of the Pending Development Projects. See "DESCRIPTION OF THE PROPERTIES--The Pending Development Projects." The price of $4.50 per share selected by the board of directors may not be representative of the trading price of a share of Common Stock, and it is likely that the Common Stock will trade at a different price. -26- Independent appraisals were not obtained to determine the fair market value of the Berg Properties for purposes of the Berg Acquisition. The total historical cost of the Berg Properties was approximately $178 million at June 30, 1998 immediately prior to the effective date of the Partnership Closing. The Company believes, however, that the most appropriate valuation is one that reflects the value of the Silicon Valley R&D Property ownership and management business of the Operating Partnerships, taken as a whole. PRO FORMA CAPITALIZATION The following table sets forth the capitalization of the Company as of September 30, 1998 and as adjusted to reflect the consummation of the UPREIT Transactions. The information set forth in the following table should be read in conjunction with the combined historical financial statements and notes thereto and the (unaudited) pro forma financial information and notes thereto included elsewhere in this Proxy Statement/Prospectus and the discussion set forth in "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources."
September 30, 1998 ----------------------------------- Company Company Pro Historical Forma(2) --------------- --------------- (in thousands) Debt: Wells Fargo Line $39,044 $46,610 Mortgage notes payable (related parties) 18,780 18,780 Mortgage notes payable 162,222 157,597 --------------- --------------- Total debt(1) 220,046 222,987 Minority Interest 273,740 273,740 Shareholders' equity: Preferred Stock, $0.001 par value, 20,000,000 authorized, none issued and outstanding on a pro forma basis - - Common Stock, $0.001 par value, 200,000,000 authorized, 8,193,594 issued and outstanding on a pro forma basis - 8 Receivable from issuance of Common Stock (941) (941) Additional paid in capital 27,596 55,961 Accumulated deficit in excess of dividends paid (19,711) (19,711) --------------- --------------- Total shareholders' equity 6,944 35,272 --------------- --------------- Total Capitalization $500,730 $531,999 --------------- --------------- --------------- ---------------
- ----------- (1) For a description of the Company's debt, see Note 5 of Notes to Combined Financial Statements for the Berg Properties and "DESCRIPTION OF THE PROPERTIES--Mortgage Debt." (2) Excludes any effect of exercise or conversion of potentially dilutive securities. -27- INFORMATION WITH RESPECT TO THE COMPANY INCLUDED INFORMATION This Proxy Statement/Prospectus is accompanied by (i) a copy of the Company's Form 10-K for the one-month transition period and fiscal year ended December 31, 1997; (ii) Part I of the Company's Form 10-Q for the quarter ended September 30, 1998; and (iii) combined historical financial statements of the Operating Partnerships' predecessor as of and for the periods or years ended June 30, 1998 and 1997, and December 31, 1997, 1996 and 1995. PRICE RANGE OF THE COMMON STOCK AND DISTRIBUTION HISTORY The following are the high and low sales prices, by quarter, of the Company's common stock for the two most recent fiscal years as adjusted to give retroactive effect to the 1 for 30 reverse stock split which was effective as of November 10, 1997:
1997 1996 ------------------------------ ------------------------------ High Low High Low ------------- ------------- ------------- ------------- First Quarter(1) 397 1/2 56 1/4(2) 161 1/4 138 3/4 Second Quarter 112 1/2 52 1/2 210 138 3/4 Third Quarter 153 3/4 93 3/4 247 1/2 187 1/2 Fourth Quarter 136 7/8 93 3/4(3) 292 1/2 213 3/4
- ---------- (1) In 1997, the Company changed its fiscal year end from November 30 to December 31. Thus, the first quarter of 1997 includes the month of December 1996. (2) During the first fiscal quarter in 1997 (on February 27, 1997), the Company paid a $9.00 special dividend ($270 adjusted to give retroactive effect to the 1 for 30 reverse stock split). (3) During the fourth fiscal quarter in 1997 (on October 21, 1997), the Company paid a $3.30 special dividend ($99 adjusted to give retroactive effect to the 1 for 30 reverse stock split). As of September 30, 1998, the approximate number of holders of record of the Company's common stock was approximately 360. The Company paid no dividends during fiscal 1996. The Company declared and paid a special dividend of $9.00 per share ($270 per share, post-split) on February 27, 1997. A special dividend of $3.30 per share was paid on October 21, 1997 ($99 per share, post-split). The Company intends to qualify as a REIT for tax purposes in the fiscal year ending December 31, 1998. In order to so qualify, the Company intends to declare and pay regular quarterly dividends in the future. See "DISTRIBUTION POLICY." -28- THE COMPANY'S PRO FORMA DATA SUMMARY UNAUDITED PRO FORMA FINANCIAL DATA Set forth below are summary unaudited pro forma combined financial information and other data for the Company as of and for the periods indicated, prepared on the assumption that the Private Placement and the Berg Acquisition had occurred at September 30, 1998 for balance sheet data and property and other data. The pro forma operating data further assumes that such transactions had occurred as of January 1, 1997. This data should be read in conjunction with the Selected Financial Data and the historical and pro forma financial statements included elsewhere in this Proxy Statement/Prospectus.
Pro Forma Pro Forma Nine Months Ended Year Ended September 30, 1998 December 31, 1997 ------------------ ------------------- (in thousands) OPERATING DATA: Revenue: Rent $39,558 $48,992 Tenant reimbursements 6,357 6,769 Other income 178 359 ================== =================== Total revenue 46,093 56,120 ------------------ ------------------- Expenses: Operating expenses 3,403 4,036 Real estate taxes 3,696 4,475 General and administrative 2,100 2,750 Interest (related parties) 1,022 1,362 Interest 10,660 14,639 Depreciation and amortization 7,936 10,842 ------------------ ------------------- Total Expenses 28,817 38,104 ------------------ ------------------- Income before minority interest 17,276 18,016 Minority Interest 15,325 16,021 ------------------ ------------------- Income before gain on sale of real estate 1,951 1,995 Gain on sale of real estate - 4,736 ------------------ ------------------- Net income 1,951 6,731 ================== =================== Basic and Diluted Earnings Per Share (1) $0.24 $0.82 ================== =================== Weighted average number of common shares outstanding 8,193,594 8,193,594 ================== =================== PROPERTY AND OTHER DATA: Total properties, end of period 69 69 Total square feet, end of period 4,340,569 4,340,569 Average monthly rental revenue per square foot(2) $1.01 $0.87 Average occupancy - stabilized 100% 97% FUNDS FROM OPERATIONS: (3) $25,212 $28,858 BALANCE SHEET DATA: Real estate assets, net of accumulated depreciation $506,120 Total assets 543,477 Debt 204,207 Debt (related parties) 18,780 Total liabilities 234,465 Minority Interest 273,740 Shareholders' equity 35,272
- ------------------- (1) Per share calculations do not consider the dilutive effect of (i) 59,479,633 L.P. Units that may become exchangeable for shares of Common Stock; and (ii) 605,000 shares of Common Stock issuable in connection with options outstanding under the 1997 Stock Option Plan. For purposes of the pro forma per share calculation, these securities if converted or exercised, would have no effect on per share calculations. (2) Average monthly rental revenue per square foot has been determined by taking the base rent for the period, divided by the number of months in the period, and then divided by the total square feet of occupied space. (3) As defined by the National Association of Real Estate Investment Trusts ("NAREIT"), FFO represents net income (loss) before minority interest of unitholders (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, 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. 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 the Company's ability to incur and service debt and make capital expenditures. 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. FFO is not comparable to similarly entitled items reported by other REITs that do not define them exactly as the Company defines FFO. See "Distribution Policy." -29- THE BUSINESS OF BERG & BERG HISTORY OF BERG & BERG Carl E. Berg, the Company's President and Chief Executive Officer and the controlling member of the Berg Group, has been engaged in the development and long-term ownership of Silicon Valley real estate for more than 25 years. In 1969, Mr. Berg foresaw the rising demand for efficient, multi-purpose facilities for the rapidly growing electronics industry in the area of Santa Clara County that has come to be known as "Silicon Valley" (a term that now encompasses much of the southern portion of the San Francisco Bay Area). See "--The Silicon Valley R&D Property Market". He formed a general partnership, Sobrato-Berg Properties, with John Sobrato to focus on the development of R&D Properties, that is, mixed-use facilities providing space for offices, development and research, light manufacturing and assembly. Between 1969 and 1980, Sobrato-Berg Properties acquired and developed approximately 45 R&D Properties, totaling approximately 3.5 million rentable square feet. In 1980, Messrs. Berg and Sobrato terminated their partnership and, as a result of the subsequent division of its assets, 20 properties totaling approximately 1.2 million rentable square feet were transferred to Berg Family Partnership, owned by Mr. Berg and other members of the Berg Group. In 1980, Mr. Berg and his brother, Clyde J. Berg, organized Berg & Berg to continue the business of acquiring and developing R&D Properties. Between 1980 and 1983, Berg & Berg acquired and developed 18 additional R&D Properties, totaling approximately 1.4 million rentable square feet. In 1983, Berg & Berg's assessment of the Silicon Valley commercial real estate market suggested a significant decline in demand for rental property, particularly in the R&D Property segment of the market. Based on this assessment, in 1983 Berg & Berg focused its attention on enhancing investment returns from its existing portfolio of properties and constructing facilities for identified tenants on a build-to-suit basis. From 1983 until 1995, Berg & Berg was engaged primarily in build-to-suit development activities on a limited basis in selected locations where experience with its portfolio properties indicated that new buildings could be rented at rates adequate to justify anticipated development costs and provide an acceptable return on its investment. In late 1994, Berg & Berg perceived a change in the market for R&D Properties in Silicon Valley and in 1995 acquired over 60 acres of land in Milpitas, Fremont and Mountain View, California and over 450,000 square feet of R&D Properties with short-term leases at below-market rents. During the past two years, Berg & Berg has purchased land or options on land totaling more than 55 acres in south San Jose. In 1995 and 1996, Berg & Berg began construction of eight buildings comprising over 700,000 square feet and was one of the two most active developers leasing and building R&D Properties in Silicon Valley. Since 1972, Mr. Berg also has been actively involved in venture capital investments in technology companies in the Silicon Valley. Directly and through various venture capital partnerships, he has made early-round equity investments in more than 100 technology companies, including such companies as Amdahl Corporation, Sun Microsystems, Inc., Integrated Device Technologies, Inc., Valence Technology, Inc., Iwerks Entertainment, Inc., On-Command Video, Inc. and Videonics, Inc. Mr. Berg has served on the boards of directors of numerous technology companies and currently serves on six such boards. These activities have helped Berg & Berg to develop a detailed understanding of the real estate requirements of technology companies, to acquire valuable market information, to increase its name recognition within the venture capital and entrepreneurial communities, and to manifest its commitment to the growth and success of Silicon Valley companies. The Company believes that Mr. Berg's substantial knowledge of and contacts in the information technology industry have provided a significant benefit to Berg & Berg in the operation of its commercial real estate business, and will continue to benefit the Company after the Berg Acquisition. -30- REGIONAL ECONOMIC PROFILE The San Francisco Bay Area comprises nine counties, including Santa Clara, Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, Solano and Sonoma Counties, covering approximately 7,200 square miles. The San Francisco Bay Area is the second largest metropolitan area in California with over 6.5 million people, and the fourth largest metropolitan area in the United States after New York, Los Angeles, and Chicago. The economy of the San Francisco Bay Area is one of the strongest and most diverse in the nation. The growth of the computer, biotechnology, and engineering industries propels the region's economy forward as new technologies draw strength from a broad base of industries, services, venture capital financing, banking, universities, and research institutions. The San Francisco Bay Area's long term relationship with Pacific Rim countries has made it one of the major gateways for Asia and Far East trade. Moreover, the San Francisco Bay Area has a reputation as one of the most desirable areas in the United States to visit, which has made tourism a major growth industry. The San Francisco Bay Area is a center of all resources necessary to create, develop and expand new businesses. Factors contributing to the region's economic strength include the following: - TECHNOLOGY CENTER. The Silicon Valley economy has an expansive employment base of technology, semiconductor, electronics, telecommunications, software, and computer related companies unsurpassed in the nation and the world. The Silicon Valley is host to over 4,000 technology companies employing in excess of 250,000 people. Santa Clara County ranks fourth in the State of California in terms of employment and population and is headquarters to many Fortune 500 companies, including Applied Materials, Inc., Apple Computer, Inc., Intel Corporation, Sun Microsystems, U.S. Robotics, Inc., National Semiconductor Corporation, Cisco Systems, Inc., and Hewlett-Packard. - FINANCIAL SERVICES CENTER. The San Francisco Bay Area is the home of the nation's highest density of venture capital firms, the headquarters for Bank of America, Wells Fargo Bank, and numerous investment banking firms specializing in technology industries. According to the Price Waterhouse LLP National Venture Capital Survey, during 1997, venture capital firms invested approximately $3.66 billion in Silicon Valley companies. - TRANSPORTATION AND FREEWAYS. Silicon Valley has an elaborate regional freeway system, the San Jose International Airport, close access to the San Francisco International Airport, and a modern light rail system that is expected to cover major portions of the Silicon Valley's R&D areas by the year 2000. The major freeways are Interstates 280, 680, and 880, U.S. 101, and Highway 85. U.S. 101 and Interstate 280 converge in San Jose and connect to San Francisco, while Interstate 880 connects the Oakland area. Interstate 680 provides access to the East Bay and Pleasanton areas. Highway 85 forms a semi-circle around San Jose and connects the main residential areas to the heart of Silicon Valley. - HIGHLY EDUCATED WORK FORCE. The San Francisco Bay Area has the highest percentage of college-educated adults in the nation and its pre-eminent educational institutions, such as Stanford University and the University of California at Berkeley, have played a major role in making it one of the world's leading technology centers. The presence of these major research institutions and the highly educated work force has fueled the region's economic engine and will enable the region to build on its strong technology base in the future. - CENTER FOR INTERNATIONAL TRADE. The San Francisco Bay Area is currently the fourth largest trade district behind Los Angeles, New York and Detroit serving primarily the Pacific Rim countries. -31- THE SILICON VALLEY R&D PROPERTY MARKET Santa Clara County, which incorporates much of Silicon Valley, including the San Jose metropolitan area, has grown in population from 659,000 in 1960 to 1,653,100 on January 1, 1997, according to census data. San Jose, with a population of more than 850,000, is the third largest city in California and the eleventh largest in the United States. Santa Clara County is the largest county in the San Francisco Bay Area encompassing an area of 1,312 square miles, and includes many communities of diverse size and nature. Much of Santa Clara County's economic growth has been driven by the development and expansion of high technology industries. In recent years, space requirements and higher rents for R&D Properties in Santa Clara County have led technology companies to seek facilities elsewhere at office parks located in southwestern Alameda County and southwestern San Mateo County. As a result, the Company believes that the term "Silicon Valley" now refers to the more or less contiguous areas of industrial development in all three counties where a substantial number of technology companies can be found. THE SILICON VALLEY [MAP] -32- Supported by major educational and research institutions and by a strong venture capital community, Silicon Valley has been instrumental in the development and commercialization of technology in virtually every major field. Over the past 40 years the Silicon Valley economy has grown and diversified through an evolutionary process as successive generations of technology emerge, mature and are eventually replaced. In recent years, the continuous emergence of new generations of technology companies has kept unemployment rates in Santa Clara County consistently lower than California rates overall, and generally lower than national rates, as shown by the following table: UNEMPLOYMENT RATE
United States (1) California (2) Santa Clara County (2) ----------------- -------------- ---------------------- 1993 6.8% 9.4% 6.8% 1994 6.1% 8.6% 6.2% 1995 5.6% 7.8% 4.9% 1996 5.4% 7.2% 3.6% 1997 4.9% 6.1% 3.1%
- ---------------- (1) Source: U.S. Bureau of Labor Statistics. (2) Source: State of California Employment Development Department. The overall 1997 unemployment rates for the area referred to as Silicon Valley in this Proxy Statement/Prospectus are lower than the rates for Santa Clara County. While Silicon Valley companies often establish manufacturing plants in other locations where they can benefit from lower facilities and labor costs, the headquarters, marketing and research and development functions associated with running the company and developing new products often remain in Silicon Valley. This occurs because of the availability of a well-trained and experienced workforce, an established infrastructure of vendors and service-providers and the proximity to major universities engaged in advanced science and technology research. Consequently, the principal space requirement for entrepreneurial technology companies in Silicon Valley is for R&D Properties. According to regular quarterly reports on R&D Properties prepared by BT Commercial Real Estate ("BT Commercial"), Silicon Valley R&D Properties currently represent over 120 million rentable square feet, more than 50% of all commercial industrial space in Silicon Valley. At the end of the fourth quarter of 1997, the vacancy rate for Silicon Valley R&D Properties stood at 4.5%, an approximate 10% decrease from the fourth quarter of 1996. Currently, the occupancy rate is approximately 95% for properties in good condition at desirable locations. SILICON VALLEY R&D PROPERTY MARKET The following table sets forth data regarding the Silicon Valley R&D Property market:
Increase in Aggregate Increase in Aggregate Average Asking Space Available(1) Leased Space(1) Vacancy Rate Rental Rates($)(2) --------------------- --------------------- ------------ ------------------ 1993 12.1 1.5 14.1% 0.76 1994 15.2 3.0 12.2% 0.76 1995 22.5 8.5 7.0% 0.75 - 0.80 1996 17.2 5.2 5.1% 0.80 - 1.08 1997 16.7 5.5 4.5% 1.19 - 1.39
- ------------- (1) Millions of square feet. (2) Per square foot per month. As indicated by the table, since 1995, the Silicon Valley R&D Property market has seen a significant reduction in the excess of gross absorption over net absorption, while witnessing declining vacancy rates and significantly increasing rental rates. The Company does not anticipate a significant increase in gross absorption in this market because there are few large blocks of contiguous space and suitable development sites. For example, in the fourth quarter of 1997, only five blocks of contiguous R&D Property space of at least 100,000 square feet were available in the entire market, according to BT Commercial. The Company believes that average asking rental rates during 1998 will exceed 1997 average asking rental rates and will remain level in 1999. According to BT Commercial, between the fourth quarter of 1996 and the fourth quarter of 1997, average asking rental rates in the Silicon Valley R&D Property market rose from $1.11 to $1.39 per square foot per month. On the other hand, tenant improvement allowances offered by landlords have declined substantially, and in desirable locations, like Cupertino, Mountain View, Sunnyvale, San Jose, Fremont and Milpitas, now can be as much as 50% lower than they were in the past few years. Since January 1995, over 1.4 million rentable square feet of the Berg Properties have been leased to approximately 45 tenants with rents at least equal to the average asking rental rate in the Silicon Valley R&D Properties market. -33- BERG & BERG BUSINESS STRATEGY Berg & Berg's development business and its portfolio of Silicon Valley R&D Properties have been built on a business strategy incorporating the following elements: - STRONG GEOGRAPHIC AND INDUSTRY FOCUS. Berg & Berg has focused its activities on addressing the facility requirements of technology-oriented companies in the Silicon Valley. The Company believes that this focus has enabled Berg & Berg to gain a thorough understanding of the Silicon Valley real estate market, to anticipate trends in the market, to identify and concentrate its efforts on the most favorably located sub-regions of the market and to take advantage of its experience and its extensive contacts and relationships with local government agencies, real estate brokers and subcontractors, as well as with tenants and prospective tenants. - LEAN, EXPERIENCED MANAGEMENT TEAM. In part because of its primary focus on Silicon Valley and the special real estate requirements of technology tenants, Berg & Berg has been able to conduct and expand its business with a small management team comprised of highly-qualified and experienced professionals working within a relatively flat organizational structure. These managers share a common approach to property development and management. The Company believes that the leanness, experience and continuity of this management team have enabled Berg & Berg to rapidly assess and respond to market opportunities and tenant needs, minimize development and construction risks, control operating expenses and develop and maintain excellent relationships with its tenants. The Company further believes that these advantages translate into significantly lower costs for operations and construction which give the Company the ability to compete favorably with other R&D Property developers in Silicon Valley, especially for build-to-suit projects subject to competitive bidding. Furthermore, its lower cost structure should allow the Company to generate better returns from properties whose value can be increased through appropriate remodeling and efficient property management. - MARKET AWARENESS AND SENSITIVITY. Berg & Berg has consistently followed a demand-driven approach to the R&D Property business in which it has used its in-depth experience and extensive industry contacts to identify the facility requirements of tenants and potential tenants in the Silicon Valley and its various sub-regions. - EMPHASIS ON GENERAL PURPOSE FACILITIES, SINGLE TENANT PROJECTS AND LONG-TERM TENANT RELATIONSHIPS. Most of the Properties are general purpose R&D Properties, located in desirable sub-regions of the Silicon Valley. Such Properties have been developed for, or leased to, single-tenants, many of whom are large, publicly-traded electronics companies. Most of the Company's major tenants have occupied their Properties for many years pursuant to fully net leases under which the tenant pays all operating costs. The Company believes that Berg & Berg's practice of emphasizing the development of -34- single-tenant rather than multi-tenant properties has contributed to its relatively low turnover and high occupancy rates and that the relatively small number of tenants occupying the Properties allows it to efficiently manage the Properties and serve the needs of its tenants without the need for an extensive in-house staff or the assistance of a third-party management organization. In addition, this emphasis allows the Company to pay less for tenant improvements and leasing commissions than multi-tenant, high turnover property owners, and also reduces the time and expense associated with obtaining building permits and other government approvals. The Company believes that the relatively stable, extended relationships which Berg & Berg has developed with its key tenants have been a valuable factor in the expansion of its business. - SOUND PROPERTY MANAGEMENT PRACTICES. Berg & Berg makes extensive use of its experienced in-house architectural, design and construction management personnel in all phases of its acquisition, development and property management businesses, and focuses on similar types of development projects to more effectively utilize these skills and experience. For each property, the Berg & Berg staff develops a specific development, marketing and property management program. It selects vendors and subcontractors on a competitive bidding basis from a select group of highly qualified firms with whom it maintains ongoing relationships and carefully supervises their work. The Company believes that, as a result of these sound operating practices, Berg & Berg has acquired a reputation for completing its projects on time and within budget. -35- BERG PROPERTIES SUMMARY SELECTED FINANCIAL DATA Set forth below are Summary Combined Financial Data for the Berg Properties as of and for the periods indicated on an historical basis. This data should be read in conjunction with the Selected Financial Data and the historical financial statements included elsewhere in this Proxy Statement/Prospectus.
Six Months Ended June 30, Year Ended December 31, -------------------------- ------------------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ------------ ------------ ----------- ---------- ---------- ---------- ---------- ($ in thousands) (Unaudited) (Unaudited) OPERATING DATA: Revenue: Rent $21,962 $18,848 $40,163 $28,934 $23,064 $25,186 $25,620 Tenant reimbursements 4,038 3,094 6,519 3,902 4,193 3,190 3,486 ------------ ------------ ----------- ---------- ---------- ---------- ---------- Total revenue 26,000 21,942 46,682 32,836 27,257 28,376 29,106 ------------ ------------ ----------- ---------- ---------- ---------- ---------- Expenses: Operating expenses 2,088 2,150 $ 3,741 $ 1,906 $ 2,032 $ 1,355 1,129 Real estate taxes 2,126 2,006 4,229 3,750 3,595 2,716 3,116 Management fee (related parties) 645 498 1,050 827 654 739 994 Interest (related parties) 61 135 248 293 357 329 45 Interest 3,044 3,338 5,919 6,090 6,190 8,222 9,054 Depreciation and amortization 3,862 3,351 7,717 6,739 6,323 6,851 7,156 ------------ ------------ ----------- ---------- ---------- ---------- ---------- 11,826 11,478 22,904 19,605 19,151 20,212 21,494 ------------ ------------ ----------- ---------- ---------- ---------- ---------- Income before gain on sale of real estate and extraordinary item 14,174 10,464 23,778 13,231 8,106 8,164 7,612 Gain on sale - - - - 20,779 - - ------------ ------------ ----------- ---------- ---------- ---------- ---------- Income before extraordinary item 14,174 10,464 23,778 13,231 28,885 8,164 7,612 Extraordinary item - - - 610 3,206 - 1,766 ------------ ------------ ----------- ---------- ---------- ---------- ---------- ------------ ------------ ----------- ---------- ---------- ---------- ---------- Net income $14,174 $10,464 $23,778 $13,841 $32,091 $ 8,164 $ 9,378 ------------ ------------ ----------- ---------- ---------- ---------- ---------- ------------ ------------ ----------- ---------- ---------- ---------- ---------- PROPERTY AND OTHER DATA: Total properties, end of period 58 56 58 53 50 41 40 Total square feet, end of period 3,779 3,593 3,779 3,392 3,195 2,856 2,796 Average monthly rental revenue per square foot(1) $ 0.95 $ 0.85 $ 0.86 $0.78 $0.71 $ 0.96 $0.84 Occupancy at end of period 100% 96.9% 97.7% 91.9% 87.4% 80.3% 89.6% FUNDS FROM OPERATIONS(2)(3) $18,036 $13,815 $31,495 $19,970 $14,429 $15,015 $14,768 Cash flow from operations $17,356 $13,709 $29,909 $20,248 $16,392 $16,518 $18,480 Cash flow from investing 690 (9,831) (17,251) (29,275) (6,353) (5,003) (3,248) Cash flow from financing (23,765) 5 (8,432) 9,433 (10,013) (12,093) (13,599) June 30, December 31, -------------------------- ------------------------------------------------------------- 1998 1997 1997 1996 1995 1994 1993 ------------ ------------ ----------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: ($ in thousands) (Unaudited) (Unaudited) Real estate assets, net of accumulated depreciation $95,600 $97,190 $100,15 $90,710 $72,319 $62,450 $61,610 Total assets 104,280 109,525 113,950 97,651 73,730 59,957 64,516 Debt 37,868 78,353 76,507 73,416 69,543 79,594 100,126 Debt - related parties 156,632 2,252 1,975 2,546 3,051 2,889 1,433 Total liabilities 200,238 86,874 84,299 80,826 76,199 83,720 104,117 Partners' (deficit)/ equity (95,958) 22,651 29,651 16,825 (2,469) (23,763) (39,601)
- -------------- (1) Average monthly rental revenue per square foot has been determined by taking the base rent for the period, divided by the number of months in the period, and then divided by the total square feet of occupied space. (2) As defined by the National Association of Real Estate Investment Trusts ("NAREIT"), FFO represents net income (loss) before minority interest of unitholders (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, 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. 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 the Company's ability to incur and service debt and make capital expenditures. 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. FFO is not comparable to similarly entitled items reported by other REITs that do not define them exactly as the Company defines FFO. See "Distribution Policy." (3) Non-cash adjustments to FFO were as follows: in all periods, depreciation and amortization; in 1996, 1995 and 1993, gains on extinguishment of debt; and in 1995, gain on sale of property. -36- SELECTED COMBINED HISTORICAL FINANCIAL DATA FOR THE ACQUIRED PROPERTIES Set forth below are Summary Combined Financial Data for the Acquired Properties as of and for the periods indicated on an historical basis. This data should be read in conjunction with the historical financial statements included elsewhere in this Proxy Statement / Prospectus.
Six Months Ended June 30, Year Ended December 31, ------------------------------- ---------------------------------------------------------------- 1998 1997(1) 1997(1) 1996 1995 1994 -------------- ------------- ------------- ------------- -------------- ------------ (in thousands) (Unaudited) (Unaudited) Revenue Base rent $3,301 $2,420 $5,409 $3,388 $3,136 $2,956 Other income 218 58 250 61 58 60 -------------- ------------- ------------- ------------- -------------- ------------ Total Revenue 3,519 2,488 5,659 3,449 3,194 3,016 Expenses Property operating 19 25 49 170 417 725 Real estate taxes 197 116 246 48 11 128 -------------- ------------- ------------- ------------- -------------- ------------ Total Expenses 216 141 295 218 428 853 -------------- ------------- ------------- ------------- -------------- ------------ Revenue in excess of certain expenses $3,303 $2,347 $5,364 $3,231 $2,766 2,163 -------------- ------------- ------------- ------------- -------------- ------------ -------------- ------------- ------------- ------------- -------------- ------------
- ----------- (1) The Fremont Properties commenced operations during the first quarter of 1997. -37- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION FOR THE PROPERTIES The following discussion should be read in conjunction with the Selected Financial Data and the Combined Financial Statements for the Properties and notes thereto appearing elsewhere in this Proxy Statement/Prospectus. The Combined Financial Statements of the Berg Properties are comprised of the operations, assets and liabilities of the Berg Properties other than the Acquired Properties and the Pending Development Projects. The Kontrabecki Properties and the Fremont Properties became part of the real estate holdings of the Operating Partnerships at the Partnership Closing. The Company is the sole general partner and the beneficial owner of an approximately 12.11% interest in the Operating Partnerships with control of the operations and activities of the Operating Partnerships and all of the Properties from July 1, 1998. OVERVIEW The Berg Properties are a combination of Silicon Valley R&D Properties controlled historically by the Berg Group. Since the beginning of 1995, the aggregate R&D Property square footage represented by the Berg Properties has increased significantly from approximately 2.9 million square feet at December 31, 1994 to approximately 3.8 million square feet at June 30, 1998, primarily from the development of new buildings. Such increase combined with a substantial increase in the overall occupancy rate of the Berg Properties have contributed to a dramatic increase in the revenues earned by the Berg Group from the Berg Properties. The table below details the size of the Berg Properties portfolio and the total occupancy rate as of each of the dates presented:
June 30, December 31, -------------------- --------------------------------------------- 1998 1997 1997 1996 1995 1994 -------- -------- --------- -------- --------- -------- Square feet (millions) 3.8 3.6 3.8 3.4 3.2 2.9 Occupancy percentage 100% 96.9% 97.7% 91.9% 87.4% 80.3%
Historically, entities within the Berg Group have developed and managed the Berg Properties, drawing on funds provided by operations, lines of credit from Wells Fargo (including the Wells Fargo Line), direct property loans provided by other lending institutions, and contributions of capital from time to time by members of the Berg Group, principally to repay indebtedness outstanding under the Wells Fargo lines of credit. In addition, certain affiliates of the Berg Group have used the Wells Fargo lines of credit for other ventures on a demand basis, including loans used primarily to finance the construction of improvements on certain of the Berg Properties. Those loans and all other lending arrangements with affiliates will be terminated upon the closing of the Berg Acquisition. The table below details the borrowings and repayments by the Berg Group during the periods indicated:
Six Months Ended June 30, Years Ended December 31, ----------------------------- -------------------------------------------- 1998 1997 1997 1996 1995 ------------- -------------- -------------- ------------- ------------- ($ in thousands) Borrowing of Wells Fargo lines - $ 2,134 $3,750 $6,999 $ 1,034 Repayment of Wells Fargo lines $(1,277) - (1,335) (952) (5,978) Borrowing on Notes (related parties) 119,956 - - - 637 Repayment on Notes (related parties) (1,975) (294) (571) (504) (474) Borrowing on Mortgages - 3,105 3,105 - - Repayment of Mortgages (686) (302) (2,429) (1,563) (1,210) --------------- -------------- -------------- ------------- ------------- Borrowed/(Repaid) Total: $(116,018) $(4,643) $2,520 $3,980 $(5,991) --------------- -------------- -------------- ------------- ------------- --------------- -------------- -------------- ------------- -------------
-38- Most of the Berg Properties were developed by members of the Berg Group or their Affiliates who have held such Properties continuously since their initial construction. Occasionally, the Berg Group has acquired and sold developed properties, as well. In 1995, the Berg Group sold two buildings totaling approximately 315,000 rentable square feet: one building was sold directly to the tenant, Xilinx Corporation; the other building was distributed by Berg & Berg Developers to its partners and then sold to Xilinx Corporation (collectively, the "Xilinx Sales"). Immediately after the Xilinx Sales, Berg & Berg acquired McCandless Technology Park in Milpitas, California, which comprised approximately 345,000 rentable square feet. Later in 1995, members of the Berg Group acquired several additional R&D Properties consisting of approximately 110,000 rentable square feet. The table below summarizes dispositions, new development, and acquisitions of R&D Properties by the Berg Group since January 1, 1995, in rentable square footage:
Six Months Ended June 30, Years Ended December 31, ---------------------------- --------------------------------------- 1998 1997 1997 1996 1995 ------------- ------------- ------------ ------------ ----------- Constructed - 201,157 387,729 196,348 200,484 Purchased - - - - 454,591 Sold - - - - (315,460) ------------- ------------- ------------ ------------ ----------- Total Net - 201,157 387,729 196,348 339,615 ------------- ------------- ------------ ------------ ----------- ------------- ------------- ------------ ------------ -----------
Since 1991, BBE has operated as a management company providing services to the Berg Group members and their Affiliates owning the Berg Properties, who have paid BBE a management fee of approximately 3% of gross base rental revenue determined on a cash basis. All management fee arrangements with BBE were terminated as of July 1, 1998. Beginning in 1995, new leases established for approximately 44 of the Berg Properties (including leases acquired in the purchase of McCandless Technology Park) obligated the tenants to pay approximately 3% of the base rent as additional monthly common area charges. Berg & Berg views these charges as a means for tenants to fund their liability for future repairs of a non-structural nature ratably over the term of the lease. In the Combined Financial Statements of the Berg Properties these payments have been characterized as rent under GAAP accounting, and no reserve has been established for any future repairs. As of July 1, 1998, the Company acquired its general partnership interest in the Operating Partnerships at the Partnership Closing. The Company's results of operations, cash flows, and liquidity therefore include the Berg Properties and the Acquired Properties from July 1, 1998. RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997 THE BERG PROPERTIES RENTAL REVENUES AND TENANT REIMBURSEMENTS. Rental revenue increased by $3.1 million or 16.4%, to $22.0 million for the six months ended June 30, 1998 compared to $18.9 million for the six months ended June 30, 1997. The primary reasons for the increase in rental revenues were the increase in the overall occupancy rate for the Berg Properties, from 96.9% at June 30, 1997 to 100% at June 30, 1998, the addition of approximately 187,000 rentable square feet of leased space during the third quarter of 1997 and higher rents associated with new leases and renewals. Tenant reimbursements increased by $0.9 million or 29.0%, to $4.0 million for the six months ended June 30, 1998 as compared to $3.1 million for the six months ended June 30, 1997. The increase in tenant reimbursements was due primarily to the higher occupancy level and the increase in total rentable square feet of leased space. EXPENSES. Total expenses for the Berg Properties increased by $0.3 million, or 2.6%, to $11.8 million for the six months ended June 30, 1998 compared to $11.5 million for the six months ended June 30, 1997. Property operating expenses were $2.1 million for the six months ended June 30, 1998 and 1997. Real estate taxes were $2.1 million for the six months ended June 30, 1998 compared to $2.0 million for the six months ended June 30, 1997. Management fees (related party) increased by $0.1 million, or 20%, to $0.6 million for the six months ended June 30, 1998 in comparison to $0.5 million for the six months ended June 30, 1997. The increase in management fees is a direct result of the increase in rental revenues. Interest expense, including amounts owed to related parties decreased by $0.4 million, or 11.4%, to $3.1 million for the six months ended June 30, 1998 compared to $3.5 million for the six months ended June 30, 1997. The decrease in interest expense resulted from a decrease in debt balances due to normal recurring principal payments, as well as the repayment of $2.0 million of related party debt. Depreciation and amortization expense increased by $0.5 million, or 14.7%, to $3.9 million for the six months ended June 30, 1998 as compared to $3.4 million for the six months ended June 30, 1997. The increase in depreciation and amortization expense resulted primarily from new improvements and new construction since the June 30, 1997. -39- NET INCOME. Net income increased by approximately $3.7 million to $14.2 million for the six months ended June 30, 1998, an increase of 35.2% over the net income of $10.5 million for the six months ended June 30, 1997. The substantial rise in net income resulted primarily from the generation of additional revenues from new leases at higher rental rates and from the addition of approximately 187,000 rental square feet of leased space, while incurring minimal increases in expenses. THE ACQUIRED PROPERTIES RENTAL REVENUES AND TENANT REIMBURSEMENTS. Rental revenue for the six months ended June 30, 1998 was $3.3 million for the Acquired Properties, with $2.3 million coming from the Kontrabecki Properties and $1.0 million coming from the Fremont Properties. Tenant reimbursements and other income were a combined $0.2 million. EXPENSES. Total expenses for the Acquired Properties were $0.2 million, all of which were attributable to the Fremont Properties. The Kontrabecki Properties have minimal expenses and tenant reimbursements as the tenants paid most of their expenses directly to the service providers. REVENUE IN EXCESS OF CERTAIN EXPENSES. The combined revenue in excess of certain expenses of the Acquired Properties was $3.3 million, of which $2.3 million was derived from the Kontrabecki Properties and $1.0 million from the Fremont Properties. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 THE BERG PROPERTIES RENTAL REVENUES AND TENANT REIMBURSEMENTS. Rental revenue increased by $11.3 million, or 39.1%, to $40.2 million for the year ended December 31, 1997 compared to $28.9 million for the year ended December 31, 1996. The principal reasons for the increase in rental revenue were the increase in the overall occupancy rate for the Berg Properties, from 91.9% at December 31, 1996 to 97.7% at December 31, 1997, the addition of approximately 388,000 rentable square feet of leased space, and scheduled rental rate increases. Tenant reimbursements increased by $2.6 million, or approximately 66.7%, to $6.5 million for the year ended December 31, 1997 from $3.9 million for the year ended December 31, 1996. The increase in tenant reimbursements was due primarily to the higher occupancy level, an increase of 388,000 rentable square feet of leased space, and an increase in the number of tenants reimbursing the Berg Properties for operating expenses rather than paying them directly to the service provider. EXPENSES. Total expenses for the Berg Properties increased by approximately $3.3 million, or 16.8%, to $22.9 million for the year ended December 31, 1997, compared to $19.6 million for the year ended December 31, 1996. Property operating expenses increased by $1.8 million, or 94.7%, to $3.7 million for the year ended December 31, 1997 from $1.9 million for the year ended December 31, 1996. The increase in operating expenses was offset by an increase of $2.6 million in tenant reimbursements and was due primarily to the increased occupancy of the Berg Properties and the substantial increase in leased square footage. Depreciation expense increased by $1.0 million, or 14.9%, to $7.7 million for the year ended December 31, 1997 as compared to $6.7 million for the year ended December 31, 1996. The increase in depreciation expense resulted primarily from new improvements and new construction. Real estate taxes increased slightly by $0.4 million, or approximately 10.5%, to $4.2 million for the year ended December 31, 1997 from $3.8 million for the year ended December 31, 1996. Interest expense (including amounts associated with related parties) for the year ended December 31, 1997 was virtually unchanged from the year ended December 31, 1996, as debt principal balances and interest rates remained substantially the same. -40- NET INCOME. Income before extraordinary item increased by $10.6 million, or approximately 80.3%, to $23.8 million for the year ended December 31, 1997, from $ 13.2 million for the year ended December 31, 1996, as rental revenue increased substantially due to increased occupancy of the Berg Properties, scheduled rental rate increases, and the addition of leased space without a comparable increase in total expenses. For the year ended December 31, 1996, net income included an extraordinary gain of $0.6 million related to the forgiveness of debt by Great West Life & Annuity Insurance Company. THE ACQUIRED PROPERTIES RENTAL REVENUES AND TENANT REIMBURSEMENTS. Rental revenue for the year ended December 31, 1997 was $5.4 million for the Acquired Properties, with $4.1 million coming from the Kontrabecki Properties and $1.3 million coming from the Fremont Properties, which were completed during the first quarter of 1997. Tenant reimbursements and other income were a combined $0.3 million, with $0.1 million attributable to the Kontrabecki Properties and $0.2 million attributable to the Fremont Properties. EXPENSES. Total expenses for the Acquired Properties were $0.29 million, of which $0.02 million applied to the Kontrabecki Properties and $0.27 million applied to the Fremont Properties. REVENUE IN EXCESS OF CERTAIN EXPENSES. The combined revenue in excess of certain expenses of the Acquired Properties was $5.4 million, of which $4.2 million were generated by the Kontrabecki Properties and $1.2 million by the Fremont Properties. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 The Berg Properties RENTAL REVENUE AND TENANT REIMBURSEMENTS. Rental revenue increased by $5.8 million, or 25.1%, to $28.9 million for the year ended December 31, 1996 from $23.1 million for the year ended December 31, 1995, as the overall occupancy rate increased to 91.9% at December 31, 1996 from 87.4% at December 31, 1995. In addition, rental rates rose for new and renewal leases, and the Berg Group added approximately 196,000 square feet of new leased R&D Properties to the Berg Properties. Tenant reimbursements decreased by $0.3 million, or 7.1%, to $3.9 million for the year ended December 31, 1996 from $4.2 million for the year ended December 31, 1995, as the additional tenant reimbursements attributable to increased occupancy of the Berg Properties and the acquisition of additional leased space were more than offset by the decline in tenant reimbursements as a result of new tenants paying operating expenses directly to the service providers. EXPENSES. Total expenses increased by 2.1% to $19.6 million for the year ended December 31, 1996, from $19.2 million for the year ended December 31, 1995. Operating expenses decreased by $0.1 million, or 5%. Interest expense decreased by $0.2 million, or 3.0% to $6.4 million for the year ended December 31, 1996 from $6.6 million for the year ended December 31, 1995 due to construction activities and related borrowings. Depreciation and amortization expense increased by $0.4 million, or 6.3% for the year ended December 31, 1996, to $6.7 million from $6.3 million for the year ended December 31, 1995, due to the addition of new R&D Properties and leased space acquired by the Berg Group during 1995 and 1996. Real estate taxes increased by $0.2 million, or 5.6% to $3.8 million for the year ended December 31, 1996 from $3.6 million for the year ended December 31, 1995, as a result of minor reassessments as values rose on certain Berg Properties while the real estate tax increases attributable to the increase in net rentable square footage were offset by the disposition of two R&D Properties in the Xilinx Sales. For the year ended December 31, 1996, general and administrative expenses, as reflected by the management fee paid to BBE, increased with rental revenues. NET INCOME. Income before gain on sale of real estate and extraordinary items increased by $5.1 million to $13.2 million for the year ended December 31, 1996, from $8.1 million for the year ended December 31, 1995, as growth in revenues far exceeded the increase in expenses. Income decreased for the year ended December 31, 1996, however, due to the effect of two extraordinary items for the year ended December 31, 1995: The $20.8 million gain on the Xilinx Sales, and a $3.2 million gain which resulted from the forgiveness of debt by Great West Life & Annuity Insurance Company. For the year ended December 31, 1996, $0.6 million of extraordinary gain also resulted from debt forgiveness by the same lender. -41- THE KONTRABECKI PROPERTIES RENTAL REVENUE AND TENANT REIMBURSEMENTS. Rental revenue increased by approximately $0.3 million, or 9.7%, to $3.4 million for the year ended December 31, 1996 from $3.1 million for the year ended December 31, 1995. The increase was primarily due to an increase in occupancy to 86.9% at December 31, 1996 from 81.8% at December 31, 1995, and rising rental rates for new and renewal leases. Tenant reimbursements and other income were level for the period. EXPENSES. Total expenses decreased substantially by 48.8%, to $0.22 million for the year ended December 31, 1996, compared to $0.43 million for the year ended December 31, 1995. For the year ended December 31, 1996, operating and maintenance expenses decreased by $0.25 million, or 59.5%, to $0.17 million from $0.42 million for the year ended December 31, 1995. These substantial reductions resulted primarily from the lease of vacant space to tenants who paid the expenses directly to the service provider. REVENUE IN EXCESS OF CERTAIN EXPENSES. The Kontrabecki Properties produced revenue in excess of certain expenses of $3.23 million for the year ended December 31, 1996, an approximately 16.8% increase over the same period for the year ended December 31, 1995. PRO FORMA LIQUIDITY AND CAPITAL RESOURCES The Company expects its FFO to be the principal source of liquidity for distributions, debt service, leasing commissions and recurring capital expenditures. The Company has not operated previously as a REIT and has no FFO operating history. The Company also has not previously paid regular dividends and other distributions to its shareholders and can make no assurances that it will be able to do so in the future. Based solely upon past operating results for the Properties and the results of operations for the nine months ended September 30, 1998, on a pro forma basis, the Company expects its FFO for 1998 to be adequate to meet projected distributions to shareholders and other presently anticipated liquidity requirements in 1998. See "DISTRIBUTION POLICY." After closing the Private Placement at the final closing date for the Berg Acquisition, the Company expects to have total indebtedness remaining on the Properties on a pro forma basis of approximately $223 million, comprised of mortgage debt secured by certain of the Properties under the Prudential Secured Loan and existing secured loan arrangements of $93 million. The Prudential Secured Loan totals $130 million, bearing an interest rate of 6.56% per annum, maturing October 15, 2008, and is payable in monthly installments of principal (based upon a 30 year amortization) and interest of approximately $0.8 million. The Company has paid total fees of approximately $0.9 million in connection with this loan. The Company also has assumed responsibility for a $100 million Wells Fargo Line which had an outstanding balance of approximately $39 million as of September 30, 1998. Interest rates on the Wells Fargo Line are variable and ranged from approximately 7.0% to 8.20% over the past three fiscal years. The average rate for the three months ended September 30, 1998 was 7.25%. The Wells Fargo Line expires in October 1999 and will need to be replaced. There can be no assurance that the Company will be able to obtain a similar line of credit with similar terms and the Company's cost of borrowing funds could increase substantially. The Company's Debt to Total Market Capitalization ratio, assuming no additional draws on the Wells Fargo Line, will be approximately 42% based upon an estimated Total Market Capitalization of approximately $525 million. The Company expects to meet its short-term liquidity requirements generally through its initial working capital, the Wells Fargo Line, and net cash provided by operations. The Properties require periodic investments of capital for tenant-related capital expenditures and for general capital improvements. For the years ended December 31, 1993 through December 31, 1997, the recurring tenant improvement costs and leasing commissions incurred with respect to new leases and lease renewals of the Berg Properties averaged approximately $1.5 million annually. Of the Acquired Properties, only 83,902 square feet of space is subject to leases that expire between January 1, 1998 and December 31, 2001. The Company will therefore have approximately 416,000 square feet under expiring leases annually from January 1, 1998 through December 31, 2000. The Company expects that the average annual cost of recurring tenant improvements and leasing commissions, related to the properties, will be approximately $1.5 million from January 1, 1998 through December 31, 2000. It expects to recover substantially all of these costs from the tenants under the new or renewed leases through increases in rental rates. The Company expects to meet its long-term liquidity requirements for the funding of property development, property acquisitions and other material non-recurring capital improvements, as well as annual tenders of L.P. Units by certain Limited Partners, through long-term secured and unsecured indebtedness and the issuance of additional equity securities by the Company. See "POLICIES WITH RESPECT TO CERTAIN ACTIVITIES--Financing Policies." -42- HISTORICAL CASH FLOWS BERG PROPERTIES CASH PROVIDED FROM OPERATIONS. The amount of net cash provided by operations has consistently increased since 1995. The Berg Properties had net cash provided by operating activities of approximately $17.4 million and $13.7 million for the six months ended June 30, 1998 and 1997, respectively, and approximately $29.9 million, $20.2 million and $16.4 million for the years ended December 31, 1997, 1996 and 1995, respectively. The $3.7 million increase in net cash provided by operating activities for the six months ended June 30, 1998 compared to the same period in 1997 was primarily due to an increase in net income. The approximately $9.7 million increase in net cash provided by operating activities for the year ended December 31, 1997 over the year ended December 31, 1996 was primarily due to an increase in net income, partially offset by an increase in other assets, and deferred rent receivable. The $3.8 million increase in net cash provided by operating activities for the year ended December 31, 1996 over the same period in 1995 was due primarily to an increase in income before gain on sale of real estate and extraordinary item. INVESTING ACTIVITIES. Net cash provided (used) in investing activities with respect to the Berg Properties was approximately $0.7 million and $(9.9) million for the six months ended June 30, 1998 and 1997, respectively, and approximately $(17.3) million, $(29.3) million and $(6.4) million for the years ended December 31, 1997, 1996, and 1995, respectively. The $10.6 million increase in net cash provided by investing activities for the six months ended June 30, 1998 compared to the same period in 1997 was primarily due to a decrease in construction activities. The approximately $12 million decrease in net cash used in investing activities for the year ended December 31, 1997 compared to the year ended December 31, 1996 was also due to a decrease in construction activities. Correspondingly, the approximately $22.9 million increase in net cash used in investing activities for the year ended December 31, 1996 compared to the year ended December 31, 1995, was primarily due to an increase in construction and development expenditures for a number of the R&D Properties, including several projects in McCandless Technology Park in Milpitas. The volume and cost of construction and development activities for new projects and tenant improvements in connection with new leases varies from year to year. The Company has estimated such expenditures in connection with its estimation of pro forma cash available for distribution during 1998, and in determining effective annual rents for the Berg Properties. There can be no assurance that such estimates will reflect actual results, however, and capital expenditures in prior periods should not be viewed as indicative of expenditures in future periods. FINANCING ACTIVITIES. Net cash (used) provided in financing activities with respect to the Berg Properties was $(23.8) million and $(0.005) million for the six months ended June 30, 1998 and 1997, respectively, and $(8.4) million, $9.4 million, and $(10.0) million for the years ended December 31, 1997, 1996 and 1995, respectively. Changes in financing activities generally were directly related to the level of new construction and development of R&D Properties. For the six months ending June 30, 1998, total debt increased by $118,735 as a result of the Company making distributions to certain partners in the amount of $142.5 million compared to an increase in total debt of $4.6 million for the six months ended June 30, 1997. Capital distributions were $142.5 million and $5.0 million and capital contributions were nil and $0.4 million for the six months ended June 30, 1998 and 1997, respectively. For the year ended December 31, 1997, the increase in total debt on the Berg Properties was $1.5 million less than the increase in debt during the same period in 1996, contributions by partners were reduced by $11.5 million, and distributions to partners increased by approximately $4.9 million. Comparing the year ended December 31, 1996 to the year ended December 31, 1995, total debt on the Berg Properties increased by $4.0 million, capital contributions increased by $9.3 million, and capital distributions decreased by $0.1 million. NON-CASH FINANCING ACTIVITIES. Non-cash investing and financing activities for the Berg Properties consisted of debt forgiveness gains of approximately $0.6 million and $3.2 million for the years ended December 31, 1996 and 1995, respectively, attributable to the debt forgiveness by Great West Life & Annuity Insurance Company. Transfers of construction in progress, reflecting the difference in the amount of construction in progress at the beginning and end of each period, were none and $3.1 million for the six months ended June 30, 1998 and 1997, respectively, and $6.8 million and $0.08 million and none for the years ended December 31, 1997, 1996 and 1995, respectively. -43- YEAR 2000 ISSUE The Company utilizes computer software for its corporate and real property accounting records and to prepare its financial statements. The vendor of the Companys current principal software accounting system has advised the Company that it will provide, at no charge, a Year 2000 compliance software upgrade to the Company in early 1999. If necessary, the Company could prepare all required accounting entries manually without incurring material additional operating expenses. Conceivably, tenants of the Properties could experience delays in processing their accounting records and making required lease payments, if they encounter Year 2000 compliance problems. The Company does not believe that any such delays would have a material adverse effect on the Company. INFLATION Most of the leases with the tenants of the Properties require the tenants to pay all operating expenses, including real estate taxes and insurance, and increases in common area maintenance expenses, either directly or by reimbursements paid to the landlord. Such lease provisions substantially reduce the Company's exposure to increases in costs and operating expenses resulting from inflation. -44- DESCRIPTION OF THE PROPERTIES GENERAL Prior to the Partnership Closing, the members of the Berg Group and certain of their Affiliates owned all of the Berg Properties, which consist of 50 sites, including 58 separate buildings aggregating approximately 3,780,000 rentable square feet, and all of which are located in Silicon Valley. As the sole general partner of all of the Operating Partnerships, the Company has acquired control of the Berg Properties. The Acquired Properties, which consist of 11 sites, including 11 separate buildings aggregating approximately 561,000 rentable square feet, also located in Silicon Valley, are owned by the Operating Partnerships and controlled by the Company. All of the Properties will be held by the Operating Partnerships after the Berg Acquisition. OVERVIEW OF THE BERG PROPERTIES All of the Berg Properties are R&D Properties, designed for research and development, office and, in some cases, include space for light manufacturing operations with loading docks. The Company considers all of the Berg Properties to be "Silicon Valley R&D Properties." Generally, the Berg Properties are one to four story buildings of tilt-up concrete construction, have parking of 3.5 spaces per thousand square feet, or greater, clear ceiling heights less than 18 feet, and range in size from 18,000 to 211,000 rentable square feet. Most of the office space is open and suitable for configuration to meet the tenants' requirements with the use of movable dividers. Approximately 40 of the 58 R&D Properties are single tenant facilities, although most have been designed to be divisible and to be usable by multiple tenants. The current leases for the Berg Properties typically have terms ranging from three to ten years. Most of the leases provide for fixed periodic rental increases. Substantially all of the leases are "triple net" leases pursuant to which the tenant is required to pay substantially all of the operating expenses of the Property, including all maintenance and repairs (excluding only certain structural repairs to the building shell), property taxes and insurance. Most of the leases contain renewal options which allow the tenant to extend the lease based on fixed rental adjustments (which may be below market ratio) or adjustment to then prevailing market rates. AVERAGE OCCUPANCY AND RENTAL RATES The following table sets forth the aggregate average percent of square footage leased and the average Annual Base Rent per leased square foot for the Berg Properties for the periods specified:
Total Rentable Average Occupancy Average Monthly Base Rent Total Annual Base Rent Square Footage at Period End Per Leased Square Foot (1) (in thousands) (2) ----------------- -------------------- ---------------------------- ------------------------- 1992 2.8 million 87.55% $0.85 $24,893 1993 2.8 million 89.58% 0.84 25,316 1994 2.9 million 80.27% 0.96 26,389 1995 3.2 million 87.38% 0.71 23,745 1996 3.4 million 91.86% 0.78 29,119 1997 3.8 million 97.68% (3) 0.86 38,295
- --------------------- (1) Calculated as total Annual Base Rent divided by the average total leased square footage at period end divided by 12. (2) Excludes annual base rent under leases entered into wherein the first date of occupancy is after December 31, 1997 for Berg Properties consisting of 53,494, 26,150, and 8,206 square feet, respectively. (3) As of September 30, 1998 the Berg Properties were 100% occupied. -45- LEASING ACTIVITY The following table sets forth certain information (on a per rentable square foot basis) about leasing activity for the Berg Properties owned as of December 31, 1997 for the years indicated:
Number of Square Footage Base Rent Tenant Improvements Effective Leases(1) Leased Under Leases and Commissions(2) Annual Rent -------------- ----------------- --------------- ------------------------ ------------- 1992 10 717,673 $9.97 $ - $9.97 1993 10 531,313 $10.26 $0.49 $9.77 1994 10 454,576 $7.01 $0.83 $6.18 1995 17 569,740 $9.58 $0.18 $9.40 1996 24 705,971 $11.31 $0.77 $10.54 1997 18 811,903 $14.57 $0.71 $13.86
- --------------------- (1) Excludes leases with a term of less than 12 months and leases related to new buildings or substantially renovated buildings. (2) Amounts represent the annual amortization expense associated with leasing commissions and tenant improvements related to leases executed during the period. Costs related to new buildings or substantially renovated buildings have been excluded. LEASE EXPIRATIONS The following table shows expirations of leases for the Berg Properties in place as of December 31, 1997 for each of the next ten years beginning with 1998, assuming none of the tenants exercises renewal options or termination rights that have not been exercised as of the date hereof:
Percentage of Annual Base Rent Total Annual Base Number of Rentable Square Footage Under Expiring Rent Represented By Leases Expiring Subject to Expiring Leases (in Expiring Leases thousands)(1) Leases(2) ----------------- ------------------------- ---------------------- --------------------- 1998 4 94,409 $644 1.50% 1999 9 426,466 $3,471 8.07% 2000 18 642,497 $7,463 17.35% 2001 18 457,758 $4,713 10.95% 2002 11 808,652 $11,250 26.15% 2003 7 338,093 $3,500 8.14% 2004 10 578,853 $7,771 18.06% 2005 - - - - 2006 1 93,984 $1,015 2.36% 2007 and thereafter 4 339,272 $3,194 7.42% ----------------- ------------------------- ---------------------- --------------------- 82 3,779,984 $43,021 100.00%
- --------------------- (1) Actual Base Rent for 1998. Includes additional 26,150 square feet leased to Sasco, 53,494 leased to Avnet and 8,206 leased to Breakthrough Software. (2) Based on actual 1998 Rents under existing leases. -46- SIGNIFICANT PROPERTIES AND TENANTS The Berg Properties are occupied by a total of 73 tenants. Most of the Berg Properties are occupied by single tenants, and most of the largest tenants are publicly-held companies in the electronics industry. The following table sets forth information concerning the 12 largest tenants for the Berg Properties, representing 56.8% of the total Annual Base Rent and 50.8% of the total leased square footage for the Berg Properties as of December 31, 1997. See "BERG PROPERTIES HISTORICAL FINANCIAL DATA."
Number Number Annual Base Rent Percent of Total Annual Tenant of Leases of Buildings (in thousands) Base Rent from all Leases ----------------------- ----------- ------------- ------------------ ------------------------- 1 Apple Computer, Inc. 3 4 $6,223 16.25% 2 Amdahl Corporation 4 7 3,320 8.67% 3 Cisco Systems, Inc. 2 2 2,745 7.17% 4 ESL (TRW) 1 1 1,273 3.32% 5 Motorola, Inc. 1 1 1,254 3.27% 6 On Command Video 1 2 1,155 3.02% 7 Arrow Electronics 2 2 1,114 2.91% 8 Condor Systems, Inc. 1 2 1,073 2.80% 9 Comerica Bank 1 1 996 2.60% 10 Behring Pharmaceutical 1 1 945 2.47% 11 Santa Clara County 2 1 873 2.28% 12 NEC Electronics 1 1 784 2.05% ----------- ------------- ------------------ ------------------------- Total 20 25 $21,755 56.81%
Set forth below is additional information concerning certain Berg Properties: APPLE PROPERTIES The Apple Properties consist of four buildings located at three locations in Cupertino, California totaling 376,400 square feet occupied by Apple Computer, Inc. ("Apple") for more than five years. The Apple Properties represent approximately 8.67% of the total rentable square footage in the Operating Partnerships. The largest building is a four-story 211,000 square foot building located across the street from Apple's 850,000 square foot corporate headquarters. Apple spent approximately $14 million in 1992 to renovate and upgrade this building, which is currently used for software development activities. Apple also leases a three-building "campus" complex, totaling 142,000 square feet, located one-half block from Apple's headquarters building. Apple spent approximately $10 million to renovate and upgrade this facility in 1991 and currently uses this building for engineering activities. Apple also leases a 23,400 square foot building in Cupertino, California approximately two miles from Apple's corporate headquarters. This facility is currently used for prototype manufacturing. None of the Apple Properties is sublet or unoccupied. The effective annual rent per square foot for the Apple Properties was $11.42, $12.98, $13.12, $13.23 and $15.79 for 1993 through 1997, respectively. The total income tax basis in the Apple Properties was $3,787,722 as of December 31, 1997. Depreciation has been recorded for tax purposes using the straight-line method over the useful lives of the respective assets from the dates they were placed in service, which have ranged from 5 to 45 years. The annual property taxes, including assessments, for the Apple Properties aggregated approximately $418,000 for the year ended December 31, 1997, based on a tax rate of approximately 1.08% plus assessments. DESCRIPTION OF TENANT. Apple is a Fortune 500 company and one of the largest computer firms in the world. As of March 31, 1998, Apple employed approximately 10,000 people, and its total annual revenues for 1997 were approximately $7 billion. Apple's Cupertino headquarters building was completed in 1993 at an estimated cost of $200 million, and the two largest Apple Properties are the buildings located closest to Apple's headquarters. LEASE TERMS. The lease for the four-story building expires on May 31, 2002. The lease currently provides for rental payments of $4,338,840 per year ($1.71 per square foot per month). Apple has the option to extend the term of this lease for two successive five-year periods, subject to fixed rent adjustments. The lease for the three-building campus expires on December 31, 2002. This lease currently provides for rental payments of -47- $1,975,382 per year ($1.16 per square foot per month). Apple has the option to extend the term of this lease for five years, subject to an adjustment of the rental to market rates. The lease for the 23,400 square feet building expires on November 30, 1998. This lease currently provides for rental payments of $351,702 per year ($1.25 per square foot per month). There are no termination, relocation or buy-out rights in favor of Apple under any of these leases. AMDAHL PROPERTIES The Amdahl Properties comprise a 260,000 square foot office complex of five buildings located in the Oakmead Business Park in Sunnyvale, California and two buildings of 125,000 square feet and 75,000 square feet, respectively, located in Santa Clara, California about two miles from the Sunnyvale complex. These properties are occupied by Amdahl Corporation ("Amdahl"). The Amdahl Properties represent approximately 10.6% of the total rentable square footage in the Operating Partnerships. Amdahl utilizes the Sunnyvale facility for its corporate headquarters and the Santa Clara facility for research and development activities. These buildings were built between 1972 and 1983 under build-to-suit arrangements with Amdahl. Amdahl has sublet approximately 23,000 square feet of one of the Santa Clara buildings. The effective annual rent per square foot for the Amdahl Properties was $6.63, $6.86, $7.16, $7.16 and $7.20 for 1993 through 1997, respectively. The total income tax basis in the Amdahl Properties was $7,192,570 as of December 31, 1997. Depreciation has been recorded for tax purposes using the straight-line method over the useful lives of the respective assets from the dates the assets were placed in service, which range from 5 to 45 years. The annual property taxes, including assessments, for the Amdahl Properties aggregated approximately $402,000 for the year ended December 31, 1997, based on an average tax rate of approximately 1.04% plus assessments. DESCRIPTION OF TENANT. Amdahl is a major international computer company, and a wholly owned subsidiary of Fujitsu Limited. As of December 31, 1997, Amdahl employed approximately 9,900 people and its total revenues for the year were approximately $1.6 billion. LEASE TERMS. The leases for five of the buildings, totaling 260,000 square feet, expire in the first half of 1999. These leases currently provide for aggregate annual rent of $1,061,592 ($0.34 per square foot per month). The lease for the 125,000 square foot building in Santa Clara expires on November 30, 2008. Currently, annual rental for this building totals approximately $1,104,698 during 1998 and increases by 5% every seven years ($0.74 per square foot per month before adjustments). The lease for the remaining 75,000 square foot building expires on April 14, 2004. Currently, annual rental for this facility is $1,157,085 ($1.29 per square foot per month). The leases contain 14 five-year options remaining with rental rates increasing at pre-negotiated increments for each option period. The Company believes that the rental rates for all of the Amdahl Properties are significantly below present market rates, and the pre-negotiated rate adjustments will not necessarily bear any relationship to present or future market rates. There are no termination, relocation or buy-out rights in favor of Amdahl under any of the leases. CISCO PROPERTIES The Cisco Properties consist of two buildings presently occupied by Cisco Systems, Inc. ("Cisco"). One of the buildings is a 200,484 square foot build-to-suit building located in south San Jose completed in January 1996. The other building, which is located in Santa Clara, totals 65,780 square feet and was acquired in 1996 and leased to Cisco effective February 1, 1997. The larger facility is used by Cisco as a major manufacturing and research and development site. The Cisco Properties represent approximately 6.13% of the total rentable square footage in the Operating Partnerships. The effective annual rent per square foot for the Cisco Properties was $10.20 for 1997. The total income tax basis in the Cisco Properties was $14,299,768 as of December 31, 1997. Depreciation has been recorded for tax purposes using the straight-line method over the useful lives of the respective assets from the dates the assets were placed in service, which approximate 40 years for these improvements. The annual property taxes, including assessments, for the Cisco Properties aggregate approximately $259,185 based on the 1997-98 real property tax bills, with tax rates ranging from 1.09% to 1.14% plus assessments. Cisco is in the process of completing certain improvements -48- at the smaller facility which will likely result in a real property tax reassessment of this property. Any increase in taxes associated with these improvements during the lease term is Cisco's responsibility. DESCRIPTION OF TENANT. Cisco is a publicly traded computer network products manufacturer. As of July 31, 1997, Cisco employed over 11,000 people. Its revenues grew by 57.2% over the prior year and its total revenues for its 1997 fiscal year were approximately $6.44 billion. LEASE TERMS. The lease for the 200,484 square foot building expires on December 31, 2002. The current annual rental is $2,033,580 ($0.85 per square foot per month) with fixed periodic increases. Cisco has an option to purchase this property and has the first right of option to lease or purchase additional buildings to be constructed, if any, on property adjacent to the location of this building. The purchase option must be exercised during defined periods during the lease term at fixed prices. Cisco has two five-year options to extend the term of its existing lease at fixed annual rent increases. The lease for the 65,780 square foot building expires on January 31, 2000. The current rent for this property is $907,764 ($1.15 per square foot per month) with no rental increases over the initial term of the lease. Cisco has one option to extend the term of this lease for a period of one year at a fixed rental increase. OTHER MAJOR TENANTS The other nine of the twelve major tenants for the Berg Properties currently lease R&D Properties under 11 separate leases which comprise approximately 21.63% of the Operating Partnerships' total rentable square footage. None of the nine tenants accounts for more than 3.3% of Annual Base Rent for the Berg Properties or more than 3.47% of the total rentable square footage of all Properties. The Company believes that all nine tenants currently are in good financial condition. The Company is unaware of any material defaults under any of their leases. Each of such tenants has signed a form of the Berg & Berg standard lease agreement. If any of these tenants were to vacate the Berg Properties that they currently lease or otherwise terminated their tenancies, the Company believes that it could obtain new tenants at comparable or higher rents within three months, in light of the current market for Silicon Valley R&D Properties. See "THE BUSINESS OF BERG & BERG--The Silicon Valley R&D Property Market." -49- THE BERG PROPERTIES The following table provides certain additional information concerning all of the Berg Properties:
Annualized 1997 Effective Year Developed Annualized 1997 Net Rent Per Address of Leased ("D") or Rentable Actual Annual Net Rent Per Sq. Sq. Ft. Per Premises Acquired ("A") Square Feet Tenant Base Rent for 1997 Ft. Per Month Month - ----------------------------------------------------------------------------------------------------------------------------------- 10401 Bubb Road 1972(D) 9,708 LBE Technology $145,814 $1.25 $1.23 Cupertino 1600/10 McCandless 1995(A) 40,970 Panasonic $270,402 $0.55 $0.55 Milpitas Industrial 1745 McCandless 1995(A) 20,331 EIP Microwave $178,104 $0.73 $0.69 Milpitas 10300 Bubb Road 1972(D) 23,400 Apple $351,702 $1.25 $1.25 Cupertino 1657 McCandless 1995(A) 8,184 Wedge Tech. $70,704 $0.72 $0.72 Milpitas 1230 E. Arques Ave. 1977(D) 60,000 Amdahl $302,337 $0.42 $0.42 Sunnyvale 2001 Logic Drive 1992(D) 72,426 Motorola $1,254,418 $1.44 $1.39 San Jose 1250 E. Arques Ave. 1974(D) 200,000 Amdahl $755,923 $0.31 $0.31 Sunnyvale 2039 Samaritan Drive 1984(D) 14,205 Holonet $251,983 $1.48 $1.41 San Jose 1575 McCandless 1995(A) 11,056 Acropolis $92,870 $0.70 $0.67 Milpitas 2610 No. First Street 1981(D) 6,794 SC Juv. Prob. $103,860 $1.27 $1.21 San Jose 6850 Santa Teresa 1979(D) 30,000 Magnex $210,045 $0.58 $0.58 San Jose 2243 Samaritan Drive 1984(D) 23,801 State Farm $362,727 $1.27 $1.23 San Jose 6385 San Ignacio 1980(D) 17,400 Alcatel $138,330 $0.66 $0.66 San Jose 1135 Kern Avenue 1973(D) 18,300 Davicom $192,150 $0.88 $0.82 Sunnyvale 4750 Patrick Henry 1996(A) 65,780 Siemens/Cisco (1) $898,784 $1.14 $1.08 Santa Clara 10411 Bubb Road 1972(D) 10,622 Enatec/Celerity $166,499 $1.31 $1.25 Cupertino Systems (1) 1212 Bordeaux 1984(D) 71,800 ESL $1,273,344 $1.48 $1.07 Sunnyvale 2239 Samaritan Drive 1984(D) 25,633 Lynx $250,326 $0.81 $0.77 San Jose 1810 McCandless 1995(A) 39,800 Kent Electronics $298,500 $0.63 $0.63 Milpitas 2610-B No. First Street 1981(D) 6,031 Mycom(Nyden) $55,728 $0.77 $0.73 San Jose 1500/20 McCandless 1995(A) 42,700 Adaptec $363,804 $0.71 $0.68 Milpitas 450-460 National Avenue 1973(D) 36,100 Savi Technology $345,756 $0.80 $0.80 Mt. View 140 Great Oaks 1982(D) 30,459 GSS/Array $201,024 $0.55 $0.52 San Jose 2033 Samaritan Drive 1984(D) 12,286 Good Samaritan $179,868 $1.22 $1.22 San Jose 6387 San Ignacio 1980(D) 17,400 Modutek Corporation $127,368 $0.61 $0.61 San Jose 2133-2233 Samaritan Dr. 1984(D) 110,490 Condor $1,072,860 $0.81 $0.81 San Jose 1645 McCandless 1995(A) 6,432 APS Computer/ $65,123 $0.84 $0.72 Milpitas Swinerton Inc. (1) 6540 Via Del Oro 1980(D) 20,076 Exsil $189,672 $0.79 $0.79 San Jose 2600 No. First Street 1981(D) 56,516 SC Cnty(Adult) $769,344 $1.13 $1.13 San Jose -50- Annualized 1997 Effective Year Developed Annualized 1997 Net Rent Per Address of Leased ("D") or Rentable Actual Annual Net Rent Per Sq. Sq. Ft. Per Premises Acquired ("A") Square Feet Tenant Base Rent for 1997 Ft. Per Month Month - ----------------------------------------------------------------------------------------------------------------------------------- 3236 Scott Blvd. 1981(D) 54,672 Celeritek $698,472 $1.06 $0.88 Santa Clara 6320 San Ignacio 1982(D) 45,000 Symantec $368,468 $0.68 $0.65 San Jose 6781 Via Del Oro 1982(D) 21,800 Datum $195,192 $0.75 $0.75 San Jose 6330 San Ignacio 1982(D) 19,600 Tech. Elite $218,344 $0.93 $0.69 San Jose 6351 San Ignacio 1982(D) 15,920 Alteon $176,425 $0.92 $0.88 San Jose 6540 Via Del Oro 1980(D) 5,862 X-Cyte, Inc. $15,300 $0.87 $0.87 San Jose 6540 Via Del Oro 1980(D) 5,862 SVCC/Thinking $39,119 $0.56 $0.53 San Jose Tools, Inc. (1) 6350 San Ignacio 1982(D) 63,638 Bell Sports $595,656 $0.78 $0.54 San Jose 1635 McCandless 1995(A) 7,922 Preston-Holmes $66,705 $0.70 $0.70 Milpitas 6360 San Ignacio 1982(D) 19,104 Silicon Vly Resch $190,330 $0.83 $0.63 San Jose 1625 McCandless 1995(A) 11,087 Rorze Autom. $128,292 $0.96 $0.92 Milpitas 2043 Samaritan Drive 1984(D) 48,677 Amati $709,706 $1.21 $1.09 San Jose 150-160 Great Oaks 1982(D) 52,000 Atcor $396,000 $0.63 $0.63 San Jose 6325 San Ignacio 1981(D) 50,400 Photon Dynamics $547,934 $0.91 $0.69 San Jose 1555 McCandless 1995(A) 14,436 A&D Engineering $144,503 $0.83 $0.83 Milpitas 1450 McCandless 1997(D) 45,312 Chartered $450,998 $0.83 $0.79 Milpitas Semiconductor 1435 McCandless 1995(A) 8,713 SVT Technologies $88,872 $0.85 $0.85 Milpitas 1525-35 McCandless 1995(A) 14,219 TTI West/ADE Tech. $164,232 $0.96 $0.92 Milpitas (1) 1455 McCandless Dr 1995(A) 13,129 CNET $137,203 $0.87 $0.84 Milpitas 3301 Olcott Street 1977(D) 64,500 NEC Electronics $783,675 $1.22 $0.91 Santa Clara 1690 McCandless 1997(D) 14,919 Taxan $167,997 $1.41 $1.33 Milpitas 10500 N. De Anza Blvd 1981(D) 211,000 Apple $4,145,140 $1.64 $1.56 Cupertino 6311 San Ignacio 1981(D) 30,000 Teledex $210,000 $0.58 $0.58 San Jose 6340 San Ignacio 1982(D) 9,750 Aureflam $52,065 $0.89 $0.67 San Jose Corporation 405 Tasman/1190 Morse 1976(D) 28,350 Pacific Pay $286,618 $0.84 $0.83 Sunnyvale Video/Coptec (1) 6341 San Ignacio 1980(D) 79,120 Nelms-Donham $645,198 $0.68 $0.65 San Jose 1725 McCandless Dr 1995(A) 15,400 Spec. Mat. Supply $147,243 $0.80 $0.77 Milpitas 4949 Hellyer Avenue 1995(D) 200,484 Cisco $1,913,292 $0.80 $0.77 San Jose 20605-705 Valley Green 1975(D) 142,000 Apple $1,726,622 $1.01 $0.94 Cupertino 1425 McCandless 1995(A) 16,737 Optical Assoc. $164,469 $0.82 $0.82 Milpitas 20400 Mariani 1978(D) 105,000 Syva $945,000 $0.75 $0.75 Cupertino 2800 Bayview 1994(A) 59,736 Concept $599,568 $0.84 $0.81 Fremont 10440 Bubb Road 1979(D) 19,500 Linotext Digital $245,700 $1.05 $1.00 Cupertino Color -51- Annualized 1997 Effective Year Developed Annualized 1997 Net Rent Per Address of Leased ("D") or Rentable Actual Annual Net Rent Per Sq. Sq. Ft. Per Premises Acquired ("A") Square Feet Tenant Base Rent for 1997 Ft. Per Month Month - ----------------------------------------------------------------------------------------------------------------------------------- 1170 Morse Ave. 1980(D) 34,750 CA Parkinson $365,864 $0.88 $0.66 Sunnyvale 1740 McCandless 1995(A) 51,602 Mektec $498,475 $0.81 $0.81 Milpitas 1325 McCandless 1996(D) 50,768 Sherpa $574,084 $0.94 $0.91 Milpitas 1375 McCandless 1996(D) 26,800 Digital DJ $373,109 $1.27 $1.24 Milpitas 6321 San Ignacio 1981(D) 53,494 Avnet(2) -- $0.00 $0.00 San Jose 10460 Bubb Road 1976(D) 30,460 Silicon Video/GSI $433,760 $1.58 $1.55 Cupertino (1) 3120 Scott Blvd. 1983(D) 75,000 Amdahl $1,157,085 $1.29 $1.29 Santa Clara 6331 San Ignacio 1980/1997(D) 131,320(3) On Command Video $1,155,267 $0.73 $0.73 San Jose 1587 & 1595 McCandless 1995(A) 22,207 Spin Tech./Medical $239,313 $0.90 $0.89 Milpitas Innovations 1765 McCandless 1997(D) 118,708 Larscom $614,313 $1.15 $1.12 Milpitas 3501 W. Warren Blvd 1997(D) 51,864 Comptech $267,620 $1.29 $1.24 Fremont 46600 Fremont Blvd. 1997(D) 16,000 A-Trend Technology $95,040 $1.32 $1.29 Fremont 48800 Milmont Drive 1996(D) 53,000 Premisys $563,178 $0.89 $0.85 Fremont 75/85 E. Trimble 1981(D) 93,984 Comerica $996,232 $0.88 $0.86 San Jose 1350 McCandless 1997(D) 46,272 Arrow Electronics, $569,129 $1.12 $1.09 Milpitas Inc. 1600 Memorex Drive 1995(A) 83,516 Sasco $438,460 $0.53 $0.44 Santa Clara 1680 McCandless 1997(D) 58,334 Arrow Electronics, $545,247 $1.04 $1.01 Milpitas Inc. 2251 Lawson Lane 1979(D) 125,000 Amdahl $1,104,698 $0.74 $0.74 Santa Clara 2610-C North First St 1981(D) 8,206 Breakthrough (4) $0 $0.00 $0.00 San Jose 1600 Memorex 1995(A) 26,150 Sasco(2) $0 $0.00 $0.00 Santa Clara ------------ -------------- Totals 3,779,984 $38,294,581
- ----------------- (1) Space that has been vacated during 1997 by first tenant named and re-let to second tenant named. (2) Lease signed prior to December 31, 1997, and Property occupied as of January 1998. Not considered occupied for occupancy calculations. (3) 36,320 rentable square feet completed during 1997. (4) Additional space leased to Breakthrough Software with rent commencing in February 1998. -52- STANDARD BERG & BERG LEASE TERMS The standard lease agreement used by Berg & Berg is a triple net lease. The term of the standard lease ranges from three to ten years with one to three five-year options for the tenant to extend the lease at market rental rates, but not less than the rent in the last month of the original term. Most of the leases contain provisions similar to the following: - Except to the extent caused by the sole negligence or willful misconduct of the lessor, the tenant is required to fully indemnify Berg & Berg for property related actions, suits, proceedings or the like, including any actions, suits or proceedings relating to hazardous materials. The indemnification provisions survive the termination of the lease. - The tenant may not assign the lease or sublet the premises without the prior written consent of Berg & Berg, except to a bona fide affiliate or subsidiary of the tenant. In recent leases, Berg & Berg has reserved the right to withhold consent to any proposed assignment or sublease if the proposed assignee or sublessee is a generator of hazardous materials. Regardless of an assignment or sublet permitted, the tenant remains primarily liable for the performance of all conditions, covenants and obligations under the lease. - Berg & Berg generally does not require the tenant to obtain earthquake insurance. OVERVIEW OF THE ACQUIRED PROPERTIES All of the Acquired Properties are R&D Properties. They are occupied by a total of 10 tenants under leases with terms ranging from 4 to 13 years. Most of the leases provide for fixed periodic rental increases. All of the leases are triple net leases. Most of the leases contain renewal options which allow the tenant to extend the lease based on fixed rental adjustments (which may be below market ratio) or adjustment to then prevailing market rates. AVERAGE OCCUPANCY AND RENTAL RATES The following table sets forth the aggregate average percent of square footage leased and the average Annual Base Rent per leased square foot for the Acquired Properties for the periods specified:
Total Annual Total Rentable Average Occupancy Average Annual Base Rent Effective Rent Per Base Rent Square Footage at Period End Per Leased Square Foot (1) Square Foot(3) (in thousands) -------------- ----------------- -------------------------- ------------------ -------------- 1992 416,527 84.30% $0.87 $0.87 $3,672,036 1993 416,527 74.23% 0.88 0.70 3,259,777 1994 416,527 66.05% 0.89 0.64 2,879,135 1995 416,527 81.76% 0.72 0.72 2,953,399 1996 416,527 86.84% 0.76 0.76 3,313,067 1997 560,585 90.63% 0.86 0.81 5,000,488
- ----------- (1) Calculated as total Annual Base Rent divided by the average total leased square footage at period end divided by 12. (2) Includes the Fremont Properties, which were completed and occupied during 1997. -53- LEASE EXPIRATIONS The following table shows expirations of leases for the Acquired Properties in place as of December 31, 1997 for each of the next ten years beginning with 1998, assuming none of the tenants exercises renewal options or termination rights that have not been exercised as of the date hereof:
Annual Base Rent Percentage of Total Annual Number of Rentable Square Footage Under Expiring Leases Base Rent Represented by Leases Expiring Subject to Expiring Leases (in thousands)(1) Expiring Leases(2) --------------- -------------------------- --------------------- -------------------------- 1998 1 18,304 $ 64 1.02% 1999 3 65,598 751 11.95% 2000 - - - - 2001 - - - - 2002 7 332,625 3,527 56.16% 2003 - - - 2004 2 99,802 1,422 22.64% 2005 - - - - 2006 - - - - 2007 and thereafter 1 44,256 517 8.23% --------------- -------------------------- --------------------- -------------------------- Total 14 560,585 $6,281 100.00%
- ----------- (1) Based on actual base rent under existing leases for 1998. (2) Calculated by dividing the Annual Base Rent for 1998 by total 1998 Annual Base Rents for all Acquired Properties. -54- ACQUIRED PROPERTIES The following table provides certain additional information concerning the Acquired Properties:
Year Annualized Annualized Developed Actual 1997 Net 1997 Effective ("D") or Rentable Annual Base Rent Per Net Rent Per Address of Acquired Square Rent for Sq. Ft. Sq. Ft. Per Leased Premises ("A") Feet Tenant 1997 Per Month Month - ---------------------- ----------- --------- ----------------- ----------- ---------- -------------- FREMONT PROPERTIES 4050 Starboard Drive 1997(D) 52,232 Flash - - - Fremont, California(1) Electronics, Inc. 45700 Northport 1997(D) 47,570 Phillips $669,960 $1.17 $1.14 Fremont, California Electronics 45738 Northport Loop 1997(D) 44,256 EIC $432,902 $0.82 $0.80 Fremont, California --------- ----------- Totals 144,058 $1,102,862 KONTRABECKI PROPERTIES 3510 Bassett Street 1983(D) 18,304 Sigma Circuits $153,756 $0.70 $0.55 Santa Clara, California 3540 Bassett Street 1984(D) 19,600 IXYS $180,198 $0.77 $0.70 Santa Clara, California Technologies, Inc. 3542 Bassett Street 1984(D) 20,648 Sigma Circuits $182,872 $0.74 $0.59 Santa Clara, California 3506 Bassett Street 1983(D) 25,350 Crystallume / $261,013 $0.86 $0.74 Santa Clara, California A.R.T. 3530 Bassett Street 1983(D) 50,070 SDL, Inc. $476,974 $0.79 $0.79 Santa Clara, California 3520 Bassett Street 1988(D) 52,080 KLA Instruments $624,674 $1.00 $1.00 Santa Clara, California / SDL, Inc. 3550 Bassett Street 1986(D) 49,080 Intevac $421,950 $0.72 $0.72 Santa Clara, California 3560 Bassett Street 1986(D) 73,093 Intevac $647,018 $0.74 $0.74 Santa Clara, California 3570 Bassett Street 1986(D) 23,372 Intevac $252,418 $0.90 $0.90 Santa Clara, California 3580 Bassett Street 1986(D) 21,118 Intevac $181,557 $0.72 $0.72 Santa Clara, California 3544 Bassett Street 1984(D) 63,812 Maxell Corp. $515,196 $0.67 $0.67 Santa Clara, California --------- ----------- Totals 416,527 $3,897,626
- ------------ (1) Lease signed prior to December 31, 1997, rent and occupancy commenced on January 1, 1998. (2) Lease for 3560 Bassett commenced on April 1, 1997. Rent for the first two months was payable at a 50% discount. THE PENDING DEVELOPMENT PROJECTS GREAT OAKS/SANTA TERESA This proposed project located on Berg & Berg land in south San Jose will be a contemporary two-story concrete tilt-up R&D Property of approximately 54,240 square feet situated on a three-acre site. BBE expects this project to be completed and leased in late 1998 to mid-1999. MEMOREX AND RICHARD. This proposed complex located in Santa Clara will consist of two single story R&D Properties, with limited parking, intended for single tenant occupancy. The building located on Memorex Drive will have 52,800 rentable square feet, and the building on Richard Ave. will have 58,740 square feet. BBE expects to complete and lease both buildings by mid-1998. AUTOMATION PARK. This project is being built on two adjoining parcels totaling 22 acres in north San Jose. BBE will construct four single story Spanish-style R&D Properties with approximate rentable areas of 114,028, 80,640, 80,640 and 61,056 square feet, respectively, with 4 per 1,000 square feet parking areas. BBE expects to complete and lease the four buildings between late 1998 and mid-1999. -55- L'AVENIDA. This Mountain View, California project will be a five-building complex totaling approximately 513,000 square feet on nearly 30 acres. The buildings will be high-quality contemporary tilt-up R&D Properties with reflective glass and concrete exteriors designed primarily as headquarters or research and development facilities for software or biotechnology firms. The site is a prime location near U.S. Highway 101, and neighboring tenants include Alza Corporation, Sun Microsystems, Inc. and Silicon Graphics, Inc. BBE expects to complete and lease all of the buildings in mid-1999. On August 6, 1998, Berg & Berg and Microsoft signed a lease with respect to an approximate 515,000 square foot property to be constructed by Microsoft on L'Avenida in Mountain View, California, one of the sites comprising the Pending Development Projects. This is a triple net lease with base rent in the first year of $2.95 per square foot. Microsoft controls the construction of this facility, which is scheduled to be completed in phases between March and May 1999. THE PENDING PROJECTS ACQUISITION AGREEMENT. The Acquisition Agreement, as amended, provides for the Company, the Operating Partnerships and the members of the Berg Group holding interests in the Pending Development Projects to enter into the Pending Projects Acquisition Agreement for the acquisition of the Pending Development Projects by the Operating Partnerships at the final closing date for the Berg Acquisition. Currently, there are no tenants for any of the Projects. Following are the principal terms of that agreement: - The selling Berg Group members and BBE will build and deliver each R&D Property in the Pending Development Projects to the Operating Partnerships at the acquisition value set forth in the following table, subject to adjustment if the actual average monthly rental rate per square foot differs from the projected rental rate set forth in the table. The actual acquisition value will be equal to the actual Annual Base Rent divided by the capitalization rate, minus the amount of debt encumbering the property.
Projected Triple Projected Average Approximate Net Annual Base Monthly Rental Rate Acquisition Capitalization Pending Project Building Size Rent Per Square Foot Value Rate(1) - ------------------ ------------- ------------------ -------------------- -------------- -------------- Great Oaks 54,240 $ 715,968 $1.10 $ 5,226,043 0.137 Memorex Drive 52,800 $ 535,560 $0.85 $ 3,347,250 0.160 Richard (Ave.) 58,740 $ 599,148 $0.85 $ 3,744,675 0.160 Automation Park 114,028 $1,778,836 $1.30 $12,705,971 0.140 80,640 $1,257,984 $1.30 $ 8,985,600 0.140 80,640 $1,257,984 $1.30 $ 8,985,600 0.140 61,056 $ 952,474 $1.30 $ 6,803,386 0.140 L'Avenida(2) 94,134 $3,219,382 $2.85 $18,937,541 0.170 101,622 $3,475,724 $2.85 $20,445,435 0.170 93,314 $3,191,339 $2.85 $18,772,582 0.170 126,236 $4,317,271 $2.85 $25,395,717 0.170 98,166 $3,357,277 $2.85 $19,748,688 0.170
- ----------------- (1) Calculated as 100 divided by the quotient of the Purchase Price and the Projected Triple Net Annual Base Rent. Management believes the current capitalization rate for good quality Silicon Valley R&D Properties is approximately 0.085 to 0.095. (2) This project provides an unusually high rate of return and is not representative of returns or projects that the Company may be able to obtain or acquire in the future. - The acquisition value will be payable by the Company or the Operating Partnerships in L.P. Units at $4.50 per L.P. Unit or cash, at the option of the Sellers. - The closing for the acquisition of an individual R&D Property within the Project will occur only when the building has been completed and fully leased. The Company and the Operating Partnerships are not otherwise required to acquire any of the Pending Development Projects. - The sellers will make customary representations and warranties to the Operating Partnerships as of the closing date. - Leases will be on commercially reasonable terms and conditions. See "Standard Berg & Berg Lease Terms." The Company will acquire the R&D Properties to be built by Microsoft on the L'Avenida site when and if construction has been completed and the buildings have been fully leased, and provided that the shareholders of the Company have approved the Pending Projects Acquisition Agreement at the Special Meeting. There can be no assurance that Microsoft will complete this facility, and unless all of the foregoing events occur, the Company will have no right to acquire the L'Avenida Pending Development Project, or any interest therein. -56- LAND HOLDING AND DEVELOPMENT ARRANGEMENTS BERG LAND HOLDINGS. Certain members of the Berg Group, including Carl E. Berg, own the Berg Land Holdings, which consist of several parcels of undeveloped real estate in the Silicon Valley which have been made available to the Company for future development, subject to stockholder approval at the special meeting, under the terms of the Option Agreement. Mr. Berg and such other Berg Group members have not undertaken any obligation to the Company or the Operating Partnerships to exercise any of their options or rights to acquire or develop the Berg Land Holdings and may not exercise them prior to their current expiration dates. The following table describes the Berg Land Holdings:
Estimated Remaining Development Potential Acres(1) in Rentable Square Feet(2) ------------- ------------------------- King Ranch Business Park, South San Jose 123 1,900,000 Hellyer and Piercy, South San Jose 7 105,000 Fremont & Cushing, Fremont 32 450,000
- ------------ (1) Net acres (2) Assumed coverage ratio of 32-35% of the buildable portion of the parcel. All three parcels have industrial or industrial business park zoning, permitting the development of R&D Properties. All discretionary approvals for the King Ranch, and Hellyer and Piercy properties have been obtained, with the exception of discretionary architectural reviews. Development of each of the parcels also requires various administrative and ministerial permits and approvals prior to the commencement of construction. The King Ranch site is adjacent to U.S. Highway 101. To date, designs have been prepared for two buildings of approximately 110,000 square feet and 70,000 square feet, respectively. Certain members of the Berg Group hold an option to purchase the site at Fremont Avenue and Cushing Boulevard in Fremont, California, exercisable, including all extensions, prior to January 2000. Acquisition of the land is subject to receipt of building permits and the resolution of issues concerning the set aside of wetlands. The Berg Group intends to propose offsite mitigation to the Army Corps of Engineers. If this mitigation cannot be obtained, the buildable site would be reduced to approximately 22 acres and 335,000 rentable square feet. The optionholders may decide not to exercise their option to acquire this land, in which case it will no longer be subject to the Berg Land Holdings Option Agreement. Certain members of the Berg Group hold an option to purchase the parcel located at Hellyer Avenue and Piercy Road in south San Jose during 1998. The acquisition of the land is subject to receipt of building permits and the resolution of street improvement costs with the City of San Jose. The optionholders may decide not to exercise their right to acquire this property, in which case it will no longer be subject to the Berg Land Holdings Option Agreement. THE OPTION AGREEMENT. The Acquisition Agreement, as amended, provides for the Company, the Operating Partnerships and the members of the Berg Group holding interests in the Berg Land Holdings to enter into the Option Agreement containing the following principal terms at the final closing date for the Berg Acquisition: - After the effective date of the Option Agreement and for as long as the Berg Group members and their Affiliates own or have the right to acquire shares representing 65% of the Common Stock on a Fully-Diluted basis, the Company will have the option (the "Option") to acquire any building developed by any member of the Berg Group on the Berg Land Holdings at such time as the building has been leased. Upon the Company's exercise of the Option the option price will equal the sum of (i) the full construction cost of the building, plus (ii) 10% of (i), plus (iii) the acquisition value of the parcel on which the improvements were constructed as set forth in the schedule below, and interest on that amount at LIBOR from January 1, 1998 until the close of escrow, plus (iv) taxes and assessments prorated from January 1, 1998, plus (v) interest at LIBOR on the amounts described in clauses (i) and (iv) from the date paid by the developer and ending at the close of escrow, minus the aggregate principal amount of all debt encumbering the acquired property. The acquisition value of each parcel under the Option Agreement follows: -57-
Parcel Acquisition Value ---------------------------------- Per Acre Per Square Foot ------------- ----------------- King Ranch $435,600 $10.00 Hillyer & Piercy $370,260 $8.50 Fremont & Cushing $871,200 $20.00
- The purchase price will be payable in cash, unless otherwise agreed by the Berg Group representatives, and the Company may contribute such building to the Operating Partnerships, subject to any debt incurred in connection with the acquisition, in exchange for additional general partner interests in the Operating Partnerships based up the market value of the Common Stock over the 30-trading day period preceding the Company's exercise of the Option. - The Company also must assume all assessments. - If the Company elects not to exercise the Option with respect to any building, the Berg Group may hold and lease the building for its own account, or may sell it to a third party. - All action by the Company under the Option Agreement must be approved by a majority of the members of the Independent Directors Committee. NON-COMPETITION ARRANGEMENTS. Mr. Berg has advised the Company of his intention to conduct all of his material R&D Property investment and development activities through the Company, except with respect to the Berg Land Holdings, which are subject to the Option Agreement, and the Pending Development Projects, which are subject to the Pending Projects Acquisition Agreement. Accordingly, under the Acquisition Agreement, he has agreed not to directly or indirectly acquire or develop, or acquire an equity ownership interest in any entity that has or intends to acquire an ownership interest in any real estate (with the exception of minor investments not to exceed 10% of the outstanding voting securities in publicly-traded companies) intended for R&D Property development or similar industrial use in California, Oregon or Washington without first disclosing such investment opportunity to the Company and making such opportunity available to the Company at the option of the Independent Directors Committee. Generally, Mr. Berg and the other Berg Group Members are free to pursue other types of real estate activities and other business opportunities, however. See "THE ACQUISITION AGREEMENT--Conflicts of Interest Provisions." -58- MORTGAGE DEBT AND CREDIT LINES MORTGAGE DEBT. The following table sets forth certain information regarding the mortgages encumbering the Berg Properties upon the consummation of the Berg Acquisition, assuming the application of the proceeds therefrom as set forth in "Use of Proceeds" and that such proceeds were applied effective as of September 30, 1998. All mortgage debt is nonrecourse to the Company, although certain of the mortgages are cross-defaulted and cross-collateralized with other mortgaged Properties. On September 23, 1998, the Company, in its capacity as the general partner of the Operating Partnerships, obtained a 130 million loan from Prudential Insurance Company of America. This loan is cross-collateralized and secured by a single deed of trust encumbering 18 properties improved with 24 buildings and consisting of approximately 1.7 million square feet of space, all of which are owned by the Operating Partnerships. The interest rate on the loan is fixed at 6.56% per annum, the amortization period is 30 years, and the term of the loan is 10 years. There is a significant prepayment penalty if the loan is paid prior to the maturity date. The loan is nonrecourse to the Operating Partnerships and the Company, except with respect to certain matters such as environmental liability relating to the encumbered properties, the payment of taxes and assessments with respect to the encumbered properties, the responsibility to return security deposits to the tenants of the encumbered properties, insurance or condemnation proceeds that are not properly applied under the terms of the loan, damages that result from early termination or amendment to specified major leases, waste of the subject properties, bankruptcy or insolvency of any of the Operating Partnerships or the Company, and any fraud or misrepresentations by the Company or the Operating Partnerships in connection with the loan. In addition, portions of the loan are guaranteed by certain Limited Partners.
Actual Pro Forma September Pro Forma Annual Pro September 30, 30, 1998 Debt Paid off September 30, Forma Debt Maturity 1998 Debt Description Collateral Properties Balance at Offering 1998 Balance Service Date (1) Interest Rate - ----------------- ----------------------------- ------------ ------------- ------------ ------------ ----------- ------------- ($ IN THOUSANDS) LINES OF CREDIT: Wells 1810 McCandless Drive,Milpitas, CA $39,044 $7,566 $46,610 $3,379 10/99 (2) Fargo 1740 McCandless Drive, Milpitas, CA 1680 McCandless Drive, Milpitas, CA 1600 McCandless Drive, Milpitas, CA 1500 McCandless Drive, Milpitas, CA 1450 McCandless Drive, Milpitas, CA 1350 McCandless Drive, Milpitas, CA 1325 McCandless Drive, Milpitas, CA 1425 McCandless Drive, Milpitas, CA 1526 McCandless Drive, Milpitas, CA 1575 McCandless Drive, Milpitas, CA 1625 McCandless Drive, Milpitas, CA 1745 McCandless Drive, Milpitas, CA 1765 McCandless Drive, Milpitas, CA MORTGAGE LOANS (RELATED PARTIES): 2033-2042 Samritan, San Jose CA 18,780 - 18,780 1,362 3/99 7.25% 2133 Samritan, San Jose CA 2233-2242 Samritan, San Jose CA MORTGAGE LOANS: Great West Life & Annuity Insurance Company 6320 San Ignacio Ave, San Jose, CA 7,769 - 7,768 544 2/04 7.0% Great West Life & Annuity Insurance Company 6320 San Ignacio Ave, San Jose, CA 3,707 - 3,707 259 5/04 7.0% National Electrical Contractors Association Pension Benefit Trust Fund 2251 Lawson Lane, Santa Clara, CA 4,625 (4,625) - - 1/09 - Prudential Capital Group 20400 Mariani, Cupertino, CA 2,065 - 2,065 181 3/09 8.75% New York Life Insurance Company 10440 Bubb Road, Cupertino, CA 436 - 436 42 8/09 9.625% Home Savings & Loan Association 10460 Bubb Road, Cupertino, CA 536 - 536 51 1/07 9.5% Amdahl Corporation 3120 Scott,Santa Clara, CA 6,993 - 6,993 664 3/14 9.5% Citicorp U.S.A. Inc. 280 Bayview Drive Fremont, CA 3,105 - 3,105 233 4/00 (3) Mellon Mortgage Company 3530 Bassett, Santa Clara, CA 2,986 - 2,986 243 6/01 8.125% Prudential Secured Loan 10300 Bubb, Cupertino, CA 130,000(4) - 130,000 8,528 10/08 6.56% 10500 N. DeAnza, Cupertino, CA 4050 Starboard, Fremont, CA 45700 Northpoint Loop, Fremont, CA 45738 Northpoint Loop, Fremont, CA 450-460 National, Mountain View, CA 4949 Hellyer, San Jose, CA 6311 San Ignacio, San Jose, CA 6321 San Ignacio, San Jose, CA 6325 San Ignacio, San Jose, CA 6331 San Ignacio, San Jose, CA 6341 San Ignacio, San Jose, CA 6351 San Ignacio, San Jose, CA 3236 Scott, Santa Clara, CA 3560 Bassett, Santa Clara, CA 3570 Bassett, Santa Clara, CA 3580 Bassett, Santa Clara, CA 1135 Kern, Sunnyvale, CA 1212 Bordeaux, Sunnyvale, CA 1230 E. Arques, Sunnyvale, CA 1250 E. Arques, Sunnyvale, CA 1170 Morse, Sunnyvale, CA 3540 Bassett, Santa Clara, CA 3542 Bassett, Santa Clara, CA 3544 Bassett, Santa Clara, CA 3550 Bassett, Santa Clara, CA ------------- ------------ ---------- Mortgage Loans Sub-total 162,222 157,597 10,745 ------------- ------------ ---------- Total $220,046 $222,987 $15,486
- ------------- (1) All principal due at maturity date. (2) The lesser of Wells Fargo prime rate in effect on the first day of each calendar month, or the LIBOR or the Wells Fargo Purchased Funds Rate quoted on the first day of each calendar month plus 1.65%. Average rates for the six months ended June 30, 1998 and the years ended December 31, 1997, 1996 and 1995 were 7.26%, 7.25%, 7.04% and 8.20%, respectively. (3) One month LIBOR plus 1.625% adjusted monthly. (4) In September 1998, the Company entered into a new secured loan with Prudential of $130,000,000. The loan bears interest at a fixed rate of 6.56% and due in monthly payments of principal (based on a 30 year amortization) and interest of approximately $827,000. -59- CREDIT LINES. Historically, some of the Berg Properties have been pledged as collateral under a line of credit provided by Wells Fargo, which has been guaranteed by the Berg Group members. As of September 30, 1998, approximately $39 million was outstanding under the Wells Fargo Line, which is secured by 14 Properties. The Berg Group members remain parties to the Wells Fargo Line, but have assigned to the Company and Operating Partnerships all of their borrowing rights under the Wells Fargo Line. See "FUTURE OPERATIONS OF THE COMPANY -- Line of Credit." PROPERTY TAX INFORMATION The aggregate real estate property tax obligations paid by the Company (with or without tenant reimbursement) for the Berg Properties during calendar 1997 were approximately $4.2 million. This amount does not include real estate property taxes paid directly by tenants. Of the four Operating Partnerships, only MWP had any Properties transferred to it as part of the Berg Acquisition; the other three limited partnerships have retained their historical Properties. The Property transfers to MWP resulted in a statutory change in ownership giving rise to a reassessment for California real property tax purposes, which is not expected to have a material adverse impact on the operations or financial condition of the Company. Except as noted with respect to transfers of Properties to MWP, the Company does not believe that any other aspects of the UPREIT Transactions effect a statutory change in ownership. Nevertheless, there can be no assurance that a local assessor will not assert that the UPREIT Transactions also have resulted in a statutory change in ownership with respect to the Berg Properties held by MWP I, MWP II and MWP III, as county assessors in California occasionally challenge complex transactions in which new investors acquire interests in existing real property holding entities. Substantially all of the leases for the Properties contain provisions requiring the tenants to pay as additional rent their proportionate shares of any property tax increases over specified base amounts. The Company may not be able to pass through to its tenants the full amount of any increased taxes resulting from a reassessment, however. The Company believes that any amount that cannot be passed through to tenants will not have a material adverse effect on the Company. ENVIRONMENTAL MATTERS Under various federal, state and local laws, ordinances and regulations, an owner or operator of real property may be held liable for the costs of removal or remediation of certain hazardous or toxic substances located on or in the property. Such laws often impose liability and expose the owner to governmental proceedings, without regard to whether the owner knew of, or was responsible for, the presence of the hazardous or toxic substances. The costs of any required remediation or removal of such substances may be substantial. In addition, the owner's liability as to any specific property is generally not limited and could exceed the value of the property and/or the aggregate assets of the owner. The presence of such substances, or the failure to properly remove or remediate such substances, may also adversely affect the owner's ability to sell or rent the property or to borrow using the property as collateral. Persons who arrange for the treatment or disposal of hazardous or toxic substances, such as asbestos, at a disposal facility may also be liable for the costs of any required remediation or removal of the hazardous or toxic substances at the facility, regardless of whether the facility is owned or operated by such owner or entity. In connection with the ownership of the Properties or the treatment or disposal of hazardous or toxic substances, the Company may be liable for such costs. Other federal, state and local laws impose liability for the release of ACMs into the air and require the removal of damaged ACMs in the event of remodeling or renovation. The Company is aware that there are ACMs present at several of the Properties, primarily in floor coverings. The Company believes that the ACMs present at these Properties are generally in good condition and that no ACMs are present in the remaining Properties. The Company believes it is in compliance in all material respects with all federal, state and local laws relating to ACMs and that if it were required to remove all ACMs present at the Properties over a short period of time, the cost of such removal would not have a material adverse effect on its financial condition, operating results, or ability to make distributions. The Company is not aware of any environmental liability relating to the Properties that it believes would have a material adverse effect on its financial condition, its operating results or its ability to make distributions and has not been notified by any governmental authority or any other person of any material noncompliance, liability or other claim in connection with any of the Properties. No assurance can be given that future laws, ordinances or regulations will not impose material environmental liabilities, or that the current environmental condition of the Properties will not be affected by tenants and occupants of the Properties, by the uses or condition of properties in the vicinity of the Properties, such as leaking underground storage tanks, or by third parties unrelated to the -60- Company. If the Company is required to remove or remediate any toxic wastes or hazardous substances present on any of the Properties, the cost to the Company could be material. LEGAL PROCEEDINGS From time to time the Company is involved in legal proceedings arising in the ordinary course of its business, none of which is believed to be material. The Company is not aware of any material litigation affecting any of the Properties, the Pending Development Projects, the Berg Land Holdings, or the Operating Partnerships, except for anticipated litigation concerning the Fremont Properties. See "SUMMARY OF THE UPREIT TRANSACTIONS AND PURPOSE OF THE SPECIAL MEETING -- Parties to and Terms of the Berg Acquisition." Berg & Berg is a plaintiff in BERG & BERG v. CHERYL AND GILBERT CHAVEZ in the Santa Clara County Superior Court. The court has entered a default judgment against the defendants in that action to recover funds embezzled by a former employee of Berg & Berg and BBE. Neither the Company nor the Operating Partnerships are entitled to any funds that may be recovered pursuant to the judgment. EMPLOYEES The Company initially expects to employ five persons. The Operating Partnerships will not have any employees. Prior to the consummation of the UPREIT Transactions, three of the Company's employees were employed by BBE. FUTURE OPERATIONS OF THE COMPANY OVERVIEW Upon consummation of the UPREIT Transactions, the Company will be a fully-integrated, self-administered and self-managed REIT organized to continue and expand the business of acquiring, developing, owning and managing Silicon Valley R&D Properties currently conducted by the Berg Group. Through its general partnership interests in the Operating Partnerships, the Company owns and operates 69 Silicon Valley R&D Properties. As of September 30, 1998, the occupancy rate of the Properties was approximately 100%. The Company also may acquire the 12 Silicon Valley R&D Properties comprising the Pending Development Projects if they are built and fully leased, and has the Option to acquire additional Berg Group Silicon Valley R&D Properties pursuant to the Option Agreement. Consequently, the Company's principal focus upon consummation of the UPREIT Transactions will be the management of its Silicon Valley R&D Properties. With Silicon Valley's highly educated and skilled work force, recent history of numerous successful start-up companies, and large contingent of venture capital firms, the Company believes that this region will continue to spawn successful new high-growth industries and entrepreneurial businesses to an extent matched nowhere else in the United States. In 1996, according to the National Venture Capital Survey, venture capital investment in the Silicon Valley reached $2.3 billion, representing 24.1% of the total of $9.5 billion invested nationally. Most of the investments were in technology-based companies, particularly in communications and software. In 1997, total venture capital investment in Silicon Valley exceeded $3.3 billion. Successful, venture capital-backed technology companies typically seek further capital from the public capital markets. Initial public offerings ("IPOs") by companies in the San Francisco Bay Area raised over $2.2 billion, $2.1 billion, and $1.7 billion in 1995, 1996, and 1997, respectively. The IPO proceeds frequently are used to fund growth and expansion, with a resulting need on the part of the issuer for additional space. Although equity valuations and the availability of private and public capital fluctuate considerably, the Company believes that this investment cycle will continue to create favorable R&D Property development and rental opportunities in the Silicon Valley. OPERATING AND GROWTH STRATEGY The Company intends to employ Berg & Berg's historical business strategy and the Company's substantial resources to achieve growth in FFO. The Company's operating and growth strategy contains the following principal elements: - Continued emphasis on general purpose, single-tenant Silicon Valley R&D Properties for technology-based companies to capitalize on the Company's extensive contacts in these companies and its extensive knowledge of their real estate needs. -61- - Acquiring R&D Properties built by the Berg Group on the Berg Land Holdings, which now represent one of the largest aggregations of land available for future construction of R&D Properties in Silicon Valley. - Demand-driven development activities, emphasizing build-to-suit projects for existing and emerging technology companies experiencing growth in the Silicon Valley. - Opportunistic acquisitions of high quality, well-located Silicon Valley R&D Properties in situations where illiquidity or inadequate management permit their acquisition at favorable prices, and where the Company's management skills will facilitate increases in cash flow and asset value. - Maintenance of a lean, experienced and responsive management team comprised of highly qualified and experienced professionals working within a relatively flat organizational structure. - Prudent financial management emphasizing current cash flow, as well as long-term value in the Company's acquisition and financing policies, the pre-leasing of buildings prior to acquisition or development to reduce the risks of owning them and the maintenance of sufficient liquidity to acquire and finance properties on desirable terms. - Geographic expansion into other technology-based areas of the West Coast if good R&D Properties become available there. OPERATIONS AND MANAGEMENT The Company will operate as a self-administered, self-managed REIT with its own employees. It will sublease office space from Berg & Berg at 10050 Bandley Drive and will share clerical staff and other overhead on what the Company considers to be very favorable terms. The total monthly rent payable by the Company to Berg & Berg will be $5,625, and the Company's contribution to BBE overhead when added to the rent payable to Berg & Berg will not exceed $15,000 per month. Carl E. Berg will work for the Company, as well as BBE, and will provide services to other enterprises. The other employees of the Company, except Bradley A. Perkins, will work for the Company full-time. The Company may add two additional employees, as required, but does not anticipate growth in employment except as acquisitions of new properties, particularly in other geographic regions, require additional personnel. Construction and repair work at the Company's Properties for building maintenance and tenant improvements may be provided by BBE. The Company will bid all major work competitively to subcontractors, however. The Company generally will market the Properties and negotiate leases with tenants by itself. Occasionally, the Company expects to retain real estate brokers, and its policy is to pay fixed commissions to tenants' brokers. ACQUISITIONS The Company's principal acquisition opportunities are the Pending Development Projects and the acquisition of R&D Properties that may be constructed by the Berg Group on the Berg Land Holdings. The Berg Group has acquired approximately 580,000 square feet of buildings in the last four years. The Company believes its acquisitions experience and the network of real estate professionals it has done business with will continue to provide opportunities for external growth. Furthermore, the Company's use of the Operating Partnerships structure gives prospective sellers the opportunity to contribute properties to the Company (through the Operating Partnerships) on a tax-deferred basis in exchange for L.P. Units. This capacity to complete tax-deferred transactions with sellers of real property will further enhance the Company's ability to acquire additional properties. Management also intends to monitor available, well-located, industrial properties on the West Coast of the United States. -62- MORTGAGE INDEBTEDNESS OUTSTANDING AFTER BERG ACQUISITION In addition to the $130 million Prudential Secured Loan which matures on October 15, 2008, the Company had other secured loans totaling approximately $90 million outstanding at September 30, 1998, including $39 million under the Wells Fargo Line. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FOR THE PROPERTIES -- Pro Forma Liquidity and Capital Resources" and "DESCRIPTION OF THE PROPERTIES--Mortgage Debt and Credit Lines." -63- DISTRIBUTION POLICY OVERVIEW The Company intends to make regular quarterly distributions to holders of its Common Stock based on its Cash Available for Distribution. The Company's ability to make such distributions will be affected by numerous factors including, most importantly, the receipt of distributions from the Operating Partnerships. The first distribution for the period commencing at the final closing date for the Berg Acquisition and ending on September 30, 1998 is expected to be in an amount equivalent to a quarterly distribution of $0.085 per share (which, if annualized, would equal $0.34 per share, or an annual yield of 8%, based on the last trading price set forth on the cover page of this Prospectus/Proxy Statement). In general, the Company expects that Cash Available for Distribution will exceed its initial planned distributions. Expected distributions for the 12 months following the final closing date for the Berg Acquisition will be approximately 83% of the estimated Cash Available for Distribution of the Company and are expected to exceed 95% of the Company's taxable income, as determined under federal tax laws applicable to REITs. The amount of estimated Cash Available for Distribution is based on the net amount of pro forma cash provided/(used) by operating, investing and financing activities of the Company for all of the Properties for the twelve months ending September 30, 1999, which includes adjustments for certain known events occurring after September 30, 1998 that are not reflected in the Company's historical or pro forma financial statements. DISTRIBUTION TABLE The following table illustrates the Company's pro forma cash provided/(used) by operating, investing and financing activities for the twelve months ended September 30, 1998, as adjusted, in estimating its initial dividend:
(in thousands, except expected initial dividend per share) ------------- OPERATING ACTIVITIES: Pro forma income before minority interest and gain on sale $18,016 of real estate for the year ended December 31, 1997 Less: Pro forma income before minority interest for the (11,081) nine months ended September 30, 1997 Plus: Pro forma income before minority interest for the 17,276 nine months ended September 30, 1998 ------------- Pro forma income before minority interest for the twelve 24,211 months ended September 30, 1998 Adjustments: Pro forma real estate depreciation and amortization for 10,842 the twelve months ended September 30, 1998 Net increase in contractual rental income (1) 601 Net effect of straight-line rents (2) (1,095) Estimated annual provision for leasing commissions (3) (1,100) ------------- Pro forma cash provided by operating activities 33,459 ============= INVESTING ACTIVITIES: Estimated annual provision for capital expenditures (4) (525) ------------- Pro forma cash provided by investing activities (525) ------------- FINANCING ACTIVITIES: Scheduled mortgage loan principal payments (5) (3,630) ------------- Pro forma cash provided by financing activities (3,630) ------------- Estimated pro forma Cash Available for Distribution for the $29,304 twelve months ended September 30, 1998 ============= Minority interests' share of estimated pro forma Cash $25,942 Available for Distribution (6) ============= The Company's share of estimated pro forma Cash Available $3,362 for Distribution available for holders Common Stock ============= Estimated initial annual distribution per share (7) $0.34 ============= Payout ratio based on estimated pro forma Cash Available 82.9% for Distribution (8) =============
(1) Represents the net increases in contractual rental income, net of expenses, from new leases and renewals that were not in effect for the entire twelve month period ended September 30, 1998 and new leases and renewals that went into effect between September 30, 1998 and October 20, 1998. Rental Income has not been included for any properties for the periods prior to their construction completion and availability for occupancy. (2) Effect of adjusting straight-line rental income included in pro forma income before minority interest for the twelve months ended September 30, 1998 to a cash basis. (3) Anticipated leasing commissions to be incurred based on the historical weighted average of such commissions paid in connection with lease renewals and re-leasing at the Properties multiplied by the average annual square feet of space for which leases expire during the period from July 1, 1998 through December 31, 2000. (4) The estimated cost of recurring building improvements and equipment replacements (excluding tenant improvements) at the Properties for the twelve months ending September 30, 1999. Generally, the Properties and their associated tenant leases are such that non-revenue producing tenant improvements are immaterial. (5) Represents scheduled payments of debt principal due during the 12 months ending September 30, 1999. (6) Minority interest share of estimated pro forma Cash Available for Distribution is calculated as follows: Estimated pro forma Cash Available for Distribution for the twelve months ended September 30, 1998 $29,304 Add back pro forma interest expense for which the Company is 100% responsible 213 ------------- 29,517 x 0.8789 ------------- $25,942
In order to effect the closing of the Company's acquisition of the sole general partnership interests in the Operating Partnerships, the Company issued to each of the partnerships a demand note bearing interest at a rate of 7.25% per annum aggregating $35,200 in principal. At September 30, 1998, the outstanding balance on these notes was $33,869. Upon the closing of the new Private Placement, the Company will utilize those proceeds along with available cash and a draw of $2,941 on the line of credit to repay these notes in their entirety. The portion of the outstanding balance on the line of credit in the amount of $2,941 will be the sole responsibility of the Company until such time as the balance is paid in full. Additionally, the full amount of interest on any outstanding balance associated with this amount will be absorbed 100% by the Company. On a pro forma basis, interest expense on this amount is $213 for the twelve months ended September 30, 1999. Until such time that the Company completes the Private Placement, the Company's share of Cash Available for Distribution will be less than the amount calculated in this table. Any outstanding balances owed to the Operating Partnerships in excess of $2,941 will increase the minority interests' share cash available for distribution by an amount 87.89% of the interest income associated with such balances, thereby decreasing the Company's share of such amounts. (7) The estimated annual distribution per share is based on a total of 8,193,594 shares outstanding after the UPREIT Transactions assuming no dilution from the exchange of L.P. Units, or exercise of options pursuant to the terms of the 1997 Stock Option Plan. (8) The payout ratio on estimated Cash Available for Distribution is calculated as the estimated initial annual distribution per share divided by the Company's share of Cash Available for Distribution per share for the 12 months ending September 30, 1999. The Company believes that its estimate of Cash Available for Distribution constitutes a reasonable basis for setting the amount of the Company's initial distribution and expects to maintain its initial distribution rate for the 12 months following the closing of the Berg Acquisition, unless actual results of operations, economic conditions or other factors differ materially from the assumptions used in the estimate. Cash Available for Distribution does not represent cash generated from operating activities in accordance with GAAP and is not necessarily indicative of cash available to fund cash needs. The actual return that the Company will realize and the amount available for distributions to shareholders will be affected by a number of factors, including the revenues received from the Properties, the operating expenses of the Company, the interest expense incurred on borrowings and unanticipated capital expenditures. The estimate of Cash Available for Distribution is provided in this Proxy Statement/Prospectus solely for the purpose of setting the initial distribution amount and is not intended to be a forecast by the Company of its future results of operations, FFO or Cash Available for Distribution. No assurance can be given that the Company's estimate will prove accurate. The Company anticipates that Cash Available for Distribution will exceed earnings and profits for federal income tax purposes as the latter figure takes into account non-cash expenses, such as depreciation and amortization, to be incurred by the Company. Distributions by the Company to the extent of its current and accumulated earnings and profits for federal income tax purposes will be taxable to shareholders as ordinary dividend income unless a shareholder is a tax-exempt entity. See "FEDERAL INCOME TAX CONSIDERATIONS--Taxation of United States Shareholders". Distributions in excess of earnings and profits generally will be treated as a non-taxable reduction of the shareholder's basis in the Common Stock to the extent thereof, and thereafter as taxable gain. The percentage of such distributions constituting a non-taxable return of capital, if any, may vary from period to period. The Company anticipates that a substantial percentage of the distributions to shareholders for the 12 months following the consummation of the Offering will constitute ordinary income. In order to maintain its qualification as a REIT, the Company must make annual distributions to shareholders of at least 95% of its taxable income (which does not include net capital gains). See "FEDERAL INCOME TAX CONSIDERATIONS--Taxation of the Company--Annual Distribution Requirements." Under certain circumstances, the Company may be required to make distributions in excess of Cash Available for Distribution in order to meet such distribution requirements. Any inability on the part of the Operating Partnerships to secure financing as required to fund capital expenditures and net changes in working capital, including development activities and expansions, would require the utilization of distributable cash flow to satisfy such obligations, thereby possibly reducing distributions to partners, including the Company, and funds available for the Company to pay dividends. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources." Cash Available for Distribution is based on FFO. The Company computes FFO in accordance with standards established by the Board of Governors of NAREIT in its March 1995 White Paper, which may differ from the methodology for calculating Funds from Operations utilized by other equity REITs, and accordingly, may not be comparable to such other REITs. NAREIT currently defines FFO as net income (loss) (computed in accordance with GAAP), excluding gains (or losses) from debt restructuring and sales of property, 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. Extraordinary or unusual items, along with significant non-recurring events that materially distort the comparative measure of FFO are disregarded in this calculation. Management believes that its computation of FFO is helpful to investors as a measure of the 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 the Company's ability to incur and service debt and make capital expenditures. The Company's 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. The Company's 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. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as an indication of the Company's financial performance or to cash flows from operating activities (determined in accordance with GAAP) as a measure of the Company's liquidity, nor is FFO necessarily indicative of funds available to fund the Company's cash needs, including its ability to make distributions. The Company believes that to facilitate a clear understanding of the combined historical operating results of the Berg Properties and the Company, FFO should be examined in conjunction with net income as presented in the combined financial statements. -65- Distributions by the Company will be determined by the board of directors and will depend on actual Cash Available for Distribution of the Company, its financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Board of Directors deems relevant. For a discussion of the tax treatment of distributions to holders of shares of Common Stock, see "FEDERAL INCOME TAX CONSIDERATIONS--Taxation of United States Shareholders" and "Taxation of Foreign Shareholders." THE ESTIMATES OF PRO FORMA CASH FLOWS FROM OPERATING ACTIVITIES AND CASH AVAILABLE FOR DISTRIBUTION ARE MADE SOLELY FOR THE PURPOSE OF SETTING THE INITIAL DISTRIBUTION RATE AND ARE NOT INTENDED TO BE A PROJECTION OR FORECAST OF THE COMPANY'S RESULTS OF OPERATIONS OR OF ITS LIQUIDITY. FUNDS FROM OPERATIONS DOES NOT REPRESENT CASH FLOW FROM OPERATIONS AS DEFINED BY GAAP, IS NOT NECESSARILY INDICATIVE OF CASH AVAILABLE TO FUND ALL OF THE COMPANY'S CASH NEEDS, AND SHOULD NOT BE CONSIDERED AS AN ALTERNATIVE TO NET INCOME FOR PURPOSES OF EVALUATING THE COMPANY'S OPERATING PERFORMANCE. SEE "FORWARD LOOKING INFORMATION" and "RISK FACTORS--Uncertainties Regarding Distributions to Shareholders." -66- POLICIES WITH RESPECT TO CERTAIN ACTIVITIES The following is a discussion of the Company's policies with respect to investment, financing, conflicts of interest and other activities of the Company. These policies have been formulated by the board of directors of the Company and generally may be amended or revised from time to time at the discretion of the board of directors without a vote of the shareholders of the Company. Upon the effective date of the Reincorporation Merger, however, the Charter will provide that (i) until the Protective Provisions Expiration Date, the approval of the Required Directors as provided in the Charter and the consent of the L.P. Unit Majority are required for the Company to take title to assets (other than temporarily in connection with an acquisition prior to contributing such assets to the Operating Partnerships) or to conduct business other than through the Operating Partnerships, or for the Company or the Operating Partnerships to engage in any business other than the ownership, construction, development and operation of real estate properties, (ii) changes in certain policies with respect to conflicts of interest must be consistent with legal requirements, (iii) certain policies with respect to competition by Carl E. Berg and the Berg Group are imposed pursuant to provisions of the Acquisition Agreement that cannot be amended or waived without the approval of the Independent Directors Committee, and (iv) the Company cannot take any action intended to terminate its qualification as a REIT without the approval of more than 75% of the entire board of directors. In addition, until the Protective Provisions Expiration Date, the approval of the Required Directors will be required for certain fundamental corporate actions, including amendments to the Charter or bylaws, amendments to the Operating Partnership Agreement, and any merger, consolidation or sale of all or substantially all of the assets of the Company or the Operating Partnerships. Certain specific transactions, including the issuance of securities and borrowings in excess of specified limits, and amendments of the Charter and bylaws are subject to approval by more than 75% of the directors. See "DESCRIPTION OF CAPITAL STOCK--Board Quorum and Special Voting Requirements." INVESTMENT POLICIES The Company's business will be focused solely on the ownership, construction, development and operation of real estate properties, principally R&D Properties, and the Company intends to conduct all of its activities through the Operating Partnerships. The Company's investment objective is to provide stable cash flow available for quarterly cash distributions and achieve long-term appreciation through increases in cash flows and the value of its properties. The Company intends to pursue these objectives by (i) investing capital to enhance investment returns on its existing Properties, and (ii) acquiring or developing additional properties where the Company believes that opportunities exist for attractive investment returns. Such additional properties may include some or all of the Berg Land Holdings, which are subject to options held by the Company. See "DESCRIPTION OF THE PROPERTIES--Land Holding and Development Arrangements." The Company may expand or improve its properties or, subject to the approval of the Required Directors, sell such properties in whole or in part as determined by the Board. See "FUTURE OPERATIONS--Strategy." The Company expects to pursue its investment objectives principally through the direct ownership by the Operating Partnerships of the Properties and future developed properties. Future development or investment activities will not be limited to any specified percentage of the Company's assets. The Company may also participate with other entities in property ownership, through joint ventures or other types of co-ownership. Equity investments may be subject to existing mortgage financing and other indebtedness which have priority over the equity interest of the Company. While the Company will emphasize equity real estate investments, it may, in its discretion and subject to the percentage ownership limitations and gross income tests necessary for REIT qualification, invest in mortgage and other real estate interests including securities of other real estate investment trusts. The Company has not previously invested in mortgages or securities of other real estate investment trusts and does not have any present intention to make such investments. FINANCING POLICIES The Company intends to maintain a ratio of debt to Total Market Capitalization of no more than 50%. The Company's ratio of debt to Total Market Capitalization would have been approximately 42% at September 30, 1998, on a pro forma basis after giving effect to the UPREIT Transactions. See "PRO FORMA CAPITALIZATION." The Company, however, may from time to time reevaluate its debt policy in light of then current economic conditions, relative costs of debt and equity capital, the market values of its properties, growth and acquisition -67- opportunities and other factors. Subject to the need for more than 75% of the directors to approve debt increases above 50% of Total Market Capitalization, the Company may modify its debt policy and may increase or decrease its ratio of debt to Total Market Capitalization. The Company has established its debt policy relative to Total Market Capitalization, because the Company believes that the book value of its assets (which to a large extent consists of the depreciated value of real property, the Company's primary tangible asset) does not accurately reflect its ability to borrow and to meet debt service requirements. However, Total Market Capitalization is more variable than book value and does not necessarily reflect the fair market value of the Company's underlying assets. Although the Company will consider factors other than market capitalization in making decisions regarding the incurrence of debt (such as the estimated market value of such properties upon refinancing, and the ability of particular properties and the Company as a whole to generate cash flow to cover expected debt services), there can be no assurance that the Company will maintain the ratio of debt to Total Market Capitalization (or to any other measure of asset value) described above. To the extent that the board of directors of the Company determines to seek additional capital, the Company may raise such capital through additional equity offerings, debt financing or retention of cash flow (after consideration of provisions of the Code requiring the distribution by a REIT of a certain percentage of its taxable income and taking into account taxes that would be imposed on undistributed taxable income), or through a combination of these sources. It is the Company's present intention that any additional borrowings will be made through the Operating Partnerships, although the Company may incur borrowings that would be reloaned to the Operating Partnerships. See "OPERATING PARTNERSHIP AGREEMENT." Borrowings may be unsecured or may be secured by any or all assets of the Company, the Operating Partnerships, or any existing or new property and may have full or limited recourse to all or any portion of the assets of the Company, the Operating Partnerships, or any existing or new property. The Company has not established any limit on the number or amount of mortgages that may be placed on any single property or on its portfolio as a whole. Of the Company's 69 R&D Properties, currently 18 Properties secure the Prudential Secured Loan and 14 Properties secure the Wells Fargo Line. Until October 1999, the Wells Fargo Line with a remaining balance of approximately $61 million would be available to fund property acquisitions, development activities, and for general corporate purposes. The Company may determine to issue securities senior to the Common Stock, including shares of new series of Preferred Stock and debt securities (either of which may be convertible into Common Stock or accompanied by warrants to purchase capital stock). The Company may also determine to finance acquisitions through the exchange of properties or the issuance of additional L.P. Units in the Operating Partnerships, shares of Common Stock or other securities. In the event that the board of directors determines to raise additional equity capital, it has the authority, without shareholder approval, to issue additional shares of Common Stock, Preferred Stock other capital stock (including securities senior to the Common Stock) of the Company in any manner (and on such terms and for such consideration) it deems appropriate, including in exchange for property. In the event that the Company issues (whether for cash or property) any shares of Common Stock or securities convertible into, or exchangeable or exercisable for, shares of Common Stock, subject to certain limited exceptions, including the issuance of Common Stock pursuant to any stock incentive plan adopted by the Company or pursuant to Limited Partners' exercise of the Exchange Rights or the Put Rights, the Limited Partners will have the right to purchase Common Stock or such securities in order to maintain their respective percentage interests in the Company and the Operating Partnerships on a consolidated basis. If the board of directors determines that the Company will raise additional equity capital to fund investments by the Operating Partnerships, the Company will contribute such funds to the Operating Partnerships as a contribution to capital and purchase of additional general partnership interest; however, holders of L.P. Units will have the right to participate in such funding on a pro rata basis. In the event that holders of L.P. Units sell their L.P. Units to the Company pursuant to their Put Rights, the Company is authorized to raise the funds for such purchase by issuing additional shares of Common Stock. In addition, the Company may issue additional shares of Common Stock in connection with the exchange of L.P. Units for shares of Common Stock pursuant to the exercise of the Exchange Rights. The Company's Board of Directors also has the authority to cause the Operating Partnerships to issue additional L.P. Units in any manner (and on such terms and for such consideration) as it deems appropriate, including in exchange for property. In the event that the Operating Partnerships issue new L.P. Units for cash (but not property), the Limited Partners will have the right to purchase L.P. Units in order, and to the extent necessary, to maintain their respective percentage interests in the Operating Partnerships. Any such new L.P. Units will be -68- exchangeable for Common Stock pursuant to the Exchange Rights or may be tendered to the Company pursuant to the Put Rights. See "OPERATING PARTNERSHIP AGREEMENT--Exchange Rights, Put Rights and Registration Rights." DISPOSITION POLICY The Company has no current intention to dispose of any of the Properties, although it reserves the right to do so. The tax basis of the Limited Partners in the Properties in the Operating Partnerships is substantially less than current fair market value. Accordingly, prior to the disposition of their L.P. Units in the Operating Partnerships, upon a disposition of any of the Properties, a disproportionately large share of the gain for federal income tax purposes would be allocated to the Limited Partners. See "FEDERAL INCOME TAX CONSIDERATIONS--Income Taxation of the Partnership." Consequently, it may be in the interests of the Limited Partners that the Company continue to hold the Properties in order to defer such taxable gain. In light of this, the Operating Partnership Agreement provides that for a period of ten years after the closing or until the Protective Provisions Expiration Date, if earlier, Carl Berg and Clyde Berg may prohibit the Operating Partnerships from disposing of Properties which they designate in a taxable transaction. Kontrabecki has a similar right with respect to the Kontrabecki Properties which will lapse before the end of the ten-year period, if his beneficial ownership interest in the Operating Partnerships falls below 750,000 L.P. Units. The Limited Partners may seek to cause the Company to retain the Properties even when such action may not be in the interests of some, or a majority, of the shareholders of the Company. The approval of the Required Directors will be required if the Company sells in any transaction, or series of related transactions or aggregate sales, all or substantially all of the assets of the Company. The consent of the holders of a majority of the L.P. Units will be required to effect a sale or sales of all, or substantially all, of the assets of the Operating Partnerships. For a description of certain tax consequences arising from the disposition of a property controlled by the Company, see "FEDERAL INCOME TAX CONSIDERATIONS--The Aspects of The Operating Partnerships." CONFLICT OF INTEREST POLICIES The Company has adopted certain policies and entered into certain agreements with the Berg Group designed to eliminate or minimize potential conflicts of interest. There can be no assurance that these policies will be successful in eliminating the influence of such conflicts. If they are not successful, decisions affecting the Company could be made that might fail to reflect fully the interests of all shareholders. In recognition of these potential conflicts of interest, the Company and the Berg Group have agreed that any transaction between the Company and Mr. Berg or other members of the Berg Group must be approved by the Independent Directors Committee. The members of the Berg Group also have agreed that all future transactions between the Company and their Affiliates or any other entities in which they hold 5% or greater ownership interests shall be subject to review and approval by the Independent Directors Committee. See "THE ACQUISITION AGREEMENT--Conflict of Interest Provisions." In addition, the Berg Group and the Company have entered into agreements concerning the lease of office space to the Company, the acquisition of Berg Land Holdings and of Pending Development Projects, and the use of BBE for construction and repair work. The exercise of the Company's rights or the waiver of any benefits to the Company under these agreements will be subject to the approval of the Independent Directors Committee. See "DESCRIPTION OF THE PROPERTIES--Land Holding and Development Arrangements" and "FUTURE OPERATIONS OF THE COMPANY--Operation and Management." POLICIES WITH RESPECT TO OTHER ACTIVITIES The Company has authority to offer shares of its capital stock or other securities and to repurchase or otherwise reacquire its shares or any other securities and may engage in such activities in the future. The Company has no outstanding loans to other entities or persons, including its officers and directors. The Company may in the future make loans to joint ventures in which it participates in order to meet working capital needs. The Company has not engaged in trading, underwriting or agency distribution or sale of securities of other issuers, nor has the Company invested in the securities of other issuers other than the Operating Partnerships for the purpose of exercising control, and does not intend to do so. The Company intends to make investments in such a way that it will not be treated as an investment company under the Investment Company Act of 1940. -69- At all times, the Company intends to make investments in such a manner as to be consistent with the requirements of the Code for the Company to qualify as a REIT unless, because of changing circumstances or changes in the Code (or in Treasury Regulations), directors representing more than 75% of the entire board of directors determine that it is no longer in the best interests of the Company to qualify as a REIT. -70- THE ACQUISITION AGREEMENT THE FOLLOWING SUMMARY OF THE ACQUISITION AGREEMENT, INCLUDING THE DESCRIPTIONS OF CERTAIN PROVISIONS SET FORTH ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS, IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE ACQUISITION AGREEMENT, WHICH IS FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROXY STATEMENT/PROSPECTUS IS A PART. A COPY OF THE AGREEMENT IS AVAILABLE FROM THE COMPANY UPON REQUEST. SEE "AVAILABLE INFORMATION." GENERAL The parties to the Acquisition Agreement are MWP, MWP I, MWP II, all members of the Berg Group, and all of the Kontrabecki Partnerships, including MWP III. Under the terms of the Acquisition Agreement, as amended as of July 1, 1998, the parties have agreed to operate MWP, MWP I, MWP II and MWP III as the Operating Partnerships subject to the terms of the Operating Partnership Agreement, the Operating Partnerships acquired the Berg Properties and the Acquired Properties in the Partnership Closing, and agreed to consummate the remaining transactions comprising the Berg Acquisition after the shareholders have approved Proposals 1, 3, 4 and 5 at the Special Meeting. Pursuant to the Acquisition Agreement, the Company is entitled to conduct the operations of all four limited partnerships in a consolidated manner under the name "Mission West Properties, L.P." The Acquisition Agreement was signed by all parties effective as of May 14, 1998, and amended as of July 1, 1998. THE CLOSING At the Partnership Closing, the existing general partners in MWP, MWP I, MWP II and MWP III resigned, the Company acquired its interest as sole general partner in each of the Operating Partnerships, MWP acquired certain Berg Properties and the Kontrabecki Properties in exchange for L.P. Units, and the Company and all limited partners in each of the Operating Partnerships signed and delivered an Operating Partnership Agreement. In addition, MWP III converted to a Delaware limited partnership as of the date of the Partnership Closing. The final closing of the transactions contemplated by the Acquisition Agreement will occur on the last business day of the month in which the shareholders approve the UPREIT Transactions at the Special Meeting. At such closing, the parties will sign and deliver the Operating Partnership Agreement, the Exchange Rights Agreement, the Berg Land Holdings Option Agreement, the Pending Projects Acquisition Agreement, and subject to shareholder approval of the Reincorporation Merger, the Merger Agreement. The Company expects Mr. Berg to acquire the Fremont Properties and contribute them to MWP at or before the final closing date. REPRESENTATIONS AND WARRANTIES The Acquisition Agreement provides for each of the parties to make representations and warranties customary for transactions of this nature, which generally relate to the parties lawful organization, good standing, authorization to enter into the agreement and effect the transactions required under the Acquisition Agreement, title to the Properties, condition of the Properties, effectiveness of the leases for the Properties, the accuracy of financial information exchanged by the parties, the accredited investor status of all limited partners, and similar matters. Representations and warranties concerning the Properties were made in connection with the Partnership Closing, and will be made at the time of the final closing date for the Berg Acquisition, as well. CONDITIONS TO CONSUMMATION OF THE CONTEMPLATED TRANSACTIONS To permit the Partnership Closing to occur in advance of the Special Meeting, the parties waived general conditions to closing contained in the Acquisition Agreement and satisfied closing conditions regarding the effectiveness of the offering of L.P. Units to the Limited Partners in an exempt private placement, the resignation of the existing general partners of MWP, MWP I, MWP II and MWP III, and the accuracy of representations and warranties concerning the parties to the Acquisition Agreement and the Properties. The closing of the remaining transactions constituting the Berg Acquisition and the Private Placement is subject to the satisfaction of certain conditions. The conditions applicable to the obligations of all parties include shareholder approval of such transactions as set forth in Proposals 1, 3, 4 and 5 at the Special Meeting, the absence of any injunction or restraining order against completing any of the UPREIT Transactions, the receipt of all required third party consents, the consummation of the Private Placement, and the execution and delivery of all related agreements. The obligations of the Company to close the transactions will be subject to, in addition to the preceding conditions, the accuracy of the representations and warranties of the other parties to the agreement. Any of the closing conditions may be waived by the party or parties entitled to require performance of the condition. -71- COVENANTS The Acquisition Agreement includes covenants pertaining to the provision of timely and accurate financial statements as necessary in connection with the Company's preparation of the Registration Statement and this Proxy Statement/Prospectus, the continued conduct of each party's business with respect to the Properties in the ordinary course, and each party's agreement to take actions required and reasonably requested to comply with the terms of the Acquisition Agreement and consummate the transactions subject to that agreement. Under the July 1, 1998 amendment to the Acquisition Agreement the Company and all other parties have agreed to use their respective ultimate best efforts to obtain shareholder approval of all UPREIT Transactions. The Acquisition Agreement requires the Company to provide Exchange Rights to the Limited Partners with respect to their L.P. Units and to give them certain rights to register the shares of Common Stock acquired under the terms of the Exchange Rights Agreement. Also, the Company must take steps necessary to preserve and list on the AMEX the shares of Common Stock issuable in exchange for L.P. Units under the Exchange Rights Agreement. Furthermore, the Company has agreed that each of the Limited Partners may purchase his, her or its pro rata share of new equity securities offered by the Company subsequent to the closing date. Each Limited Partner's pro rata share will be determined based on the proportion which the Limited Partner's number of L.P. Units bears to the total number of Outstanding Shares at the time of the Company's proposed offering of new equity securities. The Limited Partners will have 10 days in which to respond to the Company's offer of such securities. Thereafter, the Company will have a period of 60 days to conclude the sale and issuance of the new securities upon the same terms offered to the Limited Partners. A Limited Partner may assign the right of first refusal to any assignee of at least 500,000 L.P. Units. The right of first refusal will terminate upon the earlier of May 14, 2003, or the written agreement of the Company and holders of a majority of the L.P. Units. Under the Acquisition Agreement, the Company has agreed to provide indemnity to its officers, directors, employees, agents and certain other parties with respect to claims brought against indemnified parties as a result of his, her or its service to or relationship with the Company, whether before or after the closing of the UPREIT Transactions. This indemnification is consistent with the provisions of the articles of incorporation of the Company and the Charter. See "THE REINCORPORATION MERGER--Comparison of Rights of Shareholders." The Company also has agreed to take the action necessary to effect the Reincorporation Merger, subject to shareholder approval at the Special Meeting, and to cause Mission West-Maryland to adopt the Charter and bylaws described below. The members of the Berg Group will have the right to nominate for election to the Board of Directors the Berg Group Board Representatives so long as the Berg Group and its Affiliates beneficially own an aggregate of at least 15% of the Fully-Diluted number of shares of Common Stock. In the event that their ownership falls below 15% but is at least 10%, the members of the Berg Group will have the right to nominate one person for election to the board of directors. See "CERTAIN PROVISIONS OF MARYLAND LAW AND MISSION WEST-MARYLAND'S CHARTER AND BYLAWS." CONFLICTS OF INTEREST PROVISIONS The Acquisition Agreement includes the undertaking of Carl E. Berg not to directly or indirectly acquire or develop, or acquire any equity ownership interest in any entity that has an ownership interest in any real estate zoned or intended for use as R&D Properties or similar industrial facilities or intends to engage in similar real estate activities (with the exception of investments in securities of publicly traded companies, which securities do not represent more than 10% of the outstanding voting securities of such companies) in California, Oregon or Washington without first disclosing such investment opportunity to the Company and making such opportunity available to the Company subject to the approval of the Independent Directors Committee. This restriction does not apply to any acquisition, development or investment with respect to the Berg Land Holdings and the Pending Development Projects. This restriction remains in effect until the date on which both of the following conditions are satisfied: (i) no nominee of the Berg Group is a member of the Company's board of directors and (ii) the Berg Group and its Affiliates (other than the Company and the Operating Partnerships) beneficially own less than 25% of the outstanding Common Stock of the Company (including for these purposes shares issuable upon exercise of the Exchange Rights subject to the Ownership Limit). In addition, transactions between the Company and any Berg Group member, or entity in which a Berg Group member holds at least 5% of the equity interests are subject to review and approval by the Independent Directors Committee. Aside from those restrictions, Mr. Berg and other members of the Berg Group will generally have freedom of action with respect to the conduct of their business activities and will not be required to seek the approval of such activities or refer business opportunities to the Company, nor will they be subject to liability for failure to do so. -72- TERMINATION The Acquisition Agreement is terminable prior to the final closing date for the Berg Acquisition only by the Company or Mr. Berg in the event there exists a non-appealable final order, decree or judgment preventing the occurrence of any aspect of the UPREIT Transactions. SURVIVAL AND INDEMNIFICATION MATTERS All representations and warranties of the parties to the Acquisition Agreement will survive the closing for a period of one year. Each party to the Acquisition Agreement is obligated to indemnify the other parties and their Affiliates with respect to losses and liability resulting from inaccuracies in the representations and warranties of such party, failure by a party to perform its obligations under the Acquisition Agreement, failure to satisfy liabilities not assumed by the Operating Partnerships or the Company, and any claim for brokers' commissions or finder's fees. -73- OPERATING PARTNERSHIP AGREEMENT THE FOLLOWING SUMMARY OF THE OPERATING PARTNERSHIP AGREEMENT, INCLUDING THE DESCRIPTIONS OF CERTAIN PROVISIONS SET FORTH ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS, IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE OPERATING PARTNERSHIP AGREEMENT, WHICH IS FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROXY STATEMENT/PROSPECTUS IS A PART. MANAGEMENT As of the Partnership Closing effective date, the Operating Partnerships consists of four separate Delaware limited partnerships engaged in the combined operation and ownership of the Properties pursuant to the terms of the Acquisition Agreement, as amended, and the Operating Partnership Agreement, which is identical in all material respects for all four of the limited partnerships. Generally, pursuant to the Operating Partnership Agreement, the Company as the sole general partner of the Operating Partnerships has exclusive control of the business and assets of the Operating Partnerships and has full and complete authority, discretion and responsibility with respect to the Operating Partnerships' operations and transactions, including, without limitation, acquisitions of additional properties, borrowing funds, raising new capital, leasing buildings, as well as selecting and supervising all employees and agents of the Operating Partnerships. Through its authority to manage the business and affairs of the Company, the board of directors of the Company will direct the business of the Operating Partnerships. The Berg Group has the right to nominate two individuals for election to the board of directors so long as the members of the Berg Group and their Affiliates (other than the Company and the Operating Partnerships) beneficially own in the aggregate at least 15% of the outstanding shares of Common Stock on a Fully-Diluted basis. If the members of the Berg Group and such Affiliates beneficially own, in the aggregate, less than 15% but at least 10% of the Common Stock, on a Fully-Diluted basis, the Berg Group will have the right to nominate one individual for election to the board of directors. Notwithstanding the Company's effective control of the Operating Partnerships, the consent of the Limited Partners holding an L.P. Unit Majority is required with respect to certain extraordinary actions involving the Operating Partnerships including (i) the amendment, modification or termination of the Operating Partnership Agreement, (ii) a general assignment for the benefit of creditors or the appointment of a custodian, receiver or trustee for any of the assets of the Operating Partnerships, (iii) the institution of any proceeding for bankruptcy of the Operating Partnerships, (iv) the transfer of any general partnership interests in the Operating Partnerships, including (with certain exceptions) transfers attendant to any merger, consolidation or liquidation of the Company, (v) the admission of any additional or substitute general partner in the Operating Partnerships; and (vi) a Change of Control of the Operating Partnerships. In addition, until the Protective Provisions Expiration Date, the consent of the Limited Partners holding the L.P. Unit Majority is also required with respect to (i) the liquidation of the Operating Partnerships, (ii) the sale or other transfer of all or substantially all of the assets of the Operating Partnerships and certain mergers and business combinations resulting in the complete disposition of all L.P. Units; and (iii) the issuance of limited partnership interests having seniority as to distributions, assets and voting over the L.P. Units. Carl Berg and Clyde Berg have the right for a period of ten years, or if sooner, until the Protective Provisions Expiration Date, to prohibit taxable transfers of designated Properties by the Operating Partnerships without their prior written consent. John Kontrabecki has similar rights with respect to the former Kontrabecki Properties, which expire after he owns fewer than 750,000 L.P. Units. The Operating Partnerships will be able to effect "tax-free" like kind exchanges under Section 1031 of the Code, or in connection with other non-taxable transactions, such as a contribution of property to a new partnership, without obtaining the prior written consent of these individuals. See "POLICIES WITH RESPECT TO CERTAIN ACTIVITIES Disposition Policy." TRANSFERABILITY OF L.P. UNITS The Operating Partnership Agreement provides that the Limited Partners may transfer their L.P. Units subject to certain limitations. Except for certain transfers by the Limited Partners to or from certain of their affiliates, however, all transfers may be made only with the prior written consent of the Company as the sole general partner of the Operating Partnerships. In addition, no transfer of L.P. Units by the Limited Partners may be made in violation of certain regulatory and other restrictions set forth in the Operating Partnership Agreement. Except in the case of certain permitted -74- transfers to or from certain Affiliates of the Limited Partners, the Exchange Rights, the Put Rights, the New Equity Financing Rights and the Protective Provisions will no longer be applicable to L.P. Units so transferred, and the transferee will not have any rights to nominate persons to the board of directors of the Company. ADDITIONAL CAPITAL CONTRIBUTIONS AND LOANS The Operating Partnership Agreement provides that if the Operating Partnerships requires additional funds to pursue its investment objectives, the Company may fund such investments by raising additional equity capital and making a capital contribution to the Operating Partnerships or by borrowing such funds and lending the net proceeds thereof to the Operating Partnerships. If the Company intends to provide additional funds through a contribution to capital and purchase of units of general partnership interest, the Limited Partners will have the right to participate in such funding on a pro rata, pari passu basis and to acquire additional L.P. Units (the "New Equity Financing Rights"). If the Limited Partners do not participate in such financing, the Company will acquire additional units of general partnership interest. In either case, the number of additional units of partnership interest will be increased based upon the amount of the additional capital contributions and the value of the Operating Partnerships as of the date such contributions are made. In addition, as general partner of the Operating Partnerships, the Company has the ability to cause the Operating Partnerships to issue additional L.P. Units. In the event that the Operating Partnerships issue new L.P. Units (for cash but not property), the Limited Partners will have the right to purchase new L.P. Units at the price offered by the Company in the transaction giving rise to such participation right in order, and to the extent necessary, to maintain their respective percentage interests in the Operating Partnerships. See "POLICIES WITH RESPECT TO CERTAIN ACTIVITIES-- Financing." EXCHANGE RIGHTS, PUT RIGHTS AND REGISTRATION RIGHTS Subject to shareholder approval of Proposal 5, the Limited Partners will have the Exchange Rights, which generally become exercisable on the first anniversary of the final closing date for the Berg Acquisition. However, the Limited Partners may, in the aggregate, tender L.P. Units for exchange prior to the first anniversary solely in connection with (i) the registration of 500,000 shares of Common Stock acquired upon exercise of the Exchange Rights for resale on a Form S-3 (or any equivalent form) and (ii) a registered public offering of Common Stock initiated by the Company to the extent of 25% of the total shares in the offering subject to the underwriters' unlimited right to reduce the participation of all selling shareholders. In addition, once in each 12-month period beginning on the first anniversary of the date the Exchange Rights Agreement is signed and delivered by the parties, the Limited Partners (other than Carl Berg and Clyde Berg) will have the right to exchange a portion of their L.P. Units for shares of Common Stock (subject to the Ownership Limit) and to exercise the Put Rights to sell a portion of their L.P. Units to the Operating Partnerships at a price equal to the average Market Price of the Common Stock for the 10-trading day period immediately preceding the date of tender (the "Tender Price"). Upon any exercise of the Put Rights, the Company will have the opportunity for a period of 15 days to elect to fund the purchase of the L.P. Units and purchase additional general partner interests in the Operating Partnerships for cash, unless the purchase price exceeds $1 million in the aggregate for all tendering Limited Partners, in which case, the Operating Partnerships or the Company shall be entitled to reduce proportionally the number of L.P. Units to be acquired from each tendering Limited Partner so that the total purchase price is not more than $1 million. The Exchange Rights Agreement will permit every Limited Partner to tender L.P. Units to the Company, and at the Company's election, to receive cash, Common Stock, or a combination of cash and Common Stock in exchange for the L.P. Units tendered, subject to the Ownership Limit, or the Berg Group Ownership Limit, as the case may be. Pursuant to the Exchange Rights Agreement, the holders of L.P. Units will have the right to participate in any registered public offering of the Common Stock initiated by the Company to the extent of 25% of the total shares sold in the offering upon converting L.P. Units to shares of Common Stock, but subject to the underwriters' unlimited right to reduce the participation of all selling shareholders. The holders of L.P. Units will be able to request resale registrations of shares of Common Stock acquired on exchange of L.P. Units on a Form S-3, or any equivalent form of registration statement, and after the first year following the closing of the Berg Acquisition, the Company will be obligated to effect no more than two such registrations in any 12-month period. The Company is obligated to assist the L.P. Unit holders in obtaining a firm commitment underwriting agreement for such resale from a qualified investment banking firm. If registration on Form S-3, or an equivalent form, is not available for any reason, the Company will be obligated to effect a registration of the shares to be acquired on exercise of the Exchange Rights on Form S-11, or an equivalent form, in an underwritten public offering, upon demand by the holders of no fewer than 500,000 L.P. Units. All holders of L.P. Units will be entitled to participate -75- in such registration. The Company will bear all costs of such registrations other than selling expenses, including commissions and separate counsels' fees of the L.P. Unit holders. The Company will not be required to effect any registration for resale on Form S-3, or equivalent form of Common Stock shares issuable to the holder of L.P. Units if the request is for less than 250,000 shares. OTHER MATTERS The Operating Partnership Agreement requires that the Operating Partnerships be operated in a manner that will enable the Company to satisfy the requirements for being classified as a REIT and to avoid any federal income or excise tax liability. The Operating Partnership Agreement provides that the net operating cash flow of the Operating Partnerships, as well as net sales and refinancing proceeds, will be distributed from time to time as determined by the board of directors of the Company (but not less frequently than quarterly) pro rata in accordance with the partners' percentage interests in the Operating Partnerships. See "Distribution Policy." Pursuant to the Operating Partnership Agreement, the Operating Partnerships will also assume and pay when due, or reimburse the Company for payment of, certain costs and expenses relating to the continuity of existence and operations of the Company. In addition, the Operating Partnership Agreement obligates the Operating Partnerships to reimburse all organization costs and expenses of the UPREIT Transactions paid or incurred by the Berg Group. The Operating Partnership Agreement provides that upon the exercise of an outstanding option under the Company's 1997 Option Plan, the Company may purchase additional general partner interests in the Operating Partnerships by contributing the exercise proceeds to the Operating Partnerships. The increased interest of the Company shall be equal to the percentage of Outstanding Shares represented by the shares acquired upon exercise of the option. TERM The Operating Partnerships will continue in full force and effect until December 31, 2048 or until sooner dissolved pursuant to the terms of the Operating Partnership Agreement. -76- MANAGEMENT OF THE COMPANY DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of the Company as of May 15, 1998 are as follows:
Age Position ------ --------------------------------------------------------------- Carl E. Berg(1)(3) 60 Chairman of the Board, Chief Executive Officer, President and Director Michael J. Anderson(1) 38 Vice President, Chief Operating Officer and Director Bradley A. Perkins 41 Vice President, General Counsel and Secretary Marianne K. Aguiar 31 Vice President of Finance and Controller John Bolger(2)(3) 51 Director Roger Kirk(2) 45 Director
- ---------- (1) Berg Group Board Representative (2) Member of the Independent Director's Committee and Member of the Compensation Committee (3) Member of the Audit Committee The following is a biographical summary of the experience of the executive officers and directors of the Company: Mr. Berg has served as Chief Executive officer, President and Director of the Company since September of 1997. From 1979 to the present, Mr. Berg has been a general partner of Berg & Berg Developers and a director and officer of BBE, Inc. since its inception. Mr. Berg is also a director of Integrated Device Technologies, Inc., Videonics, Valence Technology and System Integrated Research. Mr. Anderson joined the Company on January 1, 1998. On March 30, 1998, Mr. Anderson was appointed Chief Operating Officer, Vice President and a Director. After seven years as a real estate attorney and partner at Ware & Freidenrich, Palo Alto, California, Mr. Anderson has spent the past six years in private real estate development with Sandhill Homes, LP and Sandhill Property Company. Mr. Perkins joined the Company on February 2, 1998. On March 30, 1998, Mr. Perkins was appointed Vice President, General Counsel, and Secretary. Mr. Perkins will devote a portion of his time to the Company, a portion to various Berg companies, and a portion of his time to Teledex Corporation (a telephone supplier). From November 1991 to January 1998, Mr. Perkins was with Valence Technology, Inc., where he was Vice President, General Counsel and Secretary for the past five years. From August 1988 to November 1991, Mr. Perkins was Assistant General Counsel and Intellectual Property Counsel with VLSI Technology, Inc., a semiconductor manufacturer. Ms. Aguiar joined the Company on March 29, 1998. On March 30, 1998, Ms. Aguiar was appointed Vice President of Finance and Controller. From June 1996 to March 1998, Ms. Aguiar was with Oasis Residential, Inc. where she served as Vice President, Controller and Treasurer from July 1996 to March 1998. From November 1995 to May 1996, Ms. Aguiar was employed by SBT Accounting Systems where from April 1996 to May 1996, she served as Acting Vice President of Finance and Controller and from November 1995 to April 1996 she served as Assistant Controller. From November 1992 to November 1995, Ms. Aguiar was employed by Coopers & Lybrand LLP where she served as Audit Manager. Mr. Bolger became a director of the Company on March 30, 1998. Mr. Bolger is a private investor. He was Vice President of Finance and Administration of Cisco Systems, Inc., a networking company, from May 1989 through December 1992. Mr. Bolger is a director of Integrated Device Technology, Inc., Integrated Systems Inc., McAfee Associates, Inc., Sanmina Corporation, and TCSI Corporation. Mr. Kirk initially became a director of the Company in September 1997. In May 1998, Mr. Kirk rejoined the board. Mr. Kirk has been President of Hydrodynamics, Inc., since he formed the company in 1982. Since 1988, Mr. Kirk has been the project manager and a general partner in Isabella Partners for Isabella Hydroelectric Project. Certain members of the Berg Group are also general partners in Isabella Partners. -77- NUMBER, TERMS AND ELECTION OF DIRECTORS Following the Reincorporation Merger, the number of directors will initially be set at five. However, the bylaws of Mission West-Maryland provide that the number of directors may be changed from time to time by the board of directors, provided that the number will never be less than the minimum required by Maryland law or more than 15. The board of directors may determine the exact number. Generally, each director will serve for a term of one year or until the next annual meeting at which directors are elected. CONTRACTUAL ARRANGEMENTS In January 1998, the Company entered into an employment agreement with Mr. Anderson, Vice President, Chief Operating Officer and Director, providing that in the case of voluntary termination for good cause (as defined in the agreement) or involuntary termination other than for cause, Mr. Anderson will be entitled to a severance payment of $100,000 and a continuation of medical and other group insurance benefits for six months. In the event such a termination occurs more than 12 months from his hire date, the vesting of Mr. Anderson's stock options will accelerate and options which would have vested in the six month period following the termination date will be vested as of the termination date. Additionally, Mr. Anderson acquired 200,000 shares of Common Stock on March 30, 1998 pursuant to the exercise of an option. Mr. Anderson's shares are subject to repurchase by the Company. The Company loaned Mr. Anderson $900,000 to purchase the shares. COMMITTEES OF THE BOARD OF DIRECTORS AUDIT COMMITTEE. The Company has established an Audit Committee that will consist of at least two Independent Directors following the consummation of the UPREIT Transactions contemplated in this Prospectus/Proxy Statement. The Audit Committee was established to make recommendations concerning the engagement of independent public accountants, review with the independent public accountants the plans and results of the audit engagement, approve professional services provided by the independent public accountants, review the independence of the independent public accountants, consider the range of audit and non-audit fees and review the adequacy of the Company's internal accounting controls. COMPENSATION COMMITTEE. The Company has established a Compensation Committee to determine compensation for the Company's executive officers and to implement the Company's 1997 Stock Option Plan. The Compensation Committee currently consists of two Independent Directors and will not include any officer of the Company. INDEPENDENT DIRECTORS COMMITTEE. Following the consummation of the transactions contemplated herein, the Board of Directors will establish the Independent Directors Committee consisting of at least two Independent Directors to approve transactions between the Company and members of the Berg Group and their affiliates and any entity in which any of them directly or indirectly owns at least 5% of the equity interests. In addition, the Independent Directors Committee will determine whether to exercise the Company's rights under the Berg Land Holdings Option Agreement. COMPENSATION OF DIRECTORS The Company intends to pay its directors who are not officers of the Company fees for their services as directors. Directors will receive annual compensation of $15,000, plus a fee of $1,000 for attendance (in person or by telephone) at each meeting of the board of directors, but not for committee meetings. Officers of the Company who are also directors will not be paid any director fees. -78- Each member of the Board of Directors who is not an employee of the Company or any of its subsidiaries or affiliates (a "Non-Employee Director") and who becomes a member of the Board of Directors after November 10, 1997, the date on which the 1997 Stock Option Plan was approved by the shareholders of the Company, will automatically receive a grant of an option to purchase 50,000 shares of Common Stock at an exercise price equal to 100% of the fair market value of the Common Stock at the date of grant of such option upon joining the Board of Directors. Such options will become exercisable cumulatively with respect to 1/48th of the underlying shares on the first day of each month following the date of grant. Generally, the options must be exercised while the optionee is a director of the Company. EXECUTIVE COMPENSATION Upon the acquisition of control of the Company by the Berg Voting Group on September 2, 1997 all former officers and directors resigned as of the same date. The officers and directors appointed to replace them, including Mr. Berg and Mr. Kirk, received no compensation during the 1997 fiscal year. Therefore, no officer or director who received compensation during the fiscal year ended December 31, 1997 will receive compensation during the fiscal year ending December 31, 1998. The following table sets forth the annual base salary of the former chief executive officer and the annual base salary which the Company expects to pay in 1998 to the Company's president and four other most highly compensated executive officers whose annualized base salary is expected to exceed $100,000 (collectively, the "Named Executives"). The Company also may pay, subject to approval of the board of directors, a cash bonus to each Named Executive in an amount not to exceed such executive's base salary.
SUMMARY COMPENSATION TABLE Annual Summary Compensation(1) Long-Term Compensation ----------------------------------------- ---------------------------- Other Annual Securities Underlying Salary Bonus Compensation Options (shares) ---------- ---------- -------------- ------------------------- Michael M. Earley(2) $ 49,640 - $25,750 - President and CEO Carl E. Berg 100,000 - - - Chairman, CEO and President Michael J. Anderson 150,000 $50,000 - 600,000(3) Vice President and COO Bradley A. Perkins 160,000 - - 80,000(4) Vice President and General Counsel Marianne K. Aguiar 105,000 - - 75,000(4) Vice President of Finance and Controller
- ---------------- (1) Compensation for Mr. Berg, Mr. Anderson, Mr. Perkins and Ms. Aguiar is prospective. No current Executive Officer received any compensation from the Company in 1997. (2) Michael M. Earley served as Chief Executive Officer, President and Director of the Company from March 7, 1997 through August 1997. Mr. Earley received compensation for such services through the payment by the Company to Triton Group Ltd. (of which Mr. Earley was concurrently the Chief Executive Officer and President) in the total amount of $75,390 ($49,640 paid to the Triton Group Management for general management services, including Mr. Earley's services, and $25,750 paid directly to Mr. Earley as Director's fees). (3) Mr. Anderson received a stock option to purchase 400,000 shares of stock, which vests over four years as follows: 6.25% on the first six-month anniversary of Mr. Anderson's date of hire, an additional 12.5% on his one-year anniversary, and the remainder in equal amounts on a monthly basis over the remaining three years. Mr. Anderson received a second stock option to purchase an additional 200,000 shares which was immediately exercisable, subject to the Company's right to repurchase (which right decreases over time) such shares in the event Mr. Anderson leaves the employ of the Company. Mr. Anderson exercised his option for such shares. The Company loaned Mr. Anderson the purchase price for this stock. (4) Stock options vest over four years as follows: 6.25% on the first six-month anniversary of date of hire, an additional 12.5% on the one-year anniversary, and the remainder in equal amounts on a monthly basis over the remaining three years. -79- BENEFIT PLANS 1997 STOCK OPTION PLAN. The Company's 1997 Stock Option Plan (the "Option Plan") was approved by the Company's shareholders on November 10, 1997. The Option Plan was adopted so that the Company may attract and retain the high quality employees, consultants and directors necessary to build the Company's infrastructure and to provide ongoing incentives to the Company's employees in the form of options to purchase the Company's Common Stock by enabling them to participate in the Company's success. The following summary is qualified in it entirety by reference to the full text of the Option Plan, a copy of which was filed as an exhibit to the Company's Proxy Statement, dated October 20, 1997, filed with the Commission on October 20, 1997. The Option Plan provides for the granting to employees (including officers and directors who are employees) of "incentive stock options" within the meaning of Section 422 of the Code, and for the granting of nonstatutory options to employees, consultants and directors, including directors who are neither employees of, nor consultants to, the Company ("Non-Employee Directors"). Options to purchase a maximum of 5,500,000 shares of Common Stock may be granted under the Option Plan, subject to equitable adjustments to reflect certain corporate events. The Option Plan will be administered by the Compensation Committee. The interpretation and construction of any provision of the Option Plan is within the sole discretion of the Compensation Committee, whose determination is final and conclusive. Members of the Board or committee receive no additional compensation for their services in connection with the administration of the Option Plan. The Compensation Committee selects the optionees and determines the number of shares to be subject to each option and the time or times at which shares become exercisable under the option, except for options granted to Non-Employee Directors pursuant to automatic grants. Each option granted under the Option Plan is evidenced by a written stock option agreement between the Company and the optionee. The Option Plan provides that options must vest and, unless otherwise decided by the Committee become exercisable cumulatively as to 20% of the underlying shares on each anniversary of the date of grant for so long as the optionee is employed by or providing service to the Company. The price per share exercise price of options granted under the Option Plan may not be less than 100% of the fair market value on the date of grant, except in certain specific circumstances, in which case the exercise price may not be less than 110%. Each option may be exercised only to the extent that it is vested. Options must generally be exercised during the optionee's employment or within 30 days following the optionee's termination of status as an employee, consultant or director, unless termination is due to the death or disability of an optionee. If termination of status is due to death or disability of the optionee, an option may be exercised within six months. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During the last completed fiscal year, no current members of the Compensation Committee were officers of the Company. The current officers and directors of the Company were elected or appointed during the current fiscal year, except for Carl E. Berg. Mr. Berg became an officer and director in September 1997, but did not serve on the Compensation Committee during the last completed fiscal year. No officer who received compensation in the last completed fiscal year is now an officer. The current members of the Company's Compensation Committee were elected by the board of directors effective during the current fiscal year and are not officers or employees of the Company. LIMITATION OF LIABILITY AND INDEMNIFICATION The MGCL permits a Maryland corporation to include in its charter a provision limiting the liability of its directors and officers to the corporation and its stockholders for money damages except for liability resulting from (a) actual receipt of an improper benefit or profit in money, property or services; or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. The Charter contains such a provision which eliminates such liability to the maximum extent permitted by the MGCL. The Charter also authorizes Mission West-Maryland to the maximum extent permitted by Maryland law, to obligate itself to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to any present or former director or officer, or any individual who, while a director of Mission -80- West-Maryland and at the request of Mission West-Maryland, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise from and against any claim or liability to which such person may become subject or which such person may incur by reason of his status as a present or former director or officer of Mission West-Maryland. The Maryland Bylaws obligate Mission West-Maryland, to the maximum extent permitted by Maryland law, to indemnify and to pay or reimburse reasonable expenses in advance of final disposition of a proceeding to (i) any present or former director or officer who is made a party to the proceeding by reason of his service in that capacity or (ii) any individual who, while a director of Mission West-Maryland and at the request of Mission West-Maryland, serves or has served another corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or any other enterprise as a director, officer, partner or trustee of such corporation, real estate investment trust, partnership, joint venture, trust, employee benefit plan or other enterprise and who is made a party to the proceeding by reason of his service in that capacity. The Charter and bylaws also permit Mission West-Maryland to indemnify and advance expenses to any person who served a predecessor of Mission West-Maryland in any of the capacities described above and any employee or agent of Mission West-Maryland or a predecessor of Mission West-Marylad. The MGCL requires a corporation (unless its charter provides otherwise, which the Charter does not) to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he is made a party by reason of his service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, against judgments, penalties, fines, settlements and reasonable expenses actually incurred by them in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that (a) the act or omission of the director or officer was material to the matter giving rise to the proceeding and (i) was committed in bad faith or (ii) was the result of active and deliberate dishonesty, (b) the director or officer actually received an improper personal benefit in money, property or services or (c) in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. However, under the MGCL, a Maryland corporation may not indemnify for an adverse judgment in a suit by or in the right of the corporation or for a judgment of liability on the basis that personal benefit was improperly received, unless in either case a court orders indemnification and then only for expenses. In addition, the MGCL permits a corporation to advance reasonable expenses to a director or officer upon the corporation's receipt of (a) a written affirmation by the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification by the corporation and (b) a written undertaking by him or on his behalf to repay the amount paid or reimbursed by the corporation if it shall ultimately be determined that the standard of conduct was not met. -81- CERTAIN TRANSACTIONS PRIVATE PLACEMENT TRANSACTIONS--1997 In September and November of 1997, the Company sold Common Stock in two private placement transactions. On September 2, 1997, the Company sold 200,000 shares of Common Stock at $4.50 per share prior to the Reverse Split. In connection with that transaction the Company received an opinion from Slusser Associates, Inc. that the transaction was fair to the Company's shareholders from a financial point of view. Slusser Associates, Inc. received a fee of $150,000. On November 12, 1997, the Company sold 1,250,000 shares of Common Stock at $4.50 per share after giving effect to the Reverse Split. The price paid for the Common Stock in the November transaction was the same as the price paid in the September private placement, and the Company did not retain a financial advisor to render a fairness opinion. There can be no assurance that the terms of the November private placement were as favorable to the Company as would have been obtained with unrelated third parties. The purchasers of record of the Common Stock in the two transactions included, among others, the following 5% shareholders, executive officers, directors, and affiliates of 5% shareholders, executive officers and directors:
September Private November Private Placement(1) Placement ------------------- ------------------- Berg & Berg Enterprises, 27,333 - Inc.(2) Thelmer Aalgaard(3) 12,333 70,640 Carl E. Warden(4) 12,333 105,000 John C. Bolger 12,333 9,889 Robert L. and Sharon K. Yoerg - 111,111
- --------------- (1) Reflects Reverse Split. (2) Carl E. Berg, President, Chief Executive Officer and Director of the Company, is also an officer and director of BBE. Clyde Berg is a director of BBE. Carl E. Berg, Clyde J. Berg and members of their immediate families are, directly and indirectly, the beneficial owners of all shares of the capital stock of BBE. (3) Mr. Aalgard is a director of BBE. (4) As a result of the UPREIT Transactions, Mr. Warden and the Yoergs will no longer be Affiliates of the Company. In addition, members of Mr. Aalgaard's immediate family purchased or received as a gift from Mr. Aalgaard an aggregate of 17,772 shares of Common Stock in connection with the November Private Placement. In connection with the September and November private placements, certain purchasers of Common Stock, including Mr. Aalgaard, Mr. Warden, Mr. Bolger and the Yoergs entered into the Voting Rights Agreement. The Voting Rights Agreements terminate at the earliest of the following dates: (i) upon any sale of the purchaser's shares of Common Stock pursuant to a registration statement declared effective under the Securities Act, but only as to the purchaser's shares of Common Stock so sold; (ii) upon the sale of the purchaser's shares of Common Stock pursuant to Rule 144 promulgated under the Securities Act, but only as to the purchaser's shares of Common Stock so sold; or (iii) two years after the effective date of the Voting Rights Agreements. See "THE SPECIAL MEETING -- Votes Required." PRIVATE PLACEMENT TRANSACTIONS--1998 On May 4, 1998, the Company entered into agreements with prospective purchasers to sell and issue 6,495,058 shares of Common Stock in the Private Placement, the terms of which are described elsewhere in this Proxy Statement/Prospectus. See "BACKGROUND OF THE UPREIT TRANSACTIONS--Background--The Private Placement." The Company has not obtained a "fairness opinion" or other independent financial advice with respect to the terms, including price, of the Private Placement, although Ingalls & Snyder LLC has acted as placement agent and advisor for the purchasers of 5,800,000 shares of Common Stock. The purchasers of record of the Common Stock will include, among others, the following officers, directors, 5% shareholders and purchasers, who by reason of the purchase of Common Stock in the Private Placement, will become 5% shareholders:
Non-Placement Agent Ingalls & Snyder Private Placement Private Placement --------------------- ------------------ Carl E. Berg 50,000 - Thelmer Aalgaard 70,000 - Carl E. Warden 39,609 - Leo Helzel - 457,000 Meyer Family Trust - 1,000,000 I&S Value Partners - 1,125,067 Prism Partners I, L.P. - 450,000
-82- UPREIT TRANSACTIONS The UPREIT Transactions include transactions between the Company, certain officers and directors of the Company and their affiliates. See "SUMMARY OF THE UPREIT TRANSACTIONS AND PURPOSE OF THE SPECIAL MEETING--Private Placement/Recapitalization," "RISK FACTORS--Control of the Company and the Operating Partnerships by the Berg Group," and "--Potential Conflicts of Interest with the Berg Group," "BACKGROUND OF THE UPREIT TRANSACTIONS--Benefits to the Berg Group." The Company has consummated the Partnership Closing portion of the Berg Acquisition. The Company has not obtained a "fairness" opinion or other independent financial advice with respect to the UPREIT Transactions. There can be no assurance that the terms of any of the UPREIT Transactions are as favorable as could have been obtained with unrelated third parties. PURCHASE BY MICHAEL ANDERSON Michael J. Anderson, Vice President and Chief Operating Officer of the Company, acquired 200,000 shares of Common Stock on March 30, 1998 pursuant to the exercise of an option. Mr. Anderson's shares are subject to repurchase by the Company. The Company loaned Mr. Anderson $900,000 to purchase the shares. -83- PRINCIPAL SHAREHOLDERS The following table sets forth information with respect to the beneficial ownership of the Company's Common Stock as of October 15, 1998 by (i) each person who is a shareholder of the Company holding more than a 5% interest in the Company, (ii) directors and Named Executives of the Company, and (iii) the directors and officers of the Company as a group. Unless otherwise indicated in the footnotes to the table, all of such interests are owned directly, and the person or entity has sole or shared voting and investment power. The following table also indicates information with respect to beneficial ownership of Outstanding Shares after completion of the UPREIT Transactions. For a description of the terms of the Exchange Rights and the Put Rights of the Limited Partners, see "OPERATING PARTNERSHIP AGREEMENT -- Exchange Rights, Put Rights, and Registration Rights." For a description of the right of members of the Berg Group to nominate persons to the board of directors of the Company, see "MANAGEMENT--Directors and Executive Officers."
Common Stock ------------------------------------------------------------------------------------------------- Number of Number of Shares Shares Beneficially Beneficially Owned(1) Owned(1) Number of Prior to After Outstanding UPREIT Percent UPREIT Percent Shares Percent Transactions Ownership Transactions Ownership Owned(1) Ownership -------------- ------------- -------------- ------------- ------------- ---------- Michael J. Anderson 225,000(2) 13.1% 225,000 2.7% 225,000 * Vice President, Chief Operating Officer and Director Carl E. Warden 117,333(3) 6.9% 156,942(3) 1.9% 156,942 * 1516 Country Club Drive Los Altos, CA 94024 Robert L. & Sharon K. Yoerg(4) 111,111 6.5% 111,111 1.4% 111,111 * 98 Melanie Lane Atherton, CA 94027 Thelmer Aalgaard 82,973(5) 4.9% 152,973 1.9% 2,002,598(6) 2.96% c/o Berg & Berg Enterprises, Inc. 10050 Bandley Drive Cupertino, CA 95014 Roger S. Kirk, Director 34,556 2.1% 34,556 * 34,556 * 521 E. Peach #28 Bozeman, Montana 59771 John C. Bolger, Director 25,348(7) 1.5% 25,348 * 25,348 * 96 Sutherland Drive Atherton, CA 94027 Carl E. Berg(8) 27,333 * 77,333(9) 1.0% 34,239,333(10) 50.40% President, Chief Executive Officer and Director Clyde J. Berg(8) 27,333 * 27,333 * 25,667,707(11) 37.93% c/o Berg & Berg Enterprises, Inc. 10050 Bandley Drive Cupertino, CA 95014 Berg & Berg Enterprises, Inc. 27,333(8) * 27,333 * 5,065,590(12) 7.49% 10050 Bandley Drive Cupertino, CA 95014 Bradley A. Perkins 5,000(13) * 0 * 5,000 * Vice President, General Counsel and Secretary Marianne K. Aguiar 4,688(14) * 0 * 4,688 * Vice President of Finance and Controller Ingalls & Snyder Value 0 * 1,125,067 13.7% 1,125,067 1.66% Partners, L.P.(15) 61 Broadway New York, NY 10006 Meyer Family Trust 0 * 1,000,000 12.2% 1,000,000 1.48% c/o Bay Apartment Communities, Inc. 4340 Stevens Creek Blvd., Suite 275 San Jose, CA 95129 Prism Partners I, L.P.(16) 0 * 450,000 5.5% 450,000 * 909 Montgomery Street, Suite 400 San Francisco, CA 94133 Leo Helzel(17) 0 * 437,000 5.3% 437,000 * 5550 Redwood Road, Suite 4 Oakland, CA 94619 Paul McCarthy(18) 0 * 430,000 5.2% 430,000 * c/o Marquette National Corporation 6316 South Western Avenue Chicago, IL 60636 All Directors and executive 314,321 18.2% 362,237(20) 4.4% 34,533,925 51.02% officers as a group (6 persons)(19)
-84- - ------------------- * Less than 1%. (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission which generally attribute beneficial ownership of securities to persons who possess sole or shared voting power and/or investment power with respect to those securities and includes securities which such person has the right to acquire beneficial ownership within 60 days of October 15, 1998. Unless otherwise indicated, the persons or entities identified in this table have sole voting and investment power with respect to all shares shown as beneficially owned by them. Percentage ownership calculations are based on 1,698,536 shares outstanding as of October 15, 1998. "Number of Outstanding Shares Owned" reflects the number of shares of Common Stock and the number of L.P. Units which may be exchanged for Common Stock following the completion of the UPREIT Transactions, whether or not the beneficial owner of such Outstanding Shares has the right to acquire common stock upon the exchange of L.P. Units within 60 days. Percentage Ownership calculations are based on 67,673,227 Outstanding Shares. (2) Mr. Anderson received a stock option to purchase 400,000 shares of stock, which vests over 4 years as follows: 6.25% on the first six-month anniversary of Mr. Anderson's date of hire, an additional 12.5% on his one-year anniversary, and the remainder in equal amounts on a monthly basis over the remaining 3 years. Mr. Anderson received a second stock option to purchase an additional 200,000 which was immediately exercisable subject to repurchase, which Mr. Anderson exercised. The Company loaned Mr. Anderson the purchase price for this stock. (3) Includes (i) 9,333 shares held of record by Carl E. Warden and (ii) 39,609 held of record by Marlin Concepts, Inc. to be purchased in the Private Placement. (4) Includes (i) 55,556 shares held of record by Robert L. Yoerg M.D. Trustee, Robert L. Yoerg Professional Corporation Pension Plan and (ii) 11,111 shares held of record by Sharon K. Yoerg, Custodian, Elizabeth A. Yoerg, Under the Uniform Gifts to Minors Act. (5) Mr. Aalgaard is a director of BBE. Includes (i) 33,400 shares held of record by Carl E. Berg, Trustee, Berg & Berg Profit Sharing Plan FBO Thelmer G. Aalgaard Dated 1/1/84, (ii) 4,160 shares held of record by Carl E. Berg, Trustee, Berg & Berg Profit Sharing Plan FBO Thelmer G. Aalgaard Dated 1/1/84, 1997 Contribution, and (iii) 2,220 shares held of record by Thelmer G. Aalgaard, Custodian, Rachel Michaels, Under the California Uniform Gifts to Minor Act. (6) Includes 1,325,522 shares of Common Stock issuable on exchange of L.P. Units in which Mr. Aalgaard has a pecuniary interest as a result of his status as a partner or member of the following entities: Baccarat Cambrian, a California general partnership and a limited partner in MWP; MWP; Baccarat Fremont Developers, LLC, a California limited liability company and a limited partner of MWP; Berg Venture I, a California general partnership and general partner of Triangle Development Company which is a limited partner of MWP; and Berg Venture II, a California limited partnership and limited partner of MWP. Also includes 1,109,156 shares of Common Stock issuable on exchange of L.P. Units held by Mr. Aalgaard as trustee of the Sonya L. Berg Trust and the Sherri L. Berg Trust for which Mr. Aalgaard possesses no pecuniary interest. (7) Includes 3,126 shares of Common Stock issuable on exercise of options. (8) Carl E. Berg is an executive officer, director and Clyde J. Berg is a director of BBE. With members of their immediate families, the Messrs. Berg beneficially own, directly and indirectly, all of the shares of capital stock of BBE. (9) Carl E. Berg disclaims beneficial ownership of 53,071 shares of Common Stock held by him as a trustee under various pension and profit sharing plans, some of which are subject to the Voting Rights Agreements. Mr. Berg has no investment control over such shares. (10) Includes 29,096,410 shares of Common Stock issuable on exchange of L.P. Units in which Mr. Berg has a pecuniary interest as a result of his status as a partner or member of the following entities: MWP; MWP I; MWP II; MWP III; DeAnza Office Partners, a California general partnership and limited partner of MWP; Berg Venture I, a California general partnership and general partner of Triangle Development Company which is a limited partner of MWP; and Berg Venture II, a California limited partnership and limited partner of MWP. Also includes an additional 5,065,590 shares of Common Stock held by or issuable on exchange of L.P. Units beneficially owned by BBE. This does not include any share deemed beneficially owned by Kara Ann Berg, his daughter, as to which he disclaims beneficial ownership. (11) Includes 17,494,386 shares of Common Stock issuable on exchange of L.P. Units in which Mr. Berg has a pecuniary interest as a result of his status as partner or member of the following entities: MWP I; MWP II; MWP III; DeAnza Office Partners, a California general partnership and limited partner of MWP; Berg Venture I, a California general partnership and general partner of Triangle Development Company which is a limited partner of MWP; and Berg Venture II, a California limited partnership and limited partner of MWP. Also includes 833,372 shares of Common Stock issuable on exchange of L.P. Units held by Mr. Berg as trustee of the Carl Berg Child's Trust UTA dated June 2, 1978; 2,197,026 shares of Common Stock issuable on exchange of L.P. Units held by Mr. Berg as trustee of the 1981 Kara Ann Berg Trust, and an additional 5,065,590 shares of Common Stock held by or issuable on exchange of L.P. Units beneficially owned by BBE. This does not include any share deemed beneficially owned by Sonya L Berg and Sherri L. Berg, his daughters, as to which he disclaims beneficial ownership. (12) Includes 2,711,974 shares of Common Stock issuable on exchange of L.P. Units held by BBE, and 2,330,698 L.P. Units held by or issuable to Baccarat Cambrian, which are beneficially owned by BBE. (13) Mr. Perkins received a stock option to purchase 80,000 shares of stock, which vests over 4 years as follows: 6.25% on the first six-month anniversary of Mr. Perkins' date of hire, an additional 12.5% on his one-year anniversary, and the remainder in equal amounts on a monthly basis over the remaining 3 years. (14) Ms. Aguiar received a stock option to purchase 75,000 shares of stock, which vests over 4 years as follows: 6.25% on the first six-month anniversary of Ms. Aguiar's date of hire, an additional 12.5% on her one-year anniversary, and the remainder in equal amounts on a monthly basis over the remaining 3 years. (15) Thomas Boucher and Robert L. Cipson, general partners of Ingalls & Snyder Value Partners, L.P. ("Value Partners"), have the power to vote and the power to direct the investment of Value Partners with respect to the Common Stock. (16) Jerald Weintraub, managing general partner of Prism Partners I, L.P. ("Prism"), has the power to vote and the power to direct the investment of Prism with respect to the Common Stock. Includes 31,500 shares held of record by Legion Fund Limited, for which Mr. Weintraub also has the power to vote and the power to direct the investment. (17) Mr. Helzel may be deemed to be the beneficial owner of (i) 22,000 shares held of record by Helzel Family Foundation and (ii) 415,000 shares held of record by the Leo B. and Florence Helzel Living Trust because Mr. Helzel is a director of the foundation, and trustee and beneficiary of the trust. Mr. Helzel disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. (18) Mr. McCarthy may be deemed to be the beneficial owner of (i) 215,000 shares held of record by John F. McCarthy Charitable Lead Annuity Trust and (ii) 215,000 shares held of record by Marquette National Corporation, because Mr. McCarthy is the trustee of the Trust and the Chairman, Chief Executive Officer and beneficial owner of the Marquette National Corporation. Mr. McCarthy disclaims beneficial ownership of these shares except to the extent of his pecuniary interest therein. (19) Current officers and directors include Carl E. Berg, Michael J. Anderson, Bradley A. Perkins, Marianne K. Aguiar, John C. Bolger and Roger S. Kirk. (20) Assuming all Common Stock issuable on exchange of L.P. is outstanding, directors and executive officers of the Company would hold 34,533,925 shares of Common Stock, or 47.42%. -85- THE REINCORPORATION MERGER INTRODUCTION The Company's board of directors believes that the best interests of the Company and its shareholders will be served by changing the state of incorporation of the Company from California to Maryland by means of the Reincorporation Merger. The principal reason for the Reincorporation Merger is that the MGCL contains provisions conducive to the operation of a REIT. Many REITs have incorporated in the State of Maryland, and the board of directors believes that this has provided state regulatory authorities and courts with a defined body of administrative and case law concerning the governance of REITs. The Reincorporation Merger will be effected by merging the Company into Mission West-Maryland, a newly formed wholly-owned subsidiary of the Company, which was incorporated for the purpose of redomiciling the Company as a Maryland corporation and acquiring, recapitalizing and continuing the business and operations of the Company. Upon completion of the Reincorporation Merger, the Company will cease to exist and Mission West-Maryland will continue to operate the business of the Company under the name Mission West Properties, Inc. EXCHANGE OF SECURITIES Pursuant to the Agreement and Plan of Merger, which will be in substantially the form attached hereto as Exhibit A (the "Merger Agreement"), each outstanding share of Common Stock will automatically be converted into one share of New Common Stock at the effective time of the merger and outstanding options and warrants for the purchase of Common Stock will be exchanged for options and warrants for the purchase of the equivalent number of shares of New Common Stock. Each stock certificate representing issued and outstanding shares of Common Stock will continue to represent the same number of shares of New Common Stock. Options and warrants issued and outstanding will continue to represent the right to purchase the same number of shares of New Common Stock. IT WILL NOT BE NECESSARY FOR SECURITYHOLDERS TO EXCHANGE THEIR EXISTING SECURITIES FOR SECURITIES OF MISSION WEST-MARYLAND. Securityholders of the Company may exchange their securities if they so choose, however. The Common Stock is listed for trading on the AMEX and the PCX, and after the Reincorporation Merger, the New Common Stock will continue to be listed on the AMEX and the PCX without interruption under the same symbol ("MSW"). APPROVAL AND EFFECTIVENESS OF MERGER Under California law, the affirmative vote of a majority of the outstanding shares of Common Stock of the Company is required for approval of the Merger Agreement and the other terms of the Reincorporation Merger. See "THE SPECIAL MEETING - Votes Required." The Reincorporation Merger has been approved by the Company's board of directors, which unanimously recommends a vote in favor of the proposal. If approved by the shareholders, it is anticipated that the merger will become effective as soon as practicable following the Meeting (the "Effective Date"). However, pursuant to the Merger Agreement, the merger may be abandoned or the Merger Agreement may be amended by the board of directors (except that the principal terms may not be amended without shareholder approval) either before or after shareholder approval has been obtained and prior to the Effective Date of the Reincorporation Merger if, in the opinion of the board of directors of either company, circumstances arise which make either action advisable. Shareholders of the Company will not have dissenters' rights of appraisal with respect to the Reincorporation Merger. The discussion set forth below is qualified in its entirety by reference to the Merger Agreement, the Charter and the bylaws of Mission West-Maryland (the "Maryland Bylaws" for purposes of this discussion), which will be substantially in the forms attached to this Proxy Statement/Prospectus as Exhibits A, B and C, respectively. APPROVAL BY SHAREHOLDERS OF THE REINCORPORATION MERGER WILL CONSTITUTE APPROVAL OF THE MERGER AGREEMENT, THE CHARTER AND THE MARYLAND BYLAWS OF MISSION WEST-MARYLAND, WHICH WILL BE SUBSTANTIALLY IN THE FORMS SET FORTH AS EXHIBITS A, B AND C TO THIS PROXY STATEMENT/PROSPECTUS. -86- POSSIBLE DISADVANTAGES Despite the unanimous belief of the board of directors that the Reincorporation Merger is in the best interests of the Company and its shareholders, it should be noted that California and Maryland law differ in certain respects. Maryland law may not afford stockholders the same substantive rights as California law. For a comparison of shareholders' rights and the powers of management under Maryland and California law, see "--Comparison of Rights of Shareholders of the Company and Stockholders Mission West-Maryland." NO CHANGE IN THE NAME, BUSINESS, MANAGEMENT, LOCATION OF PRINCIPAL OFFICE OR EMPLOYEE PLANS OF THE COMPANY The Reincorporation Merger will effect a change in the legal domicile of the Company and other changes of a legal nature, certain of which are described in this Proxy Statement/Prospectus. The Reincorporation Merger will not result in a change in the name of the Company, except to include "Inc." at the end. The business, management, fiscal year, location of the principal office, assets and liabilities of the Company will not change as a result of the Reincorporation Merger, although the business, management assets and liabilities may change as a result of certain other proposals contained in the Proxy Statement/Prospectus. See "BACKGROUND OF THE BERG ACQUISITION," "THE BUSINESS OF BERG & BERG," "FUTURE OPERATIONS OF COMPANY," AND "MANAGEMENT OF THE COMPANY UPON CONSUMMATION OF THE BERG ACQUISITION." The individuals listed "MANAGEMENT OF THE COMPANY UPON CONSUMMATION OF THE BERG ACQUISITION will become the directors of Mission West-Maryland. In addition, the Company expects to add one or two individuals to the board of directors before the end of 1998. All employee benefit, stock option and stock purchase plans of the Company will be continued by Mission West-Maryland, and each option or right issued pursuant to any such plan will automatically be converted into an option or right to purchase the same number of shares of New Common Stock, at the same price per share, upon the same terms, and subject to the same conditions, as set forth in such plan. Shareholders should note that approval of the Reincorporation Merger will also constitute approval of the assumption of these plans by Mission West-Maryland. COMPARISON OF RIGHTS OF SHAREHOLDERS OF THE COMPANY AND STOCKHOLDERS OF MISSION WEST-MARYLAND The Company is organized as a corporation under the laws of the State of California and Mission West-Maryland is organized as a corporation under the laws of the State of Maryland. As a California corporation, the Company is subject to the California General Corporation Law (the "CGCL"), a general corporation statute dealing with a wide variety of matters, including election, tenure, duties and liabilities of directors and officers; dividends and other distributions; rights of shareholders; and extraordinary actions, such as amendments to the articles of incorporation, mergers, sales of all or substantially all of the Company's assets and dissolution. The Company also is governed by its Articles of Incorporation (the "California Articles") and its Bylaws (the "California Bylaws"), which have been adopted pursuant to the CGCL. As a Maryland corporation, Mission West-Maryland is governed by the Maryland General Corporation Law (the "MGCL"), a general corporation statute covering substantially the same matters as are covered by the CGCL, and by the Charter and Maryland Bylaws The material differences between the CGCL and the MGCL and among these various documents are summarized below. The CGCL refers to "shareholders" and the MGCL refers to "stockholders." The use of either term refers to the holders of stock of the Company or Mission West-Maryland, as the case may be. The comparison of certain rights of the shareholders of the Company and the stockholders of Mission West-Maryland set forth below does not purport to be complete and is subject to and qualified in its entirety by reference to the CGCL and the MGCL and also to the California Articles, the California Bylaws, the Charter and the Maryland Bylaws, copies of which are available from the Company as described under "AVAILABLE INFORMATION". -87- CALIFORNIA SHAREHOLDER VOTING RIGHTS California law provides for cumulative voting in the election of directors (which permits holders of less than a majority of the voting securities of a corporation to cumulate their votes and elect a director or directors in certain situations) but permits the elimination thereof in the case of a listed corporation (which is defined as a corporation that has shares listed on the AMEX or other national securities exchanges). The California Bylaws specifically provide for cumulative voting. With certain exceptions, the CGCL requires that mergers, reorganizations, dissolution, certain sales of assets and similar transactions be approved by the holders of a majority of each class of shares outstanding. Under the CGCL, the articles of incorporation and bylaws may include supermajority voting provisions. These provisions, however, must be renewed every two years and may not require a vote in excess of two-thirds of the outstanding shares. MARYLAND SHAREHOLDER VOTING RIGHTS Under the MGCL, cumulative voting is not available unless so provided in the corporation's charter. The Charter does not provide for cumulative voting. As a result, holders of a majority of the shares of Maryland Common Stock generally would be entitled to elect all of the directors of Mission West-Maryland. Pursuant to agreement, however, the Company and the Berg Group have agreed to take action necessary to elect the two Berg Group Board Representatives to the board of directors. The MGCL requires, with certain exceptions, that the holders of two-thirds of all shares entitled to vote on the matter must approve mergers, consolidations, share exchanges, transfers of all or substantially all of the assets of the corporation and dissolution unless the charter provides for a different number not less than a majority. The Charter provides that such matters may be approved by the holders of a majority of shares entitled to vote on the matter. Under the MGCL, the charter of a Maryland corporation may include supermajority voting provisions without restrictions. The Charter currently does not contain any supermajority voting provisions. DENIAL OF VOTING RIGHTS Under the MGCL, holders of the outstanding shares of any class of stock may be denied all voting rights. -88- CALIFORNIA DIVIDENDS AND OTHER DISTRIBUTIONS Under the CGCL, the Company may only make a distribution to shareholders if (a) its retained earnings immediately prior to payment of the distribution are at least equal to the amount of the distribution, or (b) generally, its total assets (determined on the basis of their depreciated historical cost in accordance with GAAP and exclusive of certain intangible assets and certain other charges and expenses) are equal to at least 1 1/4 times its total liabilities (excluding certain deferred items) immediately after giving effect to the distribution. The CGCL also prohibits a California corporation from making any distribution to shareholders if the corporation is or, as a result thereof, would be likely to be unable to meet its liabilities as they mature. The CGCL also imposes certain further limitations on distributions on common stock if capital stock with a preference on distributions of assets upon liquidation is outstanding. DISSENTING SHAREHOLDER'S APPRAISAL RIGHTS Under California law, shareholders of a California corporation whose shares are listed on a national securities exchange (as are the shares of the Company) generally do not have dissenters' rights unless the holders of 5% or more of the class of outstanding shares claim the right or unless the corporation or any law restricts the transfer of such shares. STANDARD OF CONDUCT FOR DIRECTORS Section 309 of the CGCL requires that a director perform the duties of a director in good faith in the manner such director believes to be in the best interests of the corporation and its shareholders and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances. MARYLAND DIVIDENDS AND OTHER DISTRIBUTIONS The MGCL allows the payment of dividends and other distributions unless, after giving effect to the distribution, (a) the corporation would not be able to pay its debts as they become due in the usual course of business or (b) the corporation's total assets would be less than the sum of the corporation's liabilities plus, unless the charter provides otherwise (which the Charter does), the amount that would be needed upon dissolution to satisfy the preferential rights of those stockholders whose preferential rights upon dissolution are superior to those receiving the distribution. DISSENTING SHAREHOLDER'S APPRAISAL RIGHTS The MGCL does not provide appraisal rights to stockholders of a corporation if the corporation's shares are listed on a national securities exchange, such as the AMEX, on the record date for determining those stockholders of the corporation entitled to vote on the merger. STANDARD OF CONDUCT FOR DIRECTORS Section 2-405.1 of the MGCL requires that a director of a Maryland corporation perform his duties in good faith with a reasonable belief that his actions are in the best interests of the corporation and with the care of an ordinarily prudent person in a like position ... under similar circumstances. -89- CALIFORNIA REMOVAL OF DIRECTORS Under the CGCL and the California Bylaws, the entire board of directors or any individual director may be removed from office by a vote of shareholders holding a majority of the outstanding shares entitled to vote at an election of directors; provided, however, that unless the entire board is removed, an individual director shall not be removed, unless (a) the number of shares voted against removal, or not consenting to such removal, in the case of a written consent, would be insufficient to elect such director if voted cumulatively at an election at which the same total number of votes were cast and the entire number of directors authorized at the time of such director's most recent election were then being elected or (b) holders of the shares of any class or series entitled to elect one or more directors shall vote to remove a director so elected by said class or series. The CGCL also provides that the superior court of the proper county may, at the request of shareholders holding at least 10% of the number of outstanding shares of any class, remove any director in case of fraudulent or dishonest acts or gross abuse of authority or discretion with reference to the corporation and may bar from reelection any director so removed for a period prescribed by the court. MARYLAND REMOVAL OF DIRECTORS Under the MGCL, the stockholders of a corporation may remove any director, with or without cause, by the affirmative vote of a majority of all the votes entitled to be cast for the election of directors, unless the charter of the corporation provides otherwise. The MGCL further states that if the stockholders of any class or series are entitled separately to elect one or more directors, a director elected by a class or series may not be removed without cause except by the affirmative vote of a majority of all votes of that class or series, unless the charter of the corporation provides otherwise (which the Charter does not). The Charter provides that directors may be removed only for cause (defined in the Charter to be with respect to any particular director, conviction of a felony or a final judgment of a court of competent jurisdiction holding that such director caused demonstrable, material harm to Mission West-Maryland through bad faith or active and deliberate dishonesty) and only by the affirmative vote of at least a majority of the votes entitled to be cast in the election of directors. The MGCL does not provide for the removal of directors by a court upon petition of shareholders. -90- CALIFORNIA VACANCIES ON THE BOARD OF DIRECTORS The California Bylaws provide that vacancies on the board of directors, except for a vacancy created by the removal of a director, may be filled by a majority of the remaining directors, though less than a quorum, or by a sole remaining director. Each director so elected shall hold office until his successor is elected at an annual or a special meeting of the shareholders. A vacancy occurring on the board of directors of the Company created by the removal of a director may only be filled by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the unanimous written consent of the shareholders. The California Bylaws also provide that the shareholders may elect a director or directors at any time to fill any vacancy or vacancies not filled by the directors. Any such election by written consent (other than to fill a vacancy created by the removal of a director) shall require the consent of holders a majority of the outstanding shares entitled to vote. MARYLAND VACANCIES ON THE BOARD OF DIRECTORS As permitted by the MGCL, the Maryland Bylaws provide that (a) a vacancy on the Mission West-Maryland board of directors may be filled, if caused by any reason other than an increase in the number of directors, by a majority of the remaining directors, even if such number is less than a quorum and (b) any vacancy in the Mission West-Maryland board of directors caused by an increase in the number of directors may be filled by a majority vote of the entire Mission West-Maryland board of directors; provided that a vacancy created by the departure of a Berg Group Representative must be filled by another Berg Group Board Representative until the time that the right of the Berg Group to name directors has been terminated. A director elected by the Mission West-Maryland board of directors will hold office until the next annual meeting of stockholders and until his or her successor is elected and qualifies. -91- CALIFORNIA COMMITTEES OF BOARD OF DIRECTORS The California Bylaws provide that the board of directors may designate committees consisting of two or more directors. Such committees may have all the authority of the board of directors except with respect to: (a) the approval of any action for which the CGCL also requires shareholders' approval or approval of the issuance of outstanding shares, (b) the filling of vacancies on the board of directors or on any committee, (c) the fixing of compensation of the directors for serving on the board of directors or on any committee, (d) the amendment or repeal of bylaws or the adoption of new bylaws, (e) the amendment or repeal of any resolution of the board of directors which by its express terms is not so amendable or repealable, (f) a distribution to the shareholders of the corporation (as defined in Section 166 of the CGCL), except at a rate or in the periodic amount or within a price range determined by the board of directors and (g) the appointment of other committees of the board of directors or the members thereof. SPECIAL MEETINGS OF SHAREHOLDERS The CGCL and the California Bylaws provide that a special meeting of shareholders may be called by the board of directors, the chairman of the board, the president, or by the holders of shares entitled to cast not less than 10% of the votes at the meeting. MARYLAND COMMITTEES OF BOARD OF DIRECTORS The Maryland Bylaws provide that the board of directors may appoint committees composed of one or more directors and may delegate to such committees any of the powers of the board of directors, except as prohibited by law. The MGCL provides that the board of directors may delegate to committees any of the powers of the board of directors, except the power to: (a) authorize dividends on stock, (b) issue stock (subject to certain exceptions), (c) recommend to the stockholders any action which requires stockholder approval, (d) amend the bylaws or (e) approve any merger or share exchange which does not require stockholder approval. SPECIAL MEETINGS OF SHAREHOLDERS As permitted by the MGCL, the Maryland Bylaws provide that, a special meeting of stockholders may be called by the chief executive officer, the president or a majority of the board of directors and must be called by the secretary of Mission West-Maryland at the request in writing of shareholders entitled to cast a majority of all the votes entitled to be cast at the meeting. -92- CALIFORNIA ACTIONS BY WRITTEN CONSENT OF SHAREHOLDERS The California Bylaws provide that, subject to certain notice requirements, any action which, under any provision of the CGCL, may be taken at a meeting of shareholders, may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. AMENDMENTS TO ARTICLES, CHARTER AND BYLAWS Under the CGCL, the articles of incorporation may be amended only if such amendment is approved by the board of directors and by the holders of a majority of the outstanding shares of stock entitled to vote on the matter. Under the CGCL, a corporation's bylaws may be adopted, amended or repealed by approval of the shareholders or by the board of directors; however, the shareholders may never be divested of the power to adopt, amend or repeal the bylaws. In addition, the CGCL provides that a bylaw changing a fixed number of directors or the maximum or minimum number of directors may only be adopted by the holders of a majority of the shares entitled to vote. The California Bylaws provide that, subject to any exception, new bylaws may be adopted or the California Bylaws may be amended or repealed by the affirmative vote of a majority of the outstanding shares entitled to vote, or by the written consent of shareholders entitled to vote such shares, and the California Bylaws also provide that, subject to the rights of shareholders set forth above and any other exceptions, bylaws other than a bylaw or amendment thereof changing the authorized number of directors may be adopted, amended or repealed by the California Board. MARYLAND ACTIONS BY WRITTEN CONSENT OF SHAREHOLDERS The MGCL provides that any action that may be taken at a stockholder meeting may be taken without a meeting only if (a) a unanimous written consent setting forth the matter is signed by each stockholder entitled to vote on the matter and (b) a written waiver of any right to dissent is signed by each stockholder entitled to notice of the meeting but not entitled to vote at it. AMENDMENTS TO ARTICLES, CHARTER AND BYLAWS Under the MGCL, an amendment to the charter of a corporation must be approved by the board of directors and the holders of two-thirds of the shares entitled to vote on such matter unless such charter provides for a different vote not less than a majority of such shares so entitled to vote. The Charter provides for amendments by the affirmative vote of the holders of a majority of the shares entitled to vote on the matter. As permitted by the MGCL, the Maryland Bylaws provide that the Maryland board of directors has the exclusive power to adopt, amend or repeal any provision of the Maryland Bylaws and to make new bylaws. The Maryland Bylaws further provide that any amendment must be approved by the Required Directors. -93- CALIFORNIA LIMIT ON SHARE OWNERSHIP The California Articles contain no limitations or restrictions on ownership of shares of the Company. CERTAIN BUSINESS COMBINATIONS The CGCL contains no business combination statute. However, the CGCL requires delivery of a fairness opinion in connection with (i) a tender offer, including a share exchange tender offer, (ii) a merger (other than a short-form merger such as the Reincorporation Merger), (iii) the acquisition of control of the outstanding shares or of all or substantially all of the assets of the corporation in exchange for stock or other securities, or (iv) a sale of all or substantially all of the corporation's assets proposed by an interested party (an "Interested Party") to the corporation or some or all of its shareholders. The CGCL defines "Interested Party" to include a person who (a) directly or indirectly controls the corporation that is the subject of the proposed combination, (b) is directly or indirectly controlled by an officer or director of the subject corporation or (c) is an entity in which a material financial interest is held by any director or executive officer of the subject corporation. MARYLAND LIMIT ON SHARE OWNERSHIP As permitted by the MGCL, the Charter contains provisions limiting the ownership and transfer of shares of stock of Mission West-Maryland which are intended to ensure that Mission West-Maryland meets the requirements of the Code for qualification as a REIT. See "DESCRIPTION OF MISSION WEST-MARYLAND STOCK--Restrictions on Transfer", and "CERTAIN PROVISIONS OF MARYLAND LAW AND MISSION WEST-MARYLAND'S CHARTER AND BYLAWS." CERTAIN BUSINESS COMBINATIONS The MGCL restricts certain business combinations (including a merger, consolidation, share exchange, or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and an "Interested Stockholder" or an affiliate thereof. These provisions of Maryland law do not apply, however, to business combinations that are approved or exempted by the board of directors of the corporation prior to the time that the "Interested Stockholder" becomes an "Interested Stockholder." See "CERTAIN PROVISIONS OF MARYLAND LAW AND MISSION WEST-MARYLAND'S CHARTER AND BYLAWS." Pursuant to the authority granted under the MGCL, the board of directors will adopt a resolution providing that the "business combination" provisions of the MGCL shall not apply to Mission West-Maryland. -94- CALIFORNIA CONTROL SHARE ACQUISITIONS The CGCL contains no provisions governing acquisitions of control shares. MARYLAND CONTROL SHARE ACQUISITIONS The MGCL eliminates the voting rights of control shares in certain circumstances. "Control Shares" are defined in the MGCL as voting shares of stock which, if aggregated with all other such shares of stock previously acquired by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (a) one-fifth or more but less than one-third, (b) one-third or more but less than a majority, or (c) a majority or more of all voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. See "CERTAIN PROVISIONS OF MARYLAND LAW AND MISSION WEST-MARYLAND'S CHARTER AND BYLAWS." The MGCL permits a Maryland corporation to opt out of the control share acquisition statute by provision in its charter or bylaws. Mission West-Maryland has included such a provision in the Maryland Bylaws. However, the Mission West-Maryland board of directors may, at any time, without stockholder approval, vote to amend the Maryland Bylaws to eliminate this provision, which would result in Mission West-Maryland being governed by the control share acquisition statute. -95- CALIFORNIA LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY Pursuant to the CGCL and the California Articles, the liability of directors of the Company to the Company or to any shareholder of the Company for money damages for breach of fiduciary duty has been eliminated, except for (a) acts or omissions that involve intentional misconduct or a knowing and culpable violation of the law, (b) acts or omissions that a director believes to be contrary to the best interests of the Company or its shareholders or that involve the absence of good faith on the part of the director, (c) any transaction from which a director derived an improper personal benefit, (d) acts or omissions that show a reckless disregard for the director's duty to the Company or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Company or its shareholders, (e) acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Company or its shareholders, (f) violations of the CGCL requirements governing Company contracts in which the director has a material interest, or (g) corporate actions for which the director and the Company are jointly and severally liable. In general, the liability of officers may not be eliminated or limited under California law. MARYLAND LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY Pursuant to the MGCL and the Charter, the liability of directors and officers to Mission West-Maryland or to any stockholder of Mission West-Maryland for money damages has been eliminated, except for (a) actual receipt of an improper benefit or profit in money, property or services or (b) active and deliberate dishonesty established by a final judgment as being material to the cause of action. Thus, the directors and officers of Mission West-Maryland may not be liable for certain actions for which they might have otherwise been liable under California law. -96- CALIFORNIA INDEMNIFICATION OF DIRECTORS AND OFFICERS The CGCL contains provisions authorizing corporations to indemnify an officer or director if the officer or director acted in good faith and in a manner he or she reasonably believed to be in the best interest of the corporation. The CGCL also permits the corporation to advance expenses to a director or officer, if the corporation receives an undertaking, usually in the form of a bond, by or on behalf of the director or officer to repay any amounts advanced if it is determined ultimately that the director or officer is not entitled to be indemnified under the CGCL. Under the CGCL, the termination of any proceeding by conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that such person failed to meet the standard of conduct necessary to allow indemnification. In addition, the CGCL permits indemnification for judgments of liability and settlements in derivative actions except that (a) indemnification may only be made with court approval when a person is adjudged liable to the corporation in the performance of that person's duty to the corporation and its shareholders and (b) indemnification of amounts paid to settle and/or expenses incurred to defend a threatened or pending action shall not be made when such threatened or pending action is settled or otherwise disposed of without court approval. No indemnification is permitted under the CGCL for the actions for which liability for money damages may not be limited. The California Bylaws provide that the agents of the Company are indemnified and held harmless from all liability arising from or related to a breach of duty to the Company or its stockholders. The California Bylaws further provide that such indemnification is not exclusive of any other rights the agents of the corporation may have, including other rights pursuant to the laws of California. MARYLAND INDEMNIFICATION OF DIRECTORS AND OFFICERS The MGCL permits indemnification of officers and directors against judgments, penalties, fines and amounts paid in settlement of a proceeding, unless it is established that the act of the director or officer was material and was committed in bad faith or was the result of active and deliberate dishonesty, or the director or officer received an improper personal benefit in money, property or services, or in a criminal proceeding had reasonable cause to believe the act or omission was unlawful. Indemnification is prohibited if the person seeking indemnification has been found liable to the corporation in a proceeding brought by or in the right of the corporation, unless otherwise ordered by a court and then only for expenses. In contrast to California law, under Maryland law a termination of a proceeding by conviction or upon a plea of nolo contendere or its equivalent creates a rebuttable presumption that such person did not meet the requisite standard of conduct to allow indemnification. The Maryland Bylaws require Mission West-Maryland to indemnify, and advance expenses to, present and former directors and officers to the maximum extent permitted by Maryland law. For a complete description of the indemnification of directors and officers of Mission West-Maryland required by or permitted under the MGCL, the Charter and the Maryland Bylaws, see "MANAGEMENT OF THE COMPANY -- Limitation of Liability and Indemnification." -97- CALIFORNIA INDEMNIFICATION OF DIRECTORS AND OFFICERS (Continued) As used in the indemnification provisions of the California Bylaws, "agents" of the Company include any person who is or was a director, officer, employee or other agent of the Company, or is or was serving at the request of the Company as a director, officer, employee or agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise, or was a director, officer, employee or agent of a foreign or domestic corporation which was a predecessor corporation of the Company or of another enterprise at the request of such predecessor corporation. INSPECTION OF BOOKS AND RECORDS Under the CGCL, upon written demand for any purpose reasonably related to the shareholder's interest as a shareholder, any shareholder of the Company may inspect and copy the record of shareholders and inspect any other corporate books and records. A shareholder or shareholders (a) who hold at least 5% of the outstanding voting shares of the corporation or (b) who hold at least 1% of those voting shares and have filed a Schedule 14A with the Securities and Exchange Commission shall have an absolute right to inspect and copy the record of shareholders. These rights apply both to any California corporation and any foreign corporation that keeps such records in California or has its principal executive office in California. Thus, the inspection rights provided by the CGCL will be applicable to Mission West-Maryland after the Reincorporation. MARYLAND INSPECTION OF BOOKS AND RECORDS The MGCL provides a right to inspect and copy the corporation's books of account and stock ledger to persons who have been stockholders for more than six months and own at least 5% of any class of a Maryland corporation's outstanding shares. In addition, any stockholder of a Maryland corporation has the right to inspect the bylaws, minutes of stockholders meetings, annual statements of affairs and voting trust agreements and to request that the corporation provide a sworn statement showing all stock and securities issued and all consideration per share received therefor by the corporation within the preceding 12 months. -98- CALIFORNIA INTERESTED DIRECTOR TRANSACTIONS Under California law, certain contracts or transactions in which one or more of a corporation's directors has an interest are not void or voidable solely because of such interest if certain conditions are met. Under California law (a) either the shareholders or the board of directors must approve any contract or transaction after full disclosure of the material facts (and in the case of board approval, the contract or transaction must also be "just and reasonable") or (b) the contract or transaction must have been just and reasonable at the time it was authorized or approved. California law has a more stringent requirement than Maryland law in circumstances where board approval is sought with respect to an interested director transaction. The contract or transaction must be just and reasonable and must be approved by a majority vote of a quorum of the directors, without counting the vote of any interested directors (except that interested directors may be counted for purposes of establishing a quorum). The CGCL also provides that any loan or guarantee to or for the benefit of a director or officer of the corporation or its parent requires the approval of the shareholders unless such loan or guaranty is pursuant to a plan that has been approved by the holders of a majority of the outstanding shares. However, under the CGCL, the bylaws of a corporation with more than 100 shareholders may authorize the board of directors alone to approve loans or guaranties to directors and officers. The California Bylaws do not currently contain such a provision allowing the directors to approve such loans or guaranties. MARYLAND INTERESTED DIRECTOR TRANSACTIONS Under the MGCL, certain contracts or transactions in which one or more of a corporation's directors has an interest are not void or voidable solely because of such interest if the contract or transaction (a) is approved by a majority of the disinterested directors or by a majority of votes cast by the disinterested stockholders, in either case after full disclosure of the material facts, or (b) is fair and reasonable to the corporation. -99- DESCRIPTION OF MISSION WEST-MARYLAND STOCK THE FOLLOWING SUMMARY OF THE TERMS OF THE CAPITAL STOCK OF MISSION WEST-MARYLAND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MGCL AND TO THE CHARTER AND BYLAWS OF MISSION WEST-MARYLAND. COPIES OF THE CHARTER AND THE BYLAWS ARE ATTACHED AS EXHIBITS TO THIS PROXY STATEMENT/PROSPECTUS. GENERAL The Charter provides that Mission West-Maryland may issue up to 200,000,000 shares of New Common Stock and 20,000,000 shares of New Preferred Stock. Upon completion of the Reincorporation Merger 8,193,594 shares of New Common Stock will be issued and outstanding and no shares of New Preferred Stock will be designated into series or be issued and outstanding. NEW COMMON STOCK All shares of New Common Stock offered hereby will be duly authorized, fully paid and nonassessable. Subject to the preferential rights of any other class or series of stock and to the provisions of the Charter regarding the restrictions on transfer of stock, holders of shares of New Common Stock are entitled to receive dividends on such stock if, as and when authorized and declared by the board of directors out of assets legally available therefor and to share ratably in the assets of Mission West-Maryland legally available for distribution to its stockholders in the event of its liquidation, dissolution or winding up after payment of or adequate provision for all known debts and liabilities of Mission West-Maryland. Subject to the provisions of the Charter regarding the restrictions on transfer of stock, each outstanding share of New Common Stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors and, except as provided with respect to any other class or series of stock, the holders of such shares will possess the exclusive voting power. There is no cumulative voting in the election of directors, which means that the holders of a majority of the outstanding shares of New Common Stock can elect all of the directors then standing for election and the holders of the remaining shares will not be able to elect any directors. Holders of shares of New Common Stock have no preference, conversion, exchange, sinking fund, redemption or appraisal rights and have no preemptive rights to subscribe for any securities of Mission West-Maryland. Subject to the provisions of the Charter regarding the restrictions on transfer of stock, shares of New Common Stock will have equal dividend, liquidation and other rights. Under the MGCL, a Maryland corporation generally cannot dissolve, amend its Charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business unless approved by the affirmative vote of stockholders holding at least two-thirds of the shares entitled to vote on the matter unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is set forth in the corporation's Charter. The Charter provides that the affirmative vote of a majority of all votes entitled to be cast may approve such matters. The Charter provides that, to the extent permitted by Maryland law from time to time, the board of directors of Mission West-Maryland, without any action by the stockholders of Mission West-Maryland, may amend the Charter from time to time to increase or decrease the aggregate number of shares of stock or the number of shares of stock of any class or series that Mission West-Maryland has authority to issue. Such action is not presently permitted under Maryland law, but may be permitted in the future. NEW CLASSES OR SERIES OF STOCK The Charter authorizes the board of directors to classify or reclassify any unissued shares of New Preferred Stock into other classes or series of classes of stock and to establish the number of shares in each class or series and to set the preferences, conversion and other rights, voting powers, restrictions, limitations as to dividends or other distributions, qualifications or terms or conditions of redemption for each such class or series without any action by the stockholders of Mission West-Maryland. -100- POWER TO ISSUE ADDITIONAL SHARES OF NEW COMMON STOCK AND NEW PREFERRED STOCK Mission West-Maryland believes that the power of the Board of Directors to issue additional authorized but unissued shares of New Common Stock and New Preferred and to classify or reclassify unissued shares of New New Preferred Stock and thereafter to cause Mission West-Maryland to issue such classified or reclassified shares of stock will provide Mission West-Maryland with increased flexibility in structuring possible future financings and acquisitions and in meeting other needs which might arise. The additional classes or series, as well as the New Common Stock and New Preferred Stock, will be available for issuance without further action by Mission West-Maryland's stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which Mission West-Maryland's securities may be listed or traded. Although the Board of Directors has no intention at the present time of doing so, it could authorize Mission West-Maryland to issue a class or series that could, depending upon the terms of such class or series, delay, defer or prevent a transaction or a change in control of Mission West-Maryland that might involve a premium price for holders of New Common Stock or otherwise be in their best interest. RESTRICTIONS ON TRANSFER REIT RESTRICTIONS. For Mission West-Maryland to qualify as a REIT under the Code, its shares of stock must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year, and the REIT may not violate the Five or Fewer Test during the last half of a taxable year. Because the board of directors believes it is at present essential for Mission West-Maryland to qualify as a REIT, the Charter, subject to certain exceptions, contains certain restrictions on the number of shares of stock of Mission West-Maryland that a person may own. The Charter prohibits any person from acquiring or holding, directly or indirectly, shares of New Common Stock in excess of 9% in value of the aggregate of the outstanding shares of stock of Mission West-Maryland except for members of the Berg Group and their Affiliates (other than the Company and the Operating Partnerships) who, by agreement, are subject to the Berg Group Ownership Limit, which is 20%. The Charter prohibits ownership of New Common Stock by any members of the Berg Group or any other shareholders or their pledgees or assignees, which would cause Mission West-Maryland to violate any of the REIT Requirements. Mission West-Maryland's board of directors, in its sole discretion, may exempt a person other than the Berg Group from the Ownership Limit (an "Excepted Holder"), provided that no person may own shares of stock, directly or indirectly, which represent 9% or more of the value of the outstanding shares of stock of Mission West-Maryland if that would result in Mission West-Maryland being "closely held" within the meaning of Section 856(h) of the Code or otherwise would result in Mission West-Maryland failing to qualify as a REIT. In order to be considered by the board of directors as an Excepted Holder, a person also must not own, directly or indirectly, an interest in a tenant of Mission West-Maryland (or a tenant of any entity owned or controlled by Mission West-Maryland) that would cause Mission West-Maryland to own, directly or indirectly, more than a 10% interest in such a tenant. The person seeking an exemption must represent to the satisfaction of the board of directors that it will not violate the two aforementioned restrictions. The person also must agree that any violation or attempted violation of any of the foregoing restrictions will result in the automatic transfer of the shares of stock causing such violation to the Trust. The board of directors may require a ruling from the IRS or an opinion of counsel, in either case in form and substance satisfactory to the board of directors in its sole discretion, in order to determine or ensure Mission West-Maryland's status as a REIT. The management of the Company intends to request the board of directors of Mission West-Maryland to designate as an Excepted Holder any purchasers of shares in the Private Placement whose share ownership as of the effective date of the Reincorporation Merger exceeds the Ownership Limit. The designation shall not apply, however, to subsequent purchases of shares of stock of Mission West-Maryland by such an Excepted Holder except for shares acquired pursuant to a grant or award under the Stock Option Plan or another written compensation plan approved by the board of directors. The Charter further prohibits (a) any person from beneficially or constructively owning shares of stock of Mission West-Maryland that would result in Mission West-Maryland being "closely held" under Section 856(h) of the Code or otherwise cause Mission West-Maryland to fail to qualify as a REIT and (b) any person from transferring shares of stock of Mission West-Maryland if such transfer would result in shares of stock of Mission West-Maryland being owned by fewer than 100 persons. Any person who acquires or attempts or intends to acquire beneficial or constructive ownership of shares of stock of Mission West-Maryland that will or may violate -101- any of the foregoing restrictions on transferability and ownership, or any person who would have owned shares of the stock of Mission West-Maryland that resulted in a transfer of shares to the Trust, is required to give notice immediately to Mission West-Maryland and provide Mission West-Maryland with such other information as Mission West-Maryland may request in order to determine the effect of such transfer on Mission West-Maryland's status as a REIT. The foregoing restrictions on transferability and ownership will not apply if the board of directors, by affirmative vote of 75% of all directors, determines that it is no longer in the best interests of Mission West-Maryland to attempt to qualify, or to continue to qualify, as a REIT. If any transfer of shares of stock of Mission West-Maryland occurs which, if effective, would result in any person beneficially or constructively owning shares of stock of Mission West-Maryland in excess or in violation of the above transfer or ownership limitations, then that number of shares of stock of Mission West-Maryland the beneficial or constructive ownership of which otherwise would cause such person to violate such limitations (rounded to the nearest whole share) shall be automatically transferred to a trust for the exclusive benefit of one or more charitable beneficiaries, and the Prohibited Owner shall not acquire any rights in such shares. Such automatic transfer shall be deemed to be effective as of the close of business on the Business Day prior to the date of such violative transfer. Shares of stock held in the Trust shall be issued and outstanding shares of stock of Mission West-Maryland. The Prohibited Owner shall not benefit economically from ownership of any shares of stock held in the Trust, shall have no rights to dividends and shall not possess any rights to vote or other rights attributable to the shares of stock held in the Trust. The trustee of the Trust shall have all voting rights and rights to dividends or other distributions with respect to shares of stock held in the Trust, which rights shall be exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend or other distribution paid prior to the discovery by Mission West-Maryland that shares of stock have been transferred to the Trustee shall be paid by the recipient of such dividend or distribution to the Trustee upon demand, and any dividend or other distribution authorized but unpaid shall be paid when due to the Trustee. Any dividend or distribution so paid to the Trustee shall be held in trust for the Charitable Beneficiary. The Prohibited Owner shall have no voting rights with respect to shares of stock held in the Trust and, subject to Maryland law, effective as of the date that such shares of stock hve been transferred to the Trust, the Trustee shall have the authority (at the Trustee's sole discretion) (i) to rescind as void any vote cast by a Prohibited Owner prior to the discovery by Mission West-Maryland that such shares have been transferred to the Trust and (ii) to recast such vote in accordance with the desires of the Trustee acting for the benefit of the Charitable Beneficiary. However, if Mission West-Maryland has already taken irreversible corporate action, then the Trustee shall not have the authority to rescind and recast such vote. Within 20 days of receiving notice from Mission West-Maryland that shares of stock of Mission West-Maryland have been transferred to the Trust, the Trustee shall sell the shares of stock held in the Trust to a person, designated by the Trustee, whose ownership of the shares will not violate the ownership limitations set forth in the Charter. Upon such sale, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner and to the Charitable Beneficiary as follows. The Prohibited Owner shall receive the lesser of (i) the price paid by the Prohibited Owner for the shares or, if the Prohibited Owner did not give value for the shares in connection with the event causing the shares to be held in the Trust (e.g., a gift, devise or other such transaction), the Market Price of such shares on the day of the event causing the shares to be held in the Trust and (ii) the price per share received by the Trustee from the sale or other disposition of the shares held in the Trust. Any net sale proceeds in excess of the amount payable to the Prohibited Owner shall be paid immediately to the Charitable Beneficiary. If, prior to the discovery by Mission West-Maryland that shares of stock have been transferred to the Trust, such shares are sold by a Prohibited Owner, (i) such shares shall be deemed to have been sold on behalf of the Trust and (ii) to the extent that the Prohibited Owner received an amount for such shares that exceeds the amount that such Prohibited Owner was entitled to receive pursuant to the aforementioned requirement, such excess shall be paid to the Trustee upon demand. In addition, shares of stock of Mission West-Maryland held in the Trust shall be deemed to have been offered for sale to Mission West-Maryland, or its designee, at a price per share equal to the lesser of (i) the price per share in the transaction that resulted in such transfer to the Trust (or, in the case of a devise or gift, the Market Price at the time of such devise or gift) and (ii) the Market Price on the date Mission West-Maryland, or its designee, accepts such offer. Mission West-Maryland shall have the right to accept such offer until the Trustee has sold the shares of stock held in the Trust. Upon such a sale to Mission West-Maryland, the interest of the Charitable Beneficiary in the shares sold shall terminate and the Trustee shall distribute the net proceeds of the sale to the Prohibited Owner. -102- The foregoing restrictions do not apply to shares acquired in original issuance by members of the Berg Group. All certificates representing shares of New Common Stock other than such shares will bear a legend referring to the restrictions described above. Every owner of more than 5% (or such lower percentage as required by the Code or the regulations promulgated thereunder) of all classes or series of Mission West-Maryland's stock, including shares of New Common Stock, within 30 days after the end of each taxable year, is required to give written notice to Mission West-Maryland stating the name and address of such owner, the number of shares of each class and series of stock of Mission West-Maryland which the owner beneficially owns and a description of the manner in which such shares are held. Each such owner shall provide to Mission West-Maryland such additional information as Mission West-Maryland may request in order to determine the effect, if any, of such beneficial ownership on Mission West-Maryland's status as a REIT and to ensure compliance with the Stock Ownership Limit. In addition, each shareholder shall upon demand be required to provide to Mission West-Maryland such information as Mission West-Maryland may request, in good faith, in order to determine Mission West-Maryland's status as a REIT and to comply with the requirements of any taxing authority or governmental authority or to determine such compliance. These ownership limits could delay, defer or prevent a transaction or a change in control of Mission West-Maryland that might involve a premium price for the New Common Stock or otherwise be in the best interest of the stockholders. SECURITIES RESTRICTIONS. Subject to the restrictions set forth above in "--Restrictions on Transfer" and following the consummation of the transactions contemplated herein, Mission West-Maryland will have outstanding 8,193,594 shares of New Common Stock; 1,698,536 of which will be freely transferable in the public market without restriction or further registration under the Securities Act, unless held by Affiliates of Mission West-Maryland, whose shares will be subject to the resale limitations of Rule 144 and Rule 145(d). The 6,495,058 shares of New Common Stock issued to the purchasers of Common Stock of the Company in the Private Placement in exchange for such shares, will be eligible for resale pursuant to the Registration Statement for as long as the Company maintains its effectiveness. In general, under Rule 144, an Affiliate of Mission West-Maryland is subject to restrictions on the manner of resale of such Affiliate's shares. Further, the number of shares sold by an Affiliate in any three-month period may not exceed the greater of 1% of the shares of New Common Stock then outstanding or the reported average weekly trading volume of the New Common Stock during the four calendar weeks immediately preceding the date on which notice of the sale is sent to the Commission. Any sale by an Affiliate of Mission West-Maryland will also be subject to certain notice requirements and availability of current public information concerning Mission West-Maryland. REINVESTMENT AND SHARE PURCHASE PLAN Mission West-Maryland may adopt a Distribution Reinvestment and Share Purchase Plan that would allow stockholders to automatically reinvest cash distributions on their outstanding shares of Common Stock and/or L.P. Units to purchase additional shares of Common Stock at a discounted price and without the payment of any brokerage commission or service charge. Stockholders and Limited Partners would also have the option of investing limited additional amounts by making cash payments. No decision has been made yet by the Company whether or not to adopt such a plan, and there can be no assurance that such a plan will ever be adopted by Mission West-Maryland. -103- CERTAIN PROVISIONS OF MARYLAND LAW AND OF MISSION WEST-MARYLAND'S CHARTER AND BYLAWS THE FOLLOWING SUMMARY OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER AND MARYLAND BYLAWS DOES NOT PURPORT TO BE COMPLETE AND IS SUBJECT TO AND QUALIFIED IN ITS ENTIRETY BY REFERENCE TO MARYLAND LAW AND TO THE CHARTER AND BYLAWS, COPIES OF WHICH ARE EXHIBITS TO THIS PROXY STATEMENT/PROSPECTUS. SEE "ADDITIONAL INFORMATION." THE BOARD OF DIRECTORS The Charter provides that the number of directors of the Company shall be five and that number may be increased or decreased pursuant to the bylaws. As long as the Berg Group members and their Affiliates (other than the Company and the Operating Partnerships) own at least 15% of the voting shares on a Fully-Diluted basis, at least two directors must satisfy the qualification of being nominated by the Berg Group members. At least one director must satisfy such qualification if Berg Group's aggregate percentage ownership of voting shares on a Fully-Diluted basis is at least 10%, although less than 15%. The Maryland Bylaws provide that the board of directors may establish, increase or decrease the number of directors, provided that the number of directors shall never be less than the minimum number required by Maryland law, nor more than 15. In general, any vacancy will be filled, at any regular meeting or at any special meeting called for that purpose, by a majority of the remaining directors, except that a vacancy resulting from an increase in the number of directors must be filled by a majority of the entire board of directors. A vacancy created by the departure of a Berg Group Board Representative, however, must be filled by another Berg Group Board Representative until the date that the right of the Berg Group to name the Berg Group Board Representatives has expired. REMOVAL OF DIRECTORS The Charter provides that a director may be removed only for cause (as defined in the Charter) and only by the affirmative vote of at least a majority of the votes entitled to be cast in the election of directors. This provision, when coupled with the provision in the Maryland Bylaws authorizing the board of directors to fill vacant directorships, precludes stockholders from removing incumbent directors without cause and filling the vacancies created by such removal with their own nominees. BUSINESS COMBINATIONS Under the MGCL, certain "business combinations" (including a merger, consolidation, share exchange or, in certain circumstances, an asset transfer or issuance or reclassification of equity securities) between a Maryland corporation and any person who beneficially owns 10% or more of the voting power of the corporation's shares or an Affiliate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of 10% or more of the voting power of the then-outstanding voting stock of the corporation (an "Interested Stockholder") or an Affiliate of such an Interested Stockholder are prohibited for five years after the most recent date on which the Interested Stockholder becomes an Interested Stockholder. Thereafter, any such business combination must be recommended by the board of directors of such corporation and approved by the affirmative vote of at least (a) 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation and (b) two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the Interested Stockholder with whom (or with whose affiliate) the business combination is to be effected, unless, among other conditions, the corporation's common stockholders receive a minimum price (as defined in the MGCL) for their shares and the consideration is received in cash or in the same form as previously paid by the Interested Stockholder for its shares. These provisions of the MGCL do not apply, however, to business combinations that are approved or exempted by the board of directors of the corporation prior to the time that the Interested Stockholder becomes an Interested Stockholder. After the Reincorporation Merger the Berg Group will beneficially own more than 10% of the Company's voting shares, as will one of the purchasers in the Private Placement. They would, therefore, be subject to the business combination provision of the MGCL. However, pursuant to the statute, the Company has exempted any usiness combinations involving the Berg Group and any purchaser in the Private Placement. Consequently, the five-year prohibition and the super-majority vote requirements will not apply to business combinations between any of them and the Company. As a result, the Berg Group and such purchaser may be able to enter into business combinations with the Company that may not be in the best interest of its stockholders without compliance by the Company with the super-majority vote requirements and the other provisions of the statute. CONTROL SHARE ACQUISITIONS The MGCL provides that "control shares" of a Maryland corporation acquired in a "control share acquisition" have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be -104- cast on the matter, excluding shares of stock owned by the acquiror, by officers or by directors who are employees of the corporation. "Control Shares" are voting shares of stock which, if aggregated with all other such shares of stock previously acquired by the acquiror or in respect of which the acquiror is able to exercise or direct the exercise of voting power (except solely by virtue of a revocable proxy), would entitle the acquiror to exercise voting power in electing directors within one of the following ranges of voting power: (i) one-fifth or more but less than one-third, (ii) one-third or more but less than a majority, or (iii) a majority or more of all voting power. Control shares do not include shares the acquiring person is then entitled to vote as a result of having previously obtained stockholder approval. A "control share acquisition" means the acquisition of control shares, subject to certain exceptions. A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses), may compel the board of directors of the corporation to call a special meeting of stockholders to be held within 50 days of demand to consider the voting rights of the shares. If no request for a meeting is made, the corporation may itself present the question at any stockholders meeting. If voting rights are not approved at the meeting or if the acquiring person does not deliver an acquiring person statement as required by the statute, then subject to certain conditions and limitations, the corporation may redeem any or all of the control shares (except those for which voting rights have previously been approved) for fair value determined, without regard to the absence of voting rights for the control shares, as of the date of the last control share acquisition by the acquiror or of any meeting of stockholders at which the voting rights of such shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquiror becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquiror in the control share acquisition. The control share acquisition statute does not apply (a) to shares acquired in a merger, consolidation or share exchange if the corporation is a party to the transaction or (b) to acquisitions approved or exempted by the charter or bylaws of the corporation. The Maryland Bylaws contain a provision exempting from the control share acquisition statute any and all acquisitions by any person of the Company's shares of stock. There can be no assurance that such provision will not be amended or eliminated at any time in the future. BOARD QUORUM AND SPECIAL VOTING REQUIREMENTS Generally, a majority of the total number of directors constitutes a quorum for the transaction of business under the MGCL. However, the Maryland Bylaws provide that a quorum for any meeting of the board of directors must include the Required Directors. The Maryland Bylaws include special voting requirements for the board of directors, such that until the Protective Provisions Expiration Date, the Company will not take or permit to be taken any of the following actions without the approval of the Required Directors: (i) establishing a quorum for a meeting which is not attended by Mr. Berg or his designee; (ii) amending the Charter or the bylaws; (iii) merging with or into another entity; and (iv) any sale of all or substantially all of the Company's assets. The Maryland Bylaws also provide that the approval of more than 75% of the entire board of directors will be required for (i) the Company's taking title to assets or conducting business other than through the Operating Partnerships, (ii) the termination of the Company's status as a REIT, and (iii) incurring indebtedness in excess of 50% of the Company's Total Market Capitalization. AMENDMENT TO THE CHARTER The Charter, including its provisions regarding removal of directors, may be amended only by the affirmative vote of the holders of a majority of all of the votes entitled to be cast on the matter. In addition, the bylaws require the approval by the Berg Group of all amendments to the Charter. DISSOLUTION OF THE COMPANY The dissolution of the Company must be advised by a majority of the entire board of directors and approved by the stockholders by the affirmative vote of the holders of a majority of all of the votes entitled to be cast on the matter. -105- ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS The bylaws provide that (a) with respect to an annual meeting of stockholders, nominations of persons for election to the board of directors and the proposal of business to be considered by stockholders may be made only (i) pursuant to Mission West-Maryland's notice of the meeting, (ii) by or at the direction of the board of directors or (iii) by a stockholder who is entitled to vote at the meeting and has complied with the advance notice procedures set forth in the bylaws and (b) with respect to special meetings of stockholders, only the business specified in Mission West-Maryland's notice of meeting may be brought before the meeting of stockholders and nominations of persons for election to the board of directors may be made only (i) pursuant to Mission West-Maryland's notice of the meeting, (ii) by or at the direction of the board of directors or (iii) provided that the board of directors has determined that directors shall be elected at such meeting, by a stockholder who is entitled to vote at the meeting and has complied with the advance notice provisions set forth in the bylaws. CONFLICT OF INTEREST The Charter provides that no director will be prohibited from voting or taking any action as a director because of any actual or apparent conflict of interest between the director and the Company and that no action taken by the board of directors will be void or voidable because a majority of directors are affiliated with the Berg Group or that an action is beneficial to the Berg Group, to the extent permitted by law. ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE CHARTER AND BYLAWS The control share acquisition provisions of the MGCL, and the provisions of the Charter on removal of directors and the advance notice provisions of the bylaws could delay, defer or prevent a transaction or a change in control of Mission West-Maryland that might involve a premium price for holders of New Common Stock or otherwise be in their best interest. -106- ACCOUNTING TREATMENT OF THE BERG ACQUISITION AND THE REINCORPORATION MERGER The UPREIT Transactions and the Acquired Properties will be accounted for as a purchase. Accordingly, the costs of the acquisition were allocated to the assets and liabilities assumed based upon their respective fair values at the effective date of the acquisition. FEDERAL INCOME TAX CONSIDERATIONS The following summary of material federal income tax considerations concerning Mission West-Maryland (referred to also as the "Company" in this discussion) after the Reincorporation Merger and the election to become a REIT is based on current law, is for general information only and is not tax advice. This discussion is for general purposes only and does not purport to deal with all aspects of taxation that may be relevant to particular shareholders in light of their personal investment or tax circumstances, or to certain types of shareholders (including insurance companies, tax-exempt organizations, financial institutions or broker-dealers, foreign corporations, persons who are not citizens or residents of the United States, and persons who hold stock as part of a conversion transaction, as part of a hedging transaction or as a position in a straddle for tax purposes) subject to special treatment under the federal income tax laws. This summary does not provide a detailed discussion of any state, local, or foreign tax considerations. This summary is qualified in its entirety by the applicable provisions of the Code, rules and regulations promulgated thereunder, and administrative and judicial interpretations thereof, all as of the date hereof and all of which are subject to change (which change may apply retroactively). The Taxpayer Relief Act of 1997 (the "1997 Act") was enacted on August 5, 1997. The 1997 Act contains many provisions which generally make it easier to operate and to continue to qualify as a REIT for taxable years beginning after the date of enactment (which, for the Company, would be applicable commencing with its taxable year beginning January 1, 1998). The IRS Restructuring and Reform Bill of 1998, which has been passed by Congress and is awaiting signature by the President, changes certain aspects of the federal income tax law applicable to REITs (the "1998 Act"), and their shareholders. EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OWN TAX ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OF THE COMPANY'S ELECTION TO BE TAXED AS A REAL ESTATE INVESTMENT TRUST, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND OTHER TAX CONSEQUENCES OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS. TAXATION OF THE COMPANY GENERAL. The Company plans to elect to be taxed as a REIT under Sections 856 through 860 of the Code and the applicable Treasury Regulations (the "REIT Provisions") commencing with its taxable year ending December 31, 1998. The Company believes that it is organized and will be operated in such a manner as to qualify for taxation as a REIT under the REIT Provisions and the Company intends to continue to operate in such a manner. No assurance can be given, however, that the Company will operate in a manner so as to qualify or remain qualified as a REIT. The REIT Provisions are highly technical and complex. The material aspects of the REIT Provisions are summarized below. In the opinion of Graham & James LLP, commencing with the Company's taxable year ending on December 31, 1998, the Company will be organized in conformity with the requirements for qualification and taxation as a REIT, and its method of operation will enable it to meet the requirements for continued qualification and taxation as a REIT. This opinion is based on various assumptions relating to the organization and operation of the Company and the Operating Partnerships, however, and is conditioned upon certain representations made by the Company about factual matters relating to the organization and expected operation of the Company and the Operating Partnerships. In addition, this opinion is based upon the factual representations of the Company concerning its business and properties as set forth in this Proxy Statement/Prospectus and assumes that the actions described in this Proxy Statement/Prospectus are completed as described. Moreover, qualification and taxation as a REIT depends upon the Company's ability to meet, through actual annual operating results, the various income, asset, distribution, stock ownership, and other qualification tests imposed by the REIT Provisions -107- discussed below, the results of which will not be reviewed by nor be under the control of Graham & James LLP. Accordingly, no assurance can be given that the actual results of the Company's operation for any particular taxable year will satisfy such requirements. See "Loss of REIT Qualification". If the Company qualifies for taxation as a REIT, it generally will not be subject to federal corporate incom e taxes on the portion of its net income that is currently distributed to its shareholders. This treatment substantially eliminates the "double taxation" (at the corporate and shareholder levels) that generally results from investment in a corporation. The Company may be subject to federal income and excise tax, however, as follows: (i) The Company will be taxed at regular corporate rates on any undistributed REIT taxable income, including undistributed net capital gains. (ii) Under certain circumstances, the Company may be subject to the "corporate alternative minimum tax" on its items of tax preference. (iii) If the Company has (A) net income from the sale or other disposition of "foreclosure property" which is held primarily for sale to customers in the ordinary course of business or (B) other nonqualifying net income from foreclosure property, it will be subject to tax on such income at the highest corporate rate. (iv) If the Company has net income from "prohibited transactions" (which are, in general, certain sales or other dispositions of property held primarily for sale to customers in the ordinary course of business, other than foreclosure property), such income will be subject to a 100% tax. (v) If the Company fails to satisfy the 75% gross income test or the 95% gross income test (as discussed below), but preserves its qualification as a REIT because certain other requirements have been met, it will be subject to a 100% tax on the net income attributable to the greater of the amount by which the Company fails the 75% or 95% test, multiplied by a fraction intended to reflect the Company's profitability. (vi) If the Company should fail to distribute during each calendar year at least the sum of (A) 85% of its REIT ordinary income for such year, (B) 95% of its REIT capital gain net income for such year, and (C) any undistributed taxable income from prior periods, the Company would be subject to a 4% excise tax on the excess of such required distribution over the amounts actually distributed. The 1998 Act provides that all distributions by the REIT shall be deemed to come first from earnings from non-REIT years. (vii) If during the ten-year period (the "Recognition Period") beginning on the first day of the first taxable year for which the Company qualifies as a REIT, the Company recognizes gain in the disposition of any asset held by the Company as of the beginning of such Recognition Period, then, to the extent of the excess of (a) the fair market value of such asset as of the beginning of such Recognition Period over (b) the Company's adjusted basis in such asset as of the beginning of such Recognition Period (the "Built-in Gain"), such gain will be subject to tax at the highest regular corporate rate. The Company will not acquire any assets until the closing of the Berg Acquisition, and they will hold no such assets at the beginning of the Recognition Period. (viii) If the Company subsequently acquires any asset from a C corporation (i.e., generally a corporation subject to full corporate-level tax) in a transaction in which the basis of the asset in the Company's hands is determined by reference to the basis of the asset (or any other property) in the hands of the C corporation, and the Company recognizes gain on the disposition of such asset during the Recognition Period beginning on the date on which such asset was acquired by the Company, then, to the extent of the Built-in Gain, such gain will be subject to tax at the highest regular corporate rate. The result described above with respect to the recognition of Built-in Gain during the Recognition Period assumes the Company will make an election in accordance with Notice 88-19 issued by the Internal Revenue Service (the "IRS"). See "--Tax Aspects of the Operating Partnerships--Partnership Allocations" and " Tax Allocations with Respect to Contributed Properties" below. REQUIREMENTS FOR QUALIFICATION. The Code defines a REIT as a corporation, trust or association: (1) which is managed by one or more trustees or directors; (2) the beneficial ownership of which is evidenced by transferable shares, or by transferable certificates of beneficial interest; (3) which would be taxable as a domestic corporation, but for Code sections 856 though 859; (4) which is neither a financial institution nor an insurance company subject to certain provisions of the Code; (5) the beneficial ownership of which is held by 100 or more persons (determined without reference to any rules of attribution); (6) during the last half of each taxable year not -108- more than 50% in value of the outstanding stock of which is owned, directly or constructively, by "five or fewer" individuals (as defined in the Code to include certain entities) (the "Five or Fewer Test"); (7) that makes an election to be a REIT (or has made such election for a previous taxable year which has not been revoked or terminated) and satisfies all relevant filing and other administrative requirements established by the IRS that must be met in order to elect and maintain REIT status; (8) that uses a calendar year for federal income tax purposes and complies with the recordkeeping requirements of the Code and Treasury Regulations promulgated thereunder; and (9) which meets certain income and asset tests, described below. The Code provides that conditions (1) to (4), inclusive, must be met during the entire taxable year, that condition (5) must be met during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months and that condition (6) must be met for the last six months of each taxable year. As of the date of this Proxy Statement/Prospectus the Company believes that it will satisfy conditions (5) and (6). The Charter contains restrictions regarding transfers of shares, which are intended to assist the Company in continuing to satisfy the share ownership requirements described in (5) and (6). In particular,although the Berg Group may own as much as 20% of the outstanding stock under the Berg Group Ownership Limit, which likely represents ownership by two individuals, Carl E. Berg and Clyde J. Berg, for Five or Fewer Test purposes, the members of the Berg Group may not acquire any additional shares if it would result in the Company's failure to satisfy the Test. Such transfer restrictions are described in "DESCRIPTION OF MISSION WEST-MARYLAND STOCK--Restrictions on Transfer." In its proposed budget for the 1999 fiscal year, the Clinton Administration has proposed to impose an ownership requirement for REIT qualification in addition to the Five or Fewer Test. The proposal would create a limit of 50% of the combined voting power of all classes of voting stock or the total value of all classes of stock any one person or entity could own. Unlike the current Five or Fewer Test, which permits a "look through" for certain entities to determine the number of owners, the Clinton proposal would apply to any person (including a partnership, corporation or trust). In addition, the proposal calls for attribution of ownership between a partnership and its partners and a corporation and its shareholders (with a 10% threshold for attribution). This proposal has not been included in the 1998 Act. Pursuant to the 1997 Act, for the Company's taxable years commencing on or after January 1, 1998, if the Company complies with regulatory rules pursuant to which it is required to send annual letters to certain of its shareholders requesting information regarding the actual ownership of its stock, but does not know, or exercising reasonable diligence would not have known, whether it failed to meet the requirement that it not be closely held, the Company will be treated as having met the Five or Fewer Test. If the Company were to fail to comply with these regulatory rules for any year, it would be subject to a $25,000 penalty. If the Company's failure to comply was due to intentional disregard of the requirements, the penalty would be increased to $50,000. However, if the Company's failure to comply was due to reasonable cause and not willful neglect, no penalty would be imposed. Section 856(i) of the Code provides that a corporation that is a "qualified REIT subsidiary" shall not be treated as a separate corporation, and all assets, liabilities and items of income, deduction and credit of a "qualified REIT subsidiary" shall be treated as assets, liabilities and items of income, deduction and credit of the REIT. Pursuant to the 1997 Act, for the Company's taxable years beginning on or after January 1, 1998, a "qualified REIT subsidiary" is a corporation all of the capital stock of which is owned by the REIT. Pursuant to this amendment, the Company will have the ability, if it so chooses, to acquire an existing corporation that will qualify as a "qualified REIT subsidiary", as opposed to having to form such a subsidiary. The Company may form or acquire "qualified REIT subsidiaries" in the future. In applying the income and asset tests described below, a "qualified REIT subsidiary" will be ignored and all assets, liabilities and items of income, deduction and credit of such "qualified REIT subsidiary" will be treated as assets, liabilities and items of income, deduction and credit of the Company. A "qualified REIT subsidiary" of the Company will not be subject to federal corporate income taxation, although it may be subject to state and local taxation in certain states. In the case of a REIT such as the Company which is a partner in a partnership, Treasury Regulations provide that the REIT will be deemed to own its proportionate share of the assets of the partnership and will be deemed to be entitled to the income of the partnership attributable to such share. In addition, the character of the assets and gross income of the partnership retain the same character in the hands of the REIT for purposes of Section 856 of the Code, including satisfying the gross income tests and the asset tests. Thus, the Company's proportionate share of the assets, liabilities and items of income of the Operating Partnerships will be treated as assets, liabilities and items of income of the Company for purposes of applying the requirements described below. -109- GROSS INCOME TESTS. In order to maintain qualification as a REIT, the Company annually must satisfy two gross income requirements, as follows: (i) At least 75% of the Company's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived directly or indirectly from investments relating to real property or mortgages on real property (including "rents from real property" and, in certain circumstances, interest) or from certain types of temporary investments. (ii) At least 95% of the Company's gross income (excluding gross income from prohibited transactions) for each taxable year must be derived from such real property investments and from dividends, interest and gain from the sale or disposition of stock or securities (or from any combination of the foregoing). Rents received by the Company will qualify as "rents from real property" in satisfying the gross income requirements for a REIT described above only if several conditions are met, including the following: (i) The amount of rent must not be based in whole or in part on the income or profits of any person from the property. However, an amount received or accrued generally will not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of receipts or sales. (ii) Rents received from a tenant will not qualify as "rents from real property" in satisfying the gross income tests if the Company, or an owner of 10% or more of the Company, directly or constructively owns 10% or more of such tenant (a "Related Party Tenant"). Constructive ownership is determined under the attribution rules of Section 318 of the Code, as modified by Section 856(d)(5) of the Code. (iii) If rent attributable to personal property, leased in connection with a lease of real property, is greater than 15% of the total rent received under the lease, then the portion of rent attributable to such personal property will not qualify as "rents from real property." (iv) Rents received will not qualify as "rents from real property", unless the Company generally does not operate or manage the property or furnish or render services to the tenants of such property, other than through an independent contractor from whom the REIT derives no revenue. The Company may, however, directly perform certain services that are "usually or customarily rendered" in connection with the rental of space for occupancy only and are not otherwise considered "rendered to the occupant" of the property. In addition, for its 1998 taxable year and thereafter, the Company is permitted to receive up to 1% of its gross income from the provision of non-customary services and still treat all other amounts received from such property as "rents from real property." The term "interest" generally does not include any amount received or accrued (directly or indirectly) if the determination of such amount depends in whole or in part on the income or profits of any person. An amount received or accrued generally will not be excluded from the term "interest," however, solely by reason of being based on a fixed percentage or percentages of receipts or sales. The Company intends for all of its income to be derived from its interest in the Operating Partnerships, and expects that the Operating Partnerships' ownership of the Properties will give rise to income which will enable the Company to satisfy all of the income tests described above. All of the "rents from real property" that the Company expects to receive or expects the Partnership to receive will satisfy the foregoing conditions. Certain Properties or portions thereof have been leased to corporations in which members of the Berg Group own in excess of 10% of the total number of outstanding shares. Initially, the Berg Group will own less than 2% of the Common Stock, and the Company is not aware of any other shareholders owning interests in such tenants which would result in such entities being deemed Related Party Tenants. However, the future acquisition of 10% or more of the Company's Common Stock by the Berg Group, upon exercise of their Exchange Rights or otherwise, could cause such entities to be treated as Related Party Tenants. The members of the Berg Group have agreed not to acquire shares of the Company's Common Stock if, in the sole judgment of the Independent Directors Committee, their ownership of Common Stock would result in the loss of the Company's status as a REIT. -110- RELIEF PROVISIONS. Should the Company fail to satisfy one or both of the 75% or 95% gross income tests for any taxable year, it may nevertheless qualify as a REIT for such year by obtaining relief under certain provisions of Section 856 of the Code. Such provisions would allow the Company to preserve its REIT qualifications if (i) the failure to meet such tests was due to reasonable cause and not due to willful neglect, (ii) the Company attaches a schedule of the sources of its income to its tax return, and (iii) any incorrect information on the schedule was not due to fraud with intent to evade tax. There can be no assurance, however, that the Company would be entitled to the benefit of these relief provisions in all circumstances. As discussed above in "Taxation of the Company--General", even if these relief provisions apply, a tax would be imposed with respect to the excess net income. ASSET TESTS. To maintain its status as a REIT the Company, at the close of each quarter of its taxable year, also must satisfy the following three asset-related tests: (i) At least 75% of the value of the Company's total assets must be represented by interests in real estate assets, shares in cash, cash items and government securities (as well as certain temporary investments in stock or debt instruments purchased with the proceeds of new capital issued by the Company). (ii) No more than 25% of the Company's total assets may be represented by securities other than those in the class described in (i), above. (iii) With respect to the investments described in (ii) above, the value of any one issuer's securities owned by the Company may not exceed 5% of the value of the Company's total assets, and the Company may not own more than 10% of any one issuer's outstanding voting securities. The Clinton Administration's 1999 budget proposal would prohibit a REIT from holding more than 10% of the outstanding stock of any one issuer, determined by either vote or value. This proposal is not part of the 1998 Act. In applying these asset-related tests the Company will be deemed to own its proportionate share of all of the assets of the Operating Partnerships. Upon the consummation of the Berg Acquisition, more than 75% of the value of the Operating Partnerships' assets will qualify as "real estate assets." Having met the asset tests at the close of any quarter, the Company will not forfeit its REIT status by failing to satisfy these tests at the end of a later quarter solely due to fluctuations in asset values. Furthermore, should the Company fail to satisfy the asset tests because of its acquisition of securities or other property during a quarter, the Company can be cured of such failure by disposing of a sufficient amount of nonqualifying assets within 30 days after the close of that quarter. The Company intends to maintain adequate records of the value of its assets to ensure compliance with the asset-related tests, and to take such other action within 30-days after the close of any quarter as may be required to cure any noncompliance. ANNUAL DISTRIBUTION REQUIREMENTS. In order to qualify as a REIT, the Company must distribute dividends (other than capital gains dividends) to its shareholders in an amount at least equal to: (A) the sum of (i) 95% of the Company's "REIT taxable income" (computed without regard to deduction for the dividends paid and by excluding any net capital gain), and (ii) 95% of the excess of the net income, if any, from foreclosure property (in excess of the special tax imposed on income from foreclosure property); minus (B) the sum of certain items of "noncash income". Such dividends must be paid in the taxable year to which they relate, or in the following taxable year if declared before the Company timely files its tax return for such year, and if paid on or before the first regular dividend payment after such declaration. To the extent that the Company does not distribute all of its net capital gain or distributes at least 95%, but less than 100%, of its REIT taxable income, as adjusted, it will be subject to tax on the undistributed amount of its REIT taxable income at regular ordinary and capital gains corporate tax rates. For the Company's taxable year beginning on January 1, 1998 and for all taxable years thereafter, undistributed capital gains may be so designated by the Company and in such event will be includible in the income of the holders of shares of Common Stock. If the Company makes that election, shareholders will be treated as having paid the capital gains tax imposed on the Company on the designated amounts including in their income as long-term capital gains. Such shareholders would get an increase in the basis for income recognized and a decrease in their basis for taxes paid by the Company. Additionally, if the Company fails to distribute at least the sum of (i) 85% of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain income for such year, and (iii) any undistributed taxable income from prior periods, during each calendar year the Company would be subject to a 4% excise tax on the excess of such requied distribution over the amounts actually distributed. -111- The Company's REIT taxable income will consist almost entirely of the Company's distributive share of the income of the Operating Partnerships. The Company expects generally to have adequate cash and cash equivalents to allow liquid assets to satisfy such distribution requirements. The Company intends to make timely distributions sufficient to satisfy the REIT annual distribution requirements. Nevertheless, on occasion the Company may lack sufficient cash or cash equivalents to make timely dividend distributions in the required amounts either because its share of the Operating Partnerships' cash flow for a particular year is inadequate or because of timing differences between the Company's receipt of income and payment of deductible expenses, and the inclusion of such income and the deduction of such expenses in determining the Company's REIT taxable income. Upon the occurrence of these events, in order to meet the 95% distribution requirements, the Company may find it necessary to arrange for short-term, or possibly long-term, borrowings or to pay dividends in the form of taxable stock dividends. Certain provisions of the Code may permit the Company to remedy its failure to meet the distribution requirements for a taxable year by paying "deficiency dividends" to shareholders in a later year, which may be included in the Company's deduction for dividends paid for the earlier year. The Company then could avoid being subjected to tax on the amounts so distributed, although the Company would be required to pay interest on the amount of the deduction taken for the deficiency dividends. LOSS OF REIT QUALIFICATION. If the Company fails to qualify for taxation as a REIT in any taxable year, and the relief provisions do not apply, the Company will be subject to tax (including any applicable corporate alternative minimum tax) on its taxable income at regular corporate rates. Distributions to shareholders in any year in which the Company fails to qualify will not be deductible by the Company and need not be made. Upon such failure to qualify, all distributions to shareholders will, to the extent of the Company's current and accumulated earnings and profits, be taxable as ordinary income. In addition, subject to certain limitations of the Code, such distributions to corporate distributees may be eligible for the dividends received deduction. Unless entitled to relief under specific statutory provisions, the Company also will be disqualified from taxation as a REIT for the four taxable years following the year during which qualification was lost. It is not possible to state whether in all circumstances the Company would be entitled to such statutory relief. TAXATION OF UNITED STATES SHAREHOLDERS GENERALLY. As used herein, the term "United States Shareholder" means a holder of shares who is an individual who is a citizen or resident of the United States; a corporation, partnership or other entity created or organized in, or under the laws of, the United States or any state; an estate the income of which from sources without the United States is includible in gross income for United States federal income tax purposes regardless of whether such income is effectively connected with the conduct of a trade or business in the United States; a trust the primary supervision over the administration of which is exercisable by a court within the United States and having one or more United States fiduciaries with authority to control all substantial decisions of such trust; and any other person whose income or gain in respect of the stock is effectively connected with the conduct of a United States trade or business. As long as the Company qualifies as a REIT, distributions made to the Company's United States Shareholders out of current or accumulated earnings and profits (and not designated as capital gains dividends) will be treated by them as ordinary income and will not be eligible for the dividends received deduction for corporations. Distributions designated as capital gains dividends will be taxed as long-term capital gains (to the extent they do not exceed the Company's actual net capital gain for the taxable year) without regard to the period for which the United States Shareholder has held its stock. Pursuant to Section 291(d) of the Code corporate shareholders may be required to treat up to 20% of certain capital gain dividends as ordinary income. On November 10, 1997, the IRS issued Notice 97-64, which provides generally that a REIT may classify portions of its designated capital gain dividend as (i) a 20% rate gain distribution (which would be taxed as long-term capital gain in the 20% group), (ii) an unrecaptured Section 1250 gain distribution (which would be taxed as long-term capital gain in the 25% group), or (iii) a 28% rate gain distribution (which would be taxed as long-term capital gain in the 28% group). (If no designation is made, the entire designated capital gain divided will be treated as a 28% rate gain distribution. For a discussion of the 20%, 25% and 28% tax rates applicable to individuals, see "1997 Act Changes to Capital Gain Taxation" below). IRS Notice 97-64 also provides that a REIT must determine the maximum amounts that it may designate as 20% and 25% rate capital gain dividends by performing the -112- computation required by the Code as if the REIT were an individual whose ordinary income were subject to a marginal tax rate of at least 28%. The Notice further provides that designations made by the REIT will be effective only to the extent that they comply with Revenue Ruling 89-91, which requires that distributions made to different classes of shares be composed proportionately of dividends of a particular type. Distributions that exceed current and accumulated earnings and profits will not be taxable to a United States Shareholder to the extent that they do not exceed the adjusted basis of the shareholder's shares, but rather will reduce the shareholder's adjusted basis in the shares. To the extent that such distributions exceed a shareholder's adjusted basis in its shares they will be included in income as gain realized from the sale of the shares, assuming the shares are a capital asset in the hands of the shareholder. In addition, any dividend declared by the Company in October, November or December of any year payable to a United States Shareholder of record on a specified date in any such month shall be treated as both paid by the Company and received by the shareholder on December 31 of such year, provided that the dividend is actually paid by the Company during January of the following calendar year. United States Shareholders may not include in their individual income tax returns any net operating losses or capital losses of the Company. The Company will be treated as having sufficient earnings and profits to treat as a dividend any distribution by the Company up to the amount required to be distributed in order to avoid imposition of the 4% excise tax discussed under "Taxation of the Company--General" and "Annual Distribution Requirements" above. As a result, shareholders may be required to treat as taxable dividends certain distributions which would otherwise result in a tax-free return of capital. Furthermore, any "deficiency dividend" will be treated as a "dividend" (an ordinary dividend or a capital gain dividend, as the case may be), regardless of the Company's earnings and profits. United States Shareholders may not include in their individual income tax returns any net operating losses or capital losses of the Company. Instead, such losses would be carried over by the Company for potential offset against future income (subject to certain limitations). Distributions made by the Company and gain arising from the sale or exchange by a United States Shareholder of shares will not be treated as passive activity income, and, as a result, United States Shareholders generally will not be able to apply any "passive losses" against such income or gain. In addition, taxable distributions from the Company generally will be treated as investment income for purposes of the investment interest limitations. Capital gain dividends and capital gains from the disposition of shares (including distributions treated as such), however, will be treated as investment income only if the United States Shareholder so elects, in which case such capital gains will be taxed at ordinary income rates. The Company will notify United States Shareholders after the close of the Company's taxable year as to the portions of distributions attributable to that year that constitute ordinary income, return of capital and capital gain. In general, any loss realized upon a sale or exchange of shares by a United States Shareholder who has held such shares for six months or less will be treated as a long-term or mid-term capital loss to the extent of capital gains dividends received by such shareholder from the Company with respect to such shares which were classified as long-term or mid-term capital gains. RECENT CHANGES TO CAPITAL GAIN TAXATION. The 1997 Act altered the taxation of capital gain income. Under the 1997 Act, individuals, trusts and estates that hold certain investments for more than eighteen months may be taxed at a maximum long-term capital gain rate of 20% on the sale or exchange of those investments. Individuals, trusts and estates that hold certain assets for more than one year but not more than eighteen months may be taxed at a maximum mid-term capital gain rate of 28% on the sale or exchange of those investments. The 1997 Act also established a maximum rate of 25% for "unrecaptured Section 1250 gain" for individuals, trusts and estates, special rules for "qualified five-year gain", and other changes to prior law. The 1997 Act allowed the IRS to prescribe regulations on how the 1997 Act's new capital gain rates will apply to sales of capital assets by "pass-through entities", which include REITs, and to sales of interests in "pass-through entities". Under the 1998 Act, the long-term capital gain rates apply to capital assets held more than one year, and the mid-term holding period has been eliminated for sales or exchanges after December 31, 1997. Shareholders are urged to consult with their own tax advisors with respect to the new rules contained in the 1997 Act and the 1998 Act. TAXATION OF TAX-EXEMPT SHAREHOLDERS Distributions from the Company to certain tax-exempt employees' pension trusts or other domestic tax-exempt Shareholders will not constitute "unrelated business taxable income" unless such a shareholder has borrowed to acquire or carry its stock of the Company or the shares are used by such shareholder in an unrelated trade or business. For taxable years beginning after December 31, 1993, qualified trusts that hold more than 10% -113- of the shares of the Common Stock may under certain circumstances be required to treat a certain percentage of dividends as unrelated business taxable income if the Company is "predominantly held" by qualified trusts. For these purposes, a qualified trust is any trust defined under Section 401(a) of the Code and exempt from tax under Section 501(a) of the Code. The Company would be "predominantly held" if one or more qualified trusts, each owning more than 10% of the shares of Common Stock were to hold more than 50% of the shares of Common Stock in the aggregate. In such a circumstance, any qualified trust that owned more than 10% of the shares of Common Stock might be required to treat a certain portion of the dividends paid as unrelated business taxable income. TAXATION OF FOREIGN SHAREHOLDERS The rules governing United States federal income taxation of nonresident alien individuals, foreign corporations, foreign partnerships and other foreign shareholders (collectively, "Foreign Shareholders") are complex, and no attempt will be made herein to provide more than a summary of such rules. PROSPECTIVE FOREIGN SHAREHOLDERS SHOULD CONSULT WITH THEIR OWN TAX ADVISORS TO DETERMINE THE IMPACT OF FEDERAL, STATE AND LOCAL INCOME TAX LAWS WITH REGARD TO AN INVESTMENT IN THE COMPANY, INCLUDING ANY REPORTING REQUIREMENTS. Distributions by the Company that are not attributable to gain from sales or exchanges by the Company of United States real property interests and not designated by the Company as capital gains dividends will be treated as dividends of ordinary income to the extent that they are made out of current or accumulated earnings and profits of the Company. Such distributions ordinarily will be subject to a withholding tax equal to 30% of the gross amount of the distribution, unless an applicable tax treaty reduces or eliminates that tax. If income from the investment in the shares is treated as effectively connected with the conduct by the Foreign Shareholder of a United States trade or business, however, the Foreign Shareholder generally will be subject to a tax at graduated rates in the same manner as United States Shareholders are taxed with respect to such dividends (and the income may also be subject to the 30% branch profits tax in the case of a Foreign Shareholder that is a foreign corporation). The Company will withhold United States income tax at the rate of 30% on the gross amount of any such dividends made to a Foreign Shareholder unless (i) a lower treaty rate applies, or (ii) the Foreign Shareholder files an IRS Form 4224 with the Company certifying that the investment to which the distribution relates is effectively connected with a United States trade or business of such Foreign Shareholder. Lower treaty rates applicable to dividend income may not necessarily apply to dividends from a REIT such as the Company, however. Distributions in excess of current or accumulated earnings and profits of the Company will not be taxable to a Foreign Shareholder to the extent that they do not exceed the adjusted basis of the Foreign Shareholder's shares, but rather will reduce the adjusted basis of a Foreign Shareholder's shares. To the extent that such distributions exceed the adjusted basis of a Foreign Shareholder's shares, they will give rise to gain from the sale or exchange of its stock, the tax treatment of which is described below. As a result of a legislative change made by the Small Business Job Protection Act of 1996, it appears that the Company will be required to withhold 10% of any distribution in excess of the Company's current and accumulated earnings and profits. Consequently, although the Company intends to withhold at a rate of 30% on the entire amount of any distribution (or a lower applicable treaty rate), to the extent that the Company does not do so, any portion of a distribution not subject to withholding at a rate of 30% (or a lower applicable treaty rate) will be subject to withholding at a rate of 10%. However, the Foreign Shareholder may seek a refund of such amounts from the IRS if it is subsequently determined that such distribution was, in fact, in excess of current or accumulated earnings and profits of the Company, and the amount withheld exceeded the Foreign Shareholder's United States tax liability, if any, with respect to the distribution. Distributions that are designated by the Company at the time of distribution as capital gains dividends (other than those arising from the disposition of a United States real property interest) generally will not be subject to taxation, unless (i) investment in the shares is effectively connected with the Foreign Shareholder's United States trade or business, in which case the Foreign Shareholder will be subject to the same treatment as United States Shareholders with respect to such gain (except that a Foreign Shareholder that is a foreign corporation may also be subject to the 30% branch profits tax), or (ii) the Foreign Shareholder is a nonresident alien individual who was present in the United States for 183 days or more during the taxable year and has a tax home in the United States, in which case the nonresident alien individual will be subject to a 30% tax on the capital gains. -114- For any year in which the Company qualifies as a REIT, distributions that are attributable to gain from the sale or exchange by the Company of a United States real property interest will be taxed to a Foreign Shareholder under the provisions of the Foreign Investment in Real Property Tax Act of 1980 ("FIRPTA"). Under FIRPTA, these distributions are taxed to a Foreign Shareholder as if such gain were effectively connected with a United States trade or business conducted by the Foreign Shareholder. Foreign Shareholders would thus be taxed at the same capital gain rates applicable to United States Shareholders (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). Also, distributions subject to FIRPTA may be subject to a 30% branch profits tax in the hands of a foreign corporate shareholder not entitled to treaty exemption. The Company is required by applicable IRS regulations to withhold 35% of any distribution that could be designated by the Company as a capital gain dividend. This amount is creditable against the Foreign Shareholder's FIRPTA tax liability. If the Company is a "domestically-controlled REIT," a sale of Common Stock by a Foreign Shareholder generally will not be subject to United States taxation. A "domestically-controlled REIT" is a REIT in which, at all times during a particular testing period (generally five years preceding the sale in issue), less than 50% of the value of the REIT's shares are held directly or indirectly (taking into consideration attribution rules) by Foreign Shareholders. Because the Common Stock will be publicly traded, no assurance can be given that the Company will constitute a domestically-controlled REIT. Notwithstanding the foregoing, capital gain from the sale of stock of a domestically-controlled REIT not subject to FIRPTA will be taxable to a Foreign Shareholder (under rules generally applicable to United States Shareholders) if such person is in the United States for 183 days or more during the taxable year of disposition and certain other conditions apply. If the Company is not a domestically-controlled REIT, whether a sale of Common Stock would be subject to tax under FIRPTA as a sale of a United States real property interest would depend on whether the Common Stock is "regularly traded" (as defined by applicable Treasury Regulations) on an established securities market (e.g., the AMEX and the PCX, on which the Common Stock is listed) and whether the selling shareholder held, directly or indirectly, more than 5% of the Common Stock during the five-year period ending on the date of disposition. Arguably, the applicable Treasury Regulations defining "regularly traded" for this purpose provide that the shares of Common Stock will not be "regularly traded" for any calendar quarter during which 100 or fewer persons (treating related persons as one person) in the aggregate own 50% or more of the shares of Common Stock. If this interpretation is correct, and the Company did not at the time constitute a domestically-controlled REIT, a Foreign Shareholder (without regard to its ownership percentage of Common Stock) will be subject to federal income tax with respect to gain realized on any sale or other disposition of Common Stock that occurs within a calendar quarter during which 50% or more of the Common Stock is so owned. If the gain on the sale of the Common Stock is subject to taxation under FIRPTA, the Foreign Shareholder will be subject to the same treatment as a United States Shareholder with respect to such gain (subject to applicable alternative minimum tax and a special alternative minimum tax in the case of nonresident alien individuals). In any event, a purchaser of Common Stock from a Foreign Shareholder will not be required under FIRPTA to withhold on the purchase price if the purchased Common Stock is "regularly traded" on an established securities market or if the Company is a domestically-controlled REIT. Otherwise, under FIRPTA the purchaser of Common Stock may be required to withhold 10% of the purchase price and remit such amount to the IRS. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING TAX The Company will report to its shareholders and the IRS the amount of dividends paid or deemed paid during each calendar year, and the amount of tax withheld, if any. UNITED STATES SHAREHOLDERS. Under certain circumstances, United States Shareholders owning Common Stock may be subject to backup withholding at a rate of 31% on payments made with respect to, or cash proceeds of a sale or exchange of, Common Stock. Backup withholding will apply only if the shareholder (i) fails to furnish the Company with its Taxpayer Identification Number ("TIN") which, for an individual, would be his Social Security Number, (ii) furnishes the Company with an incorrect TIN, (iii) is notified by the IRS that it has failed properly to report payments of interest and dividends, or (iv) under certain circumstances, fails to certify, under penalty of perjury, that it has furnished a correct TIN and has not been notified by the IRS that it is subject to backup withholding for failure to report interest and dividend payments. Backup withholding will not apply with respect to payments made to certain exempt recipients, such as tax-exempt organizations. United States Shareholders should consult their own tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining such an exemption. Backup withholding is not an additional tax. Rather, the amount of -115- any backup withholding with respect to a payment to a United States Shareholder will be allowed as a credit against such United States Shareholder's United States federal income tax liability and may entitle such United States Shareholder to a refund, provided that the required information is furnished to the IRS. FOREIGN SHAREHOLDERS. Additional issues may arise pertaining to information reporting and backup withholding with respect to Foreign Shareholders, and Foreign Shareholders should consult their tax advisors with respect to any such information reporting and backup withholding requirements. Backup withholding with respect to Foreign Shareholders is not an additional tax. Rather, the amount of any backup withholding with respect to a payment to a Foreign Shareholder will be allowed as a credit against any United States federal income tax liability of such Foreign Shareholder. If withholding results in an overpayment of taxes, a refund may be obtained provided that the required information is furnished to the IRS. The United States Treasury has recently finalized regulations regarding the withholding and information reporting rules discussed above. In general, these regulations do not alter the substantive withholding and information reporting requirements, but unify certification procedures and forms and clarify and modify reliance standards. These regulations generally are effective for payments made after December 31, 1999, subject to certain transition rules. Valid withholding certificates that are held on December 31, 1999, will remain valid until the earlier of December 31, 2000, or the date of expiration of the certificate under rules currently in effect (unless otherwise invalidated due to changes in the circumstances of the person whose name is on such certificate). A Foreign Shareholder should consult its own advisor regarding the effect of the new Treasury Regulations. TAX ASPECTS OF THE OPERATING PARTNERSHIPS GENERAL. Substantially all of the Company's investments will be held indirectly through the Operating Partnerships, which in turn will own the Properties. In general, partnerships are "pass-through" entities that are not subject to federal income tax. Instead, partners receive an allocation of the items of income, gain, loss, deduction and credit of a partnership, and are potentially subject to tax on their distributive shares thereof, without regard to whether the partners actually receive a cash distribution from the partnership. The Company will include in its income its share of the foregoing partnership items for purposes of the various REIT income tests and in the computation of its REIT taxable income. See: "Partnership Allocations" below. Moreover, for purposes of the REIT asset tests, the Company will include its proportionate share of assets held directly or indirectly by the Operating Partnerships. See "Taxation of the Company". ENTITY CLASSIFICATION. If the Operating Partnerships were treated as an association taxable as a corporation instead of as a partnership, it would be taxable as a corporation and therefore subject to an entity-level tax on its income. In this event, the character of the Company's assets and items of gross income would change and would preclude the Company from satisfying the asset-related tests and the income tests (see "FEDERAL INCOME TAX CONSIDERATIONS" --"Taxation of the Company--Asset Tests" and " Income Tests"), which in turn would prevent the Company from qualifying as a REIT. See "Failure to Qualify" above for a discussion of the effect of the Company's failure to meet such tests for a taxable year. The Operating Partnerships has not requested, nor does it intend to request, a ruling from the IRS that it will be treated as a partnership for federal income tax purposes. Instead, at the closing of the Reincorporation Merger, Graham & James LLP will deliver an opinion to the effect that, based on the provisions of the Operating Partnership Agreement, and certain factual assumptions and representations described in the opinion, the Operating Partnerships will be treated as a partnership for federal income tax purposes. Unlike a private letter ruling, an opinion of counsel is not binding on the IRS, and no assurance can be given that the IRS will not challenge the status of the Operating Partnerships as a partnership for federal income tax purposes. If such challenges were sustained by a court, the Partnership would be treated as a corporation for federal income tax purposes. PARTNERSHIP ALLOCATIONS. Although the provisions of a partnership agreement generally determine the partners' respective allocations of income and loss, such allocations will be disregarded for tax purposes if they do not have "substantial economic effect" under the requirements of Section 704(b) of the Code and the Treasury Regulations promulgated thereunder. If an allocation is not recognized for federal income tax purposes, the item subject to the allocation will be reallocated in accordance with the partners' interests in the partnership, which will be determined by taking into account all of the facts and circumstances relating to the economic arrangement of the partners with respect to such item. The allocations of taxable income and loss by the -116- Operating Partnerships are intended to comply with the requirements of Section 704(b) of the Code and the Treasury Regulations promulgated thereunder. TAX ALLOCATIONS WITH RESPECT TO CONTRIBUTED PROPERTIES. Section 704(c) of the Code requires all income, gain, loss and deduction attributable to appreciated or depreciated property that is contributed to a partnership in exchange for an interest in the partnership to be allocated for federal income tax purposes in a manner such that the contributor is charged with or benefits from the unrealized gain or unrealized loss inherent in the property at the time of the contribution. The amount of such unrealized gain or unrealized loss is generally equal to the difference between the fair market value of the contributed property at the time of contribution and the adjusted tax basis of such property at the time of contribution (a "Book-Tax Difference"). Such allocations are made solely for federal income tax purposes and do not affect the book capital accounts or other economic arrangements among the partners. The Partnership Agreement generally requires such allocations to be made in a manner consistent with the provisions of Section 704(c) of the Code. Treasury Regulations under Section 704(c) of the Code provide partnerships with a choice of several methods of accounting for a Book-Tax Difference, including retention of the "traditional method" or the election of certain alternative methods which would permit any distortions caused by a Book-Tax Difference to be entirely rectified on an annual basis or with respect to a specific taxable transaction such as a sale. Based on the foregoing, in general, if any asset contributed to or revalued by the Operating Partnerships is determined to have a fair market value which is greater than its adjusted tax basis, certain partners of the Operating Partnerships will be allocated lower amounts of depreciation deductions for tax purposes by the Operating Partnerships and increased taxable income and gain on sale. Such allocations will tend to eliminate the Book-Tax Difference over the life of the Operating Partnerships. However, the special allocation rules of Section 704(c) of the Code do not always entirely rectify the Book-Tax Difference on an annual basis or with respect to a specific transaction such as a sale. Thus, the Company may be allocated lower depreciation and other deductions, and possibly greater amounts of taxable income in the event of a sale of contributed assets, and such amounts may be in excess of the economic or book income allocated to it as a result of such sale. Such an allocation might cause the Company to recognize taxable income in excess of cash proceeds, which might adversely affect the Company's ability to comply with the REIT distribution requirements. See "--Requirements for Qualification--Annual Distribution Requirements". Any property purchased or constructed by the Operating Partnerships subsequent to the Berg Acquisition will initially have a tax basis equal to its cost, and Section 704(c) of the Code will not apply. Depreciation with respect to such property will be allocated for book and tax purposes pro rata to each partner. Upon the disposition of any Properties with a Book-Tax Difference for an amount greater than the adjusted tax basis, book gain will be allocated to the Limited Partners and the Company to the extent of any prior special allocations of depreciation with respect to such Properties, then pro rata to each Partner. In addition, tax gain with respect to such Properties will be allocated to the Limited Partners to the extent of the remaining Book-Tax Difference, then pro-rata to each partner. On any subsequently purchased property, gain for tax and book purposes will be allocated pro rata to each Partner. BASIS IN PARTNERSHIP INTEREST. The Company's adjusted tax basis in its interest in the Operating Partnerships generally (i) will be equal to the amount of cash and the basis of any other property contributed to the Operating Partnerships by the Company, (ii) will be increased by its allocable share of (a) the Operating Partnerships' income, and (b) the indebtedness of the Operating Partnerships, and (iii) will be reduced, but not below zero, by the Company's allocable share of (a) the Operating Partnerships' losses and (b) the amount of cash distributed to the Company by the Operating Partnerships, and by constructive distributions resulting from a reduction in the Company's share of indebtedness of the Operating Partnerships. If the allocation of the Company's distributive share of the Operating Partnerships' loss will reduce the adjusted tax basis of the Company's partnership interest in the Operating Partnerships below zero, the recognition of such loss will be deferred until such time as the recognition of such loss would not reduce the Company's adjusted tax basis below zero. To the extent that the Operating Partnerships' distributions, or any decrease in the Company's share of the nonrecourse indebtedness of the Operating Partnerships (such decreases being considered a constructive cash distribution to the partners) exceeds the Company's adjusted tax basis, such distributions will constitute taxable income to the Company. Such taxable income will normally be characterized as a capital gain, and if the Company's partnership interest in the Operating Partnerships has been held for longer than the long-term capital gain holding period, the distribution will constitute a long-term capital gain. -117- SALE OF THE OPERATING PARTNERSHIPS' PROPERTY. Any gain realized by the Operating Partnerships on the sale of property held for more than one year will generally be mid-term capital gain, long-term capital gain or unrecaptured Section 1250 gain, except for any portion of such gain that is treated as depreciation or cost recovery recapture, in accordance with the rules described above. See "--Taxation of United States Shareholders--1997 Act Changes to Capital Gain Taxation." The Operating Partnerships intends to hold the Properties for investment with a view to long-term appreciation, to engage in the business of acquiring, developing, owning, and operating the Properties and additional properties, and to sell a Property when such sale is consistent with the Operating Partnerships' investment objectives. See "POLICIES WITH RESPECT TO CERTAIN ACTIVITIES". FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION MERGER. The Company has been advised by Graham & James LLP that, for federal income tax purposes, no gain or loss will be recognized by the holders of Common Stock or options to purchase Common Stock as a result of the consummation of the Reincorporation Merger. Each holder of Common Stock will have the same basis in the New Common Stock received pursuant to the Reincorporation Merger as he had in the Common Stock held immediately prior to the Reincorporation Merger, and his holding period with respect to the New Common Stock will include the period during which he held the corresponding Common Stock, so long as the Common Stock was held as a capital asset at the time of consummation of the Reincorporation Merger. The Company has also been advised by Graham & James LLP that the Company will not recognize gain or loss for federal income tax purposes as a result of the Reincorporation Merger, and that Mission West-Maryland will succeed without adjustment to the tax attributes of the Company. The Company is currently subject to state income taxation in California. If the Reincorporation Merger is approved, Mission West-Maryland may be subject to California state income tax. OTHER TAX CONSEQUENCES The Company and its shareholders may be subject to state or local taxation in various state or local jurisdictions, including those in which it or they transact business or reside. The state and local tax treatment of the Company and its shareholders may not conform to the federal income tax consequences discussed above. Consequently, prospective shareholders should consult their own tax advisors regarding the effect of state and local tax laws on an investment in the Company. -118- ERISA CONSIDERATIONS GENERAL In evaluating the effect of the UPREIT Transactions, a fiduciary of a qualified profit-sharing, pension or stock bonus plan, including a plan for self-employed individuals and their employees or any other employee benefit plan (a "Plan") subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), should consider (a) whether the ownership of Common Stock is in accordance with the documents and instruments governing such Plan; (b) whether the ownership of Common Stock is consistent with the fiduciary's responsibilities and satisfies the requirements of Part 4 of Title I of ERISA (where applicable) and, in particular, the diversification, prudence and liquidity requirements of Section 404 of ERISA; (c) the effect in the unlikely event that the Company's assets are treated as assets of the Plan; and (d) the need to value the assets of the Plan annually. The fiduciary investment considerations summarized below provide a general discussion that does not include all the fiduciary investment considerations relevant to a Plan. This summary is based on the current provisions of ERISA and the Code and regulations and rulings thereunder and both of which may be changed (perhaps adversely and with retroactive effect) by future legislative, administrative or judicial actions. This discussion should not be construed as legal advice and prospective purchasers of Common Stock should consult with and rely upon their own advisors in evaluating these matters in light of their own personal circumstances. PLAN ASSETS REGULATIONS Under Department of Labor ("DOL") regulations determining the assets of a Plan for purposes of ERISA and the related prohibited transaction excise tax provisions of the Code (the "Plan Asset Regulation"), when a Plan makes an equity investment in another entity, the underlying assets of that entity will not be considered assets of the Plan if the equity interest is a "publicly-offered security." For purposes of the Plan Asset Regulation, a "publicly-offered security" is a security that is (a) "freely transferable," (b) part of a class of securities that is "widely held," and (C) part of a class of securities that is registered under section 12(b) or 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act"). The Common Stock has been registered under the Securities Act and the Exchange Act of 1934. The Plan Asset Regulation provides that a security is "widely held" only if it is a part of the class of securities that is owned by 100 or more investors independent of the issuer and of one another. A security will not fail to be "widely held" because the number of independent investors falls below 100 subsequent to the offering as a result of events beyond the control of the issuer. The Company expects the Common Stock to remain "widely held" upon the completion of the UPREIT Transactions. The Plan Asset Regulation provides that whether a security is "freely transferable" is a factual question to be determined on the basis of all the relevant facts and circumstances. The Plan Asset Regulation further provides that when a security is part of an offering in which the minimum investment is $10,000 or less, as is the case with the offering of the Common Stock, certain restrictions ordinarily will not, alone or in combination, affect the finding that such securities are "freely transferable." The Company believes that the restrictions imposed under the Charter on the transfer of the New Common Stock are limited to the restrictions on transfer generally permitted under the Plan Asset Regulation and are not likely to result in the failure of the New Common Stock to be "freely transferable." However, no assurance can be given that the DOL will not reach a contrary conclusion. Therefore, the Company believes that the Common Stock and the New Common Stock should be treated as "publicly-offered securities", under the Plan Asset Regulation and, accordingly, that the underlying assets of the Company should not be considered to be assets of any Plan investing in the Common Stock. GENERAL ERISA REQUIREMENTS ERISA generally requires that the assets of a Plan be held in trust and that the trustee, or an investment manager (within the meaning of Section 3(38) of ERISA), have exclusive authority and discretion to manage and control the assets of the Plan. As discussed above, under current law the assets of the Company do not appear likely to be assets of Plans receiving shares of Common Stock or New Common Stock as a result of the UPREIT Transactions. However, if the assets of the Company were deemed to be assets of Plans under ERISA, the -119- directors of the Company would likely be fiduciaries with respect to the Plans that invest in the Company and the prudence and other fiduciary standards set forth in ERISA would apply to the directors and to all investments made by the Company. Plan fiduciaries who make the decision to invest in the Common Stock could, under certain circumstances, be liable as co-fiduciaries for actions taken by the Company or the directors that do not conform to the ERISA standards for investments under Part 4 of Title I of ERISA. PROHIBITED TRANSACTIONS Section 406 of ERISA provides that Plan fiduciaries are prohibited from causing a Plan to engage in certain types of transactions. Section 406(a) prohibits a fiduciary from knowingly causing a Plan to engage directly or indirectly in, among other things: (a) a sale or exchange, or leasing, of property with a party in interest; (b) a loan or other extension of credit with a party in interest; (c) a transaction involving the furnishing of goods, services or facilities with a party in interest; or (d) a transaction involving the transfer of Plan assets to, or use of Plan assets by or for the benefit of, a party in interest. Additionally, Section 406 prohibits a Plan fiduciary from dealing with Plan assets in his own interest or for his own account, from acting in any capacity in any transaction involving the Plan on behalf of a party (or representing a party) whose interests are adverse to the interest of the Plan, and from receiving any consideration for his own account from any party dealing with the Plan in connection with a transaction involving Plan assets. Similar provisions in Section 4975 of the Code apply to qualified Plans, and to certain other plans and individual retirement arrangements not subject to ERISA. If the assets of the Company were deemed to be assets of a Plan, a director could be characterized as a fiduciary of the Plan under ERISA or the Code. A director's characterization as a fiduciary would cause him to be deemed as a "party in interest" under ERISA and a "disqualified person" under the Code with respect to a Plan (or other plan or individual retirement arrangement) receiving Common Stock, which could cause various transactions between the director and the Company to constitute prohibited transactions under ERISA and the Code. Moreover, if the assets of the Company were deemed to be assets of the Plans, transactions between the Company and parties in interest or disqualified persons with respect to any Plan (or other plan or individual retirement arrangement) that has invested in the Company could be prohibited transactions with respect to the Plan, unless a statutory or administrative exemption is available. If a prohibited transaction has occurred, certain of the parties involved in the transaction could be required to (a) undo the transaction, (b) restore to the Plan any profit realized on the transaction, (c) make good to the Plan any loss suffered by it as a result of the transaction and (d) pay an excise tax equal to fifteen percent of the "amount involved" in the transaction for each year in which the transaction remains uncorrected. If such transaction is not corrected within the "taxable period," as defined in Section 4975(f)(2) of the Code, the parties involved in the transaction could be required to pay an excise tax equal to 100% of the "amount involved." If the investment constituted a prohibited transaction under Section 408(e)(2) of the Code by reason of the Company engaging in a prohibited transaction with the individual who established an individual retirement arrangement ("IRA") or his beneficiary, the IRA would lose its tax-exempt status. The other penalties for prohibited transactions would not apply. REPORTING AND DISCLOSURE As part of the reporting and disclosure requirements applicable to Plans under ERISA and the Code, fiduciaries of a Plan are required to determine annually the fair market value of the assets of such Plan as of the close of such Plan's fiscal year and to file annual reports valuing such assets. Since the Common Stock and New Common Stock are or will be listed on the AMEX (and that the assets of the Company will not be deemed to be assets of the Plans) and are expected to be trading on the AMEX following consummation of the UPREIT Transactions, the requirements for valuation should be complied with by such listing and trading. -120- THE SELLING STOCKHOLDERS The following table sets forth the name and the number of shares of New Common Stock beneficially owned by the Stockholders listed below (the "Selling Stockholders") as of October 15, 1998, the number of shares of New Common Stock that may be offered by Selling Stockholders and the number and percentage of shares to be owned beneficially by the Selling Stockholders if the Selling Stockholders acquire all of the shares of Common Stock of the Company they have agreed to purchase in the Private Placement, all of those shares are exchanged in the Reincorporation Merger, and all of the shares of New Common Stock of the Selling Stockholders identified below are offered and sold as described herein. As a condition to receiving the Company's permission to offer and sell shares of New Common Stock hereby, each Selling Stockholder must agree not to offer or sell any of such shares upon three days' notice from the Company that it would be detrimental to the Company or its stockholders for any Selling Stockholder to offer or sell any such shares during the period set forth in the notice. As used herein "Selling Stockholders" includes donees and pledgees selling shares received from a named stockholder after the date of this prospectus. Except as otherwise described below, none of the Selling Stockholders has held any office with, been employed by, or otherwise had a material relationship with, the Company or its affiliates since October __, 1995.
Percentage Shares of Number of of Common Stock Shares of Outstanding Name of Selling Beneficially Common Shares of Shareholder Owned Before Stock Common Offering (1) Offered Stock Hereby After Offering (2) - ----------------------- --------------- ------------ ------------ Thelmer Aalgaard (3) 152,973 70,000 4.9% Thomas and Karen Akin 111,111 111,111 * James H. and Edna J. 40,000 40,000 * Anderson Joseph Antizzo 15,000 15,000 * Ron Bender 16,668 5,556 * Carl and Mary Ann 77,333 50,000 * Berg (4) Howard Clowes 20,000 20,000 * Morty Cohen 55,556 55,556 * Miriana Cotton 55,000 55,000 * John J. Dougherty 25,000 25,000 * Draeger Trust A 55,000 55,000 * Draeger Trust C 65,000 65,000 * Bancorp Equities 20,000 20,000 * John B. Estill, 8,892 8,892 * Co-Trustee of The John and Teresa Estill 1977 Trust Harry L. Fox 10,000 10,000 * Richard S. Frary 110,000 110,000 * Hugh Fraser 12,000 12,000 * Ian Fraser 5,000 5,000 * William S. Friedman 80,000 80,000 * Tom Furlong 5,000 5,000 * Thomas Gipson 200,000 200,000 * James Greenleaf 11,000 11,000 * Jennifer Greenleaf 11,000 11,000 * Lewis Greenleaf 142,500 142,500 * Victoria Greenleaf 11,000 11,000 * Richard and Catherine 10,000 10,000 * Guerin Jeff Harris 45,000 45,000 * Leo Helzel (5) 437,000 437,000 * Lawrence B. Helzel 180,000 80,000 * Michael H. Weed and 25,000 25,000 * Patricia A. Hurley Ingalls & Snyder 1,125,067 1,125,067 * Value Partners, L.P. (6) Investors Forum 25,000 25,000 * Klaus Jander 20,000 20,000 * Scott Katzmann 11,100 11,100 * Helzel Kirshman 100,000 100,000 * Joseph A. Klein 15,000 15,000 * Michael Knapp (7) 94,733 60,000 * Joe Kos 11,000 11,000 * Aaron Kozak Rev. Trust 50,000 50,000 * Lawton Lamb 11,000 11,000 * Legion Fund #2 31,500 31,500 * Donald M. Liddell, Jr. 100,000 100,000 * Marlin Concepts, Inc. 156,942 39,609 * (8) Paul McCarthy (9) 430,000 430,000 * Dan McCarthy 100,000 100,000 * Meyer Family Trust 1,000,000 1,000,000 * (10) John B. and Beverly 9,000 9,000 * J. Miles John S. Moran 200,000 200,000 * William M. Moran 5,000 5,000 * MSR Capital Partners 200,000 200,000 * Michael O'Rosky (11) 43,300 22,000 * Ivan Poutiatine 111,000 111,000 * Lochiel Poutiatine 11,000 11,000 * Michael Pouiatine 55,000 55,000 * Prism Partners I, LP 418,500 418,500 * (12) Katherine Ray 100,000 100,000 * Antonio Rigoni 18,445 18,445 * Katharine P. Simmons 39,000 16,000 * Reed Simmons 39,000 39,000 * Evelyn Slavin 11,000 11,000 * Talkot Crossover Fund 22,222 222,222 * LP Arnie Toren 10,000 10,000 * Dean Witter, Cust. 15,000 15,000 * FBO Lindell Van Dyke IRA 112-122618-054 Lindell and Lynn Van 25,000 25,000 * Dyke Jeffrey Warmoth 25,000 25,000 * David Wollersheim 4,000 4,000 * Rev. Tr. Marlene Zielinski 25,000 25,000 * Ray Zielinski 33,000 33,000 *
-121- (1) Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission which generally attribute beneficial ownership of securities to persons who possess sole or shared voting power and/or investment power with respect to those securities which such person has the right to acquire beneficial ownership within 60 days of October 15, 1998. Unless otherwise indicated, the persons or entities identified in the table have sole voting and investment power with respect to all shares shown beneficially owned by them. The numbers do not include shares of Common Stock which may be acquired by exchange of L.P. Units, which generally cannot occur within 60 days. (2) Less than one percent of outstanding shares of Common Stock indicated by "*". The number of shares indicated for certain selling Stockholders includes the number of shares which they have agreed to purchase in a private placement of 6,495,058 shares of the Common Stock at $4.50 per share (the "Private Placement") which is subject to shareholder approval. Such Stockholders percentage ownership reflects such shares as outstanding. (3) Mr. Aalgaard is a director and employee of Berg & Berg Enterprises, Inc., an affiliate of Carl E. Berg. Includes (i) 33,400 shares held of record by Carl E. Berg, Trustee, Berg & Berg Profit Sharing Plan FBO Thelmer G. Aalgaard Dated 1/1/84, (ii) 4,160 shares held of record by Carl E. Berg, Trustee, Berg & Berg Profit Sharing Plan FBO Thelmer G. Aalgaard Dated 1/1/84, 1997 Contribution, (iii) 2,220 shares held of record by Thelmer G. Aalgaard, Custodian, Rachel Michaels, Under the California Uniform Gifts to Minor Act, and (iv) 70,000 shares which Mr. Aalgaard has agreed to purchase in the Private Placement. (4) Mr. Berg is an officer and director of the Company and of Berg & Berg Enterprises, Inc. Includes 27,333 shares of Common Stock held of record by Berg & Berg Enterprises, Inc., of which Mr. Berg disclaims beneficial ownership except as to his pecuniary interest therein. Mr. Berg is a principal shareholder of the Company. See "Principal Stockholders," footnotes 8, 9 and 10. (5) Mr. Helzel is a principal shareholder of the Company. See "Principal Stockholders," footnote 17. (6) Ingalls & Snyder Value Partners, L.P. is a principal shareholder of the Company. See "Principal Stockholders," footnote 15. (7) Mr. Knapp was formerly an officer and director of the Company. Mr. Knapp is currently an officer of Berg & Berg Enterprises, Inc., an affiliate of Carl E. Berg. Includes (i) 3,333 shares held of record by Carl E. Berg, Trustee, Berg & Berg Enterprises, Inc. 401K FBO Michael L. Knapp Dated 1/1/84, (ii) 2,000 shares held of record by Michael L. Knapp, Custodian, Ryan Michael Knapp Under the California Uniform Gifts to Minor Act, (iii) 2,000 shares held of record by Michael L. Knapp, Custodian, Kayla Marie Knapp Under the California Uniform Gifts to Minor Act and (iv) 60,000 shares which Mr. Knapp has agreed to purchase in the Private Placement of the Company. (8) Includes (i) 9,333 shares held of record by Carl E. Warden SEP/IRA and (ii) 39,609 shares held of record by Marlin Concepts, Inc. which Mr. Warden has agreed to purchase in the Private Placement. Mr. Warden is a principal shareholder of the Company. See "Prinicpal Stockholders." (9) Mr. McCarthy is a principal shareholder of the Company. See "Principal Stockholders," footnote 18 (10) The Meyer Family Trust is a principal shareholder of the Company. See "Principal Stockholders." (11) Mr. O'Rosky is an employee of Berg & Berg Enterprises, Inc., an affiliate of Carl E. Berg. Mr. O'Rosky is also the son-in-law of Clyde J. Berg, who is a director of Berg & Berg Enterprises, Inc. and brother of Carl E. Berg. Includes (i) 4,000 shares held of record by Michael J. O'Rosky, Custodian, Mason Michael O'Rosky, Under the California Uniform Gifts to Minor Act; (ii) 4,000 shares held of record by Michael J. O'Rosky, Custodian, Hannah Rae O'Rosky, Under the California Uniform Gifts to Minor Act; and (iii) 22,000 shares which Mr. O'Rosky has agreed to purchase in the Private Placement. (12) Prism Partners I, L.P. is a principal shareholder of the Company. See "Principal Stockholders," footnote 16. -122- PLAN OF DISTRIBUTION The Selling Stockholders may offer their shares of Common Stock at various times on any of the United States securities exchanges where the Common Stock is listed and traded, including the AMEX and the PCX; in transactions other than on such exchanges; in connection with short sales of the shares of Common Stock; by pledge to secure debts and other obligations; or in a combination of any of the foregoing transactions. The Selling Stockholders may sell their shares of Common Stock at market prices prevailing at the time of sale, at prices related to such prevailing market prices, at negotiated prices or at fixed prices. The Selling Stockholders may use broker-dealers to sell the shares of Common Stock. If this happens, broker-dealers will either receive discounts or commissions from the Selling Stockholders, or they will receive commissions from purchasers for whom they acted as agents. -123- LEGAL MATTERS The validity of the shares of New Common Stock offered hereby, as well as certain tax matters described under "Federal Income Tax Considerations", will be passed upon for the Company by Graham & James LLP. A partner of Graham & James LLP, who is rendering services with respect to the UPREIT Transactions, owns 12,333 shares of Common Stock. Graham & James LLP will rely on the opinion of Ballard Spahr Andrews & Ingersoll, LLP, Baltimore, Maryland, as to certain matters of Maryland law. EXPERTS The consolidated financial statements of the Company incorporated in the Proxy Statement / Prospectus by reference to the Annual Report on Form 10-K for the period ended December 31, 1997 and the Combined Financial Statements for the Berg Properties as of December 31, 1997 and 1996, and for the three years in the period ended December 31, 1997, the Combined Statement of Revenue and Certain Expenses of Fremont Properties for the year ended December 31, 1997 and the Statements of Revenue and Certain Expenses for the Kontrabecki Properties for the years ended December 31, 1997, 1996 and 1995 included in this Proxy Statement / Prospectus have been audited by PricewaterhouseCoopers LLP, independent accountants. Such financial statements have been included in reliance upon the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. The financial statements as of November 30, 1996 and for each of the two years then ended incorporated in this Prospectus by reference to Mission West Properties' Annual Report on Form 10-K for the year ended December 31, 1997, have been so incorporated in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting. In addition, certain statistical and other information under the captions "THE BUSINESS OF BERG & BERG--Regional Economic Profile and The Silicon Valley R&D Property Market" has been prepared by BT Commercial Real Estate, and is included herein in reliance upon the authority of such firm as an expert in, among other things, real estate consulting and economics. OTHER MATTERS No other matters will be presented for action at the Special Meeting. SHAREHOLDER PROPOSALS Pursuant to Rule 14a-8 under the Exchange Act, the Company shareholders may present proper proposals for inclusion in the Company's proxy statement and for consideration at the next annual meeting of its shareholders by submitting such proposals to the Company in a timely manner. In order to be so included for the 1998 annual meeting, shareholder proposals must be received by the Company at a reasonable time (which the Company considers to be at least 30 days) before the Company mails the proxy statement to shareholders. -124- GLOSSARY "ACMs" means asbestos-containing materials. "Acquired Properties" means the approximately .56 million rentable square feet of R&D Properties, consisting of the Kontrabecki Properties and the Fremont Properties, to be acquired by the Operating Partnerships at the closing of the Berg Acquisition. "Acquisition Agreement" means the agreement dated as of May 14, 1998, among the Partnership, the other partnerships comprising the Operating Partnerships, all of the partners therein, and the Company concerning the acquisition of the Berg Properties, the Acquired Properties and the Pending Development Projects by the Operating Partnerships, the Company's investment in and admission to the Operating Partnerships as sole general partner, the rights and options of the limited partners in the Operating Partnerships to tender L.P. Units or acquire shares of Common Stock under certain circumstances, and the rights of the Berg Group to appoint the Berg Group Board Representatives and receive other board of directors approval rights. "Adjusted Pro Forma Funds from Operations" means FFO as of the date of the Pro Forma financial statements adjusted for net increases in rental income and tenant reimbursements from new leases and renewals that went into effect between October 1, 1997 and March 15, 1998. "Affiliate" means a person or entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, another person or entity. "Amdahl Properties" means an office complex of five buildings located in the Oakmead Business Park in Sunnyvale, California and two additional buildings located in Santa Clara, California leased by the Operating Partnerships to Amdahl Corporation. "AMEX" means the American Stock Exchange. "Annual Base Rent" means gross rent for the calendar year excluding payments by tenants on account of real estate taxes, operating expenses and utility expenses. "Apple Properties" means four buildings at three locations in Cupertino, California leased by the Operating Partnerships to Apple Computer, Inc. "Audit Committee" means the audit committee of the Board of Directors. "BBE" means Berg & Berg Enterprises, Inc., an affiliate of Carl E. Berg and Clyde J. Berg. "Berg & Berg" means Berg & Berg Developers, a general partnership consisting of Carl E. Berg and Clyde J. Berg. "Berg Acquisition" means the series of transactions in which MWP L.P., MWP L.P. I, MWP L.P. II, and MWP L.P. III will become the Operating Partnerships, the Operating Partnerships will acquire the Acquired Properties, and the Company will become the sole general partner of the Operating Partnerships. "Berg Group" means Carl E. Berg, Clyde J. Berg, the members of their respective Immediate Families, and certain entities controlled by Carl E. Berg and/or Clyde J. Berg which are BBE, Baccarat Cambrian Partnership, Baccarat Fremont Developers LLC, and DeAnza Office Partners. "Berg Group Board Representative(s)" means one or both of the two members of the Company's board of directors appointed by the Berg Group pursuant to rights acquired in connection with the Berg Acquisition. "Berg Land Holdings" means the parcels of undeveloped land known as "King Ranch," "Hillyer & Piercy," and "Fremont & Cushing," which certain members of the Berg Group own or have rights to acquire. "Berg Land Holdings Option Agreement" means the agreement pursuant to which the Berg Group members that own or hold options to acquire the Berg Land Holdings have granted the Company and the Operating Partnerships an option to acquire completed and leased buildings constructed on the Berg Land Holdings. -125- "Berg Properties" means complexes, including 59 separate buildings aggregating approximately 3.78 million rentable square feet located in the Silicon Valley and owned by the Berg Group prior to the Berg Acquisition. "Book-Tax Difference" means the difference between the fair market value of the contributed property at the time of contribution and the adjusted tax basis of such property at the time of contribution. "BT Commercial" means BT Commercial Real Estate. "Built-in Gain" means the excess of the fair market value of assets as of the beginning of the Recognition Period over the Company's adjusted basis in assets as of the beginning of the Recognition Period. "Cash Available for Distribution" means Funds from Operations (FFO) less scheduled mortgage loan principal payments, leasing commissions paid and capital expenditures. "CGCL" means the California General Corporation Law. "Change of Control Transaction" shall mean (A) any transaction or series of transactions, in which all Limited Partners in the Operating Partnerships are legally entitled to participate and pursuant to which L.P. Units representing more than 50% of the total outstanding L.P. Units of the Operating Partnerships are purchased by a person not controlled by, in control of or under common control with the Company, any Affiliate of the Company or any Affiliate of a Limited Partner, (B) the merger or consolidation of the Partnership with another entity (other than a merger or consolidation in which the holders of L.P. Units of the Partnership immediately before the merger or consolidation own immediately after the merger or consolidation, voting securities of the surviving or acquiring entity or a parent party of such surviving or acquiring entity, possessing more than 50% of the voting power of the surviving or acquiring entity or parent party) resulting in the exchange of the outstanding L.P. Units of the Partnership for cash, securities or other property, or (C) any merger, sale, lease, license, exchange or other disposition (whether in one transaction or a series of related transactions) of more than 50% of the assets of the Partnership. "Charitable Beneficiary" means the beneficiary of the Trust. "Charter" means the articles of incorporation of Mission West-Maryland. "Cisco Properties" means two buildings, one in San Jose and one in Santa Clara, California, leased to Cisco Systems, Inc. "Code" means the Internal Revenue Code of 1986, as amended and in effect from time to time, as interpreted by the applicable regulations thereunder. Any reference herein to a specific section or sections of the Code shall be deemed to include a reference to any corresponding provision of future law. "Commission" means the Securities and Exchange Commission. "Common Stock" means common stock, no par value per share, of the Company, and also may refer to the New Common Stock issued by Mission West-Maryland pursuant to the Reincorporation. "Company" means Mission West Properties, a California corporation, and any successor to such corporation. "Compensation Committee" means the compensation committee of the Board of Directors. "Demand Note" means a 7.25% note issued by the Company to each of the Operating Partnerships in exchange for the Company's 12.11% general partnership interest in each of the Operating Partnerships in connection with the Partnership Closing. "DRULPA" means the Delaware Revised Uniform Limited Partnership Act. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "Excepted Holder" means any person exempted from the Ownership Limit by the board of directors, in its sole discretion, as provided in the Charter. "Exchange Act" means the Securities Exchange Act of 1934, as amended. -126- "Exchange Ratio" means the one-for-one basis for which shares of Common Stock will be exchanged for shares of New Common Stock. "Exchange Right" has the meaning set forth in the Exchange Rights Agreement. "Exchange Rights Agreement" means the Exchange Rights Agreement among the Company, the partnerships comprising the Operating Partnerships and each of the limited partners therein, as provided in the Acquisition Agreement. "Excluded Properties" means certain R&D Properties that are not managed by any member of the Berg Group or are not material to the Company which are not being contributed to the Operating Partnerships, including the Company's headquarters located at 10050 Bandley Drive, Cupertino, California. "FFO" means Funds from Operations defined in accordance with the resolution adopted by the Board of Governors of NAREIT in its March 1995 White Paper, net income (loss) computed in accordance with GAAP, excluding gains (or losses) from debt restructuring and sales of property, plus real estate related depreciation and amortization (excluding amortization of deferred financing costs), and after adjustments for unconsolidated partnerships and joint ventures. "Five-or-Fewer Test" means the test set out in the Code which requires that not more than 50% in value of a REIT's outstanding stock may be owned, directly or indirectly, by five or fewer individuals in order to qualify as a REIT. "Foreign Stockholders" means foreign corporations, foreign partnerships and other foreign stockholders of Mission West-Maryland. "Fully-Diluted" means the fully diluted shares of voting stock of the Company (including without limitation upon the exercise of all outstanding warrants, options, convertible securities and other rights to acquire voting stock of the Company, and all L.P. Units exchangeable or redeemable for Common Stock or other voting stock of the Company (without regard to any Ownership Limit). "GAAP" means United States generally accepted accounting principles, as in effect from time to time. "Immediate Family" means, with respect to any individual, such individual's spouse, parents, parents-in-law, children, nephews, nieces, brothers, sisters, brothers-in-law, sisters-in-law, stepchildren, sons-in-law and daughters-in-law or any trust solely for the benefit of any of the foregoing family members whose sole beneficiaries include the foregoing family members. "Independent Director" means a director of the Company who is not an employee, officer or affiliate of the Company or a subsidiary or division thereof, or a relative of a principal executive officer, and who is not an individual member of an organization acting as advisor, consultant or legal counsel, receiving compensation on a continuing basis from the Company in addition to directors' fees. "Independent Directors Committee" means the committee of the Company's board of directors comprised of the Independent Directors. "Ingalls & Snyder" means Ingalls & Snyder, LLC, a registered broker-dealer. "Interested Stockholder" means under the MGCL, any person who beneficially owns ten percent or more of the voting power of the corporation's shares or an affiliate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of ten percent or more of the voting power of the then-outstanding voting stock of the corporation. "IRS" means the Internal Revenue Service. -127- "Kontrabecki" means John Kontrabecki, the general partner of the Kontrabecki Partnerships. "Kontrabecki Partnerships" means the three limited partnerships that own the Kontrabecki Properties. "Kontrabecki Properties" means the Acquired Properties to be contributed by the Kontrabecki Partnerships. "Limited Partner(s)" means the limited partners of the three limited partnerships, Mission West Properties, L.P., MWP L.P. I and MWP L.P. II. "L.P. Unit Majority" means the Limited Partners holding the right to vote, in the aggregate, a majority of the total number of L.P. Units outstanding. "L.P. Units" means a fractional, undivided share of the partnership interests of all Limited Partners in the Partnership. "Look-Through Rule" means the ERISA rule providing that in certain circumstances where a Plan holds an interest in an entity, the assets of the entity are deemed to be the Plan's assets. "Market Price" means the closing price of a share of Common Stock (or other equity security of the Company) on the AMEX or any other principal exchange on which the Common Stock or other equity security is listed and traded. "Maryland Bylaws" means the proposed bylaws of Mission West-Maryland to be adopted by the stockholders pursuant to the Reincorporation Merger. "MGCL" means the Maryland General Corporation Law. "Merger Agreement" means the merger agreement between the Company and Mission West-Maryland to effect the Reincorporation Merger. "Mission West-Maryland" means the corporation formed under the laws of the State of Maryland to facilitate the Reincorporation Merger. "MWEAC" means Mission West Executive Aircraft Center, Inc., a wholly-owned subsidiary of the Company which is inactive. "MWP" means Mission West Properties, L.P., formerly known as Berg Properties, L.P. "MWP I" means Mission West Properties, L.P. I, formerly known as Berg & Berg Developers, L.P. "MWP II" means Mission West Properties, L.P. II, formerly known as Berg Family Partners, L.P. "Named Executives" means the Company's president and four other most highly compensated executive officers whose annual salary is expected to exceed $100,000. "NAREIT" means the National Association of Real Estate Investment Trusts. "Net Absorption" means, with respect to a specified market area, the net increase in occupied rentable space. "New Common Stock" means the common stock, par value $0.001 per share, of Mission West-Maryland. "New Equity Financing Rights" has the meaning set forth in Section 8.8 of the Operating Partnership Agreement. -128- "Office Lease" means the lease from the Berg Group to the Operating Partnerships relating to the Berg Group's headquarters located at 10050 Bandley Drive, Cupertino, California. "Operating Partnerships" means, collectively, Mission West Properties, L.P., Mission West Properties, L.P. I and Mission West Properties, L.P. II, and Mission West Properties, L.P. III with offices at 10050 Bandley Drive, Cupertino, CA 95014, through which all of the Company's interests in the Properties will be held and real estate activities will be conducted. "Operating Partnership Agreement" means the limited partnership agreement of each of the limited partnerships comprising the Operating Partnerships, as amended from time to time, which is identical in all material respects for each limited partnership. "Option" means the option that the Company has to purchase any building developed by the Berg Group on the Berg Land Holdings for so long as the Berg Group owns or has the right to acquire shares representing 65% of the Common Stock on a Fully-Diluted basis. "Option Agreement" means the agreement pursuant to which the Company and the Operating Partnerships have an option to purchase the Berg Land Holdings, as well as rights of first refusal and rights of first offer relating thereto. "Option Plan" means the Company's 1997 Stock Option Plan approved by the Company's shareholders at a special meeting held on November 10, 1997. "Outstanding Shares" means only the total number of issued and outstanding shares of capital stock of the Company and plus the total number of L.P. Units of the Operating Partnerships outstanding from time to time. "Ownership Limit" means the restriction contained in the Charter of Mission West-Maryland providing that, subject to certain exceptions, no holder may own, or be deemed to own by virtue of the constructive ownership provisions of the Code, more than 9% of the outstanding shares of new Common Stock. "PCX" means the Pacific Exchange, Inc. "Pending Development Projects" means four Berg Group-owned R&D Property development projects which the Operating Partnerships has agreed to acquire upon their completion pursuant to the terms of the Acquisition Agreement and the related Pending Projects Option Agreement. "Pending Projects Acquisition Agreement" means an agreement pursuant to which the Company and the Operating Partnerships have an option to purchase each of the buildings in the Pending Development Projects once completed and fully leased. "Plan" means employee benefit plans and IRAs. "Plan Asset Regulations" means regulations issued by the United States Department of Labor defining "plan assets" and the related prohibited transaction excise tax provisions of the code. "Private Placement" means the offer and sale of 6,295,058 shares of Common Stock to accredited investors to be approved by shareholders at the Special Meeting. "Prohibited Owner" means a person, who by reason of a transfer of shares of stock of the Company, will beneficially or constructively own shares of stock of the Company in excess or in violation of the transfer and ownership restrictions contained in Charter provisions of Mission West-Maryland. "Properties" means the Berg Properties and the Acquired Properties, collectively. -129- "Protective Provisions Expiration Date" means the date on which the Berg Group and their Affiliates own less than 15% of the shares of Common Stock on a Fully-Diluted Basis. "Prudential" means The Prudential Insurance Company of America. "Prudential Secured Loan" means a $130 million mortgage loan obtained from The Prudential Insurance Company of America by the Operating Partnerships after the final closing of the Berg Group acquisition, which is secured by certain of the Properties and used to refinance existing obligations. "Proxy Statement/Prospectus" means this prospectus and proxy statement relating to the approval by the shareholders of the Company of the Berg Acquisition, the Private Placement, and the Reincorporation Merger. "Put Rights" means the right of certain Limited Partners to cause the Operating Partnerships to purchase a portion of a Limited Partner's L.P. Units at a purchase price based on the market value of the Common Stock. "R&D Property" or "R&D Properties" means property used primarily for office, research and development, light manufacturing, and assembly. "Reform Act" means the Private Securities Litigation Reform Act of 1995. "Registration Statement" means the Form S-4 Registration Statement to be filed with the Commission of which the Proxy Statement/Prospectus forms a part. "Regulations" means the final, temporary or proposed Income Tax Regulations promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations). "Reincorporation Merger" means the merger by the Company with and into Mission West-Maryland to effectuate a change in the Company's state of incorporation. "REIT" means a real estate investment trust as defined in Section 856 of the Code which meets the requirements for qualification as a REIT described in Sections 856 through 860 of the Code. "REIT Provisions" means Sections 856 through 860 of the code and the applicable Treasury Regulations. "REIT Requirements" means all of the requirements imposed under the Code on any entity seeking to qualify and remain qualified as a REIT. "REIT taxable income" means taxable income of a REIT. "Related Party Tenant" means a tenant of a REIT in which the REIT, or an owner of 10% or more of the REIT, actually or constructively owns a 10% or greater ownership interest. "Rentable square feet" means a building's usable area plus common areas and penetrations, expressed collectively in square feet which are allocated pro rata to tenants. "Required Directors" means a majority of the directors of the Company including Carl E. Berg or a director designated by Mr. Berg to replace him as a director. "Reverse Split" means the 1-for-30 reverse split on the Common Stock effective as of November 10, 1997. "Rule 144" means Rule 144 promulgated under the Securities Act, and "Rule 145(d)" refers to certain resale restrictions applicable to affiliates under Rule 145. "San Francisco Bay Area" means nine counties, including Santa Clara, Alameda, Contra Costa, Marin, Napa, San Francisco, San Mateo, Solano and Sonoma Counties, covering approximately 7,200 square miles. -130- "Securities Act" means the Securities Act of 1933, as amended. "Silicon Valley" means the southern portion of the San Francisco Bay Area, including portions of southeastern San Mateo County, southwestern Alameda County and Santa Clara County. "Silicon Valley R&D Properties" means R&D properties located in the Silicon Valley. "Special Meeting" means the Company's special meeting of shareholders to be held ______, 1998, at Cupertino, California, including any adjournments. "Stock Option Plan" means the Company's 1997 Stock Option Plan and any other plan adopted from time to time by the Company pursuant to which shares of Common Stock are issued, or options to acquire shares of Common Stock are granted, to consultant, employees or directors of the Company, the Operating Partnerships or their respective Affiliates in consideration for services or future services. "Subsidiary" means, with respect to any Person, any corporation, partnership or other entity of which a majority of (i) the voting power of the Voting Securities; or (ii) the outstanding equity interests, is owned, directly or indirectly, by such Person. "Tender Price" means the price per share of Common Stock at which L.P. Units have been tendered by a Limited Partner upon the exercise of its Put Rights. "Total Market Capitalization" means the market value of the outstanding Common Stock determined as if all outstanding L.P. Units had been converted into Common Stock, plus the market value of all other publicly traded securities of the Company outstanding from time to time, plus the total debt of the Company and the Operating Partnerships. "Treasury Regulations" means regulations of the U.S. Department of Treasury under the Code. "Triple net basis lease" means a lease pursuant to which a tenant is responsible for the base rent in addition to the costs and expenses in connection with and related to property taxes, insurance and repairs and maintenance applicable to the leased space. "Trust" means a charitable trust which Mission West-Maryland may create to obtain excess shares not transferable to the Prohibited Owner. "Trustee" means the trustee of the Trust. "United States Shareholder" means a holder of shares who is an individual who is a citizen or resident of the United States; a corporation, partnership or other entity created or organized in, or under the laws of, the United States or any State; an estate the income of which from sources without the United States is includable in gross income for United States federal income tax purposes; a trust the primary supervision of which is exercisable by a court within the United States and having one or more United States fiduciaries with authority to control all substantial decisions of such trust; and any person whose income or gain in respect of the stock is effectively connected with the conduct of a United States trade or business. "UPREIT Transactions" means the Berg Acquisition and the Reincorporation Merger. "Voting Rights Agreements" means the agreements covering all shares of Common Stock acquired in the September Private Placement and certain shares of Common Stock acquired in the November Private Placement pursuant to which the holders agreed to vote their shares of Common Stock as directed by Carl E. Berg on behalf of BBE, on all matters submitted to a vote of the shareholders of the Company for up to two years. "Wells Fargo Line" means a line of credit provided to the Berg Group members by Wells Fargo Bank N.A., which has been assumed by the Company and the Operating Partnerships. "Xilinx Sales" means sales of two R&D Properties by Berg & Berg to Xilinx Corporation in 1995. -131- MISSION WEST PROPERTIES INDEX TO FINANCIAL STATEMENTS ----------
Page ------ I. UNAUDITED PRO FORMA FINANCIAL STATEMENTS Pro Forma Balance Sheet as of September 30, 1998 FS-2 Pro Forma Statement of Operations for the nine months FS-3 ended September 30, 1998 Pro Forma Statement of Operations for the year ended FS-4 December 31, 1997 Notes and Management's Assumptions to Unaudited Pro Forma FS-5 Financial Statements II. COMBINED FINANCIAL STATEMENTS FOR THE BERG PROPERTIES Report of Independent Accountants FS-9 Combined Balance Sheets as of June 30, 1998 and 1997 and as of FS-10 December 31, 1997 and 1996 Combined Statements of Operations for the six month periods ended FS-11 June 30, 1998 and 1997 and for the years ended December 1996, and 1995 Combined Statements of Net Equity for the six month period ended FS-12 June 30, 1998 and for the years ended December 31, 1997, 1996 and 1995 Combined Statements of Cash Flows for the six month periods FS-13 ended June 30, 1998 and 1997 and for the years ended December 31, 1997, 1996 and 1995 Notes to Combined Financial Statements FS-14 III. FREMONT PROPERTIES Report of Independent Accountants FS-23 Combined Statement of Revenue and Certain Expenses for FS-24 the six month periods ended June 30, 1998 and 1997, and for the year ended December 31, 1997 Notes to Combined Statement of Revenue and Certain Expenses FS-25 IV. KONTRABECKI PROPERTIES Report of Independent Accountants FS-26 Combined Statements of Revenue and Certain Expenses for FS-27 the six month periods ended June 30, 1998 and 1997, and for the years ended December 31, 1997, 1996 and 1995 Notes to Combined Statement of Revenue and Certain Expenses FS-28
FS-1
MISSION WEST PROPERTIES PRO FORMA BALANCE SHEET (UNAUDITED) (IN THOUSANDS) ---------- Mission Pro Forma Pro Forma West Adjustments September Properties (Note 4) 30, 1998 September 30, 1998 ------------ ---------- ---------- ASSETS: Real Estate: Land $86,715 - $86,715 Building and improvements 422,043 - 422,043 ------------ ---------- ---------- 508,758 - 508,758 Less, accumulated depreciation (2,638) - (2,638) ------------ ---------- ---------- 506,120 - 506,120 Cash and cash equivalents 2,777 $31,269 34,046 Deferred rent receivable 752 - 752 Other assets, net 2,559 - 2,559 ============ ========== ========== TOTAL ASSETS 512,208 31,269 543,477 ============ ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY: Lines of credit 39,044 7,566 46,610 Mortgage notes payable 162,222 (4,625) 157,597 Mortgage notes payable (related parties) 18,780 - 18,780 Interest payable (related parties) 3,183 - 3,183 Security deposits 1,793 - 1,793 Prepaid rental income 3,127 - 3,127 Accounts payable and accrued expenses 3,375 - 3,375 ------------ ---------- ---------- TOTAL LIABILITIES 231,524 2,941 234,465 ------------ ---------- ---------- MINORITY INTEREST 273,740 - 273,740 SHAREHOLDERS' EQUITY: Preferred Stock, $0.001 par value, 20,000,000 authorized, none issued and outstanding on a pro forma basis - - - Common Stock, $0.001 par value, 200,000,000 authorized, 8,193,594 issued and outstanding on a pro forma basis - 8 8 Receivable from issuance of (941) - (941) Common Stock Additional paid in capital 27,596 28,320 55,916 Accumulated deficit in excess of dividends paid (19,711) - (19,711) ------------ ---------- ---------- TOTAL SHAREHOLDERS' EQUITY 6,944 28,328 35,272 ------------ ---------- ---------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $512,208 $31,269 $543,477 ============ ========== ==========
The accompanying notes and management's assumptions are an integral part of this statement. FS-2 MISSION WEST PROPERTIES PRO FORMA STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) ----------
Mission West The Berg The Acquired Properties Properties Properties Pro Forma Pro Forma September 30, June 30, 1998 June 30,1998 Adjustments September 30, 1998 (Note 3B) (Note 3A) (Note 4) 1998 --------------- --------------- --------------- --------------- --------------- REVENUE: Rent $13,317 $21,962 $3,301 $978 $39,558 Tenant reimbursements 2,101 4,038 218 - 6,357 Other 178 - - - 178 --------------- --------------- --------------- --------------- --------------- TOTAL REVENUE 15,596 26,000 3,519 978 46,093 --------------- --------------- --------------- --------------- --------------- EXPENSES: Operating expenses 1,296 2,088 19 - 3,403 Real estate taxes 1,373 2,126 197 - 3,696 General and administrative 846 - - $1,254 2,100 Management fees (related parties) - 645 - (645) - Interest (related parties) 3,183 61 - (2,222) 1,022 Interest 1,167 3,044 - 6,449 10,660 Depreciation and amortization 2,638 3,862 - 1,436 7,936 --------------- --------------- --------------- --------------- --------------- TOTAL EXPENSES 10,503 11,826 216 6,272 28,817 --------------- --------------- --------------- --------------- --------------- Income before minority interest 5,093 14,174 3,303 (5,294) 17,276 interest Minority interest 5,389 - - 9,936 15,325 --------------- --------------- --------------- --------------- --------------- Net (loss) income $(296) $14,174 $3,303 $(15,230) $1,951 =============== =============== =============== =============== =============== Basic and diluted earnings (loss) per share $(0.18) $0.24 =============== =============== Weighted average number of common shares outstanding 1,634,220 8,193,594 =============== ===============
The accompanying notes and management's assumptions are an integral part of this statement. FS-3 MISSION WEST PROPERTIES PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA) ----------
Mission West The Berg The Acquired Properties Properties Properties Pro Forma Pro Forma November 30, December 31, December 31, 1997 Adjustments December 31, 1998 1997 (Note 3A) (Note 4) 1997 --------------- --------------- --------------- --------------- --------------- REVENUE: Rent $1,376 $40,163 $5,409 $2,044 $48,992 Tenant reimbursements - 6,519 250 - 6,769 Other 359 - - - 359 --------------- --------------- --------------- --------------- --------------- TOTAL REVENUE 1,735 46,682 5,659 2,044 56,120 --------------- --------------- --------------- --------------- --------------- EXPENSES: Operating expenses 246 3,741 49 - 4,036 Real estate taxes - 4,229 246 - 4,475 General and administrative 1,467 - - 1,283 2,750 Management fees (related - 1,050 - (1,050) - parties) Interest (related parties) - 248 - 1,114 1,362 Interest 425 5,919 - 8,295 14,639 Depreciation and amortization 246 7,717 - 2,879 10,842 --------------- --------------- --------------- --------------- --------------- TOTAL EXPENSES 2,384 22,904 295 12,521 38,104 --------------- --------------- --------------- --------------- --------------- Income (loss) before minority interest, gain on sale of real estate, income taxes (649) 23,778 5,364 (10,477) 18,016 Minority interest - - - 16,021 16,021 --------------- --------------- --------------- --------------- --------------- Income before gain on sale of real estate and income taxes (649) 23,778 5,364 (26,498 1,995 Gain on sale for real estate 4,736 - - - 4,736 (Provision) for income taxes (1,043) - - 1,043 - =============== =============== =============== =============== =============== Net income $3,044 $23,778 $5,364 $(25,455) $6,731 =============== =============== =============== =============== =============== Basic and diluted earnings per share $18.48 $0.82 =============== =============== Weighted average number of common shares outstanding 164,692 8,193,594 =============== ===============
The accompanying notes and management's assumptions are an integral part of this statement. FS-4 MISSION WEST PROPERTIES Notes and Management's Assumptions to the Pro Forma Financial Statements for the nine months ended September 30, 1998 and for the year ended December 31, 1997 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) 1. ORGANIZATION AND BASIS OF PRESENTATION: The pro forma consolidated financial statements of Mission West Properties (the "Company") have been prepared based on the historical financial statements of the Company, the Berg Properties and the Acquired Properties considering the effects of the Berg Acquisition, Reincorporation Merger and the Private Placement. The Company and all parties to the Acquisition Agreement agreed to consummate the Berg Acquisition wherein the Company acquired the general partner interests in the Operating Partnerships, effective for financial and income accounting and reporting purposes as of July 1, 1998. Accordingly, the historical consolidated balance sheet of the Company at September 30, 1998 reflects the consummation of the Berg Acquisition. The pro forma balance sheet of the Company at September 30, 1998 has been prepared as if the Reincorporation Merger and Private Placement has been consummated at September 30, 1998. The pro forma statements of operations for the nine months ended September 30, 1998 and for the year ended December 31, 1997 have been prepared as if the Berg Acquisition, Reincorporation Merger and Private Placement had been consummated on January 1, 1997. In management's opinion, all adjustments necessary to reflect the effects of the Berg Acquisition, Reincorporation Merger and Private Placement have been made. The pro forma financial statements should be read in conjunction with the historical financial statements. The unaudited pro forma financial statements are not necessarily indicative of what the actual financial position would have been at September 30, 1998 had the Reincorporation Merger and Private Placement occurred on September 30, 1998, nor the actual results of operations for the nine months ended September 30, 1998 or for the year ended December 31, 1997 had the Berg Acquisition, Reincorporation Merger and Private Placement occurred on January 1, 1997, nor do they purport to present the future financial position of the Company. In November 1997, the Board of Directors approved a change in the Company's fiscal year end from November 30 to December 31, effective with the calendar year beginning January 1, 1998. All share and per share amounts have been adjusted to reflect the 1 for 30 reverse stock split. 2. ASSUMPTIONS: Certain assumptions regarding the operations of the Company have been made in connection with the preparation of the pro forma financial statements. Those assumptions are as follows: a. The pro forma financial statements assume that the Company has elected to be and qualified as a real estate investment trust ("REIT") for income tax reporting purposes and has distributed sufficient taxable income to meet the requirements of the Internal Revenue Code and, therefore, incurred no income tax liabilities. b. Rent has been recognized on a straight-line method of accounting in accordance with generally accepted accounting principles. c. General and administrative expenses historically incurred by the properties and the predecessor entities have been reclassifed to reflect the self-administered structure of the Company and the additional expenses of being a public company. FS-5 MISSION WEST PROPERTIES Notes and Management's Assumptions to the Pro Forma Financial Statements for the nine months ended September 30, 1998 and for the year ended December 31, 1997 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) d. Pro forma net income per share information is calculated using 8,193,594 shares as the average number of shares outstanding during the pro forma periods. For the pro forma periods, no other securities which, if converted or exercised, would have a dilutive effect on earnings per share calculations. 3. THE ACQUIRED AND BERG PROPERTIES: The Berg Acquisition was accounted for as a purchase with the results of operations of the Operating Partnerships included from July 1, 1998. Accordingly, the historical consolidated statement of operations of the Company includes the results of operations for the Berg Properties and Acquired Properties for the three months ended September 30, 1998. In order to reflect the consummation of the Berg Acquisition as of January 1, 1997 for pro forma financial statement purposes, the results of operations of the Berg Properties and the Acquired Properties for the six months ended June 30, 1998 have been included. Straight-lined rents and depreciation and amortization have been adjusted to reflect the purchases as of the beginning of the period. A. The Acquired Properties include approximately 144,000 rentable square feet previously owned by a third party (the "Fremont Properties"), as well as approximately 416,000 rentable square feet consisting of properties held by limited partnerships previously controlled by John Kontrabecki as general partner (the "Kontrabecki Properties"). Certain entities related to the Berg Group owned non-controlling interests in the Kontrabecki Properties. Operating Partnership units aggregating 6,694,027 have been exchanged in connection with these acquisitions and $39,138 of debt collateralized by the underlying properties was assumed. Subsequent to the closing of the $130,000 Prudential Secured Loan, $36,152 of such assumed debt has been repaid. B. The acquired Berg Properties include approximately 3,780,000 rentable square feet currently owned by entities previously controlled by the Berg Group. Operating Partnership units aggregating 52,785,606 have been exchanged in connection with these acquisitions and $194,500 of debt collateralized by the underlying properties was assumed. Subsequent to the closing of the $130,000 Prudential Secured Loan, $107,440 of such assumed debt has been repaid. 4. PRO FORMA ADJUSTMENTS: (1) Concurrent with the UPREIT Transactions, the Company anticipates it will sell 6,295,058 shares at $4.50 per share to certain accredited investors for net proceeds of $28,328 (the "New Private Placement"). In connection with this sale of common stock, a fee will be paid to an individual in the form of 200,000 shares of the Company's common stock. (2) Upon the closing of the new Private Placement, the Company will utilize those proceeds along with available cash and a draw of $2,941 on the lines of credit to repay the Demand Notes issued in connection with the closing of the Company's acquisition of the sole general partnership interests in the Operating Partnerships. The portion of the outstanding balance on the lines of credit in the amount of $2,941 and any interest accrued thereon, will effect the calculation of minority interest. On a pro forma basis, interest expense on this amount is $160 and $213 for the nine months ended September 30, 1998, and the twelve months ended December 31, 1997, respectively. FS-6 MISSION WEST PROPERTIES Notes and Management's Assumptions to the Pro Forma Financial Statements for the nine months ended September 30, 1998 and for the year ended December 31, 1997 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Cash received by the Operating Partnerships from the Company will be maintained in order to pay future distributions. (3) In October 1998, the Company utilized funds of $4,625 drawn on the lines of credit to repay debt previously collateralized by one of the properties owned by the Operating Partnerships. Such debt was included in Mortgage Notes Payable as of September 30, 1998. (4) Adjustments have been made to the pro forma statements of operations for the nine months ended September 30, 1998 and the year ended December 31, 1997 in order to reflect the new capital structure of the Company. A reconciliation of interest expense on a pro forma basis for the nine months ended September 30, 1998 and the year ended December 31, 1997 is as follows:
Pro Forma Pro Forma Interest Pro Forma Interest Balance at Expense for the Nine Expense for the September Interest Months Ended Year Ended 30, 1998 Rate September 30, 1998 December 31, 1997 --------------- --------------- -------------------- -------------------- Interest expense (related parties) Mortgage notes payable (related party) $18,780 7.25% $1,022 $1,362 Historical expense (related party) prior to pro forma adjustment 3,244 248 -------------------- -------------------- Pro forma adjustment to interest expense (related party) $(2,222) $1,114 ==================== ==================== Interest expense Wells Fargo line of credit $46,610 7.25% $2,534 $3,379 Great West Life and Annuity Company 7,769 7.00% 408 544 Great West Life and Annuity Company 3,707 7.00% 195 259 Prudential Capital Group 2,065 8.75% 136 181 New York Life Insurance Company 436 9.625% 31 42 Home Savings and Loan Association 536 9.50% 38 51 Amdahl Corporation 6,993 9.50% 498 664 Citicorp U.S.A. Inc. 3,105 7.5% 175 233 Mellon Mortgage Company 2,986 8.125% 182 243 Prudential Insurance Company of America 130,000 6.56% 6,396 8,528 -------------------- -------------------- 10,593 14,124 Amortization of loan fees 67 90 -------------------- -------------------- 10,660 14,214 Historical interest expense prior to pro forma adjustment 4,211 6,344 -------------------- -------------------- Gross pro forma adjustment to interest expense 6,449 7,870 Add back historical interest expense related to historical debt on previously held real estate - 425 Less amounts reflected in pro forma adjustment (2) above (160) (213) ==================== ==================== Net pro forma adjustment to interest expense $6,289 $8,082 ==================== ====================
(5) Pro forma adjustments have been made in order to reflect straight-lined rents as if the Company acquired the Berg Properties and Acquired Properties on January 1, 1997 for the nine months ended September 30, 1998 and the year ended December 31, 1997. (6) Upon the effective date of the Company's acquisition of the general partnership interests in the Operating Partnerships, real estate assets were recorded at their estimated fair values. Adjustments have been made to historical depreciation expense in order to reflect the higher cost basis to the Company. (7) In connection with the UPREIT Transactions, the Company will own an approximate 12.11% interest in the Operating Partnerships and become their sole general partner. Minority interest, on a pro forma basis, is reconciled as follows: FS-7 MISSION WEST PROPERTIES Notes and Management's Assumptions to the Pro Forma Financial Statements for the nine months ended September 30, 1998 and for the year ended December 31, 1997 (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Nine Months Twelve Ended Months September Ended 30, 1998 December 31, 1997 ------------- ------------- Pro forma Income before minority interest $17,276 $18,016 Add back interest on lines of credit absorbed 100% by the Company (refer to footnote 4(2)) 160 213 ------------- ------------- 17,436 18,229 Operating Partnerships minority interest percentage 87.89% 87.89% ------------- ------------- $15,325 $16,021 ============= =============
(8) The Company will be self-managed and will no longer pay management fees. Therefore, the costs of managing the operations of the Company have been included in the pro forma statement of operations and historical management fees have been reclassified to reflect the Company as a self managed REIT. The Company expects to incur additional costs in excess of historical general and administrative expenses for such items as shareholder relations, director fees and other such costs of operating as an active public company. (9) The Company intends to qualify and elect to be taxed as a real estate investment trust under the Internal Revenue Code of 1986, as amended, commencing with the taxable year ending December 31, 1998. Therefore, the provision for income tax expense has been eliminated in the pro forma statement of operations. PRO FORMA ADJUSTMENT SUMMARY: Balance Sheet - September 30, 1998:
Pro Cash Mortgage Common Forma and Lines of Notes Stock Shareholders' Adjustment Cash Credit Payable Equity Equivalents - ----------- ----------- --------- ----------- ---------- --------------- 1 $28,328 $(8) $(28,320) 2 2,941 $(2,941) 3 (4,625) $4,625 ----------- --------- ----------- ---------- --------------- $31,269 $(7,566) $4,625 $(8) $(28,320) =========== ========= =========== ========== ===============
Statement of Operations - for the nine months ended September 30, 1998:
Pro General Management Fee Interest Depreciation Minority Forma Rent and (Related Parties) (Related Interest and Interest Adjustment Administrative Party) Amortization - ------------ -------- ---------------- ----------------- ----------- ---------- -------------- ---------- 2 $(160) 4 $2,222 (6,289) 5 $978 6 $(1,436) 7 $(9,936) 8 $(1,254) $645 -------- ---------------- ----------------- ----------- ---------- -------------- ---------- $978 $(1,254) $645 $2,222 $(6,449) $(1,436) $(9,936) ======== ================ ================= =========== ========== ============== ==========
Statement of Operations - for the year ended December 31, 1997:
Pro General Management Fee Interest Depreciation Minority Provision Forma Rent and (Related Parties) (Related Interest and Interest For Adjustment Administrative Party) Amortization Income Taxes - ------------ -------- ---------------- ----------------- ----------- ---------- -------------- ---------- -------------- 2 $(213) 4 $(1,114) (8,082) 5 $2,044 6 $(2,879) 7 $(16,021) 8 $(1,283) $1,050 9 $1,043 -------- ---------------- ----------------- ----------- ---------- -------------- ---------- -------------- $2,044 $(1,283) $1,050 $(1,114) $(8,295) $(2,879) $(16,021) $1,043 ======== ================ ================= =========== ========== ============== ========== ==============
FS-8 REPORT OF INDEPENDENT ACCOUNTANTS To the Berg Group: We have audited the combined balance sheets and the financial statement schedule of the Berg Properties as described in Note 1 as of December 31, 1997 and 1996, and the related combined statements of operations, net equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements and the financial statement schedule are the responsibility of the management of the Berg Properties. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of the Berg Properties as of December 31, 1997 and 1996, and the combined results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. San Francisco, California April 17, 1998 Coopers & Lybrand L.L.P. FS-9 THE BERG PROPERTIES COMBINED BALANCE SHEETS (IN THOUSANDS) -------
June 30, December 31, --------------------------------------- ---------------------------------- 1998 1997 1997 1996 ------------------- ---------------- --------------- --------------- ASSETS (Unaudited) (Unaudited) Real Estate, at cost: Land $ 30,426 $ 30,426 $ 30,426 $ 30,426 Buildings and improvements 61,323 57,691 61,262 51,410 Tenant improvements 85,790 79,763 86,541 73,163 ------------------- ---------------- --------------- --------------- 177,539 167,880 178,229 154,999 Less, accumulated depreciation (81,939) (74,415) (78,077) (71,064) ------------------- ---------------- --------------- --------------- 95,600 93,465 100,152 83,935 Construction-in-progress - 3,725 - 6,775 ------------------- ---------------- --------------- --------------- 95,600 97,190 100,152 90,710 ------------------- ---------------- --------------- --------------- Cash and cash equivalents - 5,376 5,719 1,493 Deferred rent receivable 4,586 3,496 4,144 2,843 Other assets, net 4,094 3,463 3,935 2,605 ------------------- ---------------- --------------- --------------- $104,280 $109,525 $113,950 $ 97,651 ------------------- ---------------- --------------- --------------- ------------------- ---------------- --------------- --------------- LIABILITIES AND NET EQUITY Lines of credit - $ 37,672 $ 37,953 $ 35,538 Notes payable (related parties) $156,632 2,252 1,975 2,546 Mortgage notes payable 37,868 40,681 38,554 37,878 Accounts payable and accrued expenses 1,691 2,900 2,102 2,262 Other liabilities 4,047 3,369 3,715 2,602 ------------------- ---------------- --------------- --------------- 200,238 86,874 84,299 80,826 Net (deficit) equity (95,958) 22,651 29,651 16,825 ------------------- ---------------- --------------- --------------- $104,280 $109,525 $113,950 $ 97,651 ------------------- ---------------- --------------- --------------- ------------------- ---------------- --------------- ---------------
The accompanying notes are an integral part of these financial statements. FS-10 THE BERG PROPERTIES COMBINED STATEMENTS OF OPERATIONS (IN THOUSANDS) ----------
Six Months Ended June 30, Year Ended December 31, ------------------------------ ------------------------------------------------- 1998 1997 1997 1996 1995 -------------- ------------- -------------- ------------- ------------- (Unaudited) (Unaudited) Revenue: Rent $21,962 $18,848 $40,163 $28,934 $23,064 Tenant reimbursements 4,038 3,094 6,519 3,902 4,193 -------------- ------------- -------------- ------------- ------------- Total revenue 26,000 21,942 46,682 32,836 27,257 -------------- ------------- -------------- ------------- ------------- Expenses: Operating expenses 2,088 2,150 3,741 1,906 2,032 Real estate taxes 2,126 2,006 4,229 3,750 3,595 Management fee (related parties) 645 498 1,050 827 654 Interest (related parties) 61 135 248 293 357 Interest 3,044 3,338 5,919 6,090 6,190 Depreciation and amortization 3,862 3,351 7,717 6,739 6,323 -------------- ------------- -------------- ------------- ------------- 11,826 11,478 22,904 19,605 19,151 -------------- ------------- -------------- ------------- ------------- Income before gain on sale of real estate and extraordinary item 14,174 10,464 23,778 13,231 8,106 Gain on sale - - - - 20,779 -------------- ------------- -------------- ------------- ------------- Income before extraordinary item 14,174 10,464 23,778 13,231 28,885 Extraordinary item - - - 610 3,206 -------------- ------------- -------------- ------------- ------------- Net income $14,174 $10,464 $23,778 $13,841 $32,091 -------------- ------------- -------------- ------------- ------------- -------------- ------------- -------------- ------------- -------------
The accompanying notes are an integral part of these financial statements. FS-11 THE BERG PROPERTIES COMBINED STATEMENTS OF NET EQUITY (IN THOUSANDS) ---------- Balance (deficit), January 1, 1995 $(23,763) Contributions 2,953 Distributions (13,750) Net income 32,091 ------------- Balance (deficit), December 31, 1995 $ (2,469) Contributions 12,299 Distributions (6,846) Net income 13,841 ------------- Balance, December 31, 1996 $ 16,825 Contributions 755 Distributions (11,707) Net income 23,778 ------------- Balance, December 31, 1997 29,651 Distributions (139,783) Net income 14,174 ------------- Balance, June 30, 1998 (unaudited) $(95,958) ------------- -------------
The accompanying notes are an integral part of these financial statements. FS-12 THE BERG PROPERTIES COMBINED STATEMENTS OF CASH FLOWS (IN THOUSANDS) --------------
Six Months Ended June 30, Year Ended December 31, ---------------------------- ------------------------------------ 1998 1997 1997 1996 1995 ----------- ----------- -------- -------- -------- (Unaudited) (Unaudited) Operating activities: Net income 14,174 10,464 $ 23,778 $ 13,841 $ 32,091 Adjustments to reconcile net income to net cash provided by operations: Depreciation and amortization 3,862 3,351 7,717 6,739 6,323 Loan fee amortization 6 18 12 10 10 Gain on sale of property - - - - (20,779) Extraordinary gain on extinguishment of debt - - - (610) (3,206) Changes in assets and liabilities: Deferred rent receivable (442) (653) (1,330) (586) (77) Other assets (165) (876) (1,221) (406) 354 Accrued expenses (411) 638 (160) 353 1,841 Other liabilities 332 767 1,113 907 (165) ----------- ----------- -------- -------- -------- Net cash provided by operating activities 17,356 13,709 29,909 20,248 16,392 ----------- ----------- -------- -------- -------- Investing activities: Purchase and improvements to real estate (132) (9,831) (17,251) (29,275) (35,910) Proceeds from sale of property - - - - 29,557 Tenant reimbursements for improvements 822 - - - - ----------- ----------- -------- -------- -------- Net cash (used in) investing activities 690 (9,831) (17,251) (29,275) (6,353) ----------- ----------- -------- -------- -------- Financing activities: Borrowings on lines of credit (1,277) 2,134 3,750 6,999 1,034 Repayments on lines of credit 119,956 - (1,335) (952) (5,978) Borrowings on notes payable (related parties) - - - - 637 Repayments on notes payable (related parties) (1,975) (294) (571) (504) (474) Borrowings on mortgage notes payable - 3,105 3,105 - - Repayments on mortgage notes payable (686) (302) (2,429) (1,563) (1,210) Capital contributions - 355 755 12,299 2,953 Capital distributions (139,783) (4,993) (11,707) (6,846) (6,975) ----------- ----------- -------- -------- -------- Net cash (used in) provided by financing activities (23,765) 5 (8,432) 9,433 (10,013) ----------- ----------- -------- -------- -------- Increase in cash and cash equivalents (5,719) 3,883 4,226 406 26 Cash and cash equivalents at the beginning of the period 5,719 1,493 1,493 1,087 1,061 ----------- ----------- -------- -------- -------- Cash and cash equivalents at the end of the period - $ 5,376 $ 5,719 $ 1,493 $ 1,087 ----------- ----------- -------- -------- -------- ----------- ----------- -------- -------- -------- Noncash investing and financing activities: Noncash transfers of construction-in-progress - $ 3,050 $ 6,775 $ 75 - ----------- ----------- -------- -------- -------- ----------- ----------- -------- -------- -------- Noncash property distribution - - - - $ 6,775 ----------- ----------- -------- -------- -------- ----------- ----------- -------- -------- -------- Supplemental information: Cash paid for interest, net of amounts capitalized $ 3,044 $ 3,132 $ 6,272 $ 6,278 $ 6,243 ----------- ----------- -------- -------- -------- ----------- ----------- -------- -------- -------- Assumption of line of credit by Berg $36,676 - - - - ----------- ----------- -------- -------- -------- ----------- ----------- -------- -------- --------
The accompanying notes are an integral part of these financial statements. FS-13 THE BERG PROPERTIES NOTES TO COMBINED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -------------- 1. ORGANIZATION AND BUSINESS: ORGANIZATION: The Berg Properties do not constitute a legal entity, but rather are a combination of various research and development properties held by entities controlled by the Carl E. Berg, Clyde J. Berg, members of their immediate families and certain entities which they control (collective, the "Berg Group", as defined). The Berg Group has historically been engaged in developing, owning, operating and selling income-producing real estate primarily in the region surrounding San Jose, California. In addition to its real estate operations, the controlled Berg Group has been involved with other business pursuits including technology venture capital funding, strategic investment and business development. The accompanying financial statements reflect only the assets, liabilities and results of operations of Berg Properties, which will be controlled by the Company following the consummation of the UPREIT Transactions. BUSINESS: On September 2, 1997, the Berg Group purchased 6,000,000 (200,000 giving effect to a 1 for 30 reverse stock split in November 1997) newly issued shares of common stock of Mission West Properties (the "Company"), an American Stock Exchange listed real estate company that completed the sale of all of its real estate holdings earlier in 1997 (the "Initial Investment"). Upon consummation of the Initial Investment, the Berg Group beneficially owned 79.6% of the voting securities of the Company. Subsequent to the Initial Investment a series of transactions were approved by the Company's shareholders that included a 1 for 30 reverse stock split, a private placement of 1,250,000 shares of the Company's common stock at $4.50 per share and the adoption of the Company's stock option plan, and a change in the Company's year end from November 30 to December 31. The Company also hired a new management team and issued options under the stock plan to key employees for the purchase of 755,000 shares at $4.50 per share. In March 1997, one officer exercised an option to 200,000 shares of common stock at $4.50 per pursuant to a restricted stock purchase agreement. Pursuant to the UPREIT Transactions (as defined in the Registration Statement on Form S-4), the Berg Group will transfer its development and property management business to an operating partnership of which the Company will be the sole general partner and own a percentage of the operating partnership, will purchase approximately $69,300 of income producing real estate, certain outstanding indebtedness of the Berg Properties will be repaid, a third-party investment approximating $28,300 (net of offering costs) will be received by the Company, and the Company will elect to be taxed as a real estate investment trust for its fiscal year-end beginning January 1, 1998. Therefore, effective with the transactions related to the UPREIT Transactions, the management of the historic Berg Properties and the acquisition properties will be performed by the Company and its consolidated operating partnership, and the Company will operate under a new capital structure. 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: PRINCIPLES OF COMBINATION: The financial statements have been presented on a combined basis, at historical cost, because the Berg Properties has been under the common control of the Berg Group. All significant intergroup transactions and balances have been eliminated in combination. INTERIM UNAUDITED FINANCIAL INFORMATION: The accompanying interim unaudited financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting (Continued) FS-14 THE BERG PROPERTIES NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -------------- principles may have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments and eliminations, consisting only of normal, recurring adjustments, necessary to present fairly the financial position of the Berg Properties as of June 30, 1998 and 1997, and the results of their operations and cash flows for the three months ended June 30, 1998 and 1997, have been included. The results of operations for such interim periods are not necessarily indicative of the results of the full year. MANAGEMENT ESTIMATES: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. REVENUE RECOGNITION: Rental income is recognized on a straight-line method of accounting under which contractual rent payment increases are recognized evenly over the lease term. Certain lease agreements contain terms which provide for additional rents based on reimbursement of certain costs. These additional rents are reflected on the accrual basis. PROPERTY: Property and equipment is stated at the lower of cost or fair value. Cost includes expenditures for improvements or replacements and the net amount of interest cost associated with capital additions. Capitalized interest was $257 in 1997 and $459 in 1996. Maintenance and repairs are charged to expense as incurred. Gains and losses from sales are included in income in accordance with Financial Accounting Standards No. 66, ACCOUNTING FOR SALES OF REAL ESTATE. Losses in carrying values of investment assets are provided by management when the losses become apparent and the investment asset is considered impaired. Management evaluates is investment assets on a periodic basis, to assess whether any impairment indications are present. If an investment asset is considered to be impaired, a loss is provided to reduce the carrying value of the investment asset to its estimated fair value. No such losses have been required or provided in the accompanying financial statements. DEPRECIATION: Depreciation is computed using the straight-line method over estimated useful lives of 40 years for buildings, over the life of lease terms which average 10 years for tenant improvements, and 10 years for furniture and equipment. STATEMENTS OF CASH FLOWS: Cash and cash equivalents include all cash and liquid investments with an original maturity date from date of purchase of three months or less. EXTERNAL LEASE ACQUISITION COSTS: External lease acquisition costs are capitalized and amortized over the lives of the related leases. LOAN FEES: Loan fees are stated at cost and are being amortized under a method of accounting which approximates the effective interest method over the terms of the related notes. Upon refinancing, property disposition or loan termination, such fees are directly written-off. (Continued) FS-15 THE BERG PROPERTIES NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -------------- INCOME TAXES: No federal or state income taxes are payable by the entities which own the Berg Properties and none have been provided for in the accompanying financial statements, as such properties are owned by partnerships whose partners are required to include their respective share of profits and losses in their individual tax returns. CONCENTRATION OF CREDIT RISK: Management of the Berg Properties performs ongoing credit evaluations of their tenants. The Berg Properties are not geographically diverse, and their tenants operate primarily in the technology industry. Additionally, because the Berg Properties are leased to 71 tenants, default by any major tenant could significantly impact the results of the combined total. The largest of such tenants, calculated as a percentage of aggregate base rent, are Apple Computers, Inc., 16.3%; Amdahl Corporation, 8.7%; Cisco Systems, Inc., 7.2%; and nine other tenants, approximating 24.6%. However, management believes the risk of such a default is reduced because of the critical nature of these properties for ongoing tenant operations. COMMITMENTS AND CONTINGENCIES: Members of the Berg Group and the entities which hold the Berg Properties are party to litigation arising out of the normal course of business. While the ultimate results of any such lawsuits or other proceedings cannot be predicted with certainty, management does not expect that these matters will have a material adverse effect on the combined financial position or results of operations of the Berg Properties. Insurance policies currently maintained by the Berg Properties do not cover damage caused by seismic activity, although they do cover losses from fires after an earthquake. 3. EXTERNAL LEASE ACQUISITION COSTS: Included in other assets are external lease acquisition costs. Accumulated amortization related to these costs aggregated $1,353 and $661 as of December 31, 1997 and 1996, respectively. 4. LOAN FEES: Included in other assets are loan fees. Accumulated amortization related to these fees aggregated $198 and $186 as of December 31, 1997 and 1996, respectively. 5. NOTES PAYABLE: Historically, the Berg Properties have had access to credit facilities entered into by members of the Berg Group. Balances under such facilities have been allocated to entities within the Berg Group generally based on approximate use of the credit facilities. Borrowings under these credit facilities have been used to finance various ventures including commercial real estate development and acquisition, including assets that are included in the Berg Properties, technology venture capital investments and other assets unrelated to real estate not included in these financial statements. Included in the accompanying financial statements is an allocation of certain lines of credit with an aggregate borrowing limit of $130,000. These lines of credit facilities are collateralized by certain Berg Properties and other assets of the Berg Group. Among other requirements, the credit facilities have covenants requiring the owners to maintain certain levels of personal net worth and carry interest rates based on the prime rate in effect on the first day of each calendar month, less the Purchased Funds Rate quoted on the first day of each calendar month less 1.65%, which was 7.24% at December 31, 1997. Aggregate borrowings outstanding under the lines of credit facilities at December 31, 1997 totaled $99,192 with $37,953 allocated to the Berg (Continued) FS-16 THE BERG PROPERTIES NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -------------- Properties and included in these financial statements. Included in the aggregate borrowing under the line of credit facilities is approximately $12,000 related to an embezzlement by a former employee. Amounts allocated to the Berg Properties do not include any amounts related to the theft as such amounts have been allocated to certain Berg Group Members. Pursuant to the UPREIT Transactions, it is anticipated that the notes payable of the Berg Properties will be restructured and/or retired through a combination of new debt and equity. Principal payments on outstanding borrowings as of December 31, 1997 are due as follows:
Notes Payable Mortgage Notes Lines of Credit (Related Parties) Payable --------------- ----------------- -------------- 1998 - $ 639 $ 4,464 1999 $37,953 607 1,325 2000 - 262 4,552 2001 - 139 1,580 2002 - 72 1,726 Thereafter - 256 24,907 ------- ------ ------- $37,953 $1,975 $38,554 ------- ------ ------- ------- ------ -------
(Continued) FS-17 THE BERG PROPERTIES NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) -----------
5. NOTES PAYABLE: -------------- Balance Balance Dec. 31, Dec. 31, Description Berg Group Collateral Properties Start Date 1997 1996 Matures Rate - ------------------ -------------------------------------- ---------- ------------- ------------- ------------ ---- LINES OF CREDIT: Wells Fargo Bank 2251 Lawson Lane, Santa Clara, CA Various $37,953,115 $35,537,833 October 1999 (1) Clara, CA, 3301 Olcott, ------------- ------------- Santa Clara, CA, 1230 & ------------- ------------- 1250 Arques, Sunnyvale, CA, 1135 Kern, Sunnyvale, CA, 405 Tasman, Sunnyvale, CA 1190 Morse Avenue, Sunnyvale, CA, 450 National Avenue, Mountain View, CA, 10300 Bubb Road, Cupertino, CA, 10440 Bubb Road, Cupertino, CA, 10460 Bubb Road, Cupertino, CA, 20605 - 20705 Valley Green Drive, Cupertino, CA, 20400 Mariana, Cupertino, CA, 2033 - 2243 Samaritan Drive, San Jose, CA, 10500 de Anza Boulevard, Cupertino, CA MORTGAGE NOTES: Great West Life & 6320 San Ignacio Ave, San Jose, CA January 1984 7,871,793 7,999,883 February 2004 7% Annuity Insurance Company Great West Life & 6385 San Ignacio Ave, San Jose, CA April 1984 1,986,001 2,018,561 May 2004 7% Annuity Insurance Company 6540 Via del Oro, San Jose, CA Great West Life & 1170 Morse Avenue, Sunnyvale, CA April 1984 3,755,444 3,817,019 May 2004 7% Annuity Insurance Company National Electrical Contractors 2251 Lawson Lane, Santa Clara, CA January 1980 4,820,216 5,058,865 January 2009 9.75% Association Pension Benefit Trust Fund Prudential Capital Group 1230 E. Arques, Sunnyvale, CA October 1977 1,147,269 1,216,466 November 2007 9% Prudential Capital Group 450 National Avenue, Mountain View, CA July 1973 0 0 9.25% Prudential Capital Group 3301 Olcott, Santa Clara, CA July 1977 0 1,113,702 8.75% Prudential Capital Group 20605 - 20705 Valley Green Drive, September 1978 3,250,320 3,422,564 October 1998 8.5% Cupertino, CA Prudential Capital Group 20400 Mariani, Cupertino, CA March 1979 2,153,993 2,264,142 March 2009 8.75% Prudential Capital Group 1250 E. Arques, Sunnyvale, CA November 1973 2,311,583 2,551,126 November 1999 9.5% Prudential Capital Group 10300 Bubb Road, Cupertino, CA May 1972 0 0 8.75% New York Life 10440 Bubb Road, Cupertino, CA January 1979 452,335 472,625 August 2009 9.5/8% Insurance Company Home Savings & Loan 10460 Bubb Road, Cupertino, CA January 1977 568,721 608,564 January 2007 9.5% Association Bank of America 1135 & 1137 Kern, Sunnyvale, CA June 1973 0 0 8.5% Amdahl Corporation 3120 Scott, Santa Clara, CA April 1984 7,131,711 7,301,659 March 31, 9.5% 2014 Great Western Bank 10401 Bubb Road, Cupertino, CA February 1973 0 33,132 8.5% Citicorp U.S.A. Inc. 2800 Bayview Drive, Fremont, CA April 1997 3,105,000 0 April 2000 (2) ----------- -------------- Mortgage Notes total 38,554,386 37,878,308 ----------- -------------- ----------- --------------
- ------------------------------ (1) The lesser of Wells Fargo prime rate in effect on the first day of each calendar month, or the LIBOR or the Wells Fargo Purchased Funds Rate quoted on the first day of each calendar month plus 1.65%. Average rates for the six months ended June 30, 1998 and the years ended December 31, 1997, 1996 and 1995 were 7.26%, 7.25%, 7.04% and 8.20%, respectively. (2) One month LIBOR +1.625% adjusted monthly . (Continued) FS-18 THE BERG PROPERTIES NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ------------- 6. FAIR VALUES OF FINANCIAL INSTRUMENTS: SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, requires disclosure of fair value information about financial instruments, whether or not recognized in the statement of financial condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based upon estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and the estimated future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. SFAS No. 107 excludes certain financial instruments and all non-financial instruments from its disclosure requirements. The following summarizes the financial instruments and the estimate of the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND CASH EQUIVALENTS: The carrying amount of cash and cash equivalents is considered to be a reasonable estimate of fair value. MORTGAGE NOTES PAYABLE: In accordance with the requirements of Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial Instruments," management has estimated that mortgage notes payable with an aggregate carrying value of $38,554 have on estimated aggregate fair value of $38,211 at December 31, 1997. 7. RELATED PARTY TRANSACTIONS: The Berg Properties are held by partnerships that have received certain management services and financing from members of the Berg Group to the benefit of the partnerships and the properties. Such services have included general operating expenses, office space, and administrative and technical assistance. The partnerships have reimbursed the Berg Group members for the cost of providing such services and property management services on a fee basis. Expenses related to the properties for general and property-specific services paid to related parties aggregated $1,050, $827, and $654 for the years ended December 31, 1997, 1996, and 1995, respectively. Included in the financing described in Note 5, certain affiliated entities have extended funds to the partnerships which own the properties. These amounts are included in notes payable (related parties) on the combined balance sheet. Such amounts are due upon demand and accrue interest at a rate equal to that charged on the lines of credit facilities and interest incurred on such advances is included in interest expense (related parties) in the combined statements of operations. 8. OPERATING LEASES: The Berg Properties are leased to tenants under net operating leases with initial term expiration dates extending to the year 2008. Future minimum rentals under noncancelable operating leases, excluding tenant reimbursements of expenses as of December 31, 1997, are approximately as follows:
1998 $41,320 1999 39,300 2000 34,379 2001 29,645 2002 22,870 Thereafter 32,940 -------- $200,454 -------- --------
(Continued) FS-19 THE BERG PROPERTIES NOTES TO COMBINED FINANCIAL STATEMENTS, CONTINUED (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA) ---------- Minimum rental revenues, as presented for the years ended December 31, 1997, 1996 and 1995, contain straight-line adjustments for rental revenue increases in accordance with generally accepted accounting principles. The aggregate rental revenue increases resulting from the straight-line adjustments for the years ended December 31, 1997, 1996 and 1995 were $1,301, $586, and $77, respectively. 9. EXTRAORDINARY ITEMS: In 1996 and 1995, net gains of $610 and $3,206, respectively, were realized as a result of early extinguishment of certain debt obligations. FS-19 THE BERG PROPERTIES SCHEDULE III
December 31, 1997 --------------------------------------------------------------------------------- Cost Initial Cost Capitalization ---------------------------------------------- Subsequent to Shell Tenant Acquisition/ Building Sq. Ft. Encumbrance Land Improvements Improvements Improvement - ------------------------------ --------- ----------- ----------- ------------ ------------ ------------- 6850 Santa Teresa 30,000 $ 105,060 $ 317,106 $ 188,211 0 6331 San Ignacio 131,250 122,928 1,127,074 705,238 $ 3,964,830 6341 San Ignacio 95,040 122,928 1,127,074 705,238 (117,704) 75 E. Trimble 93,984 960,000 1,150,928 955,299 2,168,521 1170 Morse 34,750 3,755,444 48,685 909,965 793,345 800,000 6540 Via Del Oro 31,800 993,000 80,772 334,458 303,990 0 6385-6387 San Ignacio 34,800 993,001 88,923 365,741 332,669 0 1212 Bordeaux 71,800 4,000,000 1,102,092 46,500 180,950 5,079,735 150-160 Great Oaks 52,000 187,425 572,879 912,960 75,439 140 Great Oaks 52,259 187,425 572,879 543,286 445,113 6311 San Ignacio 30,000 60,461 289,440 274,346 2,559 6321 San Ignacio 103,894 191,461 916,560 868,761 2,233,199 6320 San Ignacio 157,092 7,871,793 178,414 1,920,012 1,062,547 1,355,351 2610 N. First St. 77,547 639,999 1,435,464 985,593 879,605 2033-43 Samaritan 75,168 409,321 912,880 2,792,320 236,712 2133 Samaritan 80,000 435,634 971,583 2,971,817 2,887 2233 - 43 Samaritan 79,924 435,220 970,640 2,968,994 2,884 3236 Scott 54,672 7,504,850 1,457,273 724,086 1,388,005 700,000 1810 McCandless Dr. 39,800 564,762 784,519 784,519 7,716 1740 McCandless Dr. 51,602 732,232 1,017,155 1,017,155 5,951 1680 McCandless Dr. 73,253 990,398 0 0 3,562,232 1600 McCandless Dr. 40,970 581,364 807,582 807,582 6,126 1500 McCandless Dr. 42,700 605,913 841,683 841,683 6,565 1450 McCandless Dr. 45,312 606,086 0 0 2,136,034 1350 McCandless Dr. 46,272 593,511 0 0 2,206,705 1325 McCandless Dr. 77,568 1,027,019 0 0 3,574,201 1425 McCandless Dr. 38,579 549,423 763,211 763,211 5,790 1525 McCandless Dr. 28,655 406,614 564,834 564,834 4,285 1575 McCandless Dr. 33,263 472,002 655,665 655,665 4,974 1625 McCandless Dr. 33,625 477,139 662,801 662,801 5,027 1745 McCandless Dr. 35,731 507,023 704,313 704,313 5,342 1765 McCandless Dr. 118,708 1,532,956 0 0 5,018,826 1600 Memorex Drive 109,666 1,000,000 875,000 875,000 559 4949 Hellyer Avenue 200,484 1,986,336 4,585,362 4,735,026 (10,000 2001 Logic 72,426 1,007,959 1,440,000 1,277,443 0 2251 Lawson 125,000 4,820,216 998,430 2,163,118 2,369,128 8,000 1230 Arques 60,000 1,147,269 49,867 721,721 624,669 156,112 450-460 National 36,100 29,161 219,655 234,550 85,347 1135 Kern Avenue 18,300 65,306 126,199 151,631 69,584 10300 Bubb 23,400 94,336 152,665 153,488 185,899 20400 Mariani 105,000 2,153,993 596,259 956,846 1,139,174 0 3301 Olcott 64,500 576,082 643,859 586,689 838,046 1250 Arques 200,000 2,311,583 413,831 1,432,307 2,359,186 366,506 10500 De Anza 211,000 16,000,000 1,498,500 5,086,027 7,200,447 0 20605-705 Valley Green 142,000 3,250,320 532,821 1,644,011 2,178,848 636,776 1190 Morse/405 Tasman 28,350 49,231 263,040 249,865 136,082 10440 Bubb 19,500 452,335 55,493 292,807 494,892 136,061 10460 Bubb 30,460 568,721 175,162 364,464 219,312 136,861 3120 Scott 75,000 7,131,711 350,574 3,387,720 3,074,872 900,100 3501 W Warren Bld 67,864 4,902,185 1,436,890 1,813,361 1,789,802 (15,482 48800 Milmont Drive 53,000 3,170,096 1,052,190 1,158,065 1,172,833 9,430 4750 Patrick Henry 65,780 2,375,984 1,163,575 1,146,854 1,147,020 0 10401 Bubb 20,330 95,966 132,403 208,010 0 2800 Bayview 59,736 3,105,000 737,855 1,734,146 0 0 --------- ----------- ----------- ------------ ------------ ------------- Subtotal 3,779,914 $76,507,501 $30,426,287 $51,806,662 $57,977,217 $38,018,786 --------- ----------- ----------- ------------ ------------ ------------- --------- ----------- ----------- ------------ ------------ ------------- December 31, 1997 -------------------------------------------------------------------------------- Gross Amount at Which Carried at Close of Period ---------------------------------------------- Shell & Tenant Accumulated Date of Building Land Improvements Improvements Total Depreciation Completion - ------------------------------ ----------- ------------ ------------ ------------ ----------- ---------- 6850 Santa Teresa $ 105,060 $ 317,106 $ 188,211 $ 610,377 $ (509,475) 1979 6331 San Ignacio 122,928 1,356,086 4,441,056 5,920,070 (2,587,448) 1980 6341 San Ignacio 122,928 981,548 733,060 1,837,536 (1,155,158) 1980 75 E. Trimble 960,000 1,150,928 3,123,820 5,234,748 (2,054,859) 1981 1170 Morse 48,685 909,965 1,593,345 2,551,995 (1,257,784) 1980 6540 Via Del Oro 80,772 334,458 303,990 719,220 (564,532) 1980 6385-6387 San Ignacio 88,923 365,741 332,669 787,333 (617,790) 1980 1212 Bordeaux 1,102,092 530,517 4,776,668 6,409,277 (1,474,232) 1984 150-160 Great Oaks 187,425 572,879 988,399 1,748,703 (1,263,387) 1982 140 Great Oaks 187,425 572,879 988,399 1,748,703 (1,264,760) 1982 6311 San Ignacio 60,461 289,629 276,716 626,806 (494,691) 1981 6321 San Ignacio 191,461 1,120,216 2,898,304 4,209,981 (1,956,235) 1981 6320 San Ignacio 178,414 1,920,011 2,417,899 4,516,324 (2,496,504) 1982 2610 N. First St. 639,999 1,435,464 1,865,198 3,940,661 (2,344,027) 1981 2033-43 Samaritan 409,321 912,880 3,029,032 4,351,233 (2,689,750) 1984 2133 Samaritan 435,634 971,583 2,974,704 4,381,921 (2,863,030) 1984 2233 - 43 Samaritan 435,220 970,640 2,971,878 4,377,738 (2,769,310) 1984 3236 Scott 1,457,273 724,086 2,088,005 4,269,364 (2,041,780) 1981 1810 McCandless Dr. 564,762 787,362 789,392 2,141,516 (322,450) 1995 1740 McCandless Dr. 732,232 1,019,348 1,020,913 2,772,493 (260,940) 1995 1680 McCandless Dr. 990,398 1,721,342 1,840,890 4,552,630 (541,969) 1996 1600 McCandless Dr. 581,364 809,839 811,451 2,202,654 (266,610) 1995 1500 McCandless Dr. 605,913 844,216 845,715 2,295,844 (277,866) 1995 1450 McCandless Dr. 593,511 1,057,469 1,091,140 2,742,120 (345,049) 1995 1350 McCandless Dr. 606,086 1,079,873 1,114,257 2,800,216 (352,358) 1996 1325 McCandless Dr. 1,027,049 1,738,889 1,835,282 4,601,220 (612,079) 1997 1425 McCandless Dr. 549,423 765,344 766,868 2,081,635 (261,180) 1995 1525 McCandless Dr. 406,614 566,413 567,540 1,540,567 (193,498) 1995 1575 McCandless Dr. 472,002 657,498 658,806 1,788,306 (224,614) 1995 1625 McCandless Dr. 477,139 664,653 665,976 1,807,768 (227,058) 1995 1745 McCandless Dr. 507,023 706,281 707,687 1,920,991 (241,280) 1995 1765 McCandless Dr. 1,532,956 2,627,962 2,390,864 6,551,782 (812,926) 1997 1600 Memorex Drive 1,000,000 875,000 875,559 2,750,559 (704,447) 1995 4949 Hellyer Avenue 1,986,336 4,575,362 4,735,026 11,296,724 (1,399,886) 1995 2001 Logic 1,007,959 1,440,000 1,277,443 3,725,402 (779,626) 1992 2251 Lawson 998,430 2,163,118 2,377,128 5,538,676 (3,831,224) 1979 1230 Arques 49,867 805,423 697,079 1,552,369 (1,373,925) 1977 450-460 National 29,161 240,292 299,260 568,713 (568,713) 1973 1135 Kern Avenue 65,306 126,199 221,215 412,720 (391,853) 1973 10300 Bubb 94,336 152,665 339,387 586,388 (478,274) 1972 20400 Mariani 596,259 956,846 1,139,174 2,692,279 (2,060,466) 1978 3301 Olcott 576,082 633,859 1,434,735 2,644,676 (1,225,375) 1977 1250 Arques 413,831 1,570,769 2,587,230 4,571,830 (4,359,010) 1974 10500 De Anza 1,498,500 5,086,027 7,200,447 13,784,974 (13,293,962) 1981 20605-705 Valley Green 532,821 1,644,011 2,815,624 4,992,456 (3,853,122) 1975 1190 Morse/405 Tasman 49,231 327,704 321,283 698,218 (602,821) 1976 10440 Bubb 55,493 366,034 557,726 979,253 (787,043) 1979 10460 Bubb 175,162 418,778 301,859 895,799 (698,076) 1976 3120 Scott 350,574 3,377,720 3,984,972 7,713,266 (5,032,610) 1983 3501 W Warren Bld 1,436,890 1,847,476 1,740,205 5,024,571 (351,697) 1997 48800 Milmont Drive 1,052,190 1,158,065 1,182,263 3,392,518 (316,976) 1996 4750 Patrick Henry 1,163,575 1,146,854 1,147,020 3,457,449 (425,734) 1996 10401 Bubb 95,966 132,403 208,010 436,379 (405,719) 1972 2800 Bayview 737,855 1,734,146 0 2,472,001 (437,151) 1994 ----------- ------------ ------------ ------------ ----------- Subtotal $30,426,317 $61,261,856 $86,540,779 $178,228,952 $78,077,441 ----------- ------------ ------------ ------------ ----------- ----------- ------------ ------------ ------------ -----------
FS-21 THE BERG PROPERTIES SCHEDULE III REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 1997 (IN THOUSANDS) ---------- Summary of activity for real estate and accumulated depreciation is as follows:
December 31, ---------------------------------------------------------- 1997 1996 1995 ----------------- ------------------ ---------------- Real estate: Balance at beginning of year $154,999 $133,014 $120,382 Improvements and acquisition/development of real estate 23,230 22,775 35,910 Disposal of real estate - (790) (23,278) ----------------- ------------------ ---------------- Balance at end of year $178,229 $154,999 $133,014 ----------------- ------------------ ---------------- ----------------- ------------------ ---------------- Accumulated depreciation: Balance at beginning of year $71,064 $64,857 $66,174 Depreciation expense 7,013 6,387 6,132 Disposal of real estate - (180) (7,449) ----------------- ------------------ ---------------- Balance at end of year $78,077 $71,064 $64,857 ----------------- ------------------ ---------------- ----------------- ------------------ ----------------
FS-22 REPORT OF INDEPENDENT ACCOUNTANTS To the Berg Group: We have audited the accompanying Statement of Revenue and Certain Expenses of the Fremont Properties as described in Note 2 for the year ended December 31, 1997. The Statement of Revenue and Certain Expenses is the responsibility of the management of the Fremont Properties. Our responsibility is to express an opinion on the Statement of Revenue and Certain Expenses based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying Statement of Revenue and Certain Expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission, for inclusion in the registration statement on Form S-4 of Mission West Properties as described in Note 1, and is not intended to be a complete presentation of the Fremont Properties' revenue and expenses. In our opinion, the Statement of Revenue and Certain Expenses referred to above present fairly, in all material respects, the revenue and certain expenses of the Fremont Properties described in Note 2 for the year ended December 31, 1997, in conformity with generally accepted accounting principles. San Francisco, California April 17, 1998 Coopers & Lybrand L.L.P. FS-23 FREMONT PROPERTIES STATEMENT OF REVENUE AND CERTAIN EXPENSES (IN THOUSANDS) ----------
Six Months Ended June 30, ------------------------------ Year Ended 1998 1997 December 31, 1997 -------------- -------------- ------------------ (unaudited) Revenue: Base rent $1,015 $602 $1,256 Tenant reimbursements 218 58 173 -------------- -------------- ------------------ 1,233 660 1,429 Expenses: Property operating and maintenance 19 19 40 Real estate taxes 197 110 234 -------------- -------------- ------------------ Total expenses 216 129 274 -------------- -------------- ------------------ Revenue in excess of certain expenses $1,017 $531 $1,155 ============== ============== ==================
The accompanying notes are an integral part of these financial statements. FS-24 FREMONT PROPERTIES NOTES TO STATEMENT OF REVENUE AND CERTAIN EXPENSES ---------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION: The accompanying Statement of Revenue and Certain Expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the registration statement on Form S-4 of Mission West Properties. The accompanying statement is not representative of the actual operations of the Fremont Properties, as defined in Note 2, for the period presented nor indicative of future operations. Certain expenses, primarily depreciation, amortization and interest expense, which may not be comparable to the expenses expected to be incurred by Mission West Properties in future operations of the Fremont Properties, have been excluded. REVENUE AND EXPENSE RECOGNITION: Revenue is recognized on a straight-line basis over the terms of the related leases. Expenses are recognized in the period in which they are incurred. USE OF ESTIMATES: The preparation of the Statement of Revenue and Certain Expenses in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the combined revenue and expenses during the reporting periods. Actual results could differ from these estimates. 2. DESCRIPTION OF PROPERTIES: The accompanying Statement of Revenue and Certain Expenses relate to the combined operations of three properties at 4050 Starboard Drive, 45700 Northport Loop East and 45738 Northport Loop West. The commercial buildings have approximately 144,000 rental square feet and are located in Fremont, California. The Fremont Properties have been presented on a combined basis because the Fremont Properties were under common ownership and management of the developer. The Properties were developed with physical completion and lease-up concluded in the first quarter of 1997. Therefore no prior period information is available. 3. RENTALS: The Properties have entered into tenant leases that provide for tenants to share in the operating expenses and real estate taxes on a pro rata basis, as defined. FS-25 REPORT OF INDEPENDENT ACCOUNTANTS To the Berg Group: We have audited the accompanying combined Statements of Revenue and Certain Expenses of the Kontrabecki Properties as described in Note 2 for the years ended December 31, 1997, 1996 and 1995. The Statements of Revenue and Certain Expenses are the responsibility of the management of the Kontrabecki Properties. Our responsibility is to express an opinion on these Statements of Revenue and Certain Expenses based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying combined Statements of Revenue and Certain Expenses were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission, for inclusion in the registration statement on Form S-4 of Mission West Properties as described in Note 1, and is not intended to be a complete presentation of the Kontrabecki Properties' revenue and expenses. In our opinion, the combined Statements of Revenue and Certain Expenses referred to above presents fairly, in all material respects, the combined revenue and certain expenses of the Kontrabecki Properties described in Note 2 for the years ended December 31, 1997, 1996 and 1995, in conformity with generally accepted accounting principles. San Francisco, California April 17, 1998 Coopers & Lybrand L.L.P. FS-26 KONTRABECKI PROPERTIES COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES (IN THOUSANDS) ----------
Six Months Ended June 30, Year Ended December 31, -------------------- ----------------------------- 1998 1997 1997 1996 1995 --------- --------- -------- -------- --------- (unaudited) Revenue: Base rent $2,286 $1,828 $4,153 $3,388 $3,136 Other income - - 77 61 58 --------- --------- -------- -------- --------- 2,286 1,828 4,230 3,449 3,194 --------- --------- -------- -------- --------- Expenses: Property operating and maintenance - 6 9 170 417 Real estate taxes - 6 12 48 11 --------- --------- -------- -------- --------- Total expenses - 12 21 218 428 --------- --------- -------- -------- --------- Revenue in excess of certain expenses $2,286 $1,816 $4,209 $3,231 $2,766 ========= ========= ======== ======== =========
The accompanying notes are an integral part of these financial statements. FS-27 KONTRABECKI PROPERTIES NOTES TO COMBINED STATEMENTS OF REVENUE AND CERTAIN EXPENSES ---------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION: The accompanying combined Statements of Revenue and Certain Expenses were prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission for inclusion in the registration statement on Form S-4 of Mission West Properties. The accompanying combined statements are not representative of the actual operations of the Kontrabecki Properties, as defined in Note 2, for the periods presented nor indicative of future operations. Certain expenses, primarily depreciation, amortization and interest expense, which may not be comparable to the expenses expected to be incurred by Mission West Properties in future operations of the Properties, have been excluded. REVENUE AND EXPENSE RECOGNITION: Revenue is recognized on a straight-line basis over the terms of the related leases. Expenses are recognized in the period in which they are incurred. USE OF ESTIMATES: The preparation of the combined Statements of Revenue and Certain Expenses in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of the combined revenue and expenses during the reporting periods. Actual results could differ from these estimates. 2. DESCRIPTION OF THE PROPERTIES: The accompanying combined Statements of Revenue and Certain Expenses relate to the combined operations of the Kontrabecki Properties, office buildings with approximately 416,000 rentable square feet, located in Santa Clara, California. The Kontrabecki Properties have been presented on a combined basis because the Kontrabecki Properties were under common ownership and management. 3. RENTALS: The Kontrabecki Properties' management has entered into tenant leases that provide for tenants to share in the operating expenses and real estate taxes on a pro forma basis, as defined. During the fourth quarter of 1996 and throughout 1997, occupancy increase obtained at the Kontrabecki Properties allowed for a significant portion of such expenses to be charged to the tenants pursuant to the lease agreements. FS-28 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS As permitted by Section 204(a) of the California General Corporation Law, the Registrant's articles of incorporation eliminate a director's personal liability for monetary damages to the Registrant and its shareholders arising from a breach or alleged breach of the director's fiduciary duty, except for liability arising under Section 310 and 316 of the California General Corporation Law or liability for (i) acts or omissions that involve intentional misconduct or knowing and culpable violation of law, (ii) acts or omissions that a director believes to be contrary to the best interests of the Registrant or its shareholders or that involve the absence of good faith on the part of the director, (iii) any transaction from which a director derived an improper personal benefit, (iv) acts or omissions that show a reckless disregard for the director's duty to the Registrant or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director's duties, of a risk of serious injury to the Registrant or its shareholders and (v) acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the Registrant or its shareholders. This provision does not eliminate the directors' duty of care, and in appropriate circumstances equitable remedies such as an injunction or other forms of non-monetary relief would remain available under California Law. Sections 204(a) and 317 of the California General Corporation Law authorize a corporation to indemnify its directors, officers, employees and other agents in terms sufficiently broad to permit indemnification (including reimbursement for expenses) under certain circumstances for liabilities arising under the Securities Act of 1933, as amended. The Registrant's Restated Articles of Incorporation and Bylaws contain provisions covering indemnification of corporate directors, officers and other agents against certain liabilities and expenses incurred as a result of proceedings involving such persons in their capacities as directors, officers, employees or agents, including proceedings under the Securities Act or the Securities Exchange Act of 1934, as amended. The Company has not entered into indemnification agreements with its directors and executive officers. ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
Exhibit Description No. - ----------- ------------------------------------------------------------ 2.1** Form of Merger Agreement and Plan of Merger between the Company and Mission West-Maryland 3.1.1+ Amended and Restated Articles of Incorporation of the Company 3.1.2+ Bylaws, as amended, of the Company 3.2.1** Form of Articles of Amendment and Restatement of Mission West-Maryland 3.2.2** Form of Restated Bylaws of Mission West-Maryland 5.1 Opinion of Graham & James LLP regarding the validity of the securities being registered 5.2 Opinion of Ballard Spahr Andrews & Ingersoll regarding merger of the Company and Mission West-Maryland II-1 8.1 Opinion of Graham & James LLP regarding certain tax matters 10.1.1** Form of Amended and Restated Agreement of Limited Partnership of Operating Partnerships 10.1.2** Form of Agreement for Assumption and Allocation of Liabilities 10.2** Form of Exchange Rights Agreement between the Company and the Limited Partners 10.3.1+ 1997 Stock Option Plan of the Company 10.3.2** Form of Incentive Stock Option Agreement 10.3.3** Form of Non-statutory Stock Option Agreement 10.3.4** Form of Directors Stock Option Agreement 10.4.1** Acquisition Agreement, dated as of May 14, 1998, among the Company, Certain Partnerships and the Berg Group (as defined therein) 10.4.2** Amendment to Acquisition Agreement, dated as of July 1, 1998 10.4.3** Form of Partnership Interest Purchase Demand Note 10.5.1** Stock Purchase Agreement dated as of May 4, 1998, between the Company and the purchasers of Common Stock in a private placement of 5,800,000 shares and Subscription Agreement relating to same 10.5.2** Stock Purchase Agreement, dated as of May 4, 1998 between the Company and the purchasers of Common Stock in a private placement of 695,058 shares and Subscription Agreement relating to same 10.6** Pending Projects Acquisition Agreement among the Company, the Operating Partnership and the members of the Berg Group 10.7** Berg Land Holdings Option Agreement between the Company and certain members of the Berg Group 10.8** Berg & Berg Enterprises, Inc. Sublease Agreement 10.9** Incentive Stock Option Agreement for Michael J. Anderson (200,000 shares of Common Stock) 10.10** Restricted Stock Purchase Agreement for Michael J. Anderson (200,000 shares of Common Stock) 10.11** Promissory Note from Michael J. Anderson 10.12** Lease Agreement with Apple Computer, Inc. II-2 10.13** Lease Agreement with Cisco Systems, Inc. 10.14** Lease Agreement with Amdahl Corporation 10.15 Prudential Promissory Note 10.16 Prudential Deed of Trust 10.17 Prudential Certificate Regarding Distribution 10.18 Prudential Guaranty 23.1 Consent of Graham & James LLP (included in the opinion filed as Exhibit 5.1 to this Registration Statement) 23.2 Consent of Ballard Spahr Andrews & Ingersoll (included in the opinion filed as Exhibit 5.2 to this Registration Statement) 23.3 Consent of PricewaterhouseCoopers LLP 23.4 Consent of PricewaterhouseCoopers LLP 23.5* Consent of BT Commercial 24.1** Powers of Attorney 99.1 Form of Proxy for the Company's Shareholders 99.2 Form of Letter to the Company's Shareholders 99.3 Form of Notice to the Company's Shareholders
+ Incorporated by reference * To be filed by amendment. ** Previously filed II-3 ITEM 22. UNDERTAKINGS. (a) The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than a 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; (2) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) The undersigned Registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Exchange Act (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Exchange Act) that is incorporated by reference in this Registration Statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (c) The undersigned Registrant hereby undertakes to deliver or cause to be delivered with the prospectus, to each person to whom the prospectus is sent or given, the latest annual report, to security holders that is incorporated by reference in the prospectus and furnished pursuant to and meeting the requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act and, where interim financial information required to be presented by Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or cause to be delivered to each person to whom the prospectus is sent or given, the latest quarterly report that is specifically incorporated by reference in the prospectus to provide such interim financial information. (d) The undersigned Registrant hereby undertakes as follows: that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the registrant undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form. II-4 (e) The undersigned Registrant undertakes that every prospectus: (i) that is filed pursuant to paragraph (d) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Act and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial BONA FIDE offering thereof. (f) Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the provisions described in Item 15 above, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission and indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim of indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in a successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (g) The undersigned Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request. (h) The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective. II-5 SIGNATURES Pursuant to the requirements of the Securities Act, the Registrant has duly caused this Amendment No. 2 to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Cupertino, State of California on October 27, 1998. MISSION WEST PROPERTIES By: /s/ Carl E. Berg --------------------------------------- Carl E. Berg Chairman of the Board, Chief Executive Officer, President and Chief Financial Officer Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed below by the following persons in the capacities indicated, effective October 27, 1998. SIGNATURE TITLE /s/ Carl E. Berg Chairman of the Board, Chief Executive - -------------------------- Officer, President, Chief Financial Officer Carl E. Berg and Director * Michael J. Anderson Vice President, Chief Operating Officer and - -------------------------- Director Michael J. Anderson * John C. Bolger Director - -------------------------- John C. Bolger * Roger S. Kirk Director - -------------------------- Roger S. Kirk * /s/ Carl E. Berg - -------------------------- Carl E. Berg Attorney-in-fact II-6 EXHIBIT INDEX
Exhibit Description No. - ----------- ------------------------------------------------------------ 2.1** Form of Merger Agreement and Plan of Merger between the Company and Mission West-Maryland 3.1.1+ Amended and Restated Articles of Incorporation of the Company 3.1.2+ Bylaws, as amended, of the Company 3.2.1** Form of Articles of Amendment and Restatement of Mission West-Maryland 3.2.2** Form of Restated Bylaws of Mission West-Maryland 5.1 Opinion of Graham & James LLP regarding the validity of the securities being registered 5.2 Opinion of Ballard Spahr Andrews & Ingersoll regarding merger of the Company and Mission West-Maryland II-1 8.1 Opinion of Graham & James LLP regarding certain tax matters 10.1.1** Form of Amended and Restated Agreement of Limited Partnership of Operating Partnerships 10.1.2** Form of Agreement for Assumption and Allocation of Liabilities 10.2** Form of Exchange Rights Agreement between the Company and the Limited Partners 10.3.1+ 1997 Stock Option Plan of the Company 10.3.2** Form of Incentive Stock Option Agreement 10.3.3** Form of Non-statutory Stock Option Agreement 10.3.4** Form of Directors Stock Option Agreement 10.4.1** Acquisition Agreement, dated as of May 14, 1998, among the Company, Certain Partnerships and the Berg Group (as defined therein) 10.4.2** Amendment to Acquisition Agreement, dated as of July 1, 1998 10.4.3** Form of Partnership Interest Purchase Demand Note 10.5.1** Stock Purchase Agreement dated as of May 4, 1998, between the Company and the purchasers of Common Stock in a private placement of 5,800,000 shares and Subscription Agreement relating to same 10.5.2** Stock Purchase Agreement, dated as of May 4, 1998 between the Company and the purchasers of Common Stock in a private placement of 695,058 shares and Subscription Agreement relating to same 10.6** Pending Projects Acquisition Agreement among the Company, the Operating Partnership and the members of the Berg Group 10.7** Berg Land Holdings Option Agreement between the Company and certain members of the Berg Group 10.8** Berg & Berg Enterprises, Inc. Sublease Agreement 10.9** Incentive Stock Option Agreement for Michael J. Anderson (200,000 shares of Common Stock) 10.10** Restricted Stock Purchase Agreement for Michael J. Anderson (200,000 shares of Common Stock) 10.11** Promissory Note from Michael J. Anderson 10.12** Lease Agreement with Apple Computer, Inc. 10.13** Lease Agreement with Cisco Systems, Inc. 10.14** Lease Agreement with Amdahl Corporation 10.15 Prudential Promissory Note 10.16 Prudential Deed of Trust 10.17 Prudential Certificate Regarding Distribution 10.18 Prudential Guaranty 23.1 Consent of Graham & James LLP (included in the opinion filed as Exhibit 5.1 to this Registration Statement) 23.2 Consent of Ballard Spahr Andrews & Ingersoll (included in the opinion filed as Exhibit 5.2 to this Registration Statement) 23.3 Consent of PricewaterhouseCoopers LLP 23.4 Consent of PricewaterhouseCoopers LLP 23.5* Consent of BT Commercial 24.1** Powers of Attorney 99.1 Form of Proxy for the Company's Shareholders 99.2 Form of Letter to the Company's Shareholders 99.3 Form of Notice to the Company's Shareholders
+ Incorporated by reference * To be filed by amendment. ** Previosly filed EX-23.3 2 EXHIBIT 23.3 PRICEWATERHOUSECOOPERS EXHIBIT 23.3 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Prospectus constituting part of this Registration Statement on Form S-4 of Mission West Properties of our report dated February 11, 1997, except as to the 1 for 30 reverse stock split discussed in Note 1, which is as of November 10, 1997, appearing on page F-3 of Mission West Properties' Annual Report on Form 10-K for the year ended December 31, 1997. We also consent to the reference to us under the heading "Experts" in such Prospectus. San Diego, California October 27, 1998 /s/ PricewaterhouseCoopers LLP EX-23.4 3 EXHIBIT 23.4 PRICEWATERHOUSECOOPERS EXHIBIT 23.4 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form S-4 (File No. 333-52835) of our report dated April 17, 1998 on our audits of the combined financial statements and financial statement schedule of The Berg Properties as of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995 and our reports dated April 17, 1998 on our audits of the Statements of Revenue and Certain Expenses of the Kontrabecki Properties for the years ended December 31, 1997, 1996 and 1995 and the Combined Statement of Revenue and Certain Expenses of the Fremont Properties for the year ended December 31, 1997. Additionally, we consent to the incorporation by reference of our report dated March 20, 1998 on our audit of the consolidated financial statements of Mission West Properties as of and for the year ended November 30, 1997 and one month period ended December 31, 1997. We also consent to the references to our firm under the caption "Experts". San Francisco, California October 27, 1998 /s/ PricewaterhouseCoopers LLP EX-99.3 4 EXHIBIT 99.3 MISSION WEST PROPERTIES 10050 Bandley Drive Cupertino, California 95014 ---------------------------------------------------- NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON ------------- ---------------------------------------------------- TO THE SHAREHOLDERS: A special meeting (the "Meeting") of shareholders of Mission West Properties, a California corporation (the "Company") will be held at the Company's corporate offices, 10050 Bandley Drive, Cupertino, California 95014 on ___________, _____________, 199_ at ____ _.m., for the following purposes: 1. To approve a proposed private placement of 6,495,058 shares of the Company's Common Stock for $4.50 per share. 2. To ratify and approve the Company's acquisition of the sole general partner interest representing approximately 12.11% of the total partnership interests in each of four existing limited partnerships (collectively the "Operating Partnerships") owning approximately 4.34 million rentable square feet of leased commercial R&D buildings, in which the principal limited partners are Carl E. Berg and certain of his affiliates, pursuant to the terms of an Acquisition Agreement dated as of May 14, 1998 and an Amendment to Acquisition Agreement effective July 1, 1998. 3. To approve the Company's acquisition of the right to acquire, through the Operating Partnerships, certain pending commercial R&D building developments consisting of approximately 1.02 million rentable square feet from Mr. Berg and certain of his affiliates. 4. To approve the Company's acquisition of an option to acquire future commercial R&D building developments on land currently held by Mr. Berg and certain of his affiliates. 5. To approve the issuance of up to 93,398,705 shares of Common Stock upon the future redemption or exchange of 93,398,705 units of limited partnership interests held by or issuable to the limited partners in the Operating Partnerships ("L.P. Units"), including 33,919,072 L.P. Units issuable upon the acquisition of the pending commercial R&D building developments from Mr. Berg and certain of his affiliates. 6. To approve a proposal to reincorporate the Company under the laws of the State of Maryland through a merger with and into the Company's wholly owned subsidiary Mission West Properties, Inc., a Maryland corporation ("Mission West-Maryland"), which during 1998 intends to elect to become a Real Estate Investment Trust ("REIT") for federal income tax purposes, and to approve the adoption of the charter and bylaws of Mission West-Maryland to take effect upon the merger (the "Reincorporation Merger"). Only shareholders of record at the close of business on _________, 1998, will be entitled to vote at the meeting. Each of those shareholders is cordially invited to be present and vote at the meeting in person. WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE SIGN AND DATE THE ENCLOSED PROXY AND RETURN IT PROMPTLY. THIS IS IMPORTANT BECAUSE A MAJORITY OF THE SHARES MUST BE REPRESENTED, EITHER IN PERSON OR BY PROXY, TO CONSTITUTE A QUORUM. IF YOU ATTEND THE MEETING, YOU MAY VOTE IN PERSON EVEN THOUGH YOU HAVE PREVIOUSLY PROVIDED A PROXY. By Order of the Directors Bradley A. Perkins EX-5.1 5 OPINION OF GRAHAM & JAMES LLP [G & J Letterhead] ___________ __, 1998 Mission West Properties, Inc. 10050 Bandley Drive Cupertino, CA 95014 Re: Registration Statement on Form S-4 Registration No. 333-52835 Ladies and Gentlemen: We render this opinion in connection with the registration of 93,398,705 shares of common stock, $.001 par value per share (the "Common Shares"), of Mission West Properties, Inc., a Maryland corporation (the "Company") with the Securities and Exchange Commission on a Registration Statement on Form S-4 (the "Registration Statement"), relating to the exchange of the Common Shares for shares of common stock of Mission West Properties, a California corporation ("Mission West-California"), in a merger entered into to effect a reincorporation of Mission West-California. We have examined such documents, records and matters of law as we have considered relevant. Based upon such examination, it is our opinion that the Common Shares, when issued and delivered in the manner and on the terms described in the Registration Statement, will be legally issued, fully paid, and nonassessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to our firm in the Registration Statement. Very truly yours, Graham & James LLP EX-5.2 6 OPINION OF BALLARD SPAHR ANDREWS & INGERSOLL [Ballard Spahr Andrews & Ingersoll Letterhead] We have served as Maryland counsel to Mission West Properties, Inc., a Maryland corporation (the "Company"), in connection with certain matters of Maryland law arising out of the merger of Mission West Properties, a California corporation and the sole stockholder of the Company with and into the Company (the "Reincorporation Merger"), the conversion of shares of the Common Stock of Mission West California into shares of the Company's common stock $.001 par value (the "New Common Stock") and the registration of the New Common Stock under the Securities Act of 1933, as amended (the "1933 Act"), all as described in the above-referenced Registration Statement under the 1933 Act. Capitalized terms used but not defined herein shall have the meanings given to them in the Registration Statement. In connection with our representation of the Company, and as a basis for the opinion hereinafter set forth, we have examined originals, or copies certified or otherwise identified to our satisfaction, of the following documents (hereinafter collectively referred to as the "Documents"): 1. The Registration Statement, including the related form of prospectus included therein, in the form in which it was transmitted by the Company to the Securities and Exchange Commission (the "Commission") under the 1933 Act; 2. The Articles of Incorporation of the company, certified as of a recent date by the State Department of Assessments and Taxation of Maryland ("SDAT"); 3. Proposed Articles of Amendment and Restatement of the Company, in the form attached to the Registration Statement as Exhibit 3.2.1 (the "Articles of Amendment and Restatement"); 4. The Bylaws of the Company, certified as of the date hereof by an officer of the Company; 5. Resolutions adopted by the Board of Directors of the Company relating to the approval of the Articles of Amendment and Restatement, the authorization of the Reincorporation Merger and the issuance and registration of the New Common Stock (the "Board of Resolutions") and resolutions adopted by the stockholders of the Company relating to the approval of the Articles of Amendment and Restatement and the approval of the Reincorporation Merger (the "Stockholders Resolutions", and, together with the Board Resolutions, the "Resolutions"), certified as of the date hereof by an officer of the Company; 6. The form of certificate representing a share of the New Common Stock; 7. A certificate of the SDAT, as of a recent date, as to the good standing of the Company; 8. A certificate executed by an officer of the Company, dated the date hereof; 9. The Merger Agreement and Plan of Merger, certified as of the date hereof by an officer of the Company; and 10. Such other documents and matters as we have deemed necessary or appropriate to express the opinion set forth in this letter, subject to the assumptions, limitations and qualifications stated herein. In expressing the opinion set forth below, we have assumed, and so far as is known to us there are no facts inconsistent with, the following: 1. Each individual executing any of the Documents, whether on behalf of such individual or another person, is legally competent to do so. 2. Each individual executing any of the Documents on behalf of a party (other than the Company) is duly authorized to do so. 3. Each of the parties (other than the Company) executing any of the Documents has duly and validly executed and delivered each of the Documents to which such party is a signatory, and such party's obligations set forth therein are legal, valid and binding and are enforceable in accordance with all stated terms. 4. Any Documents submitted to us as originals are authentic. The form and content of any Documents submitted to us as unexecuted drafts do not differ in any respect relevant to this opinion from the form and content of such Documents as executed and delivered. Any Documents submitted to us as certified or photostatic copies conform to the original documents. All signatures on all such Documents are genuine. All public records reviewed or relied upon by us or on our behalf are true and complete. All statements and information contained in the Documents are true and complete. There has been no oral or written modification of or amendment to any of the Documents, and there has been no waiver of any provision of any of the Documents, by action or omission of the parties or otherwise. 5. Articles of Amendment and Restatement authorizing the Company to issue up to 200,000,000 shares of common stock and otherwise in substantially the form attached to the Registration Statement as Exhibit 3.2.1 will be filed with and accepted for record by the SDAT prior to the issuance of the New Common Stock. The phrase "known to us" is limited to the actual knowledge, without independent inquiry, of the lawyers at our firm who have performed legal services in connection with the issuance of this opinion. Based upon the foregoing, and subject to the assumptions, limitations and qualifications stated herein, it is our opinion that: 1. The Company is a corporation duly incorporated and existing under and by virtue of the laws of the State of Maryland and is in good standing with the SDAT. 2. The New Common Stock is duly authorized and, when and if issued and delivered against payment therefor in accordance with the Resolutions and the Merger Agreement and Plan of Merger, will be validly issued, fully paid and nonassessable. The foregoing opinion is limited to the substantive laws of the State of Maryland, and we do not express any opinion herein concerning any other law. We express no opinion as to the applicability or effect of any federal or state securities laws, including the securities laws of the State of Maryland, or as to federal or state laws regarding fraudulent transfers. To the extent that any matter as to which our opinion is expressed herein would be governed by any jurisdiction other than the State of Maryland, we do not express any opinion on such matter. We assume no obligation to supplement this opinion if any applicable law changes after the date hereof or if we become aware of any fact that might change the opinion expressed herein after the date hereof. This opinion is being furnished to you for submission to the Commission as an exhibit to the registration Statement and, accordingly, may not be relied upon by, quoted in any manner to, or delivered to any other person or entity (other than Graham & James LLP, counsel to the Company) without, in each instance, our prior written consent. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of the name of our firm therein. In giving this consent, we do not admit that we are within the category of persons whose consent is required by Section 7 of the 1933 Act. Very Truly Yours, Ballard Spahr Andrews & Ingersoll EX-8.1 7 OPINION OF GRAHAM & JAMES LLP [G & J Letterhead] ______ __, 1998 Mission West Properties 10050 Bandley Drive Cupertino, California 95014 Mission West Properties, Inc. 10050 Bandley Drive Cupertino, California 95014 Re: Certain Federal Income Tax Matters Ladies and Gentlemen: This opinion is delivered to you in our capacity as counsel to Mission West Properties, a California corporation, ("Mission West") and Mission West Properties, Inc., a Maryland corporation ("Mission West-Maryland"), in connection with the amended registration statement on Form S-4 containing the Proxy Statement/Prospectus of Mission West addressed to holders of common stock of Mission West (the "Proxy Statement/Prospectus"), which Mission West originally filed with the Securities and Exchange Commission on May 15, 1998. The Proxy Statement/Prospectus relates to the following proposals (i) the offer and sale at $4.50 per share of 6,495,058 shares of common stock of Mission West to accredited investors in a private placement (the "Private Placement"); (ii) the ratification of Mission West's acquisition of approximately 12.11% of the total partnership interests in, and becoming the sole general partner of, each of four limited partnerships for $35,200,000 (collectively, the "Operating Partnership"); (iii) the offer and sale of up to 93,398,705 shares of common stock of Mission West issuable upon the future exchange of units of limited partnership interest in the Operating Partnership; and (iv) the merger of Mission West with and into Mission West-Maryland pursuant to the Merger Agreement and Plan of Merger (the "Merger Agreement") (the "Reincorporation Merger"). This opinion relates to Mission West-Maryland's qualification for federal income tax purposes as a real estate investment trust ("REIT") under the Internal Revenue Code of 1986, as amended (the "Code"), the status of the Operating Partnership as a partnership for federal income tax purposes, and the accuracy of the discussion of federal income tax considerations in the Proxy Statement/Prospectus. Certain capitalized terms not defined herein shall have the meanings attributed to them in the Proxy Statement/Prospectus. In rendering the following opinions, we have examined the Proxy Statement/Prospectus, the Articles of Incorporation and Bylaws of Mission West-Maryland, the Merger Agreement, the Acquisition Agreement among Mission West Properties, Certain Partnerships and the Berg Group (as defined therein) dated as of May 14, 1998 (the "Acquisition Agreement"), the agreements of limited partnership of the Operating Partnership, the pro forma financial statements of Mission West prepared as of September 30, 1998 and for the three-month period then ended (the "Pro Formas"), and such other records, certificates and documents as we have deemed necessary or appropriate for purposes of rendering the open set forth herein. The foregoing documents, including the Pro Formas, are referred to herein as the "Documents". We also have relied upon the representations of Mission West, Mission West-Maryland, and the Operating Partnership regarding the manner in which such entities have been and will be owned and operated (the "Management Representations"). We have neither independently investigated nor verified such representations, and we assume that such representations are true, correct and complete and that all representations made "to the best of the knowledge and belief" of any person(s) or party(ies) or with similar qualification are and will be true, correct and complete as if made without such qualification and that no action will occur from the date hereof until the Reincorporation Merger that is inconsistent with such representations. We further assume that the Reincorporation Merger and related transactions contemplated by the Documents will be consummated in accordance with the Documents and as described in the Proxy Statement/Prospectus (including satisfaction of all covenants and conditions to the obligations of the parties without amendment or waiver thereof) insofar as is relevant to the opinions contained herein and that, prior to the Reincorporation Merger, all entities have operated and will operate in accordance with applicable laws and the terms and conditions of applicable documents. In addition, we assume that each of the limited partnerships included in the Operating Partnership will be, or will make a timely election to be, classified as a partnership as provided by ss.301.7701-3 of the Procedure and Administration Regulations promulgated under the Code. In rendering the opinions set forth herein, we have assumed (i) the genuineness of all signatures on documents we have examined, (ii) the authenticity of all documents submitted to us as original, (iii) the conformity to the original documents of all documents submitted to s as copies, (iv) the conformity of final documents to all documents submitted to us as drafts, (v) the authority and capacity of the individual or individuals who executed any such documents on behalf of any person, (vi) the accuracy and completeness of all records made available to us and (vii) the factual accuracy of all representations, warranties and other statements made by all parties. We also have assumed, without investigation, that all documents, certificates, warranties and covenants on which we have relied in rendering the opinions set forth below and that were given or dated earlier than the date of this letter continue to remain accurate, insofar as relevant to the opinions set forth herein, from such earlier date through and including the date of this letter. The opinions set forth below are based upon the current provisions of the Code, the Income Tax Regulations and Procedure and Administration Regulations promulgated thereunder, all as of the date hereof, and existing administrative and judicial interpretations thereof, all as of the date hereof of which are subject to change. Future changes in applicable law may cause the federal income tax treatment of Mission West and the Mission West-Maryland to be materially and adversely different from that described below: Based upon and subject to the foregoing, we are of the opinion that: 1. Mission West-Maryland is organized, as of the date hereof, in conformity with the requirements for qualification and taxation as a real estate investment trust ("REIT") under the Code, and Mission West-Maryland's proposed method of operation (as described in the Management Representations), including for periods following the Reincorporation Merger, should enable Mission West-Maryland to continue to meet the requirements for qualification and taxation as a REIT for periods following the date hereof, including periods following the effective time of the Reincorporation Merger. 2. The Operating Partnership will be treated as a partnership for federal income tax purposes and will not be subject to federal income tax as a corporation or an association taxable as a corporation. 3. The discussion in the Proxy Statement/Prospectus under the captions "FEDERAL INCOME TAX CONSIDERATIONS," and "FEDERAL INCOME TAX CONSEQUENCES OF THE REINCORPORATION MERGER", to the extent that such sections discuss matters of law or legal conclusions, is accurate in all material respects. We express no opinion herein other than those expressly set forth herein. You should recognize that our opinion is not binding on the Internal Revenue Service (the "IRS"), and that the IRS may disagree with the opinion contained herein. Although we believe that our opinion will be sustained if challenged, there can be no assurance that this will be the case. We consent to being named as counsel to the Company and Mission West in the Proxy Statement/Prospectus, to the references in the Proxy Statement/Prospectus to our firm and to the inclusion of a copy of this opinion letter as an exhibit to the Proxy Statement/Prospectus. In giving such consent, however, we do not thereby admit that we are an "expert" within the meaning of the Securities Act of 1933, as amended. This opinion is being furnished to you solely for the purpose of being included as an exhibit to the Proxy Statement/Prospectus. This opinion may not be used or relied upon for any other purpose without our prior written consent. Very truly yours, GRAHAM & JAMES LLP EX-10.15 8 PRUDENTIAL PROMISSORY NOTE PROMISSORY NOTE $130,000,000.00 San Francisco, California Loan No. 6 102 899 September 22,1998 FOR VALUE RECEIVED, the undersigned, MISSION WEST PROPERTIES, L.P., a Delaware limited partnership, MISSION WEST PROPERTIES, L.P. I, a Delaware limited partnership, MISSION WEST PROPERTIES, L.P. II, a Delaware limited partnership, and MISSION WEST PROPERTIES, L.P. III, a Delaware limited partnership (collectively, "Maker"), each having an address at 10050 Bandley Drive, Cupertino, California 95014, and the general partner of each being Mission West Properties, a California corporation, JOINTLY AND SEVERALLY PROMISE TO PAY TO THE ORDER OF THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("Prudential"), authorized to do business in the State of California (Prudential and its successors and assigns who become holders of this Note hereinafter collectively referred to as "Holder"), by "Electronic Funds Transfer" to Prudential at Bank of New York, located in New York, New York, ABA Routing Number 021-000-018, Account No. 890-0304-766, referencing Loan No. 6 102 899, or at such other place as Holder may from time to time designate, the principal sum of One Hundred Thirty Million United States Dollars ($130,000,000.00), together with interest thereon from the Initial Disbursement Date hereunder through the date the Loan is paid in full, at a rate per annum equal to the Interest Rate. 1. DEFINITIONS. The following terms shall have the meanings set forth below. Capitalized terms not otherwise defined herein shall have the meaning ascribed to such terms in the other Loan Documents. DEED OF TRUST: That certain Deed of Trust, Security Agreement, Fixture Filing with Assignment of Rents and Proceeds of even date herewith executed by Maker as "Trustor" to the benefit of Prudential as "Beneficiary" as security for repayment of this Note. DISCOUNT RATE: The interest rate which, when compounded monthly, is equivalent to the Treasury Rate when compounded semi-annually. INITIAL DISBURSEMENT DATE: The date of this Note. INTEREST RATE: A rate of interest per annum of six and fifty-six hundredths percent (6.56%). LOAN DOCUMENTS: As defined in the Deed of Trust. MATURITY DATE: October 15, 2008. NOTE: This Promissory Note. PREPAYMENT AMOUNT: The amount of the Principal Balance prepaid on a Prepayment Date. PREPAYMENT DATE: Any date, prior to the Maturity Date, upon which all or any portion of the Principal Balance is prepaid. PREPAYMENT PREMIUM: As defined in Paragraph 6(a). PRESENT VALUE OF THE PREPAYMENT AMOUNT: The amount determined by discounting all scheduled payments of principal and interest remaining to the Maturity Date, attributable to the Prepayment Amount, at the Discount Rate. If the Prepayment Date occurs on a date other than a regularly scheduled payment date under this Note, the actual number of days remaining from the Prepayment Date to the next regularly scheduled payment date shall be used to discount within this period. PRIME RATE: The base rate on corporate loans posted by at least seventy-five percent (75%) of the twenty (20) largest United States banks, designated and published as the "Prime Rate" in the Wall Street Journal on the date an Event of Default occurs. PRINCIPAL BALANCE: The principal balance of this Note from time to time outstanding. SECONDARY INTEREST RATE: A rate of interest per annum equal to the lesser of (i) the maximum rate allowed to be charged by Holder under applicable law, or (ii) the greater of (A) the sum of the Interest Rate plus five percent (5%), or (B) the sum of the Prime Rate plus five percent (5%). TERM: The term of the Loan, commencing on the Initial Disbursement Date and ending on the Maturity Date. TREASURY RATE: The interest rate, conclusively determined by Holder, in its sole discretion, on the Prepayment Date, equal to the semi-annual yield on the Treasury Constant Maturity Series with maturity equal to the remaining weighted average life of the Loan for the week prior to the Prepayment Date, as reported in Federal Reserve Statistical Release H.15 - Selected Interest Rates, such yield being determined by linear interpolation between the yields reported in Release H.15, if necessary. If Release H.15 is no longer published, Holder shall select a comparable publication to determine the Treasury Rate. 2. PAYMENTS. On the fifteenth day of November, 1998, an amount equal to the sum of (a) all accrued interest, at the Interest Rate, on the Principal Balance for the period from the Initial Disbursement Date through and including October 14, 1998, and (b) a monthly installment of principal and interest in the amount of Eight Hundred Twenty-Six Thousand Eight Hundred Twenty-Four and 80/100 Dollars ($826,824.80), shall be due and payable. Commencing on the fifteenth day of the December, 1998, and continuing on the fifteenth day of each calendar month thereafter through and including the Maturity Date, monthly installments of principal and interest in the amount of Eight Hundred Twenty-Six Thousand Eight Hundred Twenty-Four and 80/100 Dollars ($826,824.80) shall be due and payable. The entire unpaid Principal Balance, plus accrued interest and other amounts payable under the Loan Documents, shall be due and payable on the Maturity Date. 3. TREATMENT OF PAYMENTS. (a) Until directed otherwise in writing by Holder, all payments made under this Note shall be made by Electronic Funds Transfer from Maker's account at an Automated Clearing House member bank satisfactory to Holder in its sole discretion. Maker shall direct such bank in writing so to transfer payments on their due dates to Holder's designated account. Each payment shall be initiated by Holder by Electronic Funds Transfer through the Automated Clearing House network for settlement on each respective due date. Prior to each payment due date, Maker shall deposit and/or maintain sufficient funds in Maker's account to cover each debit entry to Maker's account. (b) Holder's approval and designation of a bank (or banks) under PARAGRAPH 3(A) above shall be confirmed in writing. Notwithstanding Holder's approval of a bank under PARAGRAPH 3(A) above, Holder shall have the right, upon thirty (30) days prior written notice to Maker, (i) to require Maker to use a different bank that is mutually acceptable to Maker and Holder, or (ii) to designate a different account for Holder. All costs of establishing and maintaining these accounts and all costs of these Electronic Funds Transfers shall be paid by Maker. (c) For purposes of calculating interest under this Note, a year of 360 days consisting of twelve (12) thirty (30) days months shall be employed regardless of the actual time elapsed. (d) All payments due under this Note or the Loan Documents shall be paid by Maker in lawful money of the United States of America on the date such payment is due. All such payments shall be made without deduction for any present or future taxes, levies, deductions, charges or withholdings (including Federal, state or local income taxes), which amounts shall be paid by Maker. (e) Payments from Maker to Holder under this Note shall be applied first to any expense reimbursements under the Loan Documents, then to any Daily Charges or Late Charges, as the case may be, then to accrued and unpaid interest, and the balance to the Principal Balance and any Prepayment Premium due thereon. 4. DAILY CHARGES; LATE CHARGES; SECONDARY INTEREST RATE. (a) If Maker fails timely to pay any sum due and payable under this Note on or before the date due, a late charge equal to Eight Hundred Fifty Dollars ($850.00) per day (the "Daily Charge") shall be due for each day that such sum is not paid (including, the day upon which the payment is made), but if such sum, together with the Daily Charges applicable thereto, is not paid by the fourteenth (14th) day after the date such sum is due, a late charge equal to four cents ($0.04) for each dollar ($1.00) of each such sum (the "Late Charge") shall be immediately due and payable in lieu of all Daily Charges. Maker acknowledges and agrees that its failure to make timely payments will result in Holder incurring additional expense in servicing the Loan, and that it is extremely difficult and impractical to ascertain the extent of such damages and that the Daily Charge or the Late Charge represent a fair and reasonable estimate, considering all of the circumstances existing on the date of the execution of this Note, of the costs that Holder will incur by reason of such late payment. Acceptance of any Daily Charge or Late Charge shall not constitute a waiver of the default with respect to the late payment, and shall not prevent Holder from exercising any of the other rights or remedies available hereunder or at law or in equity. (b) Maker further acknowledges and agrees that during the time that any payment of principal, interest or other amount due under this Note shall be delinquent, Holder will incur additional costs and expenses attributable to its loss of use of the money due and to the adverse impact on Holder's ability to meet its other obligations and avail itself of other opportunities. Maker agrees that it is extremely difficult and impractical to ascertain the extent of such expenses, and Maker therefore agrees that upon the occurrence of an Event of Default, interest at the Secondary Interest Rate shall accrue on the Indebtedness, regardless of whether there has been an acceleration of the maturity of the Indebtedness. 5. EVENT OF DEFAULT. The occurrence of an Event of Default under any Loan Document shall constitute an Event of Default under this Note. Upon the occurrence of an Event of Default, including the failure of the Maker to observe the provisions of Paragraph 4.2 of the Deed of Trust, Holder, at its option, may cause the Principal Balance, together with all unpaid accrued interest, any Prepayment Premium and any other sums evidenced or secured by this Note or any Loan Document, to be immediately due and payable, without further presentment, demand, protest or notice of any kind, by so notifying Maker in writing. 6. PREPAYMENT. (a) If for any reason the Principal Balance or any portion thereof is paid prior to the Maturity Date, whether voluntarily, involuntarily, by operation of law, acceleration, including acceleration on account of an Event of Default and/or a violation of Paragraph 4.2 of the Deed of Trust, or otherwise, but excluding any prepayment made as result of the application by Holder of insurance proceeds or condemnation awards as provided by the terms of the Loan Documents, Maker shall pay to Holder, together with the subject Prepayment Amount and any unpaid accrued interest, a prepayment charge (the "Prepayment Premium") equal to the greater of: (i) the product of (A) one percent (1%) of the Prepayment Amount multiplied by (B) a fraction, the numerator of which is the number of full months remaining until the Maturity Date as of the Prepayment Date and the denominator of which is the number of full months comprising the Term of the Loan; or (ii) the Present Value of the Prepayment Amount less the sum of (A) the Prepayment Amount, and (B) unpaid accrued interest, if any, calculated as of the Prepayment Date. (b) Maker shall have the right voluntarily to prepay all or any portion of the Principal Balance, together with accrued interest thereon, but only if Maker gives Holder not less than thirty (30) days' prior written notice of its intention to prepay, and delivers to Holder, on or before the Prepayment Date, the Prepayment Premium as calculated above, together with the Prepayment Amount and all accrued interest and other sums due under the Loan Documents. Notwithstanding the foregoing, Maker shall have the right to prepay the Principal Balance, together with accrued interest thereon, without payment of the Prepayment Premium, during the period of time commencing fourteen (14) days immediately prior to the Maturity Date. (c) Maker acknowledges that (i) the Prepayment Premium represents the reasonable estimate of Holder and Maker of a fair average compensation for the loss that may be sustained by Holder due to the payment of any of the Principal Balance prior to the Maturity Date; (ii) the Prepayment Premium shall be paid without prejudice to the right of Holder to collect any other amounts provided to be paid hereunder or under the other Loan Documents; and (iii) Holder shall not be obligated to actually reinvest the Prepayment Amount in any Treasury Constant Maturity Series or other specific investments as a condition to receiving the Prepayment Premium. (d) Maker acknowledges that it is comprised of four (4) different Persons, each of which owns separately its Property, and that the Loan is secured by the interest of all Persons comprising Maker in all of the Property. Maker further acknowledges that in connection therewith, for purposes of allocating the Loan proceeds appropriately among the Persons comprising Maker and their respective Property, Maker and Holder agree to allocate the Loan proceeds in accordance with the Original Allocated Loan Amount as set forth in Exhibit B to the Deed of Trust in order to ensure the continuing adequacy of the security interest of Holder in each Property of Maker under the Loan Documents. Maker agrees that any prepayment of the Loan, unless otherwise provided in the Loan Documents, shall be applied pro rata against the Original Allocated Loan Amount (as set forth in Exhibit B to the Deed of Trust) of each Property. (e) Maker hereby expressly waives any right it may have under California Civil Code Section 2954.10 to prepay this Note, in whole or in part, without payment of the Prepayment Premium, upon acceleration of the Maturity Date of this Note, and agrees that if for any reason, a prepayment of any or all of this Note is made, whether voluntarily, involuntarily or upon or following any acceleration of the Maturity Date of this Note by Holder, then Maker shall pay the Prepayment Premium calculated pursuant to PARAGRAPH 6(a). By initialing this provision in the space provided below, Maker hereby declares that the Holder's agreement to make the Loan at the Interest Rate and for the Term set forth in this Note constitutes adequate consideration, given individual weight by Maker, for this waiver and agreement. INITIALS OF MAKER: ____________________ 7. SECURITY. This Note is secured by the Deed of Trust and the other Loan Documents, which contain provisions for the acceleration of the maturity of this Note upon the occurrence of certain described events. 8. HOLDER'S RIGHTS; NO WAIVER BY HOLDER. The rights, powers and remedies of Holder under this Note shall be in addition to all rights, powers and remedies given to Holder under the Loan Documents and any other agreement or document securing or evidencing the Indebtedness or by virtue of any statute or rule of law, including the California Uniform Commercial Code. All such rights, powers and remedies shall be cumulative and may be exercised successively or concurrently in Holder's sole discretion without impairing Holder's security interest, rights or available remedies. Any forbearance, failure or delay by Holder in exercising any right, power or remedy shall not preclude further exercise thereof, and every right, power or remedy of Holder shall continue in full force and effect until such right, power or remedy is specifically waived in a writing executed by Holder. Maker waives any right to require the Holder to proceed against any Person or to exhaust all or any part of the Property or to pursue any remedy in Holder's power. 9. MAKER'S WAIVERS. (a) Maker and any endorsers of this Note, and each of them, hereby waive diligence, demand, presentment for payment, notice of non-payment, protest and notice of protest, and specifically consent to and waive notice of any renewals or extensions of this Note, whether made to or in favor of Maker or any other person or persons. Maker and any endorsers of this Note expressly waive all right to the benefit of any statute of limitations and any moratorium, reinstatement, marshaling, forbearance, extension, or appraisement now or hereafter provided by the Constitution and the laws of the United States and of any state thereof, as a defense to any demand against Maker or any such endorsers, to the fullest extent permitted by law. (b) Maker hereby waives any right to trial by jury with respect to any action or proceeding brought by Holder or any other Person relating to (i) the Obligations, or (ii) the Loan Documents. Maker hereby agrees that this Note constitutes a written consent to waiver of trial by jury pursuant to the provisions of California Code of Civil Procedure Section 631 and Maker does hereby constitute and appoint Holder its true and lawful attorney-in-fact, which appointment is coupled with an interest, and which shall survive the dissolution or bankruptcy of any Maker, or any Transfer, and Maker does hereby authorize and empower Holder, in the name, place and stead of Maker, to file this Note with the clerk or judge of any court of competent jurisdiction as statutory written consent to waiver of trial by jury. 10. TRANSFERS BY HOLDER. This Note, or any interest in this Note and/or the Loan Documents, may be hypothecated, transferred or assigned by Holder without the prior consent of Maker. 11. AMENDMENT. This Note may be amended or modified only by an instrument in writing which by its express terms refers to this Note and which is duly executed by the party sought to be bound thereby. 12. SUCCESSORS AND ASSIGNS. This Note shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, executors, administrators, personal representatives, successors and permitted assigns. 13. GOVERNING LAW. This Note shall be governed by and construed in accordance with the laws of the State of California. 14. TIME. Time is of the essence with respect to each and every term and provision of this Note. 15. USURY. Notwithstanding any provision herein, the total liability for payments in the nature of interest, additional interest, or other charges, under this Note or any other Loan Document, shall not exceed the applicable limits imposed by any applicable state or Federal interest rate laws. If any such payments in the nature of interest, additional interest, and other charges made hereunder or under any other Loan Documents are held to be in excess of the applicable limits imposed by any applicable state or Federal laws, it is agreed that any such amount held to be in excess shall be considered payment of principal and the Principal Balance shall be reduced by such amount in the inverse order of maturity so that the total liability for payments in the nature of interest, additional interest and other charges, shall never exceed the applicable limits imposed by any applicable state or Federal interest rate laws in compliance with the desires of Holder and Maker as set forth herein. 16. NOTICES. All notices, consents and other communications required or permitted by this Note shall be in writing and shall be given in the manner set forth in the Deed of Trust. 17. ATTORNEYS' FEES. If any arbitration, litigation or similar proceedings are brought by either party to enforce any obligation or to pursue any remedy under this Note, the party prevailing in any such arbitration, litigation or similar proceedings will be entitled to costs of collection, if any, and reasonable attorneys fees incurred in connection with such proceedings and in collecting or enforcing any award granted therein. 18. LIMITATION ON PERSONAL LIABILITIES. (a) Except as expressly set forth in PARAGRAPHS 18(B) AND 18(C) below, neither Maker nor any general partner of Maker (singularly or collectively, the "Exculpated Parties") shall have any personal liability for the Loan or any Obligations set forth in the Loan Documents, except that Holder shall be entitled to bring a foreclosure action or proceeding or other appropriate action or proceeding to enforce the Loan Documents or foreclose or realize upon and/or protect the Property (including naming the Exculpated Parties in such actions or proceedings) and/or to draw on, and retain the proceeds of, any letter of credit issued in favor of Holder with respect to the Loan. (b) Notwithstanding anything to the contrary contained in this Note or in any Loan Document, Holder shall be entitled to proceed personally against the Exculpated Parties, or any of them, for, and the Exculpated Parties shall have personal liability jointly and severally for: (i) any indemnity, guaranty, or similar instrument furnished in connection with the Loan (including the ERISA provisions of Paragraph 9.18 of the Deed of Trust and the Hazardous Substances Agreement); (ii) any assessments and/or taxes (accrued and/or payable) with respect to the Property to the extent income from the Property has been used other than in accordance with the Loan Documents; (iii) any security deposits of tenants (1) not turned over to Holder upon foreclosure, sale (pursuant to power of sale), or conveyance in lieu thereof, or (2) not turned over to a receiver or trustee for the Property after his/her appointment; (iv) any insurance proceeds or condemnation awards neither turned over to Holder nor used in compliance with the terms of the Loan Documents; (v) if any of the Exculpated Parties executes an amendment or termination of any Lease (other than a Lease with a Major Tenant which is governed by Paragraph 18(c)(iv) below) without the prior written consent of Holder, if such consent is required under the terms of the Loan Documents, the Exculpated Parties shall have personal liability for the greater of: (1) the present value (calculated at the Discount Rate) of the aggregate total dollar amount (if any) by which (A) the rental income and/or other tenant obligations prior to the amendment or termination of such Lease, exceeds (B) the rental income and/or other tenant obligations after the amendment or termination of such Lease, or (2) any termination fee or other consideration paid in connection with such amendment or termination; (vi) waste of the Property; (vii) any rents or other income from the Property received by any of the Exculpated Parties following a default under the Loan Documents and not otherwise applied to the Indebtedness or to the current (and not deferred) operating expenses of the Property incurred in the ordinary course, excluding amounts paid as operating expenses to a Person related to or affiliated with any of the Exculpated Parties unless payment of such amounts are expressly permitted under the terms of the Loan Documents; (viii) Maker's failure to maintain any letter of credit required under the terms of the Loan Documents or otherwise in connection with the Loan; (ix) Maker's obligation to indemnify Holder for commissions and fees under Paragraph 2.10 of the Deed of Trust; and/or (x) all legal fees (including allocated costs of Holder's staff attorneys) and other expenses incurred by Holder in enforcing the Loan Documents if any Exculpated Party contests, delays, or otherwise hinders or opposes (including the filing of a bankruptcy or insolvency proceeding) any of Holder's enforcement actions. (c) Except as provided in Paragraph 18(c)(v) below, the agreement contained in this Paragraph 18 to limit the personal liability of the Exculpated Parties shall become null and void and of no further force or effect, and the Exculpated Parties shall have personal liability for all Indebtedness and all Obligations evidenced by the Note and the Loan Documents, in the event: (i) there is any breach or violation of Paragraph 4.2 of the Deed of Trust; (ii) there is any fraud or material misrepresentation by any of the Exculpated Parties in connection with the Property, the Loan Documents, the Application, or any other aspect of the Loan; (iii) the Property or any part thereof becomes an asset in (1) a voluntary bankruptcy or insolvency proceeding, or (2) any involuntary bankruptcy or insolvency proceeding which is not dismissed within ninety (90) days of filing, except that this clause (2) shall not apply if such involuntary bankruptcy is filed by Holder; (iv) any Exculpated Party executes an amendment or termination of any Lease with a Major Tenant without the prior written consent of Holder, if such consent is required under the terms of the Loan Documents; or (v) the Property or any individual property constituting the Property is rendered "environmentally impaired", as such term is defined in Section 726.5 of the California Code of Civil Procedure; provided, however, that in such event, the Exculpated Parties shall have personal liability only for the Original Allocated Loan Amount allocated to the Property that is or are determined to be "environmentally impaired", unless, in so limiting Holder's recourse to less than all Indebtedness and all Obligations, Holder would be substantially deprived of the benefits available to Holder under Section 726.5. IN WITNESS WHEREOF, Maker has caused this Note to be executed and delivered effective as of the date first written above. MAKER: MISSION WEST PROPERTIES, L.P., a Delaware limited partnership By: Mission West Properties, a California corporation, its general partner By: -------------------------------------- Carl E. Berg, Chairman, President, CEO [Signatures continued on succeeding page] MISSION WEST PROPERTIES, L.P. I, a Delaware limited partnership By: Mission West Properties, a California corporation, its general partner By: -------------------------------------- Carl E. Berg, Chairman, President, CEO MISSION WEST PROPERTIES, L.P. II, a Delaware limited partnership By:Mission West Properties, a California corporation, its general partner By: -------------------------------------- Carl E. Berg, Chairman, President, CEO MISSION WEST PROPERTIES, L.P. III a Delaware limited partnership By:Mission West Properties, a California corporation, its general partner By: -------------------------------------- Carl E. Berg, Chairman, President, CEO EX-10.16 9 PRUDENTIAL DEED OF TRUST RECORDING REQUESTED BY AND WHEN RECORDED MAIL TO: Cassidy, Cheatham, Shimko & Dawson, P.C. 20 California Street, Suite 500 San Francisco, CA 94111 Attention: Stephen K. Cassidy, Esq. SPACE ABOVE THIS LINE FOR RECORDER'S USE DEED OF TRUST, SECURITY AGREEMENT AND FIXTURE FILING WITH ASSIGNMENT OF RENTS AND PROCEEDS THIS DEED OF TRUST, SECURITY AGREEMENT AND FIXTURE FILING WITH ASSIGNMENT OF RENTS AND PROCEEDS (the "Deed of Trust"), dated as of September 22, 1998, is made and delivered by MISSION WEST PROPERTIES, L.P., a Delaware limited partnership, MISSION WEST PROPERTIES, L.P. I, a Delaware limited partnership, MISSION WEST PROPERTIES, L.P. II, a Delaware limited partnership, and MISSION WEST PROPERTIES, L.P. III, a Delaware limited partnership, each having offices at 10050 Bandley Drive, Cupertino, California 95014 (each, a "Trustor" and collectively, "Trustors"; reference herein to a "Trustor" meaning each of the Trustors, unless the specific reference otherwise specifies), to Financial Title Company, having offices at 701 Miller Street, San Jose, California 95110 ("Trustee"), and THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation, having offices at Four Embarcadero Center, Suite 2700, San Francisco, California 94111 ("Beneficiary"). WITNESSETH: TRUSTOR HEREBY IRREVOCABLY GRANTS, TRANSFERS AND ASSIGNS TO TRUSTEE, IN TRUST, WITH POWER OF SALE all of Trustor's right, title and interest now owned or hereafter acquired in and to the following property, together with the Personalty (as hereinafter defined): A. That certain real property, and all rights and appurtenances thereto (collectively, the "Land"), located in the Counties of Alameda and Santa Clara State of California, and more particularly described in EXHIBIT A hereto; B. All Improvements (as hereinafter defined) and all appurtenances, easements, rights and privileges thereof, including all minerals, oil, gas and other hydrocarbon substances thereon or therein, air rights, water rights and development rights, and any land lying in the streets, roads or avenues adjoining the Land or any part thereof; C. All Fixtures (as hereinafter defined), whether now or hereafter installed, being hereby declared to be for all purposes of this Deed of Trust a part of the Land; and D. All Rents and Proceeds (as hereinafter defined). FOR THE PURPOSE OF SECURING, in such order of priority as Beneficiary may determine: (i) payment of the Indebtedness (as hereinafter defined); and (ii) payment (with interest as provided) and performance by Trustors of the other Obligations (as hereinafter defined). Notwithstanding the foregoing, or any other term contained herein or in the Loan Documents, none of Trustors' Obligations under or pursuant to the (A) Hazardous Substances Remediation and Indemnification Agreement or (B) Certificate Regarding Distribution of Loan Proceeds and Indemnity Agreement, each of even date herewith, executed by Trustors in favor of Beneficiary ("Hazardous Substances Agreement") shall be secured by the lien of this Deed of Trust. ARTICLE 1 DEFINITIONS CERTAIN DEFINED TERMS: As used in this Deed of Trust, the following terms shall have the following meanings. Terms defined in the other Loan Documents shall have the same meaning when used herein. AGREEMENTS: As defined in PARAGRAPH 8.2 hereof. APPLICATION: The Application, dated June 24, 1998, executed by Trustors (referred to as "Applicant" therein), which Application includes the mortgage loan conditions attached thereto. ASSIGNMENT OF LEASES: The Assignment of Lessor's Interest in Leases of even date herewith executed by Trustors in favor of Beneficiary. CERTIFICATE REGARDING DISTRIBUTION OF LOAN PROCEEDS AND INDEMNITY AGREEMENT: The Certificate Regarding Distribution of Loan Proceeds and Indemnity Agreement of even date herewith executed by Trustors in favor of Beneficiary. COLLATERAL: As defined in PARAGRAPH 7.1 hereof. DEBT SERVICE COVERAGE RATIO: The ratio, as reasonably determined by Beneficiary, derived by dividing (a) Net Operating Income for the Property for the applicable twelve (12) month period, by (b) the sum of (i) the annual debt service payments (including principal and interest) on the Loan for such 12-month period, and (ii) the annual debt service payments (including principal and interest) on all other indebtedness secured, or to be secured in due course, by a lien or encumbrance on all or part of the Property for such 12-month period. ELIGIBLE TRANSFER PROPERTY: As defined in PARAGRAPH 4.3 hereof. ERISA: As defined in PARAGRAPH 9.18.B hereof. EVENT OF DEFAULT: As defined in PARAGRAPH 6.1 hereof. FIXTURES: All fixtures located upon or within the Improvements or now or hereafter installed in, or used in connection with any of the Improvements, whether or not permanently affixed to the Land or the Improvements. HAZARDOUS SUBSTANCES AGREEMENT: As defined in the above Securing paragraph of this Deed of Trust. IMPOSITIONS: All real estate and personal property and other taxes and assessments, and any and all other charges, expenses, payments, claims, mechanics' or material suppliers' liens or assessments of any nature that at any time prior to or after the execution of the Loan Documents may be assessed, levied, imposed, or become a lien upon the Property or the rent or income received therefrom, or any use or occupancy thereof. IMPOUND ACCOUNT: The account that Trustor shall maintain when required pursuant to PARAGRAPH 3.4 hereof. IMPROVEMENTS: All buildings and other improvements located on the Land, or at any time hereafter constructed or placed upon the Land, and all additions to, modifications of and replacements thereof. INDEBTEDNESS: The indebtedness evidenced by the Note (including any prepayment charges due thereunder) and all other amounts due from Trustor to Beneficiary evidenced or secured by the Loan Documents, plus interest on all such amounts as provided in the Loan Documents. LAND: As defined in the above Granting Paragraph A of this Deed of Trust. LAND USE CERTIFICATION: The Land Use Certification of even date herewith executed by Trustors in favor of Beneficiary. LAWS AND RESTRICTIONS: All laws, regulations, orders, codes, ordinances, rules, statutes and policies, restrictive covenants and other title encumbrances, permits and approvals, Leases, relating to the development, occupancy, ownership, management, use, and/or operation of the Property or otherwise affecting the Property or Trustor. LEASES: Any and all leasehold interests, and other rental agreements, licenses and concessions, now or hereafter affecting or covering any part of the Property. LOAN: The loan from Beneficiary to Trustors evidenced by the Note. LOAN DOCUMENTS: The Note, this Deed of Trust, the Application, the Assignment of Leases, the Land Use Certification, the Post Closing Actions Agreement and all other documents, other than the Hazardous Substances Agreement and the Certificate Regarding Distribution of Loan Proceeds and Indemnity Agreement, evidencing, securing or relating to the Loan, the payment of the Indebtedness or the performance of the Obligations. LOAN PARTIES: Any Trustor, and/or Mission West. LOAN TO VALUE RATIO: The ratio, as reasonably determined by Beneficiary, derived by dividing (i) the aggregate outstanding principal balance, together with all accrued but unpaid interest, of the Loan and all other indebtedness secured or to be secured in due course by a lien or encumbrance on all or part of the Property, by (ii) the fair market value of the Property, as reasonably determined by Beneficiary. MAJOR LEASES: The Leases with the Major Tenants. If Beneficiary receives satisfactory evidence that the Debt Service Coverage Ratio for the preceding six month period is at least 1.50 to 1.00, then any other Lease covering at least 130,000 rentable square feet, or if Beneficiary does not receive satisfactory evidence that such minimum Debt Service Coverage Ratio is satisfied, then any Lease covering at least 65,000 rentable square feet shall be a "Major Lease." Reference to a "Major Lease" shall refer to any or all of the Major Leases as the context may require. MAJOR TENANTS: Apple Computer Inc., a California corporation; Intevac Corporation, a California corporation; Cisco Systems, a California corporation; ESL Incorporated, a California corporation; Amdahl Corporation, a Delaware corporation; and On-Command Corporation, a Delaware corporation. Reference to a "Major Tenant" shall refer to any or all of the Major Tenants as the context may require. MATERIAL ADVERSE CHANGE: Any material and adverse change in (i) the financial condition of the Loan Parties which, taken as a whole, would materially impair the ability of the Loan Parties to perform their Obligations under the Loan Documents, or (ii) the condition, management or operation of the Property. MISSION WEST: Mission West Properties, a California corporation, the managing general partner of each Trustor, or, following a merger which satisfies the provisions of Paragraph 4.2.B(vi) hereof, MWP, Inc. MISSION WEST MERGER TRANSACTION: As defined in PARAGRAPH 4.2.B hereof. MWP, INC.: Mission West Properties, Inc., a Maryland corporation. NET OPERATING INCOME: For any period, (i) gross income derived from operations of the Property in the ordinary course from arm's length Leases with unaffiliated third parties, including rent, service fees or charges, and additional rent resulting from operating expense, common area maintenance and tax escalation pass through provisions (but excluding extraordinary income derived from the sale of assets and other items of income which Beneficiary reasonably determines are unlikely to occur in any subsequent period), (ii) less operating expenses of the Property incurred in the ordinary course (such as cleaning, utilities, administrative, landscaping, security and management expenses, repairs and maintenance and reserves for replacements) and recurring fixed expenses in the ordinary course (such as ground rent, insurance, real estate and other taxes and assessments), assuming, for each of the foregoing categories of expenses, for any period during which ninety-five percent (95%) of the net rentable area of any of the Improvements is not leased and occupied, a ninety-five percent (95%) occupancy level for such Improvements. Operating expenses and fixed expenses under clause (ii) above shall exclude all expenses for capital improvements and replacements, debt service and depreciation or amortization and other similar noncash items, and such other amounts as Beneficiary reasonably determines are unlikely to recur in a subsequent period. Gross income shall not be accrued for any greater period than that allowed by generally accepted accounting principles and approved by Beneficiary, nor shall operating expenses be included to the extent prepaid. NET PROCEEDS: As defined in PARAGRAPH 5.1.B hereof. NOTE: The Promissory Note of even date herewith executed by Trustors in the original principal amount of One Hundred Thirty Million Dollars ($130,000,000.00), payable to Beneficiary or its order, and all modifications, renewals or extensions thereof. OBLIGATIONS: Any and all of the terms, covenants, promises and other obligations (including payment of the Indebtedness) made or owing by Trustor to or due to Beneficiary as provided in the Loan Documents and all of the material covenants, promises and other obligations made or owing by Trustor to any other Person relating to the Property. OPERATING PARTNERSHIP UNITS: Each Trustor's "L.P. Units," as such term is defined in each Trustor's Amended and Restated Agreement of Limited Partnership dated July 1, 1998. ORIGINAL ALLOCATED LOAN AMOUNT: As defined in PARAGRAPH 4.3 hereof. PERMITTED EXCEPTIONS: All of those title exceptions set forth in the title insurance policy issued to Beneficiary in connection with the Loan, which insures the priority of this Deed of Trust. PERSON: Any natural person, corporation, firm, association, government, governmental agency or any other entity, whether acting in an individual, fiduciary or other capacity. PERSONALTY: Trustor's right, title and interest in all personal property (other than Fixtures) now or hereafter located in, upon or about or collected or used in connection with the Property, together with all present and future attachments, accessions, replacements, substitutions and additions thereto or therefor, and the cash and noncash proceeds thereof, including all goods, equipment, furniture, fixtures and furnishings (such as appliances, satellite television equipment, light fixtures, drapes and window coverings, floor coverings, laundry equipment, and office equipment), inventory, all property listed in the Impound Account, the Agreements, all drawings, plans and specifications, and all accounts, contract rights and general intangibles (such as insurance proceeds and condemnation awards or compensation) arising out of or incident to the ownership, development or operation of the Property owned by or in which Trustor has an interest. POST CLOSING ACTIONS AGREEMENT: The Post Closing Actions Agreement of even date herewith executed by Trustors in favor of Beneficiary. PREPAYMENT PREMIUM: As defined in the Note. PRINCIPAL PARTY(IES): As defined in PARAGRAPH 6.1.B hereof. PROCEEDING: As defined in PARAGRAPH 6.1.B hereof. PROPERTY: Each of the Land, Improvements, Fixtures, Personalty and Rents and Proceeds of each Trustor as defined in the Granting paragraph of this Deed of Trust, except that whenever the context so requires, "Property" shall refer to the Land, Improvements, Fixtures, Personalty and Rents and Proceeds of all Trustors. RECEIVER: Any trustee, receiver, custodian, fiscal agent, liquidator or similar officer. RELEASE FEE: As defined in PARAGRAPH 4.3 hereof. RENTS AND PROCEEDS: All rents, royalties, revenues, receipts, issues, profits, proceeds and other income of any kind or character from the Leases, the Land, the Improvements, the Fixtures, and Transfers. SECONDARY INTEREST RATE: As defined in the Note. SERVICING FEE: As defined in PARAGRAPH 4.3 hereof. SUBSTITUTE PROPERTY: As defined in PARAGRAPH 4.3 hereof. TRANSFER: Any (i) sale, conveyance, assignment, transfer, alienation, mortgage, conveyance of security title, encumbrance or other disposition of the Property, of any kind, or any other transaction the result of which is, directly or indirectly, to divest the Trustor of any portion of or interest in its title to the Property, voluntarily or involuntarily, (ii) merger, consolidation or dissolution involving, or the sale or transfer of all or substantially all of the assets of, the Trustor or any general partner of the Trustor, (iii) transfer (at one time or over any period of time) of ten percent (10%) or more of (A) the voting stock of (1) any corporate Trustor, (2) any corporate general partner of any Trustor or (3) any corporation which is the direct or indirect owner of ten percent (10%) or more of the voting stock of any Trustor or any corporate general partner of any Trustor, (B) the beneficial interest in the Trustor, or the interest in any owner of fifty percent (50%) or more of the beneficial interest in any Trustor, if a trust, or (C) the ownership interests of any Trustor if such Trustor is a limited liability company or in any limited liability company which is a direct or indirect general partner of any Trustor, (iv) transfer of any general partnership interest in any Trustor or in any partnership which is a direct or indirect general partner of any Trustor, (v) the conversion of any such general partnership interest to a limited partnership interest or (vi) transfer of any interest in any managing member of any Trustor if such Trustor is a limited liability company. For purposes of this definition, a "Transfer" shall not include transfer of title or interest under any will (or applicable law of descent) or transfers of limited partnership interests. TRANSFER CONDITIONS: As defined in PARAGRAPH 4.2 hereof. ARTICLE 2 REPRESENTATIONS AND WARRANTIES Trustor hereby represents and warrants to Beneficiary and Trustee that as of the date of this Deed of Trust and as of the date of any subsequent disbursement pursuant to the Loan Documents: 2.1. TITLE, AUTHORIZATION AND ORGANIZATION. Trustor (i) is the lawful owner of the Property and holds good and marketable title to the Property free and clear of all defects, liens, encumbrances, easements, exceptions and assessments, except the Permitted Exceptions; (ii) has the power and authority to grant the Property as provided in and by this Deed of Trust and to own and operate the Property; (iii) is duly organized, validly existing and in good standing under the laws of the State of its organization and is duly qualified to do business in the State in which the Land is located; and (iv) is in compliance with all Laws and Restrictions. 2.2. VALIDITY OF LOAN DOCUMENTS. The execution, delivery and performance by Trustor of the Loan Documents and the borrowings evidenced by the Note (i) are within the power of Trustor, (ii) have been authorized by all requisite action and (iii) will not violate any Laws and Restrictions or any agreement or other instrument. 2.3. FINANCIAL STATEMENTS AND OTHER INFORMATION. All financial statements and other reports, papers, data and information given to Beneficiary with respect to the Property and any Loan Party are true, accurate, complete and correct and except as expressly noted to the contrary therein, have been prepared in accordance with generally accepted accounting principles throughout the periods covered thereby. There has been no Material Adverse Change since the date of the most recent financial statement given to Beneficiary. 2.4. LITIGATION. There is not now pending against or affecting any Loan Party or the Property, nor to the best of Trustor's knowledge is there threatened, any action, suit or proceeding that might result in a Material Adverse Change. 2.5. ADDITIONAL REPRESENTATIONS AND WARRANTIES. (i) The Property is not used principally or primarily for agricultural or grazing purposes; (ii) all costs for labor and materials for the construction of the Improvements have been paid in full; (iii) Trustor is not aware of any assessment for public improvements which is pending and which could become a lien upon the Property; (iv) no event has occurred which, with the giving of notice or the passage of time, or both, would constitute an Event of Default under any of the Loan Documents; (v) Trustor is not in default under any agreement or instrument to which it is a party which default would have a material and adverse effect on the Property or Trustor's ability timely to perform the Obligations; (vi) neither the Property, nor any part thereof, has sustained, incurred or suffered any material damage or destruction; and (vii) subject to the Permitted Exceptions, the Land, Improvements, Personalty and Fixtures are owned by Trustor free and clear of any liens, encumbrances, mortgages, security interests, claims and rights of others; (viii) the Property and the current use thereof complies with all Laws and Restrictions; (ix) Trustor has received no notices of violations or breach of any Laws and Restrictions; and (x) Trustor has not received any notice of any violation with respect to, and to Trustor's knowledge the Improvements are in material compliance with, The Americans With Disabilities Act of 1990 (42 U.S.C. ss.ss.12101-12213), including Title III thereof. 2.6. BANKRUPTCY. No petition in bankruptcy, petition or answer seeking assignment for the benefit of creditors or appointment of a Receiver or similar proceeding with respect to any Principal Party or Major Tenant has occurred or is contemplated. 2.7. FIRPTA CERTIFICATION. Trustor declares and certifies, under penalty of perjury, that: (i) Trustor's U.S. Taxpayer I.D. Numbers are as follows:
MISSION WEST PROPERTIES LP: 77-0414489 MISSION WEST PROPERTIES LP I 94-2883514 MISSION WEST PROPERTIES LP II 94-2610469 MISSION WEST PROPERTIES LP III 77-0002956
(ii) the business address of Trustor is 10050 Bandley Drive, Cupertino, California 95014; (iii) Trustor is not a "foreign person" within the meaning of Sections 1445 and 7701 of the Internal Revenue Code of 1986, as amended (the "Code"); and (iv) Trustor understands that the information and certification contained in this PARAGRAPH 2.7 may be disclosed to the Internal Revenue Service and that any false statement contained herein could be punished by fine, imprisonment or both. Trustor agrees to provide Beneficiary with a new certification containing the provisions of this PARAGRAPH 2.7 immediately upon any change in such information. 2.8. ZONING, BUILDING, ENVIRONMENTAL AND LAND USE LAW Compliance. The Property and all uses thereof comply with all applicable zoning, building, environmental and other land use laws, ordinances, rules and regulations, and other similar restrictions (including the Americans with Disabilities Act). Beneficiary understands and acknowledges that Trustor has informed Beneficiary that certain of the Improvements comprised in the Property comply with such laws, ordinances, rules, regulations and other similar restrictions under provisions which allow the continued use and occupancy thereof, notwithstanding subsequent changes in such laws, ordinances, rules and regulations, and that all such Improvements allowing such continued use and occupancy, notwithstanding such changes, can be reconstructed under such laws, ordinances, rules, regulations and other similar restrictions in the event of any damage or destruction to such Improvements substantially to their current size (including floor area ratios), and that as a result thereof there would be no material loss of rentable square footage in any affected Improvement. No action or proceeding, administrative or otherwise, is pending or threatened before a court or administrative agency with respect to compliance by the Property with applicable zoning, building, environmental and land use laws, ordinances, rules and regulations and similar restrictions. 2.9. PROPERTY SEPARATELY ASSESSED. Each of the Properties is separately assessed and taxed in one or more separate assessor's tax parcels under applicable real property and personal tax laws. 2.10. BROKER AND FINDER FEES. Trustor shall pay any and all commissions and fees of any kind or character due any Person on account of the Loan transaction, and shall indemnify, defend, protect and hold Beneficiary and Trustee harmless from and against any and all losses, liabilities, claims, damages, causes of action, costs and expenses (including reasonable attorneys' fees) arising out of or in connection with any such commissions or fees, or claims of any Person with respect thereto. ARTICLE 3 AFFIRMATIVE COVENANTS Trustor hereby covenants and agrees as follows: 3.1. OBLIGATIONS OF TRUSTOR. Trustor will timely perform, or cause to be timely performed, all the Obligations. 3.2. INSURANCE. A. Trustor, at its sole cost and expense, will keep and maintain for the mutual benefit of Trustor and Beneficiary: (i) insurance against loss or damage to the Property by fire and other risks covered by insurance commonly known as "all risk", including losses sustained by reason of riot and civil commotion, vandalism, malicious mischief, burglary, theft and mysterious disappearance, and coverage for differences in building and other code requirements as a reconstruction of any damage or destruction, and against such other risks or hazards as Beneficiary from time to time reasonably may designate in an amount equal to one hundred percent (100%) of the then-current "full replacement cost" of the Improvements, the Fixtures, and the Personalty, without deduction for physical depreciation; (ii) rental income insurance against loss of income in an amount equal to twelve (12) months rental and taxes and other operating expense reimbursements or payments at then-current income levels; (iii) Commercial General Liability insurance including broad form property damage, contractual liability and personal injury coverage, with a combined single limit and general aggregate in such amounts as are reasonably approved by Beneficiary; (iv) "Builders Risk" insurance during any material construction, repair, replacement, renovation or alteration of the Improvements, in such amounts as are reasonably approved by Beneficiary; (v) boiler and machinery insurance covering boilers and other pressure vessels, the air conditioning system, high pressure piping and other machinery and equipment required for the operation of the Property; (vi) Workers' Compensation Insurance with employer's liability endorsement; and (vii) such other insurance, and in such amounts, as may from time to time be reasonably required by Beneficiary, except that Trustor shall not be required to maintain earthquake insurance and shall not be required to maintain flood insurance on any Property that lies outside the 100 year flood zone. B. The policies of insurance required by this Deed of Trust shall, as applicable, (i) be prepaid annually and otherwise satisfactory in form, substance and amount to Beneficiary and written with financially solvent companies satisfactory to Beneficiary, (ii) name Beneficiary as an additional insured as its interest may appear, (iii) contain a Standard Lender's Loss Payable endorsement and other non-contributory standard mortgagee protection clauses acceptable to Beneficiary, and at Beneficiary's option, a waiver of subrogation rights by the insurer, (iv) contain an agreement by the insurer that the policy shall not be amended or canceled without at least thirty (30) days' prior written notice to Beneficiary, and (v) shall contain such other provisions as Beneficiary deems reasonably necessary or desirable to protect its interests. Any policies containing a coinsurance clause shall include a replacement cost endorsement adequate to ensure that the coinsurance clause is rendered inoperative. Any Commercial General Liability insurance shall provide (A) for severability of interests or that acts or omissions of one of the insureds or additional insureds shall not reduce or affect coverage available to any other insured or additional insured, and (B) that such insurance is primary and noncontributing with any insurance carried by Beneficiary or Trustee. C. In the event a blanket policy is submitted to satisfy Trustor's obligations under this PARAGRAPH 3.2, in addition to such other requirements set forth herein, Trustor shall deliver to Beneficiary a certificate from such insurer indicating that Beneficiary is covered under such policy as required by this PARAGRAPH 3.2, and evidencing that the amount and coverages of such insurance applicable to the Property comply with the requirements of this PARAGRAPH 3.2. D. Trustor shall furnish evidence, satisfactory to Beneficiary, that (i) all insurance requirements (including provisions for waivers of subrogation) set forth in the Leases or any other agreements affecting the Property shall have been satisfied by each party thereto; (ii) Trustor's insurance coverage is sufficient (assuming the total destruction of the Property) to permit Trustor to rebuild the Improvements (including basic tenant improvements) and to replace the Fixtures and Personalty in such a manner as to enable the Property to be operable and rentable as it is currently rented and operated; and (iii) each tenant, required by the terms of its Lease to maintain insurance on its leased premises, has caused Beneficiary to be named as an additional insured or loss payee under such insurance policies. E. Self-insurance (other than the applicable deductibles approved by Beneficiary) shall not satisfy the requirements of this PARAGRAPH 3.2. F. All of Trustor's right, title and interest in and to all policies of property insurance and any unearned premiums paid thereon are hereby assigned (to the fullest extent assignable) to Beneficiary who shall have the right, but not the obligation, to assign the same to any purchaser of the Property at any foreclosure sale. G. Not less than thirty (30) days prior to the expiration date of any policy furnished pursuant to this PARAGRAPH 3.2, Trustor shall provide Beneficiary with duplicate originals or certified copies of renewal policies together with evidence satisfactory to Beneficiary of Trustor's payment of the applicable premiums. 3.3. MAINTENANCE, WASTE AND REPAIR. Trustor will (i) maintain the Property in good order and condition; (ii) promptly make, or cause to be made, all necessary structural and non-structural repairs to the Property; (iii) not diminish or materially alter the Improvements, or erect any new buildings, structures or building additions on the Land, without the prior written consent of Beneficiary; (iv) not remove or permit to be removed any of the Fixtures or Personalty from the Property without the prior written consent of Beneficiary unless replaced by articles of equal suitability and value owned by Trustor free and clear of any lien or security interest; and (v) not permit any waste of the Property or make any change in the use thereof, nor do or permit to be done thereon anything, that may in any way impair the security of this Deed of Trust. 3.4. IMPOSITIONS; IMPOUNDS. Trustor will pay all Impositions when due. Trustor will deliver to Beneficiary, within seven (7) days after demand therefor, receipts showing the payment of any Impositions. Upon the occurrence of the first monetary or material non-monetary Event of Default (including an Event of Default under Paragraph 6.1.A(viii) hereof), and continuing until twelve (12) consecutive calendar months have elapsed following cure of such Event of Default, Trustor will pay monthly to Beneficiary an amount equal to one-twelfth (1/12th) of the annual cost of Impositions together with an amount equal to the estimated next premiums for hazard and other required insurance. Upon the occurrence of any subsequent monetary or material non-monetary Event of Default (including an Event of Default under Paragraph 6.1.A(viii) hereof), Trustor will pay such amounts monthly to Beneficiary until the Indebtedness is paid in full. These funds will be held by Beneficiary without interest and will be released to Trustor for payment of Impositions and insurance premiums, or directly applied to such costs by Beneficiary, as Beneficiary may elect. 3.5. COMPLIANCE WITH LAW. Trustor will promptly and faithfully comply with and perform all present and future Laws and Restrictions. 3.6. BOOKS AND RECORDS AND OTHER INFORMATION. A. Trustor, without expense to Beneficiary, will maintain full and complete books of account and records reflecting the results of the operations of the Property in accordance with generally accepted accounting principles, and will furnish or cause to be furnished to Beneficiary such information concerning the financial condition of Trustor and the Property as Beneficiary shall reasonably request, including annual audited financial statements and an annual operating statement for the Property and annual audited financial statements for the Principal Parties and, to the extent such statements are not in the public domain, but may reasonably be obtained by Trustor, for the Major Tenants. Upon Beneficiary's reasonable request, Beneficiary shall have the right, at all reasonable times and upon reasonable notice, to audit the books and records of Trustor. If such audit discloses a variance of five percent (5%) or more in income or expenses entered in such books and records, the cost of such audit shall be paid by Trustor. B. Trustor will furnish to Beneficiary, within seven (7) days after written request therefor, all information that Beneficiary may reasonably request concerning the Property or the performance by Trustor of the Obligations. C. Trustor shall keep at either its principal place of business or at the offices at the Property, and make available to Beneficiary during normal business hours, as-built plans and specifications or, if unavailable, the final set of plans and specifications from which the Improvements were constructed ("As-Builts"), certified by a licensed architect or licensed contractor as true, correct and complete As-Builts. 3.7. FURTHER ASSURANCES. Trustor, at any time upon the reasonable request of Beneficiary, will at Trustor's expense, execute, acknowledge and deliver all such additional papers and instruments (including a declaration of no setoff) and perform all such further acts as may be reasonably necessary to perform the Obligations and, as Beneficiary deems necessary, to preserve the priority of the lien of this Deed of Trust and to carry out the purposes of the Loan Documents. 3.8. LITIGATION. Trustor will promptly give notice in writing to Beneficiary of any litigation or other event or occurrence which might result in a Material Adverse Change. 3.9. INSPECTION OF PROPERTY. Trustor hereby grants to Beneficiary, its agents, employees, consultants and contractors, the right to enter upon the Property for the purpose of making any and all inspections, reports, tests, inquiries and reviews as Beneficiary (in its sole and absolute discretion) deems necessary to assess the then current condition of the Property, or for the purpose of performing any of the other acts Beneficiary is authorized to perform hereunder upon 72 hours prior notice to Trustor, except that such notice shall not be required (i) if an Event of Default shall have occurred and remain uncured or (ii) in the event of an emergency. Trustor shall cooperate with Beneficiary to facilitate such entry and the accomplishment of such purposes. All costs, fees and expenses (including those of Beneficiary's legal counsel and consultants) incurred by Beneficiary with respect to such inspections, reports, tests, inquiries and reviews shall be paid by Trustor to Beneficiary upon demand, shall accrue interest at the Secondary Interest Rate until paid, and shall be secured by this Deed of Trust. 3.10. CONTEST. Notwithstanding the provisions of PARAGRAPHS 3.4 AND 3.5, Trustor may, at its expense, upon written notice to Beneficiary, contest the validity or application of any Impositions or Laws and Restrictions by appropriate administrative or legal proceedings promptly initiated and diligently conducted in good faith, provided that (i) Beneficiary is reasonably satisfied that the priority of this Deed of Trust shall be maintained and neither the Property nor any part thereof or interest therein will be in danger of being sold, forfeited, or lost as a result of such contest, and (ii) if the amount of the contested Imposition or the cost to comply with the contested Laws and Restrictions is likely to exceed One Million Dollars ($1,000,000.00) if decided adversely to Trustor, or if an Event of Default has occurred or occurs and remained uncured, Trustor shall have posted a bond or furnished such other security as may be reasonably required from time to time by Beneficiary. 3.11. ADDITIONAL INFORMATION. Trustor will furnish to Beneficiary, within seven (7) days after written request therefor, any and all information that Beneficiary may reasonably request concerning the Property or the performance by Trustor of the Obligations. 3.12. PREPAYMENT. Trustor may prepay the Loan only on the terms and conditions set forth in the Note and Trustor shall pay Beneficiary prepayment charges in respect of any prepayment, whether voluntary or involuntary, as required by and on the terms and conditions set forth in the Note. 3.13. FIRPTA CERTIFICATE. In the event of any Transfer by Trustor of its rights hereunder or of any interest in the Property otherwise permitted under this Deed of Trust, the transferee shall, as an additional condition to such Transfer, under penalty of perjury, execute and deliver to Beneficiary a certificate concerning the non-foreign status of Trustor substantially in the form of PARAGRAPH 2.7 hereof. Nothing in this paragraph shall be deemed a modification or waiver of any other provision of any of the Loan Documents limiting, prohibiting or otherwise relating to any Transfer of any interest in the Property or Trustor. 3.14. TAX SERVICE CONTRACT. So long as any Loan Document remains in effect, at Trustor's sole expense, Beneficiary shall be furnished tax service contracts issued by a tax reporting agency satisfactory to Beneficiary. 3.15. TRUSTOR'S OBLIGATIONS WITH RESPECT TO LEASE OF CISCO Systems. In the event that Cisco Systems ("Cisco") exercises the right of first offer or purchase of the Property covered by its Lease (the "Cisco Property"), Trustor shall cause Cisco to deposit the proceeds of such sale payable by Cisco to an escrow account under the control of Beneficiary established with a title company mutually acceptable to Trustor and Beneficiary. Unless an Event of Default shall have occurred and remain uncured, Trustor may, following consummation of the sale of the Cisco Property to Cisco, (i) elect to replace the Cisco Property with substitute collateral pursuant to Paragraph 4.3 hereof, in which event Beneficiary shall release the proceeds to Trustor concurrently with the consummation of the substitution of collateral, or (ii) apply the proceeds to prepay the Indebtedness, which payment shall constitute a Prepayment Amount under the Note. ARTICLE 4 NEGATIVE COVENANTS Trustor hereby covenants to and agrees as follows: 4.1. RESTRICTIVE USES. Trustor will not initiate, join in, or consent to any change in the current use of the Property or in any zoning ordinance, private restrictive covenant, assessment proceedings or other public or private restriction limiting or restricting the uses that may be made of the Property or any part thereof or in any way change the boundaries of the Property without the prior written consent of Beneficiary. 4.2. PROHIBITED TRANSFERS. A. Except as otherwise provided in PARAGRAPHS 4.2.B and 4.2.C below, Trustor shall not participate in, and shall not cause, allow or otherwise permit, a Transfer without the prior written consent of Beneficiary, which consent may be given or withheld for any reason (or for no reason) or given conditionally (including a requirement that the permitted transferee assume in writing, in form and substance satisfactory to Beneficiary in its sole discretion, all of Trustor's Obligations under the Loan Documents, the Hazardous Substances Agreement and the Certificate Regarding Distribution of Loan Proceeds and Indemnity Agreement and agree to be bound thereby), as determined by Beneficiary in its sole and absolute discretion, and any default, failure to observe, or breach of the provisions of this PARAGRAPH 4.2 shall constitute an immediate Event of Default hereunder and, at the option of Beneficiary, Beneficiary may accelerate the Indebtedness whereby the entire Indebtedness (including any Prepayment Premium) shall become immediately due and payable. Any assumption of Trustor's obligations hereunder shall not, however, release any Loan Party from any liability under the Loan Documents or the Hazardous Substances Agreement. This provision shall not apply to transfers of title or interest under any will or testament or applicable law of descent or transfers of limited partnership interests in Trustor. Consent to any such Transfer by Beneficiary shall not be deemed a waiver of Beneficiary's right to require such consent to any further or future Transfers. B. Notwithstanding the foregoing, the following Transfers shall not be prohibited and shall not, except as otherwise provided in this PARAGRAPH 4.2.B, require Beneficiary's consent, or if effectuated in accordance with the terms and conditions of this PARAGRAPH 4.2.B, constitute an Event of Default under the Loan Documents: (i) the Transfer of shares of any Person which is a publicly traded company with its shares listed and traded on a national exchange in the United States of America, so long as the Transfer is executed in the ordinary course of trading of such shares on such exchange, (ii) the issuance by any Loan Party of publicly traded securities, whether or not in connection with the acquisition of properties; (iii) the conversion of Operating Partnership Units in Trustor to common stock in Mission West, or in a Person that is a publicly traded company with its shares listed and traded on a national exchange in the United States of America, subject to the satisfaction of the Transfer Conditions; (iv) the issuance of Operating Partnership Units in Trustor in connection with the acquisition of properties, so long as the proposed transaction complies with all ERISA requirements contained in the Loan Documents and, if a change occurs in the identity of the Persons controlling the major decision making management level of Trustor and/or Mission West in connection with such transaction, subject additionally to the satisfaction of the other Transfer Conditions; (v) subject to the satisfaction of the Transfer Conditions, the acquisition of Mission West through merger, tender offer, exchange offer or sale of substantially all the assets of Mission West (each a "Mission West Merger Transaction") and (vi) subject to the satisfaction of the Transfer Conditions, the merger of Mission West Properties, a California corporation, with and into a wholly-owned subsidiary named Mission West Properties, Inc., a Maryland corporation ("MWP, Inc."), provided that MWP, Inc. has no assets or liabilities immediately prior to the merger and provided further that such merger follows the plan set forth in Trustor's current S-4 Registration Statement in the section titled "The Reincorporation Merger." The term "Transfer Conditions" shall mean each of the following requirements: (A) Beneficiary receives at least thirty (30) days' prior written notice of the Transfer; (B) there is no Event of Default under the Loan Documents (or event which with the passage of time or the giving of notice, or both, would be an Event of Default) which has occurred and is continuing; (C) the proposed transaction complies with all ERISA requirements contained in the Loan Documents (including receipt by Beneficiary of such evidence as it may require in its sole discretion to determine that the proposed Transfer is not and would not render the Loan a prohibited transaction under ERISA); (D) if deemed applicable by Beneficiary, the proposed transferee shall have signed a written assumption agreement with respect to the Loan Documents in form and substance acceptable to Beneficiary in its sole discretion; (E) the proposed transferee shall have provided all information about the proposed transferee requested by Beneficiary; (F) in the event of a Mission West Merger Transaction, Beneficiary shall be satisfied with the creditworthiness, good character and reputation, and demonstrated ability and experience (by itself or through its manager) in the ownership, operation, and leasing of property similar to the Property, of the successor entity to Mission West, except that in no event shall the net worth (excluding for purposes of this calculation, the Property) of the successor entity based on market value, as determined by Beneficiary, be less than $250,000,000.00; and (G) payment by Trustor or the proposed transferee of (1) all costs and expenses incurred by Beneficiary for the processing of the Transfer, including a processing fee as determined by Lender, (2) any documentary stamp taxes, intangibles taxes, recording fees, and other costs and expenses required in connection with any assumption agreement and any modification of the Loan Documents, and (3) all other costs and expenses (including attorneys' fees and expenses for Beneficiary's staff attorneys and outside counsel) of the preparation of any assumption agreement and any modification of the Loan Documents. C. Notwithstanding PARAGRAPHS 4.2.A and 4.2.B above, if no Event of Default or event which with the passage of time or the giving of notice, or both, would constitute an Event of Default has occurred and is continuing, Beneficiary shall, upon thirty (30) days prior written request by Trustors, consent to a one-time Transfer of the entire Property if: (i) the proposed transferee is a Person which, in the judgment of Beneficiary, has financial capability and creditworthiness of Trustors, and the reputation and experience in the ownership, operation, management and leasing of similar properties, equal to or greater than Mission West, except that under no circumstances shall the proposed transferee have a net worth (excluding, for purposes of this calculation, the Property) less than $100,000,000.00; (ii) at the time of Transfer the Loan to Value Ratio does not exceed fifty-five percent (55%); (iii) Trustors pay to Beneficiary a fee equal to one-half of one percent (1/2%) of the then outstanding principal balance of the Loan concurrently with the consummation of such Transfer; (iv) at Beneficiary's option, Beneficiary has received an endorsement to Beneficiary's title policy at Trustors' expense, which endorsement states that this Deed of Trust remains a first and prior lien against the Property (excluding the Personalty); (v) the Debt Service Coverage Ratio is at least 1.85 to 1.00 for the preceding twelve (12) month period and Beneficiary receives satisfactory evidence that such Debt Service Coverage Ratio will be maintained for the next succeeding twelve (12) months; (vi) the transferee in writing expressly assumes the Obligations under the Loan Documents, and under the Hazardous Substances Agreement, and executes any other documents reasonably required by Beneficiary, and such assumptions and all such other documents are satisfactory in form and substance to Beneficiary; (vii) Beneficiary reasonably approves the form and content of all Transfer documents and Beneficiary is furnished with a certified copy of the recorded Transfer documents; (viii) the proposed transferee complies with ERISA and delivers the ERISA certification and indemnification agreements required under PARAGRAPH 9.18 hereof; and (ix) Trustors or the proposed transferee pays all reasonable fees, costs and expenses incurred by Beneficiary in connection with such Transfer, including all legal (both for outside counsel and Beneficiary's staff attorneys), accounting, title insurance, documentary stamp or transfer taxes, intangible taxes, mortgage taxes, recording fees, and appraisal fees, whether or not such Transfer is actually consummated. 4.3. SUBSTITUTION OF SECURITY. Notwithstanding PARAGRAPH 4.2 above, and so long as there is no Event of Default under the Loan Documents (or event which with the passage of time or the giving of notice, or both, would be an Event of Default which has occurred and is continuing), Beneficiary shall, upon thirty (30) days' prior written request by Trustor, subject to the conditions set forth below, release from the lien of this Deed of Trust the entirety of any Eligible Transfer Property identified in EXHIBIT B hereto: (i) Trustor grants to Beneficiary a first lien in the fee simple title of a replacement property (the "Substitute Property") owned one hundred percent (100%) by the Trustor which owns the Eligible Transfer Property that is being released (which lien shall be in the form of this Deed of Trust with only such changes thereto as Beneficiary may incorporate, from time to time, in the form of deed of trust then utilized by Beneficiary in securing commercial mortgage loans similar to the Loan to address developments in the law of concern to Beneficiary in implementing its mortgage lending practices in California) (the "Substitute Deed of Trust") and Trustor executes and delivers to Beneficiary such approvals, opinions, documents and other items as Beneficiary may reasonably request in connection with the substitution of security for, and the perfection of Beneficiary's security interest in, the Substitute Property; (ii) Beneficiary shall not be required to release any Eligible Transfer Property if the sum of the aggregate Original Allocated Loan Amount (as shown on EXHIBIT B hereto) of the Eligible Transfer Property for which a release is sought and of all other Eligible Transfer Properties which prior to such release have been released from the lien of this Deed of Trust, exceeds $65,000,000.00; (iii) Trustor pays Beneficiary a non-refundable servicing fee (the "Servicing Fee") at the time of Trustor's request in the amount of Fifteen Thousand Dollars ($15,000.00) for each Eligible Transfer Property that Trustor is requesting to be released from the lien of this Deed of Trust; (iv) Trustor pays to Beneficiary at the time the substitution of collateral is effected a release fee (the "Release Fee") equal to one-half of one percent (1/2%) of the Original Allocated Loan Amount, as adjusted to reflect amortization of principal that has occurred from the date of the recording of this Deed of Trust to the date the substitution of collateral is effected, for each Eligible Transfer Property that Trustor is requesting to be released from the lien of this Deed of Trust, except that (A) the Servicing Fee shall be credited against the Release Fee, and (B) under no circumstances shall the Release Fee exceed $75,000.00 for each Eligible Transfer Property; (v) Beneficiary receives a 1970 form ALTA title policy (including any endorsements thereto deemed necessary by Beneficiary) insuring the first lien priority of the Substitute Deed of Trust encumbering the Substitute Property, subject only to the lien of real property taxes not delinquent and such other exceptions to title approved by Beneficiary in its sole and absolute discretion, with liability coverage in the amount of the Loan, and Beneficiary receives such other title assurances as it may request to ensure that its first lien priority in the Property that is not being released will continue unaffected by the release of the Eligible Transfer Property; (vi) the Substitute Property shall satisfy, in Beneficiary's sole and absolute discretion, Beneficiary's then-current mortgage lending requirements and underwriting criteria in all respects, including requirements relating to environmental and hazardous materials matters, provided, except that without limiting the foregoing, under no circumstances shall a Substitute Property qualify for substitution for an Eligible Transfer Property hereunder unless the Substitute Property is, in Beneficiary's sole judgment, at least equal to the corresponding Eligible Transfer Property in each of the following respects: (A) appraised value, (B) stability of cash flow, taking into consideration weighted average lease maturities, (C) tenant credit and quality and diversification, (D) building quality and diversification, and (E) location quality and diversification; (vii) the Substitute Property shall be a research and development building (or buildings contiguous to each other) located in the San Francisco Bay Area, as defined by Beneficiary; (viii) the Debt Service Coverage Ratio for the Property is at least 1.50 to 1.00 for the preceding twelve month period and Beneficiary receives satisfactory evidence that such Debt Service Coverage Ratio will be maintained for the next succeeding twelve (12) months; (ix) Beneficiary receives satisfactory evidence that the prospective Net Operating Income for the Substitute Property for the succeeding twelve (12) months will be not less than one hundred ten percent (110%) of the then current Net Operating Income of the Eligible Transfer Property. (x) Beneficiary determines, in its sole and absolute discretion, that the release and substitution of collateral would not result in a violation of ERISA, including the ERISA provisions contained in this Deed of Trust, and Trustor delivers such certifications and other documents as Beneficiary may request in connection therewith; and (xi) Trustor pays all reasonable fees, costs, and expenses incurred by Beneficiary in connection with the proposed release and substitution, including all legal (for both Beneficiary's staff attorneys and outside counsel), accounting, title insurance, documentary stamps taxes, intangible taxes, mortgage taxes, recording fees, and appraisal fees, whether or not the release and/or substitution is actually consummated. 4.4. NO COOPERATIVE OR CONDOMINIUM. Trustor shall not operate the Property or permit the Property to be operated as a cooperative or condominium or otherwise such that the tenants or occupants participate in ownership, control, or management of the Property. 4.5. PARTNERSHIP OR OPERATING AGREEMENT. Trustor, if a partnership or a limited liability company, will not terminate, permit the termination of, or substantially amend the partnership agreement or operating agreement, without Beneficiary's prior written consent. As used herein, "substantially amend" means any amendment, modification, or alteration that would cause or result in (i) the change of control of the Trustor, (ii) the change of the name of the Trustor, (iii) the change of the nature of the business or operations of the Trustor, (iv) the revocation or purported repudiation of any Obligations of the Trustor under the Loan Documents, (v) the termination of the lien and/or security interest in and to the Property under the Loan Documents or (vi) a Material Adverse Change. Nothing in this PARAGRAPH 4.5 shall affect any other Obligations of Trustor under the Loan Documents, the Hazardous Substances Agreement or the Certificate Regarding Distribution of Loan Proceeds and Indemnity Agreement. ARTICLE 5 CASUALTIES AND CONDEMNATION 5.1. INSURANCE AND CONDEMNATION PROCEEDS. A. Trustor shall notify Beneficiary in writing immediately upon the occurrence of any loss or damage by fire or other casualty to any of the Property or upon obtaining knowledge of the commencement of any proceedings for condemnation of any of the Property. Beneficiary shall be entitled to (i) participate in any such condemnation proceedings and Trustor from time to time will deliver to Beneficiary all instruments reasonably necessary to permit such participation, and (ii) if the repair of the loss or casualty is reasonably estimated to cost more than One Million Dollars ($1,000,000.00) or if an Event of Default shall have occurred and remain uncured (either, an "Insurance Event"), settle and adjust all insurance claims relative to any such damage or destruction, deducting from any insurance proceeds the amount of all expenses incurred by Beneficiary in connection with any such settlement or adjustment. Notwithstanding anything to the contrary contained in any insurance policies if an Insurance Event pertains, all proceeds paid to Trustor under any insurance policies required to be maintained by Trustor pursuant to PARAGRAPH 3.2 or otherwise relating to the Property, and any insurance proceeds received by Trustor under insurance policies maintained by tenants pursuant to a lease obligation, shall immediately be delivered to Beneficiary. B. If Beneficiary elects or is required to make insurance proceeds or condemnation awards available for repair or reconstruction, Beneficiary shall, through a disbursement procedure established by Beneficiary, make available to Trustor the net amount of all insurance proceeds or condemnation awards received by Beneficiary after deduction of Beneficiary's reasonable costs and expenses, if any, in collection of the same (the "Net Proceeds"). Beneficiary shall make the Net Proceeds available to Trustor for repair or reconstruction if (i) no Event of Default or event, which with the passage of time or the giving of notice, or both, would constitute an Event of Default has occurred and is continuing; (ii) Beneficiary is satisfied that (A) the Property can and will be repaired or reconstructed within 18 months from the date of damage, destruction or condemnation to the condition of the Property immediately prior to the damage, destruction or condemnation in accordance with plans and specifications approved by Beneficiary, (B) the repair or reconstruction shall be finally completed on a date which is at least twenty-four (24) months prior to the maturity of the Loan, and (C) Leases which are terminated or terminable as a result of such damage, destruction or condemnation cover an aggregate rentable square footage of less than ten percent (10%) of the total rentable square footage contained in the Property subject to the condemnation or casualty at the closing of the Loan; (iii) Trustor shall have entered into a construction contract for completion of the repair or reconstruction with a general contractor which is acceptable in all respects to the Beneficiary (which general contractor may be a Loan Party or an affiliate thereof, provided that such Loan Party or affiliate shall be required to obtain three (3) competitive sub-bids for each component of the work of repair or reconstruction if the total cost of completion of the repair or reconstruction is likely to exceed One Million Dollars [$1,000,000.00]), and which contract must in any event include provisions for retention of not less than ten percent (10%) until full and final, lien-free completion of the repair or reconstruction and a final completion date which is at least 24 months prior to the maturity of the Loan, and (iv) in Beneficiary's reasonable judgment, the security for the Loan has not been materially impaired as a result of such damage, destruction or condemnation. In the event Beneficiary elects not, or is not required, to make the Net Proceeds available for repair or reconstruction, Beneficiary, at its sole option, may apply the Net Proceeds in payment of the Indebtedness or in satisfaction of any other Obligation in such order as Beneficiary may determine provided that if (1) Beneficiary applies the Net Proceeds to the Indebtedness and the amount of Net Proceeds equals the Original Allocated Loan Amount for the particular Property that suffered the casualty, or (2) in the event such Net Proceeds are less than the Original Allocated Loan Amount, Trustor pays Beneficiary the difference between the Original Allocated Loan Amount and Net Proceeds, in either such event, then, so long as no Event of Default has occurred and remains uncured, Beneficiary shall release the affected Property which suffered the casualty from the lien of this Deed of Trust and the other Loan Documents. A payment by Trustor to Beneficiary pursuant to the foregoing clause shall not be considered a Prepayment Amount under the Note. Notwithstanding any provision of this Deed of Trust to the contrary, under no circumstance shall Beneficiary be obligated to make any portion of the Net Proceeds available for repair or reconstruction unless at the time of the request for any disbursement it has determined in its reasonable discretion that the repair or reconstruction can be completed at a cost (which cost shall include all payments coming due under the terms of the Loan) which does not exceed the aggregate of the remaining Net Proceeds and any funds deposited with Beneficiary by Trustor. C. The Net Proceeds and any additional funds deposited by Trustor with Beneficiary, plus any loss of rental income insurance proceeds which have been deposited with Beneficiary or which the carrier has acknowledged to be payable, shall constitute additional security for the Loan. Trustor shall execute, deliver, file and/or record, at its own expense, such documents and instruments as Beneficiary requires to grant to Beneficiary a perfected, first priority security interest in the Net Proceeds and such additional funds. 5.2. ADDITIONAL PROVISIONS RELATING TO CONDEMNATION. Trustor, immediately upon obtaining knowledge of the commencement of any proceedings for the condemnation of the entire Property or any material part thereof, will notify Trustee and the Beneficiary of the pendency of such proceedings. Trustee and Beneficiary may participate in any such proceedings and Trustor from time to time will deliver to Beneficiary all instruments requested by Beneficiary to permit such participation. In the event of such condemnation proceedings, the award or compensation payable is hereby assigned to and shall be paid to Beneficiary. Beneficiary shall be under no obligation to question the amount of any such award or compensation and may accept the same in the amount in which the same shall be paid. In any such condemnation proceedings, Beneficiary may be represented by counsel selected by Beneficiary, the cost of such counsel to be borne by Trustor. The proceeds of any award or compensation so received shall, at the option of Beneficiary, either be applied to the prepayment of the Indebtedness or satisfaction of any Obligation, or be paid over to the Trustor for restoration of the Improvements in accordance with the provisions of PARAGRAPH 5.1. Trustor hereby unconditionally and irrevocably waives all rights of a property owner under Section 1265.225(a) of the California Code of Civil Procedure, or any successor statute providing for the allocation of condemnation proceeds between a property owner and a lien holder. ARTICLE 6 EVENTS OF DEFAULT AND REMEDIES OF BENEFICIARY 6.1. EVENTS OF DEFAULT. A. It shall constitute an Event of Default hereunder if any of the following events shall occur and Beneficiary, by written notice delivered to Trustors, declares an Event of Default: (i) Trustor shall fail to pay within five (5) days of the date when due any part of the Indebtedness; (ii) Trustor shall fail to timely observe, perform or discharge any Obligation, other than as described in PARAGRAPHS 6.1.A.(I), (III), (IV), (V), (VI), (VII) AND (VIII), and any such failure shall remain unremedied for thirty (30) days (the failure under this clause (ii) hereinafter referred to as the "Grace Period"), after notice to Trustor of the occurrence of such failure; provided, however, that Beneficiary may extend the Grace Period up to ninety (90) days if (A) Beneficiary determines in good faith that (1) such failure cannot be cured within the Grace Period but can be cured within ninety (90) days, (2) no lien or security interest created by the Loan Documents would be impaired prior to the completion of such cure, and (3) Beneficiary's immediate exercise of any remedies provided hereunder or by law is not necessary for the protection or preservation of the Property or Beneficiary's security interest therein, and (B) Trustor shall immediately commence and diligently pursue the cure of such default; (iii) Trustor, as lessor or sublessor, as the case may be, shall assign the Rents and Proceeds without first obtaining the written consent of Beneficiary; (iv) default by Trustor after the expiration of all applicable grace or cure periods under any agreement to which Trustor is a party, other than the Loan Documents, which agreement relates to the borrowing of money by Trustor from any Person, and such default might give rise to a Material Adverse Change or adversely affect the security for the Loan; (v) any representation or warranty made by Trustor in, under or pursuant to the Loan Documents was false or misleading in any material respect as of the date on which such representation or warranty was made or deemed remade; (vi) any of the Loan Documents shall cease to be in full force and effect or be declared null and void, or shall cease to constitute valid and subsisting liens and/or valid and perfected security interests in and to the Property, or Trustor shall contest or deny in writing that it has any further liability or obligation under any of the Loan Documents; (vii) the occurrence of a Material Adverse Change; or (viii) any default by Trustor on its obligations under the Lease between Trustor, as successor in interest to Berg & Berg Enterprises, Inc. ("Berg & Berg"), a California corporation, as "Lessor," and Avnet, Inc., a New York corporation, as "Lessee," dated October 27, 1997, as amended (the "Avnet Lease"), to construct improvements described therein as "Phase II" in the time and manner required by the Avnet Lease. B. It shall constitute an Event of Default hereunder without the requirement of any notice by Beneficiary if any of the following events shall occur: (i) Trustor, any other Loan Party, any general partner or managing member of any Loan Party which is a partnership or a limited liability company, as the case may be, any parent company of any such general partner or managing member, or any owner of the Property (each a "Principal Party," and collectively, the "Principal Parties") shall generally not pay its debts as they become due or shall admit in writing its inability to pay its debts, or shall have made a general assignment for the benefit of creditors; (ii) any Principal Party shall commence any case, proceeding or other action seeking reorganization, arrangement, adjustment, liquidation, dissolution or composition of it or its debts under any law relating to bankruptcy, insolvency, reorganization or relief of debtors, or seeking to have an order for relief entered against it as debtor, or seeking appointment of a receiver, trustee, custodian or other similar official for it or for all or any substantial part of its property (collectively, a "Proceeding"); (iii) any Principal Party shall take any action to authorize any of the actions set forth above in clauses (i) or (ii); (iv) any Proceeding shall be commenced against any Principal Party, and such Proceeding (A) results in the entry of an order for relief against it which is not fully stayed within seven (7) business days after the entry thereof or (B) remains undismissed for a period of forty-five (45) days; (v) any Principal Party shall liquidate, dissolve or otherwise terminate their corporate, limited liability company, partnership or other entity organizational structure without the prior written consent of Beneficiary; or (vi) failure to timely observe, perform or discharge any provision of PARAGRAPH 4.2 hereof or the occurrence of a Transfer without Beneficiary's prior written consent, when such consent is required pursuant to PARAGRAPH 4.2. 6.2. REMEDIES. A. Upon the occurrence of any Event of Default, Beneficiary may at any time declare all of the Indebtedness to be due and payable and the same shall thereupon become immediately due and payable, together with all payments due in accordance with the terms of the Note, without any further presentment, demand, protest or notice of any kind. Beneficiary may, in its sole discretion, also do any of the following: (i) in person, by agent, or by a Receiver, without regard to the adequacy of security, the solvency of Trustor or the condition of the Property, without obligation so to do and without notice to or demand upon Trustor, enter upon and take possession of the Property, or any part thereof, in its own name or in the name of Trustee and do any acts which Beneficiary deems necessary to preserve the value or marketability of the Property; sue for or otherwise collect the Rents and Proceeds, and apply the same, less costs and expenses of operation and collection, including reasonable attorneys' fees (including court costs, expert witness fees, document reproduction expenses, costs of exhibit preparation, courier charges, postage and communication expenses), against the Obligations, all in such order as Beneficiary may determine; appear in and defend any action or proceeding purporting to affect, in any manner whatsoever, the Obligations, the security hereof or the rights or powers of Beneficiary or Trustee; pay, purchase or compromise any encumbrance, charge or lien that in the judgment of Beneficiary or Trustee is prior or superior hereto; and in exercising any such powers, pay necessary expenses, employ counsel and pay reasonable attorneys' fees (including court costs, expert witness fees, document reproduction expenses, costs of exhibit preparation, courier charges, postage and communication expenses); (ii) as a matter of strict right and without notice to Trustor or anyone claiming under Trustor, and without regard to the then value of the Property, apply ex PARTE to any court having jurisdiction to appoint a Receiver to enter upon and take possession of the Property, and Trustor hereby waives notice of any application therefor, provided a hearing to confirm such appointment with notice to Trustor is set within the time required by law (any such Receiver shall have all the powers and duties of Receivers in like or similar cases and all the powers and duties of Beneficiary in case of entry as provided herein, and shall continue as such and exercise all such powers until the date of confirmation of sale, unless such receivership is sooner terminated); (iii) commence an action to foreclose this Deed of Trust in any manner provided hereunder or by law; (iv) with respect to any Personalty, proceed as to both the real and personal property in accordance with Beneficiary's rights and remedies in respect of the Land, or proceed to sell said Personalty separately and without regard to the Land in accordance with Beneficiary's rights and remedies as to personal property; and/or (v) deliver to Trustee a written declaration of default and demand for sale, and a written notice of default and election to cause the Property to be sold, which notice Trustee or Beneficiary shall cause to be duly filed for record. B. If Trustor shall at any time fail to perform or comply with any of the Obligations under any of the Loan Documents or any other agreement that, under the terms of this Deed of Trust, Trustor is required to perform, then Beneficiary may, in its sole discretion: (i) make any payments hereunder or thereunder payable by Trustor and take out, pay for and maintain any of the insurance policies provided for herein or therein; and/or (ii) after the expiration of any applicable grace period and subject to Trustor's right of contest of certain Obligations specifically granted hereby, perform any such other acts thereunder on the part of Trustor to be performed and enter upon the Property for such purpose. C. Should Beneficiary elect to foreclose by exercise of the power of sale herein contained, Beneficiary shall notify Trustee and shall deposit with Trustee this Deed of Trust and the Note and such receipts and evidence of expenditures made and secured hereby as Trustee may require. Upon receipt of such notice from Beneficiary, Trustee shall cause to be recorded, published and delivered to Trustors such notice of default and notice of sale as then required by law and by this Deed of Trust. Trustee shall, without demand on Trustors, after lapse of such time as may then be required by law and after recordation of such notice of default and after notice of sale having been given as required by law, sell the Property at the time and place of sale fixed by it in said notice of sale, either as a whole, or in separate lots or parcels or items as Beneficiary shall determine, and in such order as Beneficiary may determine, at public auction to the highest bidder for cash in lawful money of the United States payable at the time of sale. Trustee shall deliver to such purchaser or purchasers thereof its good and sufficient deed or deeds conveying the property so sold, but without any covenant or warranty, express or implied. The recitals in such deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Any Person, including Trustor, Trustee or Beneficiary, may purchase at such sale and Trustor hereby covenants to warrant and defend the title of such purchaser or purchasers. After deducting all costs, fees and expenses of Trustee and of this Trust, including costs of evidence of title in connection with sale, Trustee shall apply the proceeds of sale in the following priority, to payment of: (i) first, all sums expended under the terms hereof, not then repaid, with accrued interest at the Secondary Interest Rate; (ii) second, all other sums then secured hereby; and (iii) the remainder, if any, to the person or persons legally entitled thereto. Beneficiary may, in its sole discretion, designate the order in which the Property shall be offered for sale or sold through a single sale or through two or more successive sales, or in any other manner Beneficiary deems to be in its best interest. If Beneficiary elects more than one sale or other disposition of the Property, Beneficiary may at its option cause the same to be conducted simultaneously or successively, on the same day or at such different days or times and in such order as Beneficiary may deem to be in its best interests, and no such sale shall terminate or otherwise affect the lien of this Deed of Trust on any part of the Property not then sold until all Indebtedness secured hereby has been fully paid. If Beneficiary elects to dispose of the Property through more than one sale, Trustor shall pay the costs and expenses of each such sale of its interest in the Property and of any proceedings where the same may be made. Trustee may postpone the sale of all or any part of the Property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement at the time fixed by the preceding postponement, and without further notice make such sale at the time fixed by the last postponement; or Trustee may, in its discretion, give a new notice of sale. Beneficiary may rescind any such notice of default at any time before Trustee's sale by executing a notice of rescission and recording the same. The recordation of such notice shall constitute a cancellation of any prior declaration of default and demand for sale and of any acceleration of maturity of Indebtedness affected by any prior declaration or notice of default. The exercise by Beneficiary of the right of rescission shall not constitute a waiver of any default then existing or subsequently occurring, or impair the right of Beneficiary to execute other declarations of default and demand for sale, or notices of default and of election to cause the Property to be sold, or otherwise affect the Note or this Deed of Trust, or any of the rights, obligations or remedies of Beneficiary or Trustee hereunder. D. In the event of a sale of the Property, or any part thereof, and the execution of a deed therefor, the recital therein of default, and of recording the notice of default and notice of sale, and of the elapse of the required time (if any) between the recording and the notice, and of the giving of notice of sale, and of a demand by Beneficiary, or its successors or assigns, that such sale should be made, shall be conclusive proof of such default, recording, election, elapse of time, and giving of such notice, and that the sale was regularly and validly made on due and proper demand by Beneficiary, its successors or assigns. Any such deed or deeds with such recitals therein shall be effective and conclusive against Trustor, its successors and assigns, and all other Persons. The receipt for the purchase money recited or contained in any deed executed to the purchaser as aforesaid shall be sufficient discharge to such purchaser from all obligations to see to the proper application of the purchase money. E. All remedies of Beneficiary provided for herein are cumulative and shall be in addition to any and all other rights and remedies provided in the other Loan Documents or by law, including any right of offset. The exercise of any right or remedy by Beneficiary hereunder shall not in any way constitute a cure or waiver of default hereunder or under the Loan Documents, or invalidate any act done pursuant to any notice of default, or prejudice Beneficiary in the exercise of any of its rights hereunder or under the Loan Documents. F. All sums expended by Trustee or Beneficiary in the exercise of any of their rights or remedies under this Deed of Trust, and all reasonable costs and expenses incurred in connection therewith shall (i) be immediately due and payable on demand, (ii) accrue interest at the Secondary Interest Rate from the date of expenditure by Beneficiary, and (iii) be added to the Indebtedness and secured by the Loan Documents prior to any right, title or interest in or claim upon the Property attaching or accruing subsequent to the lien of this Deed of Trust. ARTICLE 7 SECURITY AGREEMENT AND FIXTURE FILING 7.1. GRANT OF SECURITY INTEREST. Trustor hereby grants to Beneficiary a security interest in and to all Trustor's right, title and interest now owned or hereafter acquired in and to the Personalty and the Fixtures (collectively, the "Collateral"). 7.2. REMEDIES. This Deed of Trust constitutes a security agreement under the California Uniform Commercial Code with respect to the Collateral in which Beneficiary is hereby granted a security interest. In addition to the rights and remedies provided under this Deed of Trust, Beneficiary shall have all of the rights and remedies of a secured party under the California Uniform Commercial Code as well as all other rights and remedies available at law or in equity. Trustor shall execute and deliver on demand, and irrevocably constitutes and appoints Beneficiary the attorney-in-fact of Trustor to, at Trustor's expense, execute, deliver and, if appropriate, to file with the appropriate filing officer or office, such instruments as Beneficiary may request or require in order to impose, perfect or continue the perfection of, the lien or security interest created hereby. Upon the occurrence of any Event of Default, Beneficiary shall have the right (i) to cause any of the Collateral which is personal property to be sold at any one or more public or private sales as permitted by applicable law and to apply the proceeds thereof to the Indebtedness or the satisfaction of any Obligation and (ii) to apply to the Indebtedness or the satisfaction of any Obligation any Collateral which is cash, negotiable documents or chattel paper. Any such disposition may be conducted by an employee or agent of Beneficiary or Trustee. Any Person, including both of Trustor and Beneficiary, shall be eligible to purchase any part or all of such Personalty at any such disposition. 7.3. EXPENSES. Expenses of retaking, holding, preparing for sale, selling or the like, pertaining to the Collateral shall be borne by Trustor and shall include Beneficiary's and Trustee's reasonable attorneys' fees and legal expenses (including court costs, expert witness fees, document reproduction expenses, costs of exhibit preparation, courier charges, postage and communication expenses). Trustor, upon demand of Beneficiary shall assemble the Collateral and make it available to Beneficiary at the Property, a place which is hereby deemed to be reasonably convenient to Beneficiary and Trustor. Beneficiary shall give Trustor at least ten (10) days' prior written notice of the time and place of any public sale or other disposition of the Collateral or of the time after which any private sale or any other intended disposition is to be made. Any such notice sent to Trustor in the manner provided for the mailing of notices herein is hereby deemed to be reasonable notice to Trustor. 7.4. FIXTURE FILING. This Deed of Trust covers certain goods which are or are to become fixtures related to the Land and constitutes a fixture filing under the California Uniform Commercial Code with respect such goods executed by Trustor as debtor in favor of Beneficiary as secured party. 7.5. WAIVERS. Trustor waives (i) any right to require Beneficiary to (A) proceed against any Person, (B) proceed against or exhaust any Collateral or (C) pursue any other remedy in its power; and (ii) any defense arising by reason of any disability or other defense of Trustor or any other Person, or by reason of the cessation from any cause whatsoever of the liability of Trustor or any other Person. Until the Indebtedness shall have been paid in full, Trustor shall not have any right to subrogation, and Trustor waives any right to enforce any remedy which Beneficiary now has or may hereafter have against Trustor or against any other Person and waives any benefit of and any right to participate in any Collateral or security whatsoever now or hereafter held by Beneficiary. If and to the extent that any Trustor is or may ever be deemed to be a guarantor of any Obligations of any of the other Trustors, each Trustor hereby waives all rights and defenses arising out of an election of remedies by Beneficiary, even though that election of remedies, such as a nonjudicial foreclosure with respect to security for a guaranteed obligation, has extinguished Trustor's rights of subrogation and reimbursement against the principal, if any, by the operation of Section 580d of the Code of Civil Procedure or otherwise. Notwithstanding the foregoing, and in addition thereto and without limiting the generality thereof, Trustor hereby absolutely and irrevocably waives any and all (1) rights which it may have or may now or hereafter acquire by way of subrogation, reimbursement or indemnity against any or all of the other Trustors by virtue of any payment made under the Loan Documents or otherwise in connection with the Loan and/or the Property, and (2) other claims or rights against any or all of the other Trustors relating to the Loan Documents or the Obligations. TRUSTOR ACKNOWLEDGES AND AGREES THAT PURSUANT TO THE FOREGOING PARAGRAPH, IT HAS WAIVED, AMONG OTHER SPECIFIC RIGHTS THAT MAY BE GRANTED TO TRUSTOR ON ACCOUNT OF ANY STATUS TRUSTOR MAY BE DEEMED TO HAVE AS A SURETY OR GUARANTOR OF ANOTHER TRUSTOR AT LAW OR IN EQUITY, ITS RIGHTS, IF ANY, TO SUBROGATION, REIMBURSEMENT AND/OR INDEMNITY AGAINST ANY OR ALL OF THE OTHER TRUSTORS. SUCH WAIVER INCLUDES A WAIVER OF TRUSTOR'S RIGHTS THROUGH SUBROGATION, AFTER PAYMENT MADE BY SUCH TRUSTOR UNDER THE LOAN DOCUMENTS, TO BE SUBSTITUTED IN PLACE OF BENEFICIARY WITH RESPECT TO THE OBLIGATIONS OF THE OTHER TRUSTORS SUCH THAT THE TRUSTOR COULD SUCCEED TO BENEFICIARY'S RIGHTS, REMEDIES AND/OR SECURITY RELATING TO SUCH OBLIGATIONS AND ASSERT A CLAIM AGAINST THE OTHER TRUSTORS. CERTAIN AUTHORITIES HAVE DETERMINED THAT, IN THE ABSENCE OF AN EFFECTIVE WAIVER, PARTICULAR ACTIONS OF A LENDER THAT IMPAIR OR DESTROY A GUARANTOR'S SUBROGATION RIGHTS COULD PROVIDE A GUARANTOR WITH A DEFENSE TO THE PAYMENT AND PERFORMANCE OF ITS OBLIGATIONS UNDER ITS GUARANTY. BY WAY OF EXAMPLE, BUT NOT OF LIMITATION, COURTS HAVE HELD THAT, ABSENT AN EFFECTIVE WAIVER, A GUARANTOR MAY BE EXONERATED FROM ITS OBLIGATIONS UNDER A GUARANTY IF A LENDER COMPROMISES OR EXTINGUISHES SUCH GUARANTOR'S SUBROGATION RIGHTS BY ELECTING TO FORECLOSE NON-JUDICIALLY, BY POWER OF SALE, ON REAL PROPERTY SECURITY THEREBY INVOKING THE DEFICIENCY BAR OF CALIFORNIA CODE OF CIVIL PROCEDURE SECTION 580D. TRUSTOR AGREES THAT SUCH DEFENSES ARE INAPPLICABLE TO TRUSTOR AS A POSSIBLE GUARANTOR IN LIGHT OF TRUSTOR'S IRREVOCABLE WAIVER OF SUBROGATION, REIMBURSEMENT AND/OR INDEMNITY RIGHTS AGAINST ANY OR ALL OF THE OTHER TRUSTORS SET FORTH IN THE FOREGOING PARAGRAPH AND THAT NO ACTION BY BENEFICIARY IN ENFORCING ITS RIGHTS AND REMEDIES AGAINST ANY OR ALL OF THE OTHER TRUSTORS OR OTHERWISE MAY COMPROMISE OR EXTINGUISH SUCH RIGHTS BECAUSE EACH SUCH RIGHT HAS BEEN IRREVOCABLY WAIVED BY TRUSTOR HEREUNDER. TRUSTOR HEREBY ACKNOWLEDGES THAT IT HAS BEEN NOTIFIED OF THE NATURE OF ALL OF ITS RIGHTS AND DEFENSES AS A POSSIBLE GUARANTOR AND HAS KNOWINGLY AND WITH THE ADVICE OF LEGAL COUNSEL WAIVED SUCH RIGHTS AND DEFENSES AS SET FORTH HEREIN. EACH OF THE WAIVERS CONTAINED HEREIN WERE SEPARATELY BARGAINED FOR. INITIALS: __________ ARTICLE 8 ASSIGNMENT OF RENTS AND PROCEEDS AND AGREEMENTS 8.1. ASSIGNMENT OF RENTS AND PROCEEDS. Trustor absolutely and unconditionally assigns and transfers the Rents and Proceeds to Beneficiary, whether now due, past due or to become due, and gives to and confers upon Beneficiary the right, power and authority to collect such Rents and Proceeds, and apply the same to the Indebtedness or the satisfaction of any Obligation. Trustor irrevocably appoints Beneficiary its agent to, at any time, demand, receive and enforce payment, to give receipts, releases and satisfactions, and to sue, either in the name of Trustor or in the name of Beneficiary, for all such Rents and Proceeds. Neither the foregoing assignment of Rents and Proceeds to Beneficiary or the exercise by Beneficiary of any of its rights or remedies under this Deed of Trust shall be deemed to make Beneficiary a "mortgagee-in-possession" or otherwise responsible or liable in any manner with respect to the Property or the use, occupancy, enjoyment or operation of all or any part thereof, unless and until Beneficiary, in person or by its own agent, assumes actual possession thereof, nor shall appointment of a Receiver for the Property by any court at the request of Beneficiary or by agreement with Trustor or the entering into possession of the Property by such Receiver be deemed to make Beneficiary a "mortgagee-in-possession" or otherwise responsible or liable in any manner with respect to the Property or the use, occupancy, enjoyment or operation thereof. Concurrently with the execution of this Deed of Trust, Trustor has executed, delivered and recorded the Assignment of Leases in favor of Beneficiary. In the event of any inconsistency between the terms and provisions of this ARTICLE 8 and the terms and provisions of the Assignment of Leases, the latter shall control. 8.2. ASSIGNMENT OF AGREEMENTS. Trustor hereby sells, assigns, transfers, sets over and delivers to Beneficiary all of Trustor's right, title and interest in and to any and all agreements, contracts, reports, surveys, plans, drawings and governmental approvals whatsoever pertaining to the operation of the Property or to the construction of the Improvements, as the same may be amended or otherwise modified from time to time (collectively, the "Agreements"). The foregoing assignment encompasses the right of Trustor to (i) terminate any of the Agreements, (ii) perform or compel performance and otherwise exercise all remedies under the Agreements, and (iii) collect and receive all sums which may become due Trustor or which Trustor may now or shall hereafter become entitled to demand or claim, under the Agreements. 8.3. REVOCABLE LICENSE. Notwithstanding anything to the contrary contained herein or in the Note, so long as no Event of Default shall have occurred, Trustor shall have a license to collect all Rents and Proceeds and all other sums which may become payable to Trustor under the Agreements, and to first apply the same to the payment or performance of the Obligations as and when due. Upon the occurrence of (i) the first Event of Default, and continuing until twelve (12) consecutive calendar months have elapsed following cure of such Event of Default, and (ii) any subsequent Event of Default, Beneficiary shall have the right, on written notice to Trustor, (A) to terminate and revoke the license herein granted to Trustor, and (B) then or thereafter to exercise and enforce any and all of its rights and remedies provided in this ARTICLE 8 or by law or at equity. 8.4. NONRESPONSIBILITY. The acceptance by Beneficiary of the assignments with all the rights, powers, privileges and authority so granted shall not obligate Beneficiary to assume any obligations in respect of the Rents and Proceeds or under the Agreements or take any action thereunder or to expend any money or incur any expense or perform or discharge any obligation, duty or liability in respect of the Rents and Proceeds or under the Agreements or to assume any obligation or responsibility for the nonperformance of the provisions thereof by Trustor. ARTICLE 9 MISCELLANEOUS 9.1. SUCCESSOR TRUSTEE. Beneficiary may remove Trustee or any successor trustee at any time or times and appoint a successor trustee by recording a written substitution in each county where the Property is located, or in any other manner permitted by law. 9.2. NO WAIVER. No failure by Beneficiary to insist upon strict, full and complete (i) payment when due of any portion of the Indebtedness or (ii) performance of any Obligation, nor failure to exercise any right or remedy hereunder, shall constitute a waiver of any such failure to pay or breach of any such Obligation, or of the later exercise of such right or remedy. 9.3. ABANDONMENT. Any and all Personalty that upon foreclosure of the Property is owned by Trustor and is used in connection with the operation of the Property shall be deemed at the option of Beneficiary to have become on such date a part of the Property and abandoned to Beneficiary in its then condition. 9.4. NOTICES. All notices or other written communications hereunder or under any other Loan Documents shall be given in writing (i) in person or by facsimile transmission with receipt acknowledged, (ii) by overnight delivery with Federal Express or another comparable overnight courier service, or (iii) by mail sent by registered or certified mail, postage prepaid, return receipt requested, addressed as follows: If to Trustor: Mission West Properties LP 10050 Bandley Drive Cupertino, CA 95014 Attn: Mr. Carl E. Berg If to Trustee: Financial Title Company 701 Miller Street San Jose, California 95110 If to Beneficiary: The Prudential Insurance Company of America Four Embarcadero Center, Suite 2700 San Francisco, California 94111 Attention: Vice President, Mortgage Capital and: The Prudential Insurance Company of America Four Embarcadero Center, Suite 2700 San Francisco, California 94111 Attention: Regional Counsel With a copy to: Cassidy, Cheatham, Shimko & Dawson, P.C. 20 California Street, Suite 500 San Francisco, CA 94111 Attention: Stephen K. Cassidy, Esq. The notice address of the parties set forth above may be changed by written notice given hereunder. All notices under this Deed of Trust shall be in writing, shall be properly addressed and shall be sent by personal delivery, by United States Mail (registered, certified, or Express Mail, return receipt requested and postage prepaid), or by courier delivery service. All such notices shall be considered delivered: (i) if personally delivered, on the date of delivery; (ii) if sent by United States Mail in the manner prescribed above, on the date shown on the return receipt for acceptance or rejection; or (iii) if sent by courier delivery service, on the date of delivery as shown by the written delivery record of such service. 9.5. SEVERABILITY. If any provision hereof or of any other Loan Document is held unenforceable or void, that provision shall be deemed severable from the remaining provisions and in no way affect the validity of this Deed of Trust or any other Loan Document, except that if such provision relates to the payment of any monetary sum, then Beneficiary may, at its option, declare the Indebtedness immediately due and payable. 9.6. JOINDER OF FORECLOSURE. Should Beneficiary hold any other or additional security for the performance of the Obligations, its sale or foreclosure, upon any default in such performance, in the sole discretion of Beneficiary, may be prior to, subsequent to, or joined or otherwise contemporaneous with any sale or foreclosure hereunder. 9.7. GOVERNING LAW. This Deed of Trust shall be governed by and construed in accordance with the laws of the State of California. 9.8. SUBORDINATION. At the option of Beneficiary, exercised in its sole and absolute discretion, this Deed of Trust and/or any other Loan Document, shall become subject and subordinate in whole or in part (but not with respect to priority of entitlement to any insurance proceeds, damages, awards, or compensation resulting from damage to the Property or condemnation or exercise of power of eminent domain), to any and all contracts of sale and/or any and all Leases upon the execution by Beneficiary and recording thereof in the Official Records of the county where the affected Land is located of a unilateral declaration to that effect. Beneficiary may require the issuance of such title insurance endorsements to the title policy in connection with any such subordination as Beneficiary, in its reasonable judgment, shall determine are appropriate, and Trustor shall pay any cost or expense incurred in connection with the issuance thereof. 9.9. WAIVER OF STATUTE OF LIMITATIONS AND RIGHTS TO TRIAL BY Jury. Trustor hereby waives, to the full extent allowed by law, the right to plead any statute of limitations as a defense to any Obligations and the right to a jury trial in any action under or relating to the Loan Documents. 9.10. ENTIRE AGREEMENT. The Loan Documents and the Hazardous Substances Agreement set forth the entire understanding between Trustor and Beneficiary relative to the Loan and the same shall not be amended except by a written instrument duly executed by each of Trustor and Beneficiary. The foregoing notwithstanding, the terms and the conditions of the Application shall survive the funding of the Loan, but in the event of any conflict between the provisions of the Application, any of the other Loan Documents or the Hazardous Substances Agreement, except as otherwise specifically provided herein, the terms of such other Loan Documents and Hazardous Substances Agreement shall control. 9.11. COPIES. Trustor will promptly give to Beneficiary copies of all (i) notices of violation relating to the Property that Trustor receives from any governmental agency or authority, and (ii) notices of default that Trustor shall give or receive under any agreement that Trustor covenants to perform hereunder. 9.12. PERSONALTY SECURITY INSTRUMENTS. If Beneficiary at any time holds additional security for any obligations secured hereby, it may enforce the terms thereof or otherwise realize upon the same, at its option, either before or concurrently herewith or after a sale is made hereunder, and may apply the proceeds upon the Indebtedness without affecting the status of or waiving any right to exhaust all or any other security, including the security hereunder, and without waiving any breach or default or any right or power whether exercised hereunder or contained herein or in any such other security. 9.13. SUITS TO PROTECT PROPERTY. Trustor shall appear in and defend any action or proceeding purporting to affect the security of the Deed of Trust, any other Loan Documents, or of any additional or other security for the Obligations, the interest of Beneficiary or the rights, powers and duties of Trustee hereunder; and shall pay all costs and expenses, including cost of evidence of title, reasonable attorneys' fees, court costs, expert witness fees, document reproduction expenses, costs of exhibit preparation, courier charges, postage and communication expenses, in any action or term, covenant or condition proceeding in which Beneficiary and/or Trustee may appear or be made a party, including foreclosure or other proceeding commenced by those claiming a right to any part of the Property in any action to partition or condemn all or part of the Property, whether or not pursued to final judgment, and in any exercise of the power of sale contained herein, whether or not the sale is actually consummated. In any such action or proceeding in which Beneficiary is made a party, Beneficiary may at its option defend such action, and all costs of such defense, including all court costs and reasonable attorneys' fees, court costs, expert witness fees, document reproduction expenses, costs of exhibit preparation, courier charges, postage and communication expenses, shall be borne and paid by Trustor. 9.14. CHARGES FOR STATEMENTS. Trustor shall pay Beneficiary's charge, up to the maximum amount permitted by law, for any such statement. Beneficiary shall provide to Trustor any statement requested by Trustor that Beneficiary is required to deliver to Trustor under applicable law. 9.15. USURY. In the event that Beneficiary, or a court of competent jurisdiction in a final, non-appealable judgment, determines that any charge, fee or interest paid or agreed to be paid in connection with the Loan may, under the applicable usury laws, cause the interest rate on the Loan to exceed the maximum permitted by law, then such charges, fees or interest shall be reduced and any amounts actually paid in excess of the maximum interest permitted by such laws shall be applied by Beneficiary to reduce the outstanding Principal Balance of the Loan. The parties intend that Trustor shall not be required to pay, and Beneficiary shall not be entitled to collect, interest in excess of the maximum legal rate permitted under the applicable usury laws. 9.16. PUBLICITY. Beneficiary, at its expense, may publicize the financing of the Property. 9.17. INFORMATION REPORTING UNDER IRS SECTION 6045(E). Any information returns or certifications that must be filed with the Internal Revenue Service and/or provided to other parties pursuant to Internal Revenue Code Section 6045(e) shall be prepared, filed by and sent to the appropriate parties by Trustor. To the extent permitted by law, Beneficiary shall have no responsibility to perform such services; provided however, that upon demand Trustor shall reimburse Beneficiary for any costs incurred by Beneficiary in doing so and shall also pay such fee as Beneficiary may reasonably and lawfully request. Beneficiary shall, where requested by Trustor, promptly supply Trustor with all information pertaining to Beneficiary reasonably required by Trustor to prepare and file any such return or certification. 9.18. ERISA. A. Beneficiary represents and warrants to Trustor that, as of the date of this Deed of Trust and throughout the term of the Loan, the source of funds from which Beneficiary extends the Loan is its General Account, which is subject to the claims of its general creditors under state law. B. Trustor represents and warrants to Beneficiary that, as of the date of this Deed of Trust and covenants that, until the Loan and all other Obligations are paid and performed in full, (i) Trustor is not and will not become an "employee benefit plan" as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), which is subject to Title I of ERISA, and (ii) the assets of Trustor do not and will not constitute "plan assets" of one or more such plans within the meaning of 29 C.F.R. Section 2510.3-101. C. Trustor represents and warrants to Beneficiary that, as of the date of this Deed of Trust (i) Trustor is not a "governmental plan" within the meaning of Section 3(32) of ERISA and (ii) transactions by or with Trustor are not subject to state statutes regulating investment of and fiduciary obligations with respect to governmental plans. D. Trustor shall deliver to Beneficiary such certifications or other evidence from time to time until the Loan and all other Obligations are paid and performed in full, as requested by Beneficiary in its sole discretion, and Trustor hereby warrants and represents to Beneficiary, that (i) Trustor is not an "employee benefit plan" or a "governmental plan"; and (ii) Trustor is not subject to state statutes regulating investments and fiduciary obligations with respect to governmental plans; and (iii) one or more of the following circumstances is true: (A) equity interests in Trustor are publicly offered securities, within the meaning of 29 C.F.R. Section 2510.3-101(b)(2); (B) less than twenty-five percent (25%) of all equity interests in Trustor are held by "benefit plan investors" within the meaning of 29 C.F.R. Section 2510.3-101(f)(2); (C) Trustor qualifies as an "operating company" or a "real estate operating company" within the meaning of 29 C.F.R. Section 2510.3-101(c) or (e); or (D) no equity interest in Trustor is held directly or indirectly by an employee benefit plan subject to ERISA. E. In addition to any other breach by Trustor of any provision of this PARAGRAPH 9.18, any of the following shall constitute an Event of Default entitling Beneficiary to exercise any and all remedies to which it may be entitled under the Loan Documents: (i) the failure of any representation or warranty made by Trustor under this PARAGRAPH 9.18 to be true and correct in all respects, (ii) the failure of Trustor to provide Beneficiary with the written certifications and evidence referred to above, or (iii) the consummation by Trustor of a transaction which would cause the Deed of Trust or any exercise of Beneficiary's rights under the Loan Documents to constitute a non-exempt prohibited transaction under ERISA or a violation of a state statute regulating governmental plans, subjecting Beneficiary to liability for violation of ERISA or such state statute. F. Trustor shall indemnify, protect and defend and hold Beneficiary harmless from and against all liability, loss, claims, damage, cost or expense, including attorneys' fees, court costs, expert witness fees, document reproduction expenses, costs of exhibit preparation, courier charges, postage and communication expenses, and costs incurred in the investigation, defense and settlement of claims and losses incurred in correcting any prohibited transaction or in the sale of a prohibited loan, and in obtaining any individual prohibited transaction exemption under ERISA that may be required, in Beneficiary's sole discretion, that Beneficiary may incur, directly or indirectly, as a result of a default under PARAGRAPH 9.18.E. This indemnity shall survive any termination, satisfaction or foreclosure of the Deed of Trust. G. Anything in PARAGRAPH 4.2 or elsewhere in this Deed of Trust to the contrary notwithstanding, no Transfer of any direct or indirect interest in Trustor shall be permitted which would negate Trustor's representations in this PARAGRAPH 9.18 or cause this Deed of Trust (or any exercise of Beneficiary's rights under the Loan Documents) to constitute a violation of any provision of ERISA or of any applicable state statute regulating a governmental plan, as determined in the sole discretion of Beneficiary. H. Anything in PARAGRAPH 4.2 or elsewhere in this Deed of Trust to the contrary notwithstanding, no Transfer of the Property or any interest therein including a junior lien or leasehold interest, shall be permitted which would cause this Deed of Trust (or any exercise of Beneficiary's rights under the Loan Documents) to constitute a violation of ERISA or any applicable state statute regulating a governmental plan, as determined in the sole discretion of Beneficiary. I. Anything in this Deed of Trust to the contrary notwithstanding, not less than fifteen (15) days before consummation of a Transfer, Trustor shall obtain from the proposed transferee or lienholder a representation to Beneficiary in form and substance satisfactory to Beneficiary that PARAGRAPH 9.18.D will be true after the transfer; and further provided that any proposed lienholder agrees that any direct or indirect transfer of its lien or any interest herein will be governed by this PARAGRAPH 9.18. 9.19. INDEMNIFICATION AND DEFENSE. A. Trustor will indemnify, defend, protect and hold Beneficiary and its agents harmless from and against all liability, loss, claims, damage, cost or expense (including reasonable attorneys' fees, court costs, expert witness fees, document reproduction expenses, costs of exhibit preparation, courier charges, postage and communication expenses) that Beneficiary might incur in connection with the making or administering of the Loan, the enforcement of any of Beneficiary's rights or remedies under the Loan Documents, by reason of any failure of any representation or warranty made by Trustor or the failure of Trustor to perform any Obligation or by reason or in defense of any and all claims and demands whatsoever that may be asserted against Beneficiary arising out of or in connection with the Property or the Loan, but which shall not include claims, liabilities, damages, causes of action or costs arising from (1) Beneficiary's and/or any participating lender's gross negligence or willful misconduct or (2) disputes between Beneficiary and any participating lender not arising from neglect, willful misconduct, or an act, omission or Event of Default by Trustor. B. Whenever, under any Loan Document, Trustor is obligated to indemnify and/or defend Beneficiary, or Trustor is obligated to defend or prosecute any action or proceeding, then Beneficiary shall have the right to participate in such prosecution or defense using counsel of Beneficiary's choice, and all costs and expenses incurred by Beneficiary in connection with such participation (including reasonable attorneys' fees, court costs, expert witness fees, document reproduction expenses, costs of exhibit preparation, courier charges, postage and communication expenses) shall be reimbursed by Trustor to Beneficiary. In addition, Beneficiary shall have the right to approve any counsel retained by Trustor in connection with the prosecution or defense of any such action or proceeding by Trustor. Trustor shall give notice to Beneficiary of the initiation of all proceedings prosecuted or required to be defended by Trustor, or which are subject to Trustor's indemnity and/or defense obligations, under this Deed of Trust, promptly after the receipt by Trustor of notice of the existence of any such proceeding, but in no event later than five (5) days thereafter. C. Should Beneficiary incur any liability, loss, claim, damage, cost or expense required to be reimbursed by Trustor to Beneficiary hereunder, the amount thereof with interest thereon at the Secondary Interest Rate shall constitute part of the Indebtedness, shall be payable by Trustor upon demand and shall be secured by this Deed of Trust. 9.20. DESTRUCTION OF NOTE. Trustor shall, if the Note is mutilated or destroyed by any cause whatsoever, or otherwise lost or stolen and regardless of whether due to the act or neglect of Beneficiary or Trustee, execute and deliver to Beneficiary in substitution therefor a duplicate promissory note containing the same terms and conditions as the Note, within ten (10) days after Beneficiary notifies Trustor of any such mutilation, destruction, loss or theft of the Note. In such event, Beneficiary shall be responsible for any payments Trustor may be legally required to make to any holder of the original promissory note after Trustor has paid Beneficiary on a duplicate note, provided, however, that Trustor shall make no such payments on the original promissory note without Beneficiary's written consent and Trustor shall give Beneficiary written notice of any request that may be made of Trustor to make such payment(s) within thirty (30) days after Trustor has received any such request. 9.21. HEIRS AND ASSIGNS. Subject to the restrictions on Transfers contained in this Deed of Trust, this Deed of Trust and all other Loan Documents apply to, inure to the benefit of, and bind all parties hereto and thereto, their heirs, legatees, devisees, administrators, executors, successors and assigns. 9.22. INTERPRETATION. When the identity of the parties or other circumstances make it appropriate, the masculine gender shall include the feminine and/or neuter, and the singular number shall include the plural. Specific enumeration of rights, powers and remedies of Trustee and Beneficiary and of acts which they may do and of acts Trustor must do or not do shall not exclude or limit the general. The headings of each Article and Paragraph are for convenience and do not limit or construe the contents of any provision hereof. The provisions of the Loan Documents and the Hazardous Substances Agreement shall be construed as a whole according to their common meaning, not strictly for or against any party and consistent with the provisions herein contained, in order to achieve the objectives and purposes of such documents. Each party and its counsel has reviewed and revised the Loan Documents and the Hazardous Substances Agreement and agree that the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of such document. The use in the Loan Documents and the Hazardous Substances Agreement of the words "including", "such as", or words of similar import when following any general term, statement or matter shall not be construed to limit such statement, term or matter to the specific items or matters, whether or not language of non-limitation such as "without limitation" or "but not limited to", or words of similar import are used with reference thereto, but rather shall be deemed to refer to all other items or matters that could reasonably fall within the broadest possible scope of such statement, term or matter. The term "Trustor" shall be deemed to refer to each and every Trustor, both individually and collectively, when more than one Trustor exists, and to the original Trustor, and its or their successors and assigns (whether or not such successor or assign assumed the Obligations hereunder); the term "Beneficiary" includes the Beneficiary named herein or any future owner or holder, including pledgee and participants, of the Note, or any other instrument secured hereby, or any participation therein; and the term "Trustee" includes the original Trustee and its successors and assigns. The references to the "Property" shall be deemed to refer to all or any portion of the Property and any interest therein. References to "foreclosure" and related phrases shall be deemed references to the appropriate procedure in connection with Trustee's private power of sale as well as any judicial foreclosure proceeding or a conveyance in lieu of foreclosure. 9.23. INFORMATION TO THIRD PERSONS. If, at any time, Beneficiary desires to sell or transfer, or grant a participation interest in, all or any portion of, or any interest in, the Note or any other Loan Document to any Person, Trustor shall furnish in a timely manner any and all financial information concerning the Property and Leases, and concerning Trustor, requested by Beneficiary or such Person in connection with any such sale or transfer. 9.24. COMMINGLING OF FUNDS. Any and all sums collected or retained by Beneficiary under any of the Loan Documents (including insurance and condemnation proceeds and any amounts paid by Trustor to Beneficiary under PARAGRAPH 3.4 hereof), shall not be deemed to be held in trust, and Beneficiary may commingle such funds or proceeds with its general assets and shall not be liable for the payment of any interest or other return thereon, except to the extent otherwise required by law. 9.25. CERTAIN OBLIGATIONS UNSECURED. Notwithstanding anything to the contrary set forth herein or any of the Loan Documents, this Deed of Trust does not secure the following obligations (the "Unsecured Obligations"): (i) any obligations evidenced by or arising under the Hazardous Substances Agreement, (ii) any other obligations in this Deed of Trust or in any of the other Loan Documents to the extent that such other obligations relate specifically to the presence on the Property of Hazardous Materials (as defined in the Hazardous Substances Agreement) and are the same or have the same effect as any of the obligations evidenced by or arising under the Hazardous Substances Agreement, and (iii) any obligations arising under the Certificate Regarding Distribution of Proceeds and Indemnity Agreement. Any breach or default with respect to the Unsecured Obligations shall constitute an Event of Default hereunder, notwithstanding the fact that such Unsecured Obligations are not secured by this Deed of Trust. Nothing in this section shall, in itself, impair or limit Beneficiary's right to obtain a judgment in accordance with applicable law after foreclosure for any deficiency in recovery of all obligations that are secured by this Deed of Trust following foreclosure. 9.26 COSTS AND FEES. All costs, fees and expenses incurred by Beneficiary in making, administering or collecting the Loan (including those of Beneficiary's legal counsel and consultants, court costs, expert witness fees, document reproduction expenses, costs of exhibit preparation, courier charges, postage, communication expenses, costs in connection with any inspections, reports, tests, inquiries and reviews, condemnation proceedings, endorsements to the title policy, actions or proceedings in which Beneficiary and/or Trustee may appear or be made a party, foreclosure or other proceedings commenced by those claiming a right to any part of the Property or any action to partition all or part of the Property, whether or not pursuant to final judgment and exercise of the power of sale contained herein, whether or not the sale is actually consummated) and all sums expended by Trustee or Beneficiary in the exercise of any of their respective rights or remedies under this Deed of Trust, shall be immediately due and payable by Trustor to Beneficiary upon demand, shall accrue interest at the Secondary Interest Rate from the date of expenditure until paid, and shall be added to the Indebtedness secured by the Loan Documents prior to any right, title or interest in or claim upon the Property attaching or accruing subsequent to the lien of this Deed of Trust. 9.27. STANDARD OF APPROVAL; COVENANT OF GOOD FAITH AND FAIR DEALING. Whenever Trustee or Beneficiary has been specifically granted a right to exercise its business judgment, or act, in a subjective manner, with respect to any matter, or the right to act in its sole and absolute discretion or sole judgment, or the right to make a subjective judgment under any provision of this Agreement, whether or not "objectively" reasonable under the circumstances, any such exercise shall not be deemed inconsistent with any covenant of good faith and fair dealing otherwise implied by law to be part of the Loan Documents. 9.28. EXHIBITS. The following Exhibits, to which reference is made in this Deed of Trust, are deemed incorporated into this Deed of Trust in their entirety: A - Property Description B - Eligible Transfer Properties 9.29 JOINT AND SEVERAL LIABILITY. The Obligations are joint and several undertakings of each of the Trustors, and Beneficiary may proceed against any one or more of the Trustors without waiving its right to proceed against any of the other Trustors. IN WITNESS WHEREOF, Trustors have caused this Deed of Trust to be executed as of the day and year first above written. TRUSTOR: MISSION WEST PROPERTIES, L.P., a Delaware limited partnership By: Mission West Properties, a California corporation, its general partner By: -------------------------------------- Carl E. Berg, Chairman, President, CEO [Signatures continued on succeeding page] MISSION WEST PROPERTIES, L.P. I, a Delaware limited partnership By: Mission West Properties, a California corporation, its general partner By: -------------------------------------- Carl E. Berg, Chairman, President, CEO MISSION WEST PROPERTIES, L.P. II, a Delaware limited partnership By:Mission West Properties, a California corporation, its general partner By: -------------------------------------- Carl E. Berg, Chairman, President, CEO MISSION WEST PROPERTIES, L.P. III a Delaware limited partnership By:Mission West Properties, a California corporation, its general partner By: -------------------------------------- Carl E. Berg, Chairman, President, CEO EXHIBIT A (Property Description) EXHIBIT B (Eligible Transfer Properties) Each of the following eighteen (18) properties shall be considered an "Eligible Transfer Property" and collectively constitute the "Eligible Transfer Properties". Single buildings that do not individually constitute an Eligible Transfer Property shall not be released unless released with the other building or buildings together constituting one of the Eligible Transfer Properties.
Name of Property and Location of Property/Allocated Loan BUILDING ADDRESS(ES) ZIP CODE NRA AMOUNT 1. 10300 Bubb Road Cupertino 95014-4165 23,400 $2,548,000.00 2. 10500 North De Anza Blvd. Cupertino 95014-2033 211,000 $34,562,000.00 3. 1230/1250 East Arquez Ave. Sunnyvale 94086-5401 260,000 $7,836,000.00 4. 3550/3560/3570/3580 Bassett Street Santa Clara 95054-2738 166,663 $12,830,000.00 5. 3540/3542/3544 Bassett St. Santa Clara 95054-2704 104,060 $7,043,000.00 6. 1135 Kern Avenue Sunnyvale 94086-3908 18,300 $1,434,000.00 7. 1212 Bordeaux Sunnyvale 94089-1202 71,800 $6,029,000.00 8. 1170 Morse Sunnyvale 94089-1605 34,750 $2,446,000.00 9. 450-460 National Ave. Mountain View 94043-2238 36,100 $2,702,000.00 10. 3236 Scott Boulevard Santa Clara 95054-3011 54,672 $4,360,000.00 11. 6311 San Ignacio San Jose 95119-1202 30,000 $1,788,000.00 12. 6321/6325 San Ignacio San Jose 95119-1202 103,894 $7,380,000.00 13. 6331 San Ignacio San Jose 95119-1202 131,320 $8,903,000.00 14. 6341/6351 San Ignacio San Jose 95119-1202 95,040 $5,315,000.00 15. 4949 Hellyer Ave. San Jose 95138-1014 200,484 $12,480,000.00 16. 4050 Starboard Drive Fremont 94538-6402 52,232 $4,480,000.00 17. 45700 Northport Loop East Fremont 94538-6476 47,570 $4,248,000.00 18. 45738 Northport Loop West Fremont 94538-6476 44,256 $3,616,000.00
STATE OF CALIFORNIA ) )ss. COUNTY OF ________________________ ) On this __ day of _____________________, 1998, before me, ______________________, a notary public in and for said state, personally appeared _________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she executed the same in his/her authorized capacity(ies), and that by his/her signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s), acted, executed the instrument. WITNESS my hand and official seal. Notary Public State of California My Commission Expires:__________ EX-10.17 10 PRUDENTIAL CERTIFICATE REGARDING DISTRIBUTION CERTIFICATE REGARDING DISTRIBUTION OF LOAN PROCEEDS AND INDEMNITY AGREEMENT THIS CERTIFICATE is made as of September 22, 1998 by MISSION WEST PROPERTIES, L.P., a Delaware limited partnership, MISSION WEST PROPERTIES, L.P. I, a Delaware limited partnership, MISSION WEST PROPERTIES, L.P. II, a Delaware limited partnership, and MISSION WEST PROPERTIES, L.P. III, a Delaware limited partnership, each having offices at 10050 Bandley Drive, Cupertino, California 95014 (each a "Borrower" and collectively, "Borrowers"), to and for the benefit of THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("Prudential"), in conjunction with a loan (the "Loan") made or to be made by Prudential to Borrowers in the amount of One Hundred Thirty Million Dollars ($130,000,000.00) as more particularly described in that certain First Mortgage Loan Application dated June 24, 1998 and executed by Borrowers (the "Application"). This Certificate is made with respect to the following facts and circumstances: A. The Loan is to be evidenced by that certain Promissory Note of even date herewith (the "Note") in the principal amount of One Hundred Thirty Million Dollars ($130,000,000.00) executed by Borrowers as an aggregate loan to all Borrowers as hereinafter described. B. The Note shall be secured by, among other things, that certain Deed of Trust, Security Agreement, and Fixture Filing with Assignment of Rents and Proceeds of even date herewith executed by Borrowers, as Trustor, in favor of Prudential, as Beneficiary (the "Deed of Trust"). Capitalized terms used herein and not otherwise defined shall have the meanings given them in the Deed of Trust. C. Borrowers have advised Prudential, and Prudential has agreed, subject to the certifications, warranties and representations of Borrowers contained in this Certificate, that Borrowers desire that the proceeds of the Loan allocated to each Borrower be allocated amongst the Borrowers, but in an amount that (i) neither constitutes less than a substantial portion of the fair market value of the Property of such Borrower that is being used as collateral for the Loan, (ii) nor is more than 75% of the value of such Property as shown on Exhibit A attached hereto. Borrowers understand and acknowledge that such allocation reflects the commercial benefits being received by each Borrower from the Loan transaction as well as the equitable allocation of Operating Partnership Units held by each Borrower at the time of Loan closing. D. Borrowers have requested that the Loan amount be encompassed in one loan with a single set of Loan Documents binding all Borrowers notwithstanding that the Loan proceeds are to be divided amongst Borrowers. Prudential has agreed to allow Borrowers to borrow the funds using this structure solely because of Borrowers' request. E. On the basis of the foregoing facts and circumstances, Prudential is willing to make the Loan as requested by Borrowers, but only in reliance on the acknowledgments, representations and warranties of Borrowers contained herein. NOW, THEREFORE, in order to induce Prudential to make the Loan, and in consideration thereof and with the understanding that Prudential is relying thereon, Borrowers hereby jointly and severally agree and certify as follows: 1. LOAN STRUCTURE. Borrowers acknowledge that, at Borrowers' request, the Loan is made in the aggregate to Borrowers, and is evidenced by and made pursuant to the Note, and that the Note is or is to be secured by a deed of trust to be recorded in Alameda County, California and Santa Clara County, California. The Note provides for joint and several liability among Borrowers at Borrowers' request. Borrowers further acknowledge that any nonpayment of principal or interest, including one resulting from one Borrower's failure to pay any portion of the Note or any installment of principal or interest due thereunder, may result in the Loan being declared in default, and all unpaid principal under the Note accelerated. Without limiting the generality of the foregoing, in such event all proceeds of the foreclosure sale of any Borrower's property may be applied to satisfy the Note. Further, each Borrower acknowledges and understands that such foreclosure sale proceeds may be applied to satisfy the Note even if the value of such Borrower's property is greater than the portion of the Note that such Borrower may be responsible for as agreed among Borrowers. Borrowers have determined the allocation of Loan proceeds pursuant to standards set forth of the Recitals set forth in PARAGRAPH C above and Prudential shall not be responsible for the allocation of such proceeds of the Loan among Borrowers. 2. CERTAIN CONSEQUENCES OF LOAN STRUCTURE. Each Borrower has been informed and understands that the consequences of becoming obligated under the Loan Documents that secure the Loan is that each Borrower's respective land, improvements and other property is being encumbered as collateral for the entire Loan. Each Borrower further understands and has been informed that in the event of a default under the Loan, all Borrowers must act together for purposes of curing any defaults, and that the failure to do so could result in the foreclosure and sale, and ultimate loss, of each Borrower's respective Property. 3. ALLOCATION AND DISTRIBUTION OF THE PROCEEDS OF THE LOAN. (a) Borrowers hereby acknowledge, represent and warrant that the proceeds of the Loan allocated to, and to be received by, each Borrower shall be in an amount that (i) neither constitutes less than a substantial portion of the fair market value of the Property of such Borrower that is being used as collateral for the Loan, (ii) nor is more than 75% of the value of such Property as shown on EXHIBIT A attached hereto. The rights and remedies of Prudential under the Loan Documents shall not be diminished, reduced or modified due to allocation of the proceeds of the Loan among Borrowers. (b) Each Borrower agrees that up to a maximum amount not to exceed its share of the Loan (per subsection (a)(ii)) and corresponding interest and other expenses, it shall reimburse and indemnify and hold harmless the other Borrowers (each an "Indemnitee") for any claim, loss, liability, damage or expense suffered or paid by the Indemnitee (including payments of the Loan and the loss of the Indemnitee's respective property as a result of the exercise of Prudential's remedies under the Loan Documents) because (i) such Borrower fails to make its allocated share of payments under the Loan (based on the percentages noted in subsection (a) above with respect to the Loan), or (ii) at the time of foreclosure or transfer by deed in lieu of foreclosure, the value of such Borrower's property so foreclosed or transferred has declined proportionately more (based on the percentages noted in subsection (a) above with respect to the Loan) than another Indemnitee's property since the date of this Certificate. Borrowers shall be entitled to set off claims related to this Loan transaction against one another so that the aggregate obligation of a Borrower shall not exceed the maximum amount provided in the preceding sentence. Nothing contained in this Agreement shall diminish the obligations of each Borrower to indemnify the General Partner in accordance with the terms of such Borrower's limited partnership agreement. 4. REPRESENTATIONS REGARDING LOAN STRUCTURE AND TERMS. Borrowers jointly and severally represent and warrant to Prudential that Borrowers have requested that the Loan be made upon the following terms and acknowledge that Prudential has agreed to such terms only on account of Borrowers' request to do so: (a) The interest rate and repayment terms of the Loan are more favorable than those that each individual Borrower could have obtained on its own without the "pooling" of all of the collateral as security for the Loan, and without the joint and several liability features of the Note. (b) All of the individual parcels of land encumbered by the Deed of Trust are interrelated in a manner such that financing of each of the separate parcels apart from the others would be upon terms that are less favorable to Borrowers, and Prudential would not finance each parcel separately under such more favorable terms. (c) The structure of the Loan has been devised in order to accommodate Borrowers' existing operational structure in order to best serve Borrowers' collective interests. 5. REPRESENTATIONS REGARDING BORROWERS' SOLVENCY. Borrowers further jointly and severally covenant, represent and warrant to Prudential as follows: (a) The proceeds of the Loan to be received by each of Borrowers, coupled with the additional consideration described in subparagraph 4(b) and other consideration described in the Loan Documents constitute reasonably equivalent value in exchange for all of the transfers made and obligations incurred by Borrowers under the Loan Documents. (b) The Deed of Trust is not being executed by Borrowers for or on account of any antecedent debt owed by any Borrower to Prudential. (c) None of Borrowers is insolvent as of the date hereof, nor shall any Borrower be insolvent on the date of the Loan closing or the date of any Transfer. (d) The execution, delivery, and recordation of the Deed of Trust is intended by Borrowers and Prudential to be a contemporaneous exchange for new value given to Borrowers, and shall in fact be a substantially contemporaneous exchange. (e) The transfers made and obligations incurred by Borrowers under the Loan Documents are not made with actual intent to hinder, delay, or defraud any entity to which any Borrower was, is, or subsequently becomes indebted. (f) No Borrower is or shall be insolvent on the date that any transfer is to be made or obligation to be incurred under the terms of the Loan Documents or on the date of the Loan closing, nor shall any Borrower become insolvent as a result of such transfer or obligation. (g) No Borrower is engaged in business or a transaction, or is about to engage in business or a transaction, on the date of this Certificate, the Loan closing or any such transfer, for which any property remaining with such Borrower is an unreasonably small amount of capital. (h) No Borrower intends to incur, or believes that it would incur, debts that would be beyond such Borrower's ability to pay as such debts matured. 6. INDEMNITY. Borrowers jointly and severally agree to indemnify, defend, protect and hold harmless Prudential against any losses, claims, damages, liabilities, or expenses (including attorneys' fees), suffered or incurred by Prudential in the event of any misrepresentation by any Borrower in this Certificate. 7. ATTORNEYS' FEES. Borrowers further agree that if any suit, action or proceeding of any kind (an "action") is brought by any party hereto to enforce, defend or interpret any provision of this Certificate (including an action for declaratory relief), the prevailing party in such action shall recover from the other parties to such action all reasonable costs and expenses which the prevailing party may incur in bringing or defending such action and/or enforcing any judgment granted therein, all of which shall be deemed to have accrued upon the commencement of such action and shall be paid whether or not such action is prosecuted to judgment. Any judgment or order entered in such action shall specifically provide for the recovery of all reasonable costs and expenses incurred by the prevailing party in connection therewith including, without limitation, costs and expenses incurred in enforcing such judgment. Prudential shall have the right (but not the obligation) to commence, appear in, or defend any action purporting to affect any of the interests, rights, obligations or liabilities of Prudential or Borrowers in connection with this Certificate or any document referred to in this Certificate or executed in connection with this Certificate, and Borrowers agree to pay to Prudential on demand all costs and expenses reasonably incurred by Prudential in connection therewith. 8. SURVIVAL. This Certificate and the representations and warranties made herein shall survive the closing of the Loan, and the execution and delivery of the Loan Documents. 9. COUNTERPARTS. This Certificate may be executed in one or more counterparts and such counterparts taken together shall constitute one and the same document. IN WITNESS WHEREOF, Borrowers have executed this Certificate as of the day and year first written above. BORROWERS: MISSION WEST PROPERTIES, L.P., a Delaware limited partnership By:Mission West Properties, a California corporation, its general partner By: ________________________________ Carl E. Berg, Chairman, President, CEO MISSION WEST PROPERTIES, L.P. I, a Delaware limited partnership By:Mission West Properties, a California corporation, its general partner By: ________________________________ Carl E. Berg, Chairman, President, CEO MISSION WEST PROPERTIES, L.P. II, a Delaware limited partnership By:Mission West Properties, a California corporation, its general partner By: ________________________________ Carl E. Berg, Chairman, President, CEO MISSION WEST PROPERTIES, L.P. III, a Delaware limited partnership By:Mission West Properties, a California corporation, its general partner By: ________________________________ Carl E. Berg, Chairman, President, CEO EXHIBIT A to CERTIFICATE REGARDING DISTRIBUTION OF LOAN PROCEEDS AND INDEMNITY AGREEMENT
----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- PROPERTY ADDRESS(ES) PROPERTY OWNERSHIP VALUE ----------------------------------------------------- ----------------------------------------------------- 4949 Hellyer Avenue $20,909,728 MWP, LP ----------------------------------------------------- ----------------------------------------------------- 4050 Starboard Drive $7,507,118 MWP, LP ----------------------------------------------------- ----------------------------------------------------- 45700 Northport Loop East $7,118,116 MWP, LP ----------------------------------------------------- ----------------------------------------------------- 45738 Northport Loop West $6,059,223 MWP, LP ----------------------------------------------------- ----------------------------------------------------- $41,594,185 ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- 10300 Bubb Road $4,269,094 MWP, LP I ----------------------------------------------------- ----------------------------------------------------- 10500 North De Anza $57,907,240 MWP, LP Boulevard I ----------------------------------------------------- ----------------------------------------------------- 1230 \ 1250 East Arques $13,129,708 MWP, LP Avenue I ----------------------------------------------------- ----------------------------------------------------- 1135 Kern Avenue $2,402,338 MWP, LP I ----------------------------------------------------- ----------------------------------------------------- 450/460 National Avenue $4,526,751 MWP, LP I ----------------------------------------------------- ----------------------------------------------------- $82,235,131 ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- 3236 Scott Boulevard $7,305,892 MWP, LP II ----------------------------------------------------- ----------------------------------------------------- 1212 Bordeaux $10,102,559 MWP, LP II ----------------------------------------------------- ----------------------------------------------------- 1170 Morse $4,097,835 MWP, LP II ----------------------------------------------------- ----------------------------------------------------- 6311 San Ignacio $2,995,501 MWP, LP II ----------------------------------------------------- ----------------------------------------------------- 6321 / 6325 San Ignacio $12,365,352 MWP, LP II ----------------------------------------------------- ----------------------------------------------------- 6331 San Ignacio $14,917,702 MWP, LP II ----------------------------------------------------- ----------------------------------------------------- 6341 / 6351 San Ignacio $8,905,930 MWP, LP II ----------------------------------------------------- ----------------------------------------------------- $60,690,771 ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- 3550 \ 3560 \ 3570 \ 3580 $21,496,897 MWP, LP Bassett Street III ----------------------------------------------------- ----------------------------------------------------- 3540 \3542 \ 3544 Bassett $11,801,222 MWP, LP Street III ----------------------------------------------------- ----------------------------------------------------- $33,298,119 ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- ----------------------------------------------------- PORTFOLIO TOTAL $217,818,206 -----------------------------------------------------
EX-10.18 11 PRUDENTIAL GUARANTY GUARANTY TO: The Prudential Insurance Company of America Four Embarcadero Center Suite 2700 San Francisco, California 94111 The undersigned, ___________________, a _______________ ("Guarantor"), is a limited partner in Mission West Properties L.P. [ __________ ], a Delaware limited partnership (the "Partnership"), which is a joint and several obligor with respect to a $130,000,000 loan from The Prudential Insurance Company of America, a New Jersey corporation ("Lender"), pursuant to which the Partnership on September 22, 1998 has executed and delivered a promissory note (the "Note") in the original principal amount of One Hundred Thirty Million Dollars ($130,000,000) and a Deed of Trust, Security Agreement and Fixture Filing with Assignment of Rents and Proceeds (the "Deed of Trust"). The Note is secured and cross-collateralized by certain properties of the Partnership and three affiliated limited partnerships whose sole general partner is Mission West Properties, a California corporation, pursuant to the terms of the Deed of Trust. Loan proceeds of $________________ have been allocated to the Partnership under the loan terms (the "Partnership Principal") which are substantially less than the value of the properties of the Partnership secured by the Deed of Trust. Generally the terms of the Note and Deed of Trust provide that no partner in the Partnership shall have any personal liability with respect to the Note except as provided in Paragraphs 18(b) and (c) of the Note or as provided in this Guaranty when executed and delivered by a limited partner to Lender. Guarantor is providing this Guaranty in connection with the loan pursuant to Paragraph 18(b)(i) of the Note. 1. ACKNOWLEDGMENT. Guarantor hereby acknowledges that the Partnership has obtained the aforementioned loan from Lender; and that the Partnership has executed and delivered the Note and Deed of Trust to Lender; and Guarantor hereby affirms and approves the same. 2. AMOUNT OF GUARANTY. Guarantor shall be obligated to pay Lender pursuant to this Guaranty no more than that amount of the original principal of the Note which is provided under this paragraph (the "Guaranteed Amount") together with accrued and unpaid interest thereon. The initial Guaranteed Amount is ____________ _______________________ ($_____________). The Guaranteed Amount shall be reduced simultaneously with each payment by the Partnership of original principal under the terms of the Note by an amount equal to ________ percent (__%) of each such payment, which is the same percentage as the Guaranteed Amount bears to the total original principal amount of Partnership Principal that has been guaranteed by limited partners of the Partnership. THIS GUARANTY DOES NOT OBLIGATE THE GUARANTOR FOR ANY EXISTING OR CONTINGENT LIABILITY OR OTHER OBLIGATION OF THE PARTNERSHIP UNDERTAKEN IN CONNECTION WITH THE NOTE OR DEED OF TRUST EXCEPT FOR THE GUARANTEED AMOUNT. 3. CONDITIONS TO GUARANTY. Guarantor shall not be liable for any amount to Lender pursuant to this Guaranty unless all of the following conditions have been satisfied first: (a) there exists an event of default under the terms of the Note or Deed of Trust, (b) Lender has accelerated the payment of the Note in accordance with the terms of the Note and Deed of Trust, (c) Lender has made a demand on the Partnership for payment of all amounts then due under the Note, (d) the Partnership has failed or refused to satisfy all amounts then due under the Note , (e) Lender has exercised all of its rights to the collateral of the Partnership securing the Note and has disposed of such collateral in accordance with the terms of the Note, Deed of Trust and other agreements respecting such collateral, (f) there remains unpaid principal and interest on the Note after Lender has exhausted its rights with respect to the collateral securing the Note (including, but not limited to, after taking into account the amount of any indebtedness owing under the Note applied toward Lender's purchase of any property securing the Note pursuant to a judicial foreclosure, nonjudicial foreclosure, or otherwise), (g) the Lender has exhausted all of its remedies and recourse to all other assets of the Partnership, and (h) Lender has demanded payment from Guarantor pursuant to written notice specifying the amount of principal under the Note then subject to this Guaranty, which shall in no event exceed the Guaranteed Amount, and delivered to Guarantor's address as set forth in the records of the Partnership. 4. Guarantor hereby waives notice of acceptance hereof, of any action taken or omitted in reliance hereon, and of any defaults of the Partnership in the payment of any such sums or in the performance of any such covenants and agreements. Guarantor hereby agrees that none of the following shall in any manner release, affect or impair its liability under this Guaranty or require its consent thereto: (a) any amendment or modification of the Note or Deed of Trust issued thereunder, including the renewal or extension of any of the Note, (b) any failure to realize proceeds from the sale of any property securing the Note provided that any such sale is effected in accordance with the terms of the agreements regarding Lender's security interest in such property. [Remainder of page intentionally left blank.] GUARANTY SIGNATURE PAGE 5. This Guaranty shall be governed by the laws of the State of California without regard to principles concerning the conflict of laws. IN WITNESS WHEREOF, the undersigned has executed this Guaranty as of September __, 1998. GUARANTOR [ ------------------------------ ] [Type or print name] By: [ _______________________________ ----------------------- ] [By: ] [Its: ] EX-99.1 12 FORM OF PROXY FOR THE COMPANY'S SHAREHOLDERS MISSION WEST PROPERTIES SPECIAL MEETING OF SHAREHOLDERS __________, 1998 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints Carl E. Berg and Michael J. Anderson, and each of them, as his agents and proxies with full power of substitution to vote any and all shares of Common Stock of Mission West Properties which the undersigned is entitled to vote at the Special Meeting of Shareholders of said Company to be held _______, 1998, or any adjournment or postponement thereof, as specified on the reverse hereof. THIS PROXY WILL BE VOTED AS THE UNDERSIGNED SPECIFIES ON THE REVERSE HEREOF. UNLESS OTHERWISE MARKED, THIS PROXY WILL BE VOTED FOR ALL PROPOSALS. (Continued and to be signed on other side) THE BOARD OF DIRECTORS SOLICITS YOUR PROXY FOR THE FOLLOWING ITEMS: 1. PROPOSAL TO APPROVE the Company's sale of 6,495,058 shares of Common Stock at $4.50 per share. FOR ( ) AGAINST ( ) ABSTAIN ( ) 2. PROPOSAL TO RATIFY AND APPROVE the Company's acquisition of the sole general partner interest in each of the Operating Partnerships. FOR ( ) AGAINST ( ) ABSTAIN ( ) 3. PROPOSAL TO APPROVE the Company's acquisition of the Pending Development Projects from Carl E. Berg and certain other members of the Berg Group. FOR ( ) AGAINST ( ) ABSTAIN ( ) 4. PROPOSAL TO APPROVE the Company's acquisition of an option to acquire future R&D Properties build on land owned by Carl E. Berg and certain other members of the Berg Group. FOR ( ) AGAINST ( ) ABSTAIN ( ) 5. PROPOSAL TO APPROVE the Company's acquisition of the sole general partner interest in the Operating Partnerships and the issuance of up to 93,398,705 shares of Common Stock in exchange for limited partnership interests held by or issuable to Carl E. Berg and certain other members of the Berg Group and other limited partners. FOR ( ) AGAINST ( ) ABSTAIN ( ) 6. PROPOSAL TO APPROVE the Merger Agreement and Plan of Merger pursuant to which the Company will change its state of incorporation from California to Maryland through a merger with and into the Company's wholly owned subsidiary Mission West Properties, Inc., a Maryland corporation ("Mission West-Maryland"), which during 1998 intends to elect to become a real estate investment trust for federal income tax purposes, and to approve the adoption of the charter and the bylaws of Mission West-Maryland. FOR ( ) AGAINST ( ) ABSTAIN ( ) Date: ______________, 1998 Signature: ____________________________ Signature: ____________________________ NOTE: Please sign as name appears herein. Joint owners should each sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. EX-99.2 13 FORM OF LETTER TO THE COMPANY'S SHAREHOLDERS [Mission West Letterhead] ______ __, 1998 Dear Shareholder: You are cordially invited to attend a Special Meeting of Shareholders of Mission West Properties ("Mission West") to be held on ______ __, 1998, at 9:00 a.m., Pacific Standard Time, at 10050 Bandley Drive, Cupertino, California (the "Mission West Special Meeting"). At the Mission West Special Meeting, you will be asked to approve the reincorporation of Mission West in the State of Maryland which intends to become a real estate investment trust ("REIT") for federal income tax purposes for the 1998 tax year, as well as certain other transactions intended to effectuate Mission West's desire to become actively engaged in the business of owning and operating real estate as a self-administered, self-managed and fully integrated REIT including: o Approval of the sale of 6,495,058 shares of Mission West's common stock for $4.50 per share to a group of accredited investors. o Ratification of Mission West's becoming the sole general partner and acquiring an approximately 12.11% interest in each of four existing limited partnerships (the "Operating Partnerships"), of which I and my family and affiliates own approximately 83% of the total partnership interests as limited partners. o Approval of the acquisition by Mission West of the right to acquire, through the Operating Partnerships, certain commercial R&D pending building developments consisting of approximately 1.02 million rentable square feet from my family, affiliates and me for cash or additional limited partnership interests, at our option. o Approval of the acquisition of an option with respect to future developments on land currently held by my family, affiliates and me. o The issuance of up to 93,398,705 shares of Common Stock issuable upon the redemption or exchange of 93,398,705 units of limited partnership interests held by or issuable to the limited partners in the Operating Partnership, including 33,919,072 units issuable upon the acquisition of the pending development projects mentioned above. o Approval of the Company's merger with its wholly owned subsidiary Mission West Properties, Inc., a Maryland corporation. Your Board of Directors believes that all of these transactions are fair to, and in the best interests of, Mission West and its shareholders. The Board has unanimously approved the transactions and unanimously recommends that you vote in favor of the related proposals submitted to the shareholders. The accompanying Proxy Statement/Prospectus provides detailed information concerning the transactions, the reasons for your Board of Directors' recommendation and certain additional information, including, without limitation, the information set forth under the heading "RISK FACTORS," which describes, among other items, potential adverse effects for the Mission West shareholders. We urge you to carefully consider all of the information in the Proxy Statement/Prospectus. It is important that your shares of Mission West common stock be represented at the Mission West Special Meeting, regardless of the number of shares you hold. Therefore, please complete, sign, date and return your proxy card as soon as possible, whether or not you plan to attend the Mission West Special Meeting. This will not prevent you from voting your shares in person if you subsequently choose to attend the Mission West Special Meeting. Sincerely, Carl E. Berg Chairman of the Board -----END PRIVACY-ENHANCED MESSAGE-----